December 31, 2009

Please Abide in the New Year: "The Dude" Will...

- "This aggression will not stand, man" - "The Dude" from "The Big Lebowski"


- Broc Romanek

December 30, 2009

Some Fun Stuff to End the Year: Cheese v. Font

Built in the same simple format as our own "Blue Justice League," I love this casual game - "Cheese or Font" - where a name pops up and you need to click on whether it's a type of cheese or font. If you want to play something more "legal," our "Blue Justice League" competition still goes on. It remains the only casual game for lawyers I've seen online.

This new "Alice in Wonderland" trailer starring Johnny Depp looks awesome.

An Inspirational Site for the New Year

My college bud, Dino, turned me onto this inspirational site: "The Fun Theory."

Second Circuit: Investor Ceased to be 10% Owner 26 Minutes Before Purchase

Below is a new entry from Alan Dye on his " Blog":

In December of last year, I blogged about Donoghue v. Corp., 2008 WL 4539487 (S.D.N.Y.), in which the court held that an alleged ten percent owner's simultaneous purchase and sale of issuer securities at 4:32 p.m. on August 1, 2007 were not subject to Section 16(b) because the issuer had issued common stock to a group of third party investors 26 minutes earlier, diluting the former ten percent owner's ownership to 9.75%. The Second Circuit has now affirmed that decision. 2009 WL 4640653 (2d. Cir.).

The case involved a purchase of common stock and warrants by Hearst Communication, Inc., pursuant to a stock purchase agreement executed in February 2007, as a result of which Hearst became a ten percent owner subject to Section 16. The stock purchase agreement prohibited from selling any additional shares of common stock for the next 90 days without Hearst's written consent. Within that time, entered into an agreement to sell common stock to a group of third party investors. One of the conditions to closing was that obtain all required consents to the transaction. Hearst agreed to consent to the transaction if would reduce the exercise price of Hearst's warrants by $0.50 a share, provided that filed a Form 8-K disclosing the terms of the consent by 5:00 p.m. on August 1, the date of closing.

Here is the sequence in which the pertinent closing events occurred:

- 12:46 notified its transfer agent to prepare the stock certificates to be delivered to the new investors, but to wait for final approval before releasing them

- 4:06 p.m.--the new investors wired payment for their shares

- 4:32 filed the Form 8-K disclosing Hearst's consent

- 4:45 instructed its transfer agent to release the stock certificates

Once the new shares were issued to the third party investors, the number of shares outstanding was sufficient to dilute Hearst's ownership to below 10%. The question was whether the warrant amendments, which the plaintiff alleged constituted a cancellation and re-grant (an issue the court found it unnecessary to address), occurred before or after the new shares were outstanding.

The Second Circuit affirmed the district court's holding that the private placement shares were issued and outstanding at 4:06 p.m., when received payment for the shares. This was a case that could have gone either way, based on the technicalities of the closing conditions, but the outcome is appropriate and clearly supportable.

- Broc Romanek

December 29, 2009

Baker v. Goldman Sachs: The Hazards of Advising a Private Company

Below is a blog written by John Jenkins of Calfee Halter & Griswold from earlier this year:

Investment banks spend a lot of time tailoring their M&A engagement letters to address the perceived risks involved in advising widely-held public companies. Those engagements are often perceived as presenting greater liability risks than M&A advisory engagements for private companies, and that's probably true most of the time, but a recent Massachusetts federal court decision provides a sobering reminder to investment banks that this isn't always the case.

What's more, the Baker v. Goldman Sachs case - here is the opinion - also shows how some of the provisions of an engagement letter designed to protect bankers in public company deals can under certain circumstances have the opposite effect in a private company transaction.

The Baker case arose out of Goldman's service as a financial advisor to Dragon Systems, Inc. in connection with its ill-fated sale to Lernout & Hauspie Speech Products, a Nasdaq-listed Belgian company that collapsed in the aftermath of an accounting scandal that surfaced shortly after the deal was completed. L&H acquired Dragon in an all stock deal, and the buyer's subsequent collapse resulted in a loss to Dragon's controlling shareholders of approximately $300 million.

Dragon's two controlling shareholders filed a lawsuit against Goldman Sachs and related entities. The plaintiffs alleged that Goldman Sachs negligently advised Dragon to merge with L & H without adequately investigating the buyer's value. The plaintiffs made a variety of contractual and other common law claims, including breach of fiduciary duty and negligent misrepresentation, and also alleged that Goldman's conduct violated the Massachusetts Unfair Trade Practices statute.

With the exception of the novel statutory claim, most of the plaintiffs' claims were consistent with what you typically see in investment banker liability cases. The most common legal theories used to sue bankers are the tort of negligent misrepresentation, and breach of contract claims premised on agency or third-party beneficiary principles. More recently, breach of fiduciary duty claims have become more prominently featured as well. With some high profile exceptions, investment bankers have generally been pretty successful in defending against these claims.

Plaintiffs relying on negligent misrepresentation or contract law principles premise their claims on allegations that they were intended beneficiaries of the contractual relationship between the banker and the company, and were thus entitled to rely upon the banker's efforts. Since these claims depend on the contractual relationship between the bank and its client, investment bankers' engagement letters have played a prominent role in their efforts to fend off such claims. Those letters typically include very specific statements about the parties to whom the investment bank is providing its services, together with broad disclaimers of liability to corporate shareholders or other third parties.

Interestingly, Goldman's engagement letter with Dragon included customary language intended to accomplish this objective. The letter explicitly stated that "any written or oral advice provided by Goldman Sachs in connection with our engagement is exclusively for the information of the Board of Directors and senior management of the Company." What's even more interesting, however, is that the plaintiffs were able to use this language as the basis for their third party beneficiary and negligent misrepresentation claims.

What the plaintiffs did was to simply point out to the court that one of the two controlling shareholder-plaintiffs was a member of the Board, and was thus within the group entitled to the benefits of the agreement. Goldman argued that in using the quoted language, it was referring to the board in its representative capacity. However, the court looked at some other potentially ambiguous phrasing in the engagement letter, including the fact that the letter was addressed to the shareholder-director and the letter's use of the personal pronoun "you" instead of "the company" in describing the persons to whom it was providing its services, to justify its conclusion that Goldman appreciated that others aside from the board in its representative capacity would benefit from its advice.

The treatment of the plaintiffs' fiduciary duty claim is another area where the Company's closely-held nature appears to have played a significant role in the court's analysis. While the fact that the engagement letter did not include a disclaimer of fiduciary duties played an important role in the court's decision not to dismiss these claims, the close contact that Goldman allegedly had with the plaintiffs throughout the course of the engagement was another important factor in leading the court to conclude that the plaintiffs sufficiently alleged that "special circumstances existed to create a fiduciary relationship apart from the terms of the contract."

It is important to keep in mind that Baker involved a motion to dismiss, so this litigation is at a very preliminary stage and it is inappropriate to draw broad conclusions from it. Nevertheless, the Baker case drives home the point that although the risk profile in engagements involving widely-held public companies may generally be higher than private company engagements, private companies (and public companies with controlling shareholders) present distinct risks of their own that banks may want to take into account in drafting and negotiating engagement letters.

