March 31, 2011

SEC Proposal: Use of Compensation Consultants and Other Advisors and Conflicts of Interest

Yesterday, as noted in this press release, the SEC unanimously proposed rules to implement Section 952 of Dodd-Frank that would direct the exchanges to adopt listing standards relating to compensation committees regarding their use of compensation consultants and other advisors as well as conflicts of interest. These rules ultimately will provide a more detailed definition of "independence" in the compensation context.

From scanning the proposing release that was posted last night, the proposed rules would not add much to Section 952, much to the chagrin of those who emailed me after the meeting and were expecting the SEC to come up with a rules package that the exchanges could just adopt. But even if the exchanges are charged with fleshing out the statute, the SEC surely will be heavily involved behind the scenes as often happens with new listing standards since the SEC must approve them.

Dodd-Frank requires that final rules in this area be adopted by July and the deadline for comments is April 29th. Even if final rules are adopted timely by the SEC, it's still possible that listing standards may not be in place before the 2012 proxy season since I believe the July deadline doesn't apply to the exchanges. Memos on the proposal are being posted in's "SEC Rules" Practice Area.

ISS Policy Change re: Section 162(m) Equity Plan Proposals

Here is something that Cooley's Amy Muecke blogged a few days ago on's "The Advisors' Blog":

Recently, I learned that ISS has made a mid-proxy season policy change that may affect vote recommendations for equity plans submitted to stockholders solely for purposes of Section 162(m) approval. Historically, ISS has always supported these proposals agreeing that it is in the best interests of the stockholders for the company to be able to grant awards under a plan that satisfies the 162(m) requirements for performance-based compensation that is excludable from the $1M deductibility limitation.

Effective immediately, ISS will no longer automatically support Section 162(m) proposals submitted by "IPO companies" - that is, companies whose public company stockholders have not previously approved their equity plans. Instead, ISS will further analyze the plan and proposal to determine whether any problematic features are more detrimental than the potential loss of tax deductions and if so, ISS will recommend voting against the proposal.

Going forward, ISS signaled that it also may also further scrutinize Section 162(m) proposals submitted by non-IPO companies (i.e., companies whose public company stockholders have previously approved their plans), but it suggested that this year it is primarily concerned with Section 162(m) plans submitted by IPO companies.

Shareholder Proposals: Incentive Compensation & Risk Report Excludable If Too Broad

And here is something that I blogged last week on's "The Advisors' Blog":

Recently, Corp Fin posted this no-action response to Wells Fargo regarding a shareholder proposal that asked the company to prepare a report "to describe the board's actions to ensure that employee compensation does not lead to excessive and unnecessary risk-taking that may jeopardize the sustainability of the company's operations. It further states that the report must disclose specified information about the compensation paid to the 100 highest paid employees."

The Corp Fin response is interesting. It notes that incentive compensation paid by a major financial institution to those that are in a position to cause the company to take inappropriate risks is a "significant policy issue" - but then the Staff goes on to note that the proposal relates to the compensation paid to a large number of employees, thus falling into the "general employee compensation" line of no-action letters since it was not limited to senior executive officers. As a result, the Staff allowed the company to exclude the proposal under (i)(7) as an ordinary business matter.

This letter is interesting also because it presented the Staff with the opportunity to take the position that the general compensation practices that lead to excessive and unnecessary risk taking (and board actions to avoid such risk taking) raise significant policy issues, which would arguably bring its no-action positions in line with the disclosures that the SEC recently concluded should be required in proxy materials. Even though some might disagree with the Staff's position, it at least avoided yet another exception to the general rule that proposals relating to general employee compensation relate to ordinary business matters and may be excluded under (i)(7). Thanks to Keir Gumbs of Covington & Burling for pointing this letter out!

- Broc Romanek

March 30, 2011

A Dearth of Whistleblower Complaints?

