March 31, 2009

Just Announced: "4th Annual Proxy Disclosure Conference" & "6th Annual Executive Compensation Conference"

We just posted the registration form for our popular conferences - "Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference" & "6th Annual Executive Compensation Conference" - to be held November 9-10th in San Francisco and via Live Nationwide Video Webcast. Here is the agenda for the Proxy Disclosure Conference (we'll be posting the agenda for the Executive Compensation Conference in the near future).

Special "Half-Off" Early Bird Rates – Act by April 24th: We know that many of you are hurting in ways that we all never dreamed of - and going to a Conference is the last thing on your mind. But with huge changes afoot for executive compensation and the related disclosures, we are doing our part to help you address all these critical changes—and avoid costly pitfalls—by offering a "half-off" early bird discount rate so that you can attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 24th to obtain 50% off.

Rolling In: Rule 452 Comments

With comments due last Friday on the NYSE's broker non-vote proposal as noted in this blog, below are links to comment letters submitted by notable groups so far (here is a link to all the comment letters):

- NYSE Proxy Working Group

- Shareholder Communications Coalition (aggregation of corporate associations)

- Council of Institutional Investors

- Business Roundtable

- Society of Corporate Secretaries

- National Investor Relations Institute

There are a surprising number of comment letters submitted by companies, including one from GM's now-former CEO Wagoner submitted Friday. I guess they realize the significance of this proposal and have overcome their traditional reluctance to voice an opinion directly (as opposed to through an industry group).

In terms of analysis of voting returns, this comment letter from Broadridge covers how broker non-votes impacted shareholder meetings during 2007.

The Latest Proxy Season Developments

If you haven't signed up to get our new "Proxy Season Blog" pushed out to you, here are a few of the items you've missed in the last week:

- Draft E-Proxy Standards: NIRI Seeks Comment
- More on "Another New E-Proxy Notice from Broadridge"
- Proxy Disclosure of Compensation Practices in a Volatile Equity Market
- Intel First to Offer Live Internet Voting
- The Growth of "Poor Economy" Disclosure
- Re-Thinking D&O Questionnaires

Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog (just like this blog).

Game Changer: Delaware Supreme Court Reverses in Lyondell

On the DealLawyers.com Blog last week, I blogged twice about a new important Delaware Supreme Court decision, Lyondell Chemical Company v. Ryan (No. 401, 2008). We've already posted a number of memos about the decision in the "Fiduciary Duties" Practice Area.

- Broc Romanek

March 30, 2009

Clinging to the “Bottom Rung”

A few weeks back, Moody’s Investor Service published its list called the “Bottom Rung,” which represents the roughly 20% of the companies that it tracks that are in most danger of defaulting on their debt. As noted in this Wall Street Journal article, Moody’s is estimating that approximately 45% of the Bottom Rung companies will default in the next year, and the number of companies falling into this category is rapidly increasing. Moody’s has been separately calling out these bottom tier credits for the last several months, and plans to update the Bottom Rung list on a monthly basis.

What are issuers doing that find themselves on the Bottom Rung list? Based on the WSJ article, Eastman Kodak came out swinging, noting in an e-mail statement that “Any speculation, however informed, suggesting that Kodak is less than financially sound, is irresponsible.” Similarly, Univision issued a statement stating that it “has more than ample liquidity to operate the business in the current environment.” But other companies contacted declined to comment, or didn’t respond, which after all is probably for the best.

I don’t think that a Bottom Rung designation necessarily changes anything that these companies are or should be disclosing in their SEC filings. Item 10(c) of Regulation S-K does not mandate disclosure of security ratings, but rather calls for additional disclosure concerning ratings and changes in ratings when a company voluntarily elects to include any security rating disclosure. (See our summary of the topic in the "Credit Ratings" Practice Area.) Many companies these days will include in their MD&A the actual ratings from the big rating agencies, along with disclosure of the rating agencies' views that are expressed in addition to the ratings themselves. I would say that this practice is not ubiquitous, however, in that some companies may still resist including the rating information with a view that it is otherwise available to investors and can be difficult going forward to keep up to date.

In the SEC’s credit rating proposals from last summer, which sought to eliminate credit rating references from the SEC’s rules, the Commission proposed to keep this voluntary disclosure scheme, but solicited comment on whether that approach should be reconsidered in favor of specified mandatory disclosure. The SEC has not moved forward on those proposals, and it is unclear whether they will be revisited.

What’s Left to Do on Credit Ratings?

Credit ratings still remain at the forefront of the SEC’s agenda, as Chairman Schapiro noted in her testimony last week before the Senate Committee on Banking, Housing and Urban Affairs. Proposals are currently outstanding (in addition to the proposals referenced above) to require NRSROs (and possibly subscriber-based ratings services) to disclose ratings actions histories for all credit ratings issued on or after June 26, 2007 at the request of the obligor being rated or the issuer, underwriter or sponsor of the security being rated, no later than 12 months after ratings action is taken, and in an XBRL format.

The SEC also re-proposed rule changes that would make it a prohibited conflict of interest for an NRSRO to rate a structured finance product whose rating is being paid for by the product’s issuer, sponsor or underwriter, unless information about the product provided to the NRSRO to determine and monitor the rating is made available to the NRSROs not retained to issue a credit rating. In addition, the re-proposed rule changes would amend Regulation FD to permit disclosure of material non-public information to NRSROs, whether or not the NRSROs make their ratings publicly available.

Further, a roundtable is schedule for April 15 to examine the SEC’s oversight of credit rating agencies. As Chairman Schapiro mentioned in her testimony, further reforms may be considered based on what is discussed at the roundtable.

SEC IG Focuses on Senior Executive Officer Bonuses

Last Friday, the Office of Inspector General released a report on its 2008 Audit of Sensitive Payments. “Sensitive payments” are described as things such as “executive compensation, travel, official entertainment funds, unvouchered expenditures, consulting services, speaking honoraria and gifts, an executive perquisites.” On the executive compensation front, the SEC’s Inspector General did not find any fraud or payments that went over the established limits or budgeted amounts, but did question the lack of justification for seemingly large merit pay increases and bonuses for some SEC executives who worked directly for the Chairman.

As noted on page 10 of the report, the seven SEC senior officers studied who worked directly for former Chairman Cox received merit pay increases ranging from $24,657 to $65,082 for the performance year ending September 30, 2007 and bonuses of $20,000 each. The SEC's Executive Director noted in his response to the report that these merit increases were unique and unlikely to recur, arising essentially as "catch-up" payments when then-Chairman Cox lifted a cap on the salaries of his direct reports, which had kept them all in line with his own salary of $152,000.

Suffice it to say that as a non-executive SEC Staffer, you are unlikely to see those sorts of increases or bonuses over the course of your career, much less in one year. It is perhaps most notable that the IG had the same question that many Corp Fin Staffers have when reviewing CD&As: “Where’s the analysis?”

- Dave

March 27, 2009

Regulatory Reform Kick-Off

Yesterday marked what I think was the big kick-off of several months of debate about the future shape of financial regulation. Treasury Secretary Geithner outlined the Administration’s framework in testimony before the House Committee on Financial Services and, as noted in this Treasury Department outline, yesterday’s remarks focused particularly on addressing systemic risk.

Not surprisingly, the Administration’s proposals echo much of the conceptual framework that has been floated over the last several months by some legislators, academics and groups such as the Group of Thirty. In particular, the four focal points of the regulatory reform are: (1) addressing systemic risk; (2) protecting investors and consumers; (3) eliminating regulatory gaps; and (4) fostering international coordination. The Administration’s systemic risk proposals contemplate one “independent” regulator who is responsible for overseeing “systemically important firms” (i.e., too big to fail firms) as well as the payment and settlement systems. Systemically important firms would be subject to heightened capital requirements, strict liquidity, counterparty and credit risk management requirements and would be subject to an FDIC-like “corrective action regime.” These special firms could be any type of financial business: banks, brokers, insurance companies, etc.

The SEC figures prominently in the proposed systemic risk efforts, not as the systemic risk regulator of course but rather as the regulator of hedge funds and money market funds. The Administration envisions that advisers of hedge funds meeting as yet unspecified size requirements would be compelled to register with the SEC, and the funds would be subject to mandatory disclosure and reporting requirements, with the details of their reports to be shared with the systemic risk regulator. The proposals also call on the SEC to “strengthen the regulatory framework” around money market funds to make them less susceptible to a run on the funds and to reduce the credit risk and liquidity risk profile.

It is not clear from the proposals what role the SEC would play in a proposed new regulation of credit default swaps and OTC derivatives. The Administration calls for a “strong regulatory and supervisory regime” over OTC derivative markets, focused on central clearing of standardized OTC derivatives, encouragement of more exchange traded instruments, mandated standards for non-standardized contracts, transparency around trading volumes and positions, and robust eligibility requirements for market participants.

Chairman Schapiro’s Remarks on the SEC’s Role

At the same time the Treasury Secretary was outlining the regulatory reform proposals in the House committee room, SEC Chairman Schapiro was at a hearing before the Senate Committee on Banking, Housing and Urban Affairs focused on the regulation of the securities markets. In her testimony, Chairman Schapiro called for maintaining the independence of a capital markets regulator, consistent with preserving the Commission’s role as the investor’s advocate. The Chairman noted that, as an independent capital markets regulator, the SEC would be integral to dealing with the overarching concerns about systemic risks and serve to help the systemic risk regulator in evaluating risks. It seems clear from this testimony that, as the battle lines are being drawn, the SEC is going to fight to preserve its independence within the overall financial regulatory structure.