SEC Approves PCAOB's 2010 Budget

Last week, the SEC issued this order approving the PCAOB's budget and annual support fee for '10. The PCAOB received a 16% increase for its 2010 budget, from $157.6 million to $183.3 million (raising the Staffing level to 636). The order includes three specific measures that the PCAOB should address during the year - one of which is that the PCAOB should consult with the SEC about any "plans to implement changes in response to legislative actions." Between an active Congress and the pending Supreme Court case, it should be an interesting year for the PCAOB...

- Broc Romanek

December 28, 2009

The Pink Car Problem: When Does "Average" Not Exist?

Taking it easy this week and re-running some of the best entries recently posted on some of our other blogs. This first one comes from Fred Whittlesey of the Hay Group. It ran on's "The Advisors' Blog" earlier this month:

A company's Compensation Committee decided to provide the CEO with a company car and asked what color car he wanted. The CEO wanted to ensure that his choice of color was consistent with market norms so he asked the HR department to research the car color of the CEOs of its ten peer companies.

The results were presented to the CEO, indicating that, on average, CEOs in the peer group drove a pink car. The CEO, who knew his peer CEOs well, commented that it was hard for him to believe that so many CEOs were driving pink cars (given the absence of any multi-level cosmetics marketing organizations in their peer group.) "Is that the average or the median?" he asked. "Both the average and the median are pink" was the reply. He asked to see the raw data which indicated that five of the CEOs drove a red car and the other five a white car.

Is this a silly parable? Would such a simplistic analytical shortcoming really occur? I recently spoke with the head of compensation for a technology company who was questioning the data for their peer group data cut from a well-known survey. The data indicated that equity grants at the executive level among the peer group companies were averaging a mix of 50% stock options and 50% RSUs. His anecdotal knowledge of the peer practices made him feel that this couldn't possibly be correct. When the raw data was examined, however, it turned out that only two of their 20 peers had an options/RSU mix near the 50/50 average. Nine were granting all or almost all (80% to 100%) options and the other nine were granting all or almost all (80% to 100%) RSUs. The pink car problem.

At a time when more individuals and organizations than ever are collecting, analyzing, and opining on executive pay levels and practices, it is critical that the underlying data be collected, analyzed, and reported correctly. Could the CEO have identified the pink car problem without access to raw data? Of course. Simply looking at the 10th, 25th, 75th, and 90th percentiles would have told the story. And when n=10 (or any even number), after all, the median is a computed number in a spreadsheet. While "ratcheting" to the median is an oft-mentioned flaw with the benchmarking process, summary statistics can contribute to flawed decision-making even absent any such intent.

The three-legged analytical stool of collection, valuation, and reporting of data needs to receive more integrated attention. Accurate collection has been made more difficult over the past 18 months due to the prevalence of "special actions" taken during the economic crisis. Valuation continues to be a challenge as experts continue to disagree on how to measure pay. The reporting of pay reflects the turmoil in collection and valuation, sometimes exacerbated by the media. Compensation professionals cannot assume that push-button data provides the answer - that data only provides a starting point for questions.

In my next blog posting, I will provide an illustration of another variant of the Pink Car Problem which created a recent headline indicating that a CEO's pay was "cut by about half." (the perceived difference was not "about half" and pay was not "cut.")

SEC's IM Division Issues FAQs on Effective Date of New Rules

Last week, the SEC's Division of Investment Management issued their own set of FAQs regarding the effective date of the new proxy disclosure enhancement rules as they apply to registered investment companies (Corp Fin had released their own set that apply to public operating companies).

- Broc Romanek

December 23, 2009

The New Rules: Corp Fin Issues CD&Is as Transitional Guidance

Yesterday, Corp Fin issued five new Compliance and Disclosure Interpretations to deal with some of the transitional issues posed by the February 28th effective date of the new executive compensation and proxy disclosure enhancement rules adopted last week, thereby tackling the "big question" that I blogged about last week. Learn more in Mark Borges' "Proxy Disclosure Blog."

Our Practical Guidance to Help Implement the New Rules

As all memberships expire in a week, you need to renew for this site (and our other publications) now to obtain practical guidance on how to comply with the SEC's new rules. We have two companion webcasts lined up for just after the new year begins - we pushed up our webcast to January 7th - "The Latest Developments: Your Upcoming Compensation Disclosures - What You Need to Do Now!" - featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller.

And to handle the other new SEC rules that don't deal with compensation issues, we have a webcast on - "How to Implement the SEC's New Rules for This Proxy Season" - featuring Marty Dunn, Amy Goodman, Ning Chiu, Howard Dicker and Dave Lynn to be held on January 6th. Renew for both sites now (or try a no-risk trial if you are not a member).

Sample D&O Questionnaire Items

In response to the SEC's new rules, Dave Lynn and Mark Borges are drafting up the new items you will need now in your D&O questionnaire as part of the Winter issue of "Proxy Disclosure Updates," which will be delivered just after the new year begins. This issue will not just rehash the new rules - it will provide practical implementation guidance.

Remember that "Proxy Disclosure Updates" is a quarterly publication that is part of Lynn, Borges & Romanek's "Executive Compensation Service (which includes the just-completed 2010 Executive Compensation Disclosure Treatise in both hard-copy and online on Try a no-risk trial now to obtain this important issue hot off the press when it's done...

- Broc Romanek

December 22, 2009

SEC Proposes Changes to Help WKSIs During Offerings

Even though the federal government was closed due to snow, the SEC issued a proposing release yesterday to amend Rule 163(c) so that it would allow a WKSI to authorize an underwriter to act as its agent to communicate about an offering before filing a registration statement (the press release came out a day later).

As noted in the release, the purpose of the proposed amendment is to remove some impediments to capital-raising since not as many WKSIs have automatic shelfs (or shelfs that don't include all the types of securities the issuers may decide to offer) - this proposal would allow WKSIs to gauge investor interest without revealing confidential information about the issuer's capital-raising plans.

PCAOB Reproposes Risk Assessment Standards

Last week, the PCAOB voted to repropose seven auditing standards relating to risk assessment and the auditor's response to risk, including risk of fraud. Learn more from FEI's "Financial Reporting Blog."

More on "The Mentor Blog"

We continue to post new items daily on our new blog - "The Mentor Blog" - for 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:

- Study: Larger Companies Less Likely to Have Independent Board Chairs
- Some Venture Capital Firms Lower Fees
- Launched: Google Scholar
- More On CalPERS and Placement Agents
- IROs: Use Single Investor RSS Feed
- FINRA's "Social Networking Task Force"
- Promoting Issuer Stock on Product Labels
- Should Brokers Really Be Treated Like Advisers?
- Alan Dye's Latest Thoughts on NY's Power of Attorney Law
- Shareholders: Part of the Solution or Part of the Problem?
- Life Balance Issues for Executive Spouses

- Broc Romanek

December 21, 2009

How to Fix Executive Compensation: November-December Issue of The Corporate Executive

We just mailed the November-December Issue of The Corporate Executive, which includes a comprehensive recap of important things said at our recent "6th Annual Executive Compensation Conference," among other things:

- Treasury Speaks about Executive Pay
- Consultant Independence and Accountability
- Fixing Benchmarks and Internal Pay Equity
- Say-on-Pay and Plan Design
- Risk Assessment & Pay
- What Compensation Committees (and Consultants and Counsel) Should Now Be Doing
- Hold-Through-Retirement and Clawbacks
- How to Implement Say-on-Pay Successfully
- SEC Staff: No More "Free Passes" on Material Noncompliant Disclosure
- One Final Reprieve on Section 6039 Returns--And Our Guidance
- Trap for the Unwary: Grant Date Under Section 423
- Section 162(m): The Buck Stops Here

Act Now: As all subscriptions expire in two weeks, please renew now for 2010 - or try a no-risk trial if you are not yet a subscriber.

