February 28, 2011

Shareholder Proposals: The Challenges of Evaluating "Risk" in Practice

I just got this one from a member: A few weeks ago, Corp Fin issued two interesting no-action responses to Goldman Sachs regarding the evaluation of risk. Through them, I think the Corp Fin Staff is trying to define the contours of the risk assessment guidance provided in Staff Legal Bulletin 14E back in '09. As you'll recall, the Staff indicated in that SLB that it will evaluate whether a proposal is excludable under 14a-8(i)(7) by focusing on the type of risk that the proposal seeks to address (i.e., climate change risk is not excludable but proposals relating to ordinary business risk are).

Interestingly, the first Goldman letter seems to turns this concept on its head. In that letter, the Staff concluded that Goldman could not exclude a proposal requesting:

"that the board prepare a report disclosing the business risk related to developments in the political, legislative, regulatory, and scientific landscape regarding climate change."

That did not sound like ordinary business risk to the Staff. In denying exclusion, the Staff noted that:

"We are unable to concur in your view that Goldman Sachs may exclude the proposal under rule 14a-8(i)(7). In arriving at this position, we note that the proposal focuses on the significant policy issue of climate change. Accordingly, we do not believe that Goldman Sachs may omit the proposal from its proxy materials in reliance on rule 14a-8(i)(7)."

In contrast, the following day, the Staff addressed a proposal in the second Goldman letter that:

"the board report to shareholders the risk management structure, staffing and reporting lines of the institution and how it is integrated into their business model and across all the operations of the company's business lines."

Given the role that risk played in the collapse of so many Wall Street firms - and the issues that Goldman has had to address with the SEC - I think some might have expected the Staff to take the position that this proposal raises significant policy issues. But not so as the Staff allowed the exclusion, noting that:

"There appears to be some basis for your view that Goldman Sachs may exclude the proposal under rule 14a-8(i)(7), as relating to Goldman Sachs' ordinary business operations. We note that the proposal relates to the manner in which Goldman Sachs manages risk.We further note that the proposal addresses matters beyond the board's role in the oversight of Goldman Sachs' management of risk."

It will be interesting to see how these tough judgment calls continue to play out...

Warren Buffett's Annual Letter to Shareholders

We now have the always fascinating annual shareholders' letter from Warren Buffett. Here are reactions to the letter from WSJ's Deal Journal and Kevin LaCroix's analysis - and here is a Bloomberg article with notable excerpts from the letter...

In his "Proxy Disclosure Blog," Mark Borges gives us the latest say-when-on-pay stats: with 291 companies filing their proxies, 55% triennial; 5% biennial; 35% annual; and 5% no recommendation. Mark notes that last week was the first in which annual exceeded triennial recommendations during a single week - and that out of the 104 companies that have reported voting results, 9 have had 30% or greater "against" votes for their SOP.

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:

- Some Seek SEC Guidance on Disclosing CEO Illness
- ICAS Report: Auditors Should Sign Off on Directors' Decision-Making Process
- Canada's Regulator Report on Corporate Governance Disclosure: Not Good News
- SEC Proposes Rules on Private Fund Reporting
- In Watershed Decision, Federal Court Dismisses Class Action Against Failed Bank D&Os

- Broc Romanek

February 25, 2011

Australia Adopts "Stronger" Say-on-Pay

As noted on Responsible-Investor.com, Australia's government recently adopted legislation strengthening its say-on-pay requirements. One change was the adoption of a "two strikes" test, meaning that shareholders would have the opportunity to remove directors if the company's remuneration report had received a 'no' vote of 25% or more at two consecutive annual general meetings. Another change is the prohibition of directors, executives and their "closely related parties" from voting on executive pay.

Also notable is that Novartis - a large Swiss company - garnered a 40% "against" vote on its first say-on-pay vote on Tuesday, as mentioned in this article.

The Debate Over Whether to Ignore Say-When-on-Pay Results So Far

So I would bear these developments in mind as companies weigh how much engagement they should be doing with shareholders. I was a little surprised at the reactions that Mark Borges and I have received to our advice that - given the voting results so far - companies may reconsider recommending a triennial vote for say-when-on-pay (egs. Marty Rosenbaum and Amy Muecke; compare Dominic Jones who asks whether boards are using triennial recommendation as a diversion).

I know many boards have pondered long and hard and decided that triennial is in the best interests of shareholders - but if shareholders are clearly saying it's not in their best interests, that surely must count for something? I say "pick your battles" in an effort to start off with a less confrontational engagement in this new "say-on-pay" world. With a statistically relevant number of results in, it's becoming pretty clear that shareholders want an annual SOP even if the company has stable management and sound pay practices. For shareholders, those factors appear relevant as to how they vote on say-on-pay - but not relevant for say-when-on-pay.

Like I said in my original blog on this topic, the fact that so many companies are ignoring the clear will of shareholders over this minor topic ("minor" in comparison to SOP itself) will likely further galvanize shareholders to more closely scrutinize pay practices. As I hear from shareholders, they feel like companies are deciding what is in the "best interests of shareholders" without taking into account what shareholders have clearly said is in their best interests. Looking at this situation from their perspective, I can see why they might get upset.

Here are more in the way of say-on-pay charts - a graphical set from Vanessa Schoenthaler and broken out by filer type from Greg Schick.

Glass Lewis Updates Its Proxy Voting Policies

Here is something from Paul Schulman of MacKenzie Partners that was just on CompensationStandards.com's "The Advisors' Blog": Glass Lewis recently concluded a client-only presentation regarding updates to their policies for 2011 and what they see as trends for the upcoming year. As you probably know, Glass Lewis will not speak to you about your proxy, taking the approach that "if you have something you want us to consider, put it in a public filing." They recently purchased the smaller advisory firm Proxy Governance and depending on the makeup of your shareholder base, you should be aware of their policies and likely vote recommendation if you're facing a potentially close vote.

Courtesy of Glass Lewis, here is a summary of their presentation (the full presentation is not publicly available). Some of the points you might pay attention to:

1. What will drive their decision to vote Against Say on Pay votes?
-Misalignment of pay with performance (P4P grade of D or F)
-Insufficient disclosure
-Poorly formulated peer group(s)
-Guaranteed bonuses & high fixed pay
-Poorly-designed incentive plans with excessive payouts and unchallenging goals
-Too much reliance on time-vesting equity awards
-Egregious contractual commitments (tax gross-ups, golden parachutes, death benefits)
-Internal pay inequity
-Excessive discretion afforded the board in granting awards and adjusting metrics

2. When will they go beyond say on pay and vote against comp committee members?
-Behavioral issues: For example, option repricing without shareholder approval, or the granting of excessive and unjustified golden handshakes or golden parachutes
-Sustained Poor Pay-for-Performance: Judged by a history of "D"s and "F"s in the GL model

3. What were the major U.S. Policy updates?
Most were relatively minor and won't apply to a broad spectrum of companies. Some of the more noteworthy were:
-Classified Boards: If we maintain concerns with affiliates or insiders who are not up for election, we will consider recommending voting against such directors at their next election if the concerning issue is not resolved.
-Excessive Audit Committee Memberships: We may exempt certain audit committee members from our standard threshold (i.e. serving on more than 3 public company audit committees) if, upon further analysis of relevant factors, we can reasonably determine that the audit committee member is likely not hindered by multiple audit committee commitments.
-Board Interlocks: We will also evaluate multiple board interlocks among non-insiders (i.e. multiple directors serving on the same boards at other companies) for evidence of a pattern of poor oversight.
-Stock Option Repricings: We recommend to vote against all members of the compensation committee when the company completed a "self tender offer" without shareholder approval within the past two years.

