Survey Results: D&O Questionnaires

We recently wrapped up our Quick Survey on D&O Questionnaires practices. Below are our results:

1. When we update our D&O questionnaire each year, the following groups review it before it's sent to the D&Os:
- Outside law firm - 37.1%
- Independent auditor - 5.7%
- Finance department - 1.4%
- General counsel - 57.1%
- Executive compensation department - 4.29%

2. Our _______ has overall responsibility for the "master" D&O Questionnaire to be sent out each year:
- Legal department - 64.9%
- Finance department - 0%
- Corporate secretary - 21.1%
- Outside counsel - 14.0%

3. Before we distribute our D&O Questionnaires, the company "pre-completes" responses in the following sections for review and acknowledgement by each individual respondent:

- We ask respondents to provide all information without pre-completing - 9.0%
- Compensation information, except for the perks - 16.7%
- Compensation information, including the perks - 16.7%
- Equity ownership, including beneficial ownership - 53.9%
- Section 16 compliance - 24.4%
- Biographical information - 59.0%
- Related-party transactions - 18.0%
- Independence - 16.7%
- Audit committee financial expertise - 18.0%

4. To assist respondents in identifying related-party transactions, we provide the respondents with a list of the company's vendors, customers or other counterparties:
- Yes - 14.6%
- No - 85.5%

5. To assist in identifying related-party transactions, we compare known information about respondents' affiliations with a list of the company's vendors, customers or other counterparties:
- Yes - 59.6%
- No - 40.4%

6. After sending the D&O Questionnaire, the company's follow-up with respondents consists of:
- Reviewing responses with all respondents individually - 1.8%
- Reviewing some responses with respondents individually if questions or issues arise - 86.0%
- Answering questions from respondents about particular questions or issues if they arise - 66.7%
- Little or no interaction with the respondents - 10.5%

7. After receiving the D&O Questionnaire responses, the company reviews the responses (or a summary report) with the following:
- Full board of directors - 23.4%
- Governance and nominating committee - 57.5%
- Compensation committee - 4.3%
- Disclosure controls committee - 14.9%
- Relevant departments - 36.2%
- Outside counsel - 42.6%

8. Our company retains the D&O questionnaire responses for a period of:
- Until the proxy statement is filed (we essentially don’t retain them) - 1.8%
- For about one year (roughly until the next year's questionnaire is drafted) - 5.3%
- Between 1 and 3 years - 21.1%
- Between 3 and 5 years - 19.3%
- Between 5 and 7 years - 28.1%
- More than 7 years - 24.6%

Use of Corporate Plane for Directors to Attend Board Meetings

As we are reminded by this recent note from the "The Race to the Bottom" Blog - and this DealBook piece on how Verizon is ending free plane use for ex-CEOs ahead of next week's shareholders meeting - personal use of corporate aircraft continues to be a controversial issue. But what about when outside directors get flown to - and/or from - board meetings? How do companies deal with that?

That is the subject of our latest "Quick Survey - Corporate Airplane Use by Outside Directors." Please take a moment to answer the question posed.

"4th Annual Proxy Disclosure Conference": Early Bird Follow-Up

The early bird offer that expired Friday resulted in great momentum, with a record number of members signed up so far for the “4th Annual Proxy Disclosure Conference” (whose pricing is combined with the “6th Annual Executive Compensation Conference”) – that will be held in San Francisco and via Live Nationwide Video Webcast on November 9-10th.

Our New “Early Bird” Rates – Expires May 22nd: Still recognizing the hard economic times we face—and in response to requests from members who were not able to submit their registrations by the deadline—we are offering a reduced rate for the Conferences through May 22nd.

For example, you can attend in San Fran for only $995 if you register by May 22nd (reg. rate is $1295) – and it’s only $495 if you also attend the “17th Annual NASPP Conference” (which starts right after the Proxy Disclosure Conference). Here is the Conference registration form – and here is the agenda.

With Congress poised to consider legislation mandating say-on-pay (expected to be introduced by Sen. Schumer soon) – and SEC Chair Schapiro recently stating that there will be new proposals to change the executive compensation rules in the near future - this year’s Conferences are a “must.” Register now and take advantage of these favorable rates.

- Broc Romanek

Tripping the PPIP - and TALF - Fantastic

Many are still figuring out whether - and how - to do deals under the new "Public-Private Partnership Investment Program." And only a handful of deals have been done so far under TALF. Join these experts tomorrow in our webcast - "Tripping the PPIP - and TALF - Fantastic" - as they analyze the issues presented under both government programs:

- Alan Beller, Partner, Cleary Gottlieb Steen & Hamilton LLP
- Tony Nolan, Partner, K&L Gates LLP
- Meg Tahyar, Partner, Davis Polk & Wardwell

How to Repay TARP Funds

One of the hot TARP topics is how can companies repay them if they so wish - quite a few companies have already expressed an interest in repaying. Last week, Treasury Secretary Timothy said that Treasury will support early repayment of Capital Purchase Program funds and will apply standards that consider the banking industry's financial health and lending levels (despite evidence that Treasury is taking its time in assessing applications to repay once they are submitted).

Last month, Treasury posted a form of acknowledgement of repurchase equity to be utilized for public companies desiring to make such repurchases - although any repurchases must be approved by the institution's federal regulators (here are Treasury's FAQs about repayment; here is the form to repurchase warrants). It's unclear from the form of agreement whether Treasury will impose some minimum requirement for partial repurchases of an institution's preferred. In our "TARP" Practice Area, we have posted memos specifically about repaying TARP funds.

John Grossbauer on Delaware's Final Legislation

In this podcast, John Grossbauer of Potter Anderson provides some follow-up to his podcast from last month now that the new Delaware legislation has been finalized. We have been posting numerous memos analyzing these amendments in our "Delaware Law" Practice Area.

- Broc Romanek

Tabulating Voting Results: Apple Pulls a "Yahoo"

Yesterday, Apple announced that it filed a corrected Form 10-Q to clean up some "human errors" that happened during the course of tabulating voting results from its recent annual shareholders meeting. The reversed error now shows that Apple received a majority vote on a non-binding shareholder proposal that sought to have the company to conduct say-on-pay votes. The company incorrectly counted abstentions as "no" votes. [As an aside, some proxy statements say some strange things about effect of abstentions. But that's a story for another day.]

Apple initially claimed victory in its initial Form 10-Q filed last week. Now with egg on its face - and in the wake of two consecutive years of a majority vote in favor of doing so - the company says it will place say-on-pay on the ballot next year. The reversal comes on the heels of the tabulation math being examined by Mercury News' "SiliconBeat" on Friday.

Unfortunately, bad tabulation math happens all too often after annual meetings (eg. last year's Yahoo meeting). Once again, I urge all those that deal with annual meetings to read this important piece from last Fall's issue of InvestorRelationships.com: "An Insider’s Perspective: How to Avoid a Yahoo-Like Tabulation Nightmare." You can get receive it for free - you just need to input some basic contact information.

Voting results have become too important for companies to not have truly independent tabulators (often, a company's transfer agent serves as the tabulator). And I believe that the SEC should adopt rules requiring companies to file voting results on a Form 8-K within 4 business days of the results being certified (or at least requiring disclosure on a press release or posted on corporate websites within that timeframe).

The existing standard of having shareholders wait until the next Form 10-Q is simply too long - for many of the calendar-year companies that hold their annual meetings in April and May, we won't see voting results until mid-August. If I make an effort to vote, it's nice to know the results as soon as possible - it's a vital part of the voter experience. Think election night.

And clearly people really need to evaluate how they treat tabulation from a disclosure controls and procedures perspective - and make sure the disclosure committee is involved in the process. Don't just rely on the tabulators if you value your job (not to imply that the tabulators were at fault in Apple; we don't yet know what the "human error" was)...

Corp Fin Updates Numerous CD&Is

On Friday, Corp Fin updated a bunch of its "Compliance and Disclosure Interpretations," including some in these categories: '33 Act Sections; '33 Act Rules; '33 Act Forms; '34 Act Rules; Section 16 Rules & Forms; '34 Act Forms; Form 8-K; and Regulation S-K. The Staff has marked each of the specific CD&Is that have been updated. I imagine Dave might provide us with analysis about some of these changes when he blogs towards the end of next week.

