August 31, 2009

NYSE Proposes Amendments to Corporate Governance Listing Standards

Ahead of our upcoming webcast with a group of senior NYSE Staffers - "The NYSE Speaks '09: Latest Developments and Interpretations" - the NYSE has issued proposals to amend its corporate governance listing standards. These proposals will be analyzed during the program. It's been quite a while since the standards were last revised...

Where Were the Lawyers? Judge Rakoff Asks in BofA Settlement Case

Back from vacation and I see that things have heated up in the case where US District Court Judge Jed Rakoff's decision to not approve a $33 million settlement between the SEC and Bank of America over allegations of misleading proxy materials because the bonus obligations due to Merrill Lynch employees were not fully disclosed. When I left a few weeks ago, the Judge was about to hold a hearing to discuss the issues involved. At the hearing, he asked for briefs from both parties by August 24th.

On the 24th, the SEC and Bank of America submitted the briefs as requested by the Judge. Here is the brief submitted by the SEC, including the controversial Disclosure Schedule that was not included in the proxy materials as Exhibit A. Here is Bank of America's brief that asserts that obligation to pay bonuses was disclosed.

As noted in this NY Times article, Judge Rakoff's request for documentation regarding who was responsible for the decision not to disclose Merrill's bonuses resulted in both parties blaming the lawyers in their briefs. Although as Tom Gorman notes, "The briefs read as if they were filed in two different cases."

On August 25th, Judge Rakoff - apparently not very happy with the briefs - issued this order. As noted by Barbara Black in the "Securities Law Prof Blog":

Judge Rakoff still isn't satisfied with the explanations given to him by the SEC and the Bank of America about the settlement involving the disclosure (or lack thereof) of Merrill bonuses in the BofA proxy statement. He instructed the SEC to provide more explanation about why it didn't follow SEC policy and seek penalties from individual defendants. He also didn't accept the agency's explanation that its hands were tied because the corporation asserted reliance on advice of counsel as a defense and would not waive the attorney client privilege and give the SEC the documents. How could the corporation base a defense on attorneys' advice without disclosing the advice? The judge asked for further submissions due September 9th.

The Judge could hold a second hearing on the settlement - or he could approve or reject it after receiving this new rounds of briefs.

Here are a number of commentaries on what has transpired so far:

- NY Times' Floyd Norris - "The SEC Explains"

- Washington Post's Zach Goldfarb - "SEC's About-Face on Bank of America Raises Eyebrows"

- Jay Brown's "Race to the Bottom" - "BofA, the SEC, and the Merrill Lynch Bonuses: The Costs of Legal Representation"

- Tom Gorman's "SEC Actions" - "The BofA Settlement, Round Two: The Real Issues"

- Tom Gorman's "SEC Actions" - "The Lawyers Did It?"

- WSJ - "Judge Rips SEC on BofA Pact"

- NY Times - "Plain Talk From Judge Weighing Merrill Case"

- Reuters - "BofA to settle Merrill lawsuit for $150 million"

- Reuters - "SEC may wield stronger hand after BofA bonus case"

Our September Eminders is Posted!

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

- Broc Romanek

August 28, 2009

More on Shareholder Access Comments

Last Friday I blogged about the "grass roots" letter writing campaign that had been ginned up to oppose the SEC's access proposals. It being a slow news week in Washington, it seems that reporters have turned to reading some of the more serious comment letters on the proposals, as a number of stories came out this week, mostly covering the level of opposition to the proposals. For example, this WSJ article notes some of the various suggestions for tweaking the proposals both from those for and against the changes, all seemingly made against the backdrop of a strong presumption that something will be adopted in November of this year. (The WSJ article also notes that the US Chamber of Commerce was behind the small town letters expressing concern over adoption of the access proposal, with more efforts expected to be ramped after Labor Day.)

I thought that I would highlight a couple of letters that caught my eye which have very little to do with the particulars of the proposals, but nonetheless make a case that, once again, now might not be the right time to move forward with implementing a new access regime. In this letter from several former SEC Senior Staffers, they credibly note "[w]e are, however, concerned that at this particular juncture in its history, it would be a mistake for the Commission to divert its resources to these matters. Simply put, there are far more important regulatory matters on its agenda." The letter goes on to point out:

Importantly, each of these subjects is of far more immediate concern to the SEC than proxy access. Proxy access is a regulatory problem that the Commission has labored to address for virtually the entire history of the Commission. As the proposing release notes, the Commission has considered the problem in virtually every decade, in 1942, 1977, 1980, 1992, 2003, 2007, and last year, in 2008. On each occasion the Commission began with bold proposals to fundamentally revamp the process and concluded with modest actions that, frankly, accomplished little. This disappointing history is not a criticism of past Commissions. Rather it demonstrates that the problem is complex and the Commission's legal authority to act in this area is limited. The substance of corporate governance remains a matter of State, not Federal, law. Absent Congressional action to dramatically alter the Federal / State landscape (which this group does not necessarily endorse), the SEC will never have the ability to change the governance of corporations meaningfully.

Another letter of note is from the Shareholder Communications Coalition, which has been around since 2005 and is made up of The Business Roundtable, The National Association of Corporate Directors, The National Investor Relations Institute, The Securities Transfer Association, and The Society of Corporate Secretaries & Governance Professionals. This group essentially argues that moving forward with access would involve putting the cart before the horse, by making such a significant change to director elections without addressing some real underlying systemic problems with the proxy system. Among the issues noted that need to be addressed were empty voting, hidden ownership, over-voting, the lack of competition with proxy administrative services, the enormous (and growing) influence of proxy advisory firms. These are all hopefully issues that the SEC is currently studying as it has undertaken a review of shareholder communications and the proxy system.

This is a road that we have all been down before, and many of the same arguments for and against are playing out all over again. We should know pretty soon whether history is destined to repeat itself.

SEC Settles Naked Shorting Cases

Earlier this month, the SEC announced that it settled enforcement actions for violations of the rules designed to prevent abusive naked short selling. Charged in the cases were two options traders and their broker-dealers, who were alleged to have violated the locate and close-out requirements of Regulation SHO. These cases involved conduct spanning from 2005-2007. No doubt that more such cases are in the works.

As part of its efforts to stamp out abusive short selling practices, the SEC announced plans for a public roundtable on September 30 to discuss securities lending, pre-borrowing, and possible additional short sale disclosures.

The Curious Case of Jaycee James

In his Section16.net blog, Alan Dye notes that last week the SEC initiated a cease and desist proceeding against a guy by the name of Jaycee James, who allegedly filed 83 Forms 3 and 4 and Schedules 13D, relating to 29 different companies, all to report fictitious transactions and holdings (see In re Jaycee James, Rel. No. 34-60529). No fraud is alleged, just reporting violations. What on earth would make someone feel compelled to file fake Section 16 reports? I am not sure if I want to find out.

Alan also recently blogged about the Staff's latest Section 16 C&DI, noting:

The staff's update of its Compliance and Disclosure Interpretations on Friday included a new Section 16 interpretation, applicable to reverse stock splits. CDI 117.03 says that Rule 16a-9(a), which exempts from Section 16 "the increase or decrease in the number of securities held as a result of a stock split or stock dividend applying equally to all securities of a class," exempts the cashing out of an insider's fractional interest resulting from a reverse stock split, so long as the cash-out feature of the stock split applies equally to all holders of the class. The availability of Rule 16a-9 to exempt the disposition of fractional interests for cash had been uncertain (as discussed on pages 508-509 of the 2008 edition of the Section 16 Treatise and Reporting Guide). The new CDI means that insiders will not need to file a Form 4 to report the disposition of fractional interests in connection with a typical reverse stock split.

If you don't have access to Section16.net, be sure to check out our "Rest of 2009" rates.

- Dave Lynn

August 27, 2009

Executive Compensation and the Health Care Debate

At the risk of saying anything about health care reform (lest I be attacked by an angry Town Hall-roving mob), I had not really considered the connection that may exist between the debate over health care and the debate over executive compensation until I saw these letters sent out last week by Representative Henry Waxman (D-CA) and Representative Bart Stupak (D-MI). Representative Waxman is, of course, the Chairman of the House Committee on Energy and Commerce, and Representative Stupak is the Chairman of that Committee's Subcommittee on Oversight and Investigations.

The letters request that 52 health insurers provide five years of essentially Summary Compensation Table data for each employee or officer who was compensated more than $500,000 in any one of those years, as well as five years of compensation data for the board of directors. The letters also seek, among other things, information about company-paid outside conferences, retreats or events, company financial performance, documents used by the compensation committee in developing or applying compensation plans, and details about the companies' health care insurance products. Some of the information must be provided by September 4 and some by September 14.

A number of the insurers are public, while others are not (including, e.g., a number of Blue Cross/Blue Shield systems), but in any event developing the compensation data and the other requested information will likely be quite a chore. The letters from Waxman and Stupak follow a letter from Representative John Dingell (D-MI) and Representative Sander Levin (D-MI) to Blue Cross Blue Shield of Michigan asking about executive compensation and a series of rate hikes.