More on our "Proxy Season Blog"

With the proxy season in full swing, we are posting new items regularly on our "Proxy Season Blog" for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

- Director Qualifications: SEC Comments and Example Disclosures
- CalPERS Responds (Slowly) To Records Request for Rule 14a-8 Letters
- An Early Look at 2011 Governance Shareholder Proposals
- The "Fifth Analyst Call" Request
- Latest on Environmental Disclosure in SEC Filings

- Broc Romanek

February 24, 2011

Clearing Up Confusion Over Audit Response Letters

Related to my recent blog drawn from a Willkie Farr memo covering comments made by Corp Fin's Chief Accountant at a conference, here is a note from Stan Keller of Edwards Angell Palmer & Dodge (repeated from this memo):

There has been some confusion over the role of lawyer audit response letters under the ABA Statement and related AICPA auditing standard (together the so-called "Treaty") and the relationship of those response letters to the accounting standards governing the accrual and disclosure of loss contingencies. This confusion is reflected in reactions to the FASB's proposal to revise the accounting standard for loss contingencies and to a recent statement by Wayne Carnall, Chief Accountant of the SEC's Division of Corporation Finance, warning companies against over-reliance on the Treaty in reporting litigation contingencies in financial statements. If the Treaty is properly understood, that statement should not, itself, be cause for concern.

The Treaty is an auditing standard designed to provide audit support for a company's accounting for loss contingencies in accordance with applicable accounting standards, principally Accounting Standards Codification 450-20 (formerly Financial Accounting Standard No. 5). As an auditing standard, the Treaty addresses the lawyer's response to the auditors and is just one part, though a key part, of the auditing process in which auditors gather and verify information. It does not address the disclosure requirements for the company's accounting for loss contingencies, but rather deals with the information lawyers are to provide to the auditors. The Treaty was carefully constructed so that it provides audit comfort to the auditors, as a third party, while preserving the confidentiality of client communications and the fundamental protections of attorney-client privilege, thereby encouraging consultation by the client with counsel as critical to promoting voluntary legal compliance.

Thus, the information provided by lawyers in the audit response letter to auditors is more tailored than the information companies may be required to disclose pursuant to the accounting standards. The Treaty does not foreclose the auditor from obtaining additional information from the company consistent with the underlying purposes of the Treaty. Nor does the Treaty address the advice lawyers give their client companies regarding the company's disclosure obligations. Significantly, audit response letters under the ABA Statement reaffirm the role of lawyers, when appropriate in connection with their engagement, in advising clients regarding disclosure.

The lawyer's audit response letter provides meaningful information to the auditors by identifying overtly threatened and pending claims being handled by the lawyer and unasserted claims as to which the client specifically requests comment. In this way, the auditors are alerted to the existence of claims against the client. By confirming that the lawyer fulfills his or her professional responsibility, the audit response letter permits the auditor to rely on the continued involvement of the lawyer.

To illustrate the distinction between lawyer audit responses and company financial statement disclosures, lawyers in their audit response letter do not speculate on the amount of potential loss. Under the Treaty, they provide an estimate only if the risk of error in the estimate is "slight." On the other hand, under ASC 450-20, a company may have to estimate the potential loss or range of losses and, if it cannot, explain why it cannot. The SEC has made this disclosure requirement clear as it seeks to ensure compliance with the existing accounting standard. Compliance with this requirement is the best way to convince the FASB that adoption of revised standards, which are likely to be more problematic, is not necessary.

The Battle Over the SEC's Budget: Reaching a Crisis Stage

I've blogged frequently over the need for the SEC to be self-funded and the more recent efforts by Congress to limit the SEC's budget (here's one of many blogs on the topic). As noted in "The Hill" blog, House Democrats blasted Republicans recently in a hearing during which SEC Chair Schapiro testified as to the needs of the SEC. During the hearing, Rep. Barney Frank noted he will try to find $131 million from other sources to help fund the SEC.

As it stands, President Obama's proposed budget would increase the SEC's budget by 28%, to $1.428 billion from $1.118 billion. In comparison, the SEC would receive $1.069 billion under the House Republican's plan - which is a reduction of over $70 million from the continuing resolution that the SEC presently is operating under (and a $337 million or 24% decrease, from what the SEC originally requested). As noted in CorpGov.net, there is a letter-writing campaign by investors to maintain the SEC's budget.

In its "2012 Congressional Budget Justification," the SEC tells the story of how its budget has fared in recent years. From it, you can see that the SEC had 3748 full time equivalent staff last year - down 103 from 2005 (and in 2005, the SEC had received increased funding as a result of earlier financial scandals). Since 2005, the need for increased funding for the SEC has been highlighted in two separate GAO reports to Congress, including how the SEC has lost key staffers due to lack of funding. In fact, for many years during the 1990s - while the country experienced an economic boom - many SEC staffers went for years without a pay raise. When I left the SEC at the end of '98 - then working for a Commissioner - I made an annual salary in the mid-70s. True.

After receiving an increase in funding in 2005, the SEC experienced three years of frozen and reduced budgets. This resulted in a forced reduction in SEC staff from the 3851 in 2005 to 3465 in 2007, as the turmoil in the markets was beginning to grip the nation. The SEC has also reported that its investments in IT systems underwent a forced decline of about 50% from 2005 to 2009.

If the House Republicans have their way and the SEC's 2011 budget is reduced by $70 million - the SEC will have only 7 months to make its cuts since its fiscal year ends on September 30th. To do that, I imagine some drastic measures will have to be made. This sure seems like complete madness since Dodd-Frank was enacted less than a year ago. What financial crisis?

Here's an interesting DealBook column commenting upon the possible ramifications on SEC enforcement cases if the SEC's budget remains limited.

Recent Developments Regarding Fairness Opinions, Valuation Analyses and Related Topics

We have posted the transcript for our recent DealLawyers.com webcast: "Recent Developments Regarding Fairness Opinions, Valuation Analyses and Related Topics."

My condolences to those that knew Joe Flom, one of the founders of Skadden Arps and beyond a giant in corporate law. As I understand it, Joe was working until near the end despite being the advanced age of 87. Amazing.

