April 30, 2010

US Supreme Court Rules in Securities Fraud Statute of Limitations Case

As noted in the D&O Diary Blog, earlier this week, the US Supreme Court issued its opinion in Merck v. Reynolds. The decision resolves a split in the circuit courts over the two-year statute of limitations for claims brought under Section 10(b) of the '34 Act, the antifraud provision most frequently invoked by private plaintiffs.

The applicable statute - 28 U.S.C. § 1658(b) - provides that a private securities fraud complaint must be filed within two years after "the discovery of facts constituting the violation" or five years after the alleged violation itself, whichever comes first. The Supreme Court held that the two-year period begins to run when the plaintiff discovers - or a reasonably diligent investor would have discovered - facts showing that a materially misleading statement was made with the intent to deceive investors. We are posting memos analyzing the decision in our "Securities Litigation" Practice Area.

IRS Releases a Draft Schedule for Reporting of Uncertain Tax Positions

Here is news culled from this Sullivan & Cromwell memo: Recently, the IRS issued IRS Announcement 2010-30 accompanied by the release of a highly-anticipated draft schedule and instructions to be used by certain corporate taxpayers to report uncertain tax positions on their annual income tax returns. Although the draft schedule provides space for reporting current and prior year tax positions, a transition rule provides that tax positions taken in a taxable year beginning before December 15, 2009, or in a short tax year beginning on or after December 15, 2009, and ending before January 1, 2010, would not need to be reported.

The draft schedule would require a concise description of each reported tax position as well as information about its magnitude, but would not require disclosure of the taxpayer's risk assessments or tax reserve amounts.

More on our "Proxy Season Blog"

With the proxy season winding down, we are still posting new items regularly on our "Proxy Season 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:

- Proxy Season Early Trends: More Proposals, and More Exclusions
- CII Backs Strict Majority Vote for Corporate Directors
- Director Attitudes Shifting: Laggards Should be Voted Off
- More on "Fixing the Problems with Client Directed Voting"
- The Need to Better Draft VIFs

- Broc Romanek

April 29, 2010

A Real Trend? More Companies Holding Virtual Annual Meetings

Last year, as noted by Dominic Jones in his "IR Web Report," there was a small spurt of companies holding annual meeting solely online, with Broadridge, Warner Music Group and Conexant Systems joining companies that have done it for a few years (eg. Herman Miller, see this blog).

Dominic notes that a number of new companies have announced plans to go "virtual-only" this proxy season, including Illumina, Artio Global Investors, Winland Electronics and PICO Holdings.

Intel originally intended to join this group - but decided to stay with the hybrid "both physical and online" meeting structure it pioneered last year (see this first-hand report of last year's meeting), with the help of Broadridge's online voting platform. Dominic notes that several new companies will try this hybrid model this year - Best Buy, American Water Works and Charles Schwab - with Charles Schwab relying on its transfer agent Wells Fargo to provide the online voting platform rather than Broadridge.

So the total number of companies dipping their toes into the online meeting world is still less than a dozen. Is this a trend that is here to stay? My guess is "yes." Tune in for this webcast that I just announced - "Holding the Virtual Annual Meeting: Factors to Consider and Practice Pointers" - featuring panelists whose companies have tested these new waters recently...

Dominic Jones continues to do good work, his latest is today's "HP and Palm: announcing an acquisition social media style."

Survey: The Different Types of Pre-Registration for Annual Shareholder Meetings

In our "Annual Stockholders' Meetings" Practice Area, I just posted a number of examples of the different ways that companies require - or request - shareholders to indicate whether they will attend the annual meeting in person.

In addition, I have posted a "Quick Survey on Annual Meeting Conduct," which includes a question about pre-registration practice. Please take a moment to fill out this short anonymous survey.

While you're at it, please take a moment to complete this "Quick Survey on Codes of Ethics and the Board."

Broadridge's E-Proxy Stats for '10 Proxy Season So Far

As they have been doing for the past two years, Broadridge feeds us the latest statistics about e-proxy use during the proxy season through March 31st (which we have posted in our "E-Proxy" Practice Area).

As of March 31st, these stats included:

- 821 companies (technically, it's not companies - it's "distributions" which is a greater number than the number of companies) used voluntary e-proxy between June 30, 2009 and March 31st (compared to 526 for the same period in the year prior). 571 of these companies were using e-proxy for a second year - 8 companies distributed a second notice. Remember the cut-off is early in the meeting season and Broadridge reports having 655 commitments to use e-proxy for this year not yet processed.

- 96 jobs were bifurcated, nearly all of them stratified by the number of shares held (96%) although some were stratified by notice vs. full package (11%).

- 0.39% of shareholders requested paper after receiving a notice; this average is down 50% from last year's 0.80% (and the prior year had been 1.05%). Note that this percentage doesn't include Broadridge's "standing order for paper" instructions (ie. shareholders who have said they wish to continue receiving paper copies indefinitely).

- 14% of companies using e-proxy had routine matters on their meeting agenda (way down from 54% last year); another 73% had non-routine matters proposed by management; and 13% had non-routine matters proposed by shareholders. None were contested elections.

After the annual meeting season ends, Broadridge will be reporting out the full season's numbers, including the latest retail voting trends. But this early report clearly shows that companies continue to use e-proxy, undaunted by the broker non-vote changes in the NYSE's Rule 452.

- Broc Romanek

April 28, 2010

Goldman Sachs: What to Make of the Circus?

With representatives from Goldman Sachs testifying - for 11 hours! - before the Senate Banking Committee yesterday (see this morning's WaPo article, with over 500 comments already), the 24-hour coverage of Goldman's perceived role in the financial crisis continues. Personally, I'm still puzzled by the all the coverage - the underlying theme of the stories is not really new news. Ever since the crisis came to light, it has been well known that Goldman was far less impacted by the housing market collapse compared to its brethren - and for the most part, they were called geniuses until now.

Here's a hodge-podge of Goldman-related stories that I found interesting:

- Today's Washington Post editorial "Goldman and the blame game"

- MarketWatch's "Assessing the coverage of Goldman Sachs"

- Tom Brakke's "The Sideshow" from "The Research Puzzle"

- This NY Times' Dealbook column entitled "A Crowd With Pity for Goldman"

- In this article, Harvey Pitt provide his thoughts on the risks of the SEC losing the Goldman case

- In his "Ideoblog," Prof. Larry Ribstein describes how the SEC's Goldman case continues its war on "shorts" - and here is Larry's analysis on how the case is mutating

- In his "SEC Actions" blog, Tom Gorman writes about "The SEC, the Goldman Case and Critics"

- A former Goldman Sachs director is alleged to have tipped Galleon Group, touching Warren Buffett's investment in Goldman, as noted in this Reuters article

Although things are moving so fast, that it's relevance may be limited - Ted Allen provides these notes from last Wednesday's House hearing on the regulatory reform bill.

Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now

We have posted the transcript for the recent webcast: "Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now."

One topic discussed at length during the program is "when disclosure of an SEC investigation is required - or is recommended - to be disclosed?" (a topic also recently tackled by Marty Rosenbaum in his OnSecurities Blog.

SEC Agrees to Reduce Penalties in Exchange for Cooperation

The SEC's new cooperation policy was one of the hot topics during our recent webcast with former senior SEC Enforcement Staffers. Here is news from Ted Levine, Wayne Carlin and Kevin Schwartz of Wachtell Lipton (also available in this memo):

In two recent insider trading actions, the SEC agreed to settlements with substantially reduced civil penalties based on the defendant's agreement to cooperate with an ongoing investigation and related enforcement action: SEC v. Cutillo et al., No. 09 Civ. 9208 (S.D.N.Y. Mar. 30, 2010) and SEC v. Galleon Management, LP et al., No. 09 Civ. 8811 (S.D.N.Y. Apr. 19, 2010). These cases merit attention as the SEC reportedly considers revising its framework for assessing penalties against entities.

The Commission brought these two actions against Schottenfeld Group LLC -- a registered broker-dealer -- based on alleged insider trading by individuals who, at the time of the trading, were registered representatives and proprietary traders at Schottenfeld. The SEC is statutorily authorized to obtain civil penalties of up to three times the profit gained or loss avoided as a result of insider trading. Historically, the Commission's practice in insider trading settlements has been to secure a "one-time" penalty equal to the amount of disgorgement.

In the Cutillo and Galleon actions, however, the Commission submitted and the courts approved settlements that included civil penalties equal to only 50% of the disgorgement amounts. In a joint submission to the court in Galleon, the parties explained that the penalty in that case represented a 50% "discount from a one-time penalty, in exchange for [Schottenfeld's] agreement to cooperate with the Commission." The final judgments in both cases stated that penalties in excess of the amounts agreed were not being ordered "based on Defendant's agreement to cooperate in a Commission investigation and related enforcement action." While this is not stated explicitly in the filings, the settlements suggest that Schottenfeld may have entered into a formal cooperation agreement, as contemplated by the initiatives announced by the SEC in January. It is also unclear whether the settlements are based on the defendant's forward-looking promise to cooperate or, rather, are based in whole or in part on cooperation that has already occurred.