What is the "Shareholder Communication Coalition"?

Recently, a mailing by the Shareholder Communication Coalition to the CEOs of the S&P 500 - asking for general support on proxy plumbing issues - led a number of members to ask me for more information about this organization. In this podcast, I caught up with Niels Holch, Executive Director of the Shareholder Communications Coalition, to learn more about the activities of the Shareholder Communication Coalition, including this white paper that outlines the Coalition's recommendations for reforming the proxy voting and shareholder communications system:

- What is the Shareholder Communication Coalition? How - and why - was it formed?
- What has been its focus to date? Can you tell us about the letters that some CEOs recently received?
- Any other activities on the near horizon?
- How can members of the associations involved in the Coalition give their input to the Coalition? Where can people sign-up for email alerts to keep up with Coalition activities?

SEC's Rating Agency Regulatory Scheme Heighten Risk of Insider Trading

You can't imagine how difficult it is to draw up rules and cover all the possible implications until you try it yourself. There is always some unintended consequence hiding around the corner. That's why federal agencies are required to allow the public to comment on proposed rules.

A few months ago, Floyd Norris nailed what he thinks is a crucial flaw in the SEC's attempt to regulate the rating agencies in this column. Here is an excerpt from that column:

It did that in the name of reforming the credit rating agency system. The new rule shows the dangers of trying to solve one problem without thinking about others. At the heart of the problem is that it is legal for companies and other issuers of securities to give confidential information to rating agencies. Back before the crisis, the fact the agencies had access to such information served to enhance the respect given to their opinions.

Now we know that the major rating agencies -- Standard & Poor's, Moody's and Fitch -- disgraced themselves in rating structured finance products. They relied on bad assumptions, and in some cases may have been lied to by issuers. Their models turned out to be spectacularly wrong. A lot of people think a root cause of the problem was the conflict of interest created by the fact the agencies were paid by the creators of those products, and therefore were dependent on their good will for additional business.

But regulators are unwilling to outlaw the old system, in part because that would leave investors without access to ratings unless they paid for them. So the solution chosen by the S.E.C. is to encourage other rating agencies to rate the products. The rule adopted last week says that whatever information is given to the agency hired by the issuer to rate the structured finance security must be given to other rating agencies, including those that provide analyses only to investors who pay for them.

The result will be that analysts for the other rating agencies, like Egan-Jones Ratings, will have access to information not available to the general public, and their analyses will go only to clients. Those clients will have the benefit of nonpublic information, or at least of their agent's analysis of what it means.

- Broc Romanek

December 18, 2009

Should Congress Be Allowed to Engage in Insider Trading?

With insider trading so much in the news lately, it's worth recalling that back in the summer there was a fuss that members of Congress are permitted to trade with knowledge of nonpublic information (see this recent WaPo article). In fact, there was even a "Stop Trading on Congressional Knowledge Act" bill floated to close the "loophole" that allows members of Congress to trade even when they have access to nonpublic information. I am told that this is not the first time that efforts have been made to change the ethics rules and hold Congress to more of a corporate standard.

Hearings were held in July on this topic, as noted in this article (and here is the testimony given) - but I don't believe the bill has gone anywhere since. has a resource page about whether insider trading by Congress should be allowed.

The SEC's Enforcement Division continues to track down bankers and lawyers who are engaging in insider trading. For example, see this recent action against a former law firm lawyer - and this new one against some bankers.

New SEC Filing Fees: Effective on Monday

On Wednesday, President Obama signed the government's appropriations bill that includes funding for the SEC. As a result, as noted in this SEC advisory, the new registration statement fee rates take effect as of Monday. As announced a while back, the fee rate will increase to $71.30 per million dollars from $55.80 per million, a 28% hike.

More on our "Proxy Season Blog"

With the proxy season now looming in many of our minds, we are posting new items regularly on our "Proxy Season Blog" for 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:

- RiskMetrics' 2009 Proxy Season Scorecard
- Remuneration Reports Receive More Dissent in Australia
- Study: "Private Ordering" is Not a Viable Alternative to Proxy Access
- Walden Asks Broadridge Not to Eliminate In-Person Shareholder Meetings

- Broc Romanek

December 17, 2009

SEC Adopts New Executive Compensation Rules - and Posts Adopting Release!

Not only did the SEC adopt new proxy disclosure enhancement rules yesterday at its open Commission meeting, it actually posted the adopting release later in the day (a same-day practice that the PCAOB follows often). Here is the SEC's press release - and the SEC Chair's opening statement. We are posting memos regarding these new rules in our "Law Firm Memos" Portal, with a direct link to these memos from our "Hot Box" on the home page.

The Big Question: When Do the SEC's New Rules Take Effect?

The reason for the hurry is simple - these new rules apply to the coming proxy season as they are effective February 28th. My guess is that the effective date is pushed out so far because a "major" rulemaking requires a 60-day waiting period before implementation - and perhaps the SEC has deemed this a "major" rulemaking (or the OMB forced that determination upon the SEC). The "major rule" determination comes out of SBREFA - the "Small Business Regulatory Enforcement Fairness Act."

Unfortunately, the SEC barely addressed the issue of compliance dates during its open Commission meeting - and then continued to be opaque in the adopting release (the release says nothing about effective dates other than the February 28th date on the cover). During the course of yesterday, I easily received over 100 emails and calls on this topic and continue to do so. So I imagine Corp Fin is receiving many more.

We are assuming that the February 28th effective date applies to the filing of proxy statements, not the annual meeting dates. Since there is no transition discussion in the adopting release (as Mark Borges has blogged), I'm not sure how this effective date applies to preliminary vs. definitive proxy statements for those that straddle both sides of this date. Or what about companies that file their Form 10-Ks in early February who decide to include the Part III information when they file? If you decide to voluntarily comply beforehand, do you also need to comply with the old rules (only issue is whether to use new or old SCT rules)? I'll update this blog as we find out more on this critical topic.

I know complying with these new rules is gonna be a real bear for those of you that need to revise D&O questionnaires - or send out supplemental ones - so we just pushed up our webcast to January 7th - "The Latest Developments: Your Upcoming Proxy Disclosures - What You Need to Do Now!" - featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller. And to handle the other new SEC rules that don't deal with compensation issues, we just announced a companion webcast on - "How to Implement the SEC's New Rules for This Proxy Season" - featuring Marty Dunn, Amy Goodman, Ning Chiu, Howard Dicker and Dave Lynn to be held on January 6th.

The Surprise: Disclosure of How Diversity Is Considered in the Director Nomination Process

Much of the SEC's rulemaking was anticipated (although the timing was feared - I bet more than one holiday plan has been ruined), but I'm not sure many expected the SEC to adopt its proposal to require disclosure of how diversity is considered in the director nomination process. I imagine boards will be adopting diversity policies in the very near future so that they have something to disclose...we'll be discussing this during our January 6th webcast.

More on "SEC Re-Opens Proxy Access Comment Period: What Does It Mean?"

Two days ago, I blogged about what the SEC's "re-opening" of the proxy access period might mean. I have been troubled by the possible conflicting meanings between what the SEC's press release on the matter says - and what is stated in the extension release.

