July 31, 2009

Our "Q&A Forum": The Big 5000!

In our "Q&A Forum," we have reached query #5000 (although the "real" number is really much higher since many of these have follow-ups). I know this is patting ourselves on the back, but it's nearly eight years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been over 17,000 questions answered.

You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis and that any answers don't contain legal advice.

You've never seen me so happy! They're bringing Jimmy back! New "Rockford Files" coming soon...

Changes in the SEC's Misappropriations Theory? SEC v. Cuban

Many have been following the battle between Mark Cuban and the SEC over Cuban's alleged insider trading, partly due to Cuban's prolific personality as I blogged about a few months ago.

A few weeks ago, a federal court - US District Court for the Northern District of Texas - dismissed the SEC's insider-trading complaint against Cuban in SEC v. Cuban. The decision has stirred quite a bit of debate over the future of the misappropriations theory. We are posting memos analyzing the case in our "Insider Trading" Practice Area.

In this podcast, Ken Winer of Foley & Lardner discusses the court's decision in Cuban, including:

- Case's implications for executives who are about to provide material, nonpublic information to a third party
- Whether the dismissal means that it will be safe for someone in Cuban's position to trade based on information obtained from an executive

Consideration Delayed: Formation of a New "Consumer Protection Agency"

While the House gears up today to vote on a say-on-pay bill (here is the latest version of the bill; here is Mark Borges' analysis of what amendments will be offered on the floor today), Rep. Barney Frank and his House Financial Services Committee have delayed a vote on the bill that would create a new "Consumer Protection Agency" amid concerns from the business community. A number of Senators (including Democrats) have already expressed concern over this agency. Over 20 business groups have also urged a delay including the Chamber of Commerce and the AICPA, as noted in this article.

As an aside, check out this recent blog from the FEI's Edith Orenstein about the yin-yang of regulation.

- Broc Romanek

July 30, 2009

Differing Views on "Dark Pools"

Recently, I cautioned how "dark pools" may be one of the next big problems facing our markets. A member - who probably knows more about this area than I do - disagreed and says:

I have a number of friends working for dark pools - and I remember reading some of the initial SEC market reports on stock order preferencing and internalization back in the day that were precursors to this type of trading - and I don't share your dire opinion. Because in the end, dark pools provide more liquidity and help narrow stock spreads and because, quite frankly, it's inevitable that automated algorithmic software agents will disintermediate human market makers and specialists.

The biggest problem is that they need to get rid of that name "dark pools" as it sounds like something out of a Harry Potter book - and will one day result in Henry Waxman and Maxine Waters calling for a special House investigation. In the end though, dark pools will get more regulated - not so much because they are bad - but because institutional wholesale traders who made a living "working" large orders by calling up their Ivy League buddies on other trading desks can not, in the long run, compete with the automated algorithms associated with the dark pools so in order to preserve their "buggy whip"-like jobs stricter regulations will be demanded to protect them from the algorithm software engineer menace.

It's Here: New Edition of Romeo & Dye's "Section 16 Forms & Filings Handbook"

We just started mailing the new '09 edition of the popular Romeo & Dye "Section 16 Forms & Filings Handbook," with numerous new - and critical - samples to those that ordered it. If you don't try a no-risk trial to the "Romeo & Dye Section 16 Annual Service," we will not be able to mail this invaluable resource to you. 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 no-risk trial to the Romeo & Dye Section 16 Annual Service now.

SEC Offers Its News Via Email

For those of you that don't feel pounded already with email alerts about breaking news, the SEC recently added a free service where you can subscribe to receive their latest developments via email. You can select from a menu as to what type of news you wish to receive (unfortunately, it doesn't offer choices by type of law - rather, it's by the type of document the SEC has released). This builds on pre-existing services that the SEC offers: RSS feeds and Twitter.

So if you had this service, you would have seen Corp Fin Director Meredith Cross' first written statement since she rejoined the SEC in this testimony - entitled "Protecting Shareholders and Enhancing Public Confidence by Improving Corporate Governance" - that she delivered yesterday to the Senate Banking Committee as soon as it was made available ...

By the way, I can't find a spot to "follow" (ie. sign-up) for the SEC's Twitter feed on their site. However, you do get the option to do so when you subscribe to their email alerts or you can just do so by going to their Twitter page (they already have over 2700 followers). But most folks provide a link to their Twitter feed on their site or blog, like I do on the top left side of this blog for my Twitter feed. Am I missing something?

- Broc Romanek

July 29, 2009

Musings: SEC's Proposal to Report Voting Results

For those that regularly read this blog, you know I was happy to see the SEC propose a requirement that would force companies to disclose the voting totals from their shareholder meetings more timely. It has always amazed me that some companies stonewall on the vote results - it's a poor PR move as it riles shareholders (see this example) and they have to disclose it eventually. But I imagine they do this in the hope that shareholders - and the financial press - will lose interest in the story.

The SEC proposes that disclosure be made within four business days after the end of a shareholder meeting (on a Form 8-K or a periodic report). For a contested director election, the 8-K would be due within 4 business days after the preliminary voting results are determined.  The proposal begs the question as to when "preliminary voting results are 'determined'" (i.e. trigger date). Maybe I'm missing it, but there doesn't seem to be any exception for other types of contested matters? Anyways, if it's a contested director election, there could be two Form 8-Ks - one within four business days after the meeting's end based on a preliminary vote and another one within four business days of the final vote being certified.

Importance of Tabulation Process

On page 44 of the SEC's proposing release, the SEC provides its discussion of this proposal - and a cost analysis is on page 96. Understandably, there is not a detailed discussion of the tabulation process and what's involved. But as I wrote about in the Fall '08 issue of InvestorRelationships.com - in my interview with Carl Hagberg (whose upcoming issue of the Shareholder Service Optimizer will provide pointers on the inspection process) - the time is now for companies to rethink how they process their votes as well as who they hire to do it.

For starters, you probably want to hire only those inspectors that have a well-defined process about how they inspect - and you probably should hire only those inspectors whom you feel comfortable would pass muster under the pressures of litigation (eg. an entity that is independent - perhaps one is not your transfer agent). With the loss of broker nonvotes, we can expect closer elections and more litigation over voting results. You need to protect yourself and not rely on procedures that historically have been pretty loose.

Is Four Days Enough?

I expect that we will see quite a few comment letters from companies that express concerns that a 4-day filing requirement is unrealistic for some meetings - particularly getting a preliminary vote for a contested election in that time period. In my opinion, companies should be able to meet a fairly short deadline (5 business days?) if there isn't a close call since most votes typically come from "street-name holders" - where virtually all the tabulation has been finished by Broadridge before the polls close. And remember that the voting instruction forms received from street-name holders aren't even subject to examination by the Inspector of Election - or by anyone else - unless the Inspectors' Report has been released and the results have been officially challenged in court.

But I do agree that a reasonable exception needs to be carved out - not just for director  election contests, but for any meeting where the preliminary results on one or more proposals are "too close to be completely comfortable with" - to allow for more time (and of course, a true proxy contest - where both sides have the right to examine the proxies and challenge their validity - is another matter altogether). In fact, maybe there shouldn't be a trigger for preliminary results - so these type of results are never required to be filed - because of their "preliminary" nature. Maybe the SEC's rule should just focus on final results.

The trick here is to figure out how to properly define "too close" so that companies don't regularly lean on this exception whenever they don't like the voting results. Perhaps a specified voting percentage is the way to go (eg. 48/52% or closer)? 

If companies invoke this type of exception, I imagine investors may not be excited about a lack of a cap regarding how long a company can go without sharing a final result. Maybe a compromise is a filing standard that would require with certification of final results - maybe within 10 business days from the date of the meeting?

What Next for Regulators?

Finally, since the SEC is looking to adopt requirements related to the process by which votes are inspected and reported, it seems like a prime opportunity to tackle overvoting.  My sense is different tabulators use different methodologies to resolve overvotes. A closer look at this process has been long overdue to ensure that practices are fairly uniform.


By the way, one beef that investors have had is that some companies have presented the percentage of votes in favor of shareholder proposals as a proportion of all votes cast, rather than as the standard RiskMetrics' pro forma calculation that excludes abstentions from the total. The SEC should clarify what they want companies to disclose.
Announcing Voting Results: California Style

From Keith Bishop: Apropos to the SEC's recent proposal concerning timely announcement of voting results - California law already requires that for a period of 60 days following a shareholders' meeting, the corporation must upon the written request of a shareholder "forthwith" inform the shareholder of the result of any particular vote.  Cal. Corp. Code Sec. 1509.  This applies to annual and special meetings.  The corporation must disclose the number of shares voting for, the number of shares voting against, and the number of shares abstaining or withheld from voting.  

In the case of election of directors, the corporation is required to report the number of shares (or votes in the case of cumulative voting) cast for each nominee.  Now you may be saying, well that is good for California corporations, but what about foreign corporations?  Foreign corporations that are qualified to transact intrastate business in California are required to provide this information at the request of a shareholder resident in California.  Cal. Corp. Code Sec. 1510(a).  