- Broc Romanek

February 23, 2011

Dave & Marty on Contingencies, Say-on-Pay Voting and SEC Memories

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:

- The latest FAS 5 developments, including recent Staff comment trends
- A debate on Say-on-Pay voting standards
- Fond memories of life at the Commish

Evolving Disclosure Practices in Response to the Repeal of Rule 436(g)

A few months ago, I blogged several times about the repeal Rule 436(g) and how practices were evolving to deal with the implications of the repeal and the SEC Staff's interpretive guidance. As noted in this Dewey & LeBoeuf memo, new practices have developed for disclosure of credit ratings information in periodic reports and the conduct of investment grade securities offerings.

Mailed: January-February Issue of The Corporate Executive

The January-February Issue of The Corporate Executive includes pieces on:

- The SEC's Final Say-on-Pay Rules
- Implementing the Dodd-Frank Act Requirements
- Exemption for Smaller Reporting Companies
- Say-on-Pay Votes
- Say-on-Frequency Votes
- Additional Say-on-Pay/Say-on-Frequency Requirements
- Say-on-Golden Parachute Vote
- Transition Guidance
- Best Practices for Drafting Proxy Statements this Season
- Fixing Long-Term Incentive Grants
- A Wake-Up Call for More Performance or Lower Grant Value?
- Designing More Effective Long-Term Performance Share Plans
- Calibrating Equity Grant Values
- Follow-up: Grants Contingent on Shareholder Approval

Act Now: Get this issue rushed to you by trying a No-Risk Trial today.

- Broc Romanek

February 22, 2011

Sleeper: FAA Issues Final Guidance re: Airplane Use Reimbursement

From CompensationStandards.com's "The Advisors' Blog": Here's something that I kept putting off blogging about until someone else wrote about it - but no one ever has. In our "Airplane Use" Practice Area, I have posted final guidance that the FAA issued on December 30th about its reconsideration of the "Schwab" interpretation regarding executives not being allowed to reimburse for corporate aircraft use under certain circumstances (here's my blog about the FAA's proposal).

Here's one member's reaction to this guidance:

It is a another example of bureaucrats standing in the way of common sense and sound policy. If an executive wants to pay for personal use of corporate aircraft, there is no reason the FAA should stand in the way.

Based on my reading of the policy, the FAA would allow CEO to fully reimburse XYZ for the personal use of corporate aircraft, but only if it is possible he could be called back on company business or forced to cancel his trip ( i.e., a normal vacation). On the other hand, if he is going to a wedding or funeral, FAA has declared it would not be reasonable to assume the company would - or could - force him to alter his plans. Thus, if he uses the plane for a wedding, he could only reimburse a limited amount of the expense under FAA guidelines ( i.e., fuel and landing fees), whereas he could pay all the incremental costs associated with a normal vacation.

If his wife or kids used the plane when CEO was not present, you could read the guidelines to limit the reimbursement to the limited FAA guideline level. If the company wants to establish a written policy that makes reimbursement of personal use of corporate aircraft mandatory, the policy will have to include a caveat that any reimbursement must comply with FAA restrictions.

More on "Say-on-Pay Frequency: Confusion Over Vote Counting"

As a follow-up to my recent blog regarding "Say-on-Pay Frequency: Confusion Over Vote Counting," here are a few interesting items:

1. As reflected in this nifty chart from CompensationStandards.com's "Say-on-Pay" Practice Area, ExeQuity's Robbi Fox has been tracking the proxy statements for the S&P 500 companies who have filed so far (as compared to voting results filed in Form 8-Ks) and out of the 36 S&P 500 companies that have filed proxies:

- Abstentions count as against, broker nonvotes have no effect -15 companies (42%)
- Abstentions and broker nonvotes have no effect -18 companies - (50%)
- Abstentions and broker nonvotes count as against - 3 companies - (8%)

2. In her "100 F Street" Blog, Vanessa Schoenthaler analyzes "The Anatomy of a Shareholder Vote Calculation."

3. Here's an interesting piece called "Doing The Math On Proxy Odds," which analyzes the potential use of vote modeling - in the form of "voting power analysis" - typically used in political campaigns in some proxy battles at public companies.

4. I agree wholeheartedly with Mark Borges' blog last Friday entitled "Is it Worth Making a Triennial Vote Recommendation?" As I wrote in the Winter 2011 issue of the Compensation Standards newsletter in early January, most institutional investors have been vocal about their preference for an annual frequency - even if they didn't really care about having it from a substantive perspective, they still wanted an annual vote to facilitate their ability to run their own peer comparisons (difficult to do if companies are holding SOP votes in different years). So these institutions decided to seek it from a process perspective.

So I'm not sure why companies continue to recommend triennial now that the early meeting results bear out that shareholders will often reject that frequency (as noted in ISS's blog on Friday). As Tim Smith of Walden Asset Management emailed me over the weekend, he was initially angry about Dodd-Frank's midnight addition of a frequency vote - but he's now glad that frequency is on the ballot because rejecting the triennial recommendation has woken up many shareholders to the power that they now have with say-on-pay. It's a reminder of what shareholder engagement is all about - listen to your shareholders and act on what they say. Clearly, many companies are choosing to operate in a bubble...

In his "Proxy Disclosure Blog," Mark Borges gives us the latest say-when-on-pay stats: with 248 companies filing their proxies, 57% triennial; 6% biennial; 32% annual; and 5% no recommendation.

Webcast: "Developments in Debt Restructurings & Debt Tender/Exchange Offers"

Tune in tomorrow for the DealLawyers.com webcast - "Developments in Debt Restructurings & Debt Tender/Exchange Offers" - to hear Casey Fleck of Skadden Arps, Ward Winslow of Jones Day, Jay Goffman of Skadden Arps and Richard Truesdell of Davis Polk discuss how to conduct debt tender and exchange offers and restructure debt - including how these deals have changed in the current economic climate.

- Broc Romanek

February 18, 2011

Corp Fin Hires Lona Nallengara as Deputy Director

Yesterday, Corp Fin announced that it has hired Lona Nallengara as Deputy Director for Legal and Regulatory Policy - replacing Brian Breheny who left the SEC a few months ago. Lona joins the SEC from Shearman & Sterling's NYC office and he hails from Canada. Although many deputy director hires for the various SEC Divisions are done from within the agency, hiring a deputy from the outside certainly is not unprecedented (think Michael McAlevey).

Have you seen this new BBC show called "Rastamouse"? Fits into my long-awaited dream to open up a chain of bowling alleys called "RastaBowl" in which all employees wear dreadlock wigs...

Shareholder Proposals: Corp Fin Rejects First Chevedden Handwriting-Based Challenge

Recently, I blogged about how a number of companies have taken the traditional route of seeking no-action relief from the Corp Fin Staff to exclude proposals submitted by Ken Steiner, who in turn has listed John Chevedden as his proxy. These eligibility challenges allege that Steiner's ownership verifications appeared to be pre-signed by the introducing broker and they allege that Chevedden then filled in the company name, shares owned and date of ownership on the blank form that had been pre-signed with an October 12, 2010 date (I also noted that some of the no-action requests included a handwriting expert certification).

