June 30, 2009

More on Reading Corp Fin's No-Action "Tea Leaves"

I received quite a bit of member feedback on my recent blog regarding how Corp Fin has a challenging job analyzing the circumstances of each shareholder proposal before making an exclusion/inclusion determination. Some of the feedback was frustration with the way that the Staff sometimes splits hairs. Here is an example of one member's frustration:

I liked your note about how companies, in trying to interpret the SEC's no-action responses, can misinterpret the tea leaves. I have heard from some in-house counsel about a special meeting proposal that John Chevedden has submitted to almost two dozen companies. He has two versions (copied below), which differ only slightly in the wording - as noted by the bolded and underlined language:

1. RESOLVED, Shareowners ask our board to take the steps necessary to amend our bylaws and each appropriate governing document to give holders of 10% of our outstanding common stock (or the lowest percentage allowed by law above 10%) the power to call special shareowner meetings. This includes that such bylaw and/or charter text will not have any exception or exclusion conditions (to the fullest extent permitted by state law) that apply only to shareowners but not to management and/or the board.

2. RESOLVED, Shareowners ask our board to take the steps necessary to amend our bylaws and each appropriate governing document to give holders of 10% of our outstanding common stock (or the lowest percentage allowed by law above 10%) the power to call special shareowner meetings. This includes that such bylaw and/or charter text will not have any exception or exclusion conditions (to the fullest extent permitted by state law) that apply only to shareowners and meanwhile not apply to management and/or the board.

In fact, in three instances, John submitted both versions to the same company. In no-action responses to Bristol-Myers, Dow and Wyeth, the SEC Staff allowed exclusion of the "and meanwhile not" version under 14a-8(i)(3). On the other hand, the Staff inexplicably did not allow exclusion of the "but not to" version of the proposal (and rejected arguments made under (i)(2), (i)(3), and (i)(6)).

In each of the cases, it appears that the Staff's determination hinged on whether the proposal contained the "and meanwhile not" wording or the "but not to" wording. It certainly is not clear why the result would turn on that wording. None of the companies made arguments that referred to that wording - and to my eyes, they mean the same thing. It seems that you make your arguments to the SEC Staff, they ruminate on your letters in silence for a few weeks, and their unexplained answer mysteriously appears on their website. I'm not happy.

Personally, my ten cents is that during those weeks of silence, the Corp Fin Staff is in fact researching precedent and often going through a healthy internal debate on where to draw the line. It is understandable that the line drawn often is not apparent to those on the outside since the Staff's response letters don't explain the rationale for the Staff's decision - and we are not privy to the internal debate. And I note that the Staff simply doesn't have the resources to add the rationale to their responses - so that is not the answer unless Congress ponies up more funding for the agency.

Fake SEC Filings: I Felt the Love

A while back, I asked whether anyone remembered a fake filing from a few years back. In response, a horde responded - reminding me of the fake Form F-1 filed by Apollo Publication Corporation in June 2005. I was embarrassed because I had blogged about that filing myself back then - not once, but twice! Clearly, I spaced when I did my homework.

Some interesting anecdotes about the Apollo fake filing:

- It was a Form F-1, not a Form S-1 or SB-2
- The directors of the alleged company included President Bush, Alan Greenspan, Jimmy Carter, Fidel Castro and a cast of thousands.
- The SEC issued a stop order in September '05 (here is an article about that).

An Even Better Fake Filing: Vietnam War Style

One long-time member sent me this prospectus to allow investors to buy stock in the Vietnam War. I am told this was a big hit circa 1970. It is one of the true classics, particularly for those who were in the military during the Vietnam-era. Almost every sentence has a gem in it. Just check out the subtitle: "This offering involves a high degree of risk." Ain't that the truth...

- Broc Romanek

June 29, 2009

Barriers to Entry: A "No-No" for IR Web Pages

As I've spoken at a number of conferences over the past year regarding last year's "corporate use of website" guidance from the SEC, I thought a few words about creating barriers to entry on your IR web pages would be appropriate. And by "few words," I mean: "don't do it."

There is nothing more antithetical to investor relations than requiring investors to jump through unnecessary hoops in order for them to access any of the content on your IR web pages. There is no practical reason for companies to impose click-through disclaimers on their IR content any more than requiring similar disclaimers for other content on their site. Can you imagine requiring a potential customer to click on a disclaimer to get product information? It's against the general nature of the Web (ie. simple and fast navigation on the information highway) - and severely diminishes the value of your IR web pages as investors will likely go elsewhere to seek what they want.

Luckily, this is a position that the SEC appears to agree with - in its recent interpretive release, the SEC cautions that the use of disclaimers may not be effective. In particular, the SEC says that companies can't require investors to waive protections under the federal securities laws as a condition to accessing content (at least in the blog and e-forum context).

In fact, the Corp Fin Staff seems to be issuing comments to companies that have click-through disclaimers. For example, in comment #3 of this letter to West Bancorp (as part of a Form 10-K review), the Staff asks the company how the disclaimer - which required investors to agree to a general release of liability - "accords with your responsibilities under the federal securities laws."

Unfortunately, the company's response was to add a statement to the disclaimer that the agreement is not intended to limit federal securities law liability. Check out this company's IR home page - would you bother as an investor to go further? So much for having relations with investors. [Ironically, the disclaimer is all about "we provide this site 'as is' and stuff like that" - but when you click the "I Agree" button, you are told you are going to a third-party provider who hosts the company's IR web page.]

I strongly believe that the SEC needs to get into the business of imposing a few bare minimum "do's" and "don'ts" for IR web pages since it's much more likely that's where investors will obtain information about an investment today compared to reviewing SEC-filed documents. In other words, the SEC needs to help save companies from themselves...

California Bylaw Provisions May Not Offend the Right to Buy Livestock

Here's something to brighten your day from Keith Bishop: "As someone who enjoys fishing, I've been bemused by the fact I have a constitutional right to fish here in California (Art. I, Sec. 25 "The people shall have the right to fish upon and from the public lands of the State and in the waters thereof . . .").

I've been practicing corporate law in California for more than two decades and I am ashamed to admit that I've been completely ignorant of the fact that this California statute specifically prohibits the directors or stockholders of a California corporation from adopting a bylaw that would prohibit any officer, stockholder or other person connected with the corporation from buying livestock in any market in California where livestock is bought and sold. This is definitely a statute to keep in mind when drafting bylaws - especially since any attempted enforcement of the proscribed bylaw would be a misdemeanor."

First Drafts: On the Two Yard Line or Closer to Midfield?

Below is some good stuff that John Jenkins of Calfee Halter & Griswold recently blogged on the "DealLawyers.com Blog":

A few months ago, our law firm had one of its periodic training sessions for our associate attorneys. The topic for this particular session was making the transition from junior associate to seasoned business lawyer, and the presenters were two investment bankers from one of our firm’s clients.

Lawyers have an obligation to zealously represent clients and protect their legal interests in a transaction, and that may cause lawyers to butt heads with bankers from time to time. But when bankers speak about the things lawyers do that drive them nuts or impress the heck out of them, it’s worth listening to them, because I think you can pretty much count on their position being consistent with that of the typical corporate client.

After all, when it comes to what an M&A client wants to accomplish - getting the deal done as quickly and efficiently as possible - there’s nobody in the transaction whose interests are more closely aligned with the client’s than its investment banker. That’s because bankers eat what they kill: they only get paid for their efforts if the deal closes.

The bankers who spoke to our associates shared a lot of insights about good and bad lawyering, and I’ll talk about more of them in later posts, but at the very top of their list of bad habits was something that anybody who has worked on a deal has experienced - namely, receiving a first draft of a purchase agreement that is so aggressively one-sided that it’s like starting a drive from your own two yard line.

They pointed out that this bit of grandstanding usually ingratiates you to absolutely nobody, including your own client. The first draft of a deal document sets the tone for the entire transaction. When you start out with one that’s burdensome and oppressive, the recipient’s legal and financial advisors immediately let their client know that the document is over the top. That means that not only does the draft usually get flyspecked, but each succeeding draft, along with just about every request made by the other side during the course of negotiations, gets looked at with a jaundiced eye.

Instead, the bankers suggested that a more balanced first draft is a much better way to approach a deal. If you start out with a document that puts the ball on the 35 yard line, you not only create an atmosphere that suggests your side wants to do business, but ironically, you’ll probably be more successful in your efforts to win on the handful of important deal points that you’ve drafted in your favor. When it comes to doing deals, it’s usually the reasonable people who can get away with murder.