It is not yet clear how the compensation and other information will be used by the Committee in the course of its deliberations on health care policy, or whether this is just a political move designed to demonize the insurance industry through the perennial hot button issue, compensation. I think that I will keep my thoughts on that topic to myself.

Treasury Responds to TARP Criticisms

Recently, the Treasury released responses to recommendations made in the GAO's June report on the TARP programs, as well as a handful of recommendations from prior reports. The Treasury's responses indicate general progress on the development of TARP programs. The Treasury's Office of Financial Stability has 194 full-time employees with a goal of reaching 225, internal controls have been put into place and it appears that efforts toward increasing the tracking of funds and the transparency with respect to recipients are beginning to pay off. But much still remains a work in progress; Treasury is still in the process of developing a risk assessment procedure for the programs, is continuing to renegotiate existing vendor conflict of interest mitigation plans and is considering ways in which to provide more information about the costs of TARP contracts and agreements. The Treasury will have more recommendations to respond to soon - the GAO is required to issue a report on Treasury's operation of TARP every 60 days.

Former SEC Commissioner Paul Atkins Joins the Congressional Oversight Panel

Speaking of TARP accountability, it was announced last week that former SEC Commissioner Paul Atkins will join the Congressional Oversight Panel, which was set up to oversee the expenditure of TARP funds. The Chair of the Oversight Panel is Harvard Law Professor Elizabeth Warren. Atkins will fill a slot vacated by former Republican Senator John Sununu,

- Dave Lynn

August 26, 2009

The SEC's New Chief Accountant

The SEC announced the appointment of Jim Kroeker as Chief Accountant for the Commission. He has been serving as Acting Chief Accountant since the beginning of the year, and during that time he has been quite busy, focusing on fair value issues, among many others. Before coming to the SEC as Deputy Chief Accountant back in February 2007, Jim had been in Deloitte's national office. It is nice to see someone serving as "Acting" to get the permanent slot, for a change.

Minding Your HSR Compliance for Equity Compensation Programs

When you mention the Hart-Scott-Rodino Act, it usually evokes images of mergers and acquisitions, but HSR compliance should not be viewed so narrowly. As noted in this O'Melveny & Myers LLP memo, the Federal Trade Commission has long taken the position that the HSR Act is applicable to the acquisition of any voting stock, including an acquisition by an individual. As a result, companies and their officers and directors need to be cognizant of tripping HSR filing and waiting period requirements, and the potential consequences of non-compliance (including significant fines).

The O'Melveny memo notes that these types of events could potentially result in an HSR filing requirement if the value of the transaction exceeds the HSR Act's jurisdictional thresholds and no exemption applies:

  • an acquisition of voting stock upon the exercise of a stock option or warrant (except for a true same-day, cashless net exercise);
  • a grant of restricted stock where the grantee receives the right to vote the securities at the time of grant;
  • the vesting of restricted stock units;
  • a purchase of voting stock in an open market transaction;
  • a purchase of voting stock pursuant to a dividend reinvestment plan; or
  • a purchase of voting stock pursuant to an employee stock purchase plan.

Some companies reimburse officers and directors for filing and legal fees associated with HSR compliance, and the memo notes that such reimbursement amounts generally get reported as perquisites in the Summary Compensation Table.

New Treasury and SEC Regulations and the ARRA: Executive Compensation Restrictions

We have posted the transcript from our recent CompensationStandards.com webcast: "New Treasury and SEC Regulations and the ARRA: Executive Compensation Restrictions."

- Dave Lynn

August 25, 2009

Just Mailed: The July-August Issue of The Corporate Executive

We just sent out the July-August 2009 issue of The Corporate Executive, along with a Special Supplement. This issue is devoted to in-depth analysis and practical guidance on the SEC's proposed changes to the executive compensation disclosure rules. The issue includes:

- The SEC's Proposed Changes - And their Effects
- The Relationship of Compensation and Risk
- A Broader Scope to the CD&A (But Only When Material)
- Revisiting Equity Award Disclosure - Some Welcome Relief
- A Troublesome Result - And a Fix
- Compensation Consultant Disclosure: An Interim Step?
- Other Important Areas Where Comment is Solicited - And Our Comments
- Walk-Away Disclosure and Analysis - A Heads Up
- Are You Recognizing Too Much Expense for Your ESPP?
- Limits Reduce Employee Returns
- Accounting Considerations
- Proxy Disclosure Updates - Full Walkaway Model CD&A
- Treasury's Mark Iwry to Speak at 6th Annual Executive Compensation Conference

Subscribing to The Corporate Executive is now more important than ever, particularly given all of the changes contemplated with executive compensation and SEC disclosure requirements. In recognition of the need we are serving this year (and in view of the tight economic times), we are extending a special offer for new subscribers which will enable anyone to receive The Corporate Executive at no risk. If you sign up now for 2010, you can get the July-August 2009 issue on a complimentary basis and the rest of 2009 for free.

FASB Deliberates on Loss Contingencies

Last week, the FASB took up its controversial 2008 proposed changes to the standards regarding disclosure of loss contingencies. As Edith Orenstein notes in FEI Financial Reporting Blog, the August 19 meeting focused on litigation contingencies, with other types of loss contingencies to be taken up at a later meeting. The Board didn't rule out an effective date by the end of this year, however it appears that the possibility is pretty remote. Here are highlights of the deliberations from the FEI Financial Reporting Blog:

Disclosure objective: The board agreed on the following disclosure object for loss contingencies: An entity shall disclose qualitative and quantitative information about the loss contingency to enable a financial statement user to understand the nature of the contingency and its potential timing and magnitude.

Disclosure principles: The board agreed on three broad principles for loss contingencies:

1. Disclosures about litigation contingencies should focus on the contentions of the parties, rather than predictions about the future outcome.

2. Disclosures about a contingency should be more robust as the likelihood and magnitude of loss increase and as the contingency progresses toward resolution.

3. Disclosures should provide a summary of information that is publicly available about a case and indicate where users can obtain more information.

Quantitative disclosure requirements: The board directed the staff to develop an approach that would focus on disclosure of non-privileged quantitative information that would be relevant to making an estimate of the potential loss, for consideration by the Board at a future meeting.

Reasonably possible equals more than remote: The board decided to maintain the existing requirement to disclose asserted claims and assessments whose likelihood of loss is at least reasonably possible and to clarify that at least reasonably possible and more than remote have the same meaning.

Disclosure of certain remote contingencies: The board agreed that certain remote loss contingencies should be disclosed, and the board directed the staff to develop possible approaches for discussion at a future meeting.

Unasserted claims: The board agreed to maintain existing threshold requirements for unasserted claims and assessments and agreed to enhance the existing interpretive guidance about the threshold.

Recoveries, indemnifications, and settlement negotiations. The board agreed that:

  • entities should not consider the possibility of recoveries from insurance or indemnification arrangements when assessing whether a contingency should be disclosed.
  • to require disclosure about possible recoveries from insurance and other sources if and to the extent that the information has been provided to the plaintiff in discovery.
  • not to require entities to disclose information about settlement negotiations.

Secondary Liability Legislation: Does it Have Legs?

At the end of July, Senator Arlen Spector (D-PA) introduced a bill that would amend the Exchange Act to permit private civil actions against secondary actors for securities fraud, seeking to override the Supreme Court's rulings in Central Bank and Stoneridge. The legislation would provide that anyone who knowingly or recklessly provides "substantial assistance" to a primary violator will be deemed to have violated the statute to the same extent. Given the current environment, there is at least some chance that this kind of legislation might get support, although at this point it may be too soon to tell.

- Dave Lynn

August 24, 2009

Last Piece of the Puzzle: The Administration's Derivatives Legislation

The Administration recently released the last piece of draft legislation for its financial reform agenda. The legislation is focused on creating a comprehensive system of regulation for the credit default swap market and all other OTC derivative markets. The draft bill is generally consistent with the framework that the Administration outlined back in June, and the overall thrust of these proposals is to encourage the movement of OTC derivatives transactions from unregulated over the counter markets to regulated exchanges and centralized clearinghouses.

Of all of the draft legislation that the Administration has advanced thus far, I think that this bill is the most far-reaching, in that it essentially creates a new regulatory system where pretty much nothing in the way of government regulation (other than, e.g., capital standards) had existed before. The components of the contemplated regulatory system include:

  • Centralized clearing of standardized OTC derivatives through CFTC- or SEC-regulated clearing organizations;
  • A requirement that standardized OTC derivatives would be required to be traded on a CFTC- or SEC-regulated exchange or alternative swap execution facility;
  • An "encouragement" to use standardized OTC derivatives, with higher capital requirements and higher margin requirements applicable to non-standardized derivatives;
  • Transparency through confidential reporting of positions to federal regulators and public data regarding aggregated open positions and trading volumes;
  • Federal regulation of any firm dealing in OTC derivatives and firms taking large positions in OTC derivatives;
  • Strict capital and margin requirements for all OTC derivative dealers and major market participants through the SEC or CFTC;
  • Tools for the SEC and CFTC to prevent manipulation, fraud and abuse; and
  • A tightened definition of those eligible investors who may engage in OTC derivatives transactions.

