Corp Fin Deputy Director Brian Breheny To Leave

After 7 years in Corp Fin, Deputy Director Brian Breheny announced yesterday that he was leaving to become a partner for Skadden Arps. Before serving as Deputy Director for the past few years, Brian served as head of the Office of Mergers & Acquisitions since his arrival at the SEC in 2003. Well-liked and a witty speaker at conferences, Brian's presence at the Commission will be missed.

A lot of comings and goings among the senior SEC Staff yesterday, as another long-time Enforcement Staffer announced his departure and a big hire for Market Reg was announced too.

Nasdaq Proposes Easier Path to Second Bid Price Grace Period

Last week, Nasdaq filed a proposal with the SEC that would ease the eligibility criteria for a company to receive a second 180-day compliance (ie. "grace" period) for a bid price deficiency on the Nasdaq Capital Market - but also proposed other changes that would enhance the ability of Nasdaq Staff to not grant the additional grace period if it determines that it was not possible for the company to cure the deficiency.

Under existing rules, once a company has a closing bid price below $1 for 30 consecutive days, it becomes deficient and receives notice that it has a 180-day grace period to regain compliance. Compliance can be achieved by maintaining a minimum $1 closing bid price for 10 consecutive days. At the expiration of the 180-day period, a company can receive an additional 180 day grace period, provided it is either already listed on the Capital Market or transfers to that market and satisfies all of the Capital Market's initial listing criteria, except for bid price.

The proposal would:

- Ease the requirements for the second grace period for the Capital Market by allowing a company to qualify if it satisfies the lower continued listing requirement for market value. The initial listing criteria for market value is between $5 and $15 million, whereas the continued listing standard is $1 million. The company would continue to be required to meet one of the other sets of initial listing criteria for the Capital Market, other than the bid price.

- Require that the company notify Nasdaq of its intent to cure the bid price deficiency and provide authority to the Staff to determine that the company is not eligible for the second grace period if (i) the company does not indicate its intent to cure the deficiency or (ii) it does not appear to the Staff that it is possible for the company to cure the deficiency.

- To avail itself of the second grace period (that is only available to Capital Market companies), a company listed on the Global or Global Select Markets would continue to be permitted to transfer to the Capital Market if it meets the applicable market value requirement for continued listing (and all other applicable requirements) for initial listing on the Capital Market (except for the bid price requirement) and notifies Nasdaq of its intent to cure the bid price deficiency. However, the proposal also provides that a Global Market company may request a hearing to remain on Global Market.

CFTC Seeks Input on 30 Rulemakings

Here is news from Sullivan & Cromwell: On August 26th, the Commodity Futures Trading Commission issued this Federal Register notice requesting public comment on the 30 rulemakings identified by the CFTC to implement Title VII of the Dodd-Frank Act. This unusual CFTC release reflects the complexity and quantity of rulemaking the agency faces. Comments pursuant to this release are discretionary and should focus on topics that may be novel or not obviously on the list of topics the CFTC would be considering as it drafts its proposed rules.

- Broc Romanek

The SEC Comment Process: What is a "Bedbug Letter"?

A member recently emailed me about this SEC Staff comment letter, surprised that the Staff would refuse to process a registration statement due to its material deficiencies - and that the Staff would make a referral to the Enforcement Division if the registration statement would approach going effective.

Internally in Corp Fin, this type of letter is called a "bedbug" letter and these have routinely been issued for decades to registration statements that are filed with problems so large that it would be a waste of Staff time to write up comments. The standard language in the bedbug letter hasn't varied at all over the years - perhaps the threat to make the Enforcement referral should be stated overtly rather than implicitly, particularly in this case where the addressee is in China...

Shareholder Engagement: UK Style

Recently, as noted in this ISS Blog, the United Kingdom's Financial Reporting Council (FRC) released a "Stewardship Code" that includes principles on how institutional investors should engage with portfolio companies after collecting comments from a variety of market participants on potential approaches to fostering dialogue between investors and issuers.

The code includes principles on: the monitoring of investee companies; the escalation of activities taken to protect or enhance shareholder value; collective engagement; voting policy; managing conflicts of interest; and public reporting and reporting to clients.
The FRC is encouraging institutional investors to report publicly on the extent to which they follow the code and intends to list all those who have done so.

Meanwhile, the UK Future of Banking Commission recently issued this "British Commission Report on Banking and the Financial Crisis."

The Mad Rush: Three Weeks Until the "5th Annual Proxy Disclosure Conference"

As happens so often, there is now a mad rush for folks to register for week of proxy disclosure and executive pay conferences that starts in three weeks - on Monday, September 20th. With an aggregate of over 50 panels, if these conferences don't help get you prepared for the upcoming proxy season of change, nothing will. You can either register for the three days of the "18th Annual NASPP Conference" (in Chicago) - or the two days of the "5th Annual Proxy Disclosure Conference" & "7th Annual Executive Compensation Conference" (in Chicago or by video webcast) or a combination of both. Note that we just extended the length of the last panel of the" 5th Annual Proxy Disclosure Conference" to cover proxy access in more depth. Register Now.

- Broc Romanek

Survey: Few US Companies Well Prepared for Say-on-Pay

When I first saw this press release from Towers Watson regarding how few companies are prepared for say-on-pay, I thought our marketing department had outdone itself since our comprehensive week of executive pay conferences comes up in less than a month - with an aggregate of over 50 panels on executive pay topics. If these conferences don't help get you prepared, nothing will. You can either register for the three days of the "18th Annual NASPP Conference" (in Chicago) - or the two days of the "5th Annual Proxy Disclosure Conference" & "7th Annual Executive Compensation Conference" (in Chicago or by video webcast) - or a combination of both.

Here are highlights from the Towers Watson press release:

- Only 12% of respondents said they are very well prepared for the say-on-pay legislation, while 46% said they were somewhat prepared. Just under one-fourth of respondents (22%) didn't know if their companies were ready.

- 69% said they were identifying potential executive pay issues and concerns in advance, while 60% said they were improving their CD&A to better explain the executive pay program's rationale and appropriateness for the company. In addition, many companies indicated they are engaging with proxy advisors (44%) to discuss areas of concern, meeting with key institutional shareholders (29%) and preparing a formal communication plan (23%).

- More than one-half (59%) of respondents believe that proxy advisory firms have substantial influence on executive pay decision-making processes in U.S. companies. However, 42% said that guidelines established by proxy advisory firms have had no or minimal impact to this point on the design of their executive compensation programs.

Mr. Ponzi's "Securities Exchange Company"

Here are some thoughts from Keith Bishop of Allen Matkins:

Regarding Broc's blog about a fake SEC a while back, I've always thought it ironic that the SEC has virtually the same name as Charles Ponzi's company. In 1919, Mr. Ponzi named his company the "Securities Exchange Company" or SEC. Thus, while his own last name has become a synonym for fraudulent pyramid schemes, the name of Ponzi's company is quite similar to the government agency that now pursues those schemes. Here is an interesting article on the subject.