FINRA's New Limited Representative Category for Investment Bankers

A few weeks ago, the SEC approved FINRA's rule change that creates a new limited representative category - Limited Representative-Investment Banking - for persons whose activities are limited to investment banking, including those who work on the equity and debt capital markets and syndicate desks. The new registration category, which has long been requested by the securities industry, permits persons who function solely in the investment banking area to avoid having to pass the Series 7 examination.

- Broc Romanek

Here It Comes! Schumer's Major Governance Legislation

According to this WSJ article from Saturday, Sen. Schumer intends to introduce legislation this week that would overhaul a number of governance areas. This is the legislation that we all have been expecting since the financial crisis broke - and, with a few exceptions, its components should come as no surprise since most of them have been proposed before in one form or another before.

According to the article - whose authors saw a draft of the legislation - it will include these significant provisions (bear in mind that actual proposals could change from the draft):

1. Say-on-Pay - require companies to give shareholders an annual nonbinding vote on executive pay practices
2. Say-on-Severance - give shareholders a nonbinding vote on severance packages for executives following mergers or acquisitions
3. Proxy Access - buttress potential SEC rules that would make it easier and cheaper for investors to nominate their own directors (article says SEC is considering a number of "proxy access" techniques and could issue a proposal in mid-May)
4. No More Classified Boards - require companies to hold annual director elections rather than putting only a portion of the board up to vote each year
5. Majority Vote Standard for Director Elections- require directors to resign if they don't win a majority of shares voted
6. Independent Board Chairs - require board chair to be independent
7. Risk Management Board Committees - require boards to appoint special committees to oversee risk management

The article says that House Financial Services Committee Chair Barney Frank is working on say-on-pay legislation as well. And we already have seen SEC Chair Schapiro's ambitious agenda for governance rulemaking that will take place in the near term.

This is all quite notable, particularly when combined with the high likelihood that the SEC will approve the NYSE's proposal to eliminate broker non-votes in director elections which, according to this WSJ article, may come as soon as this week!

It will be interesting to see how hard corporate lobbying groups will fight the pay components of Schumer's bill. There are numerous examples that reflect little change in executive compensation practices. For example, see today's Bud Crystal note on Six Flags.

And speaking of Sen. Schumer, he and Sen. Shelby introduced an amendment to an existing anti-fraud bill last week that would increase the SEC's budget by $20 million to allow it to hire 60 additional Enforcement Staffers and upgrade its technology.

Ca-Ca-Catfight! Banc of America vs. the Gov

Good heavens, who knows where to start commenting on the latest mess related to fixing this crisis. According to this WSJ article from Thursday, BofA's CEO Ken Lewis says he was urged to lie to investors as part of testimony before New York Attorney General Andrew Cuomo. The NY AG's office has released a slew of documents related to this testimony, including this letter to Congress.

Probably best to just fire off a few quick thoughts (mine and others) and not drone on:

- The obvious: If proven true, it would mean the Treasury Secretary and Federal Reserve Chairman urged a CEO to break US federal securities laws. And if true, these type of actions taken by senior government officials raise serious questions as to whether citizens can trust their government, and what can be done to hold them accountable and increase transparency such that they can no longer engage in such actions behind closed doors, even during a financial crisis.

- On December 4th, then-SEC Chair Chris Cox delivered this speech, in which the he warned of the danger of such actions by the government and how it would undermine the enforcment and regulatory regime in the US. It is notable this speech came during the timeframe the questionable practices were alleged to have occurred.

- WSJ's article entitled, "Are Ken Lewis, Ben Bernanke and Hank Paulson Heroes or Goats?"

- D&O Diary's blog entitled, "Ken Lewis, BofA and the Fed Strong-Arm: Ten Questions"

- This might have happened more than once. Last month, this Washington Post article outlined how the head of FHFA (which oversees Fannie Mae, Freddie Mac and the FHLB) urged Freddie and Fannie to make misleading disclosures.

- BofA, under the leadership of the CEO, has the ultimate responsibility for ensuring compliance with its obligations to provide disclosure to investors. Notwithstanding what he was told to do by government officials, it was ultimately the company's decision as to whether or not to break the law. In the Freddie and Fannie case, it appears that they chose not to break the law and did make the required disclosures.

- Don't leave the investigating to Congress or even the NY AG in this case. The SEC should investigate, subpoena all people in the discussions and all the relevant emails, documents and telephone records and get to the bottom of this and get us the truth. Anyone, including any government officials, that are found to have broken securities laws, should be held accountable by the SEC so they can ensure the investing public that this is not a rigged market.

- BofA's annual shareholder meeting - to be held this Wednesday - surely will be one for the ages! Ken Lewis - and other BofA directors - already were the subject of a "just vote no" campaign before this latest maelstorm.

Here is a video clip of the "Seinfeld" scene where Kramer goes into his "catfight" routine. Classic. Perhaps not as good though as this "Friends" catfight. Or if you want some "cat love," this "Christian the Lion" reunion video will surely make you weep with joy.

The Bank Stress Tests: Fed's White Paper Outlines Standards

On Friday, the Federal Reserve issued a "Design and Implementation" White Paper, which includes the stress test standards for the 19 banks that are being subjected to the tests. While the stress test results will not be released until next Monday, the White Paper helps us somewhat understand how those tests are being carried out - particularly Table 1 which spells out the scenarios, etc. I indicate "somewhat" because some critics say the White Paper is too vague (eg. Bloomberg's article, "Fed's White Paper Leaves Questions Unanswered, Analysts Say.").

For the most part, it seems like the government's tests are based on two potential economic scenarios - a baseline scenario - based on a early '09 consensus among economic forecasters - and a more "worser case" scenario, based on a longer, more severe recession. Here is the Fed's related press release - and here is a list of the 19 banks.

Condolences to those that knew Professor Louis Lowenstein, who passed away last week and was a founder of Kramer Levin. Here is an obituary from the NY Times.

- Broc Romanek

The Coming Battle: Aggregation of Ownership to Meet SEC Thresholds

With the SEC's reconsideration of shareholder access looming (which would likely include a minimum ownership threshold to place nominees on a ballot), the issue of whether one investor can combine ownership of multiple shareholders to meet a minimum threshold under the SEC's rules becomes an increasingly important issue.

So far, this issue has been debated mostly in the Rule 14a-8(b) context, where a number of companies have sought exclusion of shareholder proposals submitted by individuals represented by John Chevedden. I have heard complaints from a number of members who worry that the combined effect of recent no-action responses may lead to potentially abusive results.

With a few exceptions in prior proxy seasons, the Corp Fin Staff consistently has rejected arguments that nominal proponents are merely strawmen and that the "agent" is the real party-in-interest. And the Staff often allows (eg. this recent AMR no-action letter) co-proponents - none of whom owned sufficient shares to qualify under Rule 14a-8(b) on their own - to aggregate their shares to satisfy the minimum requirements. Remember that the Staff's no-action responses depend on the particular facts presented - and the arguments made.

I'm hearing from a lot of members worried about the risk that these Staff positions impose, particularly a position that could be viewed to allow anyone to essentially "borrow" shares from passive individual shareholders and submit a proposal on behalf of those holders. In addition, they are worried that anyone can - via the representation of other shareholders - submit multiple proposals to the same company in a single year. These members note that these activities arguably violate Rule 14a-8.

Given that the SEC will likely address this issue in its upcoming shareholder access rulemaking (as it has done as part of its prior access proposals), it seems appropriate that the SEC request comment on this issue in both the Rule 14a-8 and shareholder access contexts due to its importance.

A First: Reincorporating to North Dakota

Thanks to Michelle Leder of footnoted.org for pointing out the first company - American Railcar - to reincorporate to North Dakota. Here's the proposal from the company's preliminary proxy statement; note that Carl Icahn owns a majority stake in the company.

As we have blogged about before, North Dakota changed its laws in '07 so that they are among the most shareholder-friendly. And some shareholders have urged a group of companies to reincorporate there, through the shareholder proposal process, etc.

Last Day for Early Bird Rates: "4th Annual Proxy Disclosure Conference" & "6th Annual Executive Compensation Conference"

You need to register by the end of today to obtain the very reasonable Early Bird rates our popular conferences - "Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference" & "6th Annual Executive Compensation Conference" – that will be held in San Francisco on November 9-10th (and via Live Nationwide Video Webcast). Warning: These reasonable rates will NOT be extended beyond today!

Here is the Conference registration form – and here is the agenda. These Conferences have been accredited by RiskMetrics for director education.

- Broc Romanek

Yes, There Were Regulatory Failures: Now What?