While it is certainly hard to believe that the end of the August recess is almost upon us, it still seems highly likely that Congress will take up derivatives legislation when they get back in town. The Administration's proposals closely track the agreed-upon guidelines for derivatives legislation reached by Representative Barney Frank (D-MA) and Representative Collin Peterson (D-MN). Further, a number of bills seeking to enhance OTC derivatives regulation have already been introduced in Congress. For example, on the House side, Agriculture Committee Chairman Peterson introduced H.R. 977, which is pending before the House Financial Services Committee. Moreover, H.R. 2454 was introduced by Energy and Commerce Committee Chairman Henry Waxman (D-CA) and includes several provisions concerning OTC derivatives regulation. This legislation was approved by the House on June 26. In the Senate, Agriculture Committee Chairman Tom Harkin (D-IA) introduced S. 272, while other bills with provisions targeting derivatives have been introduced jointly by Senators Carl Levin (D-MI) and Susan Collins (R-ME) (S. 961) and by Senator Ben Nelson (D-NE) (S. 807).

The CFTC Response: Not Quite Far Enough

CFTC Chairman Gary Gensler was apparently not a recipient of Treasury Secretary Geithner's obscenity-laced tirade a few weeks back, so he felt free to comment to Congressional leaders (as noted in this Bloomberg article) on the Administration's derivatives legislation, asking lawmakers to, among other things, not adopt exemptions for foreign currency swaps and end users that are not swap dealers or major market participants.

Among other recommendations, Gensler also suggests that Congress not move forward with the mixed swap provisions of the Administration's draft legislation, which provide for the dual SEC-CFTC regulation of swaps deriving value from both a security and a commodity. Rather, Gensler suggests a system where the applicable regulation follows what the value of the derivative is primarily based on. He also suggests Bankruptcy Code amendments to provide protections similar to those afforded in the futures markets.

SEC/CFTC Harmonization

The SEC and the CFTC announced last week that they will hold joint meetings to seek public input on the harmonization of market regulation by the two agencies. The first meeting, to occur on September 2, will be held at the CFTC, and the second meeting will be held at the SEC the next day. The two agencies have until the end of September to come up with a report to Congress which identifies conflicts in their regulation of financial instruments and that makes recommendations for harmonizing the regulations.

- Dave Lynn

August 21, 2009

Comment Letter Troubles

Yesterday, the SEC announced that it had experienced problems receiving electronically submitted comment letters on a number of proposing releases, most notably the shareholder access proposals and the proposed amendments to Regulation SHO. The problems occurred during a "brief time" on August 17, although it is not clear from the notice when that brief time occurred. Some folks who attempted to submit comments got e-mails from the Secretary's office following up, while others did not.

The notice indicates that the Staff believes all comments have been identified, but that commenters might want to contact the Office of the Secretary (202-551-5400) or check www.sec.gov under the comment file for the particular release to confirm receipt of their comments. It is always a good idea to check the online comment file in any event to make sure that your comment letter got through.

The Small Business Voice on Shareholder Access

Some of the comment letters that did manage to get through earlier this week on the shareholder access proposals seem to represent an interesting new trend. Over the last few years, there has developed quite the cottage industry in letter writing campaigns on SEC proposals. In many cases, these coordinated comment responses have come as "form" letters. The Staff has wisely adopted a practice of categorizing the form letters by type, and thereby taking them out of the list of commenters, while still providing the text of the letters. The prevalence of these letter writing campaigns has skyrocketed the comment letter count to numbers in the tens of thousands, which certainly makes the job of putting together a comment summary seem like a daunting task!

With this latest round of shareholder access proposals, we are seeing a wave of individualized letters from small business owners. And here we are talking very small businesses, not, e.g., smaller reporting companies. So, for example, in this letter, Noreka Taylor from Mama's Kitchen in Kinston, NC writes:

Being a good cook alone is not going to help me make it through the recession. My country and my government should be helping me and my business succeed, not intentionally doing it more harm! Now that I have finally seen an increase in customers and income, my country has decided to try to hurt the economy again. These changes just do not make sense. Putting unqualified appointees into corporate chairs to peddle their own agenda and special interest could not possibly help anyone or anything except lining their own pockets. My restaurant cannot afford these changes and most other small businesses cannot either.

Meanwhile, at Don's Tractor Repair in Wakefield, KS, Tim Zumbrunn worries that the access rule will put him out of business if his suppliers get caught up in expensive proxy contests. Tim states "[o]ur federal government should not intrude on publicly traded corporations, and corporate state laws should remain intact." Proxy access is even on the mind of Teresa Liddell at Dust 2 Dust ATV Track and Trails in Thackerville, OK, stating that "[t]he recent proposal by the SEC to change shareholder proxy access and give the government greater access to businesses and their decisions would only hurt us and many other businesses."

Each of these letters is personalized and describes different ways in which the proxy access proposals might cause harm, so they can't be easily categorized into "form" letter categories. It is hard to say how much sway these letters will have with the Staff and the SEC as compared to, say, the Seven Firms letter or the letter from the Council of Institutional Investors, but they certainly indicate the lengths to which those opposed to access will go in seeking to undercut the SEC's proposals.

Robert Khuzami: Breaking the Ice

In a speech before the New York City Bar on his first 100 days as the Director of Enforcement, Robert Khuzami got things started off with this joke:

All that being said, I'm pretty proud of my own 100-day accomplishments. So how have things changed? Before I joined the Division in March, the Dow was struggling around 6500 points. Now the Dow is over 9200. So am I really responsible for a 41% increase in the Dow? I am, and I'd explain it, but it's very complicated. It involves algorithms, and calculus, and a black box and other ... stuff. Now, when I ran this speech by my wife, she looked (kind of like some of you out there) a little incredulous. She said, "you're not claiming credit for the stock market, are you? While you're at it, are you also taking credit for the mild hurricane season or the sharp decrease in lethal shark attacks world-wide." Well I am, and I'd explain it, but it's very complicated. It involves algorithms, and calculus, and a black box and other ... stuff.

The speech went on to note the significant changes being implemented in Enforcement, including the organization of specialized units, the streamlining of management and internal processes, the creation of an Office of Market Intelligence, an effort to foster cooperation by individuals and the expansion of resources throughout the Division, including adding staff to the Trial Unit and hiring a Chief Operating Officer.

- Dave Lynn

August 20, 2009

Corp Fin's Crowded Agenda

I attended the ABA Annual Meeting earlier this month, and at the Federal Regulation of Securities Committee's "Dialogue with the Director" session, new Corp Fin Director Meredith Cross, along with Deputy Director Brian Breheny, outlined Corp Fin's agenda. In addition to reviewing comment letters and coming up with recommendations on already proposed rules, the Staff is working on rulemaking initiatives that include:

  • Expanding Schedule 13D/G reporting to cover short positions. The Staff is also considering changes to the beneficial ownership rules for purposes of 13D/G reporting;
  • Liberalizing shareholder communications to permit distribution of educational materials to shareholders regarding the proxy voting process, without the materials being deemed a proxy solicitation. The Staff is proposing to conduct a study regarding shareholder communications and will announce the results;
  • Amending credit rating agency rules to address conflicts of interest;
  • Improving asset-backed securities registration and disclosure; and
  • Amending Rule 163 (communications by WKSIs).

The Staff is also:

  • Keeping track of legislation in Congress to enable them to gear up to quickly to propose any rulemaking mandated by legislation;
  • Continuing its review of the proposed Regulation D amendments;
  • Discussing Section 5/short selling issues with General Counsel David Becker to determine how to move forward; and
  • Conducting a "Core Disclosure" review project for the purpose of reviewing all disclosure rules to ensure that the disclosure is "right" rather than just "more."
The Staff is in the process of reviewing how the work of Corp Fin is being done and whether any improvements can be made, including in the area of maintaining and expanding transparency. The Staff has been improving the efficiency of such things as responding to no-action and waiver requests. Further, it was announced that a new products team has been established, headed up by Tom Kim and Paul Belvin. This team will coordinate the review of new financial products in the Division, including reviewing new products on a pre-filing basis.


We have posted notes from the "Dialogue with the Director" session (courtesy of Suzanne Rothwell at Skadden) in our "Conference Notes" Practice Area.

