May 28, 2010

The New UK "Financial Services Act 2010" Makes Significant Reforms

On the heels of the passing of "The Financial Services Act 2010," the United Kingdom's new coalition government announced that it will not disband the Financial Services Authority - sparing the country's financial regulator from abolishment. Learn more in this memo in our "European Law" Practice Area.

Sometime today, the UK's Financial Reporting Council is likely to announce changes to the UK's "Combined Code on Corporate Governance."

First DOJ Opinion in '10 Permits Payment to Foreign Official

Last month, the DOJ issued its first opinion of the year - Opinion Procedure Release No. 10-01 - in which it announced that it would not take enforcement action under the Foreign Corrupt Practices Act against a U.S. company that proposed to pay a foreign official for services the foreign official would provide on behalf of the US company. Learn more in this memo posted in our "Foreign Corrupt Practices Act" Practice Area.

Stayed tuned for this upcoming webcast: "Critical FCPA Diligence in Deals Today."


- Broc Romanek

May 27, 2010

Posted: Final Version of Senate's Dodd Bill (and More)

Yesterday, the final version of the Senate's Dodd bill - the "Restoring American Financial Stability Act of 2010" - was made publicly available. At 1,615 pages, it will take quite some time to print (and read!).

If you're interested in just the corporate governance and executive compensation portions of the RAFSA, check out this 23-page excerpt courtesy of Davis Polk. Of course, we continue to post memos analyzing the bill in our "Regulatory Reform" Practice Area (here is a 8-pager with a nice side-by-side comparison of the House and Senate bills). And stay tuned for an upcoming podcast on the Senate bill next week if you are more audio-inclined...

The Skinny on "Virtual" Law Firms

In this podcast, David Goldenberg of Virtual Law Partners explains how the "virtual" law firm model works, including:

- What is Virtual Law Partners?
- How is the firm run differently than a typical firm?
- From a client's perspective, how are services provided any different?
- What led you to the virtual model?
- How do you overcome the challenges of not being physically together?

Smaller Company M&A: The Latest Developments

We have posted the transcript of our recent webcast: "Smaller Company M&A: The Latest Developments."

- Broc Romanek

May 26, 2010

Say-On-Pay So Far: Wow! A Third Company Fails to Gain Majority Support

As noted in the ISS Blog, KeyCorp became the third company to fail to obtain majority support for its executive pay package at its annual meeting last Friday. The pay package received only 45% support - it received 87% support last year. Here's the company's Form 8-K with the voting results.

So KeyCorp joins Motorola and Occidental Petroleum as the first three US companies whose management say-on-pay ballot items didn't pass. Wow.

Consider the magnitude of this development:

- These three companies are not Wall Street banks where the general public is angry over banker bonuses.

- There were no organized campaigns against the pay packages at these three companies. This was a pure grass roots movement. With organized campaigns, imagine the level of votes.

- Only a few hundred companies have say-on-pay on their ballot this year; a small fraction of the 10,000 that will have it on their ballot next year when Congress makes it mandatory.

- If the Senate provision remains in the final bill changing NYSE Rule 452, say-on-pay will become a "nonroutine" agenda item - and broker nonvotes won't be available to be cast in favor of pay packages. This means it will become harder to obtain majority support for executive pay packages.

How to Prepare for Mandatory Say-on-Pay

We have just posted the agendas for the "7th Annual Executive Compensation Conference" and the "18th Annual NASPP Conference" to be held in Chicago on September 20-23 (the "7th Annual" is also available via video webcast).

Among the 40-plus panels, we have tailored a special track to help you prepare for mandatory say-on-pay including these panels:

- "Say-on-Pay: The Proxy Solicitors Speak"
- "Say-on-Pay: Successfully Communicating Externally and Internally"
- "The Proxy Advisors & Investors Speak: Their Hot Button Issues and Say-on-Pay"
- "The New Compensation Legislation: What to Do About Say-on-Pay and More"
- "Five Hot Button Compensation Fixes: In Light of Say-on-Pay and More"
- "This Coming Year's Grants: How to Deal with Last Year's Inadvertent Gains"
- "The Big Roundtable: Consultants, Directors and Top HR Heads"
- "Directors Speak Their Minds on Executive Compensation"

With Conference registrations going strong - on track to reach nearly 2000 attendees - you don't want to be caught unprepared as we head into next year. Last year's Conference sold out a month in advance - and that was without the reality of mandatory say-on-pay hanging over our heads.

Act Now: You have two choices - either attend the "18th Annual NASPP Conference" in Chicago (which includes the ability to attend the "7th Annual Executive Compensation Conference" - or attend the "7th Annual Executive Compensation Conference" by video webcast (which includes the "5th Annual Proxy Disclosure Conference").

Handicapping the House-Senate Conference Committee Reconciliation

Although we will not officially know the entire composition of the House-Senate Conference Committee that will reconcile the Senate and House versions of a financial reform bill for a few more weeks, we do know that Rep. Barney Frank will head the Committee (as noted in the NY Times' DealBook) and we do know the twelve Senators that will be included in that Committee (as noted in this Reuters article; this Reuters article identifies likely House members of the Committee even though they won't be officially named til week of June 7th). Congress - and President Obama - have a goal to wrap up a final bill by the 4th of July recess.

Even though the House's bill was weaker in the governance area, it is likely that Rep. Frank will push to keep the stronger Senate provisions in the final bill - with some tweaks as noted below - given that very few of the 400-plus proposed amendments to the Dodd bill dealt with governance issues. The real reconciliation debate will center on how financial institutions are regulated (ie. derivatives, "too big to fail", etc. - see Frank's comments in these areas yesterday).

Note that Barney Frank wants the Conference Committee negotiations televised.

Barney Frank Speaks: His View of Which Governance Provisions Will Survive Reconciliation

According to this article, Rep. Frank yesterday said that the specific language regarding the proxy access provision was up in the air. He also said that the Senate provision for a self-funded SEC may be tweaked to keep Congress involved somewhat - and he indicated that the House provision to exempt smaller companies from SOX's internal controls requirement may survive. According to the ISS Blog, Frank said that the Senate's majority vote requirement could well be stripped out in the final bill.

Below is a piece written by CongressDaily's Bill Swindell entitled "Frank Sees SEC Self-Funding Language As Ripe for Revision" that covers a number of topics:

A drive to allow the SEC to self-fund its budget by retaining fees it collects will likely have to be modified to allow for greater oversight by appropriators, House Financial Services Chairman Barney Frank said Tuesday. Frank said conference negotiators on legislation to revamp the nation's financial regulatory system will have to take into account the resistance of appropriators to SEC self-funding because they would lose their power to dictate its budget.

"The Appropriations Committee gets very upset about this. What I am hoping that gets worked out, and it will be with their participation, is a way to do some self-funding, which leaves the Appropriations Committee with a role," Frank said during a talk at the Compliance Week annual conference. The Senate bill contains the provision, allowing the agency's chairman to submit a budget to the SEC, but it would automatically get the amount requested. The language was sponsored by Sen. Charles Schumer, D-N.Y., who has argued the agency needs more resources to monitor wrongdoing in the aftermath of the Bernard Madoff and Allen Stanford fraud cases. The House bill set an increase in authorization levels.

The FY10 funding for the SEC was $1.1 billion, a $151 million increase over FY09. It has requested $1.26 billion for FY11. The agency collected $1.5 billion in fees in 2008. "The appropriators are going to push hard to maintain some role, and I think they will be successful," Frank said. Both bills give the SEC authority to issue rules that would allow shareholders to nominate board of director candidates through increased proxy access. "I think we are at least going to empower the SEC to do it. Beyond that, I'm not sure," Frank said.

The SEC last year proposed a rule to require companies in some cases to include in their proxy materials the nominations for directors by shareholders, but held off on finalizing the proposal. The U.S. Chamber of Commerce and other business groups question whether the agency has the right to issue rules over corporate governance standards that are enacted at the state level.