With so much going on, it's hard to keep up. Here is another worthy development that hasn't been addressed yet in this blog - this GAO report from March about the role of regulators in the current financial crisis, particulary regarding risk assessment by the banking and securities regulators. GAO's report provided little in way of surprise, but it is another document that folks will consider when deciding how our regulatory structure will look like after the coming reform.

The battle for this reform is being waged now and it's probably the most important one since the major reforms instituted during the Great Depression. Last month, SEC Chair Schapiro urged the Senate to not sacrifice investor protector (nor the SEC's role) as Congress considers creating one entity to oversee all risk in the financial system (see the related Reuters article). There clearly are high stakes involved in this debate.

By the way, I found it interesting that Jon Stewart had Elizabeth Warren, head of the TARP oversight board, on The Daily Show last week (here is the archived video). Overall, I wasn't too keen on her commentary - but I did like her closing remarks, when she highlighted how important it was to not continue watering down our regulatory framework. She explained how this country went through 150 years of "boom and bust" cycles and how those disappeared for 50 years after FDR instituted strong regulations during the Great Depression. Then those cycles reappeared in the form of the late '80s S&L crisis, the late '90s Long Term Capital scare, the Enron and related frauds in '02 and now this serious credit meltdown. She believes the last 20 years of boom and bust can be attributed to weaker regulations. Food for thought...

I can relate to Elizabeth's senior moment when she forgot what PPIP stood for! She can take a refresher during next Thursday's webcast - "Tripping the PPIP - and TALF - Fantastic" - featuring Alan Beller of Cleary Gottlieb, Tony Nolan of K&L Gates and Meg Tahyar of Davis Polk.

Today's Webcast: "XBRL: What Lawyers Need to Know"

Please print off these "Course Materials" prior to catching today's webcast: "XBRL: What Lawyers Need to Know." John Huber and Dave Lynn will go over what types of issues lawyers need to know - then, Louis Matherne of Clarity Systems will give a short demo tailored to lawyers so you can see how XBRL will change the document production workflow for creating disclosure documents.

As I mentioned in this blog on Monday, companies will need to change their 10-Q and 10-K cover pages, even if they aren't impacted by the XBRL rule changes yet - there continues to be a lot of follow-up questions in our "Q&A Forum" on this topic. And on Tuesday, XBRL US published its 2009 version of the US GAAP XBRL taxonomies.

Special Meetings Called By Shareholders: GE Lowers Its Threshold

Been meaning to blog about this WSJ article entitled:“GE Gives Shareholders More Power.” The article notes that the company has reduced the threshold allowing shareholders to call a special meeting from 40% to 25%. And even though a 25% threshold for a company the size of General Electric is huge, it's still a notable development. Here’s GE's Form 8-K regarding the change.

As noted in this article, it looks like GE's annual meeting held yesterday had a bit of drama when one of Fox News' employees used the microphone reserved for shareholders to ask questions - without identifying himself as a reporter. When it comes to concerns about old-style journalists being replaced by bloggers, I also get worried about them - but then I think about incidents like this to remind me that there are so many folks pretending to be journalists in the mainstream press these days that the glory days of that medium clearly are long gone.

I know it's late, but I've been meaning to gloat about my March Madness picks. Not only did I pick three of the Final Four (only missed Duke), I did pick North Carolina to win. Check out this bracket that captures the expected average salaries of graduates from schools that were in the tourney field.

- Broc Romanek

The Art of Selling Your Lawyering

In recognition of the many changes impacting the practice of law, we will be devoting more resources to helping you cope - and keep abreast - of how the changes will impact your career. For example, tune in next month for our webcast: "Looking Out for #1: How to Manage Your Career." We'll also be expanding the resources in our "Career Development" Practice Area.

In this podcast, Mike O'Horo, Founder and President of Sales Results, provides some insight into how lawyers can best position themselves to gain clients, including:

- What is your general training philosophy?
- If lawyering skills are sales tools, what can lawyers do to best use them to sell?
- What do you recommend that young lawyers do to sell themselves?

PCAOB Staff Weighs In: Auditor Considerations for Fair Value, Etc.

Yesterday, the PCAOB Staff issued this Staff Audit Practice Alert to inform auditors about the potential implications on reviews of interim financial information and annual audits caused by the FASB's three recently-issued Staff Positions on fair value measurements and OTTI.

Closings Then and Now

On the DealLawyers.com Blog, John Jenkins of Calfee Halter & Griswold continues to provide some great analysis of recent developments. Below is a more personal anecdote that he recently blogged that rang true to an old-timer like me:

I started practicing law in 1986, but so much has changed since then that I often feel like I’m a complete relic. For instance, it boggles my mind when I think about the fact that there’s an entire generation of lawyers out there who’ve never hand-marked an SEC filing, never dealt with trying to clear Blue Sky merit review, and never hand-delivered a filing package to the SEC reviewer and then raced to the bank of pay phones next to the file room to let the rest of the team know that the deal was effective.

Those events were rites of passage for generations of young deal lawyers, and I think that today’s lawyers have actually missed out on something by not being able to take part in them. Sitting bleary-eyed in the Judiciary Plaza Roy Rogers forcing down another cup of coffee while waiting for the SEC’s file desk to open - along with a bunch of other sleepy junior associates toting overstuffed deal bags - was a shared experience that built a kind of camaraderie among young deal lawyers. Regardless of where you worked, misery loved company, and after a couple of all nighters at the printer, those early mornings at Judiciary Plaza were definitely miserable!

But I think the biggest thing that most young lawyers miss out on today is what an epic event a deal closing used to be. Today, it seems every closing is done by e-mail and overnight delivery. I can’t tell you the last time that I went to a closing or sent someone to physically attend a closing. Closings with actual people signing actual documents are increasingly rare events. Things were sure different back in the day.

Closing a public offering wasn’t a big deal - the closing was over in a couple of hours at most, and was pretty anti-climactic in light of everything that came before it. However, there was nothing anticlimactic about the closing of a big M&A transaction. These closings were elaborate, multi-day, round-the-clock affairs that involved lots of paper, little sleep, all the boredom, stress, caffeine, and nicotine that you could handle, and all the cold pizza and warm deli trays you could eat.

Oh yeah, I almost forgot - this drama usually played itself out across a bunch of dreary conference rooms that featured fluorescent lighting that sometimes looked like it came straight out of the office scene in Joe Versus the Volcano (okay, maybe it just seemed that way at the time). The M&A people were in one room, the Bank people were in another, then there were often war rooms and usually a much nicer room where the client’s executives were ensconced. This last room was definitely for the grownups. Aside from the client’s senior people, nobody who wasn’t a senior investment banker or partner spent much time in this sanctuary. You only went into this room to get signature pages signed, and you rarely spoke above a whisper.

Today, closing a deal still involves a tremendous amount of work, but most of the time is spent writing and responding to e-mails, revising closing documents at your desk and generally staring at a computer screen. Sure, there may be cold pizza and caffeine involved, but there’s definitely no nicotine unless it’s contained in a stick of gum. What’s more, there’s just not the commotion. No conference rooms full of people, nobody rushing around calling back to their office to find out what happened to the tax clearance certificate from Massachusetts, no big shot partners arguing face-to-face over last minute changes to somebody’s legal opinion (or an eleventh hour request for a new opinion).

Of course, all of those things still happen; it’s just that they happen in cyberspace or on conference calls. In many respects, that’s a real benefit. Don’t get me wrong; 99% of everything I’ve just described stunk worse than Battlefield Earth, but the other one percent represents the kind of shared experience that helps lawyers develop a little empathy for one another. Personally, I think we could use more of those kinds of experiences.

How Do You Feel About Deal Closings?

You can provide more than one answer to this one:

- Broc Romanek

Last Chance for Early Bird Rates: "4th Annual Proxy Disclosure Conference" & "6th Annual Executive Compensation Conference"

You need to register by this Friday, April 24th, to obtain the very reasonable Early Bird rates our popular conferences - "Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference" & "6th Annual Executive Compensation Conference" – that will be held in San Francisco on November 9-10th (and via Live Nationwide Video Webcast). Warning: These reasonable rates will NOT be extended beyond this Friday!

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 for those that attend in San Francisco and nearly half-off for those that attend via the Web (both of the Conferences are bundled together with a single price). Here is the Conference registration form – and here is the agenda.

