November 30, 2010

Dave & Marty on Tax Opinions, ISS Policies and Train Songs

Be sure to check out the Thanksgiving edition of the Dave & Marty radio show, where Marty and I discuss, among other fascinating topics, the federal securities law provisions for which we are most thankful. The other show topics include:

- Marty's tips for tax opinions
- Things people say that irk us
- Favorite train songs

I also discuss the recent ISS Policy Update, including what to expect under the new "holistic" executive compensation analytical approach that will work off of a significantly condensed list of problematic pay practices.

If you have any topics that you would like to hear covered on the radio show (whether related to the securities laws or not), please send them my way.

COSO to Update the Internal Control Framework

As the internal control framework developed by the Committee of Sponsoring Organizations of the Treadway Commission nears its twentieth birthday, COSO has announced a project to review and update the framework. This update isn't designed to alter the core principles of the framework, but rather will seek to "facilitate more robust discussion of internal control" through refinements to some of the concepts and guidance included in the framework. PwC is going to support the project, with an anticipated publication date in 2012.

FINRA IPO Abuse Rule Effective in May

As I noted in the blog last month, the SEC recently approved FINRA Rule 5131, which will regulate practices such as quid pro quo arrangements, "spinning," inequitable penalty bids and the acceptance of market orders for new issue shares before commencement of secondary market trading. FINRA has now issued Regulatory Notice 10-60, which announces that the effective date of new Rule 5131 is May 27, 2011.

- Dave Lynn

November 29, 2010

ISS's Final U.S. Postseason Report

Without much fanfare, ISS recently released its final postseason report about the 2010 proxy season - which has a load of interesting statistics - which we have posted in our "Proxy Season" Practice Area.

DOJ Proclaims "New Era" of FCPA Enforcement

Here is news culled from this Morrison & Foerster memo: In a speech last week on the Foreign Corrupt Practices Act, the head of the U.S. Department of Justice's Criminal Division proclaimed a "new era of FCPA enforcement." Assistant Attorney General Lanny Breuer said enforcement of the FCPA is "stronger than it's ever been -- and getting stronger." He described "historic" growth in FCPA actions and penalties ($1 billion+ in past 12 months and 35 individuals awaiting trial) and took on critics of the DOJ's increasingly aggressive enforcement strategies. You "are right to be more concerned." "We are here to stay." Mr. Breuer concluded with concrete advice to companies "worried" about the new climate of "vigorous" enforcement, including encouraging companies to self-report.

According to this blog, you shouldn't be surprised to see NBA star Ben Wallace in law school one day. That would be one mammoth lawyer!

Mailed: November-December Issue of The Corporate Executive

The November-December Issue of The Corporate Executive includes pieces on:

- Trap for the Unwary: Carrying Forward Contributions Under a Section 423 ESPP
- IRS Issues Private Letter Ruling on Division of Restricted Stock Pursuant to Divorce
- Purchase Date as Grant Date: Not a Bad Idea for Purchase Date FMV Only ESPPs
- The Box: Awards Contingent Upon Shareholder Approval of an Additional Allocation of Shares to the Plan
- Section 6039 Forms Expected Any Day Now
- Conducting Risk Assessments--A Step-by-Step Action Plan
- Examples of Effective Say-on-Pay Disclosures

Act Now: Get this issue rushed to you by trying a "Rest of '10 for Free" No-Risk Trial today.

- Broc Romanek

November 23, 2010

IR Websites: Are They Preventing Disclosure Leaks?

As usual, Dominic Jones has been providing great coverage about how two companies recently experienced leaks on their IR web pages - where earnings information was released inadvertently ahead of the planned release time (see his coverage of Disney and NetApp). In addition to this coverage, Dominic blogged this piece yesterday: "IR website vendors explain how they prevent disclosure leaks." It's worth checking out to help ensure your company won't experience this type of snafu.

Recently, I enjoyed reading Nell Minow's piece about overcoming adversity and some reader responses like this one. Good piece to show my kids.

The Latest on IASB's Loss Contingency Standard

Similar to the controversial FASB project to update its loss contingency standard (see this blog for the latest on that), the IASB is working on updating its own contingency standard. Here is news, courtesy of Tom White of WilmerHale: At its meeting on November 16, the IASB decided to modify its proposed standard for recognition of a loss contingency, IAS 37. Responding to comments - including the letter submitted by an ABA Committee - the IASB decided to modify the proposed recognition standard to reinstate the requirement that the preparer determine that it is more likely than not that a liability exists. The IASB also decided to provide more guidance about how to apply the standard to litigation contingencies. The IASB has also indicated that, in light of other priorities, it does not expect to return to IAS 37 until the 2nd half of 2011, at the earliest.

FASB Announces Post-Implementation Review Process

As Edith Orenstein blogs in FEI's "Financial Reporting Blog," the Financial Accounting Foundation (FAF) - which oversees the FASB - announced the launch of a post-implementation review process. This action follows up, in part, on a recommendation made by the SEC's Committee on Improvements to Financial Reporting (CIFiR) aka the "Pozen Committee" - so named in honor of its chair, Bob Pozen. The recommendation was one of many recommendations aimed mainly at the SEC, but also at FASB and the PCAOB, in the final CIFiR report issued in August 2008. Edith also blogs about the appointment of the new FAF CEO (Terri Polley) and four new trustees.

- Broc Romanek

November 22, 2010

ISS Issues 2011 Policy Updates

On Friday, ISS issued its 2011 Policy Updates. Below is a description of them, courtesy of ISS:

Each year, ISS undertakes an extensive process to update the policies that inform its benchmark proxy voting recommendations. Our commitment is to make this process open and transparent, so that all members of the financial community--including our institutional investor clients and corporate issuers--understand the foundations of our benchmark policies and proxy voting recommendations. Our objective in this process is to address critical emerging corporate governance issues in a way that informs and enhances dialogue among investors, boards, and companies.

Our broad-based policy formulation process collects feedback from a diverse range of market participants through multiple channels: an annual Policy Survey of institutional investors and corporate issuers, roundtables with industry groups, and ongoing feedback during proxy season. ISS' Global Research Policy Board, comprised of our global research heads and subject matter experts, uses this input in forming draft policy updates, the most significant of which are published for an open review and comment period. Policy changes will be effective for shareholder meetings on or after Feb. 1, 2011.