The Schottenfeld settlements suggest a willingness on the part of the SEC to extend quantifiable benefits in return for cooperation, at least in some cases. In insider trading cases, a "discount" has verifiable meaning, in view of the historical baseline of one-time penalties. Yet even here, the Schottenfeld settlements do not articulate what the cooperation entailed (or promised for the future), or by what criteria the SEC determined that the appropriate discount level was 50%. In other types of cases, whether a penalty amount is discounted for past or future cooperation is a much more subjective question. As the Commission revisits its framework for seeking penalties against entities, some meaningful transparency from the SEC as to its methodology for determining penalty amounts and discounts is important.

- Broc Romanek

April 27, 2010

Australia Looking to Take Say-on-Pay One Step Further

Below are three items that I recently blogged on CompensationStandards.com's "The Advisors' Blog":

As noted in the excerpt below of this article from Manifest (a European proxy advisor service), Australia may take the concept of say-on-pay further than proposed here in the US (here is the Australian's full response on this topic):

Australian Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen has delighted Australian shareholders with plans to introduce extensive executive remuneration reforms designed to force boards to be more accountable and give shareholders more power.

In a ringing endorsement of the Productivity Commission's review of executive pay which was published in January this year, the Rudd administration has announced that it will introduce legislation to implement many of the PC's 17 recommendations, including the "two strikes" proposal, which will strengthen the non-binding vote on remuneration and set out consequences where companies do not adequately respond to shareholder concerns on remuneration issues.

As currently proposed, the two strikes and re-election resolution would work as follows:

- 25 per cent 'no' vote on remuneration report triggers reporting obligation on how concerns addressed; and
- Subsequent 'no' vote of 25 per cent activates a resolution for elected directors to submit for re-election within 90 days.

It is not clear whether it would be the entire board to be submitted for re-election, just the remuneration committee or the chairman, however there will be a further opportunity for input as there during the consultation process ahead of the final drafting of amendments to the Corporations Act 2001.

An unexpected but welcome addition to the proposals is a "claw-back" provision which would require a director or executive to repay to the company any bonuses calculated on the basis of financial information that subsequently turned out to be materially misstated. Bowen asserted that the introduction of a claw-back provision "warrants further analysis, as it would help strengthen the ability of shareholders to recover overpaid bonuses that have occurred as a result of materially misstated financial statements."

Issuers have expressed their concerns in the Australian media calling the proposals "heavy handed". Speaking to ABC News, John Colvin from the Institute of Company Directors said: "We're a bit perplexed and quite frankly bemused at why we would have such a heavy-handed, red-taped, legislative approach to this area,"

"Whilst there are examples of, and we acknowledge those, of pay outcomes which haven't been in line with either company expectations... on the whole Australian remuneration of corporate governance has been very good." The Australian Shareholders Association (ASA) said that the response was "much stronger than they had anticipated."

"We think that it's a very well-measured, very well-considered report," said an ASA representative "from the ASA's point of view it certainly went a little bit further than we had asked, but we're very positive about the recommendations and we're very hopeful that they'll have the effect of making boards much more accountable on this issue which is very important to shareholders."

AFL-CIO Actively Attacking Bank Pay

Recently, the AFL-CIO launched "PayWatch 2010" and announced it is focusing on the six largest banks this year - Bank of America, Citigroup, Wells Fargo, Morgan Stanley, JPMorgan Chase and Goldman Sachs - when the companies hold advisory votes on executive compensation later this month and in May. They also are focusing on the bank's lobbying on financial reform.

As part of this focus, the AFL-CIO plans to stage protests at the banks' annual meetings and may oppose compensation committee members. The AFL-CIO also is planning a rally this Thursday on Wall Street, with hope for more than 10,000 demonstrators.

Here's a silly AARP video on big banks and financial reform that might tickle you entitled "A Financial Protection Sing-A-Long."

Survey of Recent Disclosures: Board's Role in Risk Oversight

Below is an excerpt from this Akin Gump memo, based on their survey on recent risk oversight disclosures:

To assess the types of disclosures that companies are providing about the board's role in overseeing risk management, we reviewed preliminary or final proxy statements filed by 50 randomly selected S&P 500 companies since the February 28, 2010 effective date of the new disclosure rules. The results of our survey, categorized by the various types of disclosures, are set forth below.

Separate Section Devoted to Risk Oversight

Ninety-two percent of surveyed companies had a designated section in their proxy statements for risk oversight. This section typically stood alone, but sometimes was combined with the section addressing board leadership structure. Typically, the section was located in the portion of the proxy statement discussing corporate governance matters and was often titled "The Board's Role in Risk Oversight" (or words of similar effect).

Statements about Management's Primary Risk Management Responsibility

Twenty-four percent of surveyed companies included a statement to the effect that management is primarily responsible for risk management, while the board's role is one of oversight.

Sample disclosures are set forth below:

Sunoco, Inc.: "Management of risk is the direct responsibility of the Company's CEO and the senior leadership team. The Board has oversight responsibility, focusing on the adequacy of the Company's enterprise risk management and risk mitigation processes."

Peabody Energy Corporation: "Management is responsible for the day-to-day management of the risks we face, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management."

AT&T Inc.: "Assessing and managing risk is the responsibility of the management of AT&T. The Board of Directors oversees and reviews certain aspects of the Company's risk management efforts."

Strategic Direction

Forty-two percent of surveyed companies explained that oversight of risk management was an important or integral part of the board's role in the strategic planning process.

Several illustrative examples are set forth below:

Valero Energy Corporation: "The Board also believes that risk management is an integral part of Valero's annual strategic planning process, which addresses, among other things, the risks and opportunities facing Valero."

Stryker Corporation: "A fundamental part of setting the Company's business strategy is the assessment of the risks the Company faces and how they are managed."

Bristol-Myers Squibb Company: "Our Board meets regularly to discuss the strategic direction and the issues and opportunities facing our company in light of trends and developments in the biopharmaceutical industry and general business environment. Our Board has been instrumental in determining our strategy to combine the best of biotechnology with pharmaceuticals to become a best-in-class next generation biopharmaceutical company. Throughout the year, our Board provides guidance to management regarding our strategy and helps to refine our operating plans to implement our strategy. Each year, typically during the second quarter, the Board holds an extensive meeting with senior management dedicated to discussing and reviewing our long-term operating plans and overall corporate strategy. A discussion of key risks to the plans and strategy as well as risk mitigation plans and activities is led by the Chairman and Chief Executive Officer as part of the meeting. The involvement of the Board in setting our business strategy is critical to the determination of the types and appropriate levels of risk undertaken by the company."

Enterprise Risk Management

Fifty-four percent of surveyed companies expressly used the term "enterprise risk management."

Sample disclosures are set forth below:

American Express Company: "The Company relies on its comprehensive enterprise risk management process (ERM) to aggregate, monitor, measure and manage risks. The ERM approach is designed to enable the Board of Directors to establish a mutual understanding with management of the effectiveness of the Company's risk management practices and capabilities, to review the Company's risk exposure and to elevate certain key risks for discussion at the Board level. The Company's ERM program is overseen by its Chief Risk Officer who is an executive officer of the Company and a member of the Company's most senior management."

Express Scripts, Inc.: "In order to assist the board of directors in overseeing our risk management, we use enterprise risk management ("ERM"), a company-wide initiative that involves the board of directors, management and other personnel in an integrated effort to identify, assess and manage risks that may affect our ability to execute on our corporate strategy and fulfill our business objectives. These activities entail the identification, prioritization and assessment of a broad range of risks (e.g., financial, operational, business, reputational, governance and managerial), and the formulation of plans to manage these risks or mitigate their effects."

Primary Responsibility at Board vs. Committee Level

Eight percent of surveyed companies stated that the primary responsibility for risk management oversight rests with the entire board, 34 percent of surveyed companies stated that primary responsibility is vested in one or more committees and 52 percent reflected that both the board and various committees have responsibility for risk management oversight.

Of those companies where primary responsibility is vested in one or more committees, 65 percent (22 percent of all surveyed companies) identified their audit committees as having primary responsibility, 18 percent had a separate committee expressly dedicated to risk management (all of these companies were in the financial services or insurance industries) and 18 percent stated that various board committees were responsible for overseeing the management of risks relating to the committee's primary areas of responsibility.

Regardless of where primary responsibility rested, over half of the surveyed companies included descriptions of the specific types of risks that various committees of the board oversee.

Compensation Committee Responsibility for Determining Compensation Risk Disclosure

As discussed above, the new SEC disclosure rules require companies to discuss their compensation policies and practices for employees as they relate to risk management practices and risk-taking incentives if the risks arising from those policies and practices are reasonably likely to have a material adverse effect on the company. The new rules do not require a company to include any disclosure if the company has determined that the risks arising from its compensation policies and practices are not reasonably likely to have a material adverse effect.