And here is my conclusion after further pondering: the comment period is not really "re-opened," meaning that the SEC is not seeking hordes of new comment letters on its proposal. Rather, I think the SEC seeks something more limited in scope - they only want folks to focus on commenting on the "additional data and related analyses" (eg. costs) provided in the comment letters received so far, particularly these three from third-parties mentioned in the extension release:

- NERA's Report on Capital Formation Efficiency (starts at page 126) submitted by BRT
- BRT Study on "Why Some Banks Perform Better During the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation" submitted by the BRT
- Beth Young's "Private Ordering Study" submitted by The Corporate Library, CII and

The SEC also wants comments on this new study from its Division of Risk, Strategy & Financial Innovation regarding share ownership and holding patterns (the data was derived from Schedule 13Fs filed with the SEC).

So as strange as "commenting upon the comments" may seem, the SEC is probably trying to ensure it gets all the facts straight (and that its own study is officially in the rulemaking record) before it rulemakes in a very controversial area...

Poll: How Many Proxy Access Comment Letters This Decade?

Take a moment to participate in this anonymous poll about how many comment letters have been submitted to the SEC on its various reiterations of proxy access proposals since 2003 - the total does include form letters (I'll post the answer after the holidays):

- Broc Romanek

December 16, 2009

Dave & Marty on Shareholder Proposals, Staff Transparency and Muscle Cars

In this podcast, Dave Lynn and Marty Dunn weigh in on the latest developments regarding shareholder proposals and transparency of the SEC Staff's positions - as well as discuss muscle cars.

Speaking of Staff transparency, here are slides regarding areas of frequent comment from the Corp Fin Staff to financial institutions that were presented by the Staff at last week's AICPA Conference.

Another US Supreme Court Case: Conrad Black's Fraud

The day after I went to the Supreme Court, Conrad Black's fraud case came before SCOTUS as a test case to determine whether the "honest services" clause (ie. deprive[s] another of the intangible right of honest services) in the wire and mail fraud statute is so broad that it should be invalidated. Here is the transcript of that case's oral arguments - and here is a blog analyzing the arguments: " When Is Fraud Really Fraud? The Case of Conrad Black."

Canadian Securities Regulators Decide Not to Overhaul Corporate Governance Regime

Here is an excerpt from this Tory's memo: "Canada's securities regulators have decided not to proceed with the overhaul of our corporate governance regime proposed last December. The proposals would have introduced a more principles-based regime focusing on disclosure in relation to nine high-level corporate governance principles and eliminating the bright-line tests in the current definition of independence, leaving independence determinations to the reasonable judgment of the board of directors. In so doing, the proposals would have moved Canada's corporate governance regime further away from the U.S. regime, which focuses increasingly on mandatory requirements."

- Broc Romanek

December 15, 2009

SEC Re-Opens Proxy Access Comment Period: What Does It Mean?

Yesterday, the SEC issued this press release to extend the comment period on its proxy access proposal for another 30 days. The original comment period ended on August 17th.

For the most part, the press release seems like a formality since the SEC had previously announced back in October that it didn't intend to consider adopting final rules in this area until early next year. And the SEC regularly takes into consideration comment letters that come in after a comment deadline.

This action may mean absolutely nothing. Or maybe the SEC is being extra careful about meeting the dictates of the Administrative Procedures Act since litigation over this rulemaking has been threatened (and even stronger authority from Congress doesn't help with the APA). Or perhaps it signals some increasing willingness to consider an "opt out" - the related formal extension release lists four specific comment letters it has received as items that the public may wish to comment upon (as well as the other 500-plus comment letters received so far).

Or maybe this will set the SEC back even further on their rulemaking timetable for proxy access (even with a short 30-day comment period) - since it takes the Staff time to process new comment letters - and this would delay the SEC's consideration of these rules until legislation is passed providing stronger authority for their ability to rulemake in this area...

Proxy Access: Do You Need to Re-Submit Your Comment Letter?

For those that have already commented, you do not need to resubmit your comment letter - your existing letter is already on file and will be contemplated. However, the SEC is seeking comment on the letters already submitted - including the four noted in their extension notice - so if you feel strongly about this rulemaking, you may want to consider sending in new thoughts on those. But don't just submit the same letter you already submitted - that won't make you a fan of the Staff...

Factors to Consider Before Ordering a NOBO List

In this podcast, Rachel Posner of Georgeson digs into the intricacies of ordering a NOBO list, including analysis of the factors to consider when deciding whether to order one.

- Broc Romanek

December 14, 2009

House Passes "Wall Street Reform and Consumer Protection Act of 2009"

On Friday, the House of Representatives - by a vote of 223-202 - passed the "Wall Street Reform and Consumer Protection Act of 2009" (it appears that this will be referred to as the "Wall Street Reform Bill"). As I've blogged, this bill consolidates and revises numerous reform bills that have been introduced in the House this Fall (eg. Title I contains what was the Financial Stability and Improvement Act of 2009). As of the start of last week, there were 238 amendments offered to this bill.

I'm not convinced I've seen a final copy of the bill actually passed since so many amendments were at play. I believe its changed since this version that was floated heading into last week - but that old version is what is linked to from this press release announcing the passage of the bill. [I'll blog if a newer version becomes available]. We will be posting memos analyzing the bill in our "Regulatory Reform" Practice Area.

Now, the House bill will have to be reconciled with any financial reform legislation that emerges from the Senate. Senator Dodd introduced a reform bill a few months ago - but his bill has encountered opposition and remains in the Senate Banking Committee. Senate action is expected early next year and I imagine some of the House bill's provisions will not square with the Senate's version...

FEI's "Financial Reporting Blog" summarizes the accounting implications of this bill.

House Passes Internal Controls Relief for Smaller Companies

Among the numerous provisions of the House's reform bill is the Adler-Garrett amendment, which is a permanent exemption for small issuers (those with less than $75 million in public float) from the outside auditor attestation requirements of Section 404 of Sarbanes-Oxley (and have the GAO and SEC study enlarging the exemption for companies with a public float up to $700 million). On Friday, the House voted 271-153 against an amendment offered by Rep. Paul Kanjorski to remove the smaller company exemption.

Politics As Usual: A Poll on the House Bill

I chuckled when I read this quote from Rep. Nancy Pelosi about the House's action: "The legislation says very clearly to Wall Street: the party is over." It's clear that the bill will impact all of us in some way - it is quite comprehensive - but it's a falsehood to say the party is over. Hasn't she seen "Animal House"? Recall this quote from John Belushi's Bluto: "Over? Did you say "over"? Nothing is over until we decide it is! Was it over when the Germans bombed Pearl Harbor? Heck no!"

The Republicans issued this press release says this bill will destroy jobs and the economy. And see this press release from Rep. Barney Frank from before the House vote. The politics is at full throttle. But don't take my word for it, participate in this anonymous poll and weigh in:

- Broc Romanek

December 11, 2009

E-Proxy & Proxy Contests

Continuing our proxy solicitor podcast series, in this podcast, Scott Winter of Innisfree provides some insight into how e-proxy intersects with proxy contests, including:

- Can you provide an overview of how notice & access works in a proxy contest?
- How common is notice & access in a proxy contest?
- Will the proposed amendments to the notice and access rules increase use of notice & access by dissidents?
- Should companies or dissidents utilize notice & access in a proxy contest?