A few weeks ago, the NY Post ran this piece entitled "SEC whistleblower call draws few tipsters." In it, the guy who runs the National Whistleblowers Center states he expected 3000 whistleblower complaints per year. Really? For 10,000 public companies - of which more than half are so small that there isn't much to whistle about - I just think that number was completely unrealistic to begin with - dropping a zero would be more like it, if that...

Farewell to Bowne

With RR Donnelley's acquisition of Bowne now complete, it is with fondness that I reflect back upon all those late nights at the printers. Over the years, as many of you have, I have sat through drafting sessions at all the printers but I understand that most of those days are behind us given email and other new technologies. Those were the days my friend...

Poll: My Favorite Financial Printer Moment

Please email me your favorite story about being at the printers (I will not share without your permission, as always). Here is a poll about your fondest memories of being at the printers:

- Broc Romanek

March 29, 2011

The Growing Push for Board Diversity

One area of governance reform not touched upon enough by Congress in Dodd-Frank or Sarbanes-Oxley is board diversity. It's an important area to be concerned about - and not just for political correctness reasons. If all of the members of the board have similar backgrounds and experiences, the company's management (and thus shareholders too) is not getting the benefits that come with having a truly diversified board (see the results in the studies mentioned in this memo).

There have been movements afoot overseas to "fix" undiversified boards when it comes to gender, including Norway (which has a mandatory quota!), Spain and Australia (yet there are still issues globally, as this blog notes). This recent UK report noted it would take 70 years to achieve gender-balanced boardrooms at the current rate of change. This report makes a set of recommendations to effectuate greater changes sooner. However, I'm not aware of much movement in the area of race-balanced boardrooms - and the debate over whether sexual orientation should be considered in a board matrix hasn't even really begun.

As this speech by SEC Aguilar indicates (Aguilar has delivered numerous speeches on diversity recently), there can be improvement in the disclosures provided by some companies regarding this topic, as newly required under changes to Item 407 of Regulation S-K in late '09. Of course, better disclosure doesn't necessarily mean change in the boardroom.

One development that may help speed change here in the US is the idea of creating databases of diversified candidates for boards. I would hope that the director recruiting firms in this country already do something like this - but the idea of government giving a push might not be a bad one. Keith Bishop recently blogged about the possibility of California getting back into this business by resurrecting a director registry that it used to maintain. And DirectWomen is a great place to look for qualified women to serve on boards. We do have resources about this topic generally in our "Board Diversity" Practice Area.

I love Nell Minow's recent article entitled "Corporate Boards -- Still Pale, Male, and Stale." I imagine that the opening quote in the article - from a CEO, "Oh, we already have a woman" - that was uttered many years ago could just as easily be said today by someone less informed...

Study: No Women on Over 40% of the World's Largest Boards

Following up on the theme above, consider this new report from GovernanceMetrics International that shows that more than 40% of the world's largest publicly listed companies have not appointed even one woman to their boards. Did they just blow your mind? It blew mine.

3rd Annual Public Company M&A Nuggets

We have posted the transcript from our recent webcast: "3rd Annual Public Company M&A Nuggets."

- Broc Romanek

March 28, 2011

John Huber on Accounting Help for Law Firms

John Huber recently began a second career at FTI Consulting. In this podcast, John talks about his new career path, including:

- How does your new job differ from working at Latham?
- How do you envision partnering with law firms in your new position?
- Any thoughts on the current battle over the SEC's budget?

On Wednesday, the SEC is holding an open Commission meeting to adopt rules that require the stock exchanges to maintain listing standards regarding independent compensation committees and advisors.

More on "The Burden of XBRL Costs on Smaller Companies"

I received quite a few emails in reaction to my recent blog regarding the costs for smaller companies to comply with the SEC's upcoming mandatory XBRL filing requirement. Many folks believe I underestimated the costs that companies will bear. This is borne out by the poll results on XBRL costs, with 16% saying costs were as expected; 51% saying they were higher than expected and 16% said they were so high that they wish they weren't public (none said costs were lower than expected and the rest said "what me worry?).