In addition to natural persons residing in California, a shareholder will be considered resident in California if it is a state bank, national bank headquartered in California or any retirement fund for public employees established or authorized by California law (think, CalPERS and CalSTRS). Cal. Corp. Code Sec. 1510(b).   Even if the foreign corporation is not qualified to transact business in California, it can be subject to the disclosure requirement if it has one or more subsidiaries that are domestic corporations or foreign corporations qualified to transact intrastate business in California.  Finally, California has expansive provisions for determining who is a shareholder for purposes of this requirement.  Cal. Corp. Code Sec. 1512.

Broc's note: I wonder whether there is any "internal affairs doctrine" applicability and case law on the subject? Anyone?

Poll: Can Four Business Days for Disclosing Preliminary Voting Results Be Done?

Here is an anonymous poll to see how you feel about the SEC's proposal for reporting preliminary voting results of contested director elections:


- Broc Romanek

July 28, 2009

Kick-Off: The SEC's Investor Advisory Committee

Yesterday, after receiving only a handful of comments on its formation, the SEC's new "Investor Advisory Committee" met for the first time. Run much like an open Commission meeting (a Commissioner even gave a speech), this inaugural meeting was available by webcast (here is the archive). Note the Committee even has its own web page.

In connection with the meeting, the SEC Staff prepared a briefing paper entitled "Possible Refinements to the Disclosure Regime," which included discussion questions for these topics:

- Disclosure related to investment products & financial intermediaries
- Mutual fund point of sale disclosure
- Mutual fund/broker fee disclosure
- Disclosure to investors in 401(k) plans
- Environmental, climate change and sustainability disclosure
- Climate change and other environmental issues
- Social, governance and other operational matters

As an aside, the SEC adopted amendments to Regulation SHO yesterday to permanently implement more short selling restrictions. The SEC is continuing to consider proposals on a short sale price test and circuit breaker restrictions.

Zacharias v. SEC: DC Circuit Adopts Expansive Meaning of "Underwriter"

Below is recent analysis of a new case excerpted from this Davis Polk memo (which we have posted in our "Securities Act Liability" Practice Area):

In Zacharias v. SEC, the U.S. Court of Appeals for the District of Columbia Circuit affirmed an SEC order finding that two officers and directors of a public company and an unaffiliated third party engaged in a "scheme" to sell securities in violation of the registration requirement of Section 5 of the Securities Act, despite the fact that the only shares sold to the public were freely tradable shares owned by the third party.

The Court's praise of the SEC decision as "a triumph of substance over form" and the reasoning of the case (as well as the result) stand in contrast to the recent decisions of three U.S. District. Courts that rejected the SEC's claims of Section 5 violations in the hedging of "PIPEs" securities.

SEC Names Dan Goelzer as PCAOB's Acting Chair

Yesterday, the SEC announced the appointment of Dan Goelzer to serve as Acting Chair of the PCAOB. A few weeks ago, Mark Olson announced his resignation as Chair which takes effect at the end of this week. Dan has served on the PCAOB's board since the PCAOB was born. Here is the PCAOB's press release.

- Broc Romanek

July 27, 2009

Corp Fin Finishes Overhaul of its "Accounting Training Manual"

On Friday, Corp Fin posted an updated "Financial Reporting Manual" to include a new section -- Topic 4: Independent Accountants' Involvement -- as well as other changes. So it looks like the Staff has finished its overhaul of what used to be called the "Accounting Training Manual," a process that commenced at the end of '08.

Yes, the PDF version of the Manual still bears that legend "For Division of Corporation Finance Staff Use Only" and includes a disclaimer about the informal nature as guidance, even though the SEC now makes the Manual publicly available. But the HTML version does not...

Deutsche Bank's Internal Investigation: Shareholder Engagement, Austin Powers Style

Recently, it has been reported that Deutsche Bank is conducting an internal investigation regarding potential improper surveillance (see the articles in the WSJ and NY Times). What caught my eye was that an activist shareholder appeared on the list of "targets."

Allegedly, DB hired private investigators to pose as vacationers renting the shareholder's house in order to spy on him. This raises some important questions: What are the ethical obligations of a company? Is this an isolated or widespread problem? Are corporate-shareholder hostilities on the rise? Did the investigators get their rental deposit back?

In his IR Café, Dick Johnson provides analysis about the ethical implications of this type of investigation. Here is an excerpt:

My point on ethics and personal responsibility is this: In the heat of battle, when the company is under attack and the world looks like "Us vs. Them," be careful. Go back to your core principles: telling the truth, obeying the law, treating others as you would want to be treated, whatever convictions shape your outlook on life. Seek guidance in places like the NIRI Code of Ethics: Although codes won't offer a specific rule for something like hiring a private eye, they do provide principles.

And consider how any action you take might appear in the harsh light of public disclosure a year or two later. Your responsibility to decide on your actions isn't erased because you're part of a larger corporate staff. Taking a stand just might save the company from serious reputational damage. And, down the road, it might keep you out of a headline that says "... Fires Two in (Whatever) Probe."

The United Kingdom's Financial Services Authority: Death Row?

In the US, the Securities & Exchange Commission has been under fire for its role in the financial crisis. I count the SEC Chair as having testified on the Hill four times in just the past two weeks alone. But I don't think abolishing the SEC is really on the table. Compare that with the potenial fate of the UK's Financial Services Authority (just as the FSA is pushing harder). Here is some commentary from Neil Macleod of Fried Frank:

On 20 July, the opposition Conservative Party, which is currently viewed as likely to win the next UK election (which must be held by next June), and so likely to form the next government, published its proposals to reform the structure of UK financial regulation.

The most striking proposal is that Conservatives will abolish the Financial Services Authority (the "FSA") and the current tripartite structure under which regulatory responsibilities are divided between the Treasury, the Bank of England and the FSA. At the same time, they will increase the powers of the Bank of England. The Bank will be responsible for macro-prudential regulation - i.e., monitoring and controlling risks to the financial system as a whole. The regulation of all banks, building societies and other significant institutions, including insurance companies, will also be transferred to the Bank. Many of the remaining functions presently exercised by the FSA will be transferred to a new Consumer Protection Agency.

The reasoning behind these proposals is that the Conservatives view the FSA as having failed to identify or prevent the problems in the UK banking system. They also consider that there was a failure in the coordination between the tripartite authorities, and that there was a lack of effective procedures to deal with failing banks.

The Conservatives therefore propose that any institution whose regulation requires prudential judgment will be regulated by the Bank of England. Those small firms such as insurance and mortgage brokers, stockbrokers and small asset managers whose regulation is not mainly concerned with prudential judgment, but primarily concerned with protecting consumers, will be overseen by the new Consumer Protection Agency.

The Conservatives have said that they will consult on which regulatory authority should take on the FSA's various other responsibilities, including markets and securities regulation, the registration of individuals and the FSA's listing authority responsibilities.

The reaction to the proposals has been mixed. Whilst many have welcomed the idea of transferring banking regulation back to the Bank of England, others have pointed out the disruption that these proposals are likely to bring to the industry. There is also concern that the FSA will become a lame duck regulator if it is widely viewed as being likely to be abolished.

- Broc Romanek

July 24, 2009

Launch of Shareowners.org: Social Media Comes to Retail Holders

Recently, a new social media site - Shareowners.org - was launched with the hopes of binding retail shareholders together. Although this is not the first such site (eg. Broadridge's "Investor Network"), this one might take off. And just the fact that these attempts to have investors network online bears close watching as it may someday soon dramatically impact activist efforts.

In this podcast, Rich Ferlauto, AFSCME's Director of Corporate Governance and Pension Investment Policy, describes the new social media site, including:

- What is Shareowners.org?
- What is your goal with the site?
- Any surprises so far?

US Supreme Court Rejects Structure Requirement for RICO Enterprise

Recently, the US Supreme Court - in Boyle v. United States - held that an association-in-fact RICO enterprise must have a "structure" - but it need not be an "ascertainable structure beyond that inherent in the pattern of racketeering activity in which it engages." More importantly, the Court stated that the jury isn't required to be told many specifics.

As noted by the "White Collar Crime Prof Blog," this decision is very helpful for government prosecutions in that it allows RICO cases to be brought with the jury being told a minimal amount of what is required for a RICO enterprise. We are posting memos regarding this decision in our "White Collar Crime" Practice Area.

Moving Forward: Credit Rating Agency Legislation

Earlier this week, as noted in this WSJ article, the Obama Administration proposed legislation to enhance oversight of the credit rating agencies. For the most part, it mirrors legislation introduced earlier by Senator Reed, except it deviates with one major exception: Senator Reed's bill establishes greater accountability on the part of credit rating agencies by giving investors a private right of action against the credit rating agencies and the Obama administration doesn't do that. In addition, the Obama Adminstration's legislation doesn't give authority to the SEC to levy fines and penalties against the rating agencies for failure to perform.