Corp Fin has now posted the first response to one of these challenges - this American Express response - that doesn't allow exclusion by the company. Here is the notable excerpt from Corp Fin's response:

We are unable to concur in your view that American Express may exclude the proposal under rules 14a-8(b) and 14a-8(f). In this regard, we note that American Express raises valid concerns regarding whether the letter documenting the proponent's ownership is "from the 'record' holder" of the proponent's securities, as required by rule 1 4a-8(b)(2)(i). However, we also note that the person whose signature appears on the letter has represented in a letter dated January 21,2011 that the letter was prepared under his supervision and that he reviewed it and confirmed it was accurate before authorizing its use.

In view of these representations, we are unable to conclude that American Express has met its burden of establishing that the letter is not from the record holder of the proponent's securities. In addition, under the specific circumstances described in your letter, we are unable to concur in your view that the proponent was required to provide additional documentary support evidencing that he satisfied the minimum ownership requirement as of the date that he revised his proposal. Accordingly, we do not believe that American Express may omit the proposal from its proxy materials in reliance on rules 14a-8(b) and 14a-8(f).

SEC's Rating Agency Proposals: Some Investment Grade Debt Issuers Would No Longer Qualify to Use Shelfs

Here is news from Davis Polk:

In response to requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC issued proposed rules last week that would revise the Form S-3 and Form F-3 transaction eligibility criteria so that issuers of non-convertible debt securities could no longer qualify to use Form S-3 and Form F-3 by issuing investment grade securities.

This transaction criterion would be replaced with a new transaction criterion which would allow companies to use Form S-3 or Form F-3 to register primary offerings of non-convertible securities if the company has issued, for cash, more than $1 billion in non-convertible securities, other than common equity, through registered primary offerings over the prior three years and meets the registrant requirements. This is modeled on the standard used to determine whether a company that does not meet the public equity float requirement qualifies as a well-known seasoned issuer ("WKSI") based on its debt issuances.

To be eligible to file short-form registration statements on Form S-3 or Form F-3, a company must meet (1) registrant requirements (for example, a company must have been a reporting company for at least a year and be timely in meeting these reporting requirements), and (2) at least one of several alternate transaction requirements. Companies can currently meet these transaction requirements by primarily offering, for cash, non-convertible securities that are rated investment grade.

Companies often rely upon this transaction requirement to establish their Form S-3 or Form F-3 eligibility for issuances of corporate debt when they do not meet the alternate transaction requirement that they have at least $75 million in common equity held by unaffiliated shareholders. The proposed rules would not change this $75 million threshold or the registrant requirements, and so will generally only impact investment grade issuers that do not have publicly traded equity.

The proposed rules are effectively a reissuance of a substantially similar proposal issued by the SEC in 2008 but never finalized. Many commenters opposed the 2008 proposal on the basis that it set too high a threshold and would reduce the number of issuers eligible to use shelf registration statements for primary debt offerings. (See the Davis Polk comment letter on the 2008 proposal expressing these concerns here). At the open meeting, SEC Commissioners and staff recognized these concerns and urged commenters to suggest an alternate Form S-3 and Form F-3 transaction eligibility criterion. Although Dodd-Frank requires the SEC to remove references to credit ratings in their rules and forms it does not set out alternate standards. Comments on the proposed rules are due by March 28th.

- Broc Romanek

February 17, 2011

Shareholder Proposals: Explanations for Corp Fin "Ordinary Business" Exclusions No Longer Rare

Last year, the Corp Fin Staff promised a bit more in the way of explanation when it issues no-action responses in the shareholder proposal area. So far this proxy season, it looks like the Staff is keeping its promise. Recent no-action letters granting exclusion on "ordinary business" grounds (ie. Rule 14a-8(i)(7)) bears this out. For example, in this response to Ford Motor, the Staff includes a sentence about how setting product pricing is "fundamental to management's ability to run a company on a day-to-day basis." Other examples include responses to Duke Energy, Verizon and Masco.

And in this response to AT&T, the Corp Fin Staff explains how net neutrality "has recently attracted increasing levels of public attention" but that it hasn't emerged "as a consistent topic of widespread public debate such that it would be a significant policy issue." I imagine one could debate whether the Staff's statement foreshadows a possible change to the topic being deemed a significant policy issue - but my view is that the Staff is merely articulating a nuance on how to distinguish whether something is ordinary business.

None of the Staff positions is these no-action letters are new, but the one sentence explanations should help us read the tea leaves as to how the Staff feels about certain topics. Hat tip to Keir Gumbs of Covington & Burling for pointing these new responses out!

Note that I believe the AT&T resolution was filed with Mike Diamond - aka "Mike D" - of the Beastie Boys as a co-proponent.

Moxy Vote Update

In this podcast, Mark Schlegel of Moxy Vote LLC discusses the latest developments in proxy voting capabilities (here is last year's podcast), including:

- What happened over the last year at Moxy Vote since the launch?
- What can issuers do with Moxy Vote?
- What are we doing for this proxy season?

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:

- Facebook's Raw Deal
- California: No Rescission Without Privity
- Interview: Delaware Chancellor Chandler on Key Director Issues
- Ninth Circuit: Guidance on Important Scienter Issues
- Does That Matter Really Need To Go To The Board?

- Broc Romanek

February 16, 2011

Study: Benchmarking the Number of "Executive Officers"

As reflected by how many times I get asked "how many executive officers should we have?" by members, a common challenge that all public companies have to make is the determination of who should be considered an "executive officer" for purposes of disclosure in their SEC filings. Not only does such a decision have an impact on the company's disclosure obligations, but it has other consequences as well.

To assist in these determinations, companies often benchmark against their peers to gain comfort that the number of employees designated as "executive officers" is not too far off the norm. Given the dearth of benchmarking data available in this area, I jumped at the chance to work with LogixData to compile a comprehensive benchmarking study that I have posted in our "Executive Officer Determination" Practice Area.

This study provides:

- Analysis of how "executive officer" determinations are made
- Key benchmarking statistics drawn from the Form 10-Ks and proxy statements filed by all public companies during 2010

Note at the end of our study, you can email LogixData if you wish to receive a more detailed breakout of the benchmarking stats.

Nugget #4: Board Evaluations - The Independent Directors Should Experiment With When to Hold Executive Sessions

Recently, 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 #4:

Executive Sessions - The independent directors should experiment with when to hold executive sessions - Normally, executive sessions are held just before - or after - a regular board meeting. Holding an executive session after a board meeting enables the independent directors to react to matters discussed at the board meeting.

On the other hand, it may be preferable to hold executive sessions before board meetings as a way to prepare for the board meeting - and not be sidetracked by what transpires at the board meeting. However, these executive sessions might last forever and exhaust directors before they get to the board meeting. To solve this potential problem, we like the idea of having the executive session the afternoon before a board meeting that commences the next morning.

Boards should experiment and determine what works best for them. For example, Intel's board holds executive sessions in the middle of their board meetings.