The Views of the Former SEC Chairmen

Among the many folks testifying at the Senate hearing yesterday were former SEC Chairmen Richard Breeden and Arthur Levitt. Breeden and Levitt both supported Chairman Schapiro’s call for maintaining a strong SEC as a separate capital markets regulator - and not subsuming the agency into some larger financial regulator. In his testimony, Levitt stated:

"The proper role of a securities regulator is to be the guardian of capital markets. There is an inherent tension at times between securities regulators and banking supervisors. That tension is to be expected and even desired. But under no circumstance should the securities regulator be subsumed – if your goal is to restore investor confidence, you must embolden those who protect capital markets from abuse. You must fund them appropriately, give them the legal tools they need to protect investors, and, most of all, hold them accountable, so that they enforce the laws you write.”

Breeden's testimony called for merging the SEC, CFTC and PCAOB into a single regulator charged with overseeing trading in securities, futures, commodities and hybrid instruments. In this role Breeden would envision that the combined agency would also set disclosure standards for issuers and the related accounting and auditing standards.

Levitt didn’t mince words on his views about the SEC in an interview with the Washington Times, noting in this article that “The SEC has been grievously hurt over the past eight years” and that “It's lost its best people. It's been demoralized. It's been humiliated [to the] point it is no longer the pride of government agencies.” As for the Congress’s oversight of the SEC, Levitt said it “is a function of perfectly terrible oversight of the SEC on the part of Congress. It's neither a Democratic nor a Republican issue. It's a national disgrace.”

- Dave Lynn

March 26, 2009

Corp Fin Updates Exchange Act Rules CDIs

Yesterday, the Corp Fin Staff updated the Exchange Act Rules CDIs to include interpretations of Exchange Act Rule 10b5-1. Rule 10b5-1 interpretations had not been included in the Exchange Act Rules CDIs back when they were first published in September 2008, and were last addressed in the Fourth Supplement to the Manual of Publicly Available Interpretations from May 2001.

The new Exchange Act Rules CDIs largely repeat the Rule 10b5-1 interpretations from the Fourth Supplement without substantive change. There are, however, a few revised or new interpretations of note. In CDI 120.19 - which deals with the question of whether cancelling one or more plan transactions affects the availability of the affirmative defense in Rule 10b5-1(c) – the Staff notes that if a new contract, instruction or plan is put in place after the termination of a prior plan, then you would have to look at all of the facts and circumstances, including the period of time between termination of the old plan and establishment of the new plan, to determine whether a plan was established “in good faith and not as part of a plan or scheme to evade.” In order to address this concern, it has become relatively common to impose a significant waiting period before a new plan can be adopted (i.e., six months), as well as a cooling off period (i.e., 30 days) before any sales are made following a plan termination.

In CDI 120.20, the Staff notes that the Rule 10b5-1(c) affirmative defense is not available when a person establishes a 10b5-1 plan while aware of material nonpublic information but delays any plan transactions until after the material nonpublic information is made public. Further, CDI 220.01 provides guidance on how a 10b5-1 plan can be transferred to a new broker when the original broker goes out of business (something to think about these days), while CDI 220.02 indicates that an issuer contemplating a repurchase plan relying on Rule 10b5-1 and 10b-18 could not structure the plan so that the amount to be repurchased by the broker under the plan could be automatically reduced by publicly disclosed block purchases, given the potential for the issuer to effectively modify the plan through the block purchases.

Even though the Rule 10b5-1 CDIs don’t necessarily break new ground, it is a good time now to go back and review Rule 10b5-1 policies (or adopt such policies if none are in place). Some very useful resources are posted in our Rule 10b5-1 Practice Area. To date, we have not heard of any significant Rule 10b5-1 developments from the Division of Enforcement, but it is likely some of the cases that the Division began looking at a couple of years ago remain ongoing.

FASB Takes Quick Action on Fair Value and OTTI

Last week, the FASB took action to address fair value criticisms by issuing proposed FSP FAS 157-e, Determining Whether a Market is Not Active and a Transaction is Not Distressed, which clarifies when an issuer is dealing with an “inactive market” and a “distressed sale” under fair value standards. The FASB also released proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, which would revise guidance on determining other-than-temporary impairments. As noted in this Morrison & Foerster memo, concern has already been expressed as to whether the FASB’s actions on these standards have gone far enough. The guidance is subject to a 15-day comment period and the FASB expects to finalize the guidance at its April 2 board meeting.

In testimony yesterday before the House Financial Services Committee, SEC Acting Chief Accountant Jim Kroeker commended the FASB for its quick action and called for guidance to be in place for the first quarter.

Earlier this week, the FASB and the IASB announced that, in order to help address issues arising from the financial crisis, “the two boards have agreed to work jointly and expeditiously towards common standards that deal with off balance sheet activity and the accounting for financial instruments. They will also work towards analysing loan loss accounting within the financial instruments project.”

A Washington Tradition Goes Nationwide

One of the more interesting (or perhaps odd is the better word) White House traditions is the annual Easter egg roll on the South Lawn. This tradition dates back to 1878, and the current financial crisis is by no means going to stop the eggs from rolling this year. In fact, the White House is taking steps to make the egg roll more open to the general public, by distributing tickets online to the nation rather than in person the weekend before the event. If you are interested in rolling some eggs on Monday, April 13 you can try to sign up today for tickets.

- Dave Lynn

March 25, 2009

Nasdaq Extends Suspension of the Bid Price and Market Value Requirements

Nasdaq has filed with the SEC to extend the ongoing suspension of the bid price/market value of publicly held shares requirements until July 19, 2009. In support of the continued suspension, Nasdaq notes that market conditions have not improved since the suspension began last October, and that both the number of securities trading below $1 and the number of securities trading between $1 and $2 on Nasdaq has increased since the initial suspension. This is the second extension of the suspension, which would have otherwise expired on April 19, 2009. The NYSE recently filed with the SEC, on an immediately effective basis, a suspension of its $1 price requirement and an extension of the lowering of the market captialization requirement, lasting until June 30, 2009.

Nasdaq also recently re-filed its new listing rule book, which is now scheduled to become effective on April 13, 2009. In this project, the Nasdaq has sought to make the listed company rules more transparent and clear, without making substantive changes to the requirements.

More Extension News: The FDIC’s TLGP Debt Guarantee Program Extended

Just in case you are losing track of the alphabet soup of government programs, TLGP is the FDIC’s Temporary Liquidity Guarantee Program. The Debt Guarantee Program component of TLGP was set to expire at the end of June, but last week the FDIC board adopted an interim rule extending the program until October 31, 2009. Further, for any debt issued on or after April 1, the TLGP guarantee will extend until December 31, 2012. The interim rule also adopts new surcharges on guaranteed debt issuances that have a maturity of one year or more and are issued on or after April 1, 2009.

On the Way: Romeo & Dye Section 16 Deskbook

Peter Romeo and Alan Dye just completed the 2009 edition of the Section 16 Deskbook and it’s now at the printers. In addition, they are in the process of wrapping up their latest version of the popular “Forms & Filings Handbook,” with numerous new – and critical – sample forms included. To receive these critical Section 16 resources, try a '09 no-risk trial to the "Section 16 Annual Service" (or renew).

- Dave Lynn

March 24, 2009

Treasury Finally Fleshes Out Its Financial Stability Plan

To the roaring approval of the stock market (even though details are fairly scarce and it's been known for a week that this was coming), the Treasury Department provided more details about it's plans to bailout banks and handle their toxic assets by providing a fact sheet and white paper about its new "Public-Private Partnership Investment Program."

Boiling down the PPIP, it will use a combination of public and private capital, managed by private sector managers to purchase toxic (now known as "legacy") assets from banks and investors. The PPIP proposes to use $75-100 billion of TARP funding along with with private investor capital and FDIC-guaranteed debt to generate an initial $500 billion in purchasing power, which could grow to $1 trillion over time.

The PPIP has multiple components, including a Legacy Loans Program and a Legacy Securities Program. Since more details are needed, the government will need to create regulations to get these programs off the ground. We are posting memos in our "Credit Crunch" Practice Area.

SEC Commissioners Speak Out on Enforcement Policy

Last week, in this speech, Commissioner Luis Aguilar predicted the SEC will impose more fines on companies going forward - and expressed a desire to rescind the SEC's policy statement that guides the Enforcement Division on how to determine financial penalties because he believes it doesn’t deter misconduct. As you may recall, the SEC issued the policy statement back in early 2006 amid a fight among the five Commissioners that existed at the time over the level of fines levied against public companies.

Commissioner Troy Paredes also got into the act, delivering this speech regarding the Enforcement Division, its jurisdiction and available resources - and the methods used to select cases for investigation, among other topics.

Finally, Commissioner Elise Walter gave this testimony to Congress about the SEC's enforcement efforts in response to the financial crisis. She noted that possible areas of investigations include possible insider trading at subprime lenders; misleading, inadequate or non-existent disclosures regarding subprime exposure by investment banks; abusive short selling; and improper valuations of illiquid assets.

How Boards Should Manage Risk

We have posted the transcript from our recent webcast: "How Boards Should Manage Risk."

- Broc Romanek

March 23, 2009

More on the Problems Caused by Naked Short Selling

Just a few days after I weighed in on the problems caused by naked short selling, the SEC's Inspector General issued a report noting that the SEC received 5,000 complaints over a year and a half period about aggressive short selling (of which, 2.5% of those were investigated) and the SEC's failure to bring any enforcement cases in this area (and Congress may consider legislation restricting short selling ahead of the SEC adopting a new uptick rule). Here is a Bloomberg article.