The SEC's E-Proxy Proposal: Comment Letter Fatigue Setting In?

With the deadline for comments on Corp Fin's proposal to tweak e-proxy behind us, it may surprise you to learn that only two dozen of comments were submitted to the SEC, with the vast majority coming in after the deadline. [Based on the description of the items to be considered at Wednesday's open Commission meeting, I don't think this proposal will be acted upon then - although I guess it's possible that this proposal falls within the term "other corporate governance matters."]

Then again, it might not surprise you given there is so much other stuff going on - so the more "minor" proposals get buried. Even though we are in the early innings of reform in the wake of the financial crisis, folks might also be experiencing an early case of comment fatigue. I remember the same thing happened during the spate of SOX rulemaking in '03 - by the end of several dozen proposals, folks had trouble commenting on the last half dozen of the proposals...

A Bunch of International Reforms

The wave of financial reforms sweeping this country is not unique; there are reforms taking place all over the world. Here is a sampling:

- In the UK, the final Walker Review recommendations were recently issued. This is a sweeping governance reform of the United Kingdom's financial industry, including strengthening the role of non-executive directors and giving them new responsibilities to monitor risk and compensation.

- CalSTRS became the first US-based fund to endorse the United Kingdowm's "best practices" code for investors that I blogged about last week. Notably, the Walker recommendations urge that this "Code on the Responsibilities of Institutional Investors" should be ratified by the UK's Financial Reporting Council and become part of that country's Stewardship Code.

- As noted in this article, the UK's Financial Reporting Council has issued a set of proposals to reform the UK's corporate governance regime. What was previously called "The Combined Code" will become "The UK Corporate Governance Code" - subject to what they call "consultation" - and will apply to all listed companies with a "Premium Listing" for fiscal years beginning June 29, 2010, regardless of the country of incorporation.

- India's review of corporate governance prompted by the Satyam scandal is now expected to result in the issue of corporate governance guidelines by the end of December. Thanks to Jim McRitchie of for spotting this one (and the two directly above) for me.

- Broc Romanek

December 10, 2009

Us vs. Them: A Campaign Pitch

Even though I loathe lists generally, I'll admit that I've become obsessed with the voting going on between the fine blogs that comprise the ABA Journal's Blawg 100. As I blogged last week, our blog has made that list for the second year in a row - and this is the first year that the ABA Journal is putting the Blawg 100 head-to-head in a round of voting.

Well, we have felt the love and we currently stand in 1st place! We are just barely ahead of "Above the Law" (which has an advantage due to the ABA Journal's design of its voting pages into separate categories - their blog is on the main voting page and ours is not. Many folks have emailed saying they couldn't find ours in the list; our blog is in the "Practice Specific" category; their's is in the default "News" category.)

Voting continues until the end of this month - so please vote if you can. It's a tight race against some tough competition - so every vote counts. To help you navigate the ABA Journal's voting framework, here are the three steps you should take:

1. Register to vote - it's free (if you're an ABA member, your ABA id/password won't work for the ABA Journal's site).

2. Take your User Name and password - you will create these when you register - and log-in. This may happen automatically when you click on the link within the email sent to you after you register.

3. Now vote in this "Practice Specific" category by scrolling down to the description of our blog - 2nd blog from the bottom - and clicking the "plus sign" in the box to the left of it (if you don't see a "plus sign," you're not logged-in). If you can't find our blog, you're probably in the default "News" category. Click on over to the "Practice Specific" category to find ours...

If you're having troubles, please shoot me an email and let me know. Thanks for the support!

A Campaign Video: Bringing It!

Enjoy this silly video seeking votes - it's only 30-seconds long:

SEC to Adopt New Executive Compensation Rules Next Wednesday

Yesterday, the SEC issued a notice that it will hold an open Commission meeting next Wednesday, 12/16 to consider adoption of its executive compensation and other corporate governance proposals. It's unknown at this time whether they will apply to the upcoming proxy season.

We'll be covering these new rules in our January 27th webcast - "The Latest Developments: Your Upcoming Proxy Disclosures - What You Need to Do Now!" - featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller. As all memberships expire at the end of this month, renew now or try a no-risk trial to catch this webcast.

- Broc Romanek

December 9, 2009

My SCOTUS Experience: The Full Monty

I attended the US Supreme Court's oral arguments on Monday to hear the fate of the PCAOB argued in FEF and Beckstead & Watts v. PCAOB. It was my first time visiting the land's highest court. For those that haven't been, here are 10 take-aways:

1. Simply Wow; A Real Patriotic Experience - Having been to numerous Congressional hearings and other "official" DC meetings, nothing else compares. I could literally feel the history of the country in the room. And I was proud that we have such sharp minds on the bench, even though I don't agree with all of the views expressed. A "must" for any lawyer, and really any US citizen.

2. How to Attend - I enjoyed the perks of my journalistic hat and obtained a press pass. But even though seating is limited, the main room holds 400-500 and many left after the PCAOB hearing - so it would have been easy to come in and hear the second case. Here is an explanation of how to get in. I saw a number of PCAOB and SEC Staffers in the audience - they got in the same way as the general public. I understand that the cafeteria is open to the public - and it smelled good!

3. Oyez, Oyez, Oyez - When the Justices come into the room - entering simultaneously from behind curtains like magic - they are not announced by their individual names. Instead, they are introduced as a group - followed by three chants of "Oyez's" by the Court's Marshall. "Oyez" is sort of an old English tradition. Here is a recording of what that sounds like. Silence by the audience is requested and observed, except for several occasions when something funny is said and there is laughter (ie. a live studio audience). At the conclusion, only one person forgot to observe the request to remain quiet and clapped.

4. Entry into the Supreme Court Bar - The first order of business is the swearing-in of new members of the exclusive Supreme Court Bar. Only those admitted to this bar are permitted to argue before SCOTUS. It's a pretty small group that does - even though the admission process appears easy - you fill out a form with two sponsors, provide a certificate from your state bar and pay a fee. The problem is that the bar is so small that it's hard to find two existing SCOTUS bar members to sponsor you. That's one reason why nepotism happens frequently (although I imagine the practice of parents sponsoring their children is primarily ceremonial as the real SCOTUS bar is dominated by a much smaller subgroup as noted in this paper).

5. Questioning is Pointed - One of the reasons why a visit to hear oral arguments is interesting is that it's action packed. The lawyers arguing their cases are frequently interrupted by the Justices. It's not rude - it's just that time is limited and this is the way it works. During the PCAOB arguments, each advocate didn't get more than 60 seconds into their opening remarks before they got hit with their first question.

6. Fun Factoids - Very rarely during the 75-minute hearing (it went 15 minutes over) did the term "PCAOB" get mentioned - only 5 times. The PCAOB was often referred to as the "Accounting Board." And "Sarbanes-Oxley" didn't get mentioned at all. Don't believe me? Check the transcript.

7. No Electronics - No electronics of any kind are allowed in the hearing room. Actually, very little of anything. I was allowed to bring in a pad and a pen since I was press. Four sketch artists were drawing to the left of me - probably commissioned by some of the lawyers presenting the arguments (my mom is an artist and has been commissioned to do so in the past).