Hallador Energy CFO Andy Bishop forwarded me his letter to the SEC, which explains why he believes smaller companies should be exempted from mandatory XBRL. And Daniel Roberts sent me his blog entitled "Is XBRL expensive?" that analyzes the cost issue nicely, including 5 questions that companies should be asking XBRL vendors. I'm sure we haven't heard the end of this issue...

Check out the piece in "The Accounting Onion" entitled "Has India Abandoned IFRS?"

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 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:

- TIAA-CREF Updates Governance Guidelines: No Big Deal
- Practice Pointers: Adjournments of Annual Meetings
- Voting by Mobile Devices & iPads in Corporate Elections
- Retail Proponents Survive Eligibility Challenges
- More on "Benchmarking the Number of 'Executive Officers'"

- Broc Romanek

March 25, 2011

Congress and the SEC's Budget: Desperately Seeking Mary

One of my favorite movies from the '80s was "Desperately Seeking Susan" and not because I played with Rosanna Arquette in the sandbox when I was a tot or because Madonna was tremendous in the movie. It was just a great movie.

With Congress placing a big fat target on the SEC's backside, the movie came to mind because they have called SEC Chair Mary Schapiro to testify so many times in recent weeks that I'm not sure I can accurately count them all (try counting them for yourself; see Dave's recent blog on the budget fight). It's clear that Congress intends to defang the SEC as much as it can - and it surely couldn't come at a worse time given all the Dodd-Frank rulemaking it has on its plate (not to mention a lack of agency resources and the fact that the recent financial crisis is not in the distant background yet).

I certainly agree that the SEC can be improved, but how does Congress really expect senior management over there to do anything when they need to spend all their time testifying (or prepping to testify)? It's beyond ridiculous. And it certainly sends the wrong message to mainstream journalists who don't know better and feed hungrily off the "news" it gets from SEC Inspector General David Kotz, who has become too important in the eyes of those outside the agency. An all-powerful IG can't be good for anyone in my opinion.

A member sent me this blog from the Project on Government Oversight entitled "SEC Employees Cited for Misconduct Rarely Face Punishment" along with this note:

The parallel of this to corporate whistleblowing is likely lost on POGO (and Congress). The rare exception (an actual violation) defines the rule and drives the process. Lots of noise, not much substance. Many complaints motivated by office politics. A presumption of organizational guilt (because organizations are perceived to be inherently bad). If the organization doesn't investigate every allegation, it will be criticized - even though it's demonstrably a poor use of scarce resources. Imagine if police work was done in the same way. They'd need to formally investigate every crackpot allegation.

Maybe Don Henley's "All She Is Forced to Do Is Testify" is a better analogy...

A Word about David Becker: End the Witch Hunt!

And don't get me started about the recent Congressional hearings (with more hearings to come) about former SEC General Counsel David Becker and his deceased mother's Madoff investments. I'm not going to even bother reciting any of the outlandish claims made in a frivolous lawsuit or the theater that Congress is now engaged in. I'll just note that David returned to the SEC in a time of need to serve his country two years ago - leaving a handsomely paid partnership - and this is how he is repaid? I guess no good deed goes unpunished.

Talk to anyone who has real knowledge about the SEC (not the mass media who refers to David as a former "chief council") and you'll not find a single person who doesn't think that David is among the most honorable people you'll ever meet.

Sorry for all the Friday ranting. Just had to get all this stuff off my chest. Back to straight reporting next week. And a side note: the SEC yesterday hired Anne Small as Deputy General Counsel - Anne hails from WilmerHale, one of many that have been hired from that firm during the past decade or so (egs. Meredith Cross, David Becker, Steve Cutler, Mark Cahn, Joseph Brenner).