FINRA Announces Amendments to Conflicts of Interest Rules

A few months ago, I noted in the blog that the SEC had approved changes to NASD Rule 2720, which deals with underwriter conflicts of interest. Last week, FINRA issued Regulatory Notice 09-49, so the rules will now go into effect on September 14, 2009. The FINRA Regulatory Notice includes some clarifications of the rule. It should be noted for upcoming offerings that, in addition to the procedural safeguards contemplated in the amended rule, more prominent disclosure of conflicts of interest will be required in offering documents. In the Regulatory Notice, FINRA notes that, with respect to a takedown from a shelf registration statement that became effective prior to September 14, the disclosure requirements of the amended rule will apply to any post-effective amendment or prospectus supplement filed on or after September 14.

SEC and FINRA Issue Alert Regarding Leveraged and Inverse ETFs

It is certainly not surprising, given the increased focus on the risks arising from financial products, that the SEC and FINRA are now singling out particular products and highlighting their risks for investors. With the prospect of something along the lines of a financial product safety commission hanging out there to potentially infringe on its authority, I suspect that the SEC in particular wants to be proactive in addressing what could be the next big blow-up.

Earlier this week, the SEC and FINRA issued an Alert highlighting the perils of investing in leveraged and inverse exchange traded funds. In the Alert, the agencies note "[i]nvestors should be aware that performance of these ETFs over a period longer than one day can differ significantly from their stated daily performance objectives." According to the Alert, inverse ETFs (also called "short" funds) are designed to provide the opposite of the performance of the index or benchmark that they track, which may be a broad market or sector specific index. Leveraged inverse ETFs (also known as "ultra short" funds) seek to achieve a return that is a multiple of the inverse performance of the underlying index.

These are clearly instruments which have a very specific purpose that is probably inconsistent with the type of investing strategy pursued by anyone who needs an SEC/FINRA reminder on the potential dangers of the product. Whether warnings like this one do any good in discouraging people from getting in over their heads - under what is essentially a "caveat emptor" system - is a big question that will be considered as the debate over the regulatory reform landscape continues.

- Dave Lynn

August 19, 2009

SEC Provides Guidance on FASB Codification

As Broc previously noted in the blog, the FASB Codification project was launched back in July and will be effective for financial statements issued for interim and annual periods ending after September 15, 2009. Under the FASB Codification, existing references to U.S. GAAP materials are replaced by new references, thereby rendering all existing references obsolete.

Yesterday, the SEC issued an interpretive release in order to address the issues for SEC materials that are raised by the Codification. In the release, the SEC indicates that all references to the "legacy" FASB standards (and other private-sector US GAAP literature) in rules, regulations, releases and staff bulletins should be construed as the corresponding reference in the FASB Codification. The SEC notes that it will be embarking on a longer term project to revise U.S. GAAP references in its rules and guidance.

The SEC also asserts its GAAP supremacy in the release, noting that while the FASB Codification supersedes existing U.S. GAAP references from private standards-setters, it does not supersede any SEC rules or regulations. In this regard, the SEC notes that the FASB Codification is not the authoritative source for SEC rules and regulations, which are referenced in the Codification for the convenience of users.

Corp Fin Provides MD&A Guidance on Loan Losses

A new "Dear CFO" letter provides some guidance to financial institutions on what the Staff expects in terms of MD&A disclosure around an institution's provision and allowance for loan losses. While the disclosure requirements have not changed, the Staff indicates that the current economic environment may require that a company "reassess whether the information upon which you base your accounting decisions remains accurate, reconfirm or reevaluate your accounting for these items, and reevaluate your Management's Discussion & Analysis disclosure."

The letter lays out the Staff's disclosure expectations around high risk loans (e.g., option ARM products, junior lien mortgages, subprime loans), changes in practices for determining the allowance for loan losses, declines in collateral value and other potentially material considerations, such as risk mitigation strategies, the reasons behind changes in key ratios (such as the non-performing loan ratio), and how accounting for an acquisition under FAS 141R or accounting for loans under SOP 03-3 affects trends in the allowance for loan losses.

Benchmarking in the Spotlight

An article in yesterday's WSJ discussed two new academic studies that have focused on benchmarking practices at public companies. While the article tends to sensationalize the issue a bit, it does note how the studies highlight one of the principal failings of benchmarking, which is the way in which peer groups are selected. In particular, the studies appear to demonstrate a bias toward selection of peer companies with better paid CEOs, compounded by a trend noted in one of the studies that approximately 40% of the companies reviewed indicated that they paid their CEOs more than the median level of comparable pay. In the article, the typical competitiveness arguments are noted in support of benchmarking. The article observes that these studies were made possible by the 2006 amendments to the executive compensation disclosure rules, which require disclosure of the list of peer companies when benchmarking is used.

Obviously this is not any breaking news; rather, what is noteworthy is that there is now some empirical support (which, of course, should always be taken for what it is worth and in consideration of its limitations) for some of the claims about benchmarking. It certainly helps to confirm what then-Corp Fin Director Alan Beller so eloquently said at our conference back in 2004:

"Too many boards have apparently operated on the principle that compensation must be in the top half or even the top quartile of some benchmark group (the basis of selection of which is often not disclosed) for the company to be competitive in attracting executive talent. (This principle apparently operates without regard to whether performance is commensurate to compensation). This approach produces what I have called the Lake Wobegon effect, where everyone is above average. Boards of directors ought to be able to do better than this."

What can be done now, in light of this new evidence of the obvious? I think that one place to start is the useful guidance provided in the Obama Administration's broad compensation principles announced in June, which call for developing an improved pay for performance paradigm that is less focused on external competitive positioning and more focused on relative performance of the company, achieved through a diversified set of performance criteria having an emphasis on long-term value creation.

For more analysis of the Administration's compensation principles, be sure to check out this complimentary copy of the Summer 2009 issue of Compensation Standards. Also note that you can sign up to be a member of CompensationStandards.com for free for the rest of this year when you try a 2010 no-risk trial.

- Dave Lynn

August 18, 2009

SEC Reopens the Comment Period for Amendments to Reg SHO

Back in April, the SEC proposed several alternative ways of addressing short sales, including either: (1) a market-wide approach; or (2) a security-specific circuit breaker approach. As I noted in the blog back then, it promised to be a monumental task for the Staff to reconcile the competing approaches and the many comments on the proposals in coming up with a final recommendation.

Yesterday, the SEC took the relatively unusual step of reopening the comment period for the proposals, which had closed June 19th. The SEC noted that it has received approximately 4,000 comment letters, as well as over 250 copies of 4 different standard letters, and a petition with 5,605 signatures. In reopening the comment period, the SEC has focused in particular on an alternative uptick rule, which would permit short selling at a price above the current national best bid. Comment was solicited on this alternative uptick rule in the initial proposing release, but it was not one of the proposals that was specifically advanced. In the new release, the SEC discusses the alternative uptick rule in greater detail and solicits specific comments regarding its potential application.

The reopened comment period runs for 30 days from the date of publication in the Federal Register.

Yesterday was the last day of the comment period for the shareholder access proposals. Some had asked the SEC to extend the comment period, but no such extension was forthcoming. Of course, the Staff and the Commissioners will still consider comment letters that are submitted "late," although it depends on how quickly the rulemaking is moving as to whether a late letter has any influence. So far, only slightly over 170 comment letters have been submitted by my count, which is a far cry from the thousands of letters received on the prior proposals in 2003 and 2007. Here is Evelyn Y. Davis's comment letter - surprisingly, she is not in favor of shareholder access!

The UK's FSA Implements Pay Reforms for Financial Institutions

Last week, the FSA rolled out its compensation reforms applicable to large financial institutions in Policy Statement 09/15. The reforms were originally proposed through a Consultation Paper released back in March 2009. While the principles are limited in applicability to the largest UK banks, building societies and broker dealers (26 firms, as compared to 47 firms under the proposed rules), the FSA indicates in its announcement of the final rules that the Policy Statement "indicate[s] [FSA's] thinking on what is viewed as good practice (where relevant) to all firms in these groups." The Remuneration Code set forth in the Policy Statement is set to go into effect on January 1, 2010.

The rules are, of course, focused on the relationship between compensation and risk. The general requirement of the Code is that remuneration policies must be consistent with effective risk management. The Code sets forth a number of remuneration principles, which include:

1. the role of bodies responsible for remuneration policies and their members;

2. procedures and risk and compliance function input;

3. remuneration of employees in risk and compliance functions;

4. profit-based measurement and risk adjustment;

5. long-term performance measurement;

6. non-financial performance metrics;

7. measurement of performance for long-term incentive plans; and

8. remuneration structures (e.g., mix of salary and bonus, bonus deferral, performance criteria, guaranteed bonuses).

With the January 1, 2010 effective date rapidly approaching, the FSA plans to send letters out at the end of August to covered firms, asking for their remuneration policy statements. The firms will be expected to provide their remuneration policy statements to the FSA by mid-October, and then the regulator will hold meetings with the compensation committees and risk committees of the firms between November 2009 and February 2010. Some limited transition relief is provided for firms that have to amend or terminate employment agreements.