From my perspective, I’ll concede that there are circumstances where it makes sense to be pretty aggressive in documentation. For example, if you’ve got a very hot commodity or a buyer that’s drooling all over the conference room table, then a little documentary boorishness is probably in order. But most deals don’t fall into that category, and most experienced business people don’t view an acquisition or a divestiture as a zero sum game. A first draft that suggests otherwise is usually a bad idea if your client’s primary objective is to get a deal done quickly and efficiently.

- Broc Romanek

June 26, 2009

Random Thoughts (and Worries) about Proxy Access

As we continue to post hordes of memos analyzing the SEC's proxy access proposal in our "Proxy Access" Practice Area, we're also are keeping an eye on the comment letters being submitted to the SEC. It's very early - so most of the comment letters so far are from individuals, including this one from a disgruntled citizen who is mad about the SEC's handling of Bernie Madoff and this one decrying the tyranny of the voting system (from Thomas Paine no less).

On a more serious note, Ning Chiu of Davis Polk notes: "One of the sleeper issues that has not been noted as much about proxy access is the impact on majority voting. If there's a shareholder nominee, then majority voting provisions default back to a plurality standard since the definition of a contest is usually phrased as having more candidates than board seats. That limits the power of "vote no" campaigns and ISS "vote no" recommendations, which had an impact on compensation matters this year. It's possible that activists and ISS would rather have threat of majority voting than a shareholder nominee on the ballot whose chances of getting elected may be slim."

Just before the SEC posted its proxy access proposing release, I noted that the month wait for the proposal was heading towards a record. [Note that 11% correctly picked "sometime this week" in my poll of predicting when the release would be out; the release came out the day following when the poll went up.]

Former Staffer Scott Taub, now with Financial Reporting Advisors, wisely responded that it wasn't even close to record "still waiting" territory. He points to the gap between the approval of the draft IFRS roadmap at an open Commission meeting (August 27th last year) and when that proposal was posted (November 14th). That wait will be hard to beat...

The Latest Compensation Disclosures: A Proxy Season Post-Mortem

We have posted the transcript from our recent CompensationStandards.com webcast: "The Latest Compensation Disclosures: A Proxy Season Post-Mortem."

No, Michael Scott Does Not Work for Us

But I wish he did. For those of you that aren't fans of the TV show - "The Office" - Michael Scott is a funny character played by Steve Carell. I do watch the show and it's good, but the reason I have bothered to blog about him is that some of our members have decided to use the names of characters from the show when they leave anonymous questions/answers in our "Q&A Forum." Here is one of the funnier notes:

I can sell you some paper, but cannot give it away. That would be stealing from my company. Instead, I'll give you a pass for a free night stay at Schrute Farms.

My superior thanks you, Dwight Schrute, Assistant Regional Manager

I just love it. Just like I love the screen names that members have used for our "Blue Justice League." My Top 5 there include: To Dye For; Tinkerbell; Clever Hans; moto moto and Professor Bertram.

As long as I'm blogging about TV shows, you need to see Tina Fey trying to get out of jury duty by pretending to be Princess Leia in this video.

- Broc Romanek

June 25, 2009

It's "Go Time": SEC to Propose Executive Compensation Disclosure Changes, Approve Elimination of Broker Non-Votes and More

As promised by Chair Schapiro earlier this month, the SEC has calendared an open Commission meeting for next Wednesday, July 1st, where it will consider proposals related to executive compensation disclosures, TARP's say-on-pay and other corporate governance issues. It also will consider approving the NYSE's "elimination of broker non-votes for director elections" proposal. This is a biggie.

There is one curious item on the SEC's agenda - I have no idea what the second part of Item 3 relates to: "to clarify certain of the rules governing proxy solicitations." I haven’t heard anything about problems with the proxy solicitation requirements. [Note: I now understand that this relates to codification of the Amylin letters (Eastbourne Capital/Carl Icahn) letters and other "housekeeping" rules.]

Early Bird Expires Tomorrow: With the SEC's goal to have new executive compensation disclosure rules in place before next proxy season - combined with the real likelihood of say-on-pay legislation and the loss of broker nonvotes for director elections - our the “4th Annual Proxy Disclosure Conference” (whose pricing is combined with the “6th Annual Executive Compensation Conference”) will be more important than ever. These Conferences will be held at the San Francisco Hilton and via Live Nationwide Video Webcast on November 9-10th.

Take advantage of reduced rates that will expire tomorrow, June 26th by registering now. These rates will not be extended - there will be no early bird discounts after Friday!

The SEC's Quick Response to Insider Trading Allegations: A More Restrictive Compliance Program

As media accounts continue to dribble out that damage the SEC's reputation (eg. see this recent Washington Post article regarding the Cox years), it appears that the furor over allegations over possible insider trading by SEC Staffers has died down.

One of the reasons may be the SEC's quick response - it quickly announced a series of measures that will strengthen its internal compliance program as noted in this WSJ article. More specifically, as outlined in this SEC press release, the measures include:

- New set of new internal rules governing securities transactions for all SEC employees that will require preclearance of all trades
- Prohibition on trading in securities of companies under SEC investigation regardless of whether an employee has personal knowledge of the investigation
- Contracting with an outside firm to develop a computer compliance system to track, audit and oversee employee securities transactions and elicit financial disclosure in real time
- Consolidated responsibility for securities transactions and financial disclosure reporting oversight within the SEC's Ethics Office
- Authorized the hiring of a new Chief Compliance Officer

Here is a noteworthy Washington Post article in which a SEC Staffer responds to complaints unrelated to the insider trading allegation, but which were included in the related SEC's Inspector General report .

Alleged Insider Trading: Reactions from Our Community

Since our members are closer to what happens at the SEC compared to the general public, it's worth noting some of their reactions to the insider trading allegations. I've already blogged my own thoughts in a piece entitled "My Ten Cents: What Does This Alleged Insider Trading Scandal Mean?"

And we have these poll results regarding "Should the IG's Report Have Been Made Public So Soon?":

- 54.6% said it shouldn't have been made public yet
- 34% said it should have been made public when it was
- 14.4% said the report was too long to read
- 15.5% wanted to cry
- 7.2% wanted to laugh

Here some of the member reactions that I received:

- Perhaps the SEC should do what some of the more conservative law firms do and prohibit its employees from trading in anything except index funds and ETFs? That would reduce the workload for the clearance officer and virtually eliminate any appearance of conflict. Still, if either of these people is guilty, they're just plain stupid since they of all people know how easy it is for the SEC to trace suspicious acvtivity.

- It is unclear whether the SEC Enforcement Attorneys traded on inside information or seriously violated SEC rules. However, the IG has been investigating for 15+ months and felt strong enough about the record to refer it to the US Attorney. Doesn't sound good- especially the parts about trading in stocks with potential or current investigations. I do note that the IG's last two reports to Congress mention the investigation and give identifying details.

- One person said that certain people who were familiar with the record found that the many of the questioned trades "didn't make sense." No one was happy with this reputational hit.

- These appear to be innocent (yet sloppy) transactions, not intentional fraud. One of the big problems at the SEC is that not many truly understand how the law and the financial markets work in a macro sense and how everything is connected to each other. Sure you have brillant people is specialized offices who know all about net capital rules, investment company communications or no action letters, etc... but not many who understand what really make investors, financial analyst and traders tick (can we say "Madoff"). This is not an easy thing as its takes a ton of work and reading to keep on top of things as you are aware. Thus you actually have to commend those who try to help others bridge the gap (this is how to invest in a stock, this is a bond) and who generally try to hone their skill sets.

- Didn't the SEC say they wanted to hire more financial professionals, do they expect these people to put all of their money in T-bills when they join? Unfortunately, the careers of these lawyers are probably doomed regardless of their culpability since if you did that many trades eventually you will probably run into a SEC conflict at some point, especially if you are buying financial stocks. I remember trying to pre-screen trades at the SEC many years ago; itf was essentially a broken system, so I hope that is not the reason for their predicament. Bottomline: expect future risk taking, innovation, and morale at the SEC to take a further set back.

- Broc Romanek

June 24, 2009

How to Monitor Shareholder Activism in a Changing World

We just posted the "Summer '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 "Summer '09" issue includes articles on:

- How to Monitor Shareholder Activism in a Changing World
- The Art of Handling Director Resignations: Practice Pointers
- Parsing the SEC’s Proxy Access Proposal
- My Last ExxonMobil Annual Meeting
- Online Document Sharing Services: Legal and Reputation Concerns for IROs

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.