On Oct. 27, ISS released its key draft 2011 proxy voting policies to obtain feedback from institutional investors, corporate issuers, and industry constituents. The comment period ran through Nov. 11 and solicited feedback on 11 updates to ISS' proxy voting policy guidelines in markets worldwide. The U.S. topics covered included "say on pay" frequency and "say on golden parachute" proposals, independent chair proposals from shareholders, director attendance, and authorized capital requests.

Independent Chair Proposals

The draft U.S. policy update regarding independent chair proposals included consideration of compelling company-specific circumstances that challenge the efficacy of appointing an independent chair. The comments suggested that a company's disclosed rationale for maintaining a combined leadership role would not be a meaningful or useful input in determining a vote on these proposals in extenuating circumstances. These comments were consistent with the responses from the investor participants at an ISS policy roundtable in October. In fact, many institutional investors stated that ISS should not change its policy and should continue to evaluate these proposals on a case-by-case basis, taking into account whether the company has a robust counterbalancing governance structure (including an independent lead director with clearly delineated duties) and any problematic performance, governance, or management issues. Based on this feedback, ISS will not be changing its policy on independent chair proposals in 2011.

Management "Say on Pay" Votes

This is a new proxy item required by Dodd-Frank. The Dodd-Frank Act, in addition to requiring management "say on pay" (MSOP) votes on compensation, requires that each proxy for the first annual or other meeting of shareholders occurring after Jan. 21, 2011, also include an advisory vote to determine whether, going forward, the "say on pay" vote by shareholders should occur every one, two, or three years. In line with overall client feedback, ISS is adopting a new policy to recommend a vote FOR annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies' executive pay programs.

The MSOP is at its essence a communication vehicle, and communication is most useful when it is received in a consistent and timely manner. ISS supports an annual MSOP vote for many of the same reasons it supports annual director elections rather than a classified board structure: because this frequency provides the highest level of accountability and direct communication by enabling the MSOP vote to correspond to the majority of the information presented in the accompanying proxy statement for the applicable shareholders' meeting. Having MSOP votes every two or three years, covering all actions occurring between the votes, would make it difficult to create the meaningful and coherent communication that the votes are intended to provide. Under triennial elections, for example, a company would not know whether the shareholder vote references the compensation year being discussed or a previous year, making it more difficult to understand the implications of the vote.

Vote on Golden Parachutes

This is a new proxy item required under the Dodd-Frank Act. ISS' policy will be to recommend CASE-BY-CASE on proposals to approve the company's "golden parachute" compensation, consistent with ISS' policies on problematic pay practices related to severance packages. Features that may lead to an AGAINST recommendation include:

- Recently adopted or materially amended agreements that include excise tax gross-up provisions (since prior annual meeting);
- Recently adopted or materially amended agreements that include modified single triggers (since prior annual meeting);
- Single-trigger payments that will happen immediately upon a change in control, including cash payment and such items as the acceleration of performance-based equity despite the failure to achieve performance measures;
- Single-trigger vesting of equity based on a definition of change in control that requires only shareholder approval of the transaction (rather than consummation);
- Potentially excessive severance payments;
- Recent amendments or other changes that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; and
- In the case of a substantial gross-up from preexisting/grandfathered contract: the element that triggered the gross-up (i.e., option mega-grants at a low stock price, unusual or outsized payments in cash or equity made or negotiated prior to the merger); or the company's assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote. ISS would view this as problematic from a corporate governance perspective.

In cases where the golden parachute vote is incorporated into a company's MSOP vote, ISS will evaluate the "say on pay" proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation. ISS' policy on change-in-control packages has evolved over the past several years in response to client feedback and changes in common practice. ISS' policy, informed by shareholder input, has focused particularly on severance packages that provide inappropriate windfalls and cover certain tax liabilities of executives.

Director Attendance

ISS' current policy is to recommend a vote AGAINST or WITHHOLD from individual directors who attend less than 75 percent of the board and committee meetings without a valid excuse, such as illness, service to the nation, work on behalf of the company, or funeral obligations. If the company provides meaningful public or private disclosure explaining the director's absences, ISS will evaluate the information on a CASE-BY-CASE basis, taking into account the following factors:

- Degree to which absences were due to an unavoidable conflict;
- Pattern of absenteeism; and
- Other extraordinary circumstances underlying the director's absence.

The key policy change is to remove the private disclosure option for explaining absences; articulating the reasons that are acceptable; and clarifying the policy application when the company's attendance disclosure does not conform with SEC requirements. In 2011, ISS will generally recommend a vote AGAINST or WITHHOLD from individual directors who attend less than 75 percent of board and applicable committee meetings (with the exception of new nominees). Acceptable reasons for director(s) absences are generally limited to the following:

- Medical issues/illness;
- Family emergencies; and
- If the director's total service was three meetings or less and the director missed only one meeting.

These reasons for director(s) absences will only be considered by ISS if disclosed in the proxy or another SEC filing. If the disclosure is insufficient to determine whether a director attended at least 75 percent of board and committee meetings in aggregate, ISS will generally recommend a vote AGAINST or WITHHOLD from the director. The policy update aligns the application of the policy with best governance and public disclosure practices and is generally supported by the feedback received during ISS' comment period. Directors who do not attend their board and committee meetings cannot be effective representatives of shareholders. Anyone who accepts a nomination to serve as director should be prepared to make attendance at meetings a top priority.

Customarily, boards set schedules for routine board and committee meetings at least a year in advance. Moreover, attending at least 75 percent of the meetings is not an unreasonable standard for directors to meet, as it still allows sufficient leeway for meetings missed due to legitimate reasons. Issuers are encouraged to proactively provide additional explanatory disclosure on poor attendance for the benefit of shareholders in the proxy or another SEC filing.