The Code puts the UK out in front in terms implemented of pay reforms, although the FSA notes that international discussions on alignment and implementation principles are underway with the Basel Committee on Banking Supervision and the European Council. As noted in this Bloomberg article, however, the FSA's rule changes have not necessarily been welcomed in the UK, thanks to a belief that the FSA watered down the requirements and ended up leaving banks and brokers with substantial discretion with respect to pay decisions.

TALF Extended into Next Year

Yesterday, the Federal Reserve Board and the Treasury Department announced an extension to the Term Asset-Backed Securities Loan Facility. While acknowledging improvements in financial market conditions over the last few months, the Fed and Treasury noted a bleak outlook in the markets for securities backed by consumer and business loans and for CMBS. They will now be extending TALF loans against newly issued ABS and legacy CMBS through March 31, 2010. Given the time lags involved in new CMBS deals, TALF lending against newly issued CMBS will occur through June 30, 2010.

The Fed and Treasury also announced that they wouldn't be expanding the types of collateral eligible for the TALF program. They indicate that they will continue to monitor the situation to see if any further extension is warranted, or if any additional collateral should be permitted.

- Dave Lynn

August 17, 2009

Corp Fin Updates a Hodgepodge of C&DIs

On Friday, Corp Fin posted a number of new or revised C&DIs across a number of topic areas, including Securities Act Sections, Rules and Forms, Regulation S-K, Exchange Act Sections and Section 16. A summary of interpretations that are new or revised is provided on the "What's New" page posted last Friday, and now each interpretation indicates "NEW" or "REVISED" along with the date in the bracketed notation at the end. For the purposes of determining the changes made in the revised C&DIs (as well as the C&DIs that have been withdrawn), you can review the "Outdated or Superceded Compliance and Disclosure Interpretations" page included in the "Archives" section.

A few of the notable Securities Act interpretations are as follows:

  • Securities Act Forms Question 118.02/Securities Act Rules Question 212.05: These interpretations were revised to clarify that an unqualified Exhibit 5 legality opinion must be filed no later than the closing date of an offering that is conducted as a takedown off of a shelf. The interpretations had previously indicated that time for filing the opinion was prior to any sales or contracts of sale, causing concern that the opinions would be required to be filed too early in the offering process. The change to the interpretation came about as a result of some dialogue between the Staff and the Securities Law Opinions Subcommittee of the Federal Regulation of Securities Committee at the ABA meeting in Chicago earlier this month.
  • Securities Act Sections Question 139.27: This new interpretation indicates that securities from a second private placement may be added by pre-effective amendment to a pending resale registration, so long as that private placement was commenced and completed consistent with the guidance in Release No. 33-8828 (Aug. 10, 2007).
  • Securities Act Sections Question 139.28: This new interpretation provides the Staff's views on offers and sales of securities while a post-effective amendment to a registration statement is pending.
  • Securities Act Forms Question 116.20: This new interpretation gives some timely guidance for rights offerings, including the fact that General Instruction I.B.4. is not available (for either a new registration statement or for a takedown off of an existing S-3) for the securities underlying rights in a rights offering, given that the rights are not outstanding at the time of the filing of the registration statement (or conducting a takedown).

On the executive compensation disclosure front, the Staff provides guidance in Regulation S-K Question 117.03 on the reporting of compensation that as been recovered under a clawback policy, as well as reporting in the Non-Qualified Deferred Compensation Table of vested equity awards that provide for deferral of the receipt of such awards (see Regulation S-K Question 125.05).

Look for more discussion and analysis of the latest Compliance and Disclosure Interpretations in the upcoming issue of The Corporate Counsel.

The New Regulation FD C&DIs

The Staff has also made some more progress migrating the old Telephone Interpretations over to the Compliance and Disclosure Intepretation format, posting Regulation FD C&DIs for the first time on Friday. For the most part, these interpretations are the same as the Regulation FD interpretations from the Fourth Supplement to the Manual of Publicly Available Telephone Interpretations. Here is how the new C&DIs relate to the old telephone interpretations:

  • C&DI Question 101.01 - same as Interpretation 1 (note that this interpretation provides an explanation of what it means to confirm a prior forecast and how to avoid confirming a prior forecast)
  • C&DI Question 101.02 - same as Interpretation 2
  • C&DI Question 101.03 - same as Interpretation 7
  • C&DI Question 101.04 - same as Interpretation 9
  • C&DI Question 101.05 - same as Interpretation 10
  • C&DI Question 101.06 - same as Interpretation 11
  • C&DI Question 101.07 - same as Interpretation 12
  • C&DI Question 101.08 - same as Interpretation 15
  • C&DI Question 101.09 - same as Interpretation 13
  • C&DI Question 101.10 - same as Interpretation 14
  • C&DI Question 102.01 - same as Interpretation 3
  • C&DI Question 102.02 - same as Interpretation 5
  • C&DI Question 102.03 - same as Interpretation 6
  • C&DI Question 102.04 - revised Interpretation 8 (changes were not substantive)
  • C&DI Question 102.05 - revised Interpretation 4 (providing additional justification and adding concepts of webcast or broadcast)
  • C&DI Question 102.06 - revised Interpretation 16 (changed the answer to a categorical "no" without providing any additional explanation)

In updating the Regulation FD guidance, the Staff did not reissue Interpretation 17, which had reiterated the SEC's position that it did not intend, with the adoption of Regulation FD, to change the practice of using a press release to disseminate earnings information in advance of a conference call or webcast. It would seem that the interpretation is no longer necessary, given that the earnings release model has continued largely unchanged for almost a decade following adoption of Regulation FD.

SEC Approves PCAOB Rules Requiring Registered Firm Reporting

On Friday, the PCAOB announced that the SEC had approved the Board's rules governing the reporting regime that will be applicable to registered accounting firms. These rules implement Section 102(d) of the Sarbanes-Oxley Act, which required each registered public accounting firm to submit an annual report to the PCAOB, along with more current information as may be deemed necessary. The changes also included rules governing succession to the registration status of a firm. The rules will take effect on October 12, 2009.

- Dave Lynn

August 14, 2009

Study: The Voting Trends of ETFs

Recently, the Investor Responsibility Research Center Institute and PROXY Governance teamed up to conduct this study about the voting policies and voting records of seven of the largest exchange-traded fund sponsors, which account for around 94% of the $500 billion ETF market. Given this large amount, ETFs can have a significant influence over corporate matters.

The study essentially found that practices were all over the map, for both the level of detail of each ETF's voting guidelines as well as their voting philosophies and patterns. Some funds were much more likely to vote with management compared to other funds (90% of the time vs. 23%); and those funds that were less likely to vote with management relied more heavily on a proxy advisory firm for voting advice. I guess the diversity in voting practice is not too surprising, given that this is a relatively young investment product in a rapidly expanding market.

If you buy an ETF, does the ETF has the right to vote at all of the underlying companies owned by that ETF? The answer can be a little complicated in that the "ETF" term has become bastardized such that it encompasses several categories of investment structures, some of which technically aren't ETFs. But according to the SEC's "Q&As," ETFs are investment companies - and therefore, the voting rights are held by the fund managers, not the fund shareholders. ETFs are not mutual funds (and cannot call themselves mutual funds).

Finally Dismissed: Oracle's Long-Standing Insider Trading Suit

In June, a US District Court Judge dismissed an 8-year old shareholder lawsuit accusing Oracle CEO Larry Ellison of insider trading and misleading investors. The case - Nursing Home Pension Fund v. Oracle - stems from back in early '01, when Oracle's shares dropped 21% after the company announced that it would miss its quarterly earnings forecasts. The suit alleged that Ellison sold $900 million of Oracle stock before the announcement, knowing that there were problems with one of Oracle's products. The company claimed Ellison sold stock to exercise options that were going to expire and had to be sold during open trading windows.

This is the same case that was dismissed in '03 by the District Court, a decision that was reversed on appeal in '04. Ellison donated $100 million to charities and paid $22 million to resolve a separate insider trading suit in '05. That settlement followed the dismissal of a similar suit in Delaware against Ellison. For more on the case and its long history, see this Bloomberg article.

IFRS Study: More Trouble Than Its Worth?

The debate over IFRS continues to rage. A recent study finds that the US doesn't have much to gain from adopting International Financial Reporting Standards. The study examines the economic consequences of mandatory IFRS reporting around the world and finds that, on average, there are several benefits to adopting IFRS, including increased market liquidity, decreased cost of capital and increased equity valuations. However, in countries like the US, where there is already a high-quality accounting infrastructure in place, there may be minimal room for improvement.

Additionally, while some argue that adopting IFRS in the US would make it easier for investors to compare compaies with those in other countries and decrease the cost of reconciliations, the study discovered "weak" evidence of any comparability benefits. You can follow the debate over IFRS in our "IFRS" Practice Area, including this Watson Wyatt article that examines a number of comment letters.