In another historical confluence of names, some may remember O.P.M. Leasing Services which perpetuated a decade of fraud before collapsing in the early 1980s. "O.P.M." was an acronym for "Other People's Money" which also happens to be the title of Justice Louis Brandeis' well known collection of essays on economic collusion.

Book Review: "Circle of Greed" - The Rise and Fall of Bill Lerach

Recently, Kevin LaCroix provided this review of Bill Lerach's new book in his "D&O Diary Blog." By the way, Bill is fresh out of prison and on the book lecture tour...and as noted in Ideoblog, he's teaching and not feeling the least bit remorseful...

- Broc Romanek

The SEC Adopts Proxy Access

After nearly a decade of battle, the SEC adopted proxy access during an open Commission meeting by a 3-2 vote - and then promptly posted the 451-page adopting release. Here's a press release - and Chair Schapiro's opening remarks (and commentary from Harvey Pitt on Bloomberg News). Here are dissenting remarks from Commissioners Casey and Paredes - and supporting remarks from Commissioners Walter and Aguilar.

Here are the basics:

- What are the thresholds for a Rule 14a-11 access right? - Shareholders (or groups) must have 3% of the voting power (so it doesn't vary by company size as proposed) and have have held their shares for three years (up from one year as proposed) when they give notice of the nomination on Schedule 14N. When calculating the 3%, shareholders will be able to pool assets and include securities loaned to a third party as long as they can be called back - but securities sold, shorted or not held through the company's annual meeting will need to be deducted.

- Who can be nominated as a shareholder candidate? - Shareholder nominees must satisfy the applicable stock exchange's independence standards - and the shareholder exercising the right must not have the intent of changing control of the company. If a company wants to challenge a nominee's qualification, it can use the Staff's no-action process.

- How many nominees can be placed on the ballot by shareholders? - Greater of one director or 25% of the entire board. If the number of shareholder nominees exceeds the number permitted under Rule 14a-11, then preference will be given to the larger holder - not the first to nominate as the SEC had proposed.

- Is there any "opt-out" of the process rules? - Nope, it's mandatory and neither companies nor shareholders are not permitted to opt out or select a more restrictive mechanism. Rule 14a-8 was amended so that companies may not exclude shareholder proposals that seek to establish less restrictive proxy access procedures.

- When do the new rules take effect? - 60 days after their publication in the Federal Register, which is expected to happen next week. However, the deadline for submitting a nominee is120 days before the anniversary of this year's proxy mailing. So access essentially applies to an annual meeting next year only if the first anniversary of the mailing of this year's proxy materials occurs 120 days or more after effectiveness. The example given during the open meeting: if the rules are effective on November 1st, then shareholders have a proxy access right if the company mailed their proxy materials on or after March 1st during 2010.

- How are smaller companies treated? - They get a three-year delay in effectiveness if the company has a public float of less than $75 million.

- How are foreign private issuers treated? - They aren't subject to the new access rules, just like the other proxy rules.

We'll be posting memos in our "Proxy Access" Practice Area analyzing the new rules - and we'll be covering them during our "5th Annual Proxy Disclosure Conference" coming up in less than a month. Register now for this important two-day event.

FINRA Rule 5121 Supercedes NASD Rule 2720

A few weeks ago, the SEC approved FINRA's proposal to renumber NASD Rule 2720 - relating to public offerings of securities with certain conflicts of interest - to FINRA Rule 5121 as part of the process of FINRA's development of a consolidated rulebook.

Third Circuit Rejects A "Fraud Created The Market" Theory for Presumption of Reliance

As noted in this Edwards Angell Palmer & Dodge memo, a ruling last week - Malack v. BDO Seidman LLP, No. 09-4475 (3d Cir.; 8/16/10) - by the US Court of Appeals for the Third Circuit should help to limit federal securities fraud class actions. The 3rd Circuit court squarely rejected use of the "fraud created the market" theory to establish presumption of the essential element of reliance in securities fraud claims.

- Broc Romanek

SEC Issues Two Quasi-Proposing Releases on IFRS: Includes Stuff for Lawyers to Ponder

A few weeks ago, the SEC issued two releases seeking comment on three of the six topics related to its work plan to consider incorporating IFRS into the financial reporting system for US companies. As you will recall, the work plan is designed to help the SEC determine whether - and if so, how and when - IFRS should be incorporated (and because this is that type of a baby step, that's why technically they're not "proposing" releases - but they do seek public comment). Comments are due by October 18th.

This release requests comments on a number of potential contractual and corporate governance issues, such as: how would companies deal with contracts which require or rely on financial statements prepared in accordance with GAAP (e.g., requirement to deliver financial statements audited in accordance with GAAP, covenants based on GAAP financials, earn-outs based on GAAP financials)? How would companies comply with the requirements to have an "audit committee financial expert"? How would companies deal with state statutes that use GAAP concepts for matters such as determining the ability to declare a dividend or determining when a shareholder vote is required for a disposition of assets?

And the other release seeks comment on: US investors' current knowledge of IFRS and preparedness for incorporation of IFRS into the financial reporting system for US companies; how investors educate themselves on changes in accounting standards and the timeliness of such education; and the extent of, logistics for, and estimated time necessary to undertake changes to improve investor understanding of IFRS and the related education process to ensure investors have a sufficient understanding of IFRS prior to potential incorporation.

The questions raised by these two releases are far-reaching and illustrate a number of potential "traps for the unwary" for US companies after implementation of IFRS for financial reporting purposes. This KPMG memo in our "IFRS" Practice Area explains more...

The FASB's Growth Spurt; Chair Bob Herz Retires

As noted in this press release, the FASB intends to grow from five to seven members (which is the size it had from '73-'08; the reduction to five a few years ago was widely criticized). And Chair Bob Herz will soon retire, replaced by Leslie Seidman on an interim basis starting on October 1st.

Six Senators Seek Improved Off-Balance Sheet Disclosure

A few weeks ago, six Senators sent a letter to the SEC, asking the agency to consider adopting new rules governing off-balance sheet disclosures as noted in this Reuters article.

- Broc Romanek

Internal Controls: Who Will Have to Comply with Sarbanes-Oxley's Section 404?

The "Going Concern Blog" recently wrote this piece on how the Dodd-Frank Act may soon exempt companies with market caps of less than $75 million from complying with the SOX requirement to have an audit of their internal control system and how that smaller companies that have voluntarily complied with Section 404 may soon scrap their efforts (the piece was written before Dodd-Frank was passed obviously - but is still an interesting read).

In comparison, at least one company has gone to great - and manipulative - lengths to avoid falling with the grasps of Section 404 as noted in this recent SEC Enforcement action against Ephraim Fields brought recently...