8. Only One Woman on the Walls - As well known, the Supreme Court has been dominated by white men over its 200-year plus history. As a result, the portraits hanging on the walls reflect that history. With one exception (there could have been more, I didn't do a comprehensive search), there is a portrait of "Mrs. Roger Taney." Her own first name is inscribed in small letters underneath (ie. Anne). Poor woman is subjugated to her husband even in death.

9. Building Being Modernized - Although it was hard to tell, posted signs indicate that the Supreme Court building is being modernized for the first time since it was completed 75 years ago. It's a tremendous building - beautiful through and through. Nice marble walls in the bathroom (Best public bathrooms in DC? The Mandarin Hotel by far).

10. Transcripts Available - Recently, the US Supreme Court began posting same day transcripts of oral arguments. Here is the transcript from the PCAOB case.

Bob Monks recently blogged about his experience of attending the SCOTUS' Jones v. Harris oral arguments...

Chief Justice Roberts: Examines Intersection of PCAOB and Public Companies

As noted on page 38 of the transcript, Chief Justice Roberts asked several questions about the power of the PCAOB to compel a public company to respond to a PCAOB investigation. Solicitor General Lagan hedged her answer, but essentially said the PCAOB could go to the SEC to obtain a subpoena for this purpose. They were both off the mark a little bit here.

As I've been blogging for a long time (also see this blog - and this one which has model language you can put in your auditor engagement letter), the real issue is that a public company won't even know when the PCAOB is reviewing its financials, work papers, etc. during an investigation because the PCAOB only directly interacts with auditors - not the auditor's clients. That's why it's important for audit committees to insist a provision be inserted into their engagement letters with their auditors to be informed when the PCAOB is digging into their files.

Parsing the Oral Arguments: FEF and Beckstead & Watts v. PCAOB

A number of blogs have weighed in on the substance of the oral arguments made, including:

- The Supremes and Sarbanes-Oxley...
- Considerations of PCAOB
- Sarbanes-Oxley and its devilish details
- Donna Nagy on the PCAOB
- Oral Argument in Free Enterprise Fund v. PCAOB

Compared to what is provided in those blogs, below is a more comprehensive summary regarding how the oral arguments played out - along with some analysis and conjecture - from a member that also attended the hearing:

Petitioners' Argument

The Petitioners', FEF and Beckstead & Watts, argued first. The good news for PCAOB was that the Petitioners' lawyer, Michael Carvin, had a very tough time making all the points he wanted in the time allotted. (Each side gets 30 minutes.) Justices Breyer, Ginsberg, Scalia and Sotomayor peppered Carvin with so many questions- many of them quite tangential- that he struggled to get back on track. Carvin reserved some time for rebuttal and he closed well.

The argument and questioning focused on the Separation of Powers and Appointments' Clause issues. The Separation of Powers argument centered whether the structure of the PCAOB allowed Congress to essentially strip the President of the power to effectively oversee an Executive Branch agency. Carvin's Appointments Clause argument had two parts. First, he argued that the appointments violated the Appointments Clause because PCAOB members are "superior officers" that must be nominated by the President and confirmed by the Senate. Secondly, he argued that assuming they are "inferior officers," they weren't appointed by the "head" of a "department."

The Appointments' Clause arguments didn't seem to gain much traction, but there was a good deal of discussion of separation of powers, particularly the President's inability to directly remove PCAOB members at will.

Respondents' Argument

US Solicitor General Elena Kagan argued the case for the United States, which previously intervened in the case. Jeff Lampkin argued the case for the PCAOB itself. Kagan and Lampkin had easier times getting through their arguments, but were asked pointed questions by Chief Justice Roberts and Justices Scalia, Alito and Kennedy. Kagan opened with a syllogism. She said: The President has sufficient authority over the SEC (per the case Humphrey's Executor) and the SEC has sufficient authority over the PCAOB (per her reading of the Sarbanes-Oxley Act). Thus, the President has sufficient authority over the PCAOB. Justice Scalia immediately challenged this assertion and seemed to tip his hand that he thought the structure violated separation of powers doctrine. Chief Justice Roberts also hammered home the point that this would be an extension of Humphrey's Executor and seemed unwilling to do that. Justices Alito made similar points. Kennedy also focused on the separation of powers issue, although his questions were more confusing. (He needs to be briefed up.)

Posture of the Justices

Judging from their questions/comments and from what I know of their judicial philosophies, I think the Justices Breyer, Ginsberg and Sotomayor are likely to back the PCAOB. I also think that Justice Stevens is also likely to rule in favor of the PCAOB, although he said virtually nothing during oral arguments. (He tried to get Carvin to concede that the PCAOB would be constitutional if the SEC could remove the PCAOB members for cause. Carvin did not concede that point.) I think Chief Justice Roberts and Justices Alito and Scalia will vote to deem the creation of the PCAOB unconstitutional because it violates the doctrine of separation of powers. Justice Kennedy had no questions for Carvin during his opening remarks, but had several for the Respondents' counsels and for Carvin during his rebuttal. He seemed confused by the issues at times. Justice Thomas said nothing. Justices Kennedy and Thomas frequently seek to limit regulatory reach.


If I had to predict today, I think the PCAOB will lose 5-4. I think Chief Justice Roberts and Justices Alito, Kennedy, Scalia and Thomas will rule that the current structure of the PCAOB violates the separation of power doctrine. I think that Justices Breyer, Ginsberg, Sotomayor and Stevens will side with the PCAOB. Before hearing the arguments, I assumed that Roberts and Kennedy would be the deciding votes based solely on judicial temperament. I now think it all comes down to Kennedy.

Assuming the PCAOB loses, the case will be remanded for further proceedings consistent with the ruling. This means the parties will go back to the trial court for some procedural maneuvering. FEF may try to get an order shutting down the PCAOB immediately, but that is unlikely. Instead, the trial court judge will likely enter the judgment against the PCAOB but stay any order to dissolve it. This would allow Congress to act to try to cure the constitutional defect.

The Court is not expected to issue its opinion until May or June 2010. However, this timetable could make a fix (if necessary) more politically challenging, as it would be required as the congressional mid-term elections loom.

Poll: Which SCOTUS Justice Was Silent?

During these oral arguments, one Supreme Court Justice didn't ask a single question. Take this anonymous poll to indicate who you think that was...

- Broc Romanek

December 8, 2009

"We're So Sorry, Uncle Kashkari"

I don't know why, but sometimes a news story will remind me of a song. This fantastic lead - and lengthy - artlcle from Sunday's Washington Post about how Neel Kashkari recently resigned as Special Inspector General of the TARP funds reminded me of this Paul McCartney song. Seven months ago, 35-year old Kashkari was tapped to serve as SIGTARP by then-Treasury Secretary Paulson, hired out of Goldman Sachs (but not "lured" out of there; Paulson didn't know him - Kashkari sent his resume in cold!).

As the WaPo article explains in great detail, Kashkari and his wife have now moved about as far from DC as possible, living a simple life in a log cabin in Truckee, California in what he calls his "Anti-D.C. Sanctuary" (my brother-in-law used to work in Truckee's hardware store; I've been there and its beautiful, just outside of Lake Tahoe). I don't blame him. Once you see what goes on inside the Beltway - is it the same on Wall Street? - it makes you want to run and hide. And more often than not, Congress is the primary cause for bewilderment as so aptly reflected by this article excerpt:

Soon he was marking hearing dates on his calendar: "BEATING ON THE HILL."