RiskMetrics has announced that it does not take a position regarding whether companies should disclose their risk determinations where the company has determined that a material adverse effect is not reasonably likely. RiskMetrics does, however, advise companies "at a minimum" to discuss their process in reaching a determination and any mitigating features (such as clawbacks or bonus banks) that they have already adopted. RiskMetrics views this disclosure "as an opportunity for communication, not simply compliance" and expects that shareholders will be looking for a reasonably substantive discussion of the board's process for determining whether the company's incentive pay programs motivate inappropriate risk-taking and what they are doing to mitigate that risk.

Our survey shows that many companies elected to provide disclosure about their compensation risk determinations and the process the company undertook to make the determination.

- Compensation Committee Responsibility to Assess Risks. Sixty-eight percent of surveyed companies stated that their compensation committee was charged with either determining that the compensation policies and practices do not encourage excessive risk-taking or determining whether the risks arising from such policies and practices are reasonably likely to have a material adverse effect on the company.

- Disclosure of Determination. Seventy-four percent of surveyed companies expressed a determination that their compensation policies and practices either did not encourage excessive or unnecessary risk-taking (or used words of similar effect) or were not reasonably likely to result in a material adverse effect on the company. Of the 37 companies that disclosed a determination, 17 of them (46 percent) phrased their conclusion in terms of the absence of a material adverse effect, 15 companies (41 percent) expressed their conclusion in terms of not encouraging excessive or unnecessary risk-taking and the remaining companies phrased their conclusions in terms of a determination of an "appropriate level of risk-taking" or an "effective balance of risk and reward" or words of similar effect.

- Who Made the Determination. Companies varied widely as to who made the risk determination regarding compensation programs and policies. Twenty-three companies (62 percent of those disclosing the determination) stated that the determination was made by the compensation committee, 10 companies (27% of those disclosing the determination) phrased the determination as being made by the company or "we" and, in the remaining instances, "management" made the determinations.

- Process for Determination. Sixty-five percent of those companies disclosing a risk determination provided disclosure of the process that the company or compensation committee undertook to make the determination.

- Location of Determination. Companies varied widely on the location of the disclosure in their proxy statements. Almost half of the companies included the disclosure in Compensation Discussion and Analysis. Other popular disclosure locations included under a separate heading in the corporate governance section, in the discussion of board oversight of risk or under a separate heading near discussions of compensation committee interlocks and compensation consultants.

- Risk-Mitigating Features. Regardless of whether a company disclosed a risk determination with respect to its compensation policies and practices, almost three-quarters of the surveyed companies discussed various features of their compensation programs and policies that are designed to mitigate excessive risk-taking.

The following excerpt from Kraft Foods' proxy statement discusses the compensation committee's process in evaluating compensation risks, risk-mitigating features contained in the company's compensation policies and practices and the conclusion of the compensation committee with respect to such risks:

"Analysis of Risk in the Compensation Architecture

In 2009, the Human Resources and Compensation Committee evaluated the current risk profile of our executive and broad-based compensation programs. In its evaluation, the Human Resources and Compensation Committee reviewed the executive compensation structure and noted numerous ways in which risk is effectively managed or mitigated. This evaluation covered a wide range of practices and policies including: the balance of corporate and business unit weighting in incentive plans, the balanced mix between short-term and long-term incentives, caps on incentives, use of multiple performance measures, discretion on individual awards, a portfolio of long-term incentives, use of stock ownership guidelines, and the existence of anti-hedging and clawback policies. In addition, the Human Resources and Compensation Committee analyzed the overall enterprise risks and how compensation programs impacted individual behavior that could exacerbate these enterprise risks. The Human Resources and Compensation Committee collaborated with the Audit Committee in this analysis.

Additionally, we engaged an outside independent consultant to review our incentive plans (executive and broad-based) to determine if any practices might encourage excessive risk taking on the part of senior executives. The outside consultant noted several of the practices of our incentive plans (executive and broad-based) that mitigate risk, including the use of multiple measures in our annual and long-term incentive plans, Human Resources and Compensation Committee discretion in payment of incentives in the executive plans, use of multiple types of long-term incentives, payment caps, significant stock ownership guidelines, and our recoupment and anti-hedging policies. In light of these analyses, the Human Resources and Compensation Committee believes that the architecture of Kraft Foods' compensation programs (executive and broad-based) provide multiple, effective safeguards to protect against undue risk."

Reporting Processes

As previously discussed, the SEC suggested in the adopting release that, where relevant, companies disclose in their proxy statements whether the officers responsible for risk management report directly to the board or to a board committee or how information is otherwise received from such persons. Thirty-eight percent of surveyed companies identified their principal risk officer or officers by title and disclosed that the officer or officers reported directly to the board or a board committee.

Frequency of Entire Board Review

One-third of surveyed companies reported that the full board reviews risk management at least annually, 22 percent stated that the full board reviews risk management issues "periodically" or "regularly" and a few companies reported quarterly or semiannual reviews by the entire board.

Length of Disclosure

Most companies devoted at least two or three paragraphs to their discussion of the board's role in risk oversight. The average length of the disclosures was 10 sentences, with the length of the discussion ranging from a high of 27 sentences to a low of three sentences. These numbers do not reflect any specific discussions of risks relating to compensation policies and practices or factors mitigating those risks.

Effect of Board's Role in Risk Oversight on Leadership Structure

Only 20 percent of the surveyed companies specifically addressed the effect of the board's role in risk oversight on the board's leadership structure. Instead, most companies simply stressed in the discussion of their leadership structure the role that a lead director or the independent directors play in providing strong, effective oversight of management.

Set forth below are disclosures by several companies that expressly addressed the matter:

IBM: "The Board's role in risk oversight of the Company is consistent with the Company's leadership structure, with the CEO and other members of senior management having responsibility for assessing and managing the Company's risk exposure, and the Board and its committees providing oversight in connection with those efforts."

Teco Energy: "We believe that our Board leadership structure promotes effective oversight of the company's risk management for the same reasons that we believe the structure is most effective for our company in general, that is, by providing unified leadership through a single person, while allowing for input from our independent Board members, all of whom are fully engaged in Board deliberations and decisions."

The Coca-Cola Company: "The Company believes that its leadership structure, discussed in detail [above], supports the risk oversight function of the Board. While the Company has a combined Chairman of the Board and Chief Executive Officer, strong Directors chair the various committees involved in risk oversight, there is open communication between management and Directors, and all Directors are actively involved in the risk oversight function."

- Broc Romanek

April 26, 2010

FINRA Provides Due Diligence Guidance for Regulation D Offerings

Last week, FINRA issued Regulatory Notice 10-22 to provide guidance to broker-dealers regarding the conduct of due diligence in Regulation D private placements. As noted in this press release, the Notice reminds broker-dealers of their obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings - and the Notice highlights three recent enforcement actions involving private placements. In fact, this guidance may very well have been issued as a result of those actions, particularly SEC v. Tambone (1st Cir.; 3/10/10).

In 12 pages, the Notice describes specific issues that relate to a broker-dealer's due diligence investigation responsibilities (e.g., b-d's affiliation with the issuer) and describes practices that have been adopted by some broker-dealers to discharge their due diligence obligations. The Notice includes a recommendation that a broker-dealer should retain records documenting the diligence process - and provides a detailed list of recommended diligence practices while pointing out that "reliance upon a single checklist may result in an inadequate investigation."

Banks Getting Grilled: California and Credit Default Swaps

Here is news from Keith Bishop of Allen Matkins:

A few weeks ago - before the SEC's action against Goldman Sachs - the California Treasurer sent letters to six major underwriters of California's state bonds asking a series of questions about credit default swap trading related to California bonds. The key question was: "Describe, in your view, how State of California CDS trading, in recent years, has affected the State, its bond sales and the borrowing costs paid by taxpayers." Last week, the Treasurer posted the responses of all six banks.

I think that Goldman Sach's response concerning the impact of CDS trading is typical: "We believe that CDS trading has had little or no effect on California's borrowing costs. The State's credit, budget and debt management (and not CDS prices) are the primary drivers of the State's borrowing costs."

Smaller Company M&A: The Latest Developments

Tune in tomorrow for the DealLawyers.com webcast - "Smaller Company M&A: The Latest Developments" - to hear Diane Holt Frankle of DLA Piper, Mark Filippell of Western Reserve Partners, John Jenkins of Calfee, Halter & Griswold and Bob Kuhns of Dorsey & Whitney discuss all you need to know about doing private and public deals when smaller companies are either the acquirer or the acquiree.

- Broc Romanek

April 23, 2010

Now Available: "Final" Dodd Bill

Last week, Senator Dodd formally introduced an updated version of his bill (S. 3217), now weighing in at 1410 pages rather than a portly six pounds.