The Latest US GAAP-IFRS Convergence Schedule

A few weeks ago, CFO.com published a nice schedule of expected events concerning the convergence of US GAAP and IFRS, including deadlines for the submission of comments on exposure drafts.

Recently, the FASB made available the "pre-release public view" of the 2011 US GAAP Financial Reporting Taxonomy. An updated taxonomy will be released in September, kicking off the official 60-day public comment period.

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:

- Disclosures to Independent Auditors: What's the Risk of Waiver?
- Denny's Removes Director Who "Fails" to Resign
- A New Approach to Catching Insider Trading?
- It's Time for a Change: Let's Unleash the Power of the Web for Disclosures
- Who is a Director's Lawyer When Disputes Arise in the Boardroom?

- Broc Romanek

More on the "SEC's 'Revolving Door' Under Review"

Recently, I blogged about how at least one Senator wants a review of the "revolving door" of the SEC. In the "Legal History" Blog, Dan Ernst recently wrote about how the issue is as old as the SEC is - that is over 75 years old.

For me, it's a non-issue in most cases as rules already exist that address those folks that most likely need a "cooling off" period (ie. former senior Staffers). But it's fascinating to read about the topic with a historical perspective...

How to Handle Mini-Tender Offers

In this DealLawyers.com podcast, Bob Kuhns of Dorsey & Whitney explains how to handle mini-tender offers conducted by others, including:

- What is a "mini tender offer"?
- What do parties conducting mini tender offers file with the SEC?
- How can companies become aware that a mini tender is happening with their stock?
- What can companies do to combat mini tenders?

Exploring the New World of Web Disclosure

We have posted the transcript from our recent webcast: "Exploring the New World of Web Disclosure."

- Broc Romanek

Dave & Marty: The Back in the Saddle Show

In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:

- Getting ready for the Dodd-Frank Act's Say-on-Pay requirements
- The latest on the Dodd-Frank Act's disclosure provisions
- Favorite vacation spots

Another Judicial Roadblock: Judge Won't Approve Citi-SEC Settlement

A few weeks ago, the SEC and Citigroup entered into a settlement regarding allegations that the company misled investors over subprime investments. Citigroup agreed to pay a $75 million penalty and two former executives agreed to pay $100k and $75k, respectively. Earlier this week, Judge Ellen Segal Huvelle of the SD-NY refused to approve the settlement in this order (here's a motion for a shareholder to submit an amicus curiae brief); just like Judge Rakoff did in the SEC-Bank of America settlement earlier this year. Here is some commentary on this situation:

- Bloomberg's "Citigroup's Sweetheart Deal Flunks Smell Test"

- WaPo's "SEC spins judge's words in defending Citigroup settlement"

- WSJ's "Citigroup's Paltry Debt Penalty"

- WSJ's "Judge Won't Approve Citi-SEC Pact"

- Securities Law Prof Blog's "Judge Refuses to Approve SEC's Settlement with Citigroup"

More on our "Proxy Season Blog"

Even with the proxy season wound up, 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:

- US Proxy Season Review: Environmental/Social
- Action by Written Consent: A New Focus for Shareholder Activism
- You Think You Have Problems? How About 13,000 Attendees for an Annual Meeting
- The ISS Preliminary U.S. Postseason Report
- Less Support for Independent Chair Proposals

- Broc Romanek

It's Coming: SEC to Consider Proxy Access on Wednesday

As I blogged a few weeks ago, the SEC will consider adopting its proxy access rules next Wednesday, August 25th at an open Commission meeting. No word on how the big question marks - the ownership threshold and holding period - will be resolved.

There has been a flurry of last minute lobbying by a number of groups and I wonder how much of a spectacle the meeting will be. My guess is "not much" as open Commission meetings tend to be fairly mellow, but you never know. But there could be fireworks shortly afterwards. As noted in this Bloomberg article, the US Chamber of Commerce may be gearing up to sue if the SEC approves access.

30 More Days for Comments: FASB's Disclosure of Contingencies Proposal

Yesterday, the FASB extended the comment period on its proposal to revise the disclosure requirements for loss contingencies by 30 days so that it now ends on September 20th rather than August 20th. Note that the FASB has not changed the proposed effective date (at least not yet). The proposal continues to be controversial, as reflected by this US Chamber editorial yesterday in the WSJ (here is the Chamber's letter).

Overcoming the Challenges: Integration Issues & Merger of Equal Issues

We have posted the transcript for our recent DealLawyers.com webcast: "Overcoming the Challenges: Integration Issues & Merger of Equal Issues."

For dog lovers only: Back in '81, Jimmy Stewart delivered this memorable poem about a dog named "Beau" on the Johnny Carson show. It's quite moving if you watch it to the end...

- Broc Romanek

The SEC is Hiring 800? Where Do I Sign?

Recently, SEC Chair Schapiro testified that 374 professionals would be hired over the next year to help the agency carry out it's new duties (bringing the total number of Staffers to 4200), with a total of perhaps 800 over a longer period of time. Given the poor existing job market for lawyers, there are a lot of folks whose ears perked up over this news. Here's the SEC's "Job Center" for those that fall into this category. You may want to review my tips for getting hired by the SEC, as noted in this blog.

Dodd-Frank: How Did Self-Funding for the SEC Fare?

Not well. The budget requests from President Obama to Congress to support the SEC are noted in Chair Schapiro's testimony. Section 991 of Dodd-Frank didn't survive in the form originally desired by the Senate (ie. self-funding for the SEC) - rather the final Act reaches a middle ground in Section 991(e), under which the SEC can establish a $100 million reserve fund with the Section 6(b) registration fees it collects, which it can dip into without going through the normal Congressional appropriations process (as noted in this Reuters article).

This "Securities & Exchange Commission Reserve Fund" is held by the Treasury - and the SEC has 10 days after dipping into the fund to notify Congress of the date, purpose and amount drawn. Under the terms of the Act, it looks like the SEC has wide latitude as it is limited to "necessary to carry out the functions of the Commission" - but of course, Congress may decide to interpret that phrase strictly. Any funds drawn by the SEC can be replenished by more fee collections, but no more than $50 million can be deposited in any one year.

Otherwise, it's business as usual where the independent SEC is required to go to Congress annually to get funded. Not the best framework in my opinion...

What if the Act had authorized the SEC to put penalties from enforcement proceedings into the fund? It likely would raise constitutional questions. See Tumey v. Ohio, 273 U.S. 510 (1927); see also Caperton v. A.T. Massey Coal Co., No. 08-22 (U.S. June 8, 2009).

The SEC's New Ethical Requirements

Recently, the SEC adopted supplemental standards of ethical conduct for its employees, mainly to respond to the SEC's Inspector General report that contained allegations of insider trading by some of the attorneys in the Enforcement Division made back in May.