The Latest TARP Oversight Report: Concerns Over Fraud

As we all know too well, where there is money - there is bound to be fraud. Yesterday, Neil Barofsky, TARP's Special Inspector General sent a 247-page quarterly report to Congress detailing a long list of concerns about government efforts, including the lack of safeguards in handing out the money. Unlike the Congressional Oversight Panel led by Harvard Professor Elizabeth Warren, Barofsky’s office is focusing on criminal and civil wrongdoing in addition to more general recommendations and audits.

As this Washington Post article notes, the report states that Treasury Department lawyers have determined that companies participating in a $1 trillion program to relieve banks of toxic assets could be subject to limits on executive compensation (see page 110 of the report), contradicting the Obama Administration's public position. It will be interesting to see what Treasury Geithner says about the report this morning when he testifies before TARP's Congressional Oversight Panel (this letter was sent to the Panel ahead of the hearing).

Man, this report was hard to find. Treasury makes a big splash announcing its new "FinancialStability.gov" site - but it doesn't bother to timely post its own reports. Rather, I found it on the SIGTARP site.

Update: Attorney Liability Under Rule 10b-5

From Keith Bishop: Some may believe that in light of the U.S. Supreme Court's holding in Central Bank of Denver v. First Interstate Bank of Denver, lawyers may not face liability under Section 10(b) and Rule 10b-5. While the Supreme Court did hold that a private plaintiff may not maintain an aiding and abetting suit under Section 10(b), it also said "Any person, or entity, including a lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5, assuming all of the requirements for primary liability under Rule 10b-5 are met." 511 U.S. at 191. In a decision issued recently, the Ninth Circuit Court of Appeals illustrates how lawyers may face liability.

In Thompson v. Paul (9th Cir. No. 06-15515, Oct. 27, 2008), the plaintiff entered into a settlement pursuant to which she received stock of an issuer. The plaintiff alleged that she did so based on the false representation that there was no criminal investigation of the issuer's CEO. These attorneys jointly represented the issuer and CEO but withdrew before the final settlement agreement was signed. After new attorneys were found, the settlement agreement was signed and three days later the CEO was indicted on 29 counts fraud, conspiracy, money laundering and orchestrating a ponzi scheme.

The Ninth Circuit applied federal law to hold that "An attorney who undertakes to make representations to prospective purchasers of securities is under an obligation, imposed by Section 10(b), to tell the truth about those securities. That he or she may have an attorney-client relationship with the seller of the securities is irrelevant under Section 10(b)." While this case seems to be a straightforward application of the Supreme Court's statement regarding primary liability, it should serve as a warning that a bar card is not a license to misstate facts to the other side - particularly when securities are being purchased and sold.

It should also be noted that the attorneys have not yet been found liable - the Court of Appeals was considering an appeal from the attorneys' successful motion to dismiss. It remains to be seen whether the plaintiff can prove her allegations. It is also interesting to consider whether attorneys in this situation could be liable if they had simply failed to disclose, rather than affirmatively misrepresented the facts.

- Broc Romanek

The Impact of XBRL: Cover Page Changes to Forms 10-Q and 10-K

With the effective date of the SEC's XBRL rules coming up for larger companies fairly soon, it's time to bone up on their impact. Lawyers are mistaken if they don't think XBRL will impact their practice. Not only are there new liability standards to learn, but XBRL will change how they conduct due diligence and deal with internal control issues. Even more fundamental - there might be a change in the workflow process of how disclosure documents get drafted.

All lawyers should tune into our webcast on Thursday - "XBRL: What Lawyers Need to Know" - to hear John Huber and Dave Lynn go over these types of issues; this program will not be a re-hash of the SEC's new rules. In addition, I've asked Clarity Systems to give a short demo tailored to lawyers during the webcast, so you can see the potential changes in document production workflow for yourself (ie. it will not be a demo about how to set XBRL up, rather it will cover how it looks when it's up and operating; course materials for the demo will be posted on Wednesday).

At a minimum, lawyers need to be aware of the new rules because they impact the cover pages of Forms 10-Q and 10-K. Effective April 13th, the SEC added a new box to the cover page of those forms regarding compliance with the XBRL rules (the purpose of the statement is so third parties can determine whether Rule 144 is available). Thanks to Amy Seidel of Faegre & Benson, we have updated the Form 10-Q cover page - which is in a Word file - posted in our "Form 10-Q" Practice Area (as well as the 10-K cover page in our "Form 10-K" Practice Area).

What should you do with the box now since the rules won't impact filings until June? Tune into the webcast to learn how to deal with this - or read the chain of answers in #4743 of our "Q&A Forum" if you want to learn about how to deal with this issue now...

Recently, the SEC published this "Small Entity Compliance Guide" on XBRL. It's just a summary of the new rules, akin to a law firm memo - we have plenty of those posted in our "XBRL" Practice Area.

Triskaidekaphobia?

I recently received this note from a member: I'm finding that it is a Sisyphean task to try to keep up with all of the exchange name changes. The most recent change in appellation occurred on April 13th, when the NYSE Alternext US LLC changed its name to the "NYSE Amex LLC."

You may recall that the NYSE Alternext US LLC was christened only last Fall, when the SEC approved the acquisition of the American Stock Exchange by NYSE Euronext. Apparently, the NYSE has now decided that - for "branding" purposes - it is a good idea to retain the AMEX moniker. Another recent, albeit less drastic name change, was the change last April from "Pink Sheets LLC" to "Pink OTC Markets Inc." That change reflected the change from a limited liability company to a corporation.

Noisy Withdrawals: Factor in Stanford Bust?

From Linda DeMelis: Although details are still somewhat murky, the SEC’s recent enforcement action against Allen Stanford may have been triggered by the withdrawal from representation of one of Stanford’s attorneys (as noted in this article). In a Memorandum of Law accompanying the complaint, the SEC cited the withdrawal, together with the attorney’s statement that he and his law firm disaffirmed all prior written and oral representations with respect to Stanford, as a basis for emergency action. The SEC did not mention the attorney by name, but he was later identified.

As this article points out, prior to Sarbanes-Oxley, attorneys in this situation often had to deal with a confused, and sometimes contradictory, morass of state laws and bar regulations covering attorney-client confidentiality. As part of its rulemaking after passage of Sarbanes-Oxley, the SEC proposed the option of a “noisy withdrawal,” where the attorney would notify the SEC of a withdrawal from representation. The “noisy withdrawal” proposal generated some controversy when it was proposed - and it was never adopted. But just such a withdrawal might have been the “tipping point” for the SEC's enforcement action in this case.

- Broc Romanek

NYSE Finally Moves to Scrap Compulsory Press Releases

In the lead-off piece of our "Spring '09 Issue" of InvestorRelationships.com entitled "Facing an Unpredictable World: How to Change Earnings Guidance Practices," I mention how the NYSE recently filed a proposed rule change that would amend Section 202.05 and 202.06 of the Listed Company Manual to allow listed companies to comply with its "immediate release policy" by disseminating the information “by any Regulation FD compliant method.” This follows a similar change that the Nasdaq made back in '02 (as discussed in #4777 of our "Q&A Forum" yesterday). The NYSE's rule change is immediately effective subject to a 30-day operative delay - since it was filed on April 8, I suppose the operative delay will elapse on May 7.

In his IR WebReport Blog yesterday, Dominic Jones picked up the ball on this story and ran. Check it out.

More Sample Documents Posted

We’re constantly post new sample documents in our various Practice Areas, we well as in our "Sample Documents" Portal. For example, we recently posted a sample memo to companies considering repurchasing their own stock in our "Stock Repurchases" Practice Area. And in our "IPOs" Practice Area, we’ve posted a bunch of documents, including a sample lock-up agreement and a sample confidential treatment request. As always, our sample documents (and everything else on our site) come with a disclaimer that you need to make your own legal analysis.

Feeling Glum About Life?

At least you don't have over 1000 rejection letters from the past few months, this poor - and motivated - third-year is having troubles. If you have some free time, check out this blog's list of 25 free tools to find out "who knows what about you."