Shareholder Ability to Act by Written Consent

After a long hiatus, investors have resumed filing proposals requesting shareholders' ability to act by written consent. However, the corporate governance landscape has changed tremendously. ISS acknowledges that a meaningful right to act by written consent is a fundamental right that enables shareholders to take action between annual meetings. However, the potential risk of abuse associated with the right to act by written consent such as bypassing procedural protections, particularly in a hostile situation, may outweigh its benefits to all shareholders in certain circumstances. Due to alternative mechanisms that have evolved for shareholders to express concern (e.g., a majority vote standard in board elections, the right to call a special meeting) and an evolving governance landscape, ISS will be making a more holistic consideration of a company's overall governance practices and takeover defenses when evaluating these proposals.
ISS' current policy is to generally recommend a vote FOR management and shareholder proposals that provide investors with the ability to act by written consent, taking into account the following factors:

- Shareholders' current right to act by written consent;
- Consent threshold;
- The inclusion of exclusionary or prohibitive language;
- Investor ownership structure; and
- Shareholder support of, and management's response to, previous shareholder proposals.

Based on feedback received from both issuers and institutional investors from ISS' policy roundtable in October, ISS will consider, as an additional factor, the company's overall governance practices and takeover defenses (with emphasis on shareholders' ability to call special meetings) in evaluating these proposals. In 2011, ISS will continue to generally recommend a vote FOR management and shareholder proposals seeking to provide shareholders with the ability to act by written consent, after taking into account the factors mentioned above. However, ISS will recommend on a CASE-BY-CASE basis (and may recommend AGAINST) if, in addition to the considerations above, the company has the following provisions:

- An unfettered right for shareholders to call special meetings at a 10 percent threshold;
- A majority vote standard in uncontested director elections;
- No non-shareholder approved pill; and
- An annually elected board.

Gearing Up for Say-on-Pay: What Clients Are Asking Now

We have posted the transcript for our recent CompensationStandards.com webcast: "Gearing Up for Say-on-Pay: What Clients Are Asking Now." Don't forget that those that renew for 2011 now - all 2010 memberships expire at the end of the year - will gain access to these two upcoming say-on-pay webcasts:

- "The Proxy Solicitors Speak on Say-on-Pay" (1/18)
- "The Latest Developments: Your Upcoming Proxy Disclosures--What You Need to Do Now!" (1/26)

If you're not yet a member, try a 2011 no-risk trial now to get immediate access to this transcript and these upcoming webcasts!

- Broc Romanek

November 19, 2010

I Love You, Bethany McLean

Can a man love both Bethany McLean and his wife at the same time? I've watched several interviews now featuring Bethany and Joe Nocera (the NY Times' columnist who spoke so well at our executive pay conference last year) and both of them clearly are the voice of reason. Here is their interview on Charlie Rose - and here is their interview from "The Daily Show."

I just placed their new book - "All the Devils are Here: The Hidden History of the Financial Crisis" - on my Christmas list and I sure hope they come to DC on a book tour so I can have them sign it...

For a random act of culture, check out this video of a flash mob doing an oratorio at Macy's.

Matrixx Initiatives v. Siracusano: The Upcoming SCOTUS "Materiality" Case

Many of us are eagerly awaiting the Supreme Court's decision in Matrixx Initiatives v. Siracusano as it will be the first SCOTUS decision on "materiality" since Basic v. Levinson in 1988 and TSC Industries v. Northway in 1976. This article explains the case nicely.

With oral argument recently set for January 10th, the briefs - including numerous amicus briefs - have been submitted - and are now available. Among others, the SEC and groups of professors have weighed in on this important case.

SEC's RiskFin Director Hu: Back to Academics

As I tweeted yesterday, I was not surprised to hear that the SEC's RiskFin Director Henry Hu was returning to his post at the University of Texas after little more a year on the job. I would imagine that most academics would have trouble shifting gears from theory in teaching to the realities of regulation - and my guess is that this dramatic change played a role in Henry's impending departure. It will be interesting to see who the SEC taps as the next Director given this development...

- Broc Romanek

November 18, 2010

Going Public? Governance Still Seen as a Big Hurdle

According to this recent KPMG study, companies planning to go public consider corporate governance to be their biggest challenge. Under the study, the top three challenges in preparing for an IPO are:

- Improving corporate governance - 64%
- Preparation of a robust business plan - 40%
- Preparation of financial track record - 36%

How long do these pre-IPO executives believe that it would take their company to prepare for going public?

- 12 to 18 months - 15%
- 6 to 12 months to prepare - 54%
- 6 months or less - 10%

The Latest Venture Capital Developments

In this podcast, Jonathan Axelrad and Anthony McCusker of Goodwin Procter discuss the latest developments impacting the venture capital community:

- What is the climate for venture capital these days?
- What types of companies are VC investors targeting?
- Are companies being funded outside the US?

Survey Results: Directors from Financial Service Sectors Weigh In

Recently, PwC held its annual Financial Services Audit Committee Forum in New York. As I understand it, it's the biggest annual gathering of board members from across the financial services sectors, including banks, mutual funds, hedge funds, private equity firms, insurance companies, broker-dealers, REITs and related service providers in attendance. During the Forum, PwC polled attendees on several topics related board governance and financial reform:

- 28% of respondents indicated they feel their board currently spends too much time on compliance issues and not enough time on strategic business decisions
- 18% said that the Dodd-Frank Act would require their boards to take on new responsibilities traditionally handled by executive management.
- 18% also said they think that Dodd-Frank blurs the line between governance and management with regard to the role and responsibilities of board members
- As a result of financial reform, 44% said their firms' would increase spending on compliance
- 58% of those polled believe that the tone at the top of the organization and the corporate culture set by the CEO will have the greatest impact on promoting the safety and soundness of the financial system
- Regarding new "say on pay" provisions, 83% of those polled say that are confident in the current effectiveness, quality and transparency in communicating with investors about executive compensation

- Broc Romanek

November 17, 2010

Dave & Marty on Shareholder Proposals and Lynyrd Skynyrd

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:

- Marty's "13 Tips for Shareholder Proposals"
- Shareholder proposals outside of the 14a-8 process
- Favorite Lynyrd Skynyrd songs

Our New Feature: Jimmy from Legal

Maybe this is a bad idea. You tell me. But I thought I'd try an occasional installment of fictional dialogue to inject a little more humor into this blog. Here is my first one:

Sam (from the Controller's office): Hi Jimmy. Can you review the draft of our Form 10-Q and provide us with any comments by the end of today?

Jimmy (from the Legal Department): I would love to but I have at least five meetings today. Plus I have a bad "feeling" about this quarter.