The "supplemental" standards give guidance on permitted, prohibited and restricted financial interests and transactions, as well as engaging in outside employment (yes, some Staffers have been known to moonlight on occasion in unrelated fields). Once these standards take effect in mid-August, SEC Staffers won't be able to trade securities if they have possession of material nonpublic information nor trade in one "directly regulated" by the SEC. I don't think that includes public companies making filings through Edgar. There is a requirement now for Staffers to clear trades through a computer system and hold any purchases for six months (unless they are sold at a 10% loss or more).

- Broc Romanek

Hooray! New York Retroactively Fixes Power of Attorney Law

Over the past year, we have recorded much angst on this blog over a new power of attorney law in New York as it didn't appear to take into consideration how the law impacted many corporate & securities law transactions. As noted in this Sullivan & Cromwell memo, the New York Legislature has now passed - and the Governor has signed - amendments to the New York Power of Attorney Law, Sections 5-1501-5-1514 of the General Obligations Law, which became effective on September 1, 2009. The amendments will become effective on September 13, 2010 and will then be deemed to have been in effect on and after September 1, 2009, in effect amending the prior law retroactively. The amendments will alleviate the concerns about the effect of the prior law on business and commercial transactions and the automatic revocation of prior powers of attorney.

Books & Records: Investigations Into Rejections of a Director's Resignation

John Grossbauer of Potter Anderson notes: Recently, the Delaware Supreme Court issued this opinion - in City of Westland Police v. Axcelis Technologies - affirming the dismissal of a books and records demand against Axcelis Technologies made for the purpose of investigating alleged wrongdoing in connection with the rejection of a takeover proposal and the refusal to accept the resignation of three directors who had failed to receive a majority vote in the election of directors under a board-adopted "plurality plus" system.

The Court found the failure to respond affirmatively to the offer was a matter of business judgment absent additional facts suggesting some wrongdoing by the directors. With regard to the demand for information related to the decision not to accept the resignations, the Supreme Court affirmed the Court of Chancery's decision that a challenge to the failure to accept the resignations would not be governed by the Blasius standard of review.

However, in rejecting the claim, the Supreme Court provided a roadmap for future plaintiffs who desire to inquire into a board's decision not to accept resignations under a plurality-plus system. The Court cited with approval the Court of Chancery's decision in Pershing Square, LP v. Ceridian Corp., 923 A.2d 810 (Del. Ch. 2007), in which the Chancery Court found an inquiry into particular persons' "suitability" to be directors to constitute a proper purpose. The Supreme Court stated that the failure receive a majority vote, at least under a board-adopted majority vote system, would constitute a "credible basis to infer that the director is unsuitable, thereby warranting further investigation" in the event the board fails to accept a resignation of one or more directors who failed to receive the required vote.

Section16.net: Combination of Our Q&A Forums

For the many of you that are members of Section16.net, you will notice that we just folded our "Electronic Filing Issues Q&A Forum" into our primary "Q&A Forum" on that site. The combined Q&As were integrated so that they are listed chronologically. We had created the "Electronic Filing Issues Q&A Forum" in 2003 after the SEC adopted rules that mandated electronic filing of Forms 3, 4 and 5. Now that time is passed, there had been relatively few new questions being added as the 2000 Q&As in that old Forum covered the waterfront pretty well. We figure the combination of the Forums will help simplify your searches of the treasure trove of past Q&As (now a combined 6300!) - since you will now only have to conduct a search once rather than twice...

- Broc Romanek

The Joint SEC-CFTC Concept Release on Swaps

As noted in this press release, on Friday, the SEC and CFTC jointly issued an "advance notice of proposed rulemaking" that requests public comment on defining certain key terms and prescribing regulations regarding "mixed swaps" as required by Title VII of Dodd-Frank. In other words, they issued a concept release.

Why did this project start with a concept release? I'm not sure, but I'm guessing it is part of the overall process to be "super duper" open about the Dodd-Frank rulemaking - and because it is being conducted jointly with the SEC and CFTC, this early input will help the agencies coordinate and get some kinks worked out prior to actually going out with proposals.

Trends in Going Concern Opinions

Recently, Audit Analytics released its annual "Going Concern" report - here's some of the highlights:

- It is estimated that 19.8% of auditor opinions filed for year end 2009 will contain a qualification regarding the company's ability to continue as a going concern.

- Year end 2007 received the highest number of going concerns for the decade (3284) with 2008 coming in at a close second (3275) and 2009 estimated to experience a drop (3007), mostly due to company attrition from the 2008 going concerns.

- An analysis of the 3,275 companies that filed a going concern in 2008 found that 205 of these companies filed a termination of registration with the SEC.

Use of ESOPs in Deals

In this DealLawyers.com podcast, Jude Carluccio of Barnes & Thornburg explains how ESOPs are being used in deals these days, including:

- How are ESOPs considered a special type of shareholder?
- What are recent examples of ESOPs being used in deals?
- What factors might lead an acquiror to consider using an ESOP in a deal?
- What are the types of issues that companies should consider before using an ESOP?

- Broc Romanek

FINRA's Papilsky Rules Updated

Last month, the SEC approved new FINRA Rule 5141, which will replace the current NASD rules collectively referred to as the "Papilsky" rules. As noted in this alert from Latham & Watkins, the new rule will simplify and eliminate some provisions of the Papilsky rules, which seek to prevent broker-dealers participating in fixed price securities offerings from offering to favored clients any securities at a price that is at a discount to the public offering price.

The Papilsky rules originally came about as a result of the decision in Papilsky v. Berndt, which was a case where a shareholder of an investment company brought a derivative suit against the directors of the investment company and its advisor, alleging violations of fiduciary duties in failing to "recapture" brokerage commissions, underwriting commissions and tender offer fees for the investment company and its shareholders. The court held that, in the absence of an SEC or self regulatory organization rule to the contrary, recapture of the commissions and fees was legal and therefore the failure of the advisor to bring the potential for recapture to the attention of the independent directors of the fund constituted a breach of fiduciary duty. In the wake of this decision, the SEC and NASD worked to clarify the regulatory position on such "recapture" and other arrangements, resulting in NASD Rules 2730, 2740 and 2750.

The new Rule 5141 continues to prohibit FINRA members from selling securities in fixed priced offerings at other than the public offering price. FINRA intends to issue a Regulatory Notice announcing approval of the rule and announcing an effective date, which must take place within 90 days of SEC approval. The effective date will be no more than 180 days following the Regulatory Notice.

The change to the Papilsky rules will require some changes to underwriting agreements to reflect the new requirements specified in Rule 5141.

More FINRA Stuff: IPO Allocations

FINRA recently filed an amendment to its proposal to amend FINRA Rule 5131 with the SEC. The rule changes seek to regulate conflicts-of-interest and other abuses in the allocation of securities in initial public offerings. The SEC Is expected to publish the proposal for comment very soon.

Is a CEO Pledge of Allegiance the Answer?