I'm thinking of doing a webcast on how lawyers can use technology in their practice, including using it to network and find a job. Here is a poll to see if there is any interest:

Facing an Unpredictable World: How to Change Earnings Guidance Practices

We just posted the "Spring '09 Issue" of InvestorRelationships.com (we are maintaining this publication as complimentary thru ’09 as a “Thank You” to our loyal members in a down economy). The "Spring '09" issue includes articles on:

- Facing an Unpredictable World: How to Change Earnings Guidance Practices
- The Box: Updating Guidance Mid-Quarter—and the Duty to Update
- Implementing Mandatory Retirement Ages for Directors: Practice Pointers
- Web Archival Practices: Answering "How Long?"
- Chair Schapiro Announces the SEC's New Corporate Governance Agenda
- Draft E-Proxy Standards: NIRI Seeks Comment

If you're not yet a member of InvestorRelationships.com, simply provide your contact information in this sign-up form and gain free and immediate access to the issue. If you signed up last year, your ID/password will continue to work - if you forgot what those are, you can get a reminder.

It's Only a Matter of Degree

From Keith Bishop of Allen Matkins: Although Item 401 of Regulation S-K doesn't specifically require disclosure of whether or not an executive as received a college or graduate degree, many companies do include this information with respect to directors and officers. In the past few months, the press has reported allegations of misstatements of educational background at four different companies (Broadcom Corporation, Microsemi Corporation, Intrepid Potash and MGM Mirage). Here is a press release filed by Microsemi Corporation last month and here is the press release filed by Intrepid Potash.

Note that the while Microsemi did not terminate the executive, it required him to pay $100,000 and forgo his annual bonus. Microsemi also extended by one year the vesting on the executive's restricted stock award. The company also announced that it would also be taking the following remedial actions:

- Background checks on all current and future Section 16 officers and directors;
- Board confirmation that the HR Department is continuing to verify credential prior to making employment offers in connection with acquisitions;
- Amending the Code of Ethics to specify that misrepresentation of credentials is a breach of the Code; and
- Review and verification of press releases.

From what I can tell, Barry Minkow (from ZZZZ Best fame) has been doing background checks. Whatever the source, companies should be aware that someone may be checking up on them.

More 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 during the past week:

- Tracking Voting Results: FundVotes.com
- Examples: The Latest Efforts by Activists to "Just Vote No"
- Five Cool Web Sites: UK-Style
- E-Proxy Questions: Meeting Directions on Notice
- More Governance Proposals Survive No-Action Challenges
- Amgen's Compensation Survey for Investors
- "Books & Records" Being Used to Check Compensation Committees

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 you can accomplish that functionality for this blog).

- Broc Romanek

Hotel Announced and Early Bird Closing: "4th Annual Proxy Disclosure Conference" & "6th Annual Executive Compensation Conference"

We just announced that our popular conferences - "Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference" & "6th Annual Executive Compensation Conference" – will take place at the Hilton San Francisco on November 9-10th (and via Live Nationwide Video Webcast). Here is the Conference registration form – and here is the agenda.

To make your reservations at the Hilton, register for the hotel online or call 800.445.8667. When you register for the hotel, it is important to mention the National Association of Stock Plan Professionals Conference, Executive Compensation Conference or the Proxy Disclosure Conference (or just mention the Group Code of "SPP") to receive the discounted rate.

Special Early Bird Rates: Only One Week Left – 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 for those that attend in San Francisco and nearly half-off for those that attend via the Web (both of the Conferences are bundled together with a single price).

You need to register by next Friday, April 24th, to obtain these reasonable rates.

SEC Staff Issues SAB 111 re: Temporary Impairment

Yesterday, Corp Fin and the Office of Chief Accountant jointly issued SAB 111 regarding impairments of equity and debt securities (i.e. OTTI). Here is the related press release.

Meanwhile, the PCAOB voted yesterday to issue a concept release regarding possible revisions to the board’s standard on audit confirmations. Learn more from FEI's "Financial Reporting Blog."

Survey Results: Advance Notice Bylaws

We recently wrapped up our Quick Survey on advance notice bylaw practices. Below are our results:

1. Has your company revised its advanced notice bylaw provisions this year?
- We reviewed them and decided no revisions were necessary - 11.9%
- We reviewed them and made revisions - 66.7%
- Our bylaws don't contain advance notice provisions - 3.6%
- We haven't reviewed our bylaws, but we plan to do so in the near term - 15.5%
- We haven't reviewed our bylaws and have no plans to do so at this time - 2.4%

2. If your company revised its advance notice bylaw provisions, what changes did it make?
- We changed the deadlines for receipt of shareholder proposals - 40.7%
- We created separate provisions for shareholder proposals for director nominations and shareholder proposals for other business - 49.2%
- We added specific advance notice provisions for special meetings - 42.4%
- We added disclosure requirements for shareholder proponents to address derivative securities - 81.4%
- We made other changes to the advance notice provisions - 50.9%

3. Have (or will) your company submit the amended bylaws for shareholder approval?
- Yes - 6.9%
- No - 93.2%

4. How did (or will) your company disclose its amended bylaws?
- Form 8-K - 88.7%
- Form 10-Q - 5.6%
- Form 10-K - 1.4%
- Press Release - 2.8%
- We don't intend to disclose the changes - 1.4%

Please take a moment to participate in our new "Quick Survey on Compliance Committees."

- Broc Romanek

Corp Fin's New Director: Meredith Cross' Return

Yesterday, Meredith Cross was named the new Director of the SEC's Division of Corporation Finance. She had served in Corp Fin as Deputy Director, Chief Counsel and a few other capacities back in the '90s - and has been working at WilmerHale since then. Having personally worked under Meredith at the SEC, I know she will be a great asset to help Chair Schapiro accomplish her vast regulatory agenda as she is quite able and really knows her stuff.

DGCL Amendments Become Law: Proxy Access, Reimbursement Bylaws, Etc.

After having been approved by the Delaware House last month and by the Senate last Wednesday, I understand that House Bill #19 was signed into law by the Delaware Governor on Friday. As stated in the legislation (assuming no changes), the amendments to the Delaware General Corporation Law will be effective August 1st.

From a prior blog (and this podcast), you will recall that these amendments deal with, among other items, new statutes on proxy access and reimbursement bylaws, indemnification matters, judicial removal of directors and authorization to separate record dates for notice and voting at shareholder meetings. More to come...

Compensation Arrangements in a Down Market

We have posted the transcript from our recent CompensationStandards.com webcast: "Compensation Arrangements in a Down Market."

- Broc Romanek

What is a "Glimmer"? Five Reasons to Still Be Plenty Scared

While I was on holiday last week, the President and his economic advisor, Lawrence Summers, made a splash by announcing the economy had a "glimmer of hope." The stock market has been behaving like it sees more than a glimmer. Here are five things gleaned from my very full inbox that give me pause:

1. According to this story, there will be $4 trillion in losses in the financial institutions. It notes $1.29 trillion in losses have been already booked, meaning $2.71 trillion in losses have not yet been recorded - more than twice the amount already recorded.

When I read articles like these, I still worry that banks aren't giving us the full story in their disclosure (see this article) - although part of the problem is that the government is now in cahoots with banks in obscuring transparency. Banks aren't allowed to disclose how they fare in the soon-to-be-completed stress tests until later this month. I imagine this will result in a spot of insider trading.

2. Some academics say that there is "little evidence that suggests these markets are experiencing fire sales" when it comes to whether the government needs to be tinkering with the pricing of toxic assets. This article concludes: "The problem is that highly leveraged financial firms own assets that are worth far less than they thought they would be, and the firms are insolvent as a result. This is why the latest bailout plans secretly give huge subsidies to banks - because the only way to keep the insolvent zombies afloat is to transfer billions of dollars to banks, bank stockholders, and bank creditors."

3. Read this interview with a former S&L regulator, William Black, who criticizes the recovery efforts. This quote gives me chills: "We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure?"

4. Politics continue to get in the way of serious reform efforts. There is ample evidence that our "independent" regulators aren't given the freedom to do their job (or cave too quickly; Canada's regulator just said "no" to loosening mark-to-market). Exhibit A is Congress bullying the FASB into changing accounting standards. But that is only the start. While I was gone, Rep. Barney Frank criticized Moody's for being too negative? [Although Frank was not criticizing Moody's for doing its job, so-to-speak, when rating municipal borrowers, but for applying a double standard that favored corporate borrowers.]

In addition, according to this article, the Administration seems to be willing to skirt the bailout restrictions that were just implemented. With these types of games going on, it feels like any rule can be avoided if you know the right people.

By the way, this is a worldwide problem. As noted in this article, the EU Commissioner stated recently at a IASB monitoring group meeting that he had indeed let Spanish banks break the law and fail to comply with IASB accounting standards. An amazing instance of a European government official condoning breaking of the law and securities fraud.