According to this WSJ article: "In a written response, the SEC's enforcement staff played down the likelihood of naked short-selling abuses. It noted that most trades settle on time. The SEC staff said the agency needs to "intelligently leverage" its resources and a large number of complaints provide "no support for the allegations." The SEC said it is looking to improve its handling of tips."

While I agree that a large number of complaints doesn't prove anything - and the Staff certainly needs more resources to do it's job - I sure hope the SEC is taking the problems caused by naked shorts seriously and realize that adopting an uptick rule alone doesn't do the trick. I strongly urge folks to read Carl Hagberg's clear explanation of how naked short selling damages the markets and his suggestion for an easy fix.

Another Ten Cents: The Problems of Share Lending

Thanks to the many members who sent me emails last week, agreeing with the sentiments in my naked short selling blog. Below is one of those emails; this one highlights another issue that the SEC should consider:

Thanks for publishing the blog on naked short selling. I completely agree that rules against failing to deliver should be more aggressively enforced. I have had some clients in the past that have come under attacks from shorts, with their issues being listed on the "Reg SHO Threshold List" for months, while being unable to get any regulatory attention through the SEC or FINRA.

Another - admittedly less pressing - issue that needs to be considered is changing the rules governing when brokers are allowed to lend shares held in their accounts. As I understand the current system, brokers can lend shares unless the account holder has specifically asked that this not be allowed. I imagine most people who take a long position in a stock are under the belief that once they've bought the shares, they've essentially taken those shares out of circulation, which would normally be expected to reduce supply and help push the price up.

By allowing brokerages to lend shares without affirmative consent (e.g., though an "opt in"), these shares remain available to be traded many times over without the consent or even knowledge of the "holder." By requiring affirmative consent, brokerage firms may also end up choosing to share part of their stock loan revenues with the account holders, which may provide for some modest hedge and result in better pricing for share lending and more accurate price information in the market for short selling in general.

Webcast: "Compensation Arrangements in a Down Market"

Tune in tomorrow for the CompensationStandards.com webcast - "Compensation Arrangements in a Down Market" - to hear Blair Jones of Semler Brossy, Mike Kesner of Deloitte Consulting and James Kim of Frederic W. Cook & Co. discuss how boards are rethinking compensation practices in the wake of the down market.

- Broc Romanek

March 20, 2009

The Systemic Dismantling of the System

Below are a dozen pearls of wisdom from former SEC Chief Accountant Lynn Turner:

I am taken aback when people like President Obama say our problem is we had an outdated regulatory system. I beg to disagree. It was a regulatory system that in the past two decades had not become out-of-date, but rather had been almost entirely dismantled by Congress and the various Administrations as they:

1. Passed Gramm-Leach-Bliley guaranteeing large financial supermarkets that can only be too big to fail, while prohibiting the SEC from being able to require regulation of investment bank holding companies. When legislation was passed saying one could put all these businesses under one roof, without a single word in the law requiring regulation of the inherent conflicts, it was sealed in stone that there would be huge institutions the government would HAVE to bail out if they failed. And this legislation was specifically passed to permit the merger of CitiBank and Travelers to form CitiGroup, now one of the largest institutions requiring a bailout.

2. Cutting budgets at CFTC and SEC year-after-year dismantling those agencies block-by-block. They sent these agencies to do a gunfight with an empty gun all too often.

3. As new products such as credit derivatives were created and introduced to the credit markets, Congress and the Administrations took action to ensure those products could not be regulated. Companies such as Enron and AIG used the law to avoid regulation of these products. And history now has another chapter on how these products became financial weapons of mass destruction.

4. As hedge and private equity funds grew exponentially in the past two decades, Congress again exempted them from any regulatory oversight, even as they took in increasing amounts of retail money.

5. The banking regulators became "Prudential Supervisors" and not regulators, as they allowed the banks to engage in unsound lending practices, notwithstanding the 1994 legislation giving the Fed the power to stop such destructive business practices. Congress passed legislation that even allowed the Federal Home Loan Banks to expand their lending and compete with one another for the same bank's business, with significantly increased risk.

As a result, today they have balance sheets loaded up with lousy mortgage securities and loans to the like of Citi, WaMU, Countrywide and Wachovia. It use to be they were simply in the business of making loans to local community and regional banks. And when Congress passed this legislation, they also allowed the compensation for the executives of these banks, whose business is guaranteed in the same manner as Freddie and Fannie were, to jump significantly.

6. Congress failed to provide authority, tools and resources for OFHEO, the regulator of Fannie and Freddie, blocking attempts to provide for effective oversight and regulation. These agencies watched as their assets and guarantees grew to trillions of dollars without effective oversight, while the government backed them up with the guarantee of taxpayer dollars. These agencies were allowed to grow their balance sheets unchecked, and with insufficient capital in light of the risks they were taking on and imposing on the taxpayer.

7. The credit rating agencies were granted exemption from accountability by the investing public it turns out they were misleading as well as by the securities regulators. Yet it was mandated that their ratings be used. To this day, the SEC must judge the work of these credit rating agencies by the policies and procedures the rating agencies themselves decide are sufficient, even if the rating results in a bad rating. That is quite simply still the law today.

8. Congress interceded to block attempts to bring greater transparency to financial reporting of equity compensation that grew to hundreds of millions of dollars in some cases, as the use of stock options became a drug many executives and their boards became addicted to.

9. The courts and Congress stepped in to prevent investors from getting justice through legitimate legal actions. It ultimately led to the Supreme Court of this land ruling it was legal and quite fine for people to assist others in the commission of a securities fraud - in essence drive the get away car - and there would be no justice or legal course of action for those who had been their victims.

10. Shareholders were stripped of their rights, as we saw the SEC first in 1992, and then again in 2007, denying them the right to have the same access as the management who work for them, to the proxy of the companies they owned. While Congress was well aware of compensation abuses, they failed to pass legislation that would have reined in such abuses. While two to three years ago, the House passed such legislation, it went no where in the Senate.

11. We now have Congress stepping in to put undue pressure to undo transparent accounting practices. The FASB has become most accommodating as the new rules they are proposing, with only a two week comment period, will effectively become a moratorium on fair value accounting for banks.

They will no longer have to report the effect of their bad investment decisions in their income statements - much like suspended disbelief occurs at the movies. We are now going back to accounting that the GAO in 1991, in a report titled "Failed Banks," said raised the cost to taxpayers of the S&L bailout.

12. And finally, people were put in charge of the key agencies who did not believe in regulation. Inspector General reports on the OTS, OCC and SEC cite serious lapses in regulation. From Greenspan at the Fed who failed to act on the 1994 Hoepa legislation, to Dugan and Hawke at the OCC who opposed state regulators attempts to rein in predatory lending practices, to the SEC's Chris Cox, these were all regulators who publicly opposed regulation and engaged in the dismantling of the regulatory system we once had.

It wasn't that we didn't have an effective system as much as it was the system we had was dismantled during the past two decades. And now tens of millions of Americans are paying for this with their jobs, the loss of their retirement, having to work for many more years when they have grown old, and kids having to leave college, no longer able to afford it. It is no wonder the public is so outraged by what they see going on with Congress and at companies such as AIG.

More on Notorious A.I.G. - and B.A.D. Congress

Rightfully so, many of the folks I know have as equal disdain for the House of Representatives as for AIG itself, due to the silly - and potentially harmful - legislation which passed yesterday that imposes a huge tax on bonuses to anyone earning over $250,000, who happens to work for a TARP company that received $5 billion or more in funds. Those same people also show disdain for the Treasury’s bait and switch, wherein some companies were forced to accept TARP money. The processes of the bailout from start to finish so far have been the stuff of comedy (except unfortunately this is all reality).

Even though I believe changes in the way senior executives get paid need to happen, I don't think that Congress should be dictating them. As I've said before, until boards want change, they will find a way around any artificial restrictions. And those work-arounds typically end up being more excessive than the pay arrangements that would have originally been implemented.

My blog about AIG a few days ago resulted in a record level of member correspondence. Here are just a few from the many I received:

1. This letter from a former AIG Financial Product unit executive has been in the hands of Congress since October. After the fact, it is clear that AIG mispriced the risk on the credit default swaps - they took in a lot less premium than they should have, given the scope of risk. I don't know if the board has gone back and determined if the mispricing was error, or done deliberately to make a commission-generating and bonus-generating product more attractive. I would want to know that before paying out any bonuses, particularly in light of the red flag raised in that letter.

2. Congress will do something stupid and penalize AIG - which is realizing penalizing taxpayers given that we own the thing - rather than just try to get the money back from the rouges.

3. No first-year corporate lawyer would ever let her or his client invest billions in a company without doing, apparently, ANY DUE DILIGENCE.

4. As I read the news stories, these severance agreements have been in place for a very long time, perhaps before the first government advance.

5. The recipients are not to blame. Whoever approved these agreements is to blame, if, and only if, their actions are not protected by the business judgment rule (as things existed at the time; not with the benefit of 20-20 hindsight). I've seen nothing to indicate that to be the case (see the recent Citigroup case).

6. Be very careful, my friend, whatever the government concocts to punish these recipients, they can also do to you. Trust me, my friend, you really do not want to start meandering down that path.

7. I think the board could only be justified in paying bonuses to those employees whose services directly related to the winddown, and presumably those bonuses were only earned in the last few months so its hard to see how they got to be 165mm; anything else smacks of gross negligence. Further, the bonuses clearly didn't need to be at the same rate as they were before the meltdown - are there that many jobs available to these employees.

Finally, it seem likely that at least some of these employees violated fiduciary or other duties to the corporation - so the only bonus should be that "if you get the corporation successfully out of the mess you got it into, the corporation won't sue you for breach of those duties". In this environment, how successful do you think a claim for a bonus would be when matched up against a counterclaim by the corporation?