The SEC has taken the very admirable step of opening up the comment process on Dodd-Frank Act implementation ahead of time, and hopefully the pace at which comments are submitted will increase, given that the SEC is going to need to act very soon on many of the rules it needs to implement. With respect to the corporate governance and compensation provisions of the Act that affect public companies, it seems that probably the first rulemaking out of the box (other than proxy access adoption) will be rule proposals to implement Say-on-Pay, Say-on-Frequency and Say-on-Parachutes. In order to have those rules in place for the proxy season, we would expect to see proposals within the next 30 days or so. It seems likely that those rule proposals will look much like the implementing rules adopted for the TARP Say-on-Pay votes, with additional rules necessary to address the quirks of the Dodd-Frank Act, such as the Say-on-Frequency vote (or rather should I say "poll," because it sounds like that is how it will be structured).

Some comments have already trickled in, including this note from an experienced investor who has a truly novel idea in these times of many recycled ideas: require CEOs to swear to protect and defend the interests of the company along with an annual certification as to their fairness, honesty and integrity. You never know, this one might get some traction.

- Dave Lynn

Corp Fin Updates Compliance and Disclosure Interpretations

Yesterday, the Staff updated a number of C&DIs across several different topic areas. A number of the new or revised C&DIs relate to foreign private issuers, and two new C&DIs provide guidance on the ability of smaller listed issuers to utilize shelf registration under the conditions of General Instruction I.B.6.

The new interpretations are:

- Securities Act Rules Question 256.21 (general solicitation issue for a private fund)
- Securities Act Forms Question 116.22 (calculating 1/3 limit in General Instruction I.B.6.)
- Securities Act Forms Question 116.23 (calculating 1/3 limit in General Instruction I.B.6.)
- Exchange Act Rules Question 110.01 (foreign private issuer status)
- Exchange Act Forms Question 104.17 (Part III must incorporate definitive proxy statement)
- Section 16 Question 101.02 (foreign issuer and Section 16 reporting)
- Section 16 Question 110.03 (foreign issuer losing foreign private issuer status and 16a-2)
- Section 16 Question 110.04 (foreign issuer and 16a-2)

The revised interpretations are:

- Securities Act Sections Question 139.29 (lock-up in registered debt exchange offer)
- Securities Act Sections Question 139.30 (lock-up in registered third party exchange offer)
- Section 16 Question 101.01 (applicability of Section 16 when issuer loses FPI status)

The exchange offer lock-up interpretations were only revised slightly - in the fourth condition, the words "are offered" replaced the words "will receive" when referring to the same amount and form of consideration for all note holders eligible to participate in the exchange offer. Alan Dye will be blogging about the Section 16 C&DI changes on Section 16.net.

Enforcement Keeps its Subpoena Power

One of the high profile changes to the SEC Enforcement process that Chairman Schapiro made this time last year was the delegation of authority for issuing Formal Orders of Investigation, vesting with the Director of Enforcement the ability to designate the Enforcement Staff authorized to issue subpoenas in investigations. Prior to making that change, the Enforcement Staff had to go to the Commission for a Formal Order, thus slowing down the process.

The original delegation of authority had a one-year sunset provision in order to permit the Commission to evaluate the new approach. Yesterday, the Commission issued an order extending the delegation of authority without a sunset provision, so the Formal Orders can keep flowing down at the SEC.

Better than Lotto?

While on the topic of SEC Enforcement, Section 922 of the Dodd-Frank Act establishes enhanced bounty provisions for whistleblowers voluntarily providing information that leads to a successful enforcement action by the SEC. The SEC already had bounty authority in insider trading cases pursuant to Section 21A(e) of the Exchange Act, but earlier this year the SEC's Inspector General found that the bounty program was rarely used, having received few applications and paying out few bounties over the past 20 years. The SEC asked Congress to significantly expand its authority to pay bounties, and that proposal ultimately found its way into the Dodd-Frank Act.

This time, the SEC won't be fooling around when it comes to bounties, and there will no doubt be an increase in the flow of applications now that the stakes are so much higher. Under the Dodd-Frank Act provision, awards to whistleblowers range from ten to thirty percent of the collected monetary sanctions (the insider trading bounty was limited to ten percent). That means that if a whistleblower had provided "original information" which led to the recent Enforcement action against Goldman Sachs - with its $500 million settlement touted as the largest penalty against a Wall Street firm in the history of mankind - the whistleblower could have potentially collected $50 million to $150 million under this new law. Obviously, with those kinds of incentives involved, there may be more of an inclination for whistleblowers to go to the SEC (especially since they can do so anonymously up until the time the bounty is paid), particularly in those situations that typically involve very high monetary penalties, such as in the FCPA cases.

We have posted lots of memos on these new whistleblower provisions in our "Dodd-Frank Act" Practice Area.

SEC Adopts Procedures for Review of PCAOB Reports

While much of our conversation these days has been focused on the implementation of the Dodd-Frank Act, interestingly enough the SEC is still adopting rules to implement pieces of the Sarbanes-Oxley Act of 2002. Recently, the SEC amended its "Informal and Other Procedures" to add a rule that will facilitate interim SEC review of PCAOB inspection reports.

This rule was adopted to implement Section 104(h) of the Sarbanes-Oxley Act, which provides that a registered public accounting firm may request interim Commission review of PCAOB inspection reports. These reviews can take place in situations where a registered public accounting firm has responded to the substance of particular items in the PCAOB's draft inspection report and disagrees with the assessments contained in any final report prepared by the PCAOB following that response, or when a registered public accounting firm disagrees with the PCAOB's determination that quality control criticisms or defects identified in the inspection report have not been addressed to the satisfaction of the PCAOB within 12 months of the date of the inspection report. The new rules provide for the logistics of making these sorts of review requests, and the SEC has delegated responsibility for the interim reviews to the Chief Accountant.

A Few Things I Learned at the ABA Annual Meeting

The ABA Annual Meeting wrapped up earlier this week in San Francisco, and as always there were a lot of great programs and subcommittee discussions, thanks to the hard work of the Federal Regulation of Securities Committee. I learned a few things at the meeting that I thought might be worth sharing:

1. The walk up California Street from my hotel on the Embarcadero to the Fairmont Hotel in Nob Hill involved climbing what seemed to me to be an incredibly steep hill (note to self: pay more attention to your hotel reservations next time).