5. It still appears that boards are paying big pay packages (including bonuses) to CEOs despite poor performance. Read this new commentary by Bud Crystal about the pay lavished on the homebuilders. Until this vital governance area truly gets reformed, senior managers will be incentivized to play fast and loose - and boards will continue to show a lack of backbone, resulting in poor oversight.

There are plenty more of these types of stories filed every day (eg. this Rolling Stone story), leaving me with a lack of confidence that we will come out of this mess any better than before we went into it. Maybe I need a vacation from my vacation...

As an aside, Nasdaq's new Listing Rulebook goes into effect today.

FASB Issues Three Fair Value Staff Positions

On Thursday, the FASB issued three final Staff Positions that provide application guidance and enhance disclosures regarding fair value measurements and impairments of securities (here is the related press release):

- FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

- FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments

- FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments

Note that the last one contains the dissent registered by the two FASB Board members (Linsmeier and Siegel) who voted against the recent rule change by the FASB regarding fair value accounting.

Madoff Spotted in London?

One of the more peculiar things I saw during my vacation in London? I swear I spotted Bernie Madoff in Trafalgar Square. He's supposed to be in a Manhattan jail pending a June sentencing hearing. Here is the video where I captured a glimpse of the slightly younger look-alike (compare to this photo of the real deal):

- Broc Romanek

The SEC Proposes Short Sale Restrictions: The Race is On!

Reminiscent of the competing proposal approach that the Commission took a couple of years ago on shareholder access, yesterday the SEC voted to propose several alternative ways of addressing the widespread public nostalgia for the only recently abandoned uptick rule. As noted in the press release announcing the proposals, the SEC proposed either: (1) a market-wide permanent return of the uptick rule or a modified version of the uptick rule; or (2) a security specific circuit breaker approach, which could come in the form of: (i) an outright ban for the rest of the trading day when the price of a security drops precipitously; (ii) imposition of a modified uptick rule on the trading in a security for the rest of the day when there is a significant price decline; or (iii) imposition of an uptick rule on the trading in a security for the rest of the day following a big price drop. Got that? Commissioner Aguilar, Commissioner Parades and Chairman Schapiro each released their opening statements, providing more details.

I think that the competing proposal approach largely reflects the level of complexity and concern about unintended consequences arising with short sale regulation. The Commission has to walk a fine line here when seeking to perhaps reinstate a rule that was abandoned only a few years ago, and at the time based on extensive study and public comment. Much is often made of how different the market is today compared to when the tick test pilot was conducted, but it really seems that the principal differences are between a market trending up and a market trending down and the relatively obvious effects of government-induced panic, plus the attention of the public and Congress to an issue that was once largely relegated to the darker corners of the regulatory landscape.

With all of the pressure for SEC action, it is going to be a difficult task ahead for the Staff to weigh the responses to the over 200 questions included in the proposing release and narrow the field of potential rules down to just one approach. Further, they will have to do so under a new Director of the Division of Trading Markets, as yesterday’s Open Meeting marked Eric Sirri’s last as Director of the Division.

Comments will be due within 60 days of publication in the Federal Register. The roundtable on short selling is tentatively scheduled for May 5.

The “R” Word and Venture Capital Funds

An interesting opinion piece in today’s Wall Street Journal discusses the outrage that has erupted over the notion of having venture capital funds register with the SEC so that information about the funds can be passed on to the Great Systemic Regulator envisioned in the Administration’s recent regulatory reform proposals. As we tend to see time and time again, over-reaction to crises tends to sweep in things that probably don’t need the benefit of regulation or are in fact not systemically dangerous. I think that James Freeman makes a good case for why venture capital, which is vital to our capital-raising system, does not actually pose the sorts of systemic risks that we should all be concerned about.

Now that the “R” word – risk – is thrown around as being something that needs the closest attention from regulators, it is perhaps a good idea to step back and note that it was really the mispricing and mismanagement of risk (in particular with respect to financial instruments and trading strategies), as opposed to the taking of risk itself, which got us into this mess. For technology companies, for instance, who have benefited greatly from the risk tolerance of venture capital investors, every day in business is the riskiest of endeavors, which is typically reflected in their public or private valuations. But we wouldn’t want them - as a result of regulation arising from a financial crisis - to stop taking risk, or to discourage their management from pursuing risky new ideas, or discourage their venture capital backers from taking a flyer on their risky prospects, so long as those risks are all fully disclosed and properly reflected in the price of their securities.

A Bernanke Green Shoot?

For the first time in more than a year, confidence among venture capitalists has inched upward, according to a recent survey of 30 San Francisco Bay Area VC’s. The latest results show a confidence level of 3.03 on a 5-point scale during the first quarter of 2009, up from a 5-year low of 2.77 last quarter. Might a more positive outlook by traditionally optimistic VC’s be one of Ben Bernanke’s “green shoots” of economic recovery? There’s a long way to go yet – there were only 50 IPOs worldwide during the first quarter of 2009, down 80% from the first quarter of 2008. More significantly for venture capital, the first quarter of 2009 marked the second consecutive quarter with no venture-backed IPOs. As Broc noted in the blog towards the end of last year, IPOs are a traditional exit strategy for VCs – until the IPO market opens up, VC’s can’t deliver returns to their investors. So if the uptick in VC confidence is a green shoot, it’s an exceedingly small one – but at least it’s pointing up. Thanks go out to Linda DeMelis for these thoughts.

- Dave Lynn

PWC’s Annual Study Shows Jump in Litigation

Earlier this month, PWC published is 13th annual evaluation of private securities class action lawsuits. PWC's analysis found that federal securities class actions increased for a second year in a row, with the financial services industry unseating high-technology companies for the dubious distinction of most frequently sued. PWC also noted that, perhaps not surprisingly, accounting-related lawsuits declined as a percentage of total filings, while the number of settlements recorded declined to the lowest number this decade. The study also notes that CEOs and CFOs are most frequently named in lawsuits, and that plaintiffs are increasingly targeting Fortune 500 companies (also due to the financial services effect). Given these trends, 2009 could be shaping up to be a high water mark for private securities litigation.

Executive Compensation Litigation Heating Up Too

Kevin LaCroix provides an excellent overview of the latest developments in executive compensation litigation today in The D & O Diary blog. Kevin notes:

“Drawing on popular anger evidenced most recently in the outrage surrounding the AIG bonuses, these most recent compensation-related cases could represent an even more pronounced litigation threat than prior lawsuits over pay. The same forces driving the litigation have also produced a variety of other corporate and social responses, some of which may or may not fully serve the purposes of overall social utility.

Among other recently filed lawsuits involving executive compensation is the derivative complaint filed on April 1, 2009 in California (Los Angeles County) Superior Court against the current AIG CEO Edward Liddy and several other AIG directors and officers. The complaint (copy here) among other things alleges that ‘there was no rational business purpose or justification for these lucrative additional payments, particularly given AIG’s deteriorating financial condition and dismal financial performance,’ and described Liddy’s explanation of the bonus payments as ‘outrageous on its face’ and ‘absurd.’ The complaint seeks to recover damages for corporate waste, breach of fiduciary duty, abuse of control and unjust enrichment.

The bonuses paid to Merrill Lynch employees at year end just prior to the consummation of the company’s merger with Bank of America also features prominently in the shareholders’ litigation filed against Bank of America earlier this year, following the revelation of Merrill’s massive and previously unreported losses.”

The D&O Diary blog also notes the outcome in the recent Citigroup case in Delaware involving Charles O. Prince’s $68 million exit package, discussed in Broc’s blog on the topic from last month.

While shareholder-initiated litigation is taking off in the current anger-fueled environment, it seems that now may be the time when we will also see more SEC Enforcement focus on executive compensation. The “honeymoon” with the 2006 compensation rules is long over, and thus now may be the time when we will start to see Enforcement bring some high profile cases to demonstrate attention to the issue. A couple of roadblocks that could stand in the Enforcement Division’s way in bringing these sorts of cases is that the principles-based aspects of the rules might make it more difficult, in some circumstances, to bring fraud or reporting violation cases, given that the lack of bright lines gives companies a significant degree of latitude in deciding what is and is not material. Further, the heightened sensitivity to compensation issues, more engagement by compensation committees, and the voluminous disclosure that is now required may reduce the ability to hide or mischaracterize compensation that could give rise to Enforcement’s interest. Unlike shareholders, the SEC is limited to disclosure violations and can’t pursue claims such as corporate waste.