This version is the one officially filed with the Senate by the Senate Banking Committee (and which passed the Committee) - so it incorporates the Manager's Amendments added by the Banking Committee. There are lots of other changes to the bill compared to the one released in mid-March - but there were no further changes to any of the corporate governance or executive compensation sections.

SEC's Statement on Its Independence: Proof that Self-Funding is Necessary

On Wednesday, SEC Chair Schapiro issued this statement about the agency's independence from the President, Congress, et. al. As noted in this NY Times article, this statement primarily was made to respond to a letter from Republicans on the House Oversight Committee that accused the SEC of political motivations in its pursuit of a case against Goldman Sachs. The article also notes that President Obama addressed charges of collusion by stating, "never discussed with us anything with respect to the charges."

To me, the need for the SEC to issue such a unique statement is one more example of why it needs to be self-funded (here is my first blog on the topic). As I recently noted in a comment to this blog, self-funding is not really about paying Staffers more to do their jobs (or adding more resources generally) - it's freeing the SEC from the Congressional appropriations process so that it can do its job free from political interference.

The SEC's 3-2 Vote on Charging Goldman Sachs: Is That Unusual?

In his "Race to the Bottom" Blog, Professor Jay Brown blogs about the 3-2 decision in a closed Commission meeting to bring the charges against Goldman Sachs. Jay bemoans the leak to the press - and notes that the split vote fell along party lines.

As noted on our webcast last week with former senior SEC Enforcement Staffers, it is relatively rare for the Commission to be so split behind closed doors (it's more common for 3-2 votes on rulemaking proposals). But it does happen (eg. cases a few years ago imposing penalties on public companies) - and obviously, this is an important case. The fact that the split would be along party lines is something that is probably new to this era of a politicized independent agencies. I doubt it happened like this 20-30 years ago.

As noted in this Washington Post article today, the divided decision has no bearing in court (at least directly) - I take the divided decision to either mean that it was a close case or that there was some political aspect that produced the split. Harvey Pitt notes in the article that the split decision could harm the SEC's reputation. Goldman officials will testify before the Senate Permanent Subcommittee on Investigations on Tuesday.

Poll Results: SEC v. Goldman

Here are the results from the poll that I conducted a few days ago regarding the SEC's Goldman case:

- It will drag on in courts for years - 20/7%
- It will be settled within a few months - 28.9%
- Some mid-level Goldman staffer thrown under bus - 29.6%
- Some big Goldman honchos suffer badly - 10.4%
- Goldman will lose big - 13.3%
- SEC will lose big - 20.7%
- Both parties come out even - 10.4%
- What me worry? - 5.2%

- Broc Romanek

April 22, 2010

Forward-Looking Disclaimers: Mattel Has Real Style!

If there were awards given for entertainment value of disclaimers, I imagine this forward-looking information disclaimer for Mattel's new interactive 2009 Annual Report (you'll need to click on "Start") would win hands-down this year (last year's winner would be Southwest's "rap" disclaimer). It's innovative as two children read the disclaimer at the beginning of the video. After reading - and writing - so many staid disclaimers over the years, it's cute as buttons.

On the one hand, due to its high entertainment value, I bet a court would give this disclaimer more weight than written disclaimers because shareholders are much more likely to pay attention to it. But on the other, it's also possible that a court may be turned off by children reading the disclaimer for fear that investors wouldn't take it seriously.

As noted in the memos posted in our "Forward-Looking Information" Practice Area, courts seem to prefer that the cautionary language be tailored to the forward-looking language in the document. But that just applies when the forward-looking information is in a written document.

In this case, it's a video and arguably it's considered an "oral" statement - in which case, the requisite disclaimer is much more bare-bones and need not be tailored (just like Mattel has it). I'm not sure if a court would consider a video "oral." Note that under Reg G, a webcast is considered "oral" - but other provisions of the securities laws could lead one to conclude that all multimedia are "writings" (see these FAQs I drafted long ago). All interesting stuff to ponder.

I should note my general thoughts that video annual reports that come off solely as infomercials are a waste of time (read how to create effective video annual reports in my piece entitled "The Birth of "Video Annual Reports:" A Substitute for the Written Word?" from the Winter '09 issue of InvestorRelationships.com, a free publication).

Dominic Jones agrees, and adds: "I'd much prefer a cheaply made video featuring a one-on-one between an analyst and the CEO, or even just the CEO being asked a bunch of questions sourced from shareholders via the company's website. Keep it real and authentic."

Social Media and Investor Relations

A while back, Brian Lane and I taped a 45-minute podcast for Eric Schwartzman's "On the Record" regarding the impact of social media on investor relations, which a heavy dose of the legal implications - which obviously means a bit of discussion about Regulation FD.

The podcast is designed for the general public, so the remarks fall at a fairly high level. I If you scroll down this page, Eric does a good job of sifting through the audio and creating a detailed table of contents of the program's agenda by summarizing certain remarks in bullet-format, indicating the "minute mark" during which they were made.

This "Fortune 500 Business Blogging Wiki" shows that 15.6% of the Fortune 500 are blogging - the Wiki has links to the 78 business blogs. In his "IR Web Report" yesterday, Dominic Jones blogged about how investor relations officers can no longer ignore social media compliance risks.

FINRA Provides Guidance on Use of Social Media

A while back, FINRA provided guidance - in Notice 10-06 - regarding how the rules governing communications with the public apply to social media that are sponsored by members or their registered representatives.

- Broc Romanek

April 21, 2010

The Revised US Sentencing Guidelines: What You Need to Do Now

In this podcast, Jeff Kaplan of Kaplan & Walker explains how the US Sentencing Guidelines have recently been modified to add provisions that set forth the attributes of an effective compliance and ethics program (here is Jeff's recent memo on the topic), including:

- What are the Corporate Sentencing Guidelines and why to they matter to companies?
- How - and how often - are they amended?
- What are the recent amendments and why are they significant?
- Should a board of directors be aware of this new development?
- Have there been any other important legal developments relating to compliance programs since we last spoke?

Seller's Key Issues in 2010: Still a Tough Seller's Market

We have posted the transcript from the recent DealLawyers.com webcast: "Seller's Key Issues in 2010: Still a Tough Seller's Market."

US Supreme Court Bar: I'm a Member!

Often, I am called upon to explain the benefits of blogging. One clear example of a benefit is the ability to network without stepping outside of the office. Simply by blogging about my experiences of visiting the US Supreme Court a few months ago, two readers of this blog emailed me and offered to sponsor my admission to the US Supreme Court Bar.

Although ceremonial in nature for most SCOTUS bar members (as they never plan to argue a case there), it is a limited bar in that two existing members must "sponsor" you, none of whom can be related to you. Obtaining the two sponsors can be hard to accomplish. Being sworn in before all nine Justices is quite a thrill, as I was admitted yesterday morning, right before oral arguments in a case.

Here are a few new take-aways from yesterday's event (here are ten from my prior visit):

1. Attorneys to be admitted are permitted to bring one guest, so my wife accompanied me - and my dad waited in line to attend like a regular guest. They were as thrilled as me. The lawyers arguing a case are permitted to bring six guests.

2. Etiquette is taken seriously, and customs are observed far more than any other court I have been in (eg. everyone is "Mr." or "Ms." - no first names). The Clerk of the Court (a former Judge Advocate General of JAG) and the Court Marshall wore morning coats with tails (ie tailcoat). So did the Assistant Solicitor General who argued the case (although Elena Kagan, the newly appointed Solicitor General has broken from that tradition, as noted in this blog).

3. Even though yesterday was Justice Steven's 90th birthday, it was not acknowledged in the courtroom. Having seen Justice Steven's argue twice during the past few months, I can report that he is as sharp as ever.

4. The SCOTUS staff is incredibly competent and courteous. They were very helpful all throughout the process. Most of the Staff appeared to be quite young - although that is perhaps because I am getting old.

5. Those being sworn in are seated right in front of the Justices, just to the left of the counsel arguing the case. It was great to have Chief Justice Roberts look me in the eye and confirm my admission. I think he smiled because my legal first name is "Barak," similar to the President's.

6. Yesterday, only one case was argued - a rarity. Typically, two cases are argued. Occasionally, three will be. Arguments for a case last precisely one hour. Chief Justice Roberts ensures a prompt ending (although he is not as strict as Chief Justice Rehnquist who would cut off someone in mid-sentence).

7. The Supreme Court only sits in session 35-38 days per year (as only 90 cases are granted certiorari annually out of 10,000 requests). Given that there is available space for 20-30 lawyers to be admitted during an open session with live argument, most lawyers admitted to the SCOTUS bar are confirmed via postal mail or in a session without argument. To be admitted in an open session, it takes a lot of pre-planning. If you would like to learn more, please contact me.

Speaking of the Supreme Court, the government has filed its brief in opposition to the writ of certiorari in the work product case, U.S. v. Textron. See this blog for the background on this important decision.