2. The "conflict minerals" provision of the Dodd-Frank Act (Section 1502), which Broc recently blogged about, will potentially have a very broad reach once the SEC adopts implementing rules by April 17, 2011. The new disclosure will be triggered whenever conflict minerals are "necessary to the functionality or production of a product" manufactured by a company. The conflict minerals are columbitetantalite (coltan), cassiterite (tin ore), gold, wolframite, or their derivatives, and other minerals that may be determined by the Secretary of State. These minerals are used in such everyday products as cell phones, laptops, digital cameras, tin cans, light bulbs and jewelry (just to name a few). Companies whose products use any of these minerals in their manufacture under the standard referenced above will have to disclose on an annual basis whether they are sourcing these minerals from the Democratic Republic of Congo or adjoining countries (Angola, the Republic of Congo, the Central African Republic, the Sudan, Uganda, Rwanda, Burundi, Tanzania, and Zambia). When minerals are being sourced from these countries, then a report is required which will describe the measures that the company has taken to exercise due diligence on the source and chain of custody of the minerals. This report must include an independent private sector audit conducted in accordance with standards established by the GAO. There is no materially standard contemplated in the statute, so the SEC will not likely be able to apply such a standard when adopting the mandated rules.

3. The CEO pay ratio disclosure required by Section 953 of the Dodd-Frank Act will be required in any filing to which Regulation S-K applies, so presumably the SEC will feel compelled by that statutory language to require the disclosure in more than just the proxy statement. The statute doesn't contemplate any exclusions from the calculation of median total employee compensation, such as based on status as a part-time, hourly or overseas employee, so it appears unlikely at this point that any such exclusions would end up in the final rules. The practical realities of computing the total compensation numbers using the methodology of the "Total" column of the Summary Compensation Table loom large for companies, although perhaps rulemaking with respect to this particular provision will take a while.

4. Under the new Corp Fin office structure announced last month, the office tasked with reviewing large and financially significant companies will continue to expand the Staff's efforts to conduct continuous, real time reviews of certain registrants, which involves reviewing everything that these companies file and providing comments in real time. So, for example, the Staff will comment on the earnings release that is furnished by one of these companies so that comments can be addressed in the upcoming 10-K or 10-Q. The new office in Corp Fin tasked with observing capital market trends through the review of 424s will not only have input into rule changes and interpretations that may be necessary based on observed trends in offering techniques and products, but will also issue comments on 424s, presumably on a "futures" basis. This office will also handle inquiries about new products.

5. The SEC is working on rule changes and MD&A guidance that is likely to be out this Fall regarding short-term borrowing disclosure, in order to address recent events indicating that there may not have been adequate disclosure about short-term borrowings, given the way that such borrowings were reflected in the financials.

The New Pay Legislation: Action Items

We have posted the transcript from our pre-conference briefing "The New Pay Legislation: Action Items."

Access to the audio archive of this webcast and the transcript is free with your registration for our upcoming conferences, the "5th Annual Proxy Disclosure Conference" and the "7th Annual Executive Compensation Conference." The Conferences take place on September 20th and 21st in Chicago and via nationwide video webcast. Given all that is going on in the wake of the Dodd-Frank Act, you will not want to miss these conferences, so be sure to sign up today if you haven't already done so.

- Dave Lynn

SEC Loses Another One in the DC Circuit

Did you ever wonder why SEC releases have to be so long? There is no doubt that the SEC has sometimes had a tough time with the review of its regulatory actions in the DC Circuit over the past several years, and that certainly can lead the agency to try to provide as much analysis of its actions as possible in order to comport with the Administrative Procedures Act.

In a case decided last week, the Court of Appeals vacated a 2008 SEC order approving a proposal by NYSE Arca to charge investors a fee for accessing ArcaBook, a "depth-of-book" product developed by the exchange. The petition for review was brought by NetCoalition, a public policy organization composed of approximately 20 Internet companies (including Google and Yahoo!), and SIFMA.

The Court held that the SEC's "market-based" approach to evaluating the fairness and reasonableness of NYSE Arca's fees for ArcaBook did not conflict with the Exchange Act, however the SEC did not adequately explain the basis of its approval nor support its conclusion with substantial evidence. As a result, the action was remanded back to the SEC for further consideration.

SEC Staff Seeking More and Better Risk Factor Disclosure

A recent CFO.com article notes that recent filing reviews by the Corp Fin staff have involved comments seeking more information about the risks that companies face. The article notes that the SEC has been asking for more specific risk factor disclosure, particularly in areas such as: reliance on customers, suppliers, governments and key employees; the market for the company's products and services; the impact of regulatory changes; ineffective disclosure and internal controls; legal exposures and reliance on legal positions; conflicts of interest and related party transactions; a history of operating loss; and going concern issues.

The article also notes that risk disclosure remains an area that "needs fixing" in the SEC's efforts to review all of its disclosure rules. Last month, Chairman Schapiro indicated that the Staff is working on making a recommendation to change the risk disclosure requirements, all as part of the agency's overall focus on risk.

There are several factors that could help explain the Staff's increased focus on risk disclosure in filing reviews. First, there is an overarching focus on risk at all levels of the SEC, so there is no doubt an interest in ensuring that public company disclosures to investors are sufficiently robust from the SEC's perspective. Second, the SEC has hired more lawyers into Corp Fin, which has enabled that Division to do many more "full reviews" of periodic reports than had been done in the past, and one of the areas ripe for any review by lawyers is the risk factors section. Lastly, the Staff has been casting the net widely in terms of the material that it reviews when looking at a company's periodic reports (including press releases, trade articles, website postings, earnings releases, etc.), and this may in some instances lead the Staff to ask more questions about potential risks associated with a company's business and financial condition.

Revisiting Emergency Succession Planning

High profile, rapid CEO departures of the type that we have been seeing lately are a good reminder of the potential need for putting in place an emergency succession plan. Succession planning on the whole has become a focal point of investors, and will likely be a significant issue in the upcoming proxy season thanks to the Staff's position on CEO succession planning in Staff Legal Bulletin No. 14E. So now may be a good time to revisit your succession planning process.

While not all public companies have implemented emergency succession plans, the implementation of such plans appears to be on the rise these days. The main purpose of an emergency succession plan is to ensure that decisions about successor appointments (usually interim appointments) are made in advance of an unexpected event and can be implemented quickly, so as to minimize the adverse impact on a company's stock price and ongoing operations.

Keep in mind that an emergency succession plan may be very different from the company's long-term succession plan. It may be the case that different executive officers or directors are identified to succeed a CEO or other executive officers on an interim basis as compared to the long-term succession plan, because an emergency succession plan is put in place to provide for a transition of management during a crisis situation, rather than seeking to meet the company's long-term strategy.

For more on succession planning, be sure to check out our "Succession Planning" Practice Area.

- Dave Lynn

The Future of NYSE Rule 452 after Dodd-Frank

I am at the ABA Annual Meeting in San Francisco, and, not surprisingly, the conversation at the meetings is dominated by the Dodd-Frank Act. One of the provisions of particular note in the Dodd-Frank Act is Section 957, which requires that each national securities exchange amend its rules to prohibit its member organizations from voting shares without specific client instructions on matters related to executive compensation and in the election of directors (as well as in any other matters determined by the SEC).