- Broc Romanek

July 23, 2009

Clawbacks: SEC Finally Provides Clues re: "Misconduct" under Section 304

Yesterday, the SEC announced an action to clawback bonuses and stock profits from a former CEO under Section 304 of Sarbanes-Oxley. The SEC asked the U.S. District Court for the District of Arizona to order the former CEO of CSK Auto Corporation, Maynard Jenkins, to reimburse the company for more than $4 million that he received in bonuses and stock sale profits while the company was committing accounting fraud. This is the third Enforcement action that the SEC has brought regarding CSK's alleged accounting shenanigans, which resulted in two restatements - one of them charges four of the company's executives with wrongdoing (but not the former CEO).

Although this is not the first Section 304 action from the SEC, it's the first one where the "clawee" isn't alleged to have violated the securities laws. The SEC has brought very few 304 actions since the provision was enacted seven years ago, mainly because of the uncertainty over what constitutes the "misconduct" required by the provision. Here is how Section 304 opens:

If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer...

As noted in the "D&O Diary" Blog, "there is no requirement in Section 304 that the CEO or the CFO from whom the reimbursement is sought have any involvement in the events that necessitated the restatement. Indeed, the statute doesn't require any showing of wrongdoing or fault at all." And remember there is no private right-of-action under 304 - only the SEC can enforce it.

Okay, so what type of "misconduct" did the SEC find here? For openers, the SEC's press release refers to the CEO as the "captain of the ship." Did the SEC decide that the captain is responsible for the ship and that alone is enough to find "misconduct"? I don't think so.

Based on a cursory reading of the SEC's complaint, I believe the SEC found that the captain engaged in some "misconduct" - but that misconduct didn't amount to a violation of the securities laws. I get to this conclusion by noting that a number of the allegations (i.e. #43-47) in the SEC's complaint explain the "conduct" and "misconduct" by the company that led to this action and then #48 states: "By engaging in the conduct described above, Jenkins violated, and unless ordered to comply will continue to violate, Section 304(a) of the Act, 15 U.S.C. § 7243(a)."

There's not a lot of meat in the SEC's allegations to explain what role the former CEO actually had in the accounting fraud, leaving the SEC open to criticism (such as this Ideoblog commentary). But maybe that's the SEC's point - that merely being captain of the ship while rampant fraud occurs on your watch is "misconduct" enough. We'll be posting memos analyzing this case in CompensationStandards.com's "Clawback Policies" Practice Area.

At a minimum, the SEC's action seems like a wake-up call to CEOs and CFOs of companies that have had restatements due to some accounting misconduct: you are not safe - the SEC may come after you. And hopefully, this action will spur companies to attempt to enforce their own clawback policies (Equilar reports more than 64% of the Fortune 100 now have them; compared to just 17% in '06). I'm not aware of any company that ever has (although it's possible it has happened behind closed doors). I imagine companies sometimes deal with situations where it's not clear if their own clawback policy - or Section 304 - applies. Or if it does apply, whether it's prudent to seek recapture from the executive (weighing cost/time of litigation; indemnification issues, etc.).

Rather than decide to just move on and not do anything, it's time to put teeth into those clawbacks as I wrote about in my article "Ten Steps to a Clawback Provision with "Teeth."

The SEC's B-Day Party: Rum Baba with Tropical Fruits & Berry Coulis

As I blogged recently, the SEC Historical Society held a pricey dinner to celebrate the 75th anniversary of the birth of the Commission (too expensive for a home gamer like me). Given the heat that the agency is feeling, the timing was not good - as portrayed in this Politico article. From what I hear, Chair Schapiro's speech perhaps reflected the mood among the Staff these days as it was quite short. Here is a more playful review of the event.

How Do You Look Up a SEC Rule?

A member recently emailed about how fast the Government Printing Office responded when he emailed them that one of the SEC's rules was unreadable online (eCFR is what the SEC's site links to for the SEC's rules). It seems that the GPO gets right on these things as the correction was quickly made. It led me to wonder how folks typically look up a SEC rule these days - and hence this anonymous poll:


- Broc Romanek

July 22, 2009

Summer Issue: "Proxy Disclosure Updates" Newsletter

On CompensationDisclosure.com, we have just posted a complimentary copy of the Summer 2009 issue of the "Proxy Disclosure Updates" which analyzes how the latest proxy disclosures looked, particularly noteworthy in the wake of ARRA, EESA and the other regulatory responses to the crisis. This valuable quarterly newsletter is part of the Lynn, Borges & Romanek's "Executive Compensation Annual Service." The other part is the 1000-plus page Treatise...

Coming Soon: 2010 Executive Compensation Disclosure Treatise and Reporting Guide: Now that we have seen the SEC's proposals and Treasury's legislation - that will force you to radically change your executive compensation disclosures and practices before next proxy season - we are wrapping up the '10 version of Lynn, Borges & Romanek's "Executive Compensation Disclosure Treatise and Reporting Guide," which we will deliver to subscribers by early October.

Act Now for $100 or More Discount: To obtain this hard-copy '10 Treatise when its printed in October (as well as get online access to the '09 version right now on CompensationDisclosure.com, as well as the valuable quarterly "Proxy Disclosure Updates"), you need to try a no-risk trial to the Lynn, Borges & Romanek's "Executive Compensation Annual Service" now. If you order now, you can take advantage of a $100 or more discount.

Will Facebook Sidestep Google's Pre-IPO Problems?

Google certainly has had a nice run since its novel Dutch-auction IPO. But for those with good memories, you might recall that Google had to make a rescission offer about the time of its IPO because Google apparently crossed the Section 12(g) threshold well before its IPO and should have registered its common stock under the '34 Act at that time (companies that have more than 500 shareholders and $10 million in assets at calendar year end must register under Section 12(g)).

In reading this WSJ article last week about how Digital Sky Technologies is taking a stake in Facebook by purchasing shares from current and former Facebook employees, I saw the disclosure that the number of current Facebook employees is now 850.  I hope the company doesn't encounter the same issue that Google confronted, where it should have registered its shares sooner given the number of holders and that that Facebook is being valued at $6.5 billion based on Digital's purchase campaign.

SEC Charges Investment Advisor for Buying Votes with Section 13(d) Violations

Yesterday, as noted in this press release, the SEC charged - and settled - Section 13(d) violations with an investment adviser - Perry Corp. - for failing to disclose that it had purchased substantial stock in a M&A target, King Pharma. Perry purchased the shares in order to vote them in favor of a merger from which Perry stood to profit. Here's the cease-and-desist order, under which Perry agreed to pay $150,000.

The SEC was able to bring charges because the Mylan shares were not acquired by Perry in the "ordinary course of its business," which is one of the requirements of Rule 13d-1(b)(1). However, I was a little surprised that the SEC didn't shoot Perry down by finding that it either (i) did not acquire the shares in the ordinary course or (ii) was not "passive" (since "passive" is also a requirement of the rule). Instead, the SEC focused exclusively on the "ordinary course" requirement of the rule.  So I wonder why the SEC didn't use "not passive" as the hook and avoided the seemingly circuitous path to "not in the ordinary course"? I would think the SEC could have made its case by stating that Perry was not passive - and therefore could not be acting in the ordinary course. Let me know what you think.

By the way, the SEC's charges unfortunately didn't address concerns regarding Perry's strategy. In an effort to lock in the merger premium it would receive on its holdings of King Pharma shares, Perry purchased a substantial block of the acquiror's shares (Mylan) that it intended to vote in favor of the merger while contemporaneously entering into hedging transactions that minimized its economic exposure to a decline in the value of those Mylan shares.

In essence, Perry intended to vote its Mylan shares in favor of a transaction that was not in the economic interests of other Mylan shareholders because it had a more substantial economic interest in the merger being consummated as a result of its holdings in King Pharma. Similar issues arose in connection with AXA's acquisition of MONY. 

Although this issue has received considerable attention in the US and the UK, no clear solution has been found. Rather, the focus has been on enhanced disclosure obligations. The SEC's charges solely relate to Perry's failure to file a Schedule 13D with respect to its acquisition of more than 5% of Mylan's shares with the intent of influencing the direction or management of Mylan. Hopefully, manipulation of the voting process will be examined as part of the SEC's plan to rethink the proxy plumbing this Fall.
We have resources on share lending, overvoting, empty voting, etc. in our "Share Lending/Overvoting" Practice Area.

- Broc Romanek

July 21, 2009

Auditors May Finally Get an Annual Reporting Obligation

Recently, the PCAOB issued a press release noting that it had proposed rules way back in June '08 that would require the auditors registered with the PCAOB to submit an annual report by June 30th of each year. Since the SEC hadn't yet acted to approve the PCAOB's proposal, auditors were able to avoid filing an annual report this year, as well as avoid paying an annual fee for '09.

Not too long after the PCAOB's press release, the SEC acted by posting this notice to finally solicit comments on the PCAOB's proposal. Assuming no comments sway the SEC otherwise, I imagine the SEC will approve the PCAOB's proposal in a few months - and then registered auditors will be required to submit their first annual report on Form 2 to the PCAOB by June 30, 2010 (and the first annual fee, in an amount to be announced by the PCAOB, will be due in that same year). A separate obligation to file any required special reports on Form 3 will commence as soon as the SEC approves the PCAOB's proposal.