Sam: Bad feeling. How so?

Jimmy: Well, my coin dealer told me it was valuable - but I think I was shafted. [Pulls quarter from pocket.]

Sam: Oh, that's so '70s Jimmy. Coin collecting is long dead. Just review the Q and mark it up pronto.
- - - - -

Jimmy (muttering to himself, back at his desk): He doesn't know what he's talking about. Being a numismatist is where it's at; it's been listed in the Top 100 hobbies by "Hobby World" magazine for years. We'll see what he thinks about this...
- - - - -

Sammy (yelling on the phone): What is this Jimmy? I have your comments right here.

Jim: Well?

Sam: They're so...so...symmetrical. It looks like you just struck every 8th word!

Jimmy: Maybe.

Sam (slamming down the phone): Crazy. But it's probably the best work you've done around here.

Next episode: Jimmy teeters towards the "dark side"...

Please send me your ideas for "Jimmy from Legal" episodes. Or let me know how I can spice this feature up...

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:

- Impact of FINRA Regulations on the Structuring and Distribution of Public Offerings
- Home Countries Unwilling to Allow Inspections: Non-US Auditors Must Prove SOX Compliance
- Is the DOJ Moving Beyond the FCPA?
- An Insider's View of the SEC: Principles to Guide Reform
- The Countrywide Settlement: Significant Questions

- Broc Romanek

November 16, 2010

More on "Dodd-Frank: What is the 'Sleeper'?"

A while back, I blogged about what might be the sleeper in the Dodd-Frank Act and received many interesting responses from members. Here are a few that I received:

- Pay disparity disclosures - In his OnSecurities Blog, Marty Rosenbaum discusses pay disparity disclosures as a sleeper. The SEC won't propose rules in this area before next summer and many are hoping for Congress to at least pass a technical corrections bill to fix the language in this provision.

- SEC's bounty program - Under Section 922, if a whistleblower provides information on a securities law violation that leads to monetary sanctions of more than $1 million, the SEC will be required to pay the whistleblower an amount ranging from ten percent to 30 percent of what has been collected. This bounty would apply to a wide range of securities law violations, including violations of the Foreign Corrupt Practices Act. Even before the SEC proposed rules under this provision two weeks ago, law firms were warning how this could be a problem for companies who rely on employees to report potential problems through their own compliance chains, as employees will now a big incentive to go directly to the SEC.

- Congo conflict materials - The Act has a new requirement to disclose in an annual report whether a 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. Believe it or not, PBS has a video on conflict minerals disclosure.

- Expanded authority of SEC's Enforcement to use administrative courts - In this Reuters article, it is noted that a little noticed provision in Dodd-Frank gives the SEC additional authority to seek civil penalties and fines against respondents in administrative proceedings rather than in federal court.

- Elimination of rating agency exemption from Reg FD - Section 939B directs the SEC to amend Reg FD within 90 days of the law's enactment to remove the exemption for rating agencies that is contained in Reg FD. I've blogged a bit about this since I first asked for sleeper feedback since the SEC adopted rules to effectuate it, which created a stir.

Dodd-Frank: An Unintended Consequence?

Different than a "sleeper" is the unintended consequence of a Congressional act. In her footnoted blog, Michelle Leder recently noted this unusual Form 8-K filed by Newmont Mining. Well, perhaps it formerly was unusual but going forward, disclosure about a miner carrying his lunchbox may become the norm...

It's Done! 2011 Executive Compensation Disclosure Treatise

We're done! Just in time for mandatory say-on-pay, Dave Lynn and Mark Borges have finished updating the Lynn, Borges & Romanek's "2011 Executive Compensation Disclosure Treatise & Reporting Guide." This means that:

1. Online version - For those that have renewed your CompensationStandards.com membership for 2011 (all 2010 memberships expire on December 31st) - you now have access to the online version of the 2011 Edition of the Lynn, Borges & Romanek's "Executive Compensation Disclosure Treatise & Reporting Guide" since we have moved that massive piece of work onto that site going forward instead of selling it separately on CompensationDisclosure.com.

2. Hard copy - For those that want a hard copy of this massive 2011 Treatise, note that it is not part of CompensationStandards.com - so it must be purchased separately. However, CompensationStandards.com members can obtain a 40% discount by trying a no-risk trial to the hard copy now. This will ensure delivery of this 1000-plus page comprehensive tome as soon as it's done being printed after Thanksgiving.

If you need assistance, call our headquarters at (925) 685-5111 or email info@compensationstandards.com.

- Broc Romanek

November 15, 2010

Study: Six Years After Section 404's Internal Controls

Audit Analytics continues to do good work and their recent study based on six years worth of enhanced internal controls under Section 404 of Sarbanes-Oxley is no exception. In short, the study found:

- The percentage of adverse auditor attestations has declined every year for 5 years and is down to 2.4% for Year 6.

- Likewise, for Year 6, the percentage of adverse management-only assessments was the lowest - but this rate was about 10x higher than the rate experienced by companies required to file auditor attestations.

We have posted this study in our "Internal Controls" Practice Area.

As a community that flies often, you should take 10 seconds to sign this online petition against the new invasive body searches being conducted at our airports (when I signed it last night, I was #300 - now it's over 28k). "Signing" just requires you to input your name and email address - no other contact information is required. Here is a WaPo article about the new searches - they are very personal and shocking.

New Standards for Comfort Letters? AICPA Makes a Proposal

I'm catching up on some draft blogs that need to belatedly come to "life." Back in July, the Auditing Standards Board of the AICPA - in this Exposure Draft - proposed auditing standard to replace SAS 72 on comfort letters. Thanks to Bob Dow of Arnall Golden Gregory for reminding me of this development.

IFRS Status: FASB and IASB Seek Input

Recently, the FASB and IASB issued a 21-page discussion paper requesting input about the effort it will take them to adopt the convergence projects that are underway, including transition methods, whether adoption of new standards should occur at the same time or over a number of years and whether different effective dates would be appropriate for different entities. Comments are due January 31st. We have posted memos regarding this development in our "IFRS" Practice Area.