Survey Results: Schumer's "Shareholder Bill of Rights" Unpopular with Executives

Recently, the NYSE conducted a poll of its listed companies regarding Senator Schumer’s "Shareholder Bill of Rights Act of 2009." Here is a summary of the results:

- 87% oppose and 6% favor legislation that requires advisory votes on executive compensation

- 82% oppose and 7% favor legislation to require proxy access, while 76% oppose and 10% favor the proposed 1% ownership level threshold for proxy access (among those opposed, 49% oppose and 31% favor a 5% level for proxy access, 55% oppose and 27% favor a 10% level for proxy access)

- 76% oppose and 16% favor legislation that mandates separation of the CEO and Chair roles

- 90% oppose and 4% favor legislation that precludes the CEO or a former CEO from ever serving as Chairman, even after retirement as a company executive

- 63% oppose and 25% favor legislation to mandate that all directors stand for re-election each year

- 45% oppose and 43% favor legislation requiring that in uncontested elections, directors must receive a majority of votes cast

- 66% oppose and 19% favor legislation that requires companies to establish a risk committee

- 73% currently have independent directors as part of the audit committee responsible for the company’s risk management practices, while 10% have a separate committee

- 81% oppose and 4% favor the Shareholder Bill of Rights Act (51% indicated that the Act would “greatly” or “somewhat” impair the company’s position with respect to their international competitors, while 24% and 2% say it would have “no impact” or “enhance” their competitive position; 90% say the Shareholder Bill of Rights Act would “significantly” or “somewhat” increase their costs as a public company, with 3% citing no effect)

Your Vote: What are the Odds of Schumer's Bill Being Passed?

Provide your anonymous vote in this poll:

- Broc Romanek

June 23, 2009

More Congressional Reform Activity: The Peters and Durbin Bills

Senator Charles Schumer's "Shareholder Bill of Rights" is not the only legislation floating around the Hills these days seeking to reform corporate governance. Here are three others:

1. "Shareholder Empowerment Act" - As Dave recently blogged about, Rep. Gary Peters introduced the "Shareholder Empowerment Act." Similar to Schumer's bill - but going further - Peters' bill would implement eight governance reforms that were highlighted in a Council of Institutional Investors letter to Congress late last year, including:

- Require majority voting for directors
- Allow long-term investors to have proxy access by nominating their own director candidates
- Eliminate uninstructed broker votes in uncontested director elections
- Require separation of board chairs and CEO positions
- Implement nonbinding annual shareholder approval of executive compensation
- Require independent compensation consultants
- Strengthen clawbacks of unearned incentive compensation
- Bar severance agreements for executives terminated for poor performance

2. "Excessive Pay Shareholder Approval Act" and "Excessive Pay Capped Deduction Act of 2009" - In May, Senator Richard Durbin introduced two bills in May aimed at curbing "excessive” compensation: the "Excessive Pay Shareholder Approval Act" (Bill S. 1006) and the "Excessive Pay Capped Deduction Act of 2009" (Bill S. 1007).

The "Excessive Pay Shareholder Approval Act" would require a supermajority vote (60%) to approve a compensation structure in which any employee is paid more than 100x more than the average employee of that company. In addition, in connection this vote, proxy disclosure would need to include:

- Compensation paid to its lowest paid employee
- Compensation paid to its highest paid employee
- Average compensation paid to all of its employees
- Number of employees who are paid more than 100x the average employee compensation
- Total compensation paid to employees who are paid more than 100x the average employee compensation

The "Excessive Pay Capped Deduction Act" would limit the federal income tax deduction for compensation paid to executives to 100x average employee compensation. Any amounts paid in excess of this cap would be considered "excessive compensation" and would be non-deductible.

In addition, any company that paid "excessive compensation" would be required to file a report with Treasury for such taxable year that included:

- Amount paid to the employee receiving the lowest amount of compensation during such year
- Amount paid to the employee receiving the highest amount of compensation during such year
- Average compensation of all of its employees during such year
- Number of employees receiving compensation that is more than 100x the average employee compensation during such year
- Amounts paid to the employees receiving compensation that is more than 100x the average employee compensation during such year

An Inspector General Report: The SEC's "Restacking Project"

At the end of last year, I blogged about how the SEC was spending $4.1 million to shuffle its personnel around physically due to bad planning when the Staff first moved into its new building a few years ago. The SEC called this it's "restacking project."

Back in March, the SEC's Inspector General, David Kotz, issued this report on how the restacking project fared. The IG initiated the review because of Staff complaints that the project was "not properly approved and initiated, did not serve a useful purpose, and was a waste of Commission resources." The report claims that 81% of the Staffers surveyed by the IG felt that the reorganization was completely unnecessary. Then SEC Chair Cox ordered a cost-benefit analysis that was never completed for the project. Not a good story.

"Cool Deal Cube Contest": We Have a Winner!

Recently, I announced a "cool deal cube contest" as part of our ongoing "Deal Cube Chronicles." John Newell of Goodwin Procter takes the prize with this cube. John notes:

Here is an old JPMorgan advertisement from the late '80s that explains this cube. In a nutshell, it is that the cube/tombstone from the "tombstone of the unknown deal." I made a joke to a senior guy at Bowne of Boston after a public deal cratered and he made a couple of these babies.

Recently, I also received this story from a member:

During a drafting session for a follow-on offering in which we were underwriters' counsel, we commented that the CFO was referred to in his bio as a certified pubic accountant. Company counsel expressed surprise because they had copied the language verbatim from the original IPO prospectus. There followed 1-1/2 seconds of uncomfortable silence, after which we flipped through a copy of the IPO prospectus and confirmed the worst.

There is some consolation in the fact that a search of the term "certified pubic" on EDGAR yields 142 hits (and counting).

- Broc Romanek

June 22, 2009

A Preliminary Postseason Report

Whew, the proxy season is over. And it's now fair to ask: just how wild and crazy was this proxy season? Given all the coming reforms, probably not as crazy as next year's proxy season will be - but it certainly was't dull. You can read details about how the various proposals were supported in RiskMetrics' new "Preliminary Postseason Report."

Regarding one of the hottest topics, as of June 1, “say-on-pay” shareholder proposals averaged 46.7% support, representing an increase of over 5% from 2008. The 2009 figure is based on preliminary or final voting results for 50 of the 85 proposals voted so far this year. Meanwhile, RiskMetrics is tracking 18 majority votes in favor of the resolution as of June 1st, compared with 11 in all of 2008. Proposals at another five companies received between 49 and 49.9% support.

It's Time to Weigh In: RiskMetrics Launches Annual Policy Formulation Process

Last week, RiskMetrics kicked off its annual global policy formulation process by inviting comments in its 2010 proxy voting policy survey. This year’s policy formulation process will include more outreach to investment industry groups as well as expanded outreach to the global corporate community.

Given that these comments could influence RiskMetrics' views - and given that RiskMetrics' views will be more important than ever given regulatory reform, say-on-pay, proxy access, etc. - you should take advantage of this opportunity. The survey period ends July 31st - and will be followed by an open comment period in October after RiskMetrics publishes its draft policies. Don't wait for this 2nd comment period to weigh in - it's better to influence the policies now before the train gets rolling...

CEO Pay: Big Changes Coming

With the SEC's goal to have new executive compensation disclosure rules in place before next proxy season - combined with the real likelihood of say-on-pay legislation and the loss of broker nonvotes for director elections - our the “4th Annual Proxy Disclosure Conference” (whose pricing is combined with the “6th Annual Executive Compensation Conference”) will be more important than ever. Here is the agenda.

Early Bird Expires This Friday: These Conferences will be held at the San Francisco Hilton and via Live Nationwide Video Webcast on November 9-10th. Take advantage of reduced rates that will expire this Friday, June 26th by registering now. These rates will not be extended - there will be no early bird discounts after Friday!

- Broc Romanek

June 19, 2009

Going to Print: The Popular "Romeo & Dye Forms & Filings Handbook"

Good news. Peter and Alan just completed the 2009 edition of their popular “Section 16 Forms & Filings Handbook,” with numerous new – and critical – samples included among the thousands of pages of samples (remember that a new version of the Handbook comes along every 3 years or so - so those with the last edition have one that is dated). If you don’t try a ’09 no-risk trial to the “Romeo & Dye Section 16 Annual Service,” we will not be able to mail this invaluable resource to you in early July when it’s done being printed.