- Broc Romanek

August 13, 2009

More Insider Trading Developments: Is a Fiduciary Duty Necessary?

Following on the heels of another insider trading case asking important questions - SEC v. Cuban - the SEC recently prevailed in another insider-trading case: SEC v. Dorozhko. In its decision, the Second Circuit held that hacking into a secure server and trading on the basis of information obtained constitutes a "deceptive device" under Section 10(b) - even though the guy didn't owe a fiduciary duty to the company. Read some analysis in Tom Gorman's "SEC Actions" Blog - and note we've been posting memos relating to this case in our "Insider Trading" Practice Area.

In this podcast, Bill Kelly and Billy Fenrich of Davis Polk discuss the Dorozhko ruling, including:

- How does the decision differ from SEC v. Cuban?
- What are the implications of these two opinions?

Court Upholds SEC's Bar of an Accountant for "Unreasonable Conduct"

A few weeks ago , the DC Circuit Court of Appeals upheld a Rule 102(e) decision of the SEC - in Dearlove v. SEC - to bar an accountant from practicing before the SEC for conduct that was merely "unreasonable." The Court affirmed the SEC's '06 order that had barred the Deloitte engagement partner on the audit of Adelphia Communications.

The Court held that Rule 102(e) did not require the SEC to employ a common law negligence standard since generally accepted accounting standards was the standard without requiring the SEC to elicit expert testimony on the reasonableness of petitioner's conduct.

The Challenge to PCAOB's Constitutionality

In this podcast, Merritt Cole of White and Williams discusses the case that the Supreme Court recently agreed to hear challenging the constitutionality of the creation of the PCAOB, including:

- What's the history of this case?
- What are the issues before the Supreme Court?
- If the Supreme Court deems the PCAOB's creation unconstitutional, what happens to it?
- Are there any other consequences if the Supreme Court holds the PCAOB unconstitutional?

- Broc Romanek

August 12, 2009

Getting the Vote In: Rising Use of Automated Advocacy Calls

Recently, the mass media has been noticing the rising use of automated advocacy calls that companies sometimes use to help bring in the vote (recall the rising use of these calls for political elections over the past decade). For example, see this Forbes' article. This negative attention illustrates the tightrope that companies - and their proxy solicitors - will walk next year when broker votes disappear and the need for these calls increases by a factor of five.

To learn more about automated advocacy calls, I caught up with Tom Ball of Morrow & Co. in this DealLawyers.com podcast so he could tell us about the latest trends using these voicemails, including asking him:

- What are these automated advocacy calls? How common are they?
- How are the calls best used?
- How much do they cost?
- Who gets hired to do the "voiceovers" for the calls?

I also posted some samples of these voicemails in case you have never heard one: here is one sample voicemail - and here's another sample).

Survey Results: Audit Committee Oversight and Subsidiaries

Probably due to the narrowness of the topic, our recent survey on "Audit Committee Oversight and Subsidiaries" didn't have too many respondents. However, there were some interesting results.

Many companies have adopted stock ownership guidelines requiring executives and directors to own stock in their company based on a multiple of their salaries or board retainers. With the current market downturn and drop in net worth for many people, some companies are changing their stock ownership guidelines. Here is our latest "Quick Survey on Stock Ownership Guidelines" to gauge what folks are doing. Please take a moment to respond to this anonymous survey.

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

We have posted the transcript from our recent DealLawyers.com webcast: "Alternative Fee Arrangements for Deals: Little Less Talk and Lot More Action?"

- Broc Romanek

August 11, 2009

Just Mailed: July-August Issue of The Corporate Counsel

We recently mailed the July-August issue of The Corporate Counsel. This issue includes pieces on:

- NSMIA's Rule 506 Pre-Emption Follow-Up--Risdall Reversal
- The Requirement to Include Late 8-K Information in Form 10-Q/K
- 8-K Item 5.02--When Does the Reference Year Change for Determining the High-Paid NEOs?
- S-K Item 401-- Identifying Executive Officers in the 10-K/Proxy Statement
- Exhibit Filing Items
- The Staff's Longstanding Prohibition on Selling Shareholder Registration of Shares Prior to Issuance-- Universal vs. Automatic Shelf Registration
- Federal Legislative Response to Boards Declining Tendered Resignations of Losing Nominees--Pre-Empt State-Law Holding Over?
- SEC's "IDEA"-- Not a Great Idea
- Ramifications of the New SEC and Treasury Proposals

Act Now: Get this issue on a complimentary basis when you try a "Rest of '09" for free when you try a 2010 no-risk trial today.

Nasdaq Speaks '09: Latest Developments and Interpretations

We have posted the transcript for our recent webcast: "Nasdaq Speaks '09: Latest Developments and Interpretations."

Sponsor An Executive: Hijinks

If you need a laugh, check out this Canadian commercial - a spoof on executives losing money in the market...

- Broc Romanek

August 10, 2009

Complimentary Copy: Summer Issue of Compensation Standards Print Newsletter

We just dropped the Summer 2009 issue of the Compensation Standards print newsletter in the mail to members of CompensationStandards.com (members of that site get the print newsletter as a bonus).

Complimentary Copy: Since the issue provides timely analysis of all the regulatory reforms that have recently taken place, we have posted a complimentary copy of the Summer 2009 Issue so that you can get up-to-speed on the radical changes taking place in the executive pay area.

Free for Rest of '09: Since we know that times are still tough for many, we offer you the ability to be a member of CompensationStandards.com for free for the rest of this year when you try a 2010 no-risk trial. With all the change going on in the executive compensation area, you can't afford to be without the critical resources on that site (and the Compensation Standards print newsletter, which you get as a bonus for being a member of CompensationStandards.com).

More on "Will Facebook Sidestep Google's Pre-IPO Problems?"

Recently, I blogged about my concern that Facebook might confront the same Section 12(g) issues that plagued Google - forgetting to register at the 500 shareholder/$10 million assets threshold.

I didn't do enough homework as it turns out that the Facebook did indeed seek relief by filing a Section 12(h) application with the SEC back in 2008. And the SEC granted the relief, providing a limited exemption for certain employee equity grants (this Red Herring article provides a summary explanation).

These 12(h) applications are pretty rare - but I should know better as I was the guy who processed them for a spell back when I was in Corp Fin's Office of Chief Counsel many moons ago...

A Word of Caution: Take with a Grain of Salt

A member recently sent us this issue of "SEC Today," which had to issue a correction to a prior issue because someone mistook a technical correcting release from the SEC for something substantive. I am not poking fun at them as mistakes do happen - just look at my mea culpa above.

The reason for me to note this is to remind you to correct us if you see mistakes in this blog (or elsewhere on our sites). It does happen and we will go back and make the fix as soon as we are notified. It ain't easy being a "journalist"; it can be nervewracking posting these blogs everyday without the layers of review that the mainstream media enjoys. Any and all feedback is appreciated and always kept to ourselves unless we receive permission to use it otherwise.

- Broc Romanek

August 7, 2009

The SEC's "Holy Cow" Moment: Judge May Overturn BofA's Settlement over Merrill Lynch Bonuses

As I head out for a two-week email-free vacation (got some blogs tee'd up for next week and Dave will be manning the ship), I have to admit surprise by Judge Jed Rakoff's decision to not approve this week's settlement between the SEC and Bank of America over allegations of misleading proxy materials because the bonus obligations due to Merrill Lynch employees were not fully disclosed.

BofA had agreed to pay a $33 million fine, which I suggested recently was on the high side for a non-scienter violation. Personally, I thought the SEC was trying a new approach and acting fast - as bringing charges against individuals will take considerably longer. Take my poll below to express what you think.

According to this Reuters article, the Judge's order states: "Despite the public importance of this case, the proposed consent judgment would leave uncertain the truth of the very serious allegations made in the complaint." The order is linked from this "WSJ Law Blog." Judge Rakoff will hold a hearing on the case on Monday in his US District Court, Southern District of New York.

FINRA Proposes New Fixed Priced Offering Rule

On Tuesday, FINRA proposed new Rule 5141 "Sale of Securities in a Fixed Price Offering," which would eliminate NASD Rules 2730, 2740 and 2750. Under the proposal, the definition of "fixed price offering" would build on the existing definition with minor changes and would continue to make clear that an offering can have more than one stated fixed price (e.g., volume discounts and sales net of commissions to the issuer's employees).The comment period expires on September 18th.