Note that the Nasdaq is holding a webcast tomorrow (with a repeat performance the following Wednesday) for those that want to learn how to navigate their new "Application Center." Among many other topics, the new application process was discussed during our recent webcast with senior Nasdaq Staff, but these Nasdaq webcasts will drill down more deeply into the application topic.

RiskMetrics' Governance Exchange

In this podcast, Jill Lyons and Stephen Deane of RiskMetrics describe their new social media tool called the "Governance Exchange," including:

- What is the "Governance Exchange"?
- Who can belong to it?
- Why are members joining?
- Any surprises so far?

Sleepers in the SEC's Proposals?

When the SEC puts out a big proposal, there inevitably are some sleepers because that's the way of the world. I recently received this note from a member about the SEC's recent proxy solicitation proposals:

There are some potent changes in the proposed proxy amendments that will generally make contests easier to conduct. One amendment codifies a recent no-action letter to Carl Icahn that allows insurgents to include nominees of other insurgents on their proxy cards.

And the amendments also overrule a 2004 case (i.e. Mony Group v. Highfields Capital Management) where a court ruled that a shareholder conducting an exempt solicitation can't send shareholders management's proxy card and encourage them to vote as suggested by the insurgent.

- Broc Romanek

July 20, 2009

New Treasury and SEC Regulations and ARRA: Executive Compensation Restrictions

Things are moving fast on the legislative front as Rep. Barney Frank circulated a "discussion draft" on Friday of his "Corporate and Financial Institution Compensation Fairness Act of 2009" to the House Financial Services Committee. This bill is the House version of what Treasury sent to the Hill last Thursday.

Tune into tomorrow's CompensationStandards.com webcast - "New Treasury Regulations and the American Recovery Act: Executive Compensation Restrictions" - to hear these experts analyze the latest on the proposals coming out of Congress, Treasury and the SEC:

- Dave Lynn, Partner, Morrison & Foerster and Editor, CompensationStandards.com
- Mark Borges, Principal, Compensia
- Jeremy Goldstein, Partner, Wachtell Lipton Rosen & Katz
- Jannice Koors, Managing Director, Pearl Meyer & Ptrs
- Mark Trevino, Partner, Sullivan & Cromwell LLP

Our "6th Annual Executive Compensation Conference": Now that we have a sense of what Congress will likely pass before next year kicks off, you need to register now to attend our popular conferences and get prepared for a wild proxy season: "4th Annual Proxy Disclosure Conference" & "6th Annual Executive Compensation Conference." You automatically get to attend both Conferences for the price of one; they will be held November 9-10th in San Francisco and via Live Nationwide Video Webcast. Here is the agenda for the Proxy Disclosure Conference. Register now.

Executive Pay Surveys

In this CompensationStandards.com podcast, Susan Wolf of Schering-Plough describes her company's experience with using a survey to canvas shareholders about their executive pay practices, including:

- Why did the company decide to try a survey?
- What was the reaction of shareholders?
- Were there any surprises? What would you change if you did it again?

Consultant Market Shares: An Analysis of Fortune 1000 Companies

For those that may not be aware of it, "The Advisors' Blog" on CompensationStandards.com is populated with new thoughts from compensation experts daily. For example, below is a blog from Equilar that was posted last week:

With executive compensation issues firmly in the public spotlight, the SEC is once again considering expanded CD&A disclosure requirements. The SEC's most recent proposals include improved disclosure on the connection between compensation and risk, greater detail on overall compensation philosophy and design, and further insight into potential conflicts of interests between compensation consultants and the companies they advise.

With these developments in mind, Equilar recently used its "Compensation Consultant League Table" database to complete an analysis of executive compensation consultant market share at Fortune 1000 companies. In 2008, boards at 90.7% of Fortune 1000 companies retained the services of at least one compensation consulting firm.

The following table lists the Top 10 consulting firms, by executive compensation consulting market share during '08, at Fortune 1000 companies:

1. Towers Perrin - 19.3%

2. Frederic W. Cook & Co. - 17.5%

3. Hewitt Associates - 14.5%

4. Mercer Human Resources Consulting - 11.4%

5. Watson Wyatt Worldwide - 7.5%

6. Pearl Meyer & Partners - 5.4%

7. Semler Brossy Consulting Group - 3.8%

8. Hay Group - 2.3%

T-9. Exequity - 1.6%

T-9. Deloitte Consulting - 1.6%

Note: FY 2008 market share percentages are based on a total of 867 engagements with boards of directors at 824 of 908 Fortune 1000 companies studied. See methodology statement below for more information. Also note that Towers Perrin and Watson Wyatt announced plans to merge into a new firm called Towers Watson on June 29, 2009. The combined firm would have a market share of 26.8 percent.

Additional Key Findings:

- Top 10 Firms Lose Overall Market Share as Smaller Firms Proliferate - In 2008, Fortune 1000 companies listed a total of 53 executive compensation consulting firms as advisors to their boards of directors. Among these firms, the Top 10 consulting firms held a combined market share of 84.9 percent. In contrast, Fortune 1000 companies listed only 42 executive compensation consulting firms as advisors in 2006, when the Top 10 consulting firms held a combined market share of 93.8 percent.

- Independent Firms Gain Market Share - In 2008, independent executive compensation consultants held 39.3 percent of engagements with boards of directors at Fortune 1000 firms, up from 37.4 percent of engagements in 2007. Market share for independent firms had increased from 35.0 percent to 37.4 percent between 2006 and 2007. Independent firms are defined by Equilar as companies that focus primarily on executive compensation consulting.

- Full-Service Firms Maintain Market Share Above 60% - Full-service firms, which are defined by Equilar as companies that offer accounting, broad-based HR, retirement and/or benefits consulting in addition to executive compensation services (though not necessarily to the same client), held 60.7 percent of engagements with boards of directors at Fortune 1000 firms in 2008.

Readers of this analysis should take the following methodology notes into consideration:

- To study trends on the use of executive compensation consulting firms at public companies, Equilar reviewed disclosures at 908 firms listed in the Fortune 1000 index. Each firm covered by the study has an updated CD&A statement for fiscal year 2008.

- Among the companies included in this analysis, 824 firms (or 90.7 percent) retained an executive compensation consultant to advise their board of directors on executive pay. The remaining firms either have no consultant or a consultant retained by management. For the purposes of tracking market share at Fortune 1000 companies, Equilar only considers direct engagements between a board of directors and a consulting firm.

- In some cases, a board of directors may engage multiple executive compensation consulting firms during the course of a single year. Equilar counts these cases as a full engagement for all consulting firms involved. As such, the 824 companies with an executive compensation consultant for their board of directors produced a total of 867 engagements in fiscal year 2008.

Here is an extended version of Equilar's compensation consultant market share analysis, including data on year-over-year changes in market share. Equilar is an information services firm specializing in executive compensation research.

- Broc Romanek

July 17, 2009

Treasury Announces Two Executive Compensation Bills

Yesterday, Treasury announced that it has drafted two different pieces of executive compensation legislation - one related to say-on-pay and the other regarding compensation committee independence - that they've sent to Congress as part of the "Investor Protection Act of 2009." Last week, Treasury began issuing other parts of "The Investor Protection Act of 2009" and more sections are forthcoming. These draft bills are consistent with the Obama Administration's White Paper that was released last month. Here is the say-on-pay press release and bill language - and here is the committee independence press release and bill language.

Rep. Barney Frank issued a statement yesterday promising quick action in the House, specifically that the "Financial Services Committee will be marking up legislation next week." It's unknown what the timetable for consideration in the US Senate will be.

Below is a summary of the two pieces of proposed legislation, both of which would be implemented through SEC rulemaking:

1. Say-on-pay vote on executive compensation disclosures:

-  Annual meetings after 12/15/09 will be required to include a non-binding shareholder vote on the compensation disclosed in proxy statements.

-  The proxy or consent solicitation for any meeting after 12/15/09 involving an M&A transaction or sale of assets must include tabular disclosure of golden parachute payments, and provide for a non-binding shareholder vote to approve these payments.

2. Compensation committee independence:

- Compensation committee members would be subject to the same additional independence standards as audit committees members under Rule 10A-3 (no consulting or advisory fees and cannot be an affiliate).

-  Compensation consultants, legal counsel and other advisors to the committee shall meet independence standards to be promulgated by the SEC.

- The compensation committee has the authority to retain independent consultants and is directly responsible for their appointment, compensation and oversight (copied from the audit committee oversight of auditors).

 -  Proxy statements must disclose whether the compensation committee has retained an independent consultant, and if not, why not.

 -  The compensation committee has the authority to retain legal counsel and is directly responsible for their appointment, compensation and oversight (copied from the audit committee oversight of auditors).  There is no requirement that proxy disclosure be made as to whether the committee retained such legal counsel. 

 -  Companies must provide funding for the hiring of independent consultants and legal counsel by the committee.

 -  The SEC is required to study the use of compensation consultants and report to Congress in two years.

The SEC's "Wish List": 42 More Changes!?!