Section 957 was effective upon enactment, so the NYSE has now issued an information memorandum to indicate how the provision will be interpreted while rule changes are in the works. The information memorandum notes that the NYSE intends to file an amendment to Rule 452 to prohibit members from voting uninstructed shares if the matter to be voted on relates to executive compensation, including "say-on-pay" proposals, at meetings occurring after July 21, 2010. The NYSE notes that an exception will be made for those meetings on which the NYSE has issued a "may vote" ruling prior to July 21, 2010, however, effective immediately, those proposals involving executive compensation matters for which brokers had previously been allowed to vote uninstructed shares will be treated as "may not vote" rulings going forward.

The NYSE notes that it has already amended Rule 452 to eliminate discretionary voting in director elections, and that the SEC may prescribe further areas where discretionary voting by brokers must be eliminated.

SEC Fight Over Clawbacks

Before we had Section 954 of the Dodd-Frank Act (which will require the adoption of compensation clawback polices by listed companies), we of course had Section 304 of the Sarbanes-Oxley Act, which provided the SEC with the means for recouping incentive compensation in the event of a restatement involving someone's misconduct. Several years went by before the SEC started using that particular Sarbanes-Oxley provision in Enforcement proceedings, perhaps recognizing the legal uncertainties involved with the statute. To date, the SEC has sought to clawback compensation under Section 304 in only a handful of cases. At the same time, Section 304 has no doubt inspired quite a few companies to adopt compensation recoupment policies in one form or another.

Now, according to this WSJ article from over the weekend, Commissioner Aguilar is expressing concern that the SEC is not utilizing the clawback provision enough in enforcement cases, and he has threatened to recuse himself from consideration of cases where he doesn't agree with the Staff's recommendations. The Staff, meanwhile, has been trying to come up with a policy as to how it will use its clawback authority going forward.

It remains to be seen whether the implementation of Section 954 of the Dodd-Frank Act will lessen the need for the SEC to use its clawback authority, given that listed companies will now be mandated to recover previously paid compensation under a broader set of circumstances.

PCAOB Adopts New Auditing Standards on Risk Assessment

Last week, the PCAOB announced that it has adopted Auditing Standards No. 8 through No. 15, all of which relate to the effectiveness of an auditor's assessment of, and response to, the risks of material misstatement in the financial statements. These standards, which replace six interim standards, will become effective for audits of fiscal periods beginning on or after Dec. 15, 2010, if approved by the SEC.

- Dave Lynn

Poll: What is the Purpose of "Clown Diving"?

Sick of Dodd-Frank already? This video of clowns diving in unison is hilarious...but begs the question: why are they doing it? Take this anonymous poll to weigh in:

Next Week: My Vacation!

This blog has never had a true vacation in over eight years and it probably never will. Dave will be blogging next week when I am off. I need it after reading this recent NY Times article about how online journalists burn out. I'll see you again on August 16th.

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:

- Analyst Calls: Another Reason to Exercise Caution
- FTC Challenges CEO's Statements as an "Invitation to Collude"
- Dude, Where Did You Get All that Stuff?
- SEC Loses Insider Trading Case - But Wins War on Swap Jurisdiction
- More on "Drafting Standing Delegations of Authority from the Board: Factors to Consider"

- Broc Romanek

August 25th? SEC Set to Consider Adopting Proxy Access

I normally don't blog about rumors, but the SEC repeatedly has indicated that it would hold an open Commission meeting to adopt proxy access soon so that it will be in place for the next proxy season. So when Kara Scannell wrote in this WSJ article earlier this morning that the SEC's meeting would be Wednesday, August 25th - according to "people familiar with the matter" - I thought I would pass it along and stem the flow of emails asking me when it would happen. Of course - until we see the SEC's official meeting notice - that date may change, as rumored meeting dates often do...

Three Prominent UK Pension Funds Urge Companies to Resist Annual Director Elections

Here is news culled from this Wachtell Lipton memo written by Adam Emmerich, William Savitt and Brian Walker:

In response to new "good governance" guidance from the UK's Financial Reporting Council (FRC) that requires companies either to put their directors up for annual reelection or to explain why they have opted for triennial elections, three of the UK's largest institutional investors wrote an open letter urging companies to resist.

The letter, published in the Financial Times and delivered to every company listed in the FTSE All-Share index, criticizes the FRC's guidance as unnecessary and damaging to the interests of companies and shareholders. The measure threatens to "engender a short-term culture with the risk of effective boards being distracted by short-term voting outcomes," the investors write, which would be "detrimental to the interests of shareholders such as the pension funds we represent, who seek to have long-term, constructive, relationships with the directors of companies in which they invest." The letter closes with a promise to support boards of directors who provide a reasonable argument for retaining triennial elections.

The investors manage three of the UK's biggest pension funds - Hermes Equity Ownership Services, Railpen Investments and Universities Superannuation Scheme - who between them manage assets of £106 billion (US$169 billion). The letter is a powerful reminder that corporate governance arrangements should be designed to encourage the long-term strategic vision and direction necessary to maximize value for all constituencies. Replacing experienced and contemplative stewardship with myopic proxy politics encourages asymmetric risk-taking and similar tactics that pay off today at the expense of tomorrow.

As we have long argued, subjugating the corporate enterprise to the whims of the moment benefits no one - least of all shareholders, as these influential investors recognize. This very public resistance by large, sophisticated, long-term investors to the one-size-fits-all prescriptions of "good governance" may well mark a turning point in the fight for the preservation of shareholder capitalism in a form that allows for the continued strength and growth of American and European public companies.

July-August Issue: Deal Lawyers Print Newsletter

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

- Will Mandatory Shareholder Approval of Golden Parachutes Dull Their Luster?
- Mini-Tender Offers: More Frequent - No Less Troubling
- Latest Developments in Use of Top-Up Options
- Blood in the Water? Use of Delaware's Two-Record Date Statute May Provide Flexibility, But Can Also Expose a Weak Hand
- Delaware Protects Attorney-Client Privilege for Investment Banker Communications
- Leveraged Acquisitions: A New Post-Credit Crisis Structure
- Delaware Court of Chancery Announces New Rules for Controlling Shareholder Freeze-Out Transactions

If you're not yet a subscriber, try a "Rest of '10 for Half-Price" no-risk trial to get a non-blurred version of this issue on a complimentary basis.

- Broc Romanek

Dodd-Frank: What is the "Sleeper"?

With so many provisions in Dodd-Frank, it is understandable if a number of "sleepers" arise. But perhaps they won't since many of us are looking for them - and if they're found, they aren't "sleepers" by definition, right? I guess it depends on your definition of "sleeper."

My definition of the terms mean that the provision applies to many companies, not just a few. As a result, something like this nice find of an Investment Company Act issue in this Pillsbury memo doesn't really apply to our community since most of us don't deal with hedge funds investing in exchange traded funds.

The new Congo disclosure requirement in Section 1502 - "whether company products contain minerals from Congo or neighboring countries and if so, what steps those companies are taking to track the source of the minerals" - isn't much of a sleeper since most companies won't be required to make this type of disclosure; plus it has been written upon plenty (see these memos). Even the Washington Post has written an article about it.