You can use this order form or order online. The Annual Service not only includes the “Forms & Filings Handbook,” it also includes the popular “Section 16 Deskbook” and the quarterly newsletter, “Section 16 Updates.” Get all three of these publications when you try a ‘09 no-risk trial to the "Romeo & Dye Section 16 Annual Service" now.

A Father's Day Item: Becoming a "DAD"

From Keith Bishop: Are you, or would you like to become, a DAD? Pink OTC Markets provides an over-the-counter quotation system that is comprised of the OTCQX and Pink Sheets. These are not exchanges and the Pink OTC Markets is not a securities regulator or self regulatory organization.

A company that applies for admission to the OTCQX must have a "Designated Advisor for Disclosure" or otherwise known as "DAD." A DAD may be either an attorney or an investment banking firm. According to the OTCQX rules: "The role of a DAD is to serve as a cautious and conscientious gatekeeper to prevent companies with inadequate questionable disclosure from joining OTCQX." The OTCQX website currently lists a dozen attorney DADs.

By the way, I've heard that one investment banking firm was quoting a price of $90,000 to be a DAD. I must be living my life in reverse because all I do is write checks for my kids - no one is paying me to be a dad.

What Does a Spoofed Email Look Like?

Last week, Dave blogged about the email sent from a SEC attorney's email account - even though she didn't send the email (otherwise known as "spoofing"). As this episode illustrates, this fraudulent act isn't like someone stealing your credit card. Spoofing is more than a mere hassle, it can injure your reputation even if uncovered. Here is a copy of the spoofed email so you can see how crazy it was.

I rehash this incident because spoofing isn't limited to email, it now happens on Twitter and other new mediums. Companies need to be monitoring these new forms of media and not just stick their heads in the sand because they are new...

I play a lot of "old man" hoops (and I'm not that shabby), so I was excited to see this ESPN article about how President Obama has shaken up the love for basketball in the DC area.

- Broc Romanek

June 18, 2009

The Final White Paper: Treasury's and Obama's Vision for the Future

Yesterday, the Treasury Department released the final version of the White Paper that Dave blogged about yesterday. In addition, this executive summary was posted. We already have started posting memos on this important development in our "Regulatory Reform" Practice Area.

For a short glossary of the 75+ acronyms in the White Paper, check out Mike O'Sullivan's "Provided However" Blog.

Microsoft's Legal Department Enters the Blogosphere

Several months ago, Microsoft launched a new blog - entitled "Microsoft On The Issues" - that includes the company's "Law and Corporate Affairs" department among the contributors. The company uses the blog as a forum to communicate about issues important to it. For example, here's a blog about how the company's board recently recommended amendments to the company's articles of incorporation that would give shareholders representing 25% or more of outstanding shares the right to call special shareholder meetings.

Hopefully this development will help nudge companies to be more outspoken, including submitting comments during the SEC's rulemaking process - as well as draw outside counsel into the blogosphere. If in-house lawyers aren't afraid to blog, I don't see how law firms can continue to be so reluctant...

Survey Results: Compliance Committees

We recently wrapped up our Quick Survey on Compliance Committees practices. Below are our results:

1. Does your company have a Chief Compliance Officer:
- Yes, and with that title - 57.8%
- Yes, but not with that title - 26.7%
- No - 15.6%

2. Does your board have a Compliance Committee, with that or a similar title:
- Yes - 31.1%
- No - 68.9%

3. If the answer to #2 is "yes," how old is the compliance committee:
- Less than one year - 14.3%
- 1-2 years - 28.6%
- 3-4 years - 35.7%
- More than 4 years - 21.4%

4. If the answer to #2 is "yes," how often does the compliance committee meet:

- Once a year - 14.3%
- 2-3x per year - 50.0%
- More than 3x per year - 35.7%
- As needed - 0.0%

Please take a moment to participate in our new "Quick Survey on Audit Committee Oversight and Subsidiaries."

- Broc Romanek

June 17, 2009

Details of the Administration’s Financial Reform Plans Released

While the official announcement of the Administration’s proposals for financial reform is slated for later today, copies of a near-final draft of the white paper outlining the proposals have already been circulating to members of Congress and to the major news organizations. Many thanks to Marty Dunn of O'Melveny & Myers for pointing this document out to me last night.

The SEC would seem to fare well under the Administration’s proposals. The white paper indicates that the SEC and the CFTC would maintain their current authorities and responsibilities as market regulators, while the statutory and regulatory frameworks for futures and securities would be harmonized. As previously discussed, the SEC would oversee the registration of advisers of all hedge funds and other private capital pools. Regulation of securitizations and over-the-counter derivatives will be accomplished through a “coherent and coordinated” regulatory framework.

Further, the white paper calls for expanded authority for the SEC to promote transparency in investor disclosures, and states that the SEC should be provided with new tools to increase fairness for investors, through the establishment of a fiduciary duty for broker-dealers offering investment advice and harmonizing the regulation of investment advisers and broker-dealers.

Among the new regulators proposed are:

- a Financial Services Oversight Council (FSOC), chaired by the Treasury and composed of prudential regulators tasked with identifying emerging systemic risks (replacing the President’s Working Group on Financial Markets);

- a National Bank Supervisor with the authority to supervise all federally chartered banks;

- an Office of National Insurance within the Treasury Department; and

- a Consumer Financial Protection Agency, tasked with protecting consumers from “unfair, deceptive and abusive practices.”

The FSOC would also establish the Financial Consumer Coordinating Council, with membership including federal and state consumer protection agencies, and a permanent role for the SEC’s newly created Investor Advisory Committee.

Seemingly back “on the front burner” with the white paper proposals is the issue of IFRS, with the report recommending that accounting standard setters “make substantial progress by the end of 2009 toward development of a single set of high quality global accounting standards."

As widely expected, the Federal Reserve would gain more authority under these proposals, including authority over "Tier 1 Financial Holding Companies" and oversight over the payment, clearing and settlement systems.

Whether any or all of these proposals move forward is tough to say at this point, but at least today we now have a much clearer picture of the complete package of reforms under consideration.

New FINRA Conflict of Interest Rules

Just in time for hopefully an uptick in offering activity, the SEC has approved changes to NASD Rule 2720, which governs underwriter conflicts of interest in public offerings. These changes are meant to modernize and simplify the conflict of interest requirements, and provide some additional flexibility in connection with public offerings. The amendments to Rule 2720 will be implemented within 30 days after FINRA issues a Regulatory Notice (which will be issued some time within 60 days of the SEC’s approval).

Monitoring Activist Activity

During this DealLawyers.com podcast, Mary Beth Kissane of Walek Associates analyzes how companies should be monitoring shareholder activist activity, including:

- How do hedge funds have such a solid activism record?
- What should companies do to prepare for an activist attack?
- Who within the company owns the "monitoring activists" task?
- Who within the company should be dealing with the financial press?
- Who is the "financial press" these days? Bloggers included? Social media?

- Dave Lynn

June 16, 2009

The Floodgates are Now Open: More Governance Legislation

Just when you thought that the Shareholder Bill of Rights Act was the only thing to worry about on the federalized corporate governance front, along comes the “Shareholder Empowerment Act of 2009.” Last Friday, Congressman Gary Peters (D-MI) announced that he had introduced the legislation, which is intended to “expand shareholder rights and give investors a greater voice in overseeing the companies they own.”

This bill is even more wide-ranging than the Shareholder Bill of Rights legislation. The bill would amend the Securities Exchange Act of 1934 to provide:

1. Mandatory majority voting for directors - The SEC would direct the exchanges to adopt listing standards providing that a director nominee in an uncontested election must receive votes in favor from a majority of shareholders, and any nominee running unopposed for re-election would be forced to resign if he or she failed to receive a majority vote.

2. Proxy access - The SEC would be required to adopt rules, applicable beginning with shareholder meetings occurring after January 1, 2010, that would require issuers to “identify and provide security holders with an opportunity to vote on candidates for the board of directors who have been nominated by holders (sic) in the aggregate at least 1 percent of the issuer’s voting securities for at least 2 years prior to a record date established by the issuer for a meeting of security holders.” The SEC’s rules adopted under this provision would specify the information to be provided and would only be applicable when less than a majority is nominated.

3. Uninstructed Broker Votes in Uncontested Elections - This provision would direct the SEC to adopt rules providing that a broker will not be allowed to vote securities in an uncontested election if the beneficial owner has not provided specific instructions. The rule would apply for meetings held on or after January 1, 2010.