More on our "Proxy Season Blog"

With the proxy season in full swing, we are posting new items regularly on our "Proxy Season Blog" for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

- Recent Bylaw Amendments that Address Proxy Access
- Deja Vu: Apache Raises Proof-of-Ownership Objection Again
- Carpenters Ask Large-Cap Firms to Provide Board Access
- An Updated Proxy Season Time & Responsibility Schedule
- Proxy Advice: Glass Lewis Takes Over PGI's Clients

- Broc Romanek

February 15, 2011

A Closer Look at China's Audits

Professor Paul Gillis has done a great job of analyzing issues related to China and accounting practices in his "China Accounting Blog." In particular, I recommend reading his entries entitled "Audit scandals in China" and "China and the PCAOB" (the PCAOB has not inspected any of the 59 Chinese audit firms registered with it).

As the Professor notes, many privately-owned Chinese companies have gone to US stock markets to raise capital over the past few years - companies that found it difficult to get regulatory approval to list on Chinese stock exchanges. Many of the US listings were accomplished using the "backdoor" method of a reverse merger, where a Chinese company merges into a publicly listed shell - a practice that has drawn the SEC's attention according to this article.

Contingencies: Corp Fin Chief Accountant Warns Against Over-Reliance on ABA Treaty

Here is news from Willkie Farr's Michael Young (repeated from this memo):

At a recent New York Bar Association conference, the Chief Accountant of the SEC's Division of Corporation Finance, Wayne Carnall, warned against over-reliance on the so-called ABA-auditor "treaty" in reporting litigation contingencies on financial statements.

The "treaty," which has been in place for roughly 35 years, seeks to preserve attorney-client confidences by providing a structure for dialogue between auditors and corporate counsel regarding financial statement presentation of information on pending and potential litigation. It provides the template for the "auditor inquiry letters" directed to both inside and outside counsel, and cautions corporate counsel (both inside and outside) against providing certain kinds of information to outside auditors.

One important feature of the treaty cautions counsel against providing to auditors estimates about the amount or range of potential loss from a litigation unless the lawyer believes that the probability of inaccuracy is "slight."

A problem is that Generally Accepted Accounting Principles ("GAAP"), and in particular ASC 450 (formerly FAS 5), call upon those preparing financial statements to evaluate whether a loss from litigation is "probable," whether the amount of loss can be "reasonably estimated," and, where the loss is both probable and can be reasonably estimated, to accrue an appropriate amount. Where accrual is not required, but a loss is nonetheless "reasonably possible," the financial statements are to include "an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made."

At the bar association conference, Chief Accountant Wayne Carnall, in responding to questions, warned that reliance on the treaty would not justify nonfulfillment of ASC 450's requirements. He observed that the treaty is "not part of the accounting codification" and that the requirements of GAAP must control. He also warned that "companies have an obligation to comply with GAAP and compliance with the 'treaty' is not a defense." The Chief Accountant has elsewhere made clear that litigation contingency reporting will be under a microscope this financial reporting season. Given the historical prominence of the ABA treaty in lawyer-auditor dialogue, companies may want to make sure that the litigation reporting requirements of ASC 450 are being fulfilled.

Webcast: "The SEC Staff on International Issues"

Tune in tomorrow for the webcast - "The SEC Staff on International Issues" - to hear the Chief of the Corp Fin's Office of International Corporate Finance Paul Dudek - as well as former Senior Staffers Alex Cohen of Latham & Watkins and Sara Hanks - discuss the latest rulemakings and interpretations from the SEC that relate to non-US companies.

Old-Timers Trivia Question: There have been three heads of OICF over time. Paul and Sara are the latest - who was the first? Drop me a line if you know the answer...
- Broc Romanek

February 14, 2011

Corp Fin Issues 7 New Say-on-Pay and Golden Parachute CDIs

On Friday, Corp Fin posted 7 new Compliance and Disclosure Interpretations - six related to say-on-pay and one related to golden parachutes:

1. Section 169 - Rule 14a-21:
- Question 169.01
- Question 169.02
- Question 169.03
- Question 169.04
- Question 169.05
- Question 169.06

2. Section 128B - Item 402(t) Golden Parachute Compensation:
- Question 128B.01

In his "Proxy Disclosure Blog," Mark Borges gives us the latest say-when-on-pay stats: with 231 companies filing their proxies, 58% triennial; 6% biennial; 31% annual; and 5% no recommendation. And in the "Dodd-Frank Blog," Steve Quinlivan discusses the reasons for the "against" vote at Beazer Homes as well as the results reported in the 54 Item 5.07 Form 8-Ks filed so far this proxy season.

The NYSE's Annual Corporate Governance Letter

The NYSE has sent its annual corporate governance letter, highlighting considerations for NYSE-listed issuers as the annual shareholders' meeting season approaches.

Valentine's Day? Fine Design Dine & Wine

You ready for Valentine's Day? Treat yourself to fine food in great atmosphere by reading the tremendous showcases on this site, FineDesignDine.com. If you're a Top Chef fan, winner Stephanie Izard's restaurant recently was featured. The pictures alone are worth trying it out. Delectable.

In this podcast, Harlene Ellin of Fine provides some insight how you should be treating yourself to fine food and atmosphere through her site FineDesignDine.com, including:

- What is the purpose of Fine?
- How did you come up with the idea for it?
- Has there been any surprises so far?

- Broc Romanek

February 11, 2011

Our Model Say-on-Pay Disclosures

On CompensationStandards.com, we just posted the Spring 2011 issue of the Compensation Standards newsletter, in which Dave Lynn has drafted model say-on-pay disclosures to help you prepare your upcoming proxy statement. It includes a model executive summary, say-on-pay resolution and say-on-frequency resolution. We have also posted a Word version of the newsletter so that you can cut and paste as a starting point for your proxy disclosures.

Act Now: To immediately access this issue of the Compensation Standards newsletter, try a CompensationStandards.com no-risk trial now since this newsletter is posted on CompensationStandards.com as one of the benefits of membership.

A New CD&A Template

In this CompensationStandards.com podcast, Kurt Schacht of the CFA Institute's Centre for Financial Market Integrity talks about a CD&A Template put together by the joint efforts of a group of issuers and investors, including:

- Why was the template put together?
- What was the process for drafting it?
- How do you envision companies using it? How about investors?
- How does mandatory say-on-pay impact its use?

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:

- Board Diversity Survey: Cracks in the Ceiling for Women
- 23 Things Not to Write In An E-Mail
- Following Morrison v. National Australia Bank, Southern District of New York Court Weighs In
- Ten Country Interagency Report on Boards and Risk Management
- A Disclaimer Too Far
- Risks, Compliance, the SEC and New Concerns for Directors

- Broc Romanek

February 10, 2011

Shareholder Proposals: KBR Suit Alleges Chevedden's Assault & Battery

I'm not pulling your leg on this one. A physical altercation between John Chevedden and a process server has led KBR to file this brief (and these exhibits) as part of its lawsuit to exclude a shareholder proposal submitted by Chevedden due to his alleged lack of eligibility (I also recently blogged about how other companies are challenging Chevedden's eligibility).