The Senate bill, however, includes additional Schumer provisions, such as requiring that directors in uncontested elections receive a majority of the votes cast, or they must tender their resignation. It also would require the SEC to issue rules to require public companies in their proxy statements to disclose why the same or different people serve as chairman and CEO. Frank said he did not know if the additional Schumer provisions could withstand negotiations, though they are a priority for the New Yorker.

Frank expressed some skepticism for a drive to separate the CEO and chairman duties. "In my experience, it hasn't made a lot of difference if you have looked at the performance, of separating the CEO from the chairman of the board. People say it's very important. But my guess is that if you threw up the list of major companies, and didn't tell people which was which, there wouldn't be [a] way to differentiate by any kind of results and analysis," he said.

The Senate appointed its conferees Tuesday, with a 7-5 ratio of Democrats to Republicans. Frank said the House will appoint its conferees the week of June 7, and he recommended a party-line ratio of eight to five. "We have an administration that feels strongly about this, and I expect House leadership will be engaged more than they were last year when health care took up much of their time and when they paid us the compliment of trusting us," Frank wrote to Democratic members of his panel.

"Their greater involvement will not imply a lack of trust, but simply the fact we are down to a very few important issues where the administration will be strongly expressing its view," he continued. "There is also the fact that the need to keep 60 votes in the Senate will be something of a constraint."

- Broc Romanek

May 25, 2010

US Supreme Court Denies Textron's Petition for Writ of Certiorari

Here is news from Stan Keller of Edwards Angell (we are posting memos on this development in our "Work Product" Practice Area):

Yesterday, the U.S. Supreme Court denied the petition for certiorari filed by Textron, leaving the decision in favor of the IRS in the First Circuit in place. What this means, given the split of authority in the Circuits, is unclear - other than that it means continued uncertainty with regard to the protected status of tax workpapers.

Here is more of a drill down: the Supreme Court's denial of the petition for certiorari filed by Textron leaves in place the en banc decision of the U.S. Court of Appeals for the First Circuit in United States v. Textron, Inc., 577 F.3d 21 (1st Cir. 2009). That decision held that Textron's tax workpapers, which were shared with its auditor, were prepared in the ordinary course in connection with preparing its annual financial statements and were not case preparation materials prepared "because of" or "for use in" litigation, and thus were not subject to protection from IRS summons under the work product doctrine.

The Supreme Court's denial of cert. leaves the strict First Circuit test in place, which is in conflict with tests applied in other circuits. For example, the test in the Second Circuit applied in United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998), is whether the materials were prepared "in anticipation of" or "because of possible" litigation. This was the test previously applied by the First Circuit in Maine v. United States Dept. of Interior, 298 F.3d 60 (1st Cir. 2002).

The Fifth Circuit applies a stricter test but still not as strict as the First Circuit's test in Textron. In United States v. El Paso, 682 F.2d 530 (5th Cir. 1982), the Fifth Circuit required the prospect of litigation to be the "primary motivating factor for the preparation of the documents." Thus, until clarified by the Supreme Court in another case, we have uncertainty in the status of tax workpapers and other materials shared with auditors, and companies in the First Circuit share such materials with auditors at their peril.

Third-Party Review of Executive Compensation Practices II

In this follow-up podcast on, Greg Taxin of Soundboard Review Services discusses the latest developments for Soundboard Review Services (here is the first podcast), including:

- Soundboard has been quoted in its first proxy this year, for DuPont. Can you tell us what the DuPont board engaged you to do?
- How are investors using the information provided by DuPont in its proxy about your review services? Have investors contacted you?
- Having now done a number of these reviews, can you share any surprising practices you have seen or best practices that are perhaps uncommon?

More on "The Mentor Blog"

We continue to post new items daily on our 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:

- 0.3% of Directorships Voted Down in 2009: Will 2010 Be Different?
- Proxy Access: Notes from a Stanford Law Panel
- New Type of Whistleblower: State Securities Regulator Resigns in Protest
- The Problem with IFRS: Little Independence for the IASB
- More on "Earnings Releases: Google's Site as a 'Recognized Channel'"

- Broc Romanek

May 24, 2010

Posted: Memos on the "Restoring American Financial Stability Act of 2010"

Even though the Senate has not yet made available the final Dodd bill - reflecting the various amendments adopted during the last few weeks of Senate floor debate - and the final bill is not expected to be released for several days, we have begun posting memos from firms in our "Regulatory Reform" Practice Area. These firms have written their memos based on an assessment of where the bill ended up...

Note that the final tally of proposed amendments exceeded 430 - an average of 4.3 per Senator!

Virginia's New "Financial Fraud Task Force"

Last week, the USA Today carried this article about a new multi-agency federal task force focused on financial fraud cases - with a priority on securities cases - that will be based in Richmond, Virginia. The US Attorney's Office in Richmond will coordinate the Task Force with the SEC, CFTC, FBI, US Postal Service and IRS, as well as state law enforcement agencies. The arrangement is described as a partnership born as a "boots-on-the-ground outgrowth" of the interagency Financial Fraud Enforcement Task Force established by President Obama last November.

According to the USA Today article, the government is excited because potential jurors in the Virginia area are perceived to be supportive of government action - and because the federal docket moves cases from indictment to trial in 90 to 150 days, a true "rocket docket."

How does eastern Virginia have the legal right to handle almost any securities law fraud case? Because the filings from publicly traded companies go to the SEC's EDGAR computer server in Alexandria, Virginia. The EDGAR servers moved there from DC more than a decade ago. Also, this BusinessWeek article notes that the Federal Reserve in Richmond is one of the primary hubs for wire transfers.

Update on "Carried Interest" Legislation

Here is news from Davis Polk: On May 20, Democratic House and Senate tax writers released a tax extenders package (H.R. 4213) that includes provisions relating to the taxation of carried interest received by investment fund managers.

In general, the proposal would tax carried interest (and gain on the disposition of carried interest partnership interests) as ordinary income and as income subject to self-employment taxes. The new bill is substantially similar to the version originally proposed by Rep. Levin and passed by the House in December, with the following changes.

- The most significant change is that, in the case of partners who are individuals, ordinary income treatment and self-employment tax would apply to only 75% of each item of income comprising the carried interest. For taxable years beginning before 2013, the percentage would be 50% instead of 75%.

- The new version would generally apply to taxable years ending after the date of enactment, which therefore would include calendar year 2010 if the bill were enacted this year. Pursuant to a special provision, however, the new rules would apply only to partnership income for the post-enactment portion of the year (or, if less, partnership income for the entire enactment year). In the case of disposition gains, the new proposal would apply only to transactions occurring after the date of enactment.

- The new version would clarify that gains attributable to a general partner's own out-of-pocket cash contributions are eligible for capital gain treatment even though those contributions are not subject to management fees or carried interest (and thus are not pari passu with limited partner interests).

- The new version includes various other technical changes. Among other things, these changes would:
o Exclude the disposition of a publicly traded partnership interest by an individual who does not provide investment management services.
o Exclude the contribution of a carried interest partnership interest to an upper-tier partnership if the contributing partner elects to treat the upper-tier partnership as an investment services partnership interest.

- Broc Romanek

May 21, 2010

Shocker! Senate Passes Cloture Motion - and Then Passes the Dodd Bill!

Yesterday afternoon, the US Senate passed a motion for cloture by a vote of 60-40 after failing to get a majority for this motion on Wednesday. Then, the Senate didn't take advantage of the limited 30 hours of debate that cloture provides - instead it cleared a handful of procedural hurdles and passed the Dodd bill itself (the final bill is not yet available; I will blog when its posted; here's the rollcall on how each Senator voted).

First, read this news from Ted Allen's RiskMetrics' Blog:

After several weeks of debate, the U.S. Senate voted 59-39 this evening to approve Senator Christopher Dodd's wide-ranging financial reform legislation. The vote was largely along party lines, but four Republicans voted for the bill.