- Broc Romanek

November 12, 2010

FINRA's Updated Guidance on Same Day Clearance and Expedited Review of Shelf Offerings

Last week, FINRA issued updated guidance on the same day clearance procedures for shelf offerings - as well as expedited review guidance for shelf offerings filed for regular review. The Same Day Clearance Eligibility Guide - and this set of FAQs - clarifies that same day clearance is only available for registered primary shelf offerings made pursuant to the SEC's Rule 415 and, therefore, is not available if any selling shareholder securities are included, the offering includes an equity line of credit, an offering made pursuant to the multi-jurisdictional disclosure system is not a shelf offering, or the final prospectus supplement for the offering has already been filed with the SEC. Greater clarity on these exclusions is set forth in the Same Day Clearance FAQs #3, which also indicates that the Staff may identify other categories of offerings not eligible for SDC.

FINRA states that it will conduct an expedited review of such a shelf offering only if all relevant documents are provided, all representations are made in the COBRADesk screens, a statement is provided that the filing member has completed its due diligence to confirm its representations, and the filer provides the anticipated effective date and a request for expedited review. FINRA clarifies that shelf offerings will not qualify for expedited review if any of the underwriters are to receive securities as compensation, an unreasonable term or arrangement is included or the offering is filed late. The expedited review guidance confirms FINRA's recommendation that a filer seeking expedited review that can't rely on the SDC process should contact FINRA's Corporate Financing Department to discuss the offering with the applicable Staffer.

We have posted all of these new pieces of guidance in our "Shelf Registration" Practice Area.

Having visited the Sistine Chapel earlier this year - and being blown away by it - I thought I would share this virtual 3-D tour, which apparently was created by some folks at Villanova at the request of the Vatican. Viva technology!

Congress: The Mid-Term Election's Impact on the Corporate Community

After the mid-term elections - and before the infighting for powerful committee chair positions, etc. has played out - a number of folks have conducted their analysis of what the mid-term elections mean for the corporate community. Here are a few:

- Ernst & Young's Washington Council: "2010 Election Analysis"

- Bracewell & Giuliani's "Election Analysis"

- Laurel Hill's Francis Byrd: "Election Results"

- ISS's Insight Blog: "After Election Day, Governance Observers Expect Status Quo"

"One Global Policy" Approach to D&O Insurance Policies

In this podcast, Heidi Lawson of Chadbourne & Parke explains the need for directors & officers to be covered globally by D&O insurance policies, including:

- Does a "one global policy" approach work today?
- How can a company determine whether that approach works for them?
- If more local policies are recommended, what brokers can be used to find good policies?

- Broc Romanek

November 11, 2010

The Role of the SEC's New "Office of Investor Advocate"

One item in Dodd-Frank that I admit that I haven't paid much attention is the SEC's creation of a new "Office of Investor Advocate." I imagine I shrugged it off because the SEC's primary mission is investor protection. So shouldn't the entire agency essentially should be in this new office? Not to mention that an "Office of Investor Education and Advocacy" already exists - and an "Investor Advisory Committee" was created just last year. Like so many things in Dodd-Frank, Section 915 seems to mandate things the SEC already does (or has done).

Anyways, as this NY Post article notes, the SEC is now searching for someone to head up this new Office (which makes sense given the SEC's tentative schedule for Dodd-Frank implementation indicates that this Office will be created this month). Here's the job description posted by Korn/Ferry, a recruiter hired to help in the search. It looks like a significant part of the Advocate's job will be preparing reports for Congress, in addition to the primary task of serving in an ombudsman role to investors.

It is doubtful that this new Office will be combined with the existing Office of Investor Education for two reasons. One is that I believe Congress mandated this new Office because it wanted to function separately and independently from the existing Office of Investor Education. There are several signs of that (egs. new Advocate reports directly to SEC Chair and has power to hire "independent" counsel, etc.). In addition, the new Advocate job can't be filled by someone already at the SEC, as Dodd-Frank mandates that the person shall not have worked at the SEC for at least two years prior to being hired. It will be interesting to see how the Advocate's role evolves over time...

For some fun, watch this three-minute video entitled "Toxie's Dead" from NPR's show, Planet Money. It's about Toxie, a personified toxic asset that helped burst the housing bubble.

More on "FASB: Proposed Loss Contingency Standard Won't Apply to Calendar Year-End Form 10-Ks"

A few weeks ago, I blogged how the FASB advised that calendar year-end companies will not be required to comply with the FASB's proposed new loss contingency disclosure standards in their 2010 Form 10-Ks. Here is an update on this development from PricewaterhouseCoopers:

At yesterday's meeting, the FASB discussed the redeliberation plan for its loss contingencies disclosure project. The FASB staff summarized the feedback provided by respondents in the comment letter process. Many respondents recommended that the existing standard be retained and that the proposal not be finalized. The Board discussed whether the concerns raised by investors result from a compliance or standard-setting issue. The Board noted that the SEC has recently emphasized compliance with the existing standard through the SEC's process of providing comment letters to registrants, and its recent "Dear CFO letter", dated October 2010.

Prior to concluding on whether an amendment to the existing standard is still needed, the Board decided to evaluate whether there is improved disclosures of loss contingencies during the 2010 year-end financial reporting cycle. At that time, the Board will decide whether any future redeliberations are needed or whether additional outreach on the proposal should be made. This decision effectively delays the project until the second quarter of 2011 at the earliest, and most likely until the second half of 2011.

Poll: Which Flintstones' Character Could Best Serve as the Investor Advocate?

Since it's a holiday, take part in this "fun & easy" anonymous poll:


- Broc Romanek

November 10, 2010

Can Disclosure in a SEC Filing Waive the Attorney-Client Privilege?

What if a company touts in one of its SEC filings that - although several of its customers had sought indemnification from it for claims of patent infringement made against those customers by a third-party - the company had obtained opinions of counsel that concluded the company's products did not infringe the asserted patents and the patents were invalid regardless? Would this disclosure of the conclusion of these opinions constitute a waiver of any claim to the attorney-client privilege and the work product doctrine?

It appears there are few cases addressing this waiver issue. But at least in one case, the answer is "yes." In this order, the US District Court for the Middle District of Georgia found that - in AFLAC v. Intervoice - that the defendant had "let the cat out of the bag" by disclosing its counsel's conclusions and ordered that the opinions be produced.