Visiting Live SCOTUS Arguments: Get In Line Early

Below is a picture of the line outside SCOTUS yesterday to get in and observe the proceedings, several hours before the court opened. I heard folks were lined up for three days for the chance to hear Monday's arguments (as it was a popular case):

IMG00016.jpg

- Broc Romanek

April 20, 2010

SEC Alumni: Bring Out Your Old Photos

For years, I've been on the "verge" of creating an online photo gallery for Corp Fin alumni. Now I'm finally doing it via this "Photo Gallery." Send yours along to me if you find some in your attic - and even new photos are welcome. If you don't have the ability to scan photos, you can mail them to me - and I'll scan them and mail them back.

As an example, this old picture is courtesy of Marty Dunn and features the Corp Fin "Poison Pills" softball team (names are listed above the pic). Given that the picture is over 15 years old, some names may have changed. Most of the other pics so far were contributed by our Staff; hence the overabundance of pics including us...

Nasdaq Revises Its Global Select Market Listing Standards

Last week, the SEC issued this order approving amendments to Nasdaq's Global Select Market Listing standards that allow a company to list if it has at least a $160 million market capitalization, $80 million in total assets and $55 million in stockholders' equity. Companies meeting these standards would also be required to meet the round-lot holder and market value of publicly held shares requirements.

In addition, Nasdaq lowered the market value of publicly-held shares requirement for IPOs and affiliated companies from $70 million to $45 million. Also, Nasdaq amended its rules to clarify that a SPAC is not permitted to list on the Global Select Market since the new listing standard may otherwise be relied upon by such a company.

Although the amendments are immediately effective upon filing with the SEC, the Nasdaq website indicates that the changes to its rules will "become operative" as of May 6th.

Suzanne Rothwell's nifty chart containing a comparison of NYSE and Nasdaq listing requirements has been updated. Tune in on June 22nd to hear Suzanne and senior members of the Nasdaq Staff during our webcast, "Nasdaq Speaks '10: Latest Developments and Interpretations."

A Poll: The SEC v. Goldman Sachs

A number of members wanted me to gauge how our community felt about the SEC's lawsuit against Goldman Sachs (see yesterday's blog). In the following anonymous poll, you can select more than one answer:

- Broc Romanek

April 19, 2010

House Hearings: Proxy Access and More

With the SEC likely to be gearing up to hold true to its promise to consider adopting final proxy access rules sometime this spring - and the Dodd bill containing a proxy access provision - the activities of the US House of Representatives bear watching.

This Wednesday, Rep. Paul Kanjorski, the Chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, will be holding a hearing to examine legislative proposals aimed at giving investors a greater say in corporate affairs. As noted in a press release, this hearing will focus on several other corporate governance reform proposals now pending in Congress, especially the bills advanced by three active members of the House Financial Services Committee - Gary Peters, Keith Ellison and Mary Jo Kilroy.

Placement Agent Regulation Makes Headline News

On "The Mentor Blog," I've recently posted a few items from Keith Bishop of Allen Matkins about placement agent regulation. Here are two new items from Keith:

Last week, the SEC announced an action against a private equity firm - Quadrangle Group LLC - for kickbacks involving a New York Pension Fund, making headline news due to the political connections of the firm's chief.

What struck me as interesting about this case, was that it was a Securities Act case but it doesn't involve a registration statement or a public offering. I wondered why the SEC proceeded under the '33 Act - and not the '34 Act?

I did a little digging into why the SEC may have brought the action under Section 17(a) of the Securities Act. The Supreme Court has held that standard of proof must be met by the Commission when it seeks to enjoin violations of § 17(a) and § 10(b) and Rule 10b-5. In Aaron v. SEC, 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980), the Court held that scienter is a necessary element of a violation of § 17(a)(1) and § 10(b) and of Rule 10b-5. Scienter was held not to be a necessary element of a violation of § 17(a)(2) or § 17(a)(3). More importantly, the Court held that "when scienter is an element of the substantive violation sought to be enjoined, it must be proved before an injunction may issue." 446 U.S. at 701, 100 S.Ct. at 1958. By consenting to an action under Section 17(a)(2), Quadrangle is presumably able to continue to deny scienter and this may help, among other things, with insurers.

In unrelated news, CalPERS has published for comment its proposed placement agent regulations. Last Fall, emergency legislation was enacted requiring CalPERS to adopt disclosure regulations for placement agents by June 30th of this year. Because CalPERS is the country's largest pension fund, these regulations will impact money managers and those trying to market investment products across the country.

A Huge News Event: The SEC Sues Goldman Over a CDO

On Friday, the SEC sued Goldman Sachs over the sale of a "synthetic" collateralized debt obligation, under facts that are not quite as may be otherwise expected as noted by Erik Gerding in "The Conglomerate Blog." Goldman is strongly disputing the SEC's allegations.

There's been an onslaught of news about this action, including:

- This WSJ article discusses the SEC rules regarding disclosure by Goldman of a Wells notice it apparently received last summer (note our panel covered disclosure of SEC Enforcement actions during the popular webcast last week,"Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now").

- This Bloomberg article points out a hole in the existing securities laws and regulations manifesting it self in self-dealings in the capital markets.

- This Financial Times article notes how the lawyers are likely to now come at Wall Street.

- Broc Romanek

April 16, 2010

Earnings Releases: Google's Site as a "Recognized Channel"

In its earnings release yesterday, Google included this interesting sentence: "Google intends to make future announcements regarding its financial performance exclusively through its investor relations website."

As noted by Dominic Jones in his "IR Web Report," this suggests that Google will no longer issue advisory releases and instead rely solely on its recently revamped investor relations website as a disclosure channel. Dominic provides analysis of how this move potentially falls within the SEC's 2008 Regulation FD guidance and its non-exclusive factors about when web disclosure can satisfy Reg FD. Dominic notes two other companies that have done this before - BGC Partners and Reis - and one that intends to do it soon (Expedia).

Understandably, the news wire services are concerned about their business model (as noted in this article). Note that Google did file a Form 8-K related to its earnings announcement yesterday - although I believe it was filed about six minutes after the advisory release was posted.

News Wires: Don't Play Favorites With Your Disclosures

Dominic Jones touches on this in his blog today, but it's not a new topic for him - for a while now, he's been writing stories about how the traditional business wires unevenly distribute the news. For example, in his "IR Web Report Bits," Dominic wrote a story entitled "Don't play favorites with your disclosures" that provides information that suggests that giving earnings release in advance to proprietary wires like Dow Jones, Thomson Reuters and Bloomberg is common practice. And that these organizations get to analyze them and provide their analysis right on top of the news going out over the wire.

Dominic raises a number of issues over this practice, including ones that should cause lawyers to perk up (eg. insider trading concerns). Check it out and let me know what you think.

A Self-Funded SEC: Chair Schapiro Goes on the Offensive

Recently, I blogged my enthusiasm for a self-funded SEC. Yesterday, in a news conference call, SEC Chair Schapiro delivered the following statement in an effort to ensure the self-funded provision (ie Section 991) of the Dodd bill winds up in the final reform legislation:

Thank you, Senator Schumer. And, thank you for the work you, Chairman Dodd and other Committee members are doing to protect America's investors and to reduce the chances of another financial crisis by passing critical financial regulatory reform legislation. The crisis was a stark demonstration of just how important it is to give financial regulators the tools needed to address systemic risk, to end too-big-to-fail, and to bring risky but unregulated elements of the financial system under the regulatory umbrella. The SEC, in particular, has critical market regulation and investor protection roles that will likely be expanded to include additional responsibility for hedge funds, and some OTC derivatives. As financial institutions get bigger, markets move faster and investments grow more complex, the SEC's role becomes ever more critical.

As I wrote in a letter to Majority Leader Reid and Minority Leader McConnell today, self funding ensures independence, facilitates long-term planning, and closes the resource gap between the agency and the entities we regulate. In the process, it allows the SEC to better protect millions of investors whose savings are at stake.

Self funding also ensures an SEC that is more effective at identifying and addressing the kinds of risk that dealt a significant blow to the American economy. Self-funding is so important to effective financial regulation that it is considered the necessary financing model for new regulators like the Federal Housing Finance Agency and the proposed Consumer Financial Protection Agency.

Right now, however, the SEC languishes as one of the few financial regulators still subject to the annual appropriations process. The SEC needs self funding to better protect consumers and their investments. And here's why:

In the immediate post-Enron era, the SEC saw significant increases in its budget. But priorities soon shifted, and funding dropped just as markets were growing in size and complexity. At the height of the pre-crisis frenzy, the SEC was actually forced to reduce staff. Between 2004 and 2007, the SEC's enforcement and examination programs lost 10 percent of their professionals. And, as Wall Street harnessed computers so powerful that only the speed of light held them back, we were forced to cut funding for new IT initiatives by 50%.