More on "The Mentor Blog"

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

- Expanded Whistleblower Regulations: A Potent Combination of IRS Strategies
- SEC's Enforcement Provides Further Guidance on Cooperation Credit
- Board Communications: Using "In-House" Director Email Addresses
- FASB & IASB Joint Exposure Draft: Offsetting Assets & Liabilities
- Shortcomings of Chinese Listings in the US

- Broc Romanek

March 24, 2011

Say-on-Pay: A Fourth Failed Vote (and Perhaps a Fifth If You Do the Math)

Yesterday, as reported in this Bloomberg article and ISS's Blog, Hewlett-Packard became the fourth company to fail to receive majority support for its say-on-pay, with 48% voting in favor. The company hasn't yet filed its Form 8-K - when it does, I will add it to our list of Form 8-Ks filed by companies that fail to earn SOP majority support.

And yesterday, I blogged that Hemispherx Biopharma issued this press release announcing that it garnered 51% support for its say-on-pay ballot item. Well, a few members reviewed the company's proxy statement and Form 8-K and concluded that the company didn't do its math properly.

These members noted the proxy disclosure that "abstentions will have the same effect as a vote against the proposal" - but that the company didn't follow that formula when calculating the vote for its Form 8-K. Without getting into the issue of whether the proxy disclosure is correct, it seems like the company didn't follow the standards disclosed in its proxy statement, an important point to consider as I wrote about in the July-August 2010 issue of The Corporate Counsel (in the section entitled "How to Calculate Voting Result Percentages: Read Your Bylaws (and Compare with Your Proxy)." I do believe this problem is not just an isolated circumstance - as there still is a significant amount of confusion regarding the application of voting standards and the calculation of the vote itself.

Parsing Prudential's 2011 Proxy Statement

Last week, I repeated Mark Borges' analysis of General Electric's proxy statement and all the innovative things they did. A few days ago, Prudential filed its proxy statement and it also contains quite a few innovative items (as could be expected since Peggy Foran's arrival at the company last year), including:

- 3-page "State of the Union" letter, describing the work the board had done over the previous year on compensation and governance; note this letter is from the board, not the CEO

- Two-page summary at the beginning (pages 7-8) that includes business highlights and summary compensation information

- Highlight boxes on sustainability (pg. 24), corporate citizenship (pg. 23) and shareholder engagement (pg. 22)

The entire proxy statement is filled with color and charts and serves as a good example of an attempt to make disclosure inviting for shareholders. And don't forget Peggy's novel "Totes for Votes" campaign to bring in more retail votes, as she recently discussed during our "Conduct of the Annual Meeting" webcast.

Another Clawback Case: Beazer Homes

Here's news from John Savarese and Wayne Carlin drawn from this Wachtell Lipton memo:

The SEC recently announced a settled enforcement action in which it obtained a "clawback" of prior compensation and stock sale profits from a CEO pursuant to Sarbanes-Oxley Section 304. SEC v. McCarthy, No. 1:11-CV-667-CAP (N.D. Ga. March 3, 2011). This case marks the second time the SEC has obtained this type of relief without alleging that the CEO in question personally engaged in any wrongdoing.

Section 304 requires a CEO or CFO to return incentive-based compensation to an issuer when a financial restatement occurs "as a result of misconduct. . . ." The SEC's position is that the issuer's "misconduct" alone is a sufficient predicate for this relief, and that it need not establish any personal misconduct by the CEO or CFO. The SEC's position is supported by the one federal district court decision that has been rendered on this issue. SEC v. Jenkins, 718 F. Supp. 2d 1070 (D. Ariz. 2010).

The defendant in SEC v. McCarthy is the CEO of Beazer Homes USA, Inc. Beazer had previously restated its financial statements and entered into a settled cease-and-desist proceeding with the SEC, as well as a deferred prosecution agreement with the Department of Justice. The SEC also previously charged the company's former chief accounting officer with violations of the antifraud provisions of the federal securities laws, but the CEO was never charged with any misconduct in any of these proceedings.