The brief provides detailed allegations about how Chevedden has gone to great lengths to avoid being served - and how Chevedden knocked down a process server when she finally caught up with him outside a UPS store. The process server swore out a police report, which is pending before the City Attorney's office. We continue to post pleadings filed in this case in our "Shareholder Proposals" Practice Area.

House Financial Services Committee: "Oversight" = "Micromanagement"

Last week, the House Financial Services released a draft version of its Oversight Plan for this Congressional session. Rather than focus on oversight of what caused the recent financial crisis - including enforcement of existing laws and tackling why there has been a dearth of cases brought in the subprime area, etc. - it looks like the Committee intends to spend its time micromanaging the implementation of Dodd-Frank (even though Congress hasn't given the SEC the resources to do so). In addition, it looks like the Committee will be micromanaging the FASB and the standards it creates. So much for the independence of these two regulators.

The Treasury Department has announced the launch of a 'beta' Consumer Financial Protection Bureau website, ConsumerFinance.gov, with the initial focus on soliciting ideas on the Bureau's creation and priorities and for answering questions on its work.

More on our "Proxy Season Blog"

With the proxy season in full swing, we are posting new items regularly on our "Proxy Season Blog" for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

- The Latest SEC Comment Letter Trends
- Proxy Access: It Has Been Done Before
- Broadridge to SEC: Mandate Use of Social Media
- Challenges Continue with XBRL Compliance
- The Quality of the Shareholder Vote in Canada

A Call for Nominations: Regulatory Innovation

With all that has transpired in the past year, it seems that now more than ever we need some innovative approaches to financial regulation. Therefore, Dave is pleased to be a part of Morrison & Foerster's establishment of the 2011 Regulatory Innovation Award through the Burton Foundation. This award will honor an academic or non-elected public official whose innovative ideas have made a significant contribution to the discourse on regulatory reform in the arena of corporate governance, securities, capital markets or financial institutions. If you know of someone meeting these qualifications who should be considered for this award, please submit the nomination before February 18th.

- Broc Romanek

February 9, 2011

Say-on-Pay: A Second Failed Vote in the First Two Weeks of Annual Meetings!

Yesterday, Beazer Homes USA filed this Item 5.07 Form 8-K which revealed that it has become the second company to fail to receive majority support for its say-on-pay, with 54% voting "against." As I blogged before, Jacobs Engineering became the first last week. That's two failed votes out of roughly 30 SOPs voted upon so far - nearly a 7% rate.

In my poll last week - in which folks guessed how many failed votes there would be this year - zero picked 1-2 failures; 4% predicted 3-4 failures; 18% predicted 5-10 failures and 75% predicted more than 10 failures (5% said "what me worry?"). At the current 7% rate of failure, it looks like the smart money will have pegged it.

I've been amused by some who have recently reported that only 1 out of 20 have failed so far - as if a 5% failure rate was a good thing - and that's not even counting the companies who have garnered a significant "against" vote like Monsanto and Johnson Controls. If you apply that failure rate to the number of companies that will hold SOP votes soon enough, the image is scary.

As Paul Hodgson blogged last year, 500 nays-on-pay would be the result extrapolating from the 3 failures last year out of the 60 companies that voluntarily had say-on-pay on their ballot. And as Paul noted, "Can you imagine what might happen if shareholders got organized? [FX: Long, slow, whistle on descending note....]"

Interestingly, a member brought three smaller companies to my attention that filed proxy materials after the effective date of Dodd-Frank's SOP provision - but before the SEC postponed the applicability of SOP to smaller reporting companies. Given that the SEC hadn't signaled the postponement beforehand, they certainly got lucky! Of course, given that they didn't even know that SOP had applied to them, they likely don't even know they are lucky...

Shareholder Proposals: Corp Fin Reveals Approach to Proxy Access Proposals During Stay

In this response to General Electric, the Corp Fin Staff tips its hand about how it intends to approach shareholder access proposals during the current stay of the challenge to the proxy access rule (ie. Rule 14a-11). This response is an interesting example of how the Corp Fin Staff is explaining its decisionmaking these days as the Staff indicates that it's granting relief based on the way that Rule 14a-8(i)(8) operated prior to the shareholder access rulemaking. Probably the right answer, but one that had not yet been addressed to my knowledge.

Yesterday, the SEC celebrated bringing charges regarding expert networks by affixing a special logo dedicated to the event on its home page. That is a first. Wonder what the logo for adopting the say-on-pay rules would have been? Maybe this one...

Pat McGurn's Forecast for 2011 Proxy Season: Wild and Woolly

We have posted the transcript for our recent webcast: "Pat McGurn's Forecast for 2011 Proxy Season: Wild and Woolly."

- Broc Romanek

February 8, 2011

Say-on-Pay Frequency: Confusion Over Vote Counting

As perhaps can be expected given it's a new ballot item for most companies, the first batch of companies reporting voting results regarding say-when-on-pay have led many members to send questions about how to properly count votes. As an example of the confusion, Steve Quinlivan notes a voting ambiguity at the end of this blog. And in his "California Corporate & Securities Law" Blog, Keith Bishop also blogs about the confusion of counting say-on-frequency votes - here is Keith's follow-up blog too.

The bottom line is that whether a majority preferred a triennial vote depends on how "abstentions" are treated - which means that the same numbers could wind up with entirely different results for two different companies. Personally, I don't see how abstentions wouldn't be counted, but it seems like a matter of state law - not my area of strength. But I do note that the SEC's adopting release in discussing the Rule 14a-8 exclusion states at footnote 151:

"Specifically, as adopted, the note to Rule 14a-8(i)(10) will permit exclusion of such a shareholder proposal if, in the most recent shareholder vote on frequency of say-on-pay votes, a single frequency (i.e., one, two or three years) received the support of a majority of the votes cast and the issuer has adopted a policy on the frequency of say-on-pay votes that is consistent with that choice. FN 151

Footnote 151 - For purposes of this analysis, an abstention would not count as a vote cast. We are prescribing this voting standard solely for purposes of determining the scope of the exclusion under the note to Rule 14a-8(i)(10), and not for the purpose of determining whether a particular voting frequency should be considered to have been adopted or approved by shareholder vote as a matter of state law."

One might ask whether the difference matters. There are some consequences. One is determining whether a specific frequency preference received a "majority of the votes cast" for purposes of the Rule 14(a)-8(i)(10) exclusion - so it matters for purposes of the shareholder proposal rule (I guess it also could have an impact on which preference received a plurality of the votes cast, but this situation isn't likely to come up too often - and doesn't seem have any legal consequences). Perhaps the biggest factor to consider is one that isn't driven by regulation: the optics of how you report your voting results. In other words, how will it be received by shareholders and the media in general.

I expect that companies will want to disclose the potential voting implications "right" at the outset in their proxy materials - it doesn't look good to file a corrective disclosure. So it's something to figure out now and not when it comes time to report the voting results in a Form 8-K...