Only now can we afford to begin to develop the new technology that will allow us to evaluate, store and retrieve the kind of tip information that might stop the next major fraud.
Meanwhile, since 2003, trading volume has more than doubled, the number of investment advisers has grown by 50 percent, and the funds they manage have increased nearly 60 percent, to $33 trillion. That means that our 3,800 employees now oversee approximately 35,000 entities -- including 11,500 investment advisers, 7,800 mutual funds, 5,400 broker-dealers, and more than 10,000 public companies.

Self funding would have many benefits for investors:

- It would allow the SEC to increase its professional and technical capacity, to keep up with the financial industry's rapid growth;

- It would enhance our long-term planning process, allowing the SEC to address the increasingly sophisticated technologies, products, and trading strategies adopted by the financial services industry; and,

- It would provide the flexibility to react to developing risks in the same way that our domestic and foreign counterparts did during the recent financial crisis, with rapid staffing and strategic responses that help control systemic damage.

Today, the SEC's budget is offset by fees on the securities industry, assessed primarily on securities transactions and registrations. However, the fees collected by SEC are completely independent of, and typically significantly exceed, the agency's budget. For example, in 2010, the SEC will collect about $1.5 billion for the Treasury, while its appropriation is $1.1 billion. I believe that fees assessed on investors' transactions should be dedicated to protecting investors.

Effective regulation is essential to our economic security and growth. I am committed to continuously improving the performance of the SEC. We have restructured our agency, re-energized our team and re-vitalized our executive corps, hiring new leaders with real-world experience who are eager to lead our dedicated and talented career staff in the fight for investors.

But to truly protect investors to the best of their abilities, they need the independence, planning ability and resources that self funding provides. Self funding is an important component to the world class industry supervision and investor protection that American investors deserve.

- Broc Romanek

April 15, 2010

FASB's "Disclosure of Loss Contingencies" Project: Decisions Made and on the Fast Track

Yesterday, the FASB's Board held a meeting and discussed a number of Staff recommendations regarding "Disclosure of Certain Loss Contingencies," which would amend FASB Accounting Standard No. 5 "Accounting for Contingencies" as first proposed back June 2008. That proposal resulted in a large number of comments from professional organizations and others opposed to the proposal.

As I've blogged before, attorneys in particular have expressed significant concerns that the proposed mandated disclosures could result in admissions against the interests of companies as well as result in waivers of the attorney-client privilege and attorney work product protection (here is a blog about other views). Because of the comments received, the FASB decided in September 2008 to "re-deliberate" the issues raised by the proposal.

As indicated in these notes to yesterday's meeting, the FASB now has reached many decisions on this proposal - and plans to issue a new Exposure Draft sometime in May with only a 30-day comment period. Based on the notes, it appears that the concerns expressed by lawyers in the comment letters have not been fully addressed - but we will have to see the Exposure Draft to determine if that truly is the case (eg. requirement to make disclosures about certain remote contingencies under certain circumstances).

Assuming the final standard is out around Labor Day as discussed at the meeting, the FASB expects that the new requirements will be effective for fiscal years ending after December 15, 2010, and interim and annual periods thereafter (except for nonpublic entities which have different dates). The new requirements would apply to fiscal year 2010 financials for calendar year companies.

iPhone Apps for Lawyers

In this podcast, Stuart Wood of Torys explains the details of his firm's new iPhone application (you can download the app here), including:

- Why did Torys decide to build this iPhone app?
- What does the app do?
- Any surprises since launch?
- Any enhancements already planned?

More on "The Mentor Blog"

We continue to post new items daily on our 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:

- More on Placement Agent Regulation
- Use Your Existing ESOP to Increase Bank Capital
- Feedback: Prohibition of Broker Voting on Say-on-Pay Votes
- DOJ and BAE Systems' $400 Million FCPA Settlement
- Director Independence Determinations: Take All Facts & Circumstances into Account

- Broc Romanek

April 14, 2010

Early Bird Discount Ends Tomorrow: "5th Annual Proxy Disclosure Conference" & "7th Annual Executive Compensation Conference"

With Congress moving quickly on financial regulatory reform, huge changes are afoot for executive compensation practices and the related disclosures - that will impact every public company. We are doing our part to help you address all these changes - and avoid costly pitfalls - by offering a special early bird discount rate to help you attend our popular conferences - "Tackling Your 2011 Compensation Disclosures: The 5th Annual Proxy Disclosure Conference" & "7th Annual Executive Compensation Conference" - to be held September 20-21st in Chicago and via Live Nationwide Video Webcast (both of the Conferences are bundled together with a single price). Here is the agenda for the Proxy Disclosure Conference.

Special Early Bird Rates - Act by Tomorrow, April 15th: Register by April 15th to take advantage of this discount.

US Sentencing Commission: Changes Requirements for Effective Compliance & Ethics Programs

Last week, the US Sentencing Commission voted to modify the Federal Sentencing Guidelines for organizations, including the provisions that set forth the attributes of an effective compliance and ethics program. These changes take effect on November 1st.

As noted in this Gibson Dunn memo, after considering a number of proposed changes to these Guidelines, the Commission voted to:

- Enhance the report obligations from a compliance officer to the board of directors in order for the compliance program to be deemed effective in all circumstances;

- Clarify the steps a corporation must take to meet the Commission's requirement for proper remediation in the event criminal conduct occurs;

- Reject the proposed language that would have mentioned, for the first time, the appointment of monitors as a possible component of the remediation requirement or, separately, as a possible condition of probation for a convicted corporation; and

- Reject language under consideration that would have given document retention policies unique prominence in the list of compliance program requirements.

We'll be posting memos on this development in our "Sentencing Guidelines" Practice Area.

The Carol Burnett Show: Takes On Discount Airlines

I got nostalgic watching this skit from the fantastic Carol Burnett Show from my youth about the experience of "no frills" airline travel. Carol, Tim Conway, Harvey Korman. I love it when Carol kicks Tim for having his foot on the carpet...

- Broc Romanek

April 13, 2010

Survey Results: Even More on Blackout Periods

Every year or so, we survey the practices relating to blackout and window periods (there are results from nine others in our "Blackout Periods" Practice Area). Here are the latest survey results, which are repeated below:

1. Does your company ever impose a "blanket blackout period" for all or a large group of employees?
- Regularly before, at, and right after the end of each quarter - 67.7%
- Only in rare circumstances - 17.2%
- Never - 15.1%

2. Does your company allow employees (that are subject to blackout) to gift stock to a charitable, educational or similar institution during a blackout period?
- Yes, but they must preclear the gift first - 31.9%
- Yes, and they don't need to preclear the gift - 9.6%
- No - 33.0%
- Not sure, it hasn't come up and it's not addressed in our insider trading policy - 25.5%

3. Does your company allow employees (that are subject to blackout) to gift stock to a family member during a blackout period?
- Yes, but they must preclear the gift first - 24.5%
- Yes, and they don't need to preclear the gift - 8.5%
- No - 33.0%
- Not sure, it hasn't come up and it's not addressed in our insider trading policy - 34.0%

4. Are your company's outside directors covered by blackout or window periods and preclearance requirements?
- Yes - 96.8%
- No - 3.2%

5. Our company's insider trading policy defines those employees subject to a blackout period by roughly:
- Stating that all Section 16 officers are subject to blackout - 1.1%
- Stating that all Section 16 officers "and those employees privy to financial information" are subject to blackout - 10.6%
- Stating that all Section 16 officers "and others as designated by the company" are subject to blackout - 27.7%
- Stating that all Section 16 officers "and those employees privy to financial information and others as designated by the company" are subject to blackout - 41.5%
- All employees - 13.8%
- Some other definition - 5.3%
- Our company doesn't have an insider trading policy - 0.0%

Please take a moment to respond anonymously to our "Quick Survey on 'Code of Ethics and the Board'."

Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now

Tune in tomorrow for the webcast - "Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now" - to hear former senior SEC Enforcement Staffers Colleen Mahoney of Skadden Arps, Chris Mixter of Morgan Lewis, Russ Ryan of King & Spalding and Linda Chatman Thomsen of Davis Polk discuss how the Division of Enforcement's investigative process works now that the SEC has dramatically overhauled some of its Enforcement processes and procedures, and what that means for you.

Recession Did Not Substantially Alter Institutional Investment Strategies

It's not the normal type of thing I blog about, but this struck me so I thought I'd share if you didn't see it otherwise. Recently, The Conference Board issued this press release noting a study that all major categories of institutional investors (including pension funds, mutual funds, insurance companies, savings institutions and foundations) have remained fundamentally committed to the same investment policies they were adopting prior to the credit crunch.

I'm not sure whether to believe the study's findings or be happy that perhaps I can beat the market after all. More likely is that it doesn't even matter at the end of the day. It just struck me so I put it out there...

- Broc Romanek

April 12, 2010

Parsing Corp Fin's Comment Letters: A Withdrawn "Shareholder Responsibility" Proposal

When Corp Fin's comment letters (and responses) became publicly available a few years back, it was natural to think that this blog would be regularly analyzing this important back-and-forth process. For a number of reasons, we haven't gone in that direction.