Goldman CEO’s Remarks on Wall Street Pay Reform

Earlier this week, at the same Council of Institutional Investors meeting where Chairman Schapiro laid out the SEC’s regulatory agenda, Goldman Sachs CEO Lloyd Blankfein called for changes to the compensation model on Wall Street. As noted in this story appearing in the LA Times, Blankfein faced some angry protestors while delivering his address - certainly a sign of these times of extraordinary public anger.

Blankfein noted that compensation decisions must be made in the context a multi-year evaluation of risk to get a full picture of an individual’s decisions, and that performance should not be judged in isolation. Among the specific guidelines that he suggested are:

1. Compensation should include salary and deferred compensation, which is “appropriately discretionary” because it is based on performance over the year.

2. The proportion of equity comprising and individual’s compensation should increase significantly as total compensation increases.

3. Senior employees should get most of their compensation in deferred equity, while junior people should get most of their compensation in cash.

4. Individual performance should be evaluated over time to avoid excessive risk taking and to allow for a clawback effect.

5. Equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.

6. Senior executive officers should retain the bulk of their equity until they retire, and equity should not be accelerated once someone leaves the firm.

- Dave Lynn

The SEC’s Corporate Governance Agenda Comes into Focus

SEC Chairman Mary Schapiro laid out the agency’s upcoming regulatory agenda in a speech yesterday at the Spring Meeting of the Council of Institutional Investors. Now a few months into her new role, Chairman Schapiro has a vision for the SEC’s top priorities over the next several months, which will, not surprisingly, involve a lot of new rules for public companies. These rules will build on some common themes, including director accountability and enhanced disclosure about the role of risk in corporate decision-making.

The upcoming rulemaking agenda looks like this:

1. New rules designed to limit short sales in a down market will be considered at an open meeting tomorrow, followed by a roundtable.

2. In May, the SEC will consider a proxy access proposal, and in the process the Commission is considering the 2003 and 2007 proposals with “fresh eyes,” as well as proposed Delaware law changes.

3. In June, the SEC will consider whether to propose rules requiring enhanced disclosure about the experience, qualifications and skills of director nominees.

4. The SEC will also consider whether boards should disclose the reasons for selecting a particular leadership structure, such as an independent chair, a non-independent chair, or a combined CEO/chair.

5. Rule proposals are being developed to address how a company and its board of directors manage risks, both generally and in the context of compensation.

6. The SEC will consider new rules relating to compensation. The rules would be directed at making sure that shareholders fully understand how compensation structures and practices drive an executive’s risk taking. Further, the Commission will consider whether greater disclosure is needed about a company’s overall compensation approach – beyond decisions with respect to the highest paid officers – as well as enhanced disclosure about compensation consultant conflicts of interest.

Not mentioned in the speech, but certainly looming on the horizon, is the proposed change to the NYSE’s Rule 452, for which the comment period has now closed.

In addition to the proposals that are oriented toward public companies, Chairman Schapiro indicated the SEC is considering a number of other reform measures (some of which will require legislation) in the financial services area, including issues with respect to custody, the respective roles of brokers-dealers and investment advisers, registering hedge fund advisers (and potentially the hedge funds themselves), more disclosure about credit rating agencies, oversight of the credit default swap market, enhanced standards for money market funds, municipal securities disclosure and disclosure about asset-backed securities.

With these significant changes to executive compensation disclosure coming soon - and no doubt in time for next year's proxy season - be sure to sign up now for the “4th Annual Proxy Disclosure Conference” and the “6th Annual Executive Compensation Conference.” The conferences will be live on November 9-10 in San Francisco and via webcast. You still have a few more weeks (until April 24th) to get “half off” early bird rates.

Blaming Mutual Funds for Pay Excesses

In this latest report sponsored by AFSCME, The Corporate Library and the Shareowner Education Network, the relationship between mutual fund voting patterns and excessive executive compensation is examined in detail. Dramatically named “Compensation Accomplices: Mutual Funds and the Overpaid American CEO,” the report outlines how, in 2007-2008, many mutual funds voted in favor of management proposals increasing executive compensation packages, while voting against shareholder proposals that seek to align pay with performance. I don’t know about you, but it doesn’t exactly knock me out of my chair with surprise to find out that mutual funds often vote with management. The report, however, notes that the level of support seems to continue unabated despite the level of public outrage over executive compensation.

The study does note a contrary trend that I think everyone has probably noticed in the past couple of years – mutual funds seem to be increasingly willing to withhold support or vote against directors serving on compensation committees of companies where pay practices are perceived as subpar.

One limiting aspect of the study is that the data only goes through June 2008, so the full impact of the recent “torches and pitchforks” attitude toward compensation is not fully reflected.

Raising Equity Capital in a Turbulent Market

We have posted the transcript for the recent webcast: "Raising Equity Capital in a Turbulent Market." Also be sure to check out the excellent course materials posted for this webcast.

- Dave Lynn

Regulatory Principles from Last Week’s G-20 Meeting

By all accounts, last week’s G-20 summit seemed to promote quite a bit of agreement on ways to move forward to turn around the global economy and reshape the financial regulatory framework. In many ways, the G-20 meeting served as an important “deadline” for member countries to get their regulatory reform proposals lined up so that they could be discussed with other world leaders. Last Thursday, the G-20 leaders issued this communiqué outlining, among other things, the key principles under which changes to financial regulation will be implemented. The leaders called for greater consistency and systematic cooperation among countries, which will be implemented through, among other initiatives:

- a newly established Financial Stability Board, as a stronger successor to the Financial Stability Forum (FSF), which will seek to provide early warnings of macroeconomic and financial risks;

- reshaped regulatory systems that will allow authorities to identify and take account of macro-prudential risks;

- extended regulation and oversight over systemically important financial institutions, instruments and markets, including systemically important hedge funds;

- standards for internationally consistent, high quality and sufficient bank capital (once the recovery is assured);

- high quality global audit standards, including improved standards for “valuation and provisioning;”

- an end to bank secrecy and tax havens; and

- oversight over credit rating agencies.

Perhaps the most interesting focus of the G-20 for me was their pledge to deal with compensation issues at financial institutions. In this Declaration, which provides more details on the broad G-20 principles, the leaders appeared to recognize compensation issues as a global problem and endorsed FSF principles on dealing with compensation at significant financial institutions. The principles require that:

1. Boards of directors of firms play an active role in the design, operation and evaluation of compensation schemes;

2. Compensation arrangements, including bonuses, properly reflect risk, and that the timing of compensation payments be sensitive to the time horizon of risks (i.e., payments should not be made in the short term when the risks occur over the long term); and

3. Firms publicly disclose clear, comprehensive and timely information about compensation, so that stakeholders (including shareholders) are timely informed and can “exercise effective oversight.”

The EU’s Role in Financial Regulation

In anticipation of the G-20 meeting, the European Council rolled out a plan to significantly expand the European Union’s role in regulating the financial system across Europe. As discussed in this memo from Cleary Gottlieb, a new European financial supervisory body could be up and running by the end of 2010, helping to coordinate the regulatory efforts of member states. Further, the EU's plans call for legislative proposals that will help fill gaps in the regulatory structure and create a framework for regulating retail financial services. Echoing efforts in the US, the EU will direct efforts toward regulating hedge funds and credit rating agencies, revisiting capital requirements, addressing compensation issues and providing for centralized clearing of derivatives. All of these efforts appear to be on a very fast track, with further recommendations on a number of these principles expected over the next couple of months.

Skirting the EESA/ARRA Exec Comp Limitations?

This Washington Post article from over the weekend notes how the Administration has been “engineering its new bailout initiatives,” so that participating firms can avoid limitations imposed on executive compensation contemplated by the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. The article notes that a number of programs through which bailout funds are distributed are using special entities, so that funds are provided only indirectly from the government. Also noted is the Obama Administration’s decision to reverse the Bush Administration’s efforts to apply the executive pay limits to the originators of the assets participating in the TALF program (which was finally launched at the beginning of March).

Efforts to craft programs around the executive compensation limits reflect what appears to me to be a legitimate concern that the imposition of the pay limits may, in some circumstances, undermine bailout efforts by discouraging participation. While executive pay reform is important and we can’t ignore the level of public anger over the topic, it seems that there should be some flexibility in applying the limitations outside of a direct investment context. My hope is that Congress doesn’t try to reverse these decisions for the purpose of achieving short-term political gains, because we are still in a time where some level of regulatory flexibility is needed on these issues.