8. It's obviously a very complicated legal issue totally swamped by the idiocy of the players. You certainly can't blame the public for being outraged.

9. With all the layoffs, there is plenty of talent available (and having created the mess, its hard to see that the talent that AIG has is all that talented or irreplaceable).

10. People must be held accountable for their actions, and inactions - in this case, the directors. A few lawsuits will bring a new sense of vitality to them, and given the failures revealed by the recent past, I don't think the argument that current boards are irreplaceable and no one will serve is sufficient - certainly a better balance needs to be struck.

- Broc Romanek

March 19, 2009

Another New E-Proxy Notice from Broadridge

Back in January, I blogged about Broadridge's new e-proxy notice for beneficial owners. It looks like they have gone back to the drawing board and improved their Notice some more in an effort to better educate shareholders and boost their willingness to vote. [Personally, I think this process would have gone smoother had Broadridge posted a draft Notice for public comment, both last year - and this year. And I don't mean to single Broadridge out here. All the providers with Notices should post drafts for comment - so they can get input into enhancing usability.]

Although there has been no statement from the SEC Staff, Broadridge informs us that the Staff has reviewed these changes in this Notice. This is important to know since the new notice fails to satisfy a few of the requirements of Rule 14a-16(d). For example, the new notice doesn't seem to have a place for directions to the meeting (Rule 14a-16(d)(8)). And although the requisite text for the legend required by Rule 14a-16(d)(1) seems to be included in one form or another, it doesn't track the exact wording from the Rule.

We have received a number of inquiries from members nervous about relying on Broadridge's representation that the Staff has blessed this departure. Hopefully, the Staff can make some type of public statement to alleviate the fears of those that want to be in compliance.

To help educated shareholders learn more about Notice & Access, Broadridge has created this Resource Center. Originally, it seemed like they would use the simple URL of ShareholderEducation.com for this new portal. But now that simple URL routes folks to Broadridge's home page - and they're using a long complicated URL for this new page. The original idea seemed more shareholder-friendly...

Pension Assets: Another Shoe to Drop?

One item to be closely watched in the annual reports being filed now is how the pension liabilities of companies are faring. For example, this recent report states that among the 100 largest corporate pensions, they suffered asset losses of $49 billion - partially offset by declines of $26 billion in liabilities due to changing the discount rates used to calculate the amount of the liabilities. The report notes that the funded status of these plans has fallen by 22% over the past twelve months, a decrease in funded status of $308 billion. Learn more about this development from the memos posted in our "Pension Plan" Practice Area.

It's Tournament Time, with both my alma maters - Michigan and Maryland - representing! Go down memory lane and recall the miracle run by Michigan 20 years ago when their coach quit/got fired just before the tourney commenced.

March-April Issue: Deal Lawyers Print Newsletter

This March-April issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

- Lessons from the Meltdown: Remedies
- Poison in a Pen: Recent Trends in Drafting Shareholder Rights Plans
- The Ultimate Takeover Defense? RiskMetrics’ New View on Net Operating Loss Poison Pills
- Delaware Upholds Private Equity Deal Structures
- Recent Developments under the Delaware Short-Form Merger Statute
- Section 13(d): The Challenges of “Group Membership”

If you're not yet a subscriber, try a 2009 no-risk trial to get a non-blurred version of this issue for free.

- Broc Romanek

March 18, 2009

Got My Pitchfork: Get Me a Job at AIG!

Yes, I'm angry too. I drafted a profanity-laced blog on Sunday, but held it back to calm down (you can get the profanity if you need it at "Daily Kos" - and the extremism at "Zero Hedge"). Even though I can understand why paying $165 million in guaranteed bonuses (plus another $239 million later) to wind down $2.7 trillion in risky derivatives (now wound down to 1.7 trillion) could make sense to a board (as Andrew Ross Sorkin argues), I'm still having trouble buying into the arguments made in this letter from AIG's CEO Edward Liddy and AIG's White Paper for these reasons:

1. Why Did the Government Wait So Long? - One maddening thing is the lost opportunity in dealing with these problems last Fall when the government started to shell out big bucks. The Obama Administration says it just learned about this bonus program, but ignorance is not an excuse when you own 80% of the company.

In any pre-bankruptcy workout, employees can be forced to make compensation concessions as a condition to the restructuring. The employees are given a reality check, based on the compensation they would receive if the company goes into Chapter 11. In the case of AIG, you and I were the lenders - but no one represented our interests to ensure the right people gave the right things up before the company was "saved." Paulson, et al. screwed us from the start. As noted in this Washington Post column, the same negotiation tactics could be used today.

And what's the response now that this fiasco has come to light? All sorts of "innovative" solutions are being promised from newly enlightened politicians (or some not so innovative: Geithner is talking about withholding $165 million from a $30 billion payment due to AIG now - as if that is a real solution). As one member told me: I'm from Iowa, so I understand the process of closing the barn door after the horse has bolted.

2. Avoiding a Lawsuit? - One of the primary reasons that the government - which controls just under 80% of AIG - allowed these bonuses to get paid was that it didn't want to "risk a lawsuit" in paying out the bonuses. Risk a lawsuit? That was your worst case scenario in deciding not to challenge these bonuses? [Prof. Cunningham provides some examples of ways payment might have been avoided under the bonus plan; here is analysis from others.]

How many times in your life have people broken a contract to drive you to a better deal? This is "Business 101" stuff. Real business people realize that breaking contracts is an acceptable way to renegotiate terms - for starters, look at all the broken merger deals over the past year. The government is probably right to be wary of unilaterally abrogating employment contracts willy-nilly. But a little renegotiation could have gotten a lot of results here.

For example, I don’t understand why they didn’t offer to swap cash for equity (e.g., restricted stock that doesn’t get paid back until after AIG gets back on its feet.) That approach would recognize market realities and still provide a decent incentive for current employees. It’s done all the time by Silicon Valley companies that have fallen on hard times. I suppose a disgruntled employee could still file a wage claim, but it’s hard to see a court ruling in favor of a well-compensated employee that refused a reasonable settlement.

3. Feels Like Blackmail - One of AIG's arguments is that "retention" bonuses were necessary to retain the employees of their Financial Products unit because they are the only ones who could understand AIG’s complicated mess (note when the bonus plan was created last year, the stated purpose was not retention!). It sure sounds like blackmail on the part of the quants who control AIG's derivatives book. There have been a lot of layoffs on Wall Street lately – would hiring talented individuals to work for AIG really be so difficult?

My personal favorite is Liddy's claim that these bonuses were necessary to prevent the competition from stealing these outstanding employees. Some reports say that some of these employees are indeed being courted because knowledge of counterparty strategies can be lucrative; others claim that the employees getting paid the biggest bonuses no longer have any relevance to AIG since that unit is no longer soliciting new business. I imagine both of these thoughts might be correct, but there are bigger issues at stake here (not to mention that a total of 52 bonus recipients are not even employed by AIG anymore, including one who received over $4 million).

4. Who's In Charge Here? - I guess owning 80% doesn't get you much when you're the government - not even the courtesy of transparency when you repeatedly request it. Now under heavy fire, AIG has started to disclose counterparties that received some of the bailout money. I can't imagine any other situation where a 80% owner appeared to have so little clout.

5. Some Will Be Connecting Dots - It's already being reported that bonuses were paid out to some executives at some of the institutions who received money from AIG. Brace yourself as this story has "legs" and I imagine is just the first in what will be a long series of pieces about misuse of taxpayer money. The cycle will be the government rushing to bail someone out (sometimes against the recipient's will!), abuse of the bailout money, Congressional outrage, repeat.

6. Can Everyone Stop Treating Us Like Children? - I'm so sick of the corporate executives and the government feeding us a bunch of bull. I'm having trouble trusting anyone. I imagine this is a widely-held belief. It doesn't help when so many lies are thrown at us to explain the latest foul-up.

Executive Pay: Once Again, Where Do We Go From Here?

I sure hope the furor over these AIG bonuses is yet again a wake-up call for the pay apologists among us. As I recently wrote, it's time for all board advisors - lawyers and consultants - to start providing responsible advice and get their head out of the sand. Times have changed and it's not going back. The days of arguing that excessive pay is necessary to retain an executive who might jump ship are over. Excessive pay is never justifiable. It's just excessive.

Unless - and until - boards and their advisors take charge of their own destiny and fix all that is broken, all the legislative and regulatory fixes in the world won't stop them from finding loopholes and continuing the excesses. When boards recognize that the causes of these excesses are a relatively recent phenomenon (for starters, read this) - and that excessive pay arrangements aren't some type of birthright for CEOs - it's easy to go back two decades and recreate what was a more reasonable way of doing things in the executive compensation area.

A board with the proper mindset can employ the few simple tools we have identified to fix CEO pay and save themselves a lot of heartache easily. They just need the will to do so, along with advisors with the backbone to speak full truths.

I'm the kind of guy who likes to think in terms of T-shirts. For this AIG debacle, my idea of a cool T-shirt would look like this:

- Front - "AIG, I love you even more today than yesterday..."

- Back - "...Yesterday, you really pissed me off."

The SEC Staff on M&A

Tune in tomorrow for this DealLawyers.com webcast - “The SEC Staff on M&A” - to hear all the latest from:

- Michele Anderson, Chief, SEC's Office of Mergers & Acquisitions
- Dennis Garris, Partner, Alston & Bird LLP and former Chief, SEC’s Office of Mergers & Acquisitions
- Jim Moloney, Partner, Gibson Dunn & Crutcher LLP and former Special Counsel, SEC’s Office of Mergers & Acquisitions

And stay tuned for this DealLawyers.com webcast: "Deal Protection: The Latest Developments in an Economic Tsunami."