The final text was not immediately available, but the version of the bill brought to the floor included provisions to require majority voting in board elections and annual shareholder votes on executive compensation. The bill also affirmed the authority of the SEC to issue a proxy access rule.

The legislation will have to be reconciled with a narrower reform bill that the House of Representatives approved in December. That bill includes an advisory vote mandate and a proxy access provision, but not majority voting. A joint House-Senate conference likely will be held in June, and Democratic leaders hope to have a compromise bill ready for President Obama to sign by the July 4 holiday.

And more information from this excerpt of a WSJ article (see bottom of this article for bullets about where the Senate and House bills differ):

Sen. Gregg was one of 37 Republicans to vote against the 1,500-page bill. But the legislation ultimately passed with a narrow bipartisan majority. Four Republicans joined with 53 Democrats and the Senate's two independents in support of the package. Two Democrats voted against the bill, and two senators weren't present for the vote.

Now Congress will need to reconcile the Senate bill with a companion House package adopted in December on a 223-202 vote, with 27 Democrats joining unanimous Republican opposition.

The outlines of the two bills are largely the same. But there are more than a dozen notable differences that will need to be reconciled during negotiations that are expected to start within days. Despite the differences, the Senate passage virtually ensures that some type of financial regulatory reform will be finalized by this summer.

Leading the negotiations will be House Financial Services Chairman Barney Frank (D., Mass.), who has said he would like to have a compromise package by the end of June.

Insights: Delaware's Latest Changes to the DGCL

In this podcast, John Grossbauer of Potter Anderson & Corroon provides some insight into this year's changes to the Delaware General Corporation Law.

From "The Motley Fool," here's some great commentary about the ways of the world from Berkshire Hathaway's Charlie Munger.

More on "The Mentor Blog"

We continue to post new items daily on our 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:

- Careers: Three Tips for Younger Lawyers
- Delaware Supreme Court Affirms In Part, Reverses In Part, And Remands Court of Chancery's Ground-Breaking Decision On Bylaw Amendments, "Stockholders of Record" and "Vote Buying"
- SEC Proposes Large Trader Reporting System
- Special Litigation Committees: Chancellor Chandler Weighs In
- Do You Need to Use Director Nominee Questionnaires?

- Broc Romanek

May 20, 2010

Dodd Bill: Cloture Motion Fails and the Fight Over 300 Amendments Continues

Yesterday, the motion for cloture in the US Senate failed 57-42 regarding the Dodd bill, as noted in this blow-by-blow account in the WSJ. This motion would have limited further debate over the 300-plus proposed amendments to just 30 hours before forcing a vote on the bill (Yes, I said over 300 amendments! That's an average of more than three per Senator for those playing at home).

This means that the Dodd bill might not be passed this week as expected (see this Washington Post blog) - and so far there has been no Manager's Amendment, as well as no real way of knowing whether the amendment to kill proxy access and majority voting will be voted upon before the Senate's tussling ends. Thanks to the folks at Davis Polk and others for helping me sort through the chaos on the Senate floor...

Audit Inspections: Some Countries Refuse to Play Ball with US Regulators

Earlier this week, the PCAOB published this alert that contains a list of foreign issuers where the PCAOB has been denied access to the information necessary to conduct inspections of the audits of those companies (as noted in this Accountancy Age article, this lack of information sharing may hinder a Lehman investigation). In these jurisdictions, the related governments have failed to cooperate with the SEC and PCAOB in coming up with a meaningful inspection process for these audits.

At a recent Investor Advisory Group meeting, investors encouraged the PCAOB to make this list publicly available so investors could determine which audits are not subject to the type of auditing framework that exists for US issuers. Due to this tug of war, there is greater uncertainty over the quality of the independent audits for these companies, including the integrity of their financial statements and their compliance with IFRS.

Posted: The SEC's Semiannual Regulatory Agenda

Recently, the SEC posted its seminannual regulatory agenda, in which it reports its progress on rulemaking to Congress. From this list, you can see that the SEC has been busy - and will continue to be so. But there are no real surprises to be gleaned from the agenda...

- Broc Romanek

May 19, 2010

Dodd Bill: The Latest on the Regulation D Amendment

As I've been blogging, one of the battles in the Senate has been over the future of Regulation D (as strange as that is) - as I blogged yesterday, it looks like there is now closure on that issue for the Dodd bill. Here is the latest from Alan Parness of Cadwalader:

Regarding the proposed amendments to Sections 412 and 926 of S. 3217 introduced by Senators Bond et al last Thursday as SA 4037, such amendments have been supplanted by new amendments introduced on Monday by Senator Bond et al, as SA 4056, and those amendments were passed by voice vote of the Senate that evening. Here's SA 4056 and its record from the Thomas (Library of Congress) website.

By my read of SA 4056, I noticed only a few minor changes to Sections 412 and 926 from the versions in SA 4037. Note that while the SEC's initial review and adjustment of the definition of "accredited investor" in accordance with Section 412(b)(1) appears to be optional ["The Commission may undertake a review . . ."], Section 412(b)(2) mandates that the SEC undertake reviews of the definition every 4 years thereafter, but solely as regards the definition of the term in 17 CFR Sec. 230.215 (Rule 215 under the '33 Act for purposes of the definition of "accredited investor" in Section 2(a)(15)(ii) and, in turn, the Section 4(6) exemption), but not as regards the definition in Rule 501(a) of Reg. D. The version of Section 412 in SA 4037 made no such distinction between the rules.

Of course, what remains to be seen is what the SEC does in accordance with the rulemaking directives of Sections 412 and 926, if those provisions are ultimately enacted in the versions set forth in SA 4056.

Coming Soon: The Next Phase-In for XBRL

Over the next several months, companies will face additional implementation milestones to provide XBRL-tagged financial statements with their SEC filings. For financial statements for periods ending on or after June 15th, the largest companies (ie. first phase-in group) must provide detailed tagging for financial statement notes and schedules as an exhibit to their filings.

Concurrently, all other domestic and foreign large-accelerated filers using US GAAP (second phase-in group) must submit their first XBRL-tagged financial statements. This memo from KPMG summarizes guidance from a recent SEC Staff webcast that covered detailed tagging phase-in requirements, rules about changes in filing status during the three-year phase-in period, and other implementation issues.

May-June Issue: Deal Lawyers Print Newsletter

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

- Loyal to Whom? Recent Delaware Decisions Clarify Common Stockholders Are Primary Beneficiaries of Directors' Fiduciary Duties
- Recent Trends in Earnout Use: A Cautionary Note
- The Shareholder Activism Report: Recommendations to Consider
- Delaware Chancery Opens Door for Next Gen Poison Pill
- More Takeaways from Selectica

If you're not yet a subscriber, try a 2010 no-risk trial to get a non-blurred version of this issue on a complimentary basis.

- Broc Romanek

May 18, 2010

Dodd Bill: Heading to "Cloture" and a Vote This Week

A lot of activity in the US Senate late last night, winding up with a motion for cloture (a procedure that limits further debate to 30 hours) that sets up a likely vote tomorrow to limit further debate and pave the way for a final vote on the Dodd bill, potentially by the end of this week, as noted in this Washington Post article.

Many of the 300 proposed amendments won't be considered before the vote - but the Senate is tackling a fair number of them. Last night, a handful of the amendments were passed by a voice vote. One of these was an amendment from Senators Dodd and Bond that subsumed the amendment that I blogged about yesterday that seeks to preserve Regulation D and Rule 506, as noted in this BusinessWeek article.

As I figure out more details about what was actually passed, I'll tweet about them - as well as provide an update in this blog manana since I can't find any specifics as of this morning...

Importance of Enrypted Email

In this podcast, Jim Brashear, General Counsel of Zix Corporation, provides some insight into the importance of encryption (for more info, see his article: "Security of Communications: Heightened Risks for Directors & Executives"), including:

- Why are secure emails important?
- How does encryption work for emails? How simple is the process?
- What does Zix's service do to facilitate secure communications?