For those that don't think that there have been enough regulatory changes proposed so far this year - or this decade for that matter - you'll be happy to see this list of 42 desired changes that are reported to have been sent by the SEC to Congress. The 42 changes would impact quite a few areas of the federal securities laws - and are unlikely to be grouped together into a single bill. Rather, parts may be embedded into other legislation, etc.

July-August Issue: Deal Lawyers Print Newsletter


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

- Threshold Issues in Cross-Border Merger-of-Equals Transactions
- The Role of the Board in Turbulent Times: How to Avoid Shareholder Activism
- Private Equity in 2009: "Back to Basics" Practice Tips: Part II
- A "Sleeper": Delaware Court Stresses Importance of Employment/Non-Competition Agreements with Target Employees

If you're not yet a subscriber, try a "half-price for rest of '09" no-risk trial to get a non-blurred version of this issue for free.

- Broc Romanek

July 16, 2009

Rating Agency Regulation: Lawsuits as Another Hammer?

As noted in this WSJ article and NY Times article yesterday, the big California public pension plan - CalPERS - sued the S&P, Moody's and Fitch rating agencies for "wildly inaccurate and unreasonably high" ratings on structured investment products.

While the ratings agencies face other lawsuits for losses, the CalPERS' complaint attacks the way in which the ratings agencies do business.  In particular, it alleges that the agencies went beyond being passive "raters" of structured investment products, and became an integral part of the issuance of these products (Item 47 of the complaint, at page 11).

Even though the SEC seems likely to propose more regulation of the credit rating agencies right now - see this Directorship blog - although it already has done quite a bit over the past six months (this and this), it may be that lawsuits like this one become an additional driver for more changes to the rating industry. 

Gearing Up for the Fall: Financial Crisis Inquiry Commission

Yesterday, as noted in this Bloomberg article, Congress appointed the Commissioners for its Financial Crisis Inquiry Commission and the Commission is expected to start its investigations in September regarding 22 enumerated possible causes of the financial crisis (as well as the causes of the failure of major financial institutions). It's a pretty broad dictate - so the witch hunt begins!

Here are the appointments (as excerpted from this Gibson Dunn memo):

  • Phil Angelides, jointly appointed by House Speaker Pelosi and Senate Majority Leader Harry Reid, will chair the Commission. Mr. Angelides served formerly as California's State Treasurer from 1999 to 2007.
  • Bill Thomas, jointly appointed by House Minority Leader John Boehner and Senate Minority Leader Mitch McConnell will serve as the Commission's vice-chair. Mr. Thomas is a former House Ways & Means Committee Chairman.

Importantly, the Chairperson and Vice Chairperson will jointly select the staff director and other staff of the Commission.

House and Senate Democratic Leaders also appointed the following individuals:

  • Brooksley Born, former Chair of the Commodities Futures Trading Commission during the Clinton administration.
  • Byron Georgiou, Las Vegas-based businessman and attorney who serves on the advisory board of the Harvard Law School Program on Corporate Governance.
  • Senator Bob Graham, former U.S. Senator and Chair of the Senate Intelligence Committee and former Governor of Florida.
  • Heather Murren, retired Managing Director for Global Securities Research and Economics at Merrill Lynch.
  • John Thompson, Chairman of the Board of Directors of Symantec Corporation.

House and Senate Republican Leaders also appointed the following individuals:

  • Doug Holtz-Eakin, former Director of the Congressional Budget Office and former Chief Economist of the President's Council of Economic Advisers.
  • Keith Hennessey, former Director of the National Economic Council during the George W. Bush administration.
  • Peter Wallison, Co-Director for Financial Policy Studies at the American Enterprise Institute and former Counsel to President Ronald Reagan. 
How to Plan for CEO (and Other Senior Manager) Succession

We have posted the transcript for our recent webcast: "How to Plan for CEO (and Other Senior Manager) Succession."

- Broc Romanek

July 15, 2009

Delving into the SEC's Investigation of Madoff

Recently, I noted a blockbuster front-page article in the Washington Post which delved pretty deeply into the SEC's investigation of Bernie Madoff and how some earlier warning signs may have possibly been ignored - including the possibility of interference by a SEC official who would soon become related to Madoff. Amazingly, the other mass media outlets don't seem to have caught up to the WaPo reporter's research into this story despite its obvious public appeal.

In this podcast, I caught up with the reporter who wrote the story - Zach Goldfarb - to ask a few questions about this story, including:

- What is the essence of your article?
- How long did it take for you to research it?
- When did you find out it would be on the front page?
- What type of reactions have you heard since it ran?

Beware the "Dark Pools": SEC Chair Speaks Out

During her testimony before the House's Capital Markets Subcommittee of yesterday regarding oversight of her agency, SEC Chair Schapiro raised concerns over "dark pools," an area where I predict the *#i% will hit the fan one day. Here is an excerpt from her testimony:

In addition, our staff has begun exploring transparency issues related to markets known as dark pools. Dark pools are defined in various ways, but generally refer to automated trading systems that do not display quotes in the public quote stream.

We have heard concerns that dark pools may lead to a lack of transparency, may result in the development of significant private markets that exclude public investors (through the use of "indications-of-interest" that function similar to public quotes except with implicit pricing), and may potentially impair the public price discovery function if they divert a significant amount of marketable order flow away from the more traditional and transparent markets.

Given the potential risks posed by dark pools, the Commission will take a serious look at what regulatory actions may be warranted to respond to the potential investor protection and market integrity concerns that dark pools may raise.

Great Sleuthing and Drafting: "On Dead Frogs in SEC Filings..."

Congrats to Michelle Leder of footnoted.org for uncovering (in this blog entry) this Form 8-K filed by Expeditors International, in which the company hilariously addresses some legal expenses related to a DOJ investigation first disclosed nearly two years ago. Both Michelle and the drafters of the following disclosure should win some type of award:

When you come from a frame of reference, as we do, where $0 spent on legal expense would be the most preferred alternative, having to predict anything beyond that, by its nature, would become inherently and incredibly biased towards our own wants, desires and expectations. To us, this is somewhat akin to being asked to predict how many minutes after being force fed a dead frog we would throw-up...and the operative word is "force," as we'd never elect to do either on our own. In both cases (the legal fees or swallowing the dead frog) we're certain we would eventually throw up.

In neither case do we know exactly how much money or how much time would pass before we did. In both cases, however, our gut check, no pun intended, is not very much and not very long! It should go without saying that given our druthers, we'd rather not spend the legal fees or eat the dead frog in the first place. Sometimes you don't get the luxury of deciding what you have to eat. When you do, and it's unpalatable, it should be obvious that you would eat as little as possible. What we are certain of is that if we were talking about being force fed dead frogs and not incurring excessive legal fees, people would be content accepting at face value that it would be as little as possible.

This stuff is right up there with the recent theories thrown out there about finger size and traders' earning power, as noted by this article.

- Broc Romanek

July 14, 2009

Early Problems for XBRL? A Mismatch with FASB's GAAP Codification

With mandatory XBRL now upon us for larger companies, it's troublesome that - as noted in this recent CFO.com article - the FASB's new codification of accounting standards that was launched on July 1st (and becomes effective on September 15th) has created a mismatch since all of the mandated XBRL standards apply to the FASB's now-superseded standards. Thanks to Neal Hannon of The Gilbane Group, who started the sleuthing on this issue (eg. see his blog about whether the SEC can handle XBRL filings).

A new XBRL taxonomy is scheduled to be released in early '10 to solve this problem - but there needs to be a solution to cover the period between the codification's 9/15 effective date and when the new taxonomy is available next year. To tackle this, I hear that the FASB is working with XBRL US to produce an extension taxonomy that is supposed to bridge the GAAP between the old references and the codification - but we don't yet know when that will be released.

But clearly it needs to be well before the Codification's 9/15 effective date because all the XBRL providers need as much time as they can get to incorporate the changes into their software. In other words, we needed that yesterday since the Codification's effective date is only two months away. I'll continue to follow this story - but this looks like a real mess.

More on "FASB Charging for 'Souped-Up Version' of Accounting Standards"

Recently, I criticized the FASB for charging for a premium version of their new GAAP codification. I received a number of emails from members agreeing with me, including this one:

The FASB is going to catch a lot of heat for charging for a user friendly version. That is such bad business. Why pay FASB $850 when you can get even more from other service providers for an additional nominal amount? And any CPA who already has one of those services will continue with those other services. I don't have a service now because I don't feel it's necessary at this point in my level of understanding of GAAP.

And I refuse to pay the FASB to do something they decided to do and to access what they insist we must use going forward. I would be happy to continue to use my hard copy standards but they've been touting that doing so will be unacceptable and referencing anything but the Codification incorrect. I think that messaging is just propoganda to get people to fork over the $850 annually. The FASB needs to think about what their mission is and hiding information from users is not going to help satisfy their mission - even if it is just bells and whistles. That was the big hook for the Codification - it will make your searching easier. Bunk if I have to pay for that.