But once in a while, a comment letter comes to your attention, one that can't be ignored. Last year, North American Galvanizing & Coatings filed this preliminary proxy statement with an innovative (and problematic) proposal that would restate the company's certificate of incorporation with a provision that sought to make large shareholders "liable" for the consequences of voting in favor a shareholder proposal (see Proposal 5 on page D-34). In other words, the restated charter would have essentially saddled 1% or greater shareholders with the same responsibility as directors.

As noted in the company's response, this proposal was withdrawn from the proxy statement in response to this Corp Fin comment letter. As the comment letter notes, this proposal would have to overcome a heap of state and federal law issues - and likely would be subject to a heated legal challenge from activists.

Interestingly, Joe Morrow - well-known founder of proxy solicitor Morrow & Co. - is Chair of North American Galvanizing & Coatings' board and a major shareholder of the company. I have no idea whether Joe was involved in coming up with the idea for this proposal.

Justice Stevens and the Loss to Investors/Shareholders

In his "Race to the Bottom Blog," Prof. Jay Brown continues to write interesting stuff. His latest is analysis of the impact caused by Justice Stevens' retirement on the securities law cases heard in the US Supreme Court.

More on our "Proxy Season Blog"

With the proxy season in full gear, we are posting new items regularly on our "Proxy Season 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:

- Microsoft's Video Interview with a Director
- Annual Meeting Scripts: The Skinny (and Samples)
- Fixing the Problems with Client Directed Voting
- 2010 AFL-CIO Key Vote Scorecard
- Preparing the New Proxy Disclosures: Some Examples and Analysis

- Broc Romanek

April 9, 2010

PCAOB's Alert: Auditor Considerations of Significant Unusual Transactions

Yesterday, the PCAOB issued this Practice Alert reminding independent auditors about their responsibilities to assess and respond to the risk of material misstatements of financials due to error or fraud posed by significant unusual transactions. Notably, the Practice Alert states:

Significant unusual transactions, especially those close to period end that pose difficult "substance over form" questions, can provide opportunities for companies to engage in fraudulent financial reporting. Further, the auditor's evaluation of whether the company's financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework, includes the consideration of the financial statement presentation and disclosure of significant unusual transactions.
This is a practice alert because as the alert notes, the standard on auditing for fraud already requires auditors to consider these unusual transactions. As I recall, the Auditing Standards Board has also issued Practice Alerts on this same issue in the past. It is quite likely this may become a topic of discussion between auditors and audit committees in the near future.


The Ratings Game: Association of Corporate Counsel Gets In

A few months ago, the Association of Corporate Counsel announced that it would start producing "value index" ratings of law firms, based on evaluations provided confidentially by its members (it's called the "ACC Value Challenge"). It's a good idea on its face - but as you could imagine, it is likely to create a heap of controversy. That's already starting with this ABA Journal report that some of the ACC's ratings have already been leaked prematurely (and here is an earlier blog - and another article).

Given that peer remarks can be one of the most influential factors in getting hired, this may prove to be a powerful tool. My problem with the ACC rating system is that - based on this demo evaluation form - it seems to allow only firms themselves to be evaluated - not individual attorneys like Avvo does. Since most folks hire lawyers for their own abilities and not so much for the law firm's own brand (except for the most strongly-branded firms perhaps), the ACC framework might not be as useful as it could be...

The Socially Irresponsible Investor: A Video Parody

Here is a video parody about Wormwood Bayne, the stock fund for socially irresponsible investors. Hat tip to Jim McRitchie, who tipped his hat to Cliff Feigenbaum...

- Broc Romanek

April 8, 2010

Understanding Bankerspeak

Below is an entry recently posted by John Jenkins of Calfee Halter & Griswold on the DealLawyers.com Blog:

English may be the first language of business, but when it comes to M&A, you won't get very far without a thorough grounding in the unique English dialect known as "Bankerspeak."

Bankerspeak owes its existence in large part to the most productive jargon generation machine ever invented: the American business school. (Whatever else they've accomplished, business schools have been teaching future MBA's to "proactively leverage synergies" for more than a century!) But Bankerspeak also couldn't exist without significant contributions from marketing consultants, who've helped professionals learn to frost their b-school jargon with a heavy coating of smarminess.

Now, before the bankers in the audience get all huffy, let me concede the obvious point that lawyers take second place to no profession when it comes to generating incomprehensible gibberish. But, our crimes against the English language tend to be in written form, while the bankers' offenses are almost always verbal.

The biggest reason for the difference between the professions on this point is the extraordinary efforts that law schools make to transform literate liberal arts graduates into the "legal literati." If, like most lawyers, you were a liberal arts major, then chances are you were a pretty decent writer when you went to law school. Come to think of it, if you were a liberal arts major, chances are that the ability to write an English sentence was about the only skill you had, which is why you ended up in law school in the first place.

But I digress.

Anyway, if you saw someone get off a bus and cross the street prior to your first legal writing class, you would probably have written the following description of what you saw: "I saw a woman get off the bus and cross the street." After you took legal writing and joined the legal literati, that description probably looked more like this: "I observed a female (the "Person") egress the multi-passenger vehicle (sometimes hereinafter referred to as the "Bus") and traverse the thoroughfare."

The other reason that Bankerspeak tends to be a spoken dialect is that most bankers wouldn't be caught dead actually drafting something that didn't consist almost exclusively of numbers. This is actually okay, because most lawyers can't do math well enough to balance a checkbook.

At any rate, Bankerspeak is pretty ubiquitous in the transactional world, and those who aren't fluent in it are at a real disadvantage. So, as a public service, here's a handy guide to interpreting some commonly used Bankerspeak phrases:

- Bankerspeak: It's a turnaround scenario, but we're very high on management.
- English: The business looks like the 21st Century answer to Penn Central, but the CEO plays golf with one of our Managing Directors.

- Bankerspeak:This deal is very time sensitive.
- English: I leave for the Caribbean in two weeks.

- Bankerspeak: We understand your concern, and we'll leave that as an open issue for now.
- English: No.

- Bankerspeak: At this point, how visible are the assumptions behind your projections?
- English: Seriously, do you have any idea what you're talking about?

- Bankerspeak: We need you to give some thought to our position on this issue
- English: Think of me as the Voice of God.

- Bankerspeak: The market is a little choppy right now. We may want to wait until things settle down.
- English: Your deal is dead.

- Bankerspeak: We view this as potentially a positive from a marketing standpoint.
- English: Your deal is dead, but we haven't figured out how to break the news to you yet.

- Bankerspeak: There's a lot of hair on this deal.
- English: I'm impressed. You must have really worked overtime to screw the company up this badly.

- Bankerspeak: We need to give some thought to the optics of this.
- English: My God, this looks horrible! Your business ethics would make Bernie Madoff blush.

I don't care what William Shatner says -- Bankerspeak is the real "language of the deal!"

Ringing the NYSE Bell: What Does It Feel Like?

On his "IR Musings" Blog, John Palizza gives a great account of what it feels like to ring the NYSE bell. I've never done it myself and have now added it to my bucket list...

SEC Proposes Changes to Regulation AB

Yesterday, at an open Commission meeting, the SEC proposed changes to its regulations impacting asset-backed securities. Here's the press release and Chair Schapiro's opening remarks - and here is the proposing release.

- Broc Romanek

April 7, 2010

How is Morale at the SEC? A Job Satisfaction Survey

Probably not the best indicator of morale since the survey took place at the end of '08 - and the SEC's reputation has been significantly sullied since then - the SEC recently posted the results of a biannual job satisfaction survey. The SEC's survey is based on a subset of a much larger "Federal Human Capital Survey."

Here are a few thoughts:

- For starters, I am surprised to see these results made publicly available. I don't recall seeing something like this before, but I may be remiss. Not a big deal that they are - it's just not the type of thing you normally see posted.

- 1605 out of a possible 3125 Staffers (51%) responded to the survey, with an equal mix of supervisors and subordinates participating.

- This survey provides data compared to the last two surveys ('06 and '04), as well as the responses of all government employees to the '08 survey.

- Overall, morale seemed pretty good at the SEC as of the end of '08. There were 63 questions asked - and typically, a majority were positive when answering a query. Overall, the SEC Staff's level of positiveness often were in line with the government as a whole.

- As could be expected - given that the crisis was in full force at the end of '08 - the SEC scored lower in this survey for many questions compared to the last two biannual surveys. But not as much as you would expect given the circumstances.

- The area that seems like it needs the most work is "complaints, disputes or grievances are resolved fairly in my work unit" (question #44 on page 12). Positive answers were 32% - but in line with prior two surveys and not far below the government-wide average. Similar ratios existed for "promotions based on merit" (question #22) and "steps are taken to deal with a poor performer" (question #23). I know how hard it is to discipline someone in the government - supervisors are sued all the time for the smallest things, so these don't really surprise me.