Express Yourself Anonymously: An AIG Poll

Feel free to select more than one choice in this poll:


- Broc Romanek

March 17, 2009

BofA's Dueling "Say-on-Pay" Proposals

Recently, Bank of America filed preliminary proxy statement that includes BOTH a management proposal on say-on-pay and a shareholder proposal on say-on-pay (from Kenneth Steiner, whose agent is John Chevedden). The management proposal is an actual vote, while the shareholder proposal is merely a non-binding vote regarding whether the company should have a policy requiring an annual pay vote.

BofA had tried to exclude this proposal through the no-action letter process, arguing that it (1) conflicts with management's proposal and (2) the company has substantially implemented the shareholder proposal by including the management proposal. The proponent won the day with his argument that the two proposals are not the same because management's proposal is limited to the period of time that the company is in TARP, while his proposal is unlimited as to duration. Yesterday, Corp Fin posted its response, not permitting BofA to exclude the proposal on either ground (they did waive the 80-day advance requirement).

I think dueling "say-on-pay" proposals will be confusing to shareholders - and I certainly hope this won't be a new trend. Over the past month, most proponents withdrew their "say-on-pay" proposals once management included their own; this position by the Staff may cause them to reconsider going forward...

Transcript Posted: "Say-on-Pay: A Primer for TARP Companies"

Due to popular demand, we decided to prepare a cleaned-up transcript of the recent CompensationStandards.com webcast - "Say-on-Pay: A Primer for TARP Companies" - and have posted it in our "Say-on-Pay" Practice Area.

Our next CompensationStandards.com webcast is scheduled for next Tuesday - "Compensation Arrangements in a Down Market." And once new Treasury regulations come out, we can hold our postponed webcast: "New Treasury Regulations and the American Recovery Act: Executive Compensation Restrictions." As soon as the new regs come out, we'll calendar a date pronto for that webcast...

Raising Equity Capital in a Turbulent Market

Tune in tomorrow for our webcast - “Raising Equity Capital in a Turbulent Market” – to hear Dave Lynn, John Newell of Goodwin Procter and Lora Blum of Jones Day discuss how companies are using alternative methods to raise capital these days (egs. registered directs, "at-the-market," etc.).

Thanks to Jay Brown for his note about the passing of the SEC's Associate General Counsel Diane Sanger. She was truly unique and will be sorely missed.

- Broc Romanek

March 16, 2009

A Few (Negative) Words about Naked Short Selling

When the market surged 6% last Tuesday, it was allegedly due to the rumor that the SEC would bring back the "uptick" rule (on Friday, the SEC announced it will hold an April 8th Commission meeting to propose a new uptick rule). The use of short selling by hedgies to move markets for their own gain was discussed during the conversation between Jon Stewart and Jim Cramer on Thursday. Add us to the chorus that something has to be done about short-selling. And something different than the SEC's emergency short-selling restrictions implemented last Fall, which some argue had no impact.

We've always believed that naked short selling is a form of manipulation, particularly when it occurs near the market's opening and close (even if it's part of a hedging strategy, it's often still manipulative). There now have been a number of stories revealing what short sellers have been doing over the past few years and it's clear that this is destructive behavior.

It's time that the SEC and other regulators step up. Otherwise, this is one more aspect of "deregulation" that will continue to allow some to artificially manipulate stock prices - and feed the widespread belief that the markets aren't safe.

How to Fix It: Totally Eliminate Naked Short Selling

Many thanks to Carl Hagberg, for allowing us to reproduce his fine article below from the most recent issue of his "Shareholder Service Optimizer":

Here's the simple fix: We still can’t figure why smart people haven’t been able to understand exactly how naked short sales cheat investors – and how they can and do create cascades of sales to spook legitimate investors into panic selling – so the shorts can lock-in their profits, guaranteed – AND how simple the “fix” to the naked short-selling scandal really is:

Every single trade must be settled on T+3, or a mandatory buy-in must be executed by the seller's agent...no excuses or exceptions allowed. Something the SEC is still – shockingly and wrongly allowing.

We’ve been equally surprised by the large number of very smart people who think that restoring the “uptick rule” is the solution to the problem. It isn’t – especially since with trades now moving in one-cent increments, any crook in town can create an uptick to sell on - but still fail to deliver, sale after sale, after sale, etc.

How the markets are supposed to work: Let’s patiently review what should really be simple logic, about the way securities markets are supposed to work – and also about the inexorable, but basically simple law of supply and demand:

- First, let’s remember that one of the main reasons the SEC was formed in the first place – and the main reason that SEC registration of all publicly tradable shares was (and is) required – is to prevent fraudulent “over-issuances” of securities. In other words, if 100 shares of Company-A are registered, and I own 10 of them, the SEC rules and regs are meant to assure that I own one-tenth of the company, regardless of whether the shares are $1 each or $10 each.

- Second, let’s note than when shares are “sold short” there is always, by definition, a buyer. That buyer is entitled to have possession of his shares, and all the rights pertaining thereto, on T+3. And, under the present system, the buyer’s agent automatically credits the buyer with the ownership.

- But thus, please note, it is not enough for a seller to simply “locate shares” or to simply “ascertain that shares are available for lending” as current SEC rules seem to say is sufficient: the “short seller” must literally “borrow” the shares – and literally deliver them to the buyer for cancellation and re-registration; otherwise the issuer is “over-issued.”

Let’s review: For every single day a short-seller is allowed to go “naked” – i.e., the seller or his agent has failed to deliver the shares sold for cancellation – the issue is literally “over-issued” by that number of shares.

- In other words, if I sell 10 shares and the buyer has taken ownership of ten shares … but I haven’t delivered 10 shares for cancellation… there are now 110 shares “floating” out there in our little example. And, most important to note, in economic terms, this represents a 10% dilution of the SEC-registered shares.

- Theoretically, the 10% dilution – and the accompanying economic distortion of the true “equilibrium price” of the stock – is supposed to be immediately corrected by a forced “buy-in” of the undelivered shares, which will automatically bring the price back to a market-based “equilibrium” price.

- But when the buy-in rule is not strictly enforced, as is presently the case, “smart” naked-short-sellers will make as many more naked-short-sales as they possibly can – since allowing shorters to go naked almost guarantees that the shares will continue to fall – which will allow them to “cover” at even lower market prices than if they’d been covered on time.

- Please note carefully that allowing “naked shorts” to go uncovered by T+3 creates a “double whammy” in terms of market dynamics and in terms of the economics: Not only is there a frightening drumbeat or repeated sales – that tends to encourage a barrage of covered-sales too – each “naked sale” dilutes the number of shares they’ve bought, but no shares have been presented for cancellation.

- Please note too, that if a mandatory buy-in takes place, the “outstanding shares” are immediately brought back to the registered number of shares – and the market purchase automatically assures that the price is brought to a market-based “equilibrium number”…which, of course, is the correct number from a market-based perspective.

Let's review the math again: If I make a short sale of 10 shares of the 100 shares outstanding on Monday, and don't deliver on Thursday - and I am not automatically bought-in - as theoretically required, Company-A is over-issued by 10%. If I decide to make another naked short sale of 10 shares - and once again fail to deliver and fail to get bought-in, Company-A is now over-issued by 20%. Make no mistake about it: the SEC is allowing this to happen every single day!

Let's review the consequences again: The market - and the market price of the stock - are being inexorably distorted...because in reality, sellers are being allowed to sell something they do not have...or ever plan to have and for every day they are allowed to go naked they have been allowed to sell shares that should no longer truly exist under the charter and bylaws of the company - or under SEC rules.

So let's sum up: There is absolutely nothing wrong with short selling...as long as one ponies-up the shares on settlement date...regardless of whether one owns them outright or borrows them. (If one bets the wrong way, as very often happens, and the shares go up – and pass the point where the seller “sold short" legitimate short sellers will, of course, have to “cover their bet" at some point and repay the borrowed shares - either by delivering shares they may now own or buying them at the market price, which keeps the price of said shares at the market-based “equilibrium price").

But note: There is something that is both immoral and illegal about selling something you don’t own – or where you haven’t actually borrowed the goods to make delivery...and made delivery, pursuant to the normal terms of the sale. (And if you sold short with no intention of ever delivering the goods…that’s fraud.)

If one allows the supply of shares to multiply by 5% or 10% or more - as naked short sellers actually have done...while the “demand” to buy shares is constant, other things being equal, the price of said shares will definitely fall. (This is the first law of economics by the way). And if one adds to the normal desire to sell – by initiating a panic, fueled by sales of shares that one doesn’t own, and doesn't intend to lay claim to and deliver try the agreed upon date...(i.e. an artificially induced ‘disequilibrium’ between real supply and real demand)...the price will fall even more!

- Broc Romanek

March 13, 2009

Mark-to-Market Accounting Now on the Regulatory Fast Track

Yesterday’s House hearing on mark-to-market issues seemed to light a fire under the SEC and FASB, prompting commitments from FASB Chairman Robert Herz and the SEC’s Acting Chief Accountant Jim Kroeker to provide guidance on fair value accounting within three weeks.

As Edith Orenstein notes in the FEI Financial Reporting Blog, the members of the Committee pressed for immediate action:

“Rep. Paul Kanjorski (D-PA), chair of the Capital Markets Subcommittee of the House Financial Services Committee, noted in his opening remarks, “Mark-to-market accounting did not create our economic crisis, and altering it will not end the crisis. But improving the application of a fundamentally sound principle that is having profound adverse implications in a time of global financial distress is imperative. Therefore, our hearing today is about getting Financial Accounting Standards Board and the Securities and Exchange Commission to do the jobs they are required to do.” He added, “Emergency situations require expeditious action, not academic treatises. They must act quickly.”