By the way, one member noted that I was correct and that the FASB used to charge for access to their full standards. Then, Sarbanes-Oxley changed that by giving them (sort of) independent funding, and the FASB no longer charged for their standards. Selling their standards was a means of sustenance in the old days, apart from hat-in-hand to constituents. Based on the angry reactions I've heard, I think FASB needs to publicly explain why it's charging for the new Codification's bells & whistles - people are pretty miffed but they also are afraid to speak out...

The SEC's "IDEA" Becomes "Next-Generation EDGAR"

Without much fanfare - which is understandable because it was forced to by a lawsuit - it seems as though the SEC has renamed "IDEA" as "Next Generation Edgar," as evidenced by this search page. Personally, I would stick with old-fashioned "Edgar" as any technology tool is constantly evolving and labeling it as "next generation" just takes away from Edgar's important branding and doesn't really add anything.

Note that the URL for the SEC's search page still has "Idea" lodged within it...

- Broc Romanek

July 13, 2009

Obama/Treasury Propose New Regulatory Reform Legislation: A Few Oddities

On Friday, the White House and the Treasury Department released proposed legislation - the "Investor Protection Act of 2009" - to effectuate some of the regulatory reforms that had been mentioned in their White Paper last month. Here is the proposed legislation and the related fact sheet. We'll be posting memos analyzing this proposed legislation in our "Regulatory Reform" Practice Area.

These proposals seem to focus on the "consumer protection" part of the reforms noted in the White Paper - although the various provisions are essentially a hodge-podge of proposals, including the SEC obtaining the power to review and ban compensation arrangements at brokers, dealers and investment advisers.

Here is my take on what I consider a few oddities in the legislation:

- Consumer Testing of Disclosures and Rules: One part of the proposal would bolster the "SEC's authority to conduct consumer testing." Consumers? I think they mean investors? The SEC's stated mission is investor protection and I don't recall the term "consumer" being mentioned in any of the existing statutes that give the SEC some sort of authority nor any of the agency's rules and regulations.

- Expand Protections for Whistleblowers: Under the proposed legislation, the SEC would gain authority to establish a fund to pay whistleblowers. Although perhaps inviting in concept, this could be tricky to implement. If the SEC Staff dislikes being a referee in the shareholder proposal process, how will they enjoy a process that involves them potentially taking sides more clearly against companies and actually having to dispense money? If adopted, I would consider becoming a bounty hunter because I've always wanted to wear big hats...

- Establish a Permanent Investor Advisory Committee: How many federal agencies have permanent advisory committees? This could set a bad precedent - and even though investors may have been under-represented by those that regularly approach the SEC in the past, the SEC has heard plenty from investors over the past few years. The creation of a permanent committee may swing the pendulum the other way so that the investor perspective dominates the SEC's view of the world.

In the long run, the much more likely result is that regularly meeting with an advisory committee would simply be a waste of time. I like the idea of roundtables on specific issues where all sides are represented - as well as the normal comment process on rule proposals - for the SEC to obtain all the outside input it needs. I'm not a big believer in conducting more meetings as a way to find solutions to problems.

Posted: SEC's Executive Compensation/Corporate Governance Proposing Release

On Friday, the SEC posted a 137-page proposing release regarding changes in its executive compensation rules and other corporate governance enhancements. In his "Proxy Disclosure Blog," Mark Borges already has blogged some analysis of the compensation proposals.

While we were tickled to see our March-April issue of The Corporate Counsel cited in footnote 44 of the release, we were even more excited that the SEC is soliciting comments on a number of important areas of the executive compensation rules, such as whether boards consider internal pay equity when they set the amounts of executive compensation. Here is a discussion of this fix - and others - that we urge you to consider when drafting your comment letters for the SEC on the executive compensation proposals.

Our "4th Annual Proxy Disclosure Conference": Now that the SEC's proposals are out - and broker nonvotes are gone - you need to register now to attend our popular conferences and get prepared for a wild proxy season: "4th Annual Proxy Disclosure Conference" & "6th Annual Executive Compensation Conference." You automatically get to attend both Conferences for the price of one; they will be held November 9-10th in San Francisco and via Live Nationwide Video Webcast. Here is the agenda for the Proxy Disclosure Conference. Register now.

Alternative Fee Arrangements for Deals: Little Less Talk and Lot More Action?

Tune in tomorrow for this DealLawyers.com webcast - "Alternative Fee Arrangements for Deals: Little Less Talk and Lot More Action?" - to hear Wilson Chu of K&L Gates; Scott Depta of Dell and Lance Jones of Trilogy talk about how the ways that deal fees are being restructured, a trend hastened by a down economy.

- Broc Romanek

July 10, 2009

A Recap of Thoughts on Apple and Illness Disclosures

With the latest news from this Bloomberg article that the lack of disclosure over Apple's CEO Steve Jobs illness is being investigated by the SEC, it seems appropriate to recap some of my prior thoughts about duties a company may - or may not - have when it comes to disclosing illnesses of its senior management team.

Since my legal analysis hasn't changed - even though the disclosure challenges that Apple faces has - my "recap" consists simply of linking to my two prior posts on this topic:

- More on Steve Jobs and Disclosure of Health Issues

- A Delicate Disclosure Issue: Steve Jobs' Health

Here are some thoughts from other folks worth noting:

- Steve Jobs and Apple: Here We Go Again

- Experts: Apple Disclosure 'Falls Short'

- Warren Buffet Piles On Steve Jobs About Secret Transplant

- Apple Broke the Law By Lying About Steve Jobs Health

- Was Apple 'Adequate but Late' on Jobs?

- The Steve Jobs Health Factor & the Law: Gauging Materiality

- Apple Succession Plan: Nobody's Business?

- Governance Expert: Apple's Jobs' Disclosure "Dismissive," Insufficient

Poll Results: What You Said Apple Should Have Done

Last August, I posted a poll in this blog about what Apple should have disclosed. Here are the results from that poll (note more than one answer was permitted per respondent):

- 31.1% - Should have disclosed Jobs' condition because company had duty to update due to "common bug" comment

- 6.7% - Should have disclosed Jobs' condition because he had history of health concerns

- 37.8% - Should have disclosed Jobs' condition because he's so important to the company

- 23.7% - Need not have disclosured Jobs' condition because company doesn't need to respond to rumors

- 14.1% - Need not have disclosed Jobs' condition because he has right to privacy

SEC Weighs In: California IOUs as "Securities"

Yesterday morning, I blogged about "Trading California IOUs on the Web" and gave some thoughts about whether the California IOUs were eligible for an exclusion from the definition of "security" under the '34 Act, as well as how California securities law might apply to the IOUs.

Last night, the SEC weighed in by releasing a statement that provides the Staff's position that the IOUs are "securities" (but that they are not registered with the SEC since they are municipal securities) and that intermediaries may need to register as brokers or alternative trading systems, etc. The SEC also issued this related "investor alert." As noted in this LA Times article, the SEC is worried about investors being defrauded when being talked into reselling these things...

- Broc Romanek

July 9, 2009

Trading California IOUs on the Web

This recent story about trading of California's registered warrants on eBay caught my eye. My understanding is that the warrants are IOUs issued by the state and have a maturity date of October 2, 2009.

Thinking out loud, the warrants may fall within the '34 Act exclusion from the definition of a "security" in Section 3(a)(10) for a "note, draft, bill of exchange or banker's acceptance, which has a maturity date at the time of issuance not exceeding nine months." This assumes that a California registered warrant fits within Section 3(a)(10)'s terms (e.g. maturity date of 9 months or less, etc.).

Interestingly, I understand that California's definition of the term "security" doesn't have the same 9-month exclusion. Therefore, someone who is engaged in the business of effecting transactions in these warrants might be subject to licensing as a broker-dealer. Further, offers and sales could be subject to California's antifraud statutes. For example, a state official with material, non-public information about the state who negotiates a warrant could be subject to California's insider trading statute.

9 Trade Groups Join to Influence Accounting Standards

As reported by Webcpa.com in this article, 9 trade groups representing the financial, insurance, banking, real estate and other industries have united to create a coalition with the goal of influencing accounting standard-setters who are working on revising the rules for financial instruments.

The new coalition - known as the "Financial Instruments Reporting and Convergence Alliance" or "FIRCA" - includes the American Council of Life Insurers, the Commercial Mortgage Securities Association, the Council of Federal Home Loan Banks, the Financial Services Roundtable, the Group of North American Insurance Enterprises, the Mortgage Bankers Association, the Property Casualty Insurance Association of America, the Real Estate Roundtable and the U.S. Chamber of Commerce."

According to FEI's "Financial Reporting Blog," FASB Chair Bob Herz recently gave a speech noting threats to accounting principles include "politicization" by "special interests."