Proposed Rule 5141 would:

1. Incorporate the standards of Rule 2740 by prohibiting a broker-dealer that participates in a fixed price offering selling syndicate from offering securities to any person that is not a member of such selling syndicate at a price below the stated public offering price (known as the "reduced price"), with an exception to permit sales to a person to which the broker has or will provide research (provided that the purchaser pays the stated public offering price and the research falls within Section 28(e)3)(A) of the '34 Act;

2. Incorporate the standards of Rule 2730 by defining a "reduced price" to include any purchase of - or arrangement to - purchase securities from a person at more than the fair market price in exchange for securities in the offering; and

3. Modify the prohibition in Rule 2750 on sales to "related persons," by permitting a member of the selling syndicate to sell securities to an affiliate, subject to compliance with FINRA Rule 5130 (ie. IPOs) and that any other transactions between the broker and the affiliate unrelated to the sale or purchase of securities in a fixed price offering are part of the normal and ordinary course of business (i.e., thereby avoiding the recapture of the selling concession through the affiliate as intended to be prevented by the existing rule).

On Wednesday, FINRA withdrew its '04 proposal that would have clarified the application of then-Rule 2710 to shelf offerings. Note that the '04 proposal remains useful as a resource regarding the standards for the current Form S-3/F-3 shelf offering exemptions and the views of the FINRA Staff on the calculation of underwriting compensation for such offerings.

FINRA Officially Creates the "Limited Representative - Investment Banking"

Back in April, I blogged about the SEC approving FINRA's rule change that creates a new limited representative category - Limited Representative-Investment Banking - for persons whose activities are limited to investment banking, including those who work on the equity and debt capital markets and syndicate desks. On Wednesday, FINRA issued this regulatory notice creating the mandatory registration regime - effective November 2nd - and the SEC issued this order.

Poll: The SEC and Bank of America Settlement

Take a moment to participate in this anonymous poll:

- Broc Romanek

August 6, 2009

Treasury's Mark Iwry to Speak

We're very excited to announce our speakers for the "6th Annual Executive Compensation Conference" that will be held at the San Francisco Hilton and via Live Nationwide Video Webcast on November 10th.

The All-Star cast includes:

- Treasury's Mark Iwry, Senior Advisor to Secretary Geithner
- RiskMetrics' Pat McGurn and Martha Carter
- NY Times' columnist Joe Nocera
- Noted counsel John Olson and Marc Trevino
- Renowned consultants Fred Cook, Ira Kay, Mike Kesner, Doug Friske, James Kim and Don Delves
- Panel of respected Directors
- Investor advocates Ed Durkin, Meredith Miller and Paul Hodgson

Now that Congress is moving on say-on-pay (and other compensation-changing initiatives), you need to register now to attend our popular conferences and get prepared for a wild proxy season. Remember that the "6th Annual Executive Compensation Conference" is paired with the "4th Annual Proxy Disclosure Conference" (held on 11/9) - so you automatically get to attend both Conferences for the price of one. Here is the agenda for both Conferences.

Act Now: Register now to attend live in San Francisco or by video webcast. If you can't make these dates, note that both Conferences will be available through a video archive.

SEC Enforcement Staff Gains Authority to Issue Subpoenas Without Commission Blessing

As noted by this Reuters article, SEC Enforcement Director Rob Khuzami delivered a speech yesterday about his first 100 days in the job (the text of the speech is not yet available). Rob said that the SEC plans to issue more subpoenas and give people more incentives to cooperate with investigations. Based on the article, here are the speech's highlights (most of which SEC Chair Schapiro had already announced):

- Yesterday, the SEC adopted final rules that provide the Enforcement Staff with the power to issue subpoenas by getting approval only from supervisors, not the full Commission - this will make it much faster and easier to get formal orders. Rob said that the increased subpoena power may induce companies to be more aggressive in addressing wrongdoing to avoid "the necessity" of a subpoena. Some companies do not disclose SEC probes before subpoenas are actually issued.

- The SEC has plans to seek authority to submit more immunity requests to the Justice Department to encourage people to testify without fear of criminal prosecution.

- The SEC plans to create new groups to investigate cases involving asset management, foreign corrupt practices, market abuses, municipal securities and public pensions and structured products. One group already exists to investigate subprime mortgage abuses. Management will be streamlined.

- The SEC plans to create a new office to monitor incoming tips and complaints and hire its first chief operating officer to boost efficiency and speed the reimbursement of funds to harmed investors.

- The Enforcement Staff will need Rob's permission for "tolling agreements" that give them more time to conduct investigations. He said these have become too common, causing delays that reduce the SEC's accountability.

Another Sign of the Times: Birth of the "Investors Working Group"

Recently, it was announced that over 50 investor groups had joined to form the "Investors Working Group," a group co-sponsored by the Council of Institutional Investors and the CFA Institute Centre for Financial Market Integrity. The group aims to lobby Washington over how to deal with the financial crisis and the co-chairs are two former SEC Chairs, Arthur Levitt and William Donaldson. Here is the related press release - and here is their initial report recommending a host of regulatory reforms.

This comes on top of the SEC's new "Investor Advisory Committee" and new attempts to join investors together through social media...

- Broc Romanek

August 5, 2009

Dissecting the SEC's Enforcement Numbers - and Its Fines

With the SEC bringing this accounting fraud case against General Electric yesterday - costing the company a fine of $50 million - it's clear that the SEC's new aggressive approach to Enforcement is in full-gear with a trio of high-profile cases during the past two weeks (note that it's likely that some - if not all - of these cases were commenced under the prior SEC Chair's watch).

This case follows the Bank of America settlement, which cost that company a fine of $33 million. Some have complained that $33 million was too small an amount. I had the opposite reaction, that's a large amount for a mere one-time disclosure violation allegation. Bear in mind that yes, Rule 14a-9 is an anti-fraud rule - but it's a "non-scienter" fraud provision, so there is no requirement for intent or knowledge of wrongdoing. As a result, penalties often are pretty small - in fact, I recall that many cases are often settled with a C&D order and no fine at all (eg. GE's "disclosure of perks" settlement with the SEC in '04). Note the third in the trio is the CSK Auto clawback action.

These cases follow SEC Chair Schapiro's comments back in April about overhauling the approach that the SEC's Enforcement Division will take when considering which cases to pursue. We have posted memos regarding the SEC's new settlement policy, etc. in our "SEC Enforcement" Practice Area.

As is true often in life, sometimes quantity is confused for quality - and the consequences can be disastrous. In Enforcement's case, the Division's former goal seems to have been a high number of cases brought (undoubtably to impress Congress, whose focus likely would be on numbers come funding time) - so low-hanging fruit often was pursued at the cost of not tackling some important cases (eg. Madoff). It sounds like that will now change.

I personally haven't done the math for Enforcement's reported caseload over the years - but a member recently sent me these thoughts:

I am very skeptical of the Enforcement numbers. Specifically, the SEC's delinquent filing list recently constitutes a couple hundred each year. The delinquent filing list had 220 for fiscal '08.

Enforcement claimed 671 completed actions in fiscal 2008. How many delinquent filing cases are included in this total? The entire group of 220? In comparison, the SEC listed only 11 delinquent filer cases in fiscal '03. If the improvement in Enforcement's number of cases over the past five year is due solely to delinquent filers, I think this fact pattern in problematic given that delinquent filings really isn't fraud and simply requires the Staff to send out letters asking the company when they intend to become current.

This thought is not far from what Judith Burns of Dow Jones wrote in an article last Fall. Here is an excerpt from that article:

The Securities and Exchange Commission's enforcement division brought a near record level of cases in the just-ended 2008 fiscal year, results that critics say are padded with relatively easy actions against companies that are late in filing quarterly or annual reports.

SEC Chairman Christopher Cox heralded the results Wednesday, calling fiscal 2008 the enforcement division's second-best on record. That would put the total between the 656 enforcement cases brought in fiscal 2007 and the record 679 actions in fiscal 2003, the agency's high-water mark. The SEC is expected to issue official figures within weeks.

Critics say the results are inflated by a record number of so-called 12(j) actions to deregister shares in companies that lack current financial reports. The SEC brought about 50 such cases in fiscal 2006, a level that appears to have doubled in fiscal 2008, which ended Sept. 30, accounting for roughly 15% of all cases.

Individuals familiar with the matter, who agreed to speak anonymously, said that in early 2008 the SEC's enforcement division was on track to bring an abysmally low number of cases for the year. One reason for the declining output was a rush to issue cases at the end of fiscal 2007, leaving little in the pipeline for fiscal 2008, according to these individuals.

Delays in getting cases before by the five-member commission also are a factor, these individuals say. Critics say new internal controls and paperwork requirements are throwing sand in the enforcement division's gears, reducing the amount of time that SEC cops have to spend on legwork.

Deregistration actions provided easy filler, allowing the SEC to paint a picture of an aggressive enforcement staff, according to critics. Some decry the practice, saying the cases need to be brought, but should not be counted toward overall output. Others worry that the SEC is using accounting tricks, sending the wrong message to corporate America: do as I say, not as I do.

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

Recently, I blogged about the SEC's mandatory XBRL deadline and the mismatch caused by the FASB's new codification of accounting standards that was launched on July 1st (which becomes effective on September 15th) since all of the mandated XBRL standards are tied to the FASB's now-superseded standards.