4. Independent Chairman - This provision of the bill would require the SEC to direct the exchanges to adopt listing standards mandating that issuers split the Chairman and CEO roles. Further, issuers would be required to provide that, to the extent possible and consistent with the issuer’s status as a public company, the Chairman is independent (under specified standards) and has not previously served as an executive officer.

5. Shareholder Approval of Executive Compensation - This provision would give shareholders an annual, non-binding advisory vote on the compensation packages of senior executives.

6. Independent Compensation Advisers - Under this provision, the SEC would be directed to adopt rules requiring that if a board or compensation committee retains an individual advisor or advisory firm in conjunction with negotiating employment contracts or compensation agreements with the issuer's executives, the individual adviser and his or her firm must be independent, as prescribed in the bill.

7. Clawbacks of Unearned Pay - The SEC would direct the exchanges to adopt listing standards requiring issuers to have a policy for reviewing unearned bonus payments, incentive payments or equity payments awarded due to “fraud, financial results that require restatement, or some other cause.” The policy would need to require recovery or cancellation of any unearned payments “to the extent it is feasible and practical to do so.”

8. No Severance Agreements for Poor Performance - The SEC would direct the exchanges to adopt listing standards prohibiting the board or compensation committee from entering into agreements providing for severance payments for executives terminated for poor performance.

9. Disclosure of Performance Targets - The SEC would need to adopt rules requiring disclosure of specific performance targets used in compensation plans. In the course of this rulemaking, the SEC would need to “consider methods to improve disclosure in situations when it is claimed that disclosure would result in competitive harm to the issuer.” These methods might include required disclosure of past experience with similar targets, disclosure of inconsistencies between compensation targets and targets set in other contexts, and mandated confidential treatment requests.

There will no doubt be more legislative proposals of this kind. While the bills may not ultimately be adopted as proposed, they will continue to add issues to the debate over what sorts of governance reforms should go forward, and put pressure on the SEC to act with respect to its numerous outstanding rule proposals and contemplated rule proposals. Hat tip to Ted Allen's RiskMetrics Group Risk & Governance Blog for highlighting this legislation.

How to Plan for CEO (and Other Senior Manager) Succession

Tune into tomorrow's webcast - How to Plan for CEO (and Other Senior Manager) Succession - to hear Amy Goodman of Gibson Dunn; Holly Gregory of Weil Gotshal; Mark Van Clieaf of MVC Associates; and Mark Nadler of Oliver Wyman Delta talk about one of the most important - but yet the least understood - of governance areas out there.

You can review the Course Materials for this webcast now.

Don’t Sleep on the FASB Codification

The launch of the FASB Accounting Standards Codification is fast approaching on July 1, 2009. The Codification, which will serve as the single source of authoritative, non-government US GAAP, will be effective for interim and annual periods ending after September 15, 2009. Once the Codification is launched, all existing accounting standard documents are superseded, and all other accounting literature not included in the Codification will be considered "nonauthoritative." For more information, you can check out FASB’s upcoming webcast about the Codification on June 22nd.

Yesterday, the FASB announced that it had issued Statement No. 166, Accounting for Transfers of Financial Assets (which serves and an amendment to FASB Statement No. 140) and Statement No. 167, Amendments to FASB Interpretation No. 46(R). In its announcement, the FASB notes that these standards will change the way issuers account for securitizations and special-purpose entities, and will impact financial institution balance sheets beginning in 2010. It was further noted that the impact of the standards was factored in by banking regulators in the course of conducting their recent “stress tests.”

- Dave Lynn

June 15, 2009

The SEC versus Mozilo: Insider Trading and Rule 10b5-1 Plans

For some time now, we have been waiting to see if the SEC would bring any insider trading actions involving the use of Rule 10b5-1 plans. Ever since the SEC Enforcement Staff first mentioned concerns with potential abuses of Rule 10b5-1 plans back in 2007, much has been made of how to avoid invalidating a Rule 10b5-1 defense (for comprehensive coverage of these issues, see our "Rule 10b5-1" Practice Area). Now, we have the SEC’s complaint against Countrywide’s former CEO Angelo Mozilo and others as a first of its kind SEC case questioning trades made under Rule 10b5-1 trading plans.

The SEC’s complaint in the Countrywide case alleges that Mozilo and two co-defendants misled investors about the problems that the mortgage lender faced, with contemporaneous e-mails painting a picture of significant internal concern over the company’s lending practices, while at the same time the company was portraying a rosy picture to the investment world. In this regard, SEC Enforcement Director Robert Khuzami, waxing poetic, called the situation “a tale of two companies” in the SEC’s press release announcing the action.

In the complaint, the SEC notes that Mozilo entered into four Rule 10b5-1 sales plans in late 2006, in each case while he was in possession of material non-public information about the mounting credit risk that Countrywide faced and the expected problems with the Countrywide-originated loans. With respect to his October 2006 sales plan, for instance, the SEC alleges that Mozilo established the plan one day before sending an e-mail to his co-defendants stating “we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales.” Over the course of the next 12 months, Mozilo exercised over 5 million options and sold the underlying shares pursuant to the Rule 10b5-1 plans, resulting in proceeds of over $139 million.

The Mozilo complaint for the most part focuses on one of the most fundamental elements for a successful Rule 10b5-1 defense – that the person entering into the plan must not be in possession of material non-public information at the time of entering into, or amending, the plan. I still get the question from time to time of whether a person can enter into a plan while in possession of material non-public information so long as trading does not commence until after the information is made public, which obviously can never work.

It will probably be some time before this case makes it to trial. It remains to be seen whether the Mozilo case is just one isolated incident of allegations involving Rule 10b5-1 plans, or whether more of its type are on the way. In any event, I think that the threat of the SEC cracking down on Rule 10b5-1 plans has in all likelihood cleaned up most abuses in this area (if there were any to start with).

In this entry from the D&O Diary blog, Kevin LaCroix provides a great explanation of why it is appropriate for Bank of America to be advancing Mozilo’s defense expenses.

Academic Research on Hedging Transactions and Abnormal Returns

As Mike Melbinger recently noted in his CompensationStandards.com blog, a recent academic study has highlighted a potential relationship between executives entering into prepaid variable forward contracts and a drop in their company’s stock price. (The study is discussed in this WSJ article). This research could potentially raise the SEC’s attention concerning these types of transactions, similar to the way that research on well-timed Rule 10b5-1 plans originally garnered the SEC’s attention on those plans. While it doesn't seem that prepaid variable forwards have been as popular as they once were, they still offer an alternative for executives to diversify and monetize a portion of their stock holdings.

The Administration's Regulatory Reform Proposals Expected This Week

In this Washington Post piece appearing today, Timothy Geithner and Lawrence Summers lay out the Administration's plans for financial reform. The piece discusses how the Administration's proposals will address five key problems. Among the solutions, Geithner and Summers indicate that the plan will call for "harmonizing the regulation of futures and securities, and for more robust safeguards of payment and settlement systems and strong oversight of 'over the counter' derivatives. All derivatives contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse."

The WSJ also reports today that announcement of "the most sweeping reorganization of financial-market supervision since the 1930s" is expected this Wednesday. [It seems that in this phase of the financial crisis and its aftermath, Wednesday is the new Sunday. It used to be last Fall that we would wait until Sunday evening before Asian markets opened to find out what major calamity had been averted or precipitated. Now, major announcements seem to be happening on Wednesdays, which takes away some of the drama but is perhaps a good sign.]

From the WSJ report, the only agency on the chopping block is the Office of Thrift Supervision - otherwise, financial regulatory authority is expected to be reallocated so as to avoid gaps in regulation. As many have expected, the Federal Reserve will garner more power under the Administration's proposal, overseeing the largest of financial institutions with enhanced authority.

It remains to be seen how quickly Congress will act on these proposals - healthcare seems to be taking center stage away from the financial crisis as signs of normalcy on the economic front have begun to emerge.

Deal Protection: The Latest Developments in an Economic Tsunami

We have posted the transcript from our recent DealLawyers.com webcast: “Deal Protection: The Latest Developments in an Economic Tsunami.”

- Dave Lynn

June 12, 2009

SEC Creates an Investor Advisory Committee

There is no doubt that the SEC has a laser-like focus on its investor protection mission these days. Recently, the SEC announced that it will be getting some help from a newly-established investor advisory committee. Commissioner Aguilar will serve as the Commission’s “sponsor” of the Committee, and it will be made up mostly of institutional investors and representatives of individual investor organizations.

The SEC said that the Advisory Committee’s main goals will be providing:

- advice to the Commission on areas of concern to investors;
- investors' views on “current, non-enforcement, regulatory issues;” and
- information and recommendations to the Commission regarding regulatory programs.