- Dave Lynn

Big FASB Doings on Mark-to-Market Accounting

Yesterday, the FASB conducted a meeting that mainly focused on changing fair market value accounting and voted to issue three final Staff Positions (FSPs) dealing with fair value for inactive markets; other-than-temporary-impairment (OTTI), and changing annual disclosures of fair value to quarterly. Here's the FASB's summary of what happened at the meeting.

Given that I'm heading out on vacation, I'm providing a list of analyses by others on this big development:

- AAO Weblog
- NY Times
- Financial Times
- FEI's "Financial Reporting Blog"
- Sense on Cents
- naked capitalism
- Financial Times Blog

By the way, the FASB issued its Staff Position on business combination accounting yesterday that they approved a few weeks ago. In addition, you may be interested in this DealLawyers.com Blog I posted earlier in the week: "Novel No-Action Response: Ability to "Round Out" Minority Slates with Other Insurgents."

The SEC Staff on M&A

We have posted the transcript of our popular DealLawyers.com webcast: “The SEC Staff on M&A.”

Boards Today: The Spencer Stuart Board Index

A few months ago, Spencer Stuart issued this study of S&P 500 companies that shows how board composition and structure have changed over the past decade. Among the findings are:

- Shorter terms - On average, boards are older and directors serve shorter terms than 10 years ago. There are also fewer active CEOs and more first-time directors joining boards.
- Younger directors - A total of 26% of boards have an average age of 64 or older, up from 14% 10 years ago, even though 74% now have mandatory retirement ages.
- One-year terms - As of 2008, 66% of boards have one-year terms, up from 40 percent just five years ago and 39% 10 years ago.
- More board independence - In 1998, the CEO was the only insider on 23% of boards. Today the CEO is the only insider on 44%. A total of 36% of boards reported lead or presiding directors in 2003, compared with 95% today.
· Average board size convergence - Very large and very small boards are less common. Nearly 75% of boards have between nine and 13 directors, up from 66% in 1998. A decade ago, 23% of boards had 14 or more directors; today only 11% do.

Our April Eminders is Posted!

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

- Broc Romanek

Survey Results: Hedging and Other Trading Prohibitions in Insider Trading Policies

For each of the seven years I've been on this job, I've conducted an average of one survey on some aspect of insider trading policies (here is a list of them from our "Blackout Periods/Insider Trading" Practice Area). Recently, we wrapped up our latest one - this "Quick Survey" related to hedging and other trading prohibitions in insider trading policies. Below are the results:

1. Our company's insider trading policy prohibits insiders from trading in any of the following:
- Exchange-traded options - 41.1%
- Hedging/monetization transactions (e.g., zero cost collars, forward sale contracts) - 36.7%
- Puts and calls - 45.6%
- Margin accounts - 25.6%
- Pledges - 23.3%
- None of the above - 10.0%
- We don't have an insider trading policy - 1.1%

2. Our company discourages - but still permits - the following:
- Exchange-traded options - 18.2%
- Hedging/monetization transactions (e.g., zero cost collars, forward sale contracts) - 25.0%
- Puts and calls - 13.6%
- Margin accounts - 47.7%
- Pledges - 52.3%
- None of the above - 29.6%

Please take a moment to participate in our new "Quick Survey on D&O Questionnaires."

Shelley Parratt: Longest-Serving Interim Corp Fin Director?

Although my memory is limited to the modern era, I believe Shelley Parratt is the longest-serving interim Corp Fin Director in SEC history with three months under her belt so far. Marty Dunn served as an interim for a few weeks before John White started - and Meredith Cross had a brief turn before Brian Lane moved over from Chairman Levitt's office.

In fact, it's not uncommon that there be no period of time between one Director leaving and another starting - particularly when the new Director is being promoted from within the building. For example, when John Huber left the SEC in '86, Linda Quinn started that afternoon.

Not that any of this matters at all. Just some curious facts before I kick off my spring break vacation. I imagine we'll see an announcement about a new permanent Corp Fin Director in the near future.

NYSE Clarifies Shareholder Approval Requirement for Convertible Debt Exchange Offers

Below is an excerpt from this recent Gibson Dunn memo (note this reflects an update from when blog was originally posted):

In the context of an exchange offer of new convertible debt for previously outstanding convertible debt, the NYSE staff has taken the position that the 20% Test only applies to any increase in the number of shares issuable under the new debt as compared to the old debt; the calculation is not made on the total number of shares issuable under the new debt. In other words, the NYSE only looks at the net increase in the number of shares potentially issuable upon conversion as a result of the exchange.

The NYSE staff had previously provided guidance that, when calculating whether an issuance of securities meets the 20% Test, the NYSE would take into account the number of shares issuable upon the original convertible debt, in addition to the actual amount outstanding, for purposes of calculating the number of shares outstanding on the date of measurement. The NYSE, however, has since corrected that guidance and has advised us that, pursuant to NYSE Rule 312.04, when calculating whether the 20% limit has been reached, the net increase in shares issuable upon conversion (the numerator in the calculation) will be compared only to the number of shares actually outstanding on the date of the listing application without giving effect to the number of shares then issuable upon conversion of the old convertible debt.

- Broc Romanek

First Whistleblower Action Over Executive Compensation Disclosures

Yesterday, the Chicago Tribune ran this article about a lawsuit brought against McDonald's by a former Senior Director of Compensation who balked against signing a subcertification related to the company's disclosure of executive compensation. The company denies the allegations. I'm pretty sure this is the first whistleblower suit related to executive compensation disclosure.

The complaint was filed in US District Court for Northern Illinois - and includes allegations of (as noted in this blog):

- Setting up a reimbursement/repayment scheme to avoid disclosing golf club memberships for the regional President stationed in Hong Kong;
- Mislabeling the outgoing CEO as a “transitional officer” so he could keep his health and other benefits, and so the millions paid to him after his last day of work for McDonald’s could be called salary and incentive pay, rather than severance; and
- Implementing a shareholder-mandated 2.99X cap on executive severance agreements with loopholes large enough to render the cap meaningless.

We'll be closely following this development since the topic is "near and dear" to many of our members...

Are Credit Default Swaps Enforceable?

In a recent presentation, Brink Dickerson of Troutman Sanders questioned whether credit default swaps are enforceable, at least in certain circumstances. Hedge funds, large banks and other financial institutions routinely control, either as a result of holding the underlying security or under contractual arrangements, the voting rights with respect to bonds and other indebtedness. At the same time, however, these institutions have hedged their economic interest in the CDS market, in some cases so much so that they are “over-hedged” and would benefit more from the failure of the underlying business than they do from its survival.

This in turn can lead to their opposing - if not blocking - otherwise rational consent solicitations, exchange offers and other restructurings. Brink speculated that to the extent that an institution has an over hedged position that leads to an irrational action as a holder (or former holder) of indebtedness, the underlying CDS may be void (or, if misused, voidable) as a matter of public policy (see Restatement Second of Contracts § 178). He also speculated on whether the misuse of an over hedged position might lead to liability.

The law is not there yet on this issue, but the extremeness of the facts in some of the current restructurings - where in one case the CDS positions were a substantial multiple of the outstanding indebtedness - could lead to the courts striking out in a new direction. Professors Henry Hu and Bernard Black have written widely on this and related issues - which they call "debt decoupling" and "equity decoupling" - and this clearly is a topic that would get significant focus should a major company fail just because of irrational actions by a holder (or former holder).

Help Me! Researching Fake SEC Filings

On footnoted.org, Michelle Leder recently wrote about a fake Form 8-K purportedly filed by a penny stock company. That reminded me of a fake Form S-1 (or Form SB-2) filed a few years back that listed a bunch of celebrities as officers and it maybe even included the US President. I erroneously thought I blogged about it - but now I can't find any mention of it on the Web.

Does anyone remember it too? And if so, do you recall the name? Please help me prove I'm not losing my marbles and jog my memory. It's not this amended Form SB-2 filed by Toks. Although that filing included a ton of lies (and resulted in a rare stop order from the SEC), it lists the fraudster as the sole officer - so that's not the one I'm thinking of...

Speaking of "fake" on April Fools' Day, Michelle reminded me yesterday of the SEC's own bogus press release from '07. Although that fake release was never posted on the SEC's site (it was just sent to reporters), it was mentioned in our blog and captured verbatim by the Financial Times.

- Broc Romanek