But don't feel too bad for Kashkari. He'll make a mint if he decides to write his own book (rather than just edit Paulson's, which he is doing right now). So I would just chalk this up as a companion piece to my recent blog, "Can We Just Go Home Now Mommy?"

Corp Fin Updates the "Financial Reporting Manual"

Coinciding with the annual AICPA Conference being held in DC right now, Corp Fin released an updated version of its Financial Reporting Manual yesterday (this Manual is formerly known as the "Accounting Training Manual"). In the past, this was updated every 5 years or so - now Corp Fin is attempting to update it quarterly. This is the third update this year. Technically, this is an internal Staff document - but the SEC makes it publicly available as a valuable informal resource.

The dozen and a half sections marked "updated 9/30" are the ones updated (even though they just came out now). Compared to what I blogged about recently, this update does not include the 25-years worth of content based on meeting with the "CAQ Regs" Committee. That is forthcoming...

Here are some notes from what happened yesterday at the AICPA conference from FEI's "Financial Reporting Blog."

Now Available: Fall Issue of Compensation Standards

We just dropped the Fall 2009 issue of the Compensation Standards print newsletter in the mail to subscribers. Subscribers can access it now as we have posted the issue online. It provides timely analysis of compensation action items that boards should be focused on now.

Act Now: Members of are entitled to a free copy of this newsletter. As all memberships expire at the end of December, you should renew now (or try a no-risk trial).

- Broc Romanek

December 7, 2009

Today at the US Supreme Court: The Battle Over the PCAOB

You would figure one of the benefits of living in the DC area is that I would have gotten a chance to see the Supreme Court live during oral argument. But it's not easy to gain entrance. I'm happy to say that I'm heading down there this morning to watch the Supreme Court deliberate the future of the PCAOB (and possibly reshape other aspects of Sarbanes-Oxley too - see this Bloomberg article) when it considers Free Enterprise Fund v. PCAOB. I'll be giving a full report on the SCOTUS experience later this week.

Meanwhile, take a gander at the numerous merit and amicus briefs filed in the case so far with SCOTUS. Also check out this amicus brief filed by nine members of the Council of Institutional Investors, CFA Institute and others (it was the first one filed in support of the PCAOB).

Last week, the PCAOB approved its a five-year budget and strategic plan this week, which is now subject to SEC approval. The PCAOB seeks a 16% increase in its 2010 budget, from $157.6 million to $183.3 million (raising the Staffing level to 636).

Tomorrow, as noted in the SCOTUS blog, the US Supreme Court will hear oral arguments regarding the Hollinger case (executive pay and fraud). And Kevin LaCroix notes that SCOTUS has granted certiorari in a "f-cubed" case.

Ask the Experts: Prepping for a Wild Proxy Season

We have posted the transcript for our recent webcast: "Ask the Experts: Prepping for a Wild Proxy Season."

Ask the Experts: Schedule 13D and Schedule 13G Issues

With investors becoming more active - with many pursuing the same agenda - the issues implicating Schedule 13D and 13G have become more common and more complex. Join tomorrow for the webcast - "Ask the Experts: Schedule 13D and Schedule 13G Issues" - and hear from:

- Dennis Garris, Partner, Alston & Bird LLP and former Chief, SEC's Office of Mergers & Acquisitions
- Jim Moloney, Partner, Gibson Dunn & Crutcher LLP and former Special Counsel, SEC's Office of Mergers & Acquisitions
- Chuck Nathan, Partner, Latham & Watkins LLP
- David Sirignano, Partner, Morgan Lewis & Bockius LLP and former Chief, SEC's Office of Mergers & Acquisitions

They will be answering this list of questions...

Act Now: Renew your membership for 2010 as all memberships expire at the end of this month. Or try a no-risk trial for 2010 and catch this webcast for free.

- Broc Romanek

December 4, 2009

Latest Version: House Bill on Financial Reforms

We finally have the various pieces of the reform bills separately passed by the House Financial Services Committee rolled into one document, HR 4173 - "The Wall Street Reform & Consumer Protection Act of 2009" - as the Committee passed the last piece of it on Wednesday. Here is that 1279-page document that the House is expected to vote on next week. It is likely it will pass along party lines - the question is what amendments will occur before it is passed as noted in my blog from Monday...

Nasdaq Mandates 10-Minute Prior Notification of Material Information

Recently, the SEC approved a Nasdaq rule change to Rule 5250(b)(1) and IM-5250-1 so that Nasdaq-listed companies will be required - rather than merely urged - to provide Nasdaq with at least 10 minutes notification when releasing material information; the change to IM-5250-1 also ensures that Nasdaq's rules are consistent with the SEC's interpretive guidance on the use of company websites to satisfy public disclosure requirements (ie. softening language that web posting alone "will not" satisfy Regulation FD to "may not" satisfy). The rule changes become operative on December 7th.

More on "The Mentor Blog"

We continue to post new items daily on our new blog - "The Mentor Blog" - for 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:

- Suing Research Firms that Dissent
- The Buck Starts Here: GCs Should Advocate for Good Corporate Governance
- Only Interested in Transactional Law: The New Prospective Summer Associate Taboo?
- Nell Minow on "The New Fundamentals"
- Life Balance Issues for Executive Spouses

- Broc Romanek

December 3, 2009

SEC Approves NYSE Amendments to Corporate Governance Requirements

Right before Thanksgiving, the SEC approved the NYSE's amendments to its corporate governance requirements contained in Section 303A of the NYSE Listed Company Manual. The amendments are effective January 1, 2010. We'll be posting memos analyzing these new requirements in our "NYSE Guidance" Practice Area.

As noted by Mayer Brown, the rule changes include:

- Eliminating NYSE requirements that are similar to existing SEC requirements that are contained in Item 407 of Regulation S-K, and incorporating the applicable requirements of Item 407 into Section 303A of the NYSE Listed Company Manual. For example, replacing the reference to disclosure of categorical standards for independence with a reference to the disclosure requirements of Item 407(a) of Regulation S-K (which requires a description by specific category or type of transactions, relationships or arrangements that were considered in making an independence determination);

- Permitting more extensive use of a company's web site, as opposed to a proxy statement or an annual report, to disclose, among other matters, the director chosen to preside at executive sessions and the method for interested parties to communicate directly with the presiding director or the non-management or independent directors as a group;

- Eliminating the requirement for a listed company to state in its proxy statement or annual report that corporate governance documents posted on its web site are available in print to any shareholder who requests them;

- Eliminating the requirement for a listed company to disclose in its annual report that its chief executive officer filed the certification regarding compliance with the NYSE's corporate governance listing standards and that the company filed the chief executive officer and chief financial officer certifications required by the SEC;

- Requiring the chief executive officer to notify the NYSE in writing after any executive officer becomes aware of any non-compliance with NYSE corporate governance listing standards, even if not material;

- Allowing a listed company to hold regular executive sessions of independent directors as an alternative to executive sessions of non-management directors;

- Clarifying that a company must disclose a method for all interested parties, not just shareholders, to communicate their concerns to the presiding director or to the non-management or independent directors as a group;

- Requiring disclosure of a board's determination, if applicable, that an audit committee member's service on more than three public company audit committees would not impair that director's ability to serve on the listed company's audit committee, even if the company does not limit audit committee members to serving on three or fewer public company audit committees;

- Permitting disclosures to be incorporated by reference into a company's proxy statement or annual report from another document filed with the SEC, if permitted by SEC rules; and

- Modifying transition periods for newly listed companies.