Under the Section 304 settlement, the CEO agreed to reimburse to the company $6,479,281 (comprised of bonus payments plus certain stock sale proceeds); 40,103 restricted stock units; and 78,763 shares of restricted stock. Although the SEC has been silent concerning its general approach to calculating the amounts recoverable under Section 304, this settlement may reflect a recognition that not all proceeds from the sale of stock are appropriately reimbursable. The SEC's complaint alleges $7.3 million in stock sale profits during the relevant period, yet the portion of the settlement attributed to stock sale proceeds is $772,232.

Finally, the SEC has never publicly articulated the criteria it applies in determining whether or not to pursue such no-fault Section 304 relief. Greater transparency about the Commission's criteria would be in the public interest. Now that the SEC has had some initial success in establishing that it can recover substantial sums from individuals who are not accused of any wrongdoing, it would be appropriate for the SEC to provide some explanation concerning when it will seek this extraordinary form of relief.

Meanwhile, as noted in this Bloomberg article, the directors of Beazer Homes have been sued alleging that they failed to act in the best interest of shareholders when the directors approved pay raises for the company's executives while Beazer had $34 million in losses.

- Broc Romanek

March 23, 2011

Say-on-Pay: A Third Failed Vote (and Almost a Fourth)

Yesterday, Shuffle Master filed this Form 8-K to reveal its become the third company this proxy season to fail to achieve a majority vote for say-on-pay as only 45% of shareholders voted in favor (here's the other two). And Hemispherx Biopharma revealed it almost became the fourth with only 51% support as reflected in its Form 8-K.

In his "Proxy Disclosure Blog," Mark Borges gives us the latest say-when-on-pay stats: with 739 companies filing their proxies, 44.3% triennial; 3.4% biennial; 48.8% annual; and 3.4% no recommendation. As Dave blogged a few days ago, the annuals have now passed the triennials...

PCAOB Ramps Up Project to Rethink the Auditor's Report

Yesterday, the PCAOB held a public meeting regarding its project on how best to improve the auditor's report. Here's the press release - and statements from Chair Doty and three other PCAOB board members (and here's related presentation slides from a meeting with the PCAOB Investor Advisory Group last week).

It was a packed house as this project could lead to the most significant changes in reporting by auditors since the 1930's. A concept release is expected this Summer. This project is long coming, and comes on heels of recommendations made in October 2008 by the US Treasury Advisory Committee on the Auditing Profession (recommendations were also made in the 1970's by the "Cohen Commission" but were not fully acted on).

SCOTUS Supports Plaintiff's Bar in Matrixx

Yesterday, the US Supreme Court decided Matrixx Initiatives Inc. v. Siracusano, a case examining whether failure to disclose non-statistically adverse data can give rise to fraud claims. The Court upheld a decision by the Ninth Circuit Court of Appeals, determining that investors stated a claim and adequately pleaded materiality under the federal securities laws. Here's analysis from Kevin LaCroix's "D&O Diary Blog." And we'll be posting memos as they arrive in our "Materiality" Practice Area (such as this Cooley memo, Simpson Thacher memo and this Morrison & Foerster one).

- Broc Romanek

March 22, 2011

Big Changes in the OTC Marketplace Dynamics

Here's news from Bob Dow of Arnall Golden Gregory:

During this February and March, a large number of companies have exited from the OTC Bulletin Board (OTCBB). Many of these have shifted to the OTCQB platform operated by the organization formerly known as "Pink Sheets," which is now called "OTC Markets."

The companies were frequently caught by surprise because the move was involuntary and not well publicized by OTCBB or the market makers. Unbeknownst to the company, the sponsoring market maker ceased quotation on OTCBB and began anew on OTCQB. Without a market maker on OTCBB the company's stock would no longer be eligible to be quoted on OTCBB. In some cases, the reporting of trades on popular financial web sites was not transitioned smoothly due to the sudden unannounced change. Initially, OTCBB reported some of the stocks' deletion as due to "Failure to comply with Rule 15c-2," which could have been taken to imply some sort of intentional violation of the securities laws by the company. In mid-February, the OTCBB started reporting the deletions as "Ineligible for quotation due to quotation inactivity." Here's a listing of deletions.