Smaller Company Proxy Disclosures: The Latest Developments

Join us tomorrow for the webcast - "Smaller Company Proxy Disclosures: The Latest Developments" - to hear Mark Borges of Compensia and Dave Lynn of and Morrison & Foerster discuss the expectations of what smaller reporting companies should be disclosing regarding executive compensation practices, which has radically changed over the past few years.

- Broc Romanek

May 17, 2010

Dodd Bill Amendments: A (Partial) Reprieve for Regulation D

A while back, I blogged how Regulation D would get hammered under Section 926 (and Section 412) of the Dodd bill. Joe Wallin of Davis Wright Tremaine reports that Senators Bond, Warner, Brown and Cantwell have proposed an amendment (#4037) to the Dodd bill that would:

- Remove the ridiculous and industry killing 120-day wait period
- Remove the "go back in time" provision, which would have re-adjusted the accredited investor financial thresholds in a way that would have wiped out 2/3rds of existing angel investors qualifying as "accredited investors"
- Exclude the value of an investor's primary residence in determining whether the investor would meet the net worth standard
- Add a "bad boy" provision to Rule 506 offerings

Even though some groups are excited - like the Angel Capital Association - some still see issues with the amendment. For example, Alan Parness of Cadwalader has these thoughts:

1. Regarding the proposed rewrite of Section 412, I don't have any particular problem, noting that the current $1 million minimum net worth standard in the SEC's Rule 501(a)(5) would be in place for 4 years from enactment of the bill.

Obviously, the main question is how many persons would be eliminated as accredited investors under Rule 501(a)(5) if the value of the investor's primary residence were removed from the net worth calculation (those of you handling public offerings of direct participation programs subject to state filings should be familiar with NASAA's Guidelines, whereby investor suitability standards include a minimum net worth requirement which excludes the value of the investor's home, home furnishings and automobiles - see, e.g., Sec. II.B of NASAA's Omnibus Guidelines at NASAA Reports par. 2322).

2. Regarding Section 926, I'm troubled by the following:

- The preamble to paragraph (2) provides for disqualification of "any offering or sale of securities by a person." What person or persons will be covered by this provision? It's not clear whether it would encompass the same people subject to disqualification by the SEC's Rule 262.

- Paragraph (2)(A) includes only final orders of state securities and insurance regulators, and federal and state banking regulators, as opposed to court orders, and contains no limit as to when the "final order" may have been entered (compare Rule 262, which in most cases imposes a 5-year "look-back" limit). One possible issue would be whether an order is "final" if it's been issued by the regulator, but is in the process of being challenged by the respondent through administrative or judicial proceedings.

- Paragraph (2)(A)(ii) covers violations of "any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct." Obviously, the question is what particular conduct is deemed to be "fraudulent, manipulative, or deceptive" under a particular state's law or regulations. For example, NY Gen. Bus. Law Secs. 352(1) and 352-i provide that any violation of a number of provisions in GBL Article 23-A (NY's infamous "Martin Act"), constitutes a "fraudulent practice," including the requirement in Section 359-e(8) that a dealer file a "further state notice" with the NY Department of State for certain offerings (for those of you not familiar with this form, it's a pointless piece of paper which only serves as a revenue source, and it's been preempted by '34 Act Section 15(h)(1) as regards SEC-registered broker-dealers).

Query whether there are provisions under other states' securities or insurance laws, or federal or state banking laws, or rules thereunder, which deem a violation of a filing, recordkeeping or some other innocuous requirement to be "fraudulent, manipulative, or deceptive." Further, this provision is an open invitation for states to amend their securities, banking and/or insurance laws or regulations to designate a broad range of violations as "fraudulent, manipulative, or deceptive," and thereby trigger a disqualification.

- Paragraph (2)(B) contains no time limit on when the particular conviction occurred. Compare the SEC's Rule 262(a)(3), imposing a 5-year look-back, and Rule 262(b)(1), imposing a 10-year look-back, on the convictions specified in those provisions.

- Unlike the preamble to Rule 262, whereby the SEC may waive any disqualification "upon a showing of good cause," there is no mechanism provided for waiver of any disqualification under par. (2), whether by the SEC or by the particular state regulator (for reasons of uniformity, I believe granting the SEC authority to grant waivers to be the better approach).

- If, like the SEC's Rule 262(b), the proposed disqualification from use of Rule 506 may be triggered by reason of a beneficial owner of 10% or more of the issuer's equity securities being a "bad boy," that raises a number of practical problems as to how an issuer can be absolutely certain that none of its 10%+ beneficial owners is a "bad boy."

First, how is "beneficial owner" to be defined for purposes of the disqualification? In similar fashion to SEC Exchange Act Rule 13d-3 or 16a-1(a), or in a different manner? There are many possible variables in that regard. Also, if "beneficial owner" is to include someone owning 10% or more of an issuer's equity securities indirectly through another person, say, for example, that 20% of the interests in an issuer commencing a Rule 506 offering are owned by an offshore entity. Can the issuer in that case simply rely in good faith on a representation by that entity that no person holding 50% or more of its equity interests is a bad boy? What if that representation proves to be false? Does the issuer pay the price in that case with a loss of the Rule 506 exemption?

Also, one basic issue - does Congress really expect that adding a "bad boy" disqualification will deter the real securities crooks out there? In reality, I believe it will only make the process more cumbersome and expensive for honest issuers who seek to comply with the law by doing their homework and obtaining appropriate certifications (hopefully truthful!) those from the persons covered by the rule, while issuers with "bad boys" running the show will simply proceed along their merry way, either ignoring federal and state securities laws altogether, or claiming reliance on other exemptions without a bad boy disqualifier.

I wonder how many instances can be cited where a state uncovered a "bad boy" lurking behind an issuer for which a Form D was filed, and such person's involvement or nefarious background was not disclosed to investors (or, worse, such person committed a fraud in the course of the offering), as opposed to cases where a state uncovered a "bad boy" behind an issuer effecting a fraudulent offering which failed to make any filing with the SEC or the state?

3. On the practical side, I also fear that the potential for disqualification under Section 926 could lead to strong-arm tactics by certain state regulators in the course of investigations, forcing respondents to settle for extraordinary remedies in lieu of an order which would disqualify them from future Rule 506 offerings.

Put into the context of issues that have arisen recently in connection with Rule 506 offerings, say a state securities administrator decides to pursue an entity serving as the general partner of various limited partnerships which effected Rule 506 offerings in the state, as well as the entity's individual principals, on the basis that, despite the absence of any complaints from local investors or other evidence that the offerings might have been fraudulent: (i) notice filings were made later than required by law or rule, (ii) notice filings were not made as required by law or rule, and/or (iii) the issuers refused to submit copies of offering materials for such offerings upon the state's request.

Facing the state's threat to issue an order under a statute which deems a violation of any provision of the statute or a rule thereunder to be a "fraudulent practice," which would disqualify the general partner and its principals from participating in future Rule 506 offerings pursuant to par. (2)(B) of Section 926, and, after concluding that the cost and time required to challenge such an order through the requisite administrative and judicial proceedings would be impractical (let alone the likelihood of success before the local administrative or judicial panels which would hear such a challenge), the respondents capitulate and agree to make a rescission offer to all investors in that state and pay a huge penalty to the state. Unrealistic? I don't think so.

RiskMetrics's ISS Reveals All: Full GRId Methodology Now Available

A few weeks ago, RiskMetrics released a fuller explanation - a 193-page technical paper - about how their new GRId governance rating framework will work, updating the outline they issued back in March (here's ISS's 8-page summary of GRId). We are posting memos analyzing this new information in our "Governance Ratings" Practice Area.

Last week, The Corporate Library weighed in on the long-standing debate about what governance ratings actually mean to investors, particularly those related to ESG issues (Environmental, Social and Governance).

Navigating Corp Fin's Comment Process

Join us tomorrow for the webcast - "Navigating Corp Fin's Comment Process" - to hear former SEC Senior Staffers Linda Griggs of Morgan Lewis & Bockius, John Huber of Latham & Watkins, Dave Lynn of and Morrison & Foerster and Bill Tolbert of Jenner & Block explain the process by which the SEC Staff issues comments as well as provide their practical guidance about how to respond.