In his "Proxy Disclosure Blog," Mark Borges gives us the latest say-when-on-pay stats: with 218 companies filing their proxies, 58% triennial; 6% biennial; 30% annual; and 6% no recommendation.

SEC Promotes Mark Cahn to General Counsel

On Friday, the SEC announced that it had promoted Mark Cahn from Deputy General Counsel to the top job. Cahn came to the SEC two years ago from WilmerHale.

January-February Issue: Deal Lawyers Print Newsletter

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

- How to Respond to Shareholder Proposals Seeking Board Declassification
- The ABCs of Board De-Staggering
- Acquiring US Companies with Foreign Subsidiaries: Relevant Issues
- The Window Closing Pill: One Response to Stealth Stock Acquistions

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

- Broc Romanek

February 7, 2011

Hacking Nasdaq's Directors Desk: Big Trouble for Board Portals

The news was first leaked late Friday from the WSJ that "hackers have repeatedly penetrated the computer network of the company that runs the Nasdaq Stock Market during the past year." That forced the Nasdaq to issue this statement that Nasdaq's Director Desk - a provider of board portal services to 300 companies - may have been compromised for over a year! Here's more information from the NY Times and Dominic Jones' IR Web Report.

Even though security breaches are a mainstay of modern life (check out the half a billion record breaches listed on this page), this could set back the board extranet movement a decade. And for good reason. Security is paramount when it comes to sensitive board materials. I can't imagine companies not rethinking their posting of board materials online if their safety is at all in question.

I just can't understand how the federal authorities have the ability to tell a service provider to not inform its clients that there has been a breach! Or why? What is the harm in Directors Desk telling its clients that there has been a breach so they can immediately protect their sensitive information? Even if the hacker was state-sponsored - as intimated by Jeffrey Carr in this blog (and as noted by Dominic Jones) - I don't see how not informing boards of the breach can be justified, particularly given the seriousness of the breach. Carr notes in his blog: "The nth level effects of this breach could dwarf anything that we've seen to date."

Of course, I still can't wrap my head around how it took Directors Desk so long to discover the breach if enhanced security is what sold the product - it's reported that the breach existed for over a year until it was discovered. Carr's analysis of Directors Desk's security measures is that it is no match for a serious hacker. Before passing judgment on the entire board portal industry, I'll await his analysis of the security measures that other board portal providers utilize, but frankly I'm scared to hear that analysis...

SEC Speaks About a Lack of Funding

During last week's annual PLI "SEC Speaks" Conference, many SEC officials talked about the agency's limited funding and how hard it will be to implement Dodd-Frank timely on such a shoestring budget. For example, here is Chair Shapiro's opening remarks, which she closed by talking about the strain of operating under the existing budget with expanded Dodd-Frank responsibilities. Later in the day, Corp Fin Director Meredith Cross mentioned that she can't fully staff her newly created offices because of funding woes.

PLI has posted notes for each the panels devoted to the SEC's Divisions (but not the workshop sessions), including:

- Corp Fin
- Enforcement
- Trading & Markets
- Investment Management
- Judicial Developments
- Accounting
- Risk Fin

SEC Commissioner Casey raised a few eyebrows during her speech when she challenged the Enforcement Division's ability to apply new Dodd-Frank provisions to conduct that pre-dated the enactment of the Act based on anti-retroactivity principles.

Webcast: "Recent Developments Regarding Fairness Opinions, Valuation Analyses and Related Topics"

Tune in tomorrow for the DealLawyers.com webcast - "Recent Developments Regarding Fairness Opinions, Valuation Analyses and Related Topics" - to hear Kevin Miller of Alston & Bird, Steve Kotran of Sullivan & Cromwell, Stuart Rogers of Credit Suisse Securities and Jennifer Muller of Houlihan Lokey discuss the latest developments and trends of fairness opinions and valuation analyses. Please print off these course materials before the program.

- Broc Romanek

February 4, 2011

Whistleblower Bounty Program: SEC Hints on Future Direction?

A few days ago, the "WSJ Law Blog" cited to this speech delivered by the SEC's General Counsel David Becker who said that whistleblowers should not have to use internal company reporting options before running to the SEC under the controversial Dodd-Frank whistleblower fraud bounty program. Becker's logic is that some compliance programs "no matter how elaborately conceived and extensively documented, exist only on paper" and are "shams," giving an example of a company where the "ostensibly anonymous employee hotline ... actually rang on the desk of the CEO's secretary."

Does this tip the SEC's hand as to where the agency will end up after months of business protest about the structure of the Dodd-Frank whistleblower bounty program? Perhaps not given that it was announced earlier this week that Becker is headed back to the private sector and he was speaking in a personal capacity (as the disclaimer that SEC speakers always gives indicates)...

Proxy Access: Two More Amicus Briefs

In our "Proxy Access" Practice Area, we have posted two more amicus curiae briefs - one from a group of pension funds and the other from a group of law professors.

Towards State of the Art: Scrubbing Your Bylaws, Governance Guidelines & Committee Charters

We have posted the transcript for our recent webcast: "Towards State of the Art: Scrubbing Your Bylaws, Governance Guidelines & Committee Charters."

More on "The Mentor Blog"

We continue to post new items daily on our blog - "The Mentor Blog" - for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

- More on "Dress Code for Delaware Courts"
- California: Secondary Trading In Private Company Shares
- Staleness Calendar for 2011 Offerings
- Politics, Corporate Lobbying and the FASB
- Will Whistleblower Claims Give Rise to More SEC Enforcement Actions?

- Broc Romanek

February 3, 2011

Dodd-Frank's Sleeper? The Winner is Conflict Minerals

Last Friday, the SEC extended the deadlines for submitting comments on a trio of Corp Fin proposals: conflict minerals, mine safety and resource extraction disclosure. The new deadline is March 2nd.

Last year, I blogged several times analyzing potential "sleepers" in Dodd-Frank and soliciting ideas from the community. As I define "sleeper," it should be a provision that applies to many companies. Given the feedback I've received, including the comment letters submitted to the SEC so far - and the memos in our "Conflict Minerals" Practice Area - I'm now ready to deem Section 1502 regarding conflict minerals as the Dodd-Frank sleeper for disclosure lawyers. Here is an excerpt from remarks made by Amy Goodman during our recent Dodd-Frank webcast:

From talking to a number of companies in trade associations, people are realizing that this is a huge issue and could impact upwards of 6,000 issuers. While the SEC speculates that only 1,200 will actually file reports, we're hearing from companies that it's almost impossible under the current circumstances to determine that minerals do not come from the Congo. And in that case, the SEC proposal would require the report. So I would urge people to take a look at this requirement. I think it's taken a while for people to realize the seriousness of this requirement. But it could be quite burdensome.