Since the 1990s, OTCBB has been a popular medium for trading stocks that were not listed on a stock exchange. Companies are not really "listed" on OTCBB. Each company's stock is quoted on the OTCBB if a market maker begins posting quotes for the stock there. OTCBB is operated by FINRA, but in September 2010, FINRA entered into an agreement to sell the OTCBB to the investment banking firm Rodman & Crenshaw. In 2010 FINRA also increased the fees it charges market makers to quote stocks on OTCBB, to $6.00 per security per month. OTCQB does not charge any such fee.

So early in 2011, a few market makers began quietly moving their quotations to OTCQB. At some point a critical mass was achieved and the herd started moving rapidly in February. By some accounts, more than 800 companies have left the OTCBB so far in 2011. One wonders if this is what FINRA and the Rodman firm had in mind when they agreed to the sale. It seems like the value of the franchise could be diminished if there is a sufficient run-off. Here are others that have commented on this development: Reverse Merger Report and RedChip Companies Blog.

Pre-Proposal Comment Submission: If the SEC Builds It, Will They Come?

It's been a while since the SEC made it as simple as an email to submit a comment letter on a rule proposal, which in turn have raised the number of "casual" comments submitted from the men & women "on the street." Lately, I have been wondering if the Dodd-Frank proposals got more of these types of comments than usual because of their high profile nature? Particularly since the SEC took the unusual step soon after Dodd-Frank was enacted to allow for comment on its upcoming rulemakings, even before actual proposals were out.

The answer is "not really." Although a high percentage of comments posted in the SEC's pre-proposal portal are from individuals, there are only a handful for most of topics as many of the "regulars" who submit comments didn't bother at such an early stage (with some exceptions such as conflict minerals).

I do note that one person - Robin McLeish - submitted a comment letter on a majority of the topics in the portal. Her comment letters vary but here are two of them as examples:

1. On the "Office of Minority and Women Inclusion": "Hi and thanks for the chance to comment. I saw this article on CNN Money website. I feel that the Treasury should be in charge of the money and it should be backed by mineral assets. The fed can set interest rates."

2. On "Exemptions for Certain Advisors": "Hi and thanks for the chance to comment. I saw this article on CNN Money website. I feel that no one should be exempt from following the laws of the constitution. Those that do not in this one nation under God will have to answer to him on judgment day and I will be there pointing my finger at them."

Conduct of the Annual Meeting

We have posted the transcript from our recent webcast: "Conduct of the Annual Meeting."

- Broc Romanek

March 21, 2011

SEC Budget Fight: Looking Ahead to 2012

The SEC's ongoing budget battle hit home for me last week, when one night I had a dream that I was still working at the SEC and then was fired due to budgetary constraints (yes, I do sleep on occasion). While two former supervisors fired me in rapid succession, workers turned my office into a storage room (presumably to store whistleblower complaints). I am not sure I want to do any Freudian or Jungian analysis of this dream, but suffice it to say that with government shutdowns being averted at the last minute on a fairly frequent basis, the budget of the SEC and other government agencies remains front and center, perhaps even in the subconscious.

Even while Congress has yet to get its act together for the SEC's fiscal 2011 appropriation, talk continues regarding the 2012 appropriation for the SEC. In testimony last week before the Subcommittee on Financial Services and General Government of the House Committee on Appropriations, Chairman Schapiro continued the call for a significantly expanded SEC budget in 2012, with a $1.407 billion appropriation that represents a $264 million increase over the continuing resolution level under which the SEC is currently operating. (Note that under Dodd-Frank, the SEC's appropriation is assured to be deficit-neutral, because the SEC is required to adjust the fee rates so that the amount collected will match the total appropriation - not quite self-funding, but getting closer.)