We've posted some great course materials for this program, including:

- "40 Rules of the Road for Corp Fin's Review Process" - John Huber and Joel Trotter, Latham & Watkins
- "SEC Comment Letter Trends in 2009" - Dave Lynn, Morrison & Foerster

- Broc Romanek

May 14, 2010

Drilling Down Into the Dodd Bill Amendments: Personal Liability for Directors and Officers!

As I blogged a few days ago, there are over 200 amendments proposed for the Dodd bill in the Senate. There is a lot happening on the Senate floor daily right now (and continuing into the night) and it's hard to separate fact from rumor (I'm not even sure that those on the Senate floor can keep track). For starters, some people report that President Obama wants to sign a bill by the end of June; some say he wants it by Labor Day.

There are so many proposed amendments, it would be hard to discuss even a fraction of them in this blog, particularly since the ground moves daily beneath the bill. But here are two that you may want to be aware of - thanks to the "heads up" from Rick Hansen of Chevron: the Byrd (#3880) and Rockefeller (#3886) amendments. Both of these would significantly expand the disclosure obligations of '34 Act companies - principally because they contain no meaningful disclosure thresholds (i.e. materiality), and in the case of the Byrd Amendment, would significantly expand the bases upon which directors and officers may be found personally liable for failures to disclose.

1. The Byrd Amendment

Amends Securities Exchange Act of 1934 by inserting new Section 21B. Health and Safety Disclosure Violations. Requires issuers subject to the Securities Exchange Act of 1934 to disclose, at least annually:

- "any pending litigation concerning a health or safety condition or violation under Federal or State law involving the issuer, other than ordinary, routine litigation that is incidental to the business of the issuer, as determined by the [SEC]";

- "any significant health or safety condition, or significant health or safety violation, at any business unit of the issuer in which routine activities pose a risk of loss of life";

- "any significant health or safety condition, or significant health or safety violation, at any business unit of the issuer in which routine activities pose a risk of accident or fatalities, injuries, or illnesses, the occurrence of which could cause reported financial information not to be necessarily indicative of future financial condition of the issuer, or which could cause a negative effect on operating results of the issuer or any subsidiary thereof"; and

- "any trend in health or safety conditions or violations under Federal law, at any business unit of the issuer, that may change the relationship between cost and revenue for the issuer or any subsidiary thereof."

Permits the SEC and stockholders to file claims in federal court "whenever it shall appear that any issuer has violated" the disclosure requirements. The SEC or stockholders may seek equitable relief or civil penalties "to be paid by the senior executive officers or members of the board of directors" of the issuer "(i) who knew about such violations; or (ii) whose duties and decisions affected matters regarding production or safety and therefore had reason to know about such violation."

Key defined terms include:

- "pending litigation" means "any civil action or administrative proceeding for a penalty for violating a federal or state health and safety law that (i) is being contested before an administrative law judge under the Occupational Safety and Health Review Commission or the Federal Mine Safety and Health Review Commission; or (ii) is being otherwise contested or appealed under a state review board or other body."

- "significant health or safety condition" means "a condition that a certified worker or manager could identify as reasonably likely to be cited, were the condition to be observed by a Federal inspector, as (i) a significant and substantial health or safety violation under the Federal Mine Safety and Health Act of 1977; (ii) a serious or repeated violation under the Occupational Safety and Health Act of 1970; or (iii) another health or safety related violation carrying a high degree of gravity under Federal law."

- "significant health or safety violation" means "(i) a significant and substantial health or safety violation under the Federal Mine Safety and Health Act of 1977; (ii) a serious or repeated violation under the Occupational Safety and Health Act of 1970; or (iii) another health or safety related violation carrying a high degree of gravity under State or Federal law."

2. The Rockefeller Amendment

Requires issuers who are subject to the Securities Exchange Act of 1934 and that are an operator, or that have a subsidiary that is an operator, "of a coal or other mine" to disclose in the issuer's quarterly and annual reports:

- For each coal or other mine, (a) "the total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard under section 104 of the Federal Mine Safety and Health Act of 1977," (the "Act") (b) "the total number of orders issued under Section 104(b) of the Act"; (c) "the total number of citations or orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under section 104(d) of the Act"; (d) "the total number of flagrant violations under section 110(b) of the Act"; (e) "the total number of imminent danger orders issued under section 107(a) of the Act"; and (f) "the total dollar value of proposed assessments from the Mine Safety and Health Administration under the Act";

- A list of each coal or other mine that received written notice from the Mine Safety and Health Administration of(a) "a pattern of violations of mandatory health or safety standards" or (b) "the potential to have such a pattern"; and

- "Any pending legal action before the Federal Mine Safety and Health Review Commission involving such coal or other mine."

Requires issuers who are subject to the Securities Exchange Act of 1934 and that are an operator, or that have a subsidiary that is an operator, "of a coal or other mine" to file a current report on Form 8-K with the SEC disclosing the following:

- "The receipt of an imminent danger order issued under section 107(a)" of the Federal Mine Safety and Health Act of 1977;" or

- "The receipt of a written notice from the Mine Safety and Health Administration that the coal or other mine has (a) "a pattern of violations of mandatory health or safety standards" or (b) "the potential to have such a pattern."

Key defined terms include:

- "Coal or other mine" means a coal or other mine as defined in section 3 of the Federal Mine Safety and Health Act of 1977.

- "Operator" has the meaning given that term in section 3 of the Federal Mine Safety and Health Act of 1977.

A Fake SEC? The "U.S. Securities and Equities Administration"

Just when you get old enough to think that you've seen everything - something new comes along. Yesterday, the SEC issued this alert to note that "an entity calling itself the "U.S. Securities and Equities Administration" and other similar names, including the "U.S. Securities Administration" or the "U.S. Securities Bureau." In conversations with members of the public, the entity may have represented that its address is 225 Franklin Street, Boston, Massachusetts. The entity also claims to operate a website at It appears that this entity may be requesting up-front fees to remove purported restrictions on shares of stock that investors own, or to release funds purportedly being held by the U.S. government on investors' behalf."

I wonder how much this fake "SEA" pays a Staff attorney these days - I imagine a lot as they could just pay in Monopoly money...

Short Selling: A New SEC Enforcement Priority

In his "SEC Actions" Blog, Tom Gorman explains how the SEC's Enforcement Division took action against individuals for short-selling, as compared to other recent cases that involved market professionals and hedge funds.

- Broc Romanek

May 13, 2010

Last Call: Early Bird Discount Ends Tomorrow

With it looking highly likely that say-on-pay will be included in the financial reform bill being pushed through Congress, we already have a record number of members signed up so far for the pair of the conferences to be held from September 20-21 in Chicago and via video webcast: "Tackling Your 2011 Compensation Disclosures: The 5th Annual Proxy Disclosure Conference" & "7th Annual Executive Compensation Conference."

Last Chance for "Early Bird" Rates: For one more day, we are offering a $200 discount for all registrations received by the end of tomorrow. This is a great savings and we won't be able to extend this deadline, so don't wait to register.

Register Now: Don't wait any longer--we will not be able to offer this reduced rate for registrations after tomorrow so register now or contact us at or 925.685.5111. Remember that last year, these Conferences sold out a month before the event.

Keeping Silent While Others (Mis)Speak

Here is news from Keith Bishop of Allen Matkins:

Suppose you are a high ranking executive who is participating in an analyst call with a colleague and your colleague makes a misstatement. Can you go to jail if you don't jump in and correct the misstatement? What if you fail to rectify the misstatement in SEC filings? Recently, the Third Circuit Court of Appeals - in US v. Schiff - said that "the plain language of ยง 10(b) and corresponding Rule 10b-5 do not contemplate the general failure to rectify misstatements of others." The Court also rejected the government's argument that the defendant's position as a "high corporate executive" imposed a general fiduciary duty requiring disclosure. In doing so, the Court observed a number of problems with such a theory.