“There are three pieces of legislation presently pending in Congress,” noted Kanjorski, with respect to mark-to-market accounting or accounting standard-setting generally (e.g. HR 1349 co-sponsored by Rep. Ed Perlmutter (D-CO) and Rep. Frank Lucas (R-OK) which would create a Federal Accounting Oversight Board). Kanjorski added, “I guarantee you one of those pieces of legislation is going to become law before early April.

Rep. Gary Ackerman (D-NY) responded to FASB’s current timetable, ‘If you are going to act, you’ve got to do it real quick.’”

The FASB Chairman ultimately responded, “We could have the guidance in three weeks; whether it will fix things, I don’t know.”

Also on the fast track are efforts to reinstate the “uptick rule” applicable to short selling. As noted in this Business Week article, SEC Chairman Mary Schapiro indicated in her testimony before the House appropriations committee earlier this week that the SEC hopes to propose reinstatement of the uptick rule some time in April.

SEC Filing Fees Increase on Monday

With the signing of the fiscal 2009 appropriations bill earlier this week, the SEC announced that is now set to raise the fees due for Securities Act registration statements and other filings. On Monday, March 16th, the Section 6(b) fee rate applicable to Securities Act registration statements, the Section 13(e) fee rate applicable to the repurchase of securities, and the Section 14(g) fee rate applicable to proxy solicitations and statements in corporate control transactions all increase to $55.80 per million dollars. Filings that get in today by 5:30 p.m. eastern time (except for short-form Rule 462 registration statements which get until 10:00 p.m.) will pay the old fee of $39.30 per million dollars.

The Alaska Air Letter and Beneficial Ownership

As noted in this O’Melveny & Myers memo, a Rule 14a-8 no-action letter granted to Alaska Air Group by Corp Fin last week delved into the specific proxy authority granted with respect three shareholder proposals, and whether the breadth of that proxy actually caused the person designated as proxy to be a beneficial owner of all of the nominal proponents’ shares – and thus unable to submit more than one proposal under Rule 14a-8(c). The particular proxy language in question specified that the designee could “act on my behalf in all shareholder matters, including this Rule 14a-8 proposal for the forthcoming shareholder meeting before, during and after the forthcoming shareholder meeting.”

This language appears to differ from proxies in circulation among other shareholder proponents, which often are not as broad in that they don’t grant authority with respect to “all shareholder matters.” As is always the case, the Staff's decisions on shareholder proposal no-action letters are based on the specific circumstances of each proposal and the arguments raised by issuers in seeking to exclude the proposal. Certainly, the result in the Alaska Air letter will focus attention – both for issuers and proponents – on the specific language used in granting proxy authority with respect to a proposal.

- Dave Lynn

March 12, 2009

The Battle for the SEC’s Budget

To me, among the big “sleepers” in the race for who is most to blame for what went wrong with financial regulation are those Congressional overseers who failed to direct sufficient resources to the SEC and other financial regulators - and you won’t see them calling themselves before a committee to be subjected to a public flogging. In over 10 years of working at the SEC, I recall that a substantial portion of that time was spent under one sort of hiring freeze or another, and the general question on everyone’s mind was always “how do we do more with less?” Granted, in the wake of Sarbanes-Oxley, the agency got the opportunity to beef up, but it amazes me to this day how quickly that advantage eroded. Within only 5 years of enactment of Sarbanes-Oxley, there was a risk that lawyers would become an endangered species in Corp Fin, as Staffers left and a prolonged hiring freeze prevented acquiring any replacements. I myself oversaw an office that had more than doubled in size after 2002, only to shrink again to back to its prior size just a few short years later. During just the first two years of former Chairman Cox’s tenure, Corp Fin’s Staff shrank by a whopping 13%! In short, the budget has a huge impact on the effectiveness of regulators – in many instances, budgetary pressures mean doing less, because doing more with less is no longer an option.

As Broc mentioned in the blog last week, the SEC is seeking a significant increase in its budget, which very well may be too little, too late. In testimony yesterday before the House Appropriations Committee’s Subcommittee on Financial Services and General Government, Chairman Schapiro set out in more detail how the SEC intends to utilize an increased budget (including a $17 million “reprogramming request”). Among the top priorities are to:

1. add staff to the SEC's Enforcement program to focus on pursuing tips, complaints, and other leads;

2. add new positions in the Examination program to expand its inspections of credit rating agencies, and to strengthen risk-based surveillance and examination oversight of investment advisers;

3. increase the number of staff in the Office of Risk Assessment specifically dedicated to deepening the SEC's understanding of risk, and incorporating risk assessment into all aspects of the agency's operations; and

4. enhance technology, including improved systems for: handling tips, complaints and referrals; monitoring risks; and managing cases and exams.

Now we will just have to wait and see what the SEC ends up getting for fiscal year 2010. If past practice is any indicator, we should know that some time in 2011.

Say-on-Pay Proposal Defeated at Disney

As noted in this LA Times article, a shareholder proposal asking Disney’s board to provide for an advisory vote on executive compensation received 39% support earlier this week. If you back out abstentions, the level of support was 42%. While not a majority, these numbers clearly represent significant support for the measure, and may foreshadow the possibility some majority votes on these proposals coming up this proxy season.

Disney shareholders were apparently less enamored with a shareholder proposal seeking to address so called “golden coffin” benefits. Several of these proposals are likely to be on ballots this year, courtesy of AFSCME and other proponents. At Disney, the proposal only got 27% of the vote. It was a nice touch, however, that Scott Adams from AFSCME handed the Disney board members a golden nail to hammer into the golden coffin benefits, but apparently such theatrics were not enough to carry the day on the proposal.

Aligning Compensation Incentives with Corporate Objectives

In this CompensationStandards.com podcast, David Koenig, Founding Partner of Ductilibility, discusses how companies can align their compensation incentives with risk management objectives, including:

- How work regarding risk and pay ties into today's environment
- How a compensation incentive system with objective performance metrics might actually lead to misalignment between an employee's incentives and the company’s operational objectives
- Whether corporate codes of ethics are effective in preventing risky behavior, including the "risk manager's dilemma”

- Dave Lynn

March 11, 2009

Let the Games Begin: Regulatory Reform Gets Underway with the Proposed FAOB

It would be nice to see (for once) some sort of orderly, coordinated effort to move us to where we have to be on reforming the financial regulatory system. There is obviously a great sense of urgency, whether real or manufactured, and no one good answer seems to exist for how best to tackle the multitude of concerns about the quality and effectiveness of our regulatory structure.

I firmly believe that rushing toward political solutions on regulatory reform may be the worst thing that we could do at this point, particularly if the result is implementation of a new regulatory structure just at the time when institutions and companies are turning the corner toward improvement. As we all learned from the Sarbanes-Oxley Act, a rush job on regulatory reform can have some near term benefits for restoring confidence, but also some long term costs and concerns.

Unfortunately, we may not get the chance to actually see any orderly effort toward reform. Late last week, for instance, Congressman Ed Perlmutter (D-CO) and Congressman Frank Lucas (R-OK) introduced H.R. 1349, the “Federal Accounting Oversight Board Act of 2009.” As this CFO.com article points out, the bill contemplates that the SEC would cede its accounting oversight to a newly created five member board consisting of the Federal Reserve Chairman, the Treasury Secretary, the SEC Chairman, the FDIC Chairman and the PCAOB Chairman.

This Federal Accounting Oversight Board (FAOB) would get its funding from assessments on accounting firms, and would have the power to “approve and oversee accounting principles and standards for purposes of the Federal financial regulatory agencies and reporting requirements required by such agencies.” Among the things that the FAOB would need to consider in the course of approving and overseeing accounting standards would be “the extent to which accounting principles and standards create systemic risk exposure for (i) the United States public; (ii) the United States financial markets; and (iii) global markets.” Based on the other standards outlined, the bill is clearly seeking to get at fair value accounting standards through the authority of the proposed Board.

The bill has been referred to the House Committee on Financial Services and will be discussed at a hearing scheduled for tomorrow on the topic of mark-to-market accounting.

Recovering Costs: This is the Big One

Earlier this month, the US Court of Appeals for the Tenth Circuit affirmed a district court award of $611,964.20 in costs against the plaintiffs in a securities class action lawsuit (In re: Williams Securities Litigation - WCG Subclass (Docket Number 08-5100)). The plaintiffs in this case claimed that the district court’s award represented the highest costs award in the history of American jurisprudence. As discussed in this Gibson Dunn & Crutcher memo:

The Tenth Circuit acknowledged that the costs awarded were "undoubtedly higher than the norm," but the size was not particularly surprising "given the massiveness and complexity of the litigation at issue" and the fact that the Plaintiffs sought almost $3 billion in damages. Slip Op. at 12. "Defendants' costs were, quite plainly, driven upward by the cold, hard facts of this case," and in particular, "Plaintiffs' litigation choices; including the number of defendants, the high amount of damages sought, the broad allegations asserted, the complexity of the claims at issue, and Plaintiffs' aggressive course of discovery …" Slip. Op. at 13. No abuse of discretion was found in awarding over $610,000 in costs: "In this case, the stakes were indisputably high, and 'it was incumbent on [De]fendants to fully prepare their case on the merits.'"