Yesterday, an extension taxonomy was jointly released by the FASB and XBRL US that is intended to bridge the GAAP between the old references and the codification. It's a start, but Neal Hannon notes that the new codification references will not be accepted by the SEC's EDGAR. So the mismatch problem still remains.

Neal points out another disconnect:The new extension taxonomy provides pointers only to the public sections in the Codification. In other words, if you are in an XBRL tool - which nearly all folks will be when working with XBRL - and want to see the authoritative literature, the hyperlink takes you out of your XBRL software and asks you to log into the FASB Codification to see the results. This is a major pain - but should eventually be rectified in the SEC's next release of the taxonomy, slated for sometime early next year. In the meantime, those looking to discover a direct link from XBRL elements to the underlying authoritative literature will have to do a bit of discovery work on their own...

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:

- Some Thoughts on Board Leadership Disclosure
- Rights Offerings: How Does the "European" Model Stack Up?
- Very Candid Disclosure: From the Company that Brought You "Dead Frogs"
- Carbon Emission and Cap Disclosures: Likely to Come Soon
- Managing Your Law Department: Top Ten Thoughts
- List of Online Job Databases
- The Kiss of Death: "Best of..."
- Regulation FD: When Does Information Become "Public?"

- Broc Romanek

August 4, 2009

Corp Fin Deputy Director Shelley Parratt to Speak!

We're very excited to announce that Corp Fin Deputy Director Shelley Parratt has joined our All-Star cast and will serve as the keynote for our "4th Annual Proxy Disclosure Conference."

Now that Congress is moving on say-on-pay (and other compensation-changing initiatives), you need to register now to attend our popular conferences and get prepared for a wild proxy season. Remember that the "4th Annual Proxy Disclosure Conference" is paired with the "6th Annual Executive Compensation Conference" - so 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 Conferences. Register now.

SEC Settles Charges that BofA Failed to Disclose Merrill Lynch Bonus Payments

As noted in this press release, yesterday, the SEC settled charges that Bank of America misled investors about the bonuses paid to Merrill Lynch executives at the time of its acquisition of the firm. Bank of America agreed to settle the SEC's charges and pay a penalty of $33 million. Here is the SEC's complaint - and here is the litigation release.

The SEC alleges that in the joint merger proxy statement, Bank of America stated that Merrill had agreed that it would not pay year-end performance bonuses or other discretionary compensation to its executives prior to the closing of the merger without Bank of America's consent. In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008.

Note that New York Attorney General Cuomo announced that his investigation was continuing - so this saga may not be over...

Broadridge Speaks on Latest E-Proxy & Proxy Season Stats

Recently, I blogged about Broadridge's release of data regarding the latest proxy season. Now, I've caught up with Lyell Dampeer, President of Broadridge Financial Solutions, to ask him a few questions in this podcast including:

- What were the e-proxy statistics for this past proxy season?
- What should companies be thinking about for next proxy season?
- How did the other proxy season statistics look?

- Broc Romanek

August 3, 2009

House Passes "Say-on-Pay" Bill (Again): The Recap

On Friday, the House passed H.R. 3269 "Corporate and Financial Institution Compensation Fairness Act of 2009," which is Rep. Barney Frank's latest version of a say-on-pay bill, mostly along partisan politics lines by a vote of 237-185. This follows the marked-up version of the bill that the House Financial Services Committee passed on Tuesday. There are notable differences between what the House passed and the language that the Obama Administration (through the Treasury Department) recommended in June.

Two years ago, the House passed a different say-on-pay bill by a vote of 269 to 134 (afterwards, then-Sen. Obama floated the same bill in the Senate but it never went anywhere). The Senate is not expected to consider similar legislation until sometime after the August recess - and it's expected that there will be a tougher battle in the Senate over the bill's terms.

Here is a final version of the bill. And here is the House Financial Service Committee's marked-up version of the bill (with the only reported major change being the clawback reversal noted below) - and here is that Committee's report.

Below are key provisions of the bill's three major components, with commentary gleaned from a variety of sources:

1. Say-on-Pay: Section 2

- Likely Not Applicable to '10 Proxy Season - Effective date for this Section is six months after SEC adopts rules implementing this Section; and the SEC is directed to adopt rules within six months of enactment of the bill into law. The upshot is that say-on-pay is not likely to be applied to the '10 proxy season, but perhaps could be effective later in 2010. Treasury's recommendation was to adopt something before the '10 proxy season.

- FPIs Excepted - No Triennial Alternative - Requires annual non-binding vote on disclosure of executive compensation arrangements and "golden parachutes"; mark-up clarified that neither applies to foreign private issuers. Note that the idea of a triennial vote (ie. Carpenters Union's alternative) was considered during the mark-up but defeated.

- SEC Might Exempt Small Businesses - Gives authority to the SEC to exempt certain types of companies from say-on-pay; SEC might use this to exempt smaller businesses. Treasury recommendation didn't address this topic.

- Investment Managers Report How They Vote - Requires certain types of investment managers to report annually how they voted on say-on-pay at the companies for which they own at least $100 million of their equity at some point during the preceding 12 months. Treasury recommendation didn't include this likely-to-be controversial item.

- No Tabular Format for Golden Parachute Disclosures - For say-on-pay on golden parachutes, tabular format eliminated during mark-up; and mark-up clarified that golden parachutes previously approved by shareholders must be disclosed, but need not be voted upon again. I can't figure out why tabular disclosures were dropped - in my opinion, dropping it was not a good idea.

- Clawbacks Still Possible Even If Shareholders Approve Compensation - The mark-up had produced an amendment that would have prohibited clawbacks of compensation arrangements that had approved by shareholders - the only amendment made to the marked-up bill on Friday was striking this new provision. So under the bill approved by the House, clawbacks are still possible even if the compensation disclosure has been approved by shareholders.

2. Compensation Committee Independence: Section 3

- Even Longer Effective Date - The exchanges (as directed by the SEC) wouldn't be required to adopt listing standards to implement this Section until 9 months after the bill was enacted.

- Compensation Committees Must Be Independent - The thrust of this section is to have independent compensation committees (although mark-up eliminated requirement that comp committee members not be "affiliated persons"). Some of the more controversial aspects of the Treasury's recommendations were reined in by the House bill, as noted below.

- SEC Might Exempt Small Businesses - Gives authority to the SEC to exempt certain types of companies from this Section; SEC might use this to exempt smaller businesses. Treasury recommendation didn't address this topic.

- No Need to Disclose Why Didn't Hire Compensation Consultant - During the mark-up, the requirement to provide potentially embarrassing disclosure regarding why a compensation committee didn't hire a consultant was struck. However, companies would be required to provide funding for compensation consultants (as well as lawyers) if the compensation committee wanted to hire one.

- Compensation Consultants Must Be Independent - The SEC must adopt independence standards for compensation consultants. The mark-up clarifies that these standards must be competitively neutral.

- Lawyers Need Not Be Independent - During the mark-up, the requirement for the compensation committee's counsel to meet independence standards was eliminated.

- SEC's Study - Within two years, the SEC must provide a study regarding the impact of its new independence standards to Congress.

3. Regulation of Compensation at Large Financial Institutions: Section 4

This Section would regulate pay at large financial institutions - those with more than $1 billion in assets - particularly their incentive-based pay packages. It would require federal regulators to prohibit "certain compensation" structures at large financial institutions if they could have a "serious adverse effect on financial stability." It would also require federal regulators to adopt rules requiring these institutions to disclose their incentive-based pay plans for executives and employees - and then the regulators would determine if the pay packages are "aligned with sound risk management."

This is quite a controversial Section (eg. the issue of whether the government can abrogate a private contract) - and it was not part of the Treasury's recommendations. I would be surprised to see this Section survive the Senate, even with all the public anger over Wall Street bonuses. This recent Bloomberg article notes skepticism over this Section expressed by the Obama Administration and some Senators.

There is a hodge-podge of other provisions in the bill. One example is a GAO study of the correlation between compensation structure and excessive risk-taking. Note that the foregoing recap is subject to the caveat that we haven't yet seen the final bill as adopted.

A First: Shareholders Approve American Railcar's Reincorporation to North Dakota

The stockholders have spoken at American Railcar. As I blogged a while back, Carl Icahn owns a majority stake in this company and management proposed the reincorporation to North Dakota. According to this Form 8-K recently filed by the company, it's now a North Dakota corporation governed by the North Dakota Publicly Traded Corporations Act.

In comparison, a similar reincorporation proposal at Biogen didn't fare too well with that company's shareholders (as I blogged last month, about a dozen companies received shareholder proposals seeking reincorporation to North Dakota - so these proposals were not management-driven like American Railcar's). According to this Form 8-K, Biogen shareholders cast 23 million votes "for" and 213 million "against" the reincorporation proposal. So Biogen remains a Delaware corporation. Thanks to Keith Bishop for giving me a "heads up" on these...

Our August Eminders is Posted!

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- Broc Romanek