Compliance Programs under Obama Administration

In this podcast, Jeff Kaplan of Kaplan & Walker discusses corporate compliance in the current environment, including:

- What’s new in the compliance field since last year
- What he expects from the Obama administration in the area of corporate compliance
- The responsibilities of general counsels in this environment
- Some practical guidance for making sure that senior officers understand and are accountable for their compliance responsibilities

- Broc Romanek

July 8, 2009

Nasdaq Speaks '09: Latest Developments and Interpretations

Tune in tomorrow for the webcast – “Nasdaq Speaks '09: Latest Developments and Interpretations” – to hear the following experts cover all the latest on the Nasdaq (please print off these "Course Materials" in advance):

- Mike Emen, Senior Vice President, Nasdaq’s Listing Qualifications Department
- Arnold Golub, Vice President, Nasdaq’s Office of General Counsel
- David Compton, Director, Nasdaq’s Listing Qualifications Department
- Randy Genau, Director, Nasdaq’s Listing Qualifications Department
- Suzanne Rothwell, Counsel, Skadden, Arps, Slate, Meagher & Flom LLP

Here are other upcoming webcasts:

- “Venture Capital: Facing a Changing World” (9/15)
- “How to Prepare for a Proxy Access World” (9/17)

Act Now: Try a 'Rest of 09 for Half-Price’ no-risk trial now to catch these critical webcasts and more.

More Edgar Problems: The Need for Transparency

A few months ago, I blogged about how periodic Edgar outages and how the SEC does a poor job of communicating about them. Unfortunately, I can report that "it's business as usual" and that outages continue and that the SEC not only doesn't make the filing community aware of them, it might be said that they are "buried."

Last Thursday, I understand that Edgar was out for more than an hour in the late afternoon and some fee-bearing filings were tied up starting well before the 5:30 pm eastern same-day filing deadline. In many cases, the SEC's system did not return an Accession Number (ie. an acknowledging receipt) and the SEC's Filer Support staff was unable to confirm whether filings had been received. During this time, the SEC's "Latest Filings Received and Processed" page showed that no filings had been received/disseminated starting at 5:45 pm.

What if a company discloses material information on a filing and it doesn't show up on the SEC's site? But even beyond that type of concern, I believe that the SEC has a duty to inform the filing community if it has an outage. There has to be some way that they can do that so that everyone doesn't stay in the dark...

Here is a query for you: Do you know what the implication would be if an issuer filed pursuant to Rule 462(b) where the issuer can begin selling securities immediately upon acceptance of the filing (even if the filing is made after 5:30 pm)? Such an example is Submission Type S-3 MEF. Similarly, when automatic shelf-registration statements of securities of well-known seasoned issuers are submitted under Rule 462(e), they often plan to start selling securities immediately (though they are limited to pre-17:30 filings in order to go effective the same day).

If the SEC system doesn't actually accept their filings - as a result of EDGAR system issues - must they wait to begin selling securities....and perhaps miss a window of opportunity? Let me know what you think.

Survey Results: To Whom Does Your General Counsel Report?

Below are some interesting results from a recent poll on this blog - the respondents indicated that their general counsel reports to:

- CEO only - 72%
- CEO and other operational officers - 6%
- CEO and board member - 10%
- Other operational officer(s) but not CEO - 10%
- Board member(s) but not CEO - 2%

- Broc Romanek

July 7, 2009

Broadridge's E-Proxy Stats for '09 Proxy Season

Last year, Broadridge was feeding us new statistics about e-proxy during each month of the proxy season. This year, we have their beneficial owner statistics as of the end of the proxy season, which we have posted in our "E-Proxy" Practice Area.

As of May 29th:

- 1312 companies (technically, it's not companies - it's "distributions" which is a greater number than the number of companies) used voluntary e-proxy between July '08 and May '09 (compared to 653 for the same period in the year prior). And 12% of all distributions used N&A during this '08-'09 period.

- Size range of companies using e-proxy continued to vary considerably for all shapes and sizes (eg. 28.9% of distributions on jobs between 10,000 and 50,000 shareholders used N&A).

- 5.9% of beneficial positions held in companies using N&A received full package by bifurcation, in addition to the 9.2% that received full packages by prior consent. Note that the 5.9% represents positions, not companies.

- 0.8% of shareholders requested paper after receiving a notice; this average is down 25% from last year's 1.05%.

- 54% of companies using e-proxy had routine matters on their meeting agenda; another 34% had non-routine matters proposed by management; and 12% had non-routine matters proposed by shareholders. None were contested elections.

- Retail vote continued to slip, although just slightly compared to the same period last year (recall that retail voting was down dramatically last year compared to pre-eproxy days) - the number of retail accounts voting dropped from 26.6% to 24.4% (a 8% drop from the prior year's period).

Note that the slight drop in retail voting refers to those shareholders who got a Notice only and not a full package through stratification, consent, or fulfillment. The number of retail holders getting full packages increased - and this group votes at a higher rate, which somewhat offset the drop in the retail Notice-only group.

More '09 Proxy Season Statistics

In addition, Broadridge has posted its statistics for the proxy season more generally. Among the more interesting stats:

- Overall Number of Shares Voted: 85.7% (I wish we could get that rate for our political elections)

- Average Percentage of Broker Nonvotes: 19.1% (backing these out probably lowers the overall voting percentages to what happens in political elections)

- Methods by Which Shares Voted: 9.2% of shares voted by paper; 0.9% by phone; 10.6% online; and 79.3% by ProxyEdge (ie. institutional investors using Broadridge's proprietary service)

More on "The Mentor Blog"

We continue to post new items daily on our new blog - "The Mentor Blog" - for TheCorporateCounsel.net members. 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. Here are some of the latest entries:

- How to Be a Director: Yahoo's CEO Speaks Frankly
- Conference Notes: Hot Topics in Corporate Governance -
- The Basics: Insider Trading Penalties
- Advancing Legal Fees: Bank of America Ponies Up
- How to Obtain CLE While in Transition
- Corporate Governance Ratings: Any Future?
- Presenting New Ideas at a Board Meeting
- Sifting Through Job Databases for Lawyers
- What Should I Do With My Life?
- Outside Counsel Take Note: In-House Lawyers Want Predictability

- Broc Romanek

July 6, 2009

ABA Issues Exposure Draft of Shareholder Access Model Bylaw

Recently, the ABA’s Task Force on Shareholder Proposals released an Exposure Draft that proposes a model bylaw - along with commentary - that is designed to assist companies that wish to adopt a bylaw that provides shareholders with proxy access for director nominations. The Exposure Draft doesn't take the SEC's proxy access proposal into account and the Task Force seeks comment.

In this podcast, the Task Force’s co-chairs - Todd Lang of Weil Gotshal and Chuck Nathan of Latham & Watkins - discuss the Exposure Draft, including:

- Why did the Task Force embark on this project?
- What are the main principles of the illustrative bylaw?
- Are there any issues in particular that you seek comment on?

“It’s Groundhog Day!” Deciding Whether to Disclose Merger Negotiations

Below are some thoughts from John Jenkins of Calfee Halter & Griswold that I recently posted on the "DealLawyers.com Blog":

Sometimes you can’t blame deal lawyers for feeling like Bill Murray’s character in Groundhog Day - there are just some things that seem to happen over and over again in almost the same way on practically every deal. When it comes to public company deals, having to decide whether or not to disclose pending negotiations is defin itely one of those recurring events.

Assuming you’re not dealing with an auction or some other process where the seller has decided to hang a “for sale” sign on itself, nobody involved in the transaction wants the world to know that talks are going on until the parties are ready to announce a signed deal. Among other issues, premature disclosure may create problems for the buyer and the seller with key constituencies - like their employees, customers and in some cases, shareholders - that they would like to postpone until a later date when they have had time to map out a communications strategy.

The SEC cuts public companies some slack when it comes to disclosure of merger negotiations. In general, the Staff’s position is that even though MD&A’s “known trends” disclosure requirement might be read to require companies to address pending talks, if the company doesn’t otherwise have an obligation to disclose preliminary talks, then disclosure won’t be required in response to this line item in an Exchange Act report. (See, e.g., Securities Act Rel. No. 6835 (May 18, 1989)).

The SEC’s position is helpful, but this issue isn’t confined to Exchange Act reporting. Public companies have a duty to disclose material information under other circumstances as well, including situations involving leaks for which the corporation or insiders are responsible - and it’s these situations in which the disclosure issue usually arises.

Legally, there are two major issues to keep in mind in deciding whether you need to say something. The first is whether you’ve got a duty to disclose that you’re engaged in discussions. While there’s no general obligation to dispel rumors in the marketplace that you aren’t responsible for, the problem is that you’ll seldom be able to determine whether you’ve got responsibility for the leak or not - and there’s a pretty good chance that you might.

The second legal issue is whether information about the potential deal is “material.” That question, as everybody knows, is a function of its probability and its magnitude under the test announced by the Supreme Court in Basic v. Levinson. There are a lot of ways to look at Basic’s requirements, but it goes without saying that the further down the path you are, the more likely it is that information about your deal is going to be considered material.

While lawyers naturally tend to focus on the legal issues, business concerns frequently drive a decision to go public with negotiations. Companies may feel that their hands are forced by the media’s decision to run with a story on the rumored deal, or by inquiries from the Nasdaq or the NYSE about the reasons behind unusual market activity. Once information leaks, the need to manage the potential damage to key relationships may also make a compelling business case for disclosure. What’s more, there’s sometimes concern that speculation may cause the market to get carried away. That can lead to the unpleasant situation where the market price rises above the price levels that the parties are negotiating.