Guidance on Exiting ’34 Act Reporting

The March-April issue of The Corporate Counsel was just mailed. This issue includes pieces on:

- Exiting 1934 Act Reporting—Recent CDIs Provide Much-Needed Guidance
- Getting Into the Reporting System—The Easy Part
- Getting Out—The Hard Part
- Significant Negative Numbers in the Summary Compensation Table This Year
- More on Issuers' Ability to Eliminate Non-Binding Shareholder Proposals
- FAS 5 Follow-Up
- Shareholder Approval of Cash Incentive Plans—Not Always "Routine" under NYSE Rule 452
- New Oil and Gas Rules Not Applicable to 2008—But, SAB 74/Topic 11:M
- Goodwill Impairment MD&A Disclosure Not Just for the Impaired!

Act Now: Get this issue on a complimentary basis when you try a 2009 no-risk trial today. As all subscriptions are on a calendar-year basis, renew now to continue receiving upcoming issues during a time of great change.

- Dave Lynn

March 10, 2009

Corp Fin Publishes Securities Act Forms Guidance

Recently, Corp Fin updated its guidance on Securities Act Forms with a new set of Compliance and Disclosure Interpretations. This now makes a complete set of Compliance and Disclosure Interpretations on Securities Act Sections, Rules and Forms. Included among the interpretations are no less than 55 interpretations dealing with Form S-8, which is a form that never ceases to generate a lot of questions in my experience. The latest Securities Act Forms guidance includes interpretations that were previously published in the Manual of Publicly Available Telephone Interpretations and in other guidance, as well as new interpretations.

SEC Seeks to Streamline the Form ID Process

Monday is going to be “D-Day” for EDGAR, as the new electronic Form D submission rules go into effect. As Broc mentioned in the blog last week, the SEC is expecting a flood of Form ID applications, as issuers who have never had anything to do with the EDGAR system rush to get their access codes. In anticipation of the big rush, the SEC adopted rule changes yesterday (effective Monday, March 16) that will permit a person submitting a Form ID online to attach the “authenticating document” in a PDF format, rather than having to submit the authenticating document separately by fax.

The authenticating document is a notarized document containing the same information as contained in the Form ID application. Historically, the SEC Staff has had to match the information provided in the online submission with the faxed authenticating document before approving the Form ID application and generating EDGAR access codes, which can sometimes lead to delays. When this new optional method is used, a prospective filer can use a fillable PDF version of Form ID on the Commission’s website to create and print the document, and then attach a notarized version of that document as a PDF. For online Form ID applications submitted with the authenticating documents attached, the Staff will no longer have to match the faxed authenticating documents manually with the online submissions.

If attaching a PDF of the authenticating document is too much for you, and you still want to have a reason to use your old fax machine, then that “legacy” method will still exist after these rule changes go into effect. The new process, however, will hopefully speed the process for all of those nerve-wracking times where you run into a last minute need for EDGAR filing codes.

The Politics of Corporate Aircraft

Companies are facing unprecedented negative publicity these days with respect to corporate aircraft. In this CompensationStandards.com podcast, Terry Kelley, CEO of corporate aviation consulting firm GoldJets, discusses recent challenges for companies owning aircraft, including:

- What steps are companies taking to counter the current "image" problem with their aircraft?
- How are companies changing their corporate aviation policies To deal with this?
- What pitfalls should the company be aware of in revising their aircraft policies?
- What is 91Plus and how can it help companies with their corporate aviation needs?

- Dave Lynn

March 9, 2009

Comments Due Soon on the NYSE’s Rule 452 Amendment

The NYSE’s proposed amendment regarding broker discretionary voting on director elections is on the fast track (as Broc mentioned in the blog a couple of weeks ago), and that fast track means that interested parties only have a very short time to comment on the proposal. As is typical with these sorts of SRO proposals, comments are due only 21 days after publication in the Federal Register. With the Federal Register publication occurring last Friday, that means comments are due by March 27th.

Unlike your typical SRO rulemaking, this one has the potential for a broad impact on companies – changing the voting dynamics in uncontested director elections across the board. While it seems that, given the current environment, commenters won’t be able to stop this proposal from happening now, it is nonetheless important that concerns about – and support for – this proposal be aired through the public comment process, so comment if you can. For more on the topic, check out our "Broker Non-Vote" Practice Area.

Note that Exhibit 2 to the 4th Amendment includes the 39 comment letters regarding Rule 452 that the NYSE received in response to its Proxy Working Group Report, which predated the October 2006 submission of the initial notice of proposed Rule 452 changes. The NYSE typically does not solicit comments prior to filing a Section 19(b)(1) notice or any amendment to such a notice, so there are no other publicly available comments on the NYSE's website (or on the SEC's website). One of the main concerns raised by commenters on the Proxy Working Group's recommendation was the potential difficulty in achieving a quorum if director elections become non-routine.

Corp Fin’s Guidance for Smaller Reporting Company IPOs

While what we think of as the traditional IPO market continues to be virtually non-existent, smaller companies still keep filing first-time registration statements, whether it be for the purpose of raising capital or to register the resale of shares already issued. (Since the old “SB” forms have been phased out, smaller reporting companies now file on Form S-1 for an “initial public offering.”)

Last week, the Corp Fin Staff released “Staff Observations in the Review of Smaller Reporting Company IPOs” to highlight some of the typical comments raised on smaller reporting company registration statements. Many of the comments referenced in this report are equally applicable to registration statements - and other filings - for companies that do not qualify as smaller reporting companies. Topics covered include: the cover page and summary, risk factors, use of proceeds, description of business, MD&A, disclosure about directors, officers and control persons, related person transaction disclosure, the plan of distribution, selling security holders and financial statements.

Developments in Debt Restructurings & Debt Tender/Exchange Offers

We have posted the transcript for the DealLawyers.com webcast: "Developments in Debt Restructurings & Debt Tender/Exchange Offers."

- Dave Lynn

March 6, 2009

What if Willy Wonka is Real?

I just LOVE this one! Apparently, there are fraudsters out there impersonating actual SEC employees - and the problem is serious enough that the SEC issued this press release earlier this week. I imagine some of the fraudulent phone calls go something like this podcast.

Note that the frumpy dude in the "Willy Wonka" costume is not me. I may be a little "off," but I do have my pride...

A Few Items on Policing TARP

As noted in this NY Times article, a Senate hearing yesterday consisted of angry Senators wondering where its AIG bailout money went. I imagine this will be a consistent theme from Capitol Hill as the government ramps up to give away another trillion dollars.

Anyways, we've seen a few reports from the Congressional TARP Oversight Panel - consisting of five members - since it was created a few months ago. Now, we're learning more about the inner machinations of the Oversight Panel. For example, I found this WSJ article entitled "Policing TARP Proves Tricky" pretty interesting. Here is an excerpt:

The short-staffed panel is drawing heavily on the Harvard University law students and colleagues of its chairwoman, law professor Elizabeth Warren, as it churns out reports at a break-neck pace. Most of the staffers are 20-something aides from the Obama campaign, though an executive director and two banking lawyers were hired recently.

The panel's other members have had to hustle for a chance to weigh in, or, in the case of the body's two Republicans, to dissent altogether, something that isn't supposed to happen on a panel dubbed "bipartisan."

In the "Conglomerate Blog," David Zaring has this interesting entry entitled "How Powerful is Elizabeth Warren?" - she used to be his law school teacher so he has a unique insight.

Has former Senator John Sununu lost his mind? He's one of the TARP overseers - and just joined the board of a company affiliated with a TARP bank. No common sense. Perception matters. Then again, he's rushed to become "overboarded" ever since he lost his re-election bid. It's hard to keep track, but my count shows that he's joined at least three boards over the past few months.

A Code of Conduct for Proxy Advisors?

Recently, Yale's Millstein Center released its final report entitled "Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry." It proposes the first industry-wide code of conduct for proxy advisors, which includes a ban on advisors performing consulting work for any company on which it provides voting recommendations or ratings - and also asks the SEC to create a Blue Ribbon Commission to provide recommendations about how to modernize the voting framework.

The report also urges institutional investors to be more transparent about the way they act by disclosing how they vote, what ownership policies they follow and what resources they put into engagement efforts.


- Broc Romanek

March 5, 2009

Corp Fin's New Chief of Rulemaking: Felicia Kung

Congrats to Felicia Kung for being named as the new head of Corp Fin's Office of Rulemaking. She takes over for Betsy Murphy, who recently became the SEC's Secretary. Felicia has been on the Staff for many years, toiling in Corp Fin's Office of International Corporation Finance as Senior Special Counsel (ie. #2) to Paul Dudek for the past seven years. She'll be a great asset during a time of intense rulemaking.

"Hear, hear" to the promotion of Jamie Brigagliano as Deputy Director of the Division of Trading and Markets. Great guy and great choice...

Podcast on Delaware's Proposed Legislation

Recently, I blogged about new proposed amendments to the Delaware General Corporation Law. Yesterday, I caught up with John Grossbauer of Potter Anderson for this podcast, in which John provides some analysis of the new bill, including:

- How do the proposed DGCL changes address proxy access and reimbursement bylaws?
- What about authorization to separate record dates for notice and voting at shareholder meetings do?
- Any other noteworthy proposals?

California and the "Delaware Carve-Out"

Keith Bishop reports on this development: A few weeks ago, the 9th Circuit Court of Appeals - in Madden v. Cowen & Company - delivered an opinion regarding a lawsuit filed in California state court by 63 shareholders against an investment banking firm. The suit alleged that the investment banking firm misled the plaintiffs in connection with the sale of their shares in a closely held California corporation (St. Joseph) to a publicly traded Delaware corporation (FPA Medical Management) that went bankrupt shortly after the sale. The plaintiffs' suit was removed to federal court pursuant to the Securities Litigation Uniform Standards Act of 1998. The federal district court denied the plaintiffs' motion to remand the case back to state court and granted the defendant's motion to dismiss.