If the SEC should get its 2012 appropriation, it plans to add a whopping 780 positions, with 60 percent of those positions dedicated toward implementing Dodd-Frank. Outside of Dodd-Frank, Corp Fin would benefit from 37 new positions dedicated toward more frequent disclosure reviews of the largest companies.

With no clear end in sight for the 2011 budget, perhaps the 2012 appropriation is but a dream - and hopefully a dream that ends up better than mine did.

Annual Frequency Pulls Ahead in Say-on-Pay March Madness

If your brackets had predicted "Every One Year" as the winner of the most popular Say-on-Pay frequency selected by stockholders under the Dodd-Frank Act mandated Say-on-Frequency vote (otherwise known as the "final four" choices - one year, two years, three years or abstain), then the news from Mark Borges's Proxy Disclosure Blog on is looking pretty good to you. In his weekly Say-on-Pay Roundup, Mark notes: "The big news this week is that annual vote recommendations for future "Say on Pay" votes moved past triennial vote recommendations for the first time this year. I logged 225 new filings of proxy statements complying with the shareholder advisory vote requirements of the Dodd-Frank Act.

This brings the total for the year to 739 filings." While perhaps it is still too early to tell, a stockholder voting trend that has clearly favored an annual Say-on-Pay vote may be influencing the recommendations that boards are making with regard to the frequency of the vote. One recent example that Mark cites which caught my eye is a company where the triennial vote nudged out the annual vote by the narrowest of margins (49.98% for triennial versus 49.36% for annual), but yet the board determined to go with an annual Say-on-Pay vote.

Developments in Debt Restructurings & Debt Tender/Exchange Offers

We have posted the transcript for's recent webcast: "Developments in Debt Restructurings & Debt Tender/Exchange Offers."

- Dave Lynn

March 18, 2011

SEC Proposes to "Readopt" Rules 13d-3 and 16a-1

In what might be one of the more unusual rulemakings coming out of the Dodd-Frank Act, yesterday the SEC proposed to readopt relevant portions of Rules 13d-3 and 16a-1 so as to preserve the status quo with those rules as they apply to security-based swaps following the July 16, 2011 effective date of Exchange Act Section 13(o), which was added by Section 766 of the Dodd-Frank Act. Section 13(o) said that "[f]or purposes of this section and section 16, a person shall be deemed to acquire beneficial ownership of an equity security based on the purchase or sale of a security-based swap, only to the extent that the Commission, by rule, determines after consultation with the prudential regulators and the Secretary of the Treasury, that the purchase or sale of the security-based swap, or class of security-based swap, provides incidents of ownership comparable to direct ownership of the equity security, and that it is necessary to achieve the purposes of this section that the purchase or sale of the security-based swaps, or class of security-based swap, be deemed the acquisition of beneficial ownership of the equity security." The proposing release provides an excellent discussion of the framework for determining beneficial ownership, and also discusses the application of that framework to security-based swaps. The proposing release does note that the use of security-based swaps "has not been frequently disclosed in Schedule 13D and 13G filings."

The SEC Staff consulted with the Federal Reserve, the Office of the Comptroller of the Currency, the Farm Credit Administration, the Federal Housing Finance Agency, the Federal Deposit Insurance Corporation and the CFTC. Following these consultations, the SEC determined to propose to readopt, without any changes, portions of the rules enabling determinations of beneficial ownership to be made for purposes of Exchange Act Sections 13(d), 13(g) and 16 of the Exchange Act. The proposal to readopt the portions of the rules is intended to clarify that, after the effective date of Exchange Act Section 13(o), security-based swaps will remain within the scope of the rules "to the same extent as they are today."

Comments on the proposed readoption rulemaking are due April 15, 2011.