Section 304: Second Circuit Rules in Clawback Case of First Impression

Here is something I blogged on "The Advisors' Blog" on CompensationStandards.com a while back: I pulled the following from this press release from Carter Ledyard, the law firm which won this case:

On September 30, 2010, in an important case of first impression, the United States Court of Appeals for the Second Circuit held that public companies may not indemnify their CEOs or CFOs from liability under Section 304 of the Sarbanes Oxley Act, which mandates that if a public company is required to restate its financial reports as a result of misconduct, the CEO and CFO must reimburse the company for any bonuses, incentive compensation, or trading profits that they earned during that period.

The Second Circuit held that Section 304, whose purpose is to prevent CEOs and CFOs from profiting by misleading investors and regulators about the financial health of their companies, does not provide a private cause of action and may only be enforced or waived by the SEC. Allowing a public company to indemnify and release its officers and directors from liability under Section 304 would nullify the SEC's authority to pursue the Section 304 remedy or to grant exemptions from the statute.

The case before the Second Circuit, In re: DHB Industries, Inc. Derivative Litigation, Docket No. 08-3860-cv (2d Cir. Sept. 30, 2010), was an appeal from the approval by the United States District Court for the Eastern District of New York of a settlement of derivative lawsuits brought on behalf of shareholders of a public company formerly known as DHB (now Point Blank Solutions, Inc.) against former CEO David H. Brooks, former CFO Dawn Schlegel, and other former officers and directors of the company. One of the key provision of the settlement was that DHB would indemnify Brooks and Schlegel from any liability under Section 304 of the Sarbanes Oxley Act.

On September 14, 2010, Brooks and former COO Sandra Hatfield were convicted on 31 criminal charges stemming from their participation in a conspiracy involving massive securities fraud and theft of company assets. Schlegel had earlier pled guilty to having participated in this conspiracy. The SEC currently has actions pending against Brooks, Schlegel and Hatfield in the Southern District of Florida, in which it seeks disgorgement of $186 million under Section 304. The effect of today's ruling by the Second Circuit is that DHB, which is currently undergoing bankruptcy proceedings in the United States Bankruptcy Court for the District of Delaware, In re Point Blank Solutions, Inc., Case No. 10-11255-PWJ, is no longer bound by the terms of the settlement to reimburse its officers and directors for their liability under Section 304, and is instead eligible to recoup those funds itself if the SEC's pending actions are successful.

The 'Former' Corp Fin Staff Speaks on Proxy Access & Dodd-Frank

We have posted the transcript of our popular webcast: "The 'Former' Corp Fin Staff Speaks on Proxy Access & Dodd-Frank."

- Broc Romanek

November 9, 2010

Analysis: What Frequency for the Say-on-Pay Vote?

Here is something that I blogged recently on CompensationStandards.com's "The Advisor's Blog": What should be the frequency of our say-on-pay vote? This is a question being mulled at most companies these days. Perhaps we are starting to get an answer when ISS issued its draft policy updates last week for comment, which included this statement, an excerpt of which is below:

The MSOP is at its essence a communication vehicle, and communication is most useful when it is received in a consistent manner. ISS supports an annual MSOP for many of the same reasons it supports annual director elections rather than a classified board structure: because it provides the highest level of accountability and direct communication by enabling the MSOP vote to correspond to the information presented in the accompanying proxy statement for the annual shareholders' meeting. Having MSOP votes only every two or three years, potentially covering all actions occurring between the votes, would make it difficult to create meaningful and coherent communication that the votes are intended to provide. Under triennial elections companies, for example, a company would not know whether the shareholder vote references the compensation year being reported or a previous year, making it more difficult to understand the implications of the vote.

Recently, I caught up with a proxy solicitor - Dave Bobker of Phoenix Advisory Partners - to get his analysis of what companies should be considering regarding the frequency of their say-on-pay vote in this podcast, in which Dave addresses:

- What frequency do you think most companies will pick? Least?
- What frequency do you see most investors asking for?
- What would you recommend?
- What factors should companies consider when picking a frequency?

Nugget #2: Board Evaluations - Consider Splitting "Questionnaire" into Two Components (One Oral and One in Writing)

A few months ago, I started dribbling out some of the gems that Alan Dye and I shared a number of years ago during a series of "50 Nuggets in 50 Minutes" webcasts. Here is #2:

Board Evaluations - Consider splitting "questionnaire" into two components: one oral and one in writing - A number of companies split the format of their board evaluations. They use a written questionnaire for administrative issues, such as whether the length of meetings is appropriate and whether materials are sent out timely. The more sensitive and substantive questions are asked in an oral interview ("substantive" questions are those that directly relate to the company's recent performance issues). This can allow for more candid and valuable feedback as some directors might balk if asked to reduce their concerns to writing due to perceived liability concerns.

One member notes that since they began board self-evaluation, they have used the bifurcated model of survey and interview - the survey helps identify areas to explore in the interviews and the interviews have provided the most value to the board.

We have sample board evaluations - and sample board committee evaluations - posted in our "Board Evaluations" Practice Area.

The Latest Trends in Dow 30 Governance Disclosure

A few weeks ago, Davis Polk teamed with The Conference Board and issued this press release about disclosure trends of the Dow 30 over the past year. The findings included:

- Risk oversight models vary, but boards tend to directly review strategic risk issues.
- Non-financial companies typically report having a dedicated Chief Risk Officer.
- The CEO/chairman combination remains the prevalent leadership structure in the Dow 30.
- Specific industry expertise is cited as critical in director selection, and all companies say they consider diversity when identifying director nominees.
- Companies recognize a correlation between top-executive compensation and risk behavior, using an array of measures to mitigate such risk including clawbacks and stock-holding guidelines.
- A number of non-financial companies retain compensation consultants through their governance, rather than compensation, committees.
- Compensation consulting fees can be small relative to other disclosed fees paid to the same consultants for, e.g., actuarial or HR services.

- Broc Romanek

November 8, 2010

It's Proxy Season: Do We Need to Update Our D&O Questionnaire?

A question you need to ask yourself every year. Here is some input from Richard Blake of Wilson Sonsini:

Once Dodd-Frank rules are finalized and effective, there will be a number of changes to the D&O questionnaires including - but not limited to - compensation committee independence requirements. But for now, the only thing that has been proposed that could affect proxies, and that likely will be effective for this proxy season, are the say-on-pay rules - and note that say-on-pay is mandatory for this proxy season even if the SEC doesn't finalize its rules (although that's not the case for say-on-golden parachute).