As an aside, note that at least one version of the regulatory reform bills floating on Capitol Hill calls for a GAO study regarding the SEC's revolving door (personally, I don't see a problem with it - having a government background allows folks to better serve clients and also is one of the reasons why the government is able to recruit good people on the cheap). This WSJ article from yesterday was critical of this difficult issue for the Staff.

I'd be curious to see how law firms rate in a number of these categories. My guess is not too well. Good management is tough to accomplish. And supervisors in both the government and law firms often are not properly trained in this art...

The SEC Hires a "Kathy Griffin": Freed from the "D" List?

While I was on vaca, the SEC announced that Kathleen M. Griffin has been named the agency's first Chief Compliance Officer - the latest in a series of measures undertaken to strengthen the SEC's internal compliance program. The announcement came on April Fool's Day, so naturally I thought that Kathy Griffin had finally been taken off the "D" list. But alas, the SEC was not joking - nor has Kathy been freed from her semi-celebrity status as the SEC hired a different Ms. Griffin.

By the way, there is precedent for the SEC issuing a press release in the form of a joke on April Fool's Day, as I blogged about in '07.

Marty Rosenbaum has his ONSecurities.com Blog up and running again. Check out his recent analysis of the intersection of baseball and proxy statements.

Just Mailed: Romeo & Dye Section 16 Deskbook

Peter Romeo and Alan Dye just completed the 2010 edition of the Section 16 Deskbook and it's now in the mail to those that subscribe to the Romeo & Dye Section 16 Annual Service. To receive this critical Section 16 resource, try a '10 no-risk trial to the "Section 16 Annual Service."

- Broc Romanek

April 6, 2010

CEO Pay Continues a Decline: Have We Seen the Bottom?

The front page of last Thursday's Wall Street Journal announced "CEOs See Pay Fall Again," and no, it wasn't an April Fools' Day joke. According to the data tracked by the WSJ, the median value of total direct compensation (comprised of salaries, bonuses, long term incentives and grants of stock and stock options) for the CEOs of 200 major US companies declined 0.9% to $6.95 million. This was described as only the third drop in total direct compensation since 1989, when the WSJ began tracking the data, and the second year in a row for a decline, with 2008 seeing a 3.4% drop in CEO pay.

The big question remains, where is CEO pay going to go now? One thing that is surprising to me is that the drop in median total direct compensation for CEOs was so modest for 2009. With the continuing effects of the recession and financial crisis, as well as an overall level of public and shareholder anger over executive compensation, the trend doesn't seem to indicate any sort of long-term revisiting of the overall size of CEO pay packages. The article notes that pay curbs put in place in the 2008-2009 timeframe appear to be ending, at least anecdotally.

In order to be up-to-date on the latest on executive compensation trends, emerging responsible pay practices and public disclosure issues as the next pay cycle approaches, be sure to sign up today for our upcoming conferences, "Tackling Your 2011 Compensation Disclosures: The 5th Annual Proxy Disclosure Conference" and the "7th Annual Executive Compensation Conference." These conferences take place in Chicago on September 20-21. Be sure to act now, because the early bird discount will expire April 15th!

What the Top Compensation Consultants Are NOW Telling Compensation Committees

For more on the latest executive compensation trends, note that we have posted the transcript for our recent CompensationStandards.com webcast: "What the Top Compensation Consultants Are NOW Telling Compensation Committees."

The SEC's Bounty Program

A report out last week from the SEC's Inspector General notes that the SEC's two-decade old bounty program for paying whistleblowers in insider trading cases has paid out only $159,537 to five people. I didn't even know there was such a program, and I guess I wasn't alone. The report notes a number of recommendations, such as improving the process for applying for bounties and informing the public about the availability of the bounties. The SEC's Director of Enforcement agreed with all the recommendations, so we are likely to see some ramp up in the bounty efforts. The SEC has recently asked Congress to expand its authority to pay bounties in all sorts of Enforcement cases that would bring in fines of over $1 million.

- Dave Lynn

April 5, 2010

Private Securities Litigation Continues to Fall

The latest report from Cornerstone Research shows a sharp drop-off in federal securities fraud class action filing activity in 2009. Continuing a trend that we have seen over the past few years, the 169 federal securities fraud class action filings in 2009 were off 24% from 2008, and were well below the historical average over the past ten years. Included in this big decline was a sharp retreat in credit-crisis filings, down nearly 47% from 2008 levels.

By contrast, the average value for settlements in 2009 increased to $37 million compared with $28 million in 2008, according to another study published by Cornerstone Research. Securities class action settlements totaled $3.8 billion in 2009, an increase of more than 35 percent over 2008. The Cornerstone study also reports 103 settlements approved in 2009, up from 97 reported in 2008. Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse (which works in cooperation with Cornerstone Research), observed that, "Because securities fraud litigation typically settles three to five years after the first complaint is filed, this year's settlement activity reflects lawsuits brought roughly between 2004 and 2006. Given litigation trends over those years, the 2009 settlement data are within the zone of expected settlements, and aren't much of a surprise."

Pressure on Audit Fees Intensifies

Apparently it is not just the lawyers facing pressure on their fees these days. As this recent CFO.com story notes, the tide has turned on audit fees, with companies ramping up the pressure on audit firms to reduce fees and provide more services. Following years of ever-increasing audit fees in the wake of the Sarbanes-Oxley Act, along with auditors "firing" their riskier clients in large numbers, the recent trend (at least since 2007) has been a decline in audit fees, coupled with increasing incidences of companies being the ones dumping their auditors, presumably in favor of cheaper alternatives.

According to data analyzed by CFO, companies with revenues in the $250 million to $500 million range saw a drop of 5% in their fees from 2007-2008, while smaller companies in the $100 million to $250 million range saw an 8% drop on average. The growing practice at public companies is for chief financial officers to benchmark what the company is paying its auditors against the company's peers, utilizing the readily available audit fee disclosure.

One concern noted with the pressure on fees - low-balling the auditor on fees risks pressuring auditors to underaudit, with abnormally low fees serving as a negative sign for shareholders and the market on the theory that "you get what you pay for." The article cites examples - like the $186,000 per year audit fees paid Madoff's multi-billion dollar fund - where the fees just don't add up to the relative size or complexity of the audit.

This fee pressure is no doubt a trend that is here to stay - even the concerns arising from the financial crisis seem to be outweighed by the pressure on bottom lines to cut professional fees wherever possible and to put everything out for re-bid.

More on our "Proxy Season Blog"

With the proxy season in full gear, we are posting new items regularly on our "Proxy Season 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:

- Shareholder Meetings: Eni's Rules of Order
- Surfing Champion Surfaces in a Proxy Filing...
- Court: Non-Shareholder has Standing to Challenge Director Election
- The Board Diversity Disclosures: What They Look Like So Far
- Proxy Disclosures: Another SEC Enforcement Action

- Dave Lynn

April 1, 2010

SEC to Consider Changes to Regulation AB

Asset-backed securities have been in the spotlight ever since the financial crisis hit, with high-rated residential mortgage backed securities bearing a share of the blame for investor losses following the real estate market crash. What often gets lost in the debate about asset-backed securities is how the SEC had adopted in 2004 (at the height of the bubble by coincidence) a very comprehensive and workable set of rules governing the registration and disclosure system for asset-backed securities in the form of Regulation AB and some related offering rules, where no such rules had existed before. [Broc and I both spent some time in the group handling asset-backed securities in Corp Fin, and before Regulation AB, the "lore" for how to handle asset-backed securities from an SEC perspective was passed down through internal memos, sample comments, handwritten notes, spoken word and a handful of public no-action letters!]

Yesterday, the SEC announced that coming up next Wednesday April 7th, the Commission will consider whether to propose revisions to Regulation AB and other rules relating to the offering, disclosure and reporting process for asset-backed securities. Under consideration are the rules governing the shelf offering process and eligibility criteria for asset-backed securities, and the proposals would require asset-backed issuers to provide enhanced disclosures, including information regarding each asset in the underlying pool in a standardized, tagged format. The Commission will also consider changes to Rule 144A and other rules applicable to privately offered asset-backed securities (where a good deal of the action has historically been in that market).

Given the considerable Congressional and media attention on asset-backed securities, I suspect that these rule proposals will no doubt be seeking to enhance investor protections and disclosure in the asset-backed securities market, rather than seeking to in any way to relax existing regulatory requirements.

Enforcement's New Chief Accountant

Recently, the SEC announced that Howard Scheck is rejoining the Division of Enforcement as Chief Accountant. Howard is currently a partner in the Forensic & Dispute Services practice of Deloitte Financial Advisory Services LLP, and he had previously served in Enforcement for 10 years, including some of that time spent in the now extinct Branch Chief role.

As with Corp Fin, Enforcement relies heavily on the expertise of accountants in conducting investigations. Howard has both a J.D. and an accounting degree, so he brings to the job the perspectives of both a lawyer and accountant.

Our April Eminders is Posted!

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

- Dave Lynn