The SEC is free to set up these sorts of advisory committees under the Federal Advisory Committee Act (5 U.S.C. App. 2 §§ 1-16), if it can be determined that the establishment of the advisory committee is in the public interest. An advisory committee can be established (15 days after the publication of a notice in the Federal Register) by filing a charter for the committee with the Senate Committee on Banking, Housing, and Urban Affairs and with the House Committee on Financial Services. A copy of the charter is also filed with the SEC Chairman, furnished to the Library of Congress, placed in the Public Reference Room at the SEC, and posted on the SEC's site.

The charter for the committee must provide that the duties of the committee are to be solely advisory, and specify the time frame during which the committee will operate. The charter also provides that the SEC alone will make any determinations of action to be taken and policy to be expressed with respect to matters within the SEC’s authority that are recommended by the committee.

The advisory committee approach can be a useful way for the SEC to obtain a more detailed understanding of matters without expending scarce Staff resources. In my view, they seem to work best when they operate relatively independently and their specific agenda is not more or less directed by the SEC.

More on the "Shareholder Bill of Rights Act"

Broc has blogged about Senator Schumer's bill and we have posted memos analyzing it in our "Regulatory Reform" Practice Area. Now, in this podcast, Colin Diamond of White & Case provides some insight into the Shareholder Bill of Rights Act, including:

- What are the provisions of the Shareholder Bill of Rights Act?
- Are any provisions of the bill not seen before in other similar bills?
- What are the odds of passage of the bill?
- What are the implications of the bill, if passed?

The Spoofed E-mail Caper

It seems like the last thing the SEC needs right now is some bizarre story of a mysterious, highly critical e-mail sent to its leadership and the press, but that is just what happened earlier this week in the strange case of the “spoofed” e-mail account. As noted in this WSJ article (see also this Bloomberg and Washington Post coverage), the four page e-mail appeared to be sent from an enforcement attorney’s e-mail account, and it was addressed to Chairman Schapiro, a number of other SEC officials and several reporters covering the SEC. The e-mail attacked the performance of Chairman Schapiro and SEC Inspector General David Kotz, and railed against a number of things at the agency, including the performance review process. The original story from the apparent sender was that her Blackberry was stolen, but it later turned out that the e-mail was sent from outside of the SEC’s network where someone had “spoofed” her e-mail address. (I know all about “spoofing,” having received about fifty Canadian pharmacy e-mails a day from myself over the past couple of years.)

From the description of the e-mail and the excerpts that have been reported, it sounds like the e-mail came from a very angry Staffer (or ex-Staffer). I can think of several crazy e-mail stories from my days at the SEC, but by and large those involved self-inflicted e-mail gaffes. Of course back in the good old days, I recall that these sorts of loose-cannon Staffer activities were carried out on pilfered letterhead, rather than by e-mail. No matter how it is done, it is really unbelievable that someone would go to such lengths to vent their frustration - they should really get another hobby.

- Dave Lynn

June 11, 2009

The SEC and Treasury on Executive Compensation Practices

Yesterday marked a significant day in the ongoing involvement of the US government in executive compensation, as Treasury Secretary Geithner outlined a series of broad-based principles that companies – particularly financial institutions – should consider in connection with the design and implementation of their executive compensation programs. Secretary Geithner’s statements followed a meeting involving SEC Chairman Schapiro, Federal Reserve Governor Dan Tarullo and several compensation experts.

The principles that Secretary Geithner outlined yesterday should come as no surprise to those who have been reading our publications over the last several years. The principles draw on best practices that we have seen developing in the marketplace over time, and for the most part can be universally applied. (Nothing in Geithner’s comments seemed to indicate that the guidance was limited strictly to financial institutions, but banks will see these standards in more concrete terms as they are worked into the supervisory process of bank regulators.)

Here are the principles:

1. Compensation plans should properly measure and reward performance – Incentive compensation plans should be tied to performance in the sense of long-term value creation, which could be accomplished by using a wide range of internal and external metrics (and not just the company’s stock price), including metrics that distinguish the company’s performance from its peers.

2. Compensation should be structured to account for the time horizon of risk – Continuing the theme of aligning pay with long-term value creation, the principles encourage conditioning compensation on longer-term performance and thereby obviating the need for specific clawbacks, while encouraging the holding of equity awards for longer periods.

3. Compensation practices should be aligned with sound risk management – As we have heard repeatedly since the financial crisis, compensation committees are encouraged to conduct and publish risk assessments of compensation plans in order to “ensure that they do not encourage imprudent risk taking.”

4. Golden parachutes and supplemental retirement packages should be reevaluated – Companies should reexamine the extent to which golden parachutes and supplemental retirement packages are aligned with shareholder interests, whether they incentive performance and whether they result in value to executives even when shareholders lose value.

5. Promotion of transparency and accountability in the compensation-setting process – Citing the lack of independence of compensation committees and the lack of clarity in disclosures (including the lack of a true “walkaway” number for top executives), two legislative initiatives are proposed.

The first legislative initiative outlined yesterday is a push for an advisory vote on executive compensation, which goes beyond the previously introduced legislation and the pending Shareholder Bill of Rights, in that it would require a vote on executive compensation as disclosed in the proxy statement (including the CD&A and the compensation tables) and a vote targeting the compensation reported for each of the named executive officers. Similar to the prior proposals, a non-binding vote on golden parachutes would also be required in merger proxies.

The second legislative initiative coming out of the announcement is a new framework for compensation committees that would be analogous to the audit committee provisions of the Sarbanes-Oxley Act. Under SEC-mandated listing standards, the compensation committee members would be subject to the higher independence standards applicable to audit committee members, the compensation committee would get resources to hire and oversee its own advisors and independence standards would be prescribed for outside compensations consultants and outside counsel. This initiative comes as somewhat of a surprise to me, because while compensation consultant conflicts have been a concern, I have not heard much in the post-Sarbanes-Oxley era about concerns that compensation committees lack sufficient independence.

Chairman Schapiro also released a statement yesterday, reiterating the rulemaking efforts under consideration on executive pay and corporate governance. Proposals are expected on these in the next several weeks. Not to be outdone, Congressman Barney Frank issued a statement, generally supporting Secretary Geithner’s principles (except for the compensation committee proposal), but also indicating that Congress should go further and “adopt legislation that mandates that the SEC adopt appropriate rules that embody these principles.”

Treasury Issues Much-Anticipated Rules Implementing TARP Exec Comp Restrictions

We also saw the Treasury announce that it had finally published interim final rules implementing the executive compensation provisions from the Recovery Act. The lack of guidance had created difficulties for financial institutions participating in the TARP program, since they were not sure what to do with their compensation programs in the absence of greater clarity in how the legislation was to be applied.

The rules implement and expand on the Recovery Act provisions. Some new provisions that go beyond the statutory requirements include:

- Prohibiting tax gross-ups to senior executive officers and the 20 next most highly compensated employees;

- Requiring additional disclosure (to the Treasury and the principal regulator) of perquisites in excess of $25,000 for employees subject to the bonus restrictions, including a narrative description of, and justification for, the perquisites.

- Requiring a disclosure (to the Treasury and the principal regulator) of the use of compensation consultants, including a discussion of any non-compensation services performed and the use of “benchmarking" procedures.

It is Here: The SEC Publishes the Shareholder Access Release

Last night, the SEC posted the shareholder access release. The release comes in at 250 pages with 181 specific comment requests (with many of those including multiple questions), so there will be lots to comment on. The release includes an extensive discussion of the background and rationale for shareholder access, as well as a cool chart outlining the proposed Rule 14a-11 deadlines. I’ll cover more on some of the specifics in the proposals over the next couple of days.

- Dave Lynn

June 10, 2009

Proxy Access: Debating the Issues

When the SEC's proposing release finally becomes available - it's already been three weeks since the open Commission meeting and still no release! - the hunt will be "on" to start writing comment letters and meet the 60-day deadline since the SEC will need to act fairly shortly after the deadline if they truly want something effective before the beginning of the next proxy season. Here are some resources that already have identified issues that will undoubtedly be featured in numerous comment letters:

- JW Verret on the Conglomerate blog regarding bylaw complications and on the DealLawyers.com blog regarding Chinese Menu ballot concerns

- Floyd Norris' blog on various issues

- Wachtell Lipton's blog on balance of state and federal law

- Prof. Lucian Bebchuk's blog on the need for comprehensive reform of corporate elections

- Steven Davidoff on the DealBook blog on whether boards should be managing or monitoring

As the flood of law firm memos arrive dissecting the proposing release, we will be posting them in our "Proxy Access" Practice Area.