I think the only thing that could affect D&O questionnaires apart from say-on-pay is the inclusion of new Reg. S-K Item 402(t) - disclosure of "golden parachute compensation" - which would be different and broader than the disclosure in Item 402(j), which is likely already included in the questionnaires. The Item 402(t) disclosure need only be provided if the company wants to take advantage of the SEC rules that say that they don't need to take a say-on-golden-parachutes-payments vote upon an acquisition event if they previously received a favorable say-on-pay vote that included Item 402(t) disclosure. So sort of a company's choice as to what it wants to do, particularly since some companies don't ask about compensation in the questionnaire since they already know what they are paying their executives.

Our Proxy Season Checklists

Like every year, don't forget that we post a number of checklists from law firms and consulting firms, along with our own, in the "Proxy Season" Practice Area. And don't forget our sample D&O questionnaires posted in our "D&O Questionnaires" Practice Area.

Gearing Up for Say-on-Pay: What Clients Are Asking Now

Tune in tomorrow for this CompensationStandards.com webcast - "Gearing Up for Say-on-Pay: What Clients Are Asking Now" - featuring Towers Watson's Eric Larre; Semler Brossy's Blair Jones, Pay Governance's Ira Kay, Deloitte Consulting's Mike Kesner and Verizon's Mary Lou Weber as they provide guidance about how you can put your best foot forward with shareholders to help gain their approval on the ballot. This is the first of a trio of say-on-pay webcasts on CompensationStandards.com - renew now for 2011 as all memberships expire at year end. Or if you are not yet a member of that site, try a 2011 no-risk trial and gain access to this webcast for free.

- Broc Romanek

November 5, 2010

We Win Top Blog Honors (Again)!

As I belatedly blogged on Tuesday, this blog was selected by LexisNexis as a "Top 25 Business Law Blog" last week - and then the 25 blogs were pitted against each other in a short voting contest. I'm proud to say that we easily emerged as #1 - as noted in this announcement - garnering 36% of the total vote! Thanks to those that bothered to vote - your karma will be rewarded. We are now 2-for-2 as this blog won the ABA Law Journal's voting contest for the best legal blog earlier this year.

The son of a friend of mine has kicked off a new webisode series called "Naked Man" on YouTube and iTunes. Despite the title, the videos are "clean" and thus safe for work. The series' tag line is "In a world full of danger, a hero arrives. But why is he naked?" Subscribe to receive new episodes as they are rolled out...

Political Spending Shareholder Proposals: Chamber Board Members Targeted

Yesterday, a group of investors issued this press release noting that shareholder proposals regarding political spending were being filed at four companies - Accenture, IBM, Pepsi and Pfizer - who have directors that also sit on the board of the Chamber of Commerce. This tactic of challenging companies more broadly to review their policies and oversight of political expenditures by targeting a specific trade association is interesting and perhaps a harbinger of things to come.

According to the press release, these companies were selected due to their strong governance records (as well as vendor policies in three of the cases). The release also notes that more proposals likely would be filed (did you know that the Chamber's board has representatives from over 100 companies?). Finally, the release has a sample shareholder proposal at the bottom of it...

Yesterday, the SEC extended the compliance date for amendments to Regulation SHO by pushing it out a few months to February 28th. The original compliance date was next Wednesday, November 10th.

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:

- Apple's Earnings Release: Did It Go Out on the Wire?
- Is Your CEO Being Arrested for DWI/DUI Material?
- Whistleblower Complaints: Likely to Rise with Heightened Emphasis on Corporate Bounty Hunters
- Delaware Court Permits Stockholders to Shorten Term of Airgas Staggered Board
- Disclosure of Adviser Conflicts: When Is It Enough?

- Broc Romanek

November 4, 2010

The SEC's New PCAOB Appointment Procedures: Time for New Board Members?

It was way back in June that the constitutionality of the SEC's oversight over the PCAOB was upheld by the US Supreme Court. As I noted in this blog, the Sarbanes-Oxley fix dictated by SCOTUS was that the SEC can remove PCAOB board members at will going forward.

While the SEC waited for the outcome of that decision, the openings on the PCAOB board piled up. That was understandable given the uncertainty over the outcome and it may have been difficult to find a qualified candidate. But time has passed since certainty has been restored. Today, there are three openings - although two of them are filled by board members whose terms have expired (Bill Gradison and Charley Niemeier's terms ended one and two years ago, respectively). Dan Goelzer has been Acting Chair since July 31, 2009.

On Monday, the SEC issued these written procedures for appointment of a member or chair of the PCAOB. These procedures are actually a little abbreviated from the procedures announced during Chair Cox's term - so I doubt their development was a roadblock to filling board slots. Maybe now with the mid-term elections behind us, there will be some movement on this important task...

Dodd-Frank: SEC Proposes New Whistleblower Bounty Program

Yesterday, at an open Commission meeting, to propose a new whistleblower program as required by Dodd-Frank. The proposing release is already available - comments are due by December 17th. Here is the press release - and here's SEC Chair Schapiro's opening remarks.

We'll be posting memos on this proposal in our "Whistleblowers" Practice Area. Here is an excerpt of initial analysis from Cooley:

The SEC found the development of these rules especially challenging because of the potential for unintended consequences (e.g., the possibility that the rules would undermine internal corporate compliance programs - how about those developed under SOX-- or that the SEC would be inundated with spurious or other leads that are not "high quality," requiring the limited enforcement staff to triage tips.) As a result, the rules attempt to provide balance. For example, the rules propose that, among the criteria for determining the amount of an award, the SEC would take into account whether the matter was first reported internally; however, internal reporting would not be a predicate to making a whistleblower claim. Does this mean that companies will now offer their own financial incentives? Will there be a new wave of lawyers making their livings from these procedures, as with Section 16 and Prop 65?