My guess is that something will be overlooked somewhat at first; much the same way that Section 404 - "internal controls" - was overlooked when Sarbanes-Oxley was enacted. I'm curious to hear your thoughts on what the sleepers of Dodd-Frank are...shoot me an email.

Dodd-Frank: A FOIA Flap Over the SEC's Exemption

Over the past week, a debate has grown over Section 9291 of Dodd-Frank. That provision provides an exemption for the SEC from FOIA relating to information obtained during "surveillance, risk assessments, or other regulatory and oversight activities." The debate started when a Fox News article expressed concerns about the potential for overbroad application. Since then, the SEC has responded with letters to Congress, as noted in this Washington Post blog, and this statement:

The new provision applies to information obtained through examinations or derived from that information. We are expanding our examination program's surveillance and risk assessment efforts in order to provide more sophisticated and effective Wall Street oversight. The success of these efforts depends on our abilty to obtain documents and other information from brokers, investment advisers and other registrants. The new legislation makes certain that we can obtain documents from registrants for risk assessment and surveillance under similar conditions that already exist by law for our examinations. Because registrants insist on confidential treatment of their documents, this new provision also removes an opportunity for brokers, investment advisers and other registrants to refuse to cooperate with our examination document requests.

As noted in the WaPo blog, the SEC has sought this exemption for some time, so that those it regulates would be more receptive to providing information the SEC wanted access to, such as emails. We'll see if the clamor for tweaking this provision to limit this new exemption will continue as one member emailed me: "It is reasonable as a law enforcement agency that the SEC keeps documents and evidence gathered in a law enforcement and prosecution case confidential until a case is closed, to ensure fairness to the case and defendant. However, in the case of examination and inspection reports, it seems that keeping such reports "dark" and non-public, after the exam has been completed, has led to bad behavior on the part of regulators and those regulated which in turn has not served the public well."

Hotties of Investor Relations

For something light-hearted, check out Dick Johnson's recent blog on his "IR Cafe," discussing a recent Dealbreaker piece that lists attractive women in the IR world...

- Broc Romanek

Proxy Access Ahead: A Director Database for the Big Three (CalPERS, CalSTRS and CII)

According to this WSJ article, CalPERS, CalSTRS and CII are jointly gearing up for proxy access by establishing a database of prospective directors. The database is tentatively dubbed 3D for "Diverse Director Database."

Below is an excerpt of an interview recently conducted by Francis Byrd of The Altman Group with Anne Sheehan who runs the governance initiatives for CalSTRS (here is the full interview) that relates to the 3D project:

Byrd: Recent media stories have reported that CalSTRS and CalPERS, working with other investors, are in the process of developing a database of potential director nominee candidates for short slates and for submission to companies. What skill sets are you seeking from these potential candidates and how will you assure that these individuals meet (or exceed) the criteria specified by companies' boards of directors?

Sheehan: We are working on establishing a database of independent director candidates and we are doing that for a few important reasons. One reason is that there is now demonstrated economic value from having a diverse board of directors and we believe that makes the composition of boards a shareholder value issue.

Another reason is the necessity to expand the pool of qualified candidates. Almost 3,000 of the sitting directors on companies in the Russell 3000 are between the ages of 70 and 90, a lot of companies have retirement policies that typically go into effect at 72, and couple that with the adoption of majority voting standards by companies and this looks like a significant long-term shareholder value concern. Add to that the last three decades of market collapses, beginning with the 1987 crash, and we as long-term investors have to take the director pool seriously.

In each of these major collapses, the one thing that is a constant is that these failures were cultural, related to the people that were serving on the boards and how they discharged their duties to shareholders. We can only have an effect on the cultural mind-set by expanding the pool. This is not a short-term goal and we realize that this will not be accomplished in one annual meeting season. As to qualifications, the SEC's recent disclosure rules requiring disclosures regarding director qualifications is going to be very valuable for shareholders because we should learn why the sitting directors are on the boards.

Naturally, the qualifications are going to have to match the company's needs. We will put quality people in the database, many of whom will not have prior public company board service and we will do some screening to be sure that the qualifications that people put forth are true, but the final decision will still be made by shareholders when they vote. The nominating committees on these boards are going to be critical to this effort as well and in the final analysis, we are dealing with a human problem and there are no guarantees. There aren't any in the current environment and the existence of the CalSTRS/CalPERS data base is not going to produce any magical guarantees either.

Here is a guest post on CorpGov.net that sets forth an academic's view of how proxy access might work, with directors colleges run by activist investors serving as the training ground.

CalSTRS & Relational Investors Threaten Occidental Petroleum with a Proxy Fight

As noted in this WSJ article yesterday, CalSTRS (not CalPERS, as erroneously noted in many media pieces) and Relational Investors threatened to launch a proxy fight recently at Occidental Petroleum by sending this letter to the company's board, complaining about excessive pay practices and poor CEO succession planning. You may recall that Occidental was one of the three companies that lost a say-on-pay vote during this proxy season, as noted in this blog.

Critical FCPA Diligence in Deals Today

We have posted the transcript for the recent DealLawyers.com webcast: "Critical FCPA Diligence in Deals Today."

- Broc Romanek

The Need for Reviewing Your Rule 10b5-1 Plan

Here is something from Brink Dickerson of Troutman Sanders:

The standard 10b5-1 plan document recently was re-written by one of the major brokerage firms. It is better than their old form, but still not a good approach. I have several concerns with most broker-prepared 10b5-1 plans. First, while the rule is very simple in what a plan must include, the plans tend to ask for representations and other commitments from the executive that simply are not germane to having an effective plan.

I'm more troubled by what some of the plans ask from issuers. Issuers should be willing to verify the number and terms of outstanding options, and can commit to honoring option exercises against the payment of the exercise price, but should go no further. In particular, issuers should not commit to providing notices upon various corporate events. Brokers should get this information from customary exchange and market sources. The bottom line here is that Rule 10b5-1 plans are not the "issuer's plans," but the "executive's plans," and issuer involvement simply is not justified.

I am also is troubled by the representation that some of the plans contain that the executive will not disclose any non-public information to the broker. But what if the broker, through its investment banking operation, is executing a major transaction for the issuer? Still no disclosure? Of course not, but that is not how the plans read.

Transcript: "Evolving Insider Trading Policy and 10b5-1 Plan Practices"

We have posted the transcript for our popular webcast: "Evolving Insider Trading Policy and 10b5-1 Plan Practices."

ISS Solicits Feedback for Its Policy Survey

As it has done the past few years, ISS is soliciting feedback ahead of announcing its policy updates for the 2011 proxy season. It's shorter this year with just 29 questions, but the deadline is tomorrow even though the survey was posted late last week...

Our August Eminders is Posted!

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

- Broc Romanek