Once a decision to disclose pending talks is made, the next issue becomes, how much do you say? Often, people want to say as little as possible. The parties may decide not to identify the buyer, and sometimes, will avoid making any disclosure about the price as well. Sometimes, discussions about what you’re going to say can get pretty contentious, as the two sides may have conflicting views when it comes to the extent of disclosure that’s appropriate.

If you’ve got a relatively efficient market for your stock, and you don’t feel a need to reach out to other constituencies, a minimalist approach may work. Just bear in mind that the less you say, the less freely you can communicate with your key constituencies and the more you remain at risk for the consequences of market speculation. If you don’t say enough, you may find yourself needing to make a second announcement, which only further complicates everyone’s life.

When leaks happen, companies often find themselves in a completely reactive position, with very little time to think through all of the implications of their decisions about disclosure. That’s why I think the best advice is to address the possibility of leaks early on in the process, and chart out a course for managing the disclosure process if they do occur.

Advance planning won’t stop leaks from happening, but it will put everyone in a better position to respond to them if they do. Getting a jump on this issue may make it less painful when you hear the familiar sound of Sonny & Cher’s “I Got You Babe” coming through your clock radio, followed by a couple of morning DJ’s cheerily reminding you that “It’s Groundhog Day!”

Again.

Broc's note: A great version of "I Got You Babe" is the one by UB40 and the Pretender's Chrissie Hynde.

Bernie Peepoff: The Game is Up

On Friday, my family went to a local art show which included a Washington Post diorama contest for using peeps (ie. the marshmellow Easter candy) in artwork. Here are photos of some of the best from the 1100 entries. Although not nearly among the best, I was laughing because this entry featured a parody of the Bernie Madoff scandal:

And here is me with a major Peep:

- Broc Romanek

July 2, 2009

The Big Kahuna: SEC Approves NYSE's Elimination of Broker Discretionary Voting

Yesterday, the SEC voted 3-2 to approve the NYSE's proposal to amend Rule 452 (and Listed Company Manual Section 402.08) to eliminate broker discretionary voting for director elections. The amendment to Rule 452 will be applicable to meetings held after January 1, 2010 (but won't apply to a meeting that was originally scheduled to be held in 2009 if adjourned to a date after January 1st).

As I've mentioned before, in my opinion, this change is the biggest of the reforms that companies face - bigger than proxy access, say-on-pay, etc. Here is the SEC's press release addressing all of its actions yesterday - and here is Chair Schapiro's opening remarks (and Commissioners Walter's statement and Aguilar's statement).

Commissioners Casey and Paredes opposed the proposal, both stating that the broker nonvote issue should be considered in the broader context of rejiggering the proxy process (read "proxy access") as well as examining more completely the impact of this change on companies. In his opening remarks, Commissioner Paredes noted they weren't alone - 93 comment letters (out of a total of 136) also urged a comprehensive review of the proxy system. They also expressed concerns that the change would disenfranchise retail holders at the expense of more control by institutional investors.

Since all the other Commissioners agreed with the importance of studying the proxy system's “plumbing,” near the end of the meeting, Chair Schapiro stated that the SEC would conduct this type of review later this year. I see roundtables in our future. If interested in reviewing "live tweets" that occurred during the meeting, see @footnoted and @simonbillenness.

Oh, boy! Check out today's front-page article from the Washington Post about how the SEC was warned in '04 by a SEC Staffer about Madoff - but yet the SEC didn't follow up. And that Staffer's boss ended up marrying Madoff's niece. The article is quite in-depth and is likely to result in more headaches for the SEC. I'll cover this more extensively next week.

The Surprise: SEC Proposes Expedited Disclosure of Voting Results

Although most of the SEC's big open Commission meeting went as telegraphed by earlier statements by the SEC Chair, there was one big surprise. The SEC proposed a new Form 8-K requirement for companies to disclose the results of a shareholder vote within four business days after the end of the meeting at which the vote was held (in contested elections, the final results would be permitted to be delayed under certain circumstances).

As I've complained before, the current disclosure standard doesn't elicit voting results for weeks - or sometimes months - after the vote, which doesn't really work in today's more competitive annual meeting environment.

Not a Surprise: SEC Proposes Say-on-Pay for TARP Recipients

Not surprisingly, the SEC also proposed rules - by a 5-0 vote - that would help implement Section 111(e) of EESA to permit an annual advisory non-binding shareholder vote on executive compensation. The SEC's proposal clarifies how these requirements apply to TARP recipients in the form of new Rule 14A-20. The SEC has already posted the proposing release for this one; could be record time for that. Here is Corp Fin's opening statement.

During the open Meeting, it was pointed out that - outside of the EESA mandate - the SEC Staff has allowed the inclusion of say-on-pay proposals. Commissioner Casey note that she only supported this proposal because it was required under EESA.

SEC Proposes Changes to Executive Compensation Disclosure Rules

No surprises here either. As expected, the SEC proposed amending Item 402 of Regulation S-K as follows (here is Corp Fin's opening statement):

- Broader CD&AS to cover risk - provide information about how a company's overall compensation policies create incentives that can affect the company’s risk – and the management of that risk, including policies for employees generally, including non-executive officers. Such disclosure would only be required if the risks arising from those compensation policies may have a material effect on the company. The SEC did not propose any requirement that would not require the disclosure of specific salaries of any individuals beyond those already required.

- Improved reporting of stock and option awards - revise way in which stock and option awards are reported in the Summary Compensation Table and Director Compensation Table so that it's based on the award's fair value on the grant date. This would reverse the December '06 "surprise."

- More disclosure about compensation consultants - in an effort to allow shareholders to evaluate potential conflicts, require disclosure about compensation consultant fees and services (and their affiliates) when they play any role in determining the amount or form of compensation for executives and directors, but only if those consultants (or their affiliates) also provide other services to the company.

In his "Proxy Disclosure Blog," Mark Borges provided in-depth analysis of the proposals yesterday.

SEC Proposes More Corporate Governance Disclosures

Finally, the SEC proposed a few governance disclosure enhancements, including revising Item 401 of Regulation S-K to require more disclosure about each director’s particular experience, attributes and skills that are appropriate for the person to serve as a director and as a member of any committee to which the person is appointed; extend the disclosure of the director's board memberships to the past 5 years; and expand disclosure of legal proceedings to the prior 10 years.

In addition, the SEC proposed requiring disclosure of why the board selected a particular management/leadership structure, particularly why the board chose to combine or separate the board chair and CEO positions. Although not proposed, the SEC's proposing release will solicit comments about whether the SEC should require disclosure about director diversity, including whether diversity is a factor considered when nominating director candidates.

- Broc Romanek

July 1, 2009

Here We Go Again: FASB Charging for "Souped-Up Version" of Accounting Standards

On Tuesday, the FASB released FAS No. 168, its codification of GAAP that has been long in the making and is officially launched as of today.

As Edith Orenstein notes in FEI's "Financial Reporting Blog": "FAS 168 represents the last numbered standard to be issued by FASB under the old (pre-Codification) numbering system, and amends the GAAP hierarchy to set the stage for a watershed moment - the July 1 launch of FASB’s Codification (full name: the FASB Accounting Standards Codification TM.) The Codification will supercede existing GAAP for nongovernmental entities; governmental entities will continue to follow standards issued by FASB's sister organization, the Governmental Accounting Standards Board (GASB)."

For a long time, I was miffed that the accounting standards that make up GAAP were not available for free. For us lawyers, this was akin to the SEC charging for access to its rules and regulations. About six years back, the FASB got smart and started posting its standards for free. Before then, just summaries were complimentary. (Note that a paper subscription always has - and still does - cost a fee.)

Now the FASB has done it again, charging an annual $850 subscription fee for the online "professional" edition of its codification of GAAP (a beta version was available for free during the recent verfication period). In comparison, the "Basic" version of the Codification is available at no charge (here is FASB's "Codification Resources" page). From reading the descriptions of the two, I believe lawyers can live with the Basic version since the Professional one has bells & whistles not related directly to the content of the Codification (egs. better search tool and printing ability).

It gets me nervous when a regulator sells access to its regulations, even if its just adding bells & whistles. It's a perception of transparency thing and a practice that should be prohibited. I understand that FASB is a non-profit organization and not a federal agency - but it still is a regulator by virtue of the SEC designating it as the organization responsible for setting accounting standards for public companies in the US. Let me know your thoughts (I won't post them without your consent).

NYSE Permanently Lowers Market Cap Requirement

Yesterday, the NYSE filed two rule changes with the SEC - both effective immediately - regarding its continued listing standards so that:

- In this rule filing, permanently lowered the $25 million average market capitalization requirement to $15 million (a temporary bar at the $15 million level was set to expire yesterday).

- In this rule filing, extended the temporary suspension of the $1.00 average closing price requirement until July 31st (prior suspension expired yesterday).

Our July Eminders is Posted!

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

- Broc Romanek