Obama Requires Federal Agencies to Review Preemption Policies

In a bizarre coincidence, at the same time that the "state law vs. federal law" debate will rage in the proxy access context, President Obama has sent a memo to all federal agencies asking that they review all of their regulations aimed at preempting state laws issued during the past ten years in an effort to determine whether the preemption is justified - and ensure that statements of preemption be included in future rulemakings only when there is a sufficient legal basis.

A Member's Thoughts: North Dakota Reincorporation

During the SEC's open Commission meeting on proxy access, the North Dakota Publicly Traded Corporations Act was mentioned quite a bit. I have blogged before that the first company - American Railcar Industries - has proposed reincorporating from Delaware to North Dakota.

Recently, a member sent me this note: "Shareholders have submitted their own proposals at more than a dozen companies. It appears that in every case, the proponent has been an individual, mostly John Chevedden (Continental Airlines, Southwest Airlines, and Lowes). Many of these companies have not yet had their annual meetings. At those meetings already concluded, there has been only minimal support for these proposals. It will be interesting to the results at American Railcar's meeting on June 10th where the proposal has the board of director's approval."

When Will the SEC's Proxy Access Proposing Release Be Posted?

Who knows? A proposing release typically is posted anywhere between a few days and two weeks after the related open Commission meeting. Now that we are three weeks from the proxy access meeting, I believe we are approaching record "still waiting" territory. Give us your anonymous opinion as to when you think the release will become available:


- Broc Romanek

June 9, 2009

The Latest Compensation Disclosures: A Proxy Season Post-Mortem

Tune into our CompensationStandards.com webcast tomorrow - "The Latest Compensation Disclosures: A Proxy Season Post-Mortem" - to hear Dave Lynn, Mark Borges and Ron Mueller analyze how the executive compensation disclosures looked during this proxy season.

If you are not yet a member of CompensationStandards.com, try a "Rest of '09 for Half-Price" no-risk trial.

In his "Proxy Disclosure Blog" last night, Mark does a great job of summarizing the recent news that Treasury may finally issue its executive compensation guidance this week - and that it may apply to all financial institutions, not just TARP participants. Mark also raises some good questions, such as whether the new "pay czar" will be responsible for interpreting ARRA guidance or whether it will be Treasury or someone else. Chaos reigns supreme.

PCAOB Chair Olson Resigns

Yesterday, the PCAOB announced that its Chair - Mark Olson - resigned for personal reasons, effective July 31st. Mr. Olson has been in the job nearly three years and was the PCAOB's 2nd Chair. He didn't mention whether he had any concrete plans for the future. This CFO.com article recaps Mark's PCAOB tenure.

I imagine he's glad to avoid being at the PCAOB when the US Supreme Court decides the regulator's fate this October. This NY Times article notes that the SEC will need to fill three of the five PCAOB Board slots in the coming months. I wonder who would agree to take a job on the Board now given that the future of the PCAOB is uncertain.

Introducing "The Mentor Blog"

We recently launched a new blog - "The Mentor Blog" - for TheCorporateCounsel.net members. Launching this blog was something I've been mulling over for quite some time, well before the financial meltdown led to so many scrambling for new jobs (and careers). Now that the transformation of the legal profession, the corporate secretary and IR worlds - and more - is in full swing, the time is "now" to help foster the conversation that hopefully will lead you to better manage your career. The goals of this blog are threefold:

- Provide practice pointers in the area of career development, regardless of the stage of your career

- Provide guidance on how to use technologies to make you more efficient and market yourself

- Provide guidance to newbies on basic areas of the law

As with our other blogs, this is a community blog. Contributions are welcome and encouraged from each and every one of you! 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). Here are topics covered in the blog so far:

- Networking with Your Legal Recruiter

- A Guide to Public Company Auditing

- Do Your Corporate Policies Consider Social Media?

- Overcoming the Challenges of "In Transition"

- "Quasi-Insider" Trading Question: Suppliers

- Obtaining a Job in a Tough Market

- Broc Romanek

June 8, 2009

"Shareholder Value" vs. "Value for Shareholders": The Leaders Speak

Below is some important reading that has recently been brought to our attention that we commend to each of you. It shows that this country has some pretty amazing leaders:

1. Pepsi's CEO Indra Nooyi, who was educated in India and then the Yale Business School, recently gave these impressive remarks about corporate values (you can watch Ms. Nooyi deliver them on this video).

2. JPMorgan's CEO Jamie Dimon annual letter to shareholders is a "must" read, particularly starting on page 13. Note what Mr. Dimon says about compensation: "It also is clear that excessive, poorly designed and short-term oriented compensation practices added to the problem by rewarding a lot of bad behavior." And see the steps he has taken at JPMorgan (at pg 26). When I saw the bullet about no special severance provisions, I remembered that he had a huge severance provision in his contract when he went from BankOne to JPMorgan in 2004. Well, I did a little research and sure enough, it turns out that he voluntarily gave it up in '06 without any fanfare.

3. Roger Martin, Dean of the Rotman School of Management at Toronto puts a fresh lens on compensation and metrics in "Undermining Staying Power: The Role of Unhelpful Management Theories." His important observations recently were summarized in this Financial Times article.

4. Finally, one of this year's best media articles is this one entitled "The Executive Pay System is Broken" by Alistair Barr of MarketWatch. It explores possible solutions to fix executive pay and answers why it's important to do so...

By the way, on the right side of the CompensationStandards.com home page, we still maintain a group of complimentary videos of prominent leaders speaking out about excessive pay under the caption of "Respected Leaders Speak Out for Responsible Practices." We just posted an extended video (i.e. 6 mins) of when Jesse Brill spoke out on how to fix pay practices recently on "The Today Show."

Protecting Non-Qualified Deferred Compensation: Why is it Suddenly an Issue?

On his "Melbinger's Compensation Blog" on CompensationStandards.com, Mike Melbinger has been blogging a series about how Section 409A intersects with bankruptcy filings and causes a number of problems. Check it out.

May-June Issue of The Corporate Counsel

We just published the May-June issue of The Corporate Counsel. This issue includes pieces on:

- SEC Guidance on Shell Companies
- Augmenting the Schedule 13D/G Disclosure Requirements—Enhanced Advance Notice Bylaws
- Filing Form 10-Q With Non-Reviewed Financials—Impact on S-3/8 Eligibility
- Earnings Release and 10-Q Filing on Same Day—Impact on 8-K Item 2.02
- Merger Lock-Ups and Written Consents—Staff Iterates/Firms Up Its Position on Pre-Proxy Solicitation
- Voluntary Filer CDIs
- Staff Review Update
- The Staff's Nine-Month IPO Dormancy "Rule"—Some Relief in Today's Market
- Even if IFRS Roadmap Adopted, Don't Expect Voluntary Early Switching to IFRS
- NSMIA Blue Sky Pre-Emption—Litigation Update
- Some Reverse Engineering of the Facebook and WorleyParsons RSU No-Action Letters

Try a half-price for "Rest of '09" no-risk trial today to receive this issue and more.

- Broc Romanek

June 5, 2009

Coming Soon: SEC's New Executive Compensation Rules

As noted in this WSJ article, the SEC intends to roll out new proposals to change its executive compensation disclosure rules sometime in early July. Mark Borges did a great job of recapping what the proposals will likely look like in his blog.

With the SEC's goal to have its rule changes effective before next proxy season - combined with the real likelihood of say-on-pay legislation and the loss of broker nonvotes for director elections - our the “4th Annual Proxy Disclosure Conference” (whose pricing is combined with the “6th Annual Executive Compensation Conference”) will be more important than ever.

These Conferences will be held at the San Francisco Hilton and via Live Nationwide Video Webcast on November 9-10th; here is the agenda. And many also attend the NASPP Annual Conference that follows directly thereafter - the full Conference program was justed posted. Take advantage of reduced rates that will expire on June 26th by registering now.

Check out this article from yesterday's Washington Post regarding SEC Chair Schapiro's first days in office and the challenges she faced.