New York Court of Appeals: Declines to Expand Outside Advisor Liability

A few weeks ago, the New York Court of Appeals ruled on certified questions in two cases: Kirschner v. KPMG (certified by the United States Court of Appeals for the Second Circuit) and Teachers' Retirement System of Louisiana v. PricewaterhouseCoopers (certified by the Delaware Supreme Court). In the decision, the Court strengthened the in pari delicto defense, which is available to third-party professionals - including accountants or attorneys - who are accused by companies of colluding with, or negligently failing to detect the wrongdoing of, the company's own management. We are posting memos on the decision in our "Auditor Liability" Practice Area.

- Broc Romanek

November 3, 2010

Whistleblowers: Change in the Playing Field?

Last week, the SEC released this first annual report to Congress regarding the state of its whistleblower program - the report shows that the SEC has put $451.9 million into a new fund to pay whistleblowers (Dodd-Frank requires a minimum of $300 million).Today, the SEC will hold an open Commission meeting to consider proposals to implement Dodd-Frank's whistleblowing provision, Section 922.

In our "Whistleblower" Practice Area, we've posted numerous memos about the SEC's new bounty program under Dodd-Frank. Perhaps this provision is the "sleeper" of the Act because so many folks have complained about it. For example, read this entry in "The Mentor Blog," this piece from the "D&O Diary" or this one in Mike Melbinger's blog on CompensationStandards.com (or this WSJ article or this NY Post piece). All of these express concerns over the provision - and note how companies may want to change their internal whistleblower procedures in response.

Some entrepreneurial lawyers have caught on to the potential pot of gold offered by the new bounty program. For example, as noted in this New York Post article, there is a whistleblowing ad appearing in the theaters of Manhattan. The lawyer's "SEC Snitch" site includes the commercial. I imagine we are just starting to scratch the surface of how this area will evolve...

Check out this interesting blog from Harvard Business Review about how crowdsourcing could potentially help the SEC's whistleblowing efforts.

Dodd-Frank: SEC Moves Up "Accredited Investor" Rulemaking Schedule

On Monday, the SEC updated its "Implementation of Dodd-Frank page, mainly to provide more detail about which rulemakings will take place this month (whistleblowing; investment advisers; derivatives; Office of Investor Advocate) - many of which will be considered at today's open Commission meeting.

The January-March schedule was also updated to move up proposals now set for that time period regarding Sections 413 and 926 that will revise the "accredited investor" standard and who is disqualified to offer securities in an exempt offering. Previously, these were set to come out in the April-July timeframe.

SEC Staff Report: A Review of XBRL Filings

On Monday, the SEC's Division of Risk, Strategy and Financial Innovation issued this report that reviews interactive data filings submitted by companies during this past summer and lists a number of common issues in the form of "observations" (which I guess will be RiskFin's terminology rather than any of the vehicles that Corp Fin uses; ie. Staff Legal Bulletins, "Dear CFO" letters, etc.). It doesn't appear that individual comment letters were sent out to companies whose XBRL filings were reviewed by RiskFin, at least not at this stage of the XBRL roll-out...

- Broc Romanek

November 2, 2010

Time to Vote: Vote for This Blog Today

I've been remiss by not highlighting that this blog was selected by LexisNexis as a "Top 25 Business Law Blog" last week - and that there a voting contest among the 25 that ends today! Here is their announcement - and more importantly, here is where you can vote today. Simply click on the circle to the left of "TheCorporateCounsel.net" (it's the 9th bullet down) - then click "Vote Now" at the bottom of the page. It takes only a second to do...

How Does Corp Fin Process Confidential Treatment Requests? The SEC's Inspector General Weighs In

Recently, the SEC's Inspector General posted this 51-page report that assesses how Corp Fin processes confidential treatment requests. The report contains eight recommendations - Corp Fin agrees with half of them, partially agrees with three others and disagrees with one (Corp Fin's response starts on page 44 of the PDF).

The IG claims that Corp Fin "is not performing a robust review and examination of many confidential treatment requests." The report notes that 68% of the CT requests during a discrete period were not reviewed at all after an initial screening - and only 8.5% were selected for a "full" review. Of the 3381 CT requests filed during this 26-month period, only one request was denied.

Based on statements made in the report, it appears that the IG reviewed the requests from companies and evaluated whether the requests were overly broad - but yet relief was granted. Another example of the IG's inspection is that it criticized instances where the explanation from companies about why the subject matter of the CT request was not necessary for investor protection didn't address both qualitative and quantitative factors. I'm not sure how the IG's office has the expertise to fully evaluate how Corp Fin performs in this area - but I guess that is the case for all of their investigations (just like internal auditors). I wonder whether this report will cause Corp Fin Staffers to be less lenient in their grants of relief...

Don't forget that yesterday, the US Sentencing Commission's amendments to the Organizational Sentencing Guidelines - including the definition of what constitutes an effective corporate compliance program - went into effect.

The SEC Staff on M&A

Tune in tomorrow for the DealLawyers.com webcast - "The SEC Staff on M&A" - to hear Michele Anderson, Chief of the SEC's Office of Mergers and Acquisitions, and former senior SEC Staffers Dennis Garris of Alston & Bird and Jim Moloney of Gibson Dunn discuss the latest rulemakings and interpretations from the SEC.

- Broc Romanek

November 1, 2010

Corp Fin's "Dear CFO" Letter Regarding Foreclosure Exposure, Etc.

On Friday, Corp Fin posted this "Dear CFO" letter sent recently to companies regarding accounting and disclosure issues related to potential risks and costs associated with mortgage and foreclosure-related activities or exposures. The "Dear CFO" letter is a reminder of the related disclosure obligations to consider in upcoming Form 10-Qs, etc. given the foreclosure mess that has dominated headlines of late.

IFRS: SEC Staff Issues First Progress Report

On Friday, as noted in this press release, Corp Fin and the SEC's Chief Accounting Office jointly released its first progress report on its Work Plan for consideration of incorporation of IFRS into the US financial reporting system. The Staff will continue to issue these progress reports over time.

Our November Eminders is Posted!

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

The Rally to Restore Sanity: Sights & Sounds

Here are a few videos from Saturday's Rally here in DC. The first illustrates the ingenious signs that people created - many were simply inane (this one features a guy in an Abe Lincoln costume with a sign protesting for "No Guns in Theaters"):

This one illustrates how crowded it was. The shot is taken from atop the National Gallery of Art steps - this museum was off to the side and 4 streets down from the stage:

- Broc Romanek