For example, would such a duty potentially rope in all corporate officers based on a single misstatement by another officer? Although the government was not successful under either a duty to disclose or fiduciary duty theory, it still has other prosecutorial arrows in its quiver - for example, criminal conspiracy and aiding and abetting. Also, the case does not exonerate an executive from state corporate law claims of breach of fiduciary duty.

Mailed: March-April Issue of The Corporate Counsel

The March-April issue of The Corporate Counsel includes pieces on:

- Staff Provides Relief on the Need for a No-Action Letter When Suspending Section 15(d)
- Reporting Obligation under Rule 12h-3
- Revised Non-GAAP CDIs--Staff Seeks Consistency in Issuer Communications
- PIPEs Revisited--The Staff Dials Back the 1/3 of Public Float Guideline
- Roth IRA Conversion--The Soup, Nuts And Bolts
- California Still Householdless
- Beware, Congress Delving into the Accredited Investor Thresholds

Act Now : Get this issue on a complimentary basis when you try a 2010 no-risk trial today.

- Broc Romanek

May 12, 2010

The Senate Reform Bill: 205 Amendments and Counting

We now have over 200 amendments to the Dodd bill in the Senate and we're still bound to get some more. With so many amendments they cover a large swatch of issues, including exempting small companies from Sarbane-Oxley's Section 404 regarding internal controls (egs. #35 - Vitter Amendment 3764 and #56 - Hutchinson Amendment 3785) and removing proxy access from the bill (#157 - Carper 3887, as noted in this blog).

As is typical on the Hill, some amendments are unrelated to financial reform (eg. #62 - Brownback Amendment 3791 re: the Congo conflict), including one that eliminates cost-of-living increases for members of Congress (#1 - Feingold Amendment 3730)! Perhaps not an appropriate item to bury in a financial reform bill (but I get the idea).

Here's the Senate Banking Committee's 251-page report on the Dodd bill from April 30th - and here's where you can find the list of the 205 amendments (click on "Amendments" in 2nd column). This list is useful as it links to the text of each amendment - but unfortunately you have to drill down to the text of each amendment to determine its subject matter since each is merely described as "Purpose will be available when the amendment is proposed for consideration" in the index.

The Reasons for Last Week's 1000-Point Plunge: Maybe We're Better Off Not Knowing?

Yesterday, SEC Chair Schapiro delivered this testimony before the House Capital Markets Subcommittee on the causes of last Thursday's severe market disruption. As noted in this Washington Post article, the regulators now believe they have a handle on the confluence of events that precipitated the "blip" (but they still don't know what caused that day's volatility). A member sent in this commentary about the situation as known so far:

The collective facts so far from the regulators: at 2:32 pm, a CME trader sells heavy S&P 500 futures contracts (an "e-mini") as part of a "bona-fide hedge," per the CME. By 2:40, the cash equity markets are off 4% and near 10% a few minutes later.

The SEC says the NYSE institutes market steadying protocol when the selling gets off-the-hook, which has humans take over for electronic orders being routed to NYSE. The automated exchanges read this as a flaw and stop sending orders to NYSE. Market makers ("liquidity providers") that are tasked with standing in and keeping the cash markets liquid (i.e. order flow) instead withdraw as the high-frequency trading programs go haywire. This is the where the "no bid" period establishes itself.

In other words, when the sh#% hits the fan, we can count on the Wall Street Army to retreat and let the tent fold, while they head for the hills with the cash. Mad Max, or what?

Floyd Norris' Response: A Rebuttal to "SEC's Rating Agency Regulatory Scheme Heighten Risk of Insider Trading"

Floyd Norris of the NY Times provides us with this response to a rebuttal to one of his columns noted in yesterday's blog:

I just saw yesterday's blog which allows that I don't know what I am talking about. I think I was misunderstood. Let me take it slowly:

1. The rating agencies are exempt from Regulation FD; they can get info the rest of us don't have.

2. That has led some people to think the ratings are based on superior information, and that Moody's (or S&P's or Fitch's) opinion is worth more than some other analyst's - not because of relative skill in analysis, but because of an information gap.

3. Why not end the exemption? If a company feels it is necessary to tell the rating agancy something, let it tell everyone else too. At least that can be done as soon as the new rating is published. (That allows for mergers and other major corporate changes. Effectively, it says that if an agency has inside info - it cannot disclose it until it becomes public.)

4. The fact that Moody's discloses its rating is irrelevant to this analysis, contrary to what the member quoted says, so long as it (or the company) does not disclose the inside info on which the rating is based.

Your member thinks we are better off to have Moody's know more, because it can then give us the results of that knowledge. I think we would be better off to have a level playing field, in no small part because it would take away the agencies' aura, and that if companies knew they would be seen in a better light - and pay lower interest rates - if they released information, it would be released.

Obviously, his (or her) forecast of the future may be better than mine. But how does that prove I do not know what I am talking about?

- Broc Romanek

May 11, 2010

Survey: Who Gets Named by SEC Enforcement in Fraud Cases

Recently, the Deloitte Forensic Center released a study about which executives most frequently get named in SEC enforcement actions during 2008. The results were a little surprising to me - the financial executives (ie. CFOs, chief accounting officers and controllers) collectively represented only 44% of the individuals named. In comparison, CEOs represented 24% and directors and general counsel were named 4% of the time. All in all, nearly one third of the individuals named were not CEOs or financial executives!

Speaking of studies, here is an interesting one regarding SEC enforcement against investment banks and brokerage houses - it suggests that the SEC favors defendants associated with big firms compared to defendants associated with smaller firms in three ways.

Trouble in California: Attorney General's Lawsuit Against Placement Agents

Here is news from Keith Bishop of Allen Matkins:

Last week, the big news here in California was the Attorney General's action against two individuals who allegedly made millions of dollars in placing private equity fund investments with CalPERS, as noted in this article. One of the defendants is the former CEO of CalPERS.

Interestingly, the complaint relies heavily on violations of California's broker-dealer law (alleging unlicensed activity and securities fraud by a broker-dealer). This case is an example of potential problems under Blue Sky laws for unregistered or unlicensed "finders," even when doing business exclusively with institutional-type clients.

A Rebuttal to "SEC's Rating Agency Regulatory Scheme Heighten Risk of Insider Trading"

A while back, a member sent me the rebuttal below to Floyd Norris' piece on the SEC's rating agency proposals (which I included in this blog long ago):

Floyd Norris doesn't know what he is talking about and is confusing Regulation FD and non-public information with insider trading. The rating agencies do not disclose the information they are provided; they use it in developing their ratings and then they (at least Moody's, Fitch and S&P) publicly announce their rating (so again, no inside informational advantage to their customers). If the explanation of the rating is dependent on disclosure of non-public information (such as a merger), they will not issue their rating until the information is disclosed (so they get an advance peek to be able to get up to speed).

The problem that will result will be that in the absence of an understanding or even a contractual undertaking (and particularly if the Regulation FD exemption is repealed) from the rating agencies, the companies will not provide confidential information to rating agencies because they will no longer have any assurance as to non-disclosure when it goes to the Egan-Jones of the world, so the ratings will be less useful.

The bottom line is that it's not right to present this as principally an insider trading issue, except in the case of the customer-paid example, where Egan-Jones does not publicly announce it's ratings. Want a good example of a customer-paid model, look at RiskMetrics' ISS - are people happy with their objectivity?

- Broc Romanek

May 10, 2010

Say-On-Pay So Far: A Second Company Fails to Gain Majority Support

Just last week, I blogged how Motorola became the first US company to fail to obtain majority support for say-on-pay. Now, Occidental Petroleum becomes the second company, as shareholders voted on this measure at its annual meeting on Friday according to this WSJ article. The actual numbers weren't announced at the meeting nor has the Form 8-K been filed yet with the voting results.