Survey Results: Governance Trends for IPO Companies

David Westenberg of WilmerHale sent over some IPO governance trend stats, uncovered during research for his upcoming PLI book, "IPOs: A Practical Guide to Going Public." Here is the data based on his review of all US IPOs by operating companies (i.e., excluding SPACs, REITs, etc.) in 2007 and 2008 (total sample size was about 185 companies; 93% of companies were incorporated in Delaware):

1. Number of Executive Officers:

- Median - six
- 25% Percentile - five
- 75% Percentile - seven

2. Percentage of IPO companies that identified "key" employees beyond executive officers - 15%

3. Separation of Chair and CEO:

- Separate Chair and CEO - 52%
- Same Chair and CEO - 48% (of these, 8% appointed a lead director)

4. Compensation Consultants - Percentage of IPO companies that disclosed use of compensation consultant - 24%

5. Number of Directors:

- Median - seven
- 25% Percentile - six
- 75% Percentile - eight
- 50% of IPO companies had more than one employee-director.

6. Takeover Defenses:

- Classified board - 60%

- Supermajority voting requirements to approve mergers or change corporate charter and by laws - 53%

- Prohibition of stockholders’ right to act by written consent - 69%

- Limitation of stockholders’ ability to call special meetings - 74%

- Advance notice provisions - 80%

- Section 203 of the Delaware corporation statute* (chose not to opt out) - 90%

- Blank check preferred stock - 76%

- Stockholder rights plan (“poison pill”) - 6%

FASB Issues FAS No. 165 re: Subsequent Events

Last week, the FASB issued FAS No. 165, "Subsequent Events." FAS 165 is effective for interim and annual periods ending after June 15th - and is intended to establish general standards of accounting for (and disclosure of) events that occur after the balance sheet date - but before financial statements are issued or are available to be issued.

- Broc Romanek

June 4, 2009

All You Need to Know About Rule 144

Members will be excited to know that we have moved the video archives - and more importantly, the critical course materials, including lots of sample letters, instructions and memos - from our popular conference "Rule 144: Everything You Need to Know – And Do NOW" to our "Rule 144" Practice Area. Previously, this content was just available to those that paid for the Conference.

As always, we continue to post useful sample documents, either in the relevant Practice Area or in our "Sample Documents" Portal. For example, we just posted this updated chart comparing NYSE and Nasdaq listing requirements.

Latest on Mark-to-Market Accounting

In this podcast, Steve Henning of Marks, Paneth & Shron discusses the latest on mark-to-market accounting, including:

- What is mark-to-market accounting and what is the impact?
- Is mark-to-market subject to flexibility?
- Where do regulators find themselves in the debate?

Southwest's Annual Meeting: Rapping Attendant Explains Non-GAAP

Thanks to the many members who have sent me the link to this YouTube sensation in which a Southwest flight attendant amuses the company's annual meeting audience with a disclaimer about non-gaap in the form of rap:

- Broc Romanek

June 3, 2009

Mark Cuban vs. SEC: Where's the Popcorn?

Just because we haven't been blogging much about the SEC's pursuit of Mark Cuban on insider trading charges doesn't mean we're not interested. It's just that insider trading is not a big focus for Corp Fin-types like us. Plus, Mark Astarita of SECLaw.com is covering the saga quite well, such as his latest blog about how Mark Cuban has turned around and sued the SEC for violating the Freedom of Information Act.

NBA fans know Cuban well as the prolific owner of the Dallas Mavericks, a guy not afraid to get fined by the league due to being quite outspoken. He's unlike any other sports owner - he's extremely active with fans and with the team. Cuban is an entrepreneur, having made billions during the Internet boom and he's always trying new endeavors - his latest being innovative distribution of films and a failed ShareSleuth.com (which was covering stock fraud stories before it went under). As you might expect from such a personality, Cuban regularly blogs, including this stab at the SEC.

By the way, a loyal Dallas fan noted that I confused sports teams because it was none other than Terrell Owens, formerly of the Cowboys, who famously told the media and fans to "get your popcorn ready." When I wrote my title for this blog, I completely forgot that T.O. said that...

SEC vs. Cuban: Now Comes the Weird Part...

As noted way back when this story first broke, a complicated aspect of the Cuban case is the strange involvement of a SEC Enforcement Staffer who hadn't been working on the investigation into Cuban's alleged insider trading - but yet felt compelled to send emails to Cuban about various aspects of his life while the case was being put together. This eventually led to Cuban responding to this rogue Staffer via email, copying then-SEC Chair Chris Cox.

Yesterday, the WSJ ran this article noting that the Staffer may be subject to discipline. For those that are alumni of the SEC (or any government agency for that matter), memories of former rogue colleagues must surely come to mind. I can think of more than a few. Those curious experiences truly are one of the beauties of working for the Gov...

SEC Approves NYSE's Reduced Listing Standards Requirements on Pilot Basis

On Monday, the SEC posted an order approving the NYSE's proposed changes to its listing standards that reduced its $75 million stockholders' equity and market cap requirements to a $50 million/$50 million standard. These changes are on a pilot program basis through October 31 - and became effective on May 12th.

Companies that are below compliance with the $75 million standard - but above the $50 million Pilot Program standard will be deemed to have returned to compliance. This will be welcome news to those companies that were "below compliance" but are working on remediation plans.

- Broc Romanek

June 2, 2009

In the Crosshairs: Lack of Majority Voting for Director Elections

As I blogged recently, majority voting may be forced upon all public companies through Senator Schumer's governance legislation. Although the voluntary movement to adopt majority voting - although "voluntary" may be a misnomer since many companies adopted those standards under heavy pressure from shareholders - has had long legs over the past few years with larger companies, a study by The Corporate Library indicates that smaller companies have been slow to change and that nearly 75% of the Russell 3000 still use a straight plurality voting standard. In comparison, nearly 50% of the S&P 500 have switched to pure majority voting - and another 18% have adopted the plurality-plus-resignation approach (leaving 32% of the S&P 500 with a straight plurality standard).

When it comes to plurality-plus-resignation - also known as "majority voting light" or "Pfizer-style" - the first lawsuit has been filed against a company that refused to unseat some directors who didn't receive a majority. According to this complaint filed in the Delaware Chancery Court against Axcelis Technologies, a municipal pension fund has demanded to inspect the company’s books and records relating to the board’s decision to not to accept the resignations of three directors after they failied to receive a majority vote. The backdrop of this case is a failed acquisition.

Mechanics of Broker Discretionary Votes

In this podcast, Steve Bigler of Richards Layton & Finger provides some insight into the mechanics of broker discretionary votes, including:

- What is the difference between "broker discretionary votes" and "broker nonvotes"?
- Can companies tell which votes are being cast by broker discretionary votes?
- How would companies remove broker discretionary voting from their voting results? What is the technical process for a company (i.e. through a bylaw or a charter provision)?
- How might this differ for companies with a majority voting standard that have a director resignation policy?

The Problem with Blank Votes

Broker nonvotes is not the only voting issue being debated these days. A petition for rulemaking was filed recently with the SEC by Jim McRitchie of CorpGov.net to tackle the problems associated with blank votes. Jim writes: “The problem is that when retail shareowners vote but leave items on their proxy blank, those items are routinely vote by their bank or broker as the subject company’s soliciting committee recommends. Current SEC rules grant them discretion to do so. ... We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.”

More information on this issue is included in the rulemaking petition and on CorpGov.net.

- Broc Romanek

June 1, 2009

Corp Fin's New and Updated "Compliance & Disclosure Interpretations"

On Friday, Corp Fin issued two new batches of "CD&Is" (which is an easier acronym than the more accurate term of "C&DIs" that Corp Fin uses) and updated five sets of older CD&Is. The new CD&Is relate to XBRL and Regulation S-T. [The SEC's Office of Interactive Disclosure also posted this new set of XBRL FAQs.]

The updated CD&Is relate to:

- Regulation S-K (including some new executive compensation ones that Mark Borges blogged about on Friday)
- Form 8-K
- '34 Act Sections
- '34 Act Rules
- '34 Act Forms

"IDEA" is Dead! Long Live EDGAR!

As noted in this National Law Journal article, the SEC has settled the trademark infringement lawsuit brought against it by CaseWare International by agreeing to stop using "IDEA." As I blogged a while back, Caseware has been using the IDEA name for twenty years and registered the name with the Patent and Trademark Office in '01, well before the SEC began using the term.

In my opinion, this is a blessing in disguise for the SEC since Edgar is well-branded with investors and I thought it was a huge mistake to change the name last year. It looks like the SEC already has purged any vestiages of "IDEA" from its website. I sure hope they just stick with "Edgar" and not pick another new name. Long live Edgar!

If you need a laugh, check out TweetingTooHard.com. Some of these tweets can't be real! But sadly they can...

Our June Eminders is Posted!

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

- Broc Romanek