On appeal, the 9th Circuit concluded that the suit fell within the so-called "Delaware Carve-Out" that preserves certain actions based on the statutory or common law of the state in which the issuer is incorporated if certain conditions are met. 15 U.S.C. Sec. 77p(d). In this case, the issuer of the shares sold by the plaintiffs, St. Joseph, had been incorporated in California.

Thus, it is somewhat ironic that the Delaware Carve-Out was being applied to a California corporation. The defendant argued that the Delaware Carve-Out applied only to the acquiring company (in this case, FPA, a Delaware corporation) because it was the issuer of the covered security. The 9th Circuit rejected this argument finding that the issuer in the Delaware Carve-out refers to the corporation that is the issuer of the securities described in the carve-out and was not limited to the issuer of a "covered security".

The 9th Circuit also addressed the defendant's argument that it did not act on behalf of the issuer because it was not an officer, director or employee of the issuer (referring to the Private Securities Litigation Reform Act of 1995) which defines the phrase "person acting on behalf of an issuer". The 9th Circuit rejected this argument as well.

Accordingly, the court found that the Delaware Carve-Out applied and the case should be remanded to state court. The case is significant because it adopts an expansive reading of the Delaware Carve-Out and opens the door to more state court suits involving issuers and persons acting on their behalf who are not the issuers of covered securities.

Implementing the New Cross-Border Rules

We just posted the DealLawyers.com transcript for our recent webcast: "Implementing the New Cross-Border Rules."

- Broc Romanek

March 4, 2009

Today's Webcast: "Say-on-Pay: A Primer for TARP Companies"

A few days, we held the prep call for this newly-scheduled CompensationStandards.com webcast to be held today - “Say-on-Pay: A Primer for TARP Companies” - and I know it's gonna be a "biggie." Our panelists have a lot to say - with much practical guidance to provide. Join these experts:

- Mark Borges, Principal, Compensia
- Ning Chiu, Counsel, Davis Polk & Wardwell LLP
- Dave Lynn, Editor, CompensationStandards.com and Partner, Morrison & Foerster LLP
- Carol Bowie, Head, RiskMetrics' Governance Institute

On CompensationStandards.com's "The Advisors' Blog," I've posted links to two dozen say-on-pay preliminary proxy statements filed in the past few days.

And shortly after the say-on-pay webcast ends, tune into this important webcast on TheCorporateCounsel.net today: "How Boards Should Manage Risk."

Mandatory E-Filing of Forms Ds: Commences March 16th

In anticipation of the impending March 16th start-date when all Form Ds must be electronically filed, the SEC issued this notice warning those that have not ever filed electronically before to obtain their EDGAR access codes from the SEC well in advance of a filing deadline - since the SEC expects a deluge of last minute requests that it may not be able to handle. In our "Regulation D" Practice Area, we have posted numerous memos on this new e-filing requirement.

A Market Regulation Reform Group

There is a lot of high-wattage star power in a new investor task force announced by the Council of Institutional Investors and CFA Institute last month. The Investors’ Working Group is a diverse, non-partisan panel of experts, led by former SEC Chairs Bill Donaldson and Arthur Levitt. It intends to issue an initial report with recommendations by late spring. Add another set of proposals to the pile...

- Broc Romanek

March 3, 2009

How Boards Should Manage Risk

Tomorrow's webcast - "How Boards Should Manage Risk" - should be a "biggie" given the events of the past year. The focus will be on how boards should now deal with risk management, including analysis of the important Citigroup decision decided last week in Delaware (and noted below).

Part of the course materials is this recent thought leadership survey produced by KPMG International, in cooperation with the Economist Intelligence Unit. This survey reveals industry insight into how institutions are addressing the risk management shortfalls. Some of the key findings include:

- Main areas of focus are risk governance, risk culture, and the reporting and measurement of risk, with over 75% of respondents indicating increased attention in each of these areas
- While 71% surveyed believe their organization’s risk function has more influence now than two years ago and a full 81% consider risk management to be an essential source of competitive advantage, 76% say that risk management is still stigmatized as a support function
- Fewer than half the banks in the survey acknowledge that their Boards are short of risk knowledge and experience – a surprisingly low figure given the recent troubles. It is of some concern that many are not even planning to address this issue – particularly at the non-executive level where the need for expertise is at its most acute. Almost eight out of ten respondents are seeking to improve the way risk is measured and reported, a clear recognition that previous models did not give sufficiently accurate forecasts
- Incentive and remuneration issues are cited more than any other aspect for creating the preconditions for the credit crisis, followed closely by risk governance and risk culture

The research included a survey of over 400 professionals involved in risk management (30% at the C-level) in 79 countries, as well as several in-depth interviews with senior executives, undertaken in the fall of 2008.

Delaware Dismisses Caremark Claims Against Citigroup: CEO Pay "Waste" Claim Survives

From Travis Laster of Abrams & Laster: Delaware Chancellor Chandler's opinion in In re Citigroup Inc. Shareholder Litigation came out last week. The complaint alleged Caremark claims against the Citigroup directors based on Citi's subprime losses. The Chancellor dismissed all but one aspect of the case - a waste claim based on former Citi CEO Charles Prince's exit compensation agreement. [We have posted memos regarding this case in our "Risk Management" Practice Area.]

The opinion confirms that existing principles of Delaware law apply even in the midst of an unprecedented financial crisis, and that the Delaware courts will not go looking to hold directors up as examples for the economy's current difficulties. It provides a good summary of existing Delaware law principles governing Caremark claims, which I won't repeat.

Here are a few nuances worth highlighting:

1. The Chancellor distinguishes between (i) a Caremark monitoring system designed to protect against financial fraud and criminal wrongdoing and (ii) the identification of and protection against business risk. He holds that Citi's problems fell squarely under the heading of unanticipated business risk. This will be a helpful distinction for other companies faced with similar problems brought on by the current financial crisis.

2. The Chancellor makes clear that "Directors with special expertise are not held to a higher standard of care in the oversight context." (n.63). Likewise, for directors who sit on committees with oversight responsibility, "such responsibility does not change the standard of director liability under Caremark and its progeny." (Id.)

3. Prior experience with scandals at other companies is not sufficient to make a director "sensitive to similar circumstances" and hence susceptible to a Caremark claim. (37).

4. In a point of interest to those who litigate in Delaware and face competing litigation in other fora, the Chancellor questions whether a lower standard should apply to a motion to stay in favor of a prior pending action versus a motion to dismiss, noting correctly that both have the same practical effect. (n.16).

5. In what I view as the most noteworthy section of the opinion, the Chancellor holds that the plaintiffs stated a claim for waste based on former CEO Prince's $68M exit package. He explains: "[T]he discretion of directors in setting executive compensation is not unlimited. Indeed, the Delaware Supreme Court was clear when it stated that 'there is an outer limit' to the board's discretion to set executive compensation, 'at which point a decision of the directors on executive compensation is so disproportionately large as to be unconscionable and constitute waste.'" (55-56). The Chancellor held that there was a reasonable doubt as to whether the exit package awarded compensation that is beyond the "outer limit." (56).

It used to be said that waste claims were easy to plead - but difficult to prove. Then for a long time they were also hard to plead. This one survived. It's too early to say whether the Delaware courts will now be more receptive to compensation challenges based on waste theories, but I feel safe predicting that this aspect of the decision will not go unnoticed by members of the plaintiffs' bar. Look for more waste claims to come based on big exit comp numbers.

Our March Eminders is Posted!

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

- Broc Romanek

March 2, 2009

The SEC's Budget: Pray for Mojo

Although SEC Chair Schapiro issued this statement on Thursday saying that a 13% budget increase would help the SEC, I couldn't help but think that the SEC wanted more, particularly after years of flat budgets under Chairman Cox's tenure (see my rant on this topic last year). Unfortunately, 13% just catches the SEC up to where it should be under normal circumstances - it doesn't reshape the SEC as it needs to be.

Certainly, a much greater increase seems warranted given the crazed circumstances of the financial markets - and the need for the government to help re-establish trust between investors and Wall Street. A strong cop on the beat is a "must" right now and I don't think 13% can do it, as the Staff needs some reorganization, including hiring folks with expertise in the areas that failed us (eg. derivatives) - as well as a much larger Enforcement Division. Ten cent thoughts are cheap...what are yours?

Warren Buffett's Annual Letter to Shareholders

We now have the always fascinating annual shareholders' letter from Warren Buffett. Among other topics, he waxes about the free-fall in the economy and the human condition. Here is a NY Times article about the letter (and even better analysis from the "D&O Diary") - and here is Mad Money's Jim Cramer taking Warren to task for urging Americans to buy stock at the same time that Warren was selling American...

Auditor Inspections: EU Commissioner Threatens US Regulators

As noted in this recent statement, EU Commissioner Charlie McCreevy infers that unless the US accepts the EU inspection process - which has not been proven effective or independent - they will not work with the PCAOB. It appears to be a shot across the bow of new SEC Chair Schapiro who just said in this recent speech that she is once again dedicating the SEC to protecting investors. McCreevy worked at one of the Big 4 firms some time ago and has a term that expires this summer.

My Recent Obama Experience

One of the beauties of living in DC. My son and I were at the Washington Wizards' basketball game on Friday night, with President Obama in attendance - and sitting in the crowd. He was accessible by anyone and he did a lot hand-shaking. No real security in sight, even though I'm sure they were there. Below is my video when he first emerged from a tunnel - he's not visible due to a gaggle of a hundred reporters, but you get a sense of the excitement (and here is a video from a real news organization):



- Broc Romanek