Two rejections of pay in a week is a lot. In the United Kingdom, I believe it took over five years to reach two after say-on-pay was mandated for all of its companies...

The Myth: "Fat Finger" Trader Triggers 1000-Point Dow Drop

So far, it appears that the regulators, stock exchanges and the media haven't been able to ascertain the cause(s) for the wild 16 minutes of trading last Thursday. In fact, it appears that perhaps the only thing they do now know is that the rumor of a massive, erroneous trade touching off the chaos was not a cause.

Too bad because the image of a single human accidentally sending the market into the tank is much more comprehensible that the tangled web of computers which likely is the cause. Here's my romanticized version of the myth:

"Big Bob" Hunter strolled back from his daily routine of a quick late lunch, polishing off his two half-smokes within minutes of grabbing them from Tony, the corner vendor from whom Bob has frequented daily for over a decade. In fact, their nearly unspoken bond had become so great that Tony was one of the few people that Bob included on his Christmas list each year.

Nervous about the debt situation in Greece, Bob broke from tradition and also ordered a large carton of fries. As he settled back into his desk for another round of trading for his firm - Acme Big Bank - Bob casually poked at the fries as he glanced at one of his favorite "money honeys" on the cable newshow talking on the TV across the room. He chuckled about her quip regarding one of his favorite stocks as he placed a client's sell order for Procter & Gamble.

Within seconds, he noticed a flash on the ticker as P&G began to plummet. "What in the devil?," he thought. With horror, he realized that his greasy finger slid two keys from the "M" to the "B" when he had placed his P&G order. "Tarnation!," he exclaimed as he wiped his brow and called his manager over. It was going to be a long day.

Here's a press release from the SEC/CFTC on Friday noting that they are still investigating and promising to report what they find, when they find it...

And here's a funny story from my good friend Mark Coller: "Honest truth, each year I try to pick a Kentucky Derby winner based on which horse's name matches prevailing current events. It's worked fairly well. For example, remember when War Emblem won in '02 - owned by a lower level Saudi prince no less - that the naive public was gung ho on "getting Saddam" and everyone displayed flags on their houses and cars.

So this year I considered the eventual winner Super Saver - but discarded him because our national savings rate is still not stellar. I decided Devil May Care seemed to fit best - but alas, the filly came in 10th..."

Poll: What Was the Primary Cause for the Big Market Drop?

In the anonymous poll below, weigh in on what you think the primary cause of the market drop:

- Broc Romanek

May 7, 2010

Busting Millions of Trades? Feels Like Science Fiction

Yesterday felt like science fiction, with the humans finally realizing that machines have long taken over the financial world. Of course, there are humans behind those machines (traders call them "the box") - but it will be interesting to see if the regulators (see SEC/CFTC's press release) and journalists will be able to figure out what truly went wrong. I doubt that even the quants behind those machines can figure it out.

I don't have a lot of confidence in the stock market being "fair" these days. And the fact that millions of trades will be busted due to yesterday's "trader error" doesn't help. I'll be curious to see who gets bailed out by busting these trades. I imagine some quants will be saved, while others will be angry that their big bargain buys will be cancelled. Good news for some lawyers I imagine.

- Zero Hedge's "MUST HEAR: Panic And Loathing From The S&P 500 Pits"

- NY Times' "It's Not About Greece Anymore"

- Washington Post's "Greek crisis exposes cracks in Europe's foundation"

- The Market Ticker's "Mr. President: Unplug the F*ing Computers"

- NY Times' "High-Speed Trading Glitch Costs Investors Billions"

- Minyanville's "Dow Freefall Shows We Have a Quant Problem"

- Zero Hedge's "Dissecting the Crash"

- WSJ's "Did Shutdowns Make Plunge Worse?"

Don't forget this morning is Goldman Sach's annual meeting - that is sure to bring some fireworks. And if you're wondering where I got the "millions" for the title of this blog, it was drawn from the end of this WaPo article..

The Status of the Senate's Financial Reform Efforts

With over 100 amendments offered on the Dodd bill over the past two weeks, it's impossible to know the shape of the bill that the Senate ultimately will pass (although two of those changes were officially tacked onto the Dodd bill on Wednesday). And those 100-plus proposed amendments were made before yesterday's chaos - that craziness is sure to bring out a few new amendments.

Debate on the bill is expected to continue for at least another week. Note that some of the amendments do seek to strip proxy access and mandatory majority votes from the bill, as noted in Ted Allen's blog.

Are Tattoos Appropriate for Professional Women?

Thanks to the many for their kind words on my 8th blogging anniversary this week. It got me thinking about how many lawyers now blog (I'm still convinced we've barely scratched the surface on how many lawyers will be blogging soon enough; read my piece to figure out what it takes to be a blogger). All sorts of legal blogs have emerged. For example, in this blog, Corporette answers the question: "Are tattoos appropriate for professional women?"

- Broc Romanek

May 6, 2010

Proxy Season Look-In: How Say-on-Pay Is Faring So Far

Here is something I blogged earlier this morning on's "The Advisors' Blog":

As we await mandatory say-on-pay's fate on Capitol Hill, here are a few recent developments worth noting:

- RiskMetrics' Ted Allen reports that Motorola received just 46% support during the company's May 3rd annual meeting, marking the first time that a US company has failed to earn majority support from shareholders during a non-binding vote on compensation (here is Motorola's Form 8-K). Mark Borges just blogged about this as well.

- Remember that brokers still get to cast discretionary votes on management say-on-pay proposals (although one of the sections of the Dodd bill would eliminate this, as I noted in this blog). Thus, Motorola's level of support would have been even lower if these broker votes were not included. As an example, see Ted's notes about American Express' recent meeting (and see AmEx's Form 8-K) - he quotes someone from the AFL-CIO who estimates that the company's 63% level of support would have been reduced to 58% (and Wells Fargo's level of support would have dropped from 73% to 67% without the broker votes).

- Ted reports that say-on-pay shareholder proposals received 51% support at EMC, a 47.9% vote at Johnson & Johnson, and 45.3% support at IBM. The number of votes exceeded the support levels for the same resolutions at the three companies last year. Note these are proposals from shareholders to put say-on-pay on the ballot going forward; they are not management say-on-pay agenda items like the situations noted above.

- Ted also reports that SuperValu received no-action relief - under the (i)(9) "conflicts with management's proposal" basis - from Corp Fin to exclude a say-on-pay shareholder proposal because the company had already adopted a "triennial" approach to say-on-pay. The proponent wanted an annual vote instead of every three years.

The SEC's Porn Story: My Reluctant Ten Cents

In all my years, I've never been asked so much about a story related to the SEC than the countless media reports that made the rounds a few weeks back regarding the SEC's Inspector General's report over misuse of the SEC's computers to view porn. Here's a summary of the report; note that I can't find the actual report on the IG's webpage (nor even the summary for that matter, I found that on a Washington Post web page).

Note that the story first broke out back in early February and it was written up by the mass media back then (eg. this article). Thus, it's odd that the same story recycled a few months later - perhaps the public's fascination with the Goldman investigation convinced the media that it was "newsworthy" again? Or maybe because more information was made available to the media? I don't know, nor do I care.

In my opinion, this is a non-story since this type of stuff happens in every government agency as well as every company in the private sector. It's the "few bad apples" syndrome. The problem for the SEC is the story comes at a delicate time for the agency. And the specific details - which I'm not convinced really needed to be divulged - are quite repugnant.

For me, the big surprise in this story was reading that some SEC Staffers make as much as $222,000 these days (as noted in the summary)! A far cry from the pay levels when I left a dozen years ago. I think my salary was in the low 70s when I left - and I worked for a Commissioner at the time. Next week, I'll be blogging about working at the SEC.