Getting Your Website Ready for XBRL

In this podcast, Diane Mueller of Just Systems explains how to get your investor relations' website ready for XBRL, including:

- Which companies need to post their filings in XBRL filings on their IR web pages? And when?
- How exactly will companies need to display these XBRL filings on their IR web pages?
- Are there any examples of companies that have done this already?
- What should companies be doing to prepare for these new requirements?

Recently, the "XBRL Business Information Exchange Blog" noted that Citigroup had filed a model XBRL document.

The California Attorney General's Pursuit of the Credit Rating Agencies

Last Monday, the SEC adopted rules regarding credit rating agencies - and proposed some rules too. Related to my blog on the Ohio Attorney General's suit against the credit rating agencies, Keith Bishop of Allen Matkins sent me this information:

Back in September, the California Attorney General announced an investigation into the rating agencies "role in fueling the financial crisis." The California AG asked the rating agencies to supply information to address the following questions:

- Whether the rating agencies failed to conduct adequate due diligence in the rating process;
- Whether the rating agencies gave high ratings to particular securities when they knew or had reason to know that high ratings were not warranted;
- Whether the rating agencies failed to comply with their own codes of conduct in rating certain securities;
- Whether the rating agencies profited from giving inaccurate ratings to particular securities;
- Whether the rating agencies made fraudulent representations concerning the quality or independence of their ratings;
- Whether the rating agencies compromised their standards and safeguards for profits;
- Whether the rating agencies' statistical models captured the risk inherent in subprime and other risky assets and, if not, what was the rating agencies' response; and
- Whether the rating agencies conspired with the companies whose products they rated to the detriment of investors.

Also, the California Office of Administrative Law has accepted my petition for a determination that CalPERS failed to comply with the California Administrative Procedure Act when it adopted guidelines for disclosure of placement agent arrangements. This triggers a public comment period that expires on January 11, 2010. If comments are submitted, copies must be sent simultaneously to CalPERS and me (as the petitioner). The commenter must certify to the OAL that it has sent these copies. Of course, I encourage those who have an interest in the subject to submit copies.

- Broc Romanek

December 2, 2009

We Made It Again! The ABA Journal's Blawg 100!

Dave and I are excited that this blog made the ABA Journal's Blawg 100 for the second year in a row. Patting ourselves on the back, I think it's quite an achievement considering there are only 16 blogs that are in the "Practice Specific" category. Most of the other blogs in the Blawg 100 don't get into the nitty gritty issues of actual practice. Thanks to the many of you that emailed the ABA Journal to get us this far (including Matt Dallett, who had a nice quote about our blog in this list of the 100 blawgs)...

To help you navigate the ABA Journal's voting framework, here are the three steps you should take:

1. Register to vote - it's free (if you're an ABA member, your ABA id/password won't work for the ABA Journal's site).

2. Take your User Name and password - you will create these when you register - and log-in. This may happen automatically when you click on the link within the email sent to you after you register.

3. Now vote in this "Practice Specific" category by scrolling down to the description of our blog - 2nd blog from the bottom - and clicking the "plus sign" in the box to the left of it (if you don't see a "plus sign," you're not logged-in). If you can't find our blog, you're probably in the default "News" category. Click on over to the "Practice Specific" category to find ours...

If you're having troubles, please shoot me an email and let me know. Thanks for the support!

The Security at the SEC: A 20-Year Timeline

The madness of the so-called White House crashers got me thinking about how the security to gain entry into the SEC's HQ has evolved over the years. When I first started at the SEC in '88, visitors could freely come upstairs and bicycle messengers were routinely on our floor, delivering large packages filled with multiple copies of registration statements. I always wondered how they lugged those heavy boxes on their bikes.

Security essentially was perfunctory until a White House incident that led to huge concrete pylans being placed on the sidewalks along Pennsylvania Avenue, along with the contemporaneous invasion of Kuwait leading to the Gulf War circa '90. At this time, the SEC began to require visitors to obtain a pass - and Corp Fin Staffers regularly were called from the main lobby to come down and meet bike messengers to receive packages. Given that we didn't have voicemail at the time, this could be frustrating (as well as a welcome diversion).

The '95 Oklahoma City bombing was followed by another increase in security effort. Screening became almost as tight as it is now post-9/11, with visitors all herded through a holding pen to the left of the Fifth Street entrance and the Sixth Street entrance closed to anyone other than Staff. In the "Visitor's Office," visitors would show identification to obtain a yellow pass (so long as they had an invitation from a Staffer to get upstairs). They then presented this pass to a guard by one of two separate elevator banks. Staffers who forgot their IDs had to go through this process to get upstairs too.

Once the SEC moved from 450 Fifth Street to Union Station a few years ago, the SEC installed even tighter security - the biggest change being the addition of a metal detector that visitors must pass through and only a single point of entry to go upstairs. It's a bit scary to work in a federal building - so all of this security is certainly necessary.

Marty Dunn reminded me of this story: "Remember during the Breeden years when the security guards all went home and a senior Staffer came in early to find a number of men who appeared to be homeless wandering the halls? Chairman Breeden changed the security company that day and there was a little more scrutiny.

More on our "Proxy Season Blog"

With the proxy season now looming in many of our minds, we are posting new items regularly again on our "Proxy Season Blog" for 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:

- Disclose Agreements with Shareholders?
- Study: Activism Through the Shareholder Proposal Process
- Broker Nonvotes and Delaware Law
- More on "Impact of Elimination of Broker Nonvotes"
- An Interview with Morgan Stanley's Ken Bertsch

- Broc Romanek

December 1, 2009

RiskMetrics Releases 2010 Updated Policies

As I blogged in passing two weeks ago, RiskMetrics has released its policy updates for 2010. I did take in Pat McGurn's discussion during the ABA Fall meeting and he did predict a record number of shareholder proposals. I just love his colorful commentary. On how to draft CD&As, Pat said:

- Draft with a style that is the "opposite of speed dating. You don't want investors to linger for hours over your proxy statement (and CD&A). You should strive to convince them within minutes of picking up your proxy statement that there are zero problems - with the board, executive pay or other issues - and that they should move on to the next meeting.

- Don't bury the lead under a pile of legalese. You must grab the readers' attention. Use executive summaries like Movie Trailers (aka Coming Attractions). Highlight the best scenes, the most memorable lines and the score. If you don't grab their attention, they're likely to give more weight to the movie reviews (aka the proxy analyses).

Catch Pat during his annual webcast next month: "Pat McGurn's Forecast for 2010 Proxy Season: Wild and Woolly." We are posting memos regarding the 2010 policies in our "Proxy Advisors" Practice Area.

UK Leads Again: An Investor "Best Practices" Code

Perhaps because of a smaller market - and thus a smaller number of market participants to come together and agree on something - the United Kingdom seems to regularly beat the US to the punch when it comes to new governance ideas. The latest is the UK's Institutional Shareholders' Committee releasing a code of responsibilities of institutional investors. The code offers best practices, including dealing with the important topics of how to monitor companies, engage with boards and vote at shareholder meetings.

The ISC consists of the four leading UK investor bodies. The code is voluntary and will operate on a comply-or-explain basis. As noted in this press release, the code also calls on institutions to "state publicly how they apply its principles and disclose what steps they have taken, or intend to take, to verify their compliance."

Our December Eminders is Posted!

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

- Broc Romanek