To understand the magnitude of the undertaking that companies face in order to comply with this requirement, check out this memo - which besides providing guidance on how to comply with the provision, it explains supply chain due diligence, what entities like the OECD recommend and what various industry organizations like the EICC-GeSI are doing. There even have been readiness rankings of various industries created, such as this report on the electronics industry from the Enough Project.

Industry Insiders Tells Congress: Don't Cut the SEC's Budget

I've blogged numerous times about how Congress plays games with the SEC's budget (here's a recent blog on the topic) - and how Congress has shamefully limited the SEC's budget less than a year after it enacted Dodd-Frank. Due to the restrictive nature of the latest Congressional continuing resolution, the SEC has been forced to stop hiring and rein in travel and technology spending. It wasn't that long ago that the SEC envisioned hiring hundreds of new Staffers this year.

Last week, the Executive Council of the Securities Law Committee of the Federal Bar Association sent this letter to Congressional leaders to ask them to stop the madness. Congress' continuing resolution ends on March 4th - so by then, Congress will have to decide once more if they will adequately fund the SEC to do its job. Given it's current limited resources, the SEC already has announced delays for some of its Dodd-Frank rulemakings.

Note that the effective date of the SEC's final say-on-pay rules has been set as April 4th (it's tied to the rules being published in the Federal Register). The compliance date is also April 4th.

Webcast Transcript: "The Latest Developments: Your Upcoming Proxy Disclosures - What You Need to Do Now!"

We have posted the transcript for our popular CompensationStandards.com webcast: "The Latest Developments: Your Upcoming Proxy Disclosures - What You Need to Do Now!"

- Broc Romanek

February 2, 2011

The Financial Crisis Inquiry Commission Report: A "Clip Job"?

Last Thursday, the Financial Crisis Inquiry Commission released its long-awaited 410-page report about the causes of the financial crisis (and a 29-page dissent and a 95-page dissent-from-the-dissent). The Commission reviewed millions of pages of documents, interviewed 700+ witnesses and held 19 days of public hearings in New York, DC and communities across the country. Here's the FCIC page with the full report, conclusions and dissents. Here's some analysis that I received from Lynn Turner:

Unfortunately, what the FCIC did not do, is a real investigation. Congress never gave it enough money to do its job, not unlike how Congress has treated many of the regulators. It didn't hire the attorneys and accountants trained as investigators as Pecora did. Some of its top staff were seconded from the Fed which as the report notes, was one of the biggest reasons for the crisis. Its top and initial head of staff left long before the project was done as did other staff frustrated by the superficial work of the Commission. It did not make all its subpoena's public and quite frankly which would have been embarrassing as in all likelihood because they didn't issue many. Likewise all the FCIC records of interviews and inquiries have not been made public raising (1) a question as to whether they agreed to nondisclosure agreements with some parties and (2) whether there is that much of a record.

Here's more analysis of the report:

- Ben Heineman's "Financial Crisis Inquiry Commission: The Private Sector Failed"
- Bloomberg's "Wall Street's Collapse to Be Mystery Forever"
- NY Times' "Washington's Financial Disaster"
- DealBook's "Everyone Was to Blame, Crisis Commission Finds"
- Reuters' "Bernanke: all but one major firm at risk in 2008"
- DealBook's "Crisis May Seem Criminal, but Try Making a Case"
- Washington Post's "Commission member dissents on financial crisis report, says housing policy caused meltdown"
- Bloomberg's "Infighting, Investigations Overshadow FCIC Report"
- NY Times' "Crisis Panel's Report Parsed Far and Wide"

Jonathon Weil's Bloomberg piece above is what gave me the idea for "clip job" in this blog's title when he wrote this paragraph: "This, in journalistic parlance, is what we call a clip job. And that's the trouble with much of the commission's 545-page report. There's lots of breezy, magazine-style, narrative prose. But there's not much new information."

SEC General Counsel David Becker to Leave

Yesterday, the SEC announced that its General Counsel - David Becker - was returning to the private sector after a two-year stint during his second tour of duty with the SEC as its GC. Given the SEC's incredibly tight budget constraints right now, I wonder if the SEC has the money to replace David! Big shoes to fill for sure...

How to Implement Dodd-Frank for This Proxy Season

We have posted the transcript for our webcast: "How to Implement Dodd-Frank for This Proxy Season."

Poll: What Will Be the Primary Cause of the Next Financial Crisis?

For most of us, we don't know what will be the primary cause of the next financial crisis - but we do know that someday one will come because that is what history has taught us. And we do have our hunches of what might be the next cause. In this anonymous poll, share what your guess is of that cause:


- Broc Romanek

February 1, 2011

Shareholder Proposals: More Companies Challenge Chevedden Over Eligibility

Recently, I blogged about how two companies have gone to court in an attempt to exclude shareholder proposals submitted by John Chevedden based on eligibility grounds (ie. KBR, whose recently-filed court challenge is pending - and Apache, whose court challenge occurred last year). These cases hinge on whether a letter from an entity that is not a registered broker dealer or a DTC participant is proper evidence of ownership under Rule 14a-8.

These cases also raise questions about whether an introducing broker is a "record holder" for the purposes of Rule 14a-8. Interestingly, even though last year the entity at issue - RAM Trust - claimed to be an introducing broker - this year it now characterizes itself as a bank according to its most recent submission. Based on past SEC Staff practice, we would expect the Staff to refrain from responding to KBR's notice of its intent to exclude the Chevedden proposal, which would be consistent with its practice of not commenting on matters that are the subject of litigation. It is less clear whether the Staff will respond to Apache's latest notice, which was not filed concurrently with a lawsuit this time around. Stay tuned...

It also appears that at least a half dozen other companies - including Allstate, International Paper, McGraw Hill, Bristol Myers - have taken the traditional route of seeking no-action relief from the Corp Fin Staff to exclude proposals submitted by Ken Steiner, who in turn has listed Chevedden as his proxy.

The incoming no-action requests from these companies note that Steiner's ownership verifications appear to be pre-signed by the introducing broker - Mark Filiberto, DJF Brokerage's president - and they allege that Chevedden then filled in the company name, shares owned and date of ownership on the blank form that had been pre-signed with an October 12, 2010 date. Some of the later incoming no-action requests even include a handwriting expert certification that it is Chevedden's handwriting on Filiberto's signed letters (and that the pre-signed letters are all identical copies).

If true, this seems to be a case of double secret alter egos. It will be interesting to see how the Corp Fin Staff responds to these letters as it seems one thing to allege that someone is acting as an alter ego, but an entirely different thing to allege they have forged a letter. Who knew that disclosure lawyers would have a need for handwriting experts!

Our February Eminders is Posted!

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

More on our "Proxy Season Blog"

With the proxy season in full swing, we are posting new items regularly on our "Proxy Season Blog" for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

- Proxy Access: Questions to Be Addressed if the Rules Take Effect
- More on "Proxy Plumbing: Analysis of Comment Letters"
- ISS's Final U.S. Postseason Report
- CalPERS Reconsiders Corporate Engagement, Focus List
- Investors Pressure DOL on Environment, Social and Governance

- Broc Romanek