More on "The Mentor Blog"

We continue to post new items daily on our 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:

- Time (Off) Well Spent
- Pink Sheets Changes Into the "OTCQBTM Marketplace"
- More Women on Boards? Conflicting Survey Results
- Mark Cuban Says SEC Tampered With Witness
- Rule 10b-5(b): Securities Professionals Must Actually 'Make' a Statement

- Broc Romanek

May 5, 2010

An Emerging Hot Topic? Whether to Disclose Voting Result Percentages

Lately, I've heard grumblings that the SEC - when it adopted new rules requiring the reporting of voting results in a Form 8-K within four business days after the end of the meeting at which the vote was held - only required companies to just provide raw voting data, information that most shareholders would not know how to interpret. In other words, Item 5.07 of Form 8-K doesn't require companies to include voting percentages.

At first, I thought this was an oversight during the rulemaking process since reporting percentages - instead of totals - was not one of the questions asked by the SEC in its proposing release - nor does it appear that the issue was raised during the comment process either (we checked a number of comment letters from shareholder groups and didn't see anyone suggest adding this type of requirement).

But after mulling the issue - and conferring with those who know better than me - perhaps the SEC may have been wise to not require such disclosure since quite a few practitioners (including inspectors of election and tabulators!) have had trouble calculating percentages themselves. This is tricky business, figuring out whether - and how - abstentions count towards the vote calculations for shareholder proposals. Those rules differ depending on a company's state of incorporation. For example, New York and Delaware have different rules on this (and to dig deeper for Delaware companies, there are the state law percentages - and then there is the Rule 14a-8 approach, which is the approach that shareholder proponents use, that looks only at votes cast).

Another factor is how the company's bylaws are drawn up - oftentimes with language agreed to many years ago and whose intent is long forgotten. Carl Hagberg, our "go-to" independent inspector of elections, tells me that he has seen many mistakes by practitioners when they report on percentages because they have not read or interpreted the bylaws correctly. As I've noted before, Carl's article from his "Shareholder Service Optimizer" on the basics on inspectors of elections is a "must" read (it's posted in our "Annual Stockholders' Meetings" Practice Area).

Notably, there are some companies that have figured out how to make the calculations for themselves and provided valuable voluntary disclosure. Recently, IBM filed its Form 8-K with voting results and they voluntarily included percentages for the shareholder proposals on its ballot, in addition to the required raw data. It will be interesting to see if other companies will follow IBM's approach going forward...

Ban on Blackberries in the Boardroom?

Take a listen to the audio archive from a recent BBC program. The relevant segment starts at minute #11, in which a professor calls for banning blackberries in board meetings - and that companies should publicly disclose that they have a "no wireless device" policy in the boardroom. He discusses that plaintiff attorneys could use a record of a director's emailing and phone calls during a board meeting as evidence of breach of duty of care (ie. inattention to meeting).

PS - I'm no litigator, but I doubt a plaintiff could get the phone company/ISP records of phone and email calls that easily?

Latest Developments in Director Diligence

In this podcast, Jim Rowe of the James Mintz Group discusses the latest developments for diligence practices during the director recruitment process, including:

- What does the Mintz Group typically do to vet a board candidate?
- How has diligence for board candidates changed over the past few years?
- Any surprises these days about the board vetting process?

- Broc Romanek

May 4, 2010

Happy Anniversary Baby! 8 Years of Blogging and Counting

Today marks eight years of my blither and bother on this blog (note the Blog is nearly seven years old - not shabby!). It's one time of the year that I feel entitled to toot my own horn - as it takes stamina and boldness to blog for so long. A hearty "thanks" to all those that read this blog for putting up with my personality. I'm sure I won't get more refined with age.

Someone recently asked me how I came to be one of the first lawyers to blog (if I remember correctly, the few other lawyers with a blog at that time blogged solely about marketing for lawyers; not the law itself). Back in early '02, I was reading one of the dying tech magazines - the ones that disappeared with the Internet bust - and the term "blog" was mentioned in passing. I looked it up and downloaded the blogging software to give it a try. I never imagined it would amount to much as I wondered who would want to read my "diary." For the first few years that I blogged, I had to constantly explain to folks what a "blog was...

To celebrate, I thought I'd share a groovy video of a classic song circa 1970 (I love the dancing near the end):

SEC Rule 163 Proposal Stalled - But Request for Fixed Income Offering "Speed Bump" Gets Traction

Here is news from Joe Hall and Janice Brunner of Davis Polk:

At a meeting of the ABA Subcommittee on Securities Regulation recently, Tom Kim, Chief Counsel, SEC Division of Corporation Finance, indicated that the SEC's proposed amendment to Rule 163 under the Securities Act has lost momentum as a result of negative feedback received from investors. The proposed amendment, which was generally supported by corporate issuers, underwriters and their counsel, would have allowed underwriters or dealers acting on behalf of well-known seasoned issuers (WKSIs) to offer securities before the filing of a registration statement, enabling WKSIs to better gauge investor interest in their securities before publicly launching an offering.

Mr. Kim also noted that the SEC staff is paying attention to fixed income investors' concerns that they are being asked to make corporate bond investment decisions too quickly. The Credit Roundtable, a group of fixed income investors, has asked the SEC staff to consider imposing a "speed bump" or delay of at least one hour in the corporate bond offering process in order to improve investors' ability to conduct diligence before books are closed. The Credit Roundtable's other recommendations for the corporate bond offering process include increased access to management conference calls and easier access to disclosure documents through the use of hyperlinks.

Mr. Kim indicated that because these timing and disclosure concerns go to the "core" of the SEC's investor protection mission, they are being taken very seriously by the staff. The staff plans to hold a roundtable in the fall of 2010 to discuss these issues and is unlikely to act on the recommendations before then. Interested parties are encouraged to contact the Division with their views.

Posted: The Revised US Sentencing Guidelines

Last Friday, the US Sentencing Commission posted its final amendments to the US Sentencing Guidelines. Check out this podcast for analysis of these amendments (and we are posting memos in our "Sentencing Guidelines" Practice Area).

- Broc Romanek

May 3, 2010

The Price of Going Up: SEC's Filing Fees to Soar 63% for Fiscal Year 2011

On Friday, the SEC issued its first fee advisory for the year (along with this methodology). Right now, the filing fee rate for Securities Act registration statements is $71.30 million (the same rate applies under Sections 13(e) and 14(g)). Under the fee advisory, this rate will rise to $116.10 per million, a hefty 63% price hike - and the largest one-year rate hike in my experience. The new fees will not go into effect until five days after the date of enactment of the SEC's 2011 appropriation - which often is delayed well beyond the October 1st start of the government's fiscal year, as Congress and the President battle over the government's budget.

You might be asking, "How are the SEC's fees set?" Or more importantly, "Will the rate hike help the SEC's push for more resources?"

The SEC sets its filing fees annually under the "Investor and Capital Markets Fee Relief Act of 2002." The SEC's budget is not dependent on its fees as it's not a self-funded agency. All of the fees go to the US Treasury. But perhaps the higher fees could convince Congress to allow the SEC to receive the requested 12% increase in its budget. On Friday, SEC Chair Schapiro testified before a subcommittee of the Senate's Appropriations Committee and she noted:

It is important to note that the proposed increase in spending would be fully offset by the fees we collect on transactions and registrations. In FY 2011, we estimate that we will collect $1.7 billion -- an increase of $220 million over FY 2010.

It will be interesting to see if - and how - the higher level of fees impacts the SEC's push for self-funding. Learn more how the filing rate-setting process works in this blog.

FINRA Issues FAQs for its New Same-Day Clearance Process for Shelf Filings

Last week, FINRA's Corporate Financing Department supplemented its new "COBRADesk Same Day Clearance Guide" by issuing FAQs regarding the "Same-Day Clearance Option" with FAQs related to the process (the FAQs are at the end of the guide).

As you may recall, the new same-day option is for shelf takedowns that have an accelerated effective, pricing or launch date. At the recent ABA Business Law Section Spring Meeting, Paul Mathews, Director of FINRA's Corporate Financing Department, stated that 60% of the Department's shelf filings already were being submitted using the same day option and indicated that the process was working well for the companies seeking quickly access to the capital markets.

Our May Eminders is Posted!

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

- Broc Romanek