A "Deep Thoughts" Shareholder Proposal No-Action Letter

Many of the shareholder proposal no-action letter responses coming out of the Staff at this time of year can seem very company-specific or repetitive, so it is exciting to occasionally come across a letter that delves into some new topics. This recent response to Alaska Air is definitely one of those letters. It goes deeply into the Rule 10b-5 private cause of action, damages, and the anti-waiver provision of the Exchange Act. In getting a favorable (i)(2) response from the Staff, Alaska Air was ably assisted by my radio show co-host Marty Dunn at O'Melveny & Myers. This letter proves yet again that the Staff's job in dealing with shareholder proposals is not by any means easy!

March-April Issue: Deal Lawyers Print Newsletter

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

- Never Say Never, But, You May Have to Wait Two Years: Delaware's Airgas Decision
- How Process Flaws Can Rewrite Your Merger Agreement: Process Flaws, Remedies and Del Monte
- The Validity of Stockholders' Representatives after Aveta
- Tips for PE Firms Participating in Stalking Horse Auctions

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.

- Dave Lynn

March 17, 2011

A Dodd-Frank Start-Up: The CFPB

In testimony yesterday before the House Subcommittee on Financial Institutions and Consumer Credit of the Committee on Financial Services, Special Advisor to the Treasury Secretary for the Consumer Financial Protection Bureau Elizabeth Warren provided an overview of the progress to date in establishing the Consumer Financial Protection Bureau, the goals of the CFPB and its approach to regulating consumer financial products, such as mortgages and credit cards.

On the CFPB's overall approach, Warren indicated that the new bureau will not be principally focused on creating a raft of new regulations governing consumer financial products. Rather, it appears that the bureau will be taking (at least for now) more targeted steps toward increasing transparency and reducing paperwork for mortgages and credit cards, all towards increasing consumer understanding of these financial products. Warren also described the financial education efforts of the CFPB and a consumer response center that will receive consumer complaints. The CFPB has a direct supervisory role with respect to non-bank financial companies that provide consumer financial products and services, and is ramping up supervision and enforcement efforts.

It appears that the CFPB has now put in place most of its leadership team, bringing in people with diverse professional backgrounds. In true start-up mode, the CFPB consolidated its offices last fall after working out of a variety of locations, and is planning a new office across the street from the White House complex that will feature public spaces where consumer information and financial education materials can be displayed.

While the CFPB will at some point be a significant new regulatory force to be reckoned with, it appears that much effort has been done to make the bureau more palatable to the financial services industry, without necessarily watering down the mission. As budget battles rage on, we shall see whether it will ultimately get the resources to move from Dodd-Frank start-up to a full-blown regulator.

A Disclosure Challenge: What to Say About the Economy Now?

An area of disclosure that presented some challenges during 10-K season this year - and that will continue to present challenges in upcoming reports - is what exactly to say in risk factors and MD&A about the state of the economy. As a result of the financial crisis and recession, over the past few years many issuers have included very robust risk factors and MD&A disclosure about the state of the economy and credit markets, and the impact (or potential impact) that these developments had on business and financing activities. Strong performance across many sectors in the latter half of 2010, thawing credit conditions and increasingly robust capital markets, as well as an acknowledged end to the recession, all contributed to significantly increased optimism by the time 10-Ks for calendar year-end issuers rolled around.

However, on the disclosure front, that optimism has been tempered to a great degree, with many issuers acknowledging the end of the recession and improving conditions for financing, but hedging that disclosure with significant warnings that the economic improvements may not continue (and that the recession might be back), as well continued uncertainty about the state of lending and capital market conditions. This disclosure approach will no doubt continue throughout the year, even if business and financing conditions continue to improve.

One area that issuers must continue to be mindful of is the consistency of the discussion of trends (such as for the economy and financing) on earnings calls and in earnings releases as compared to what ultimately gets disclosed in the 10-K and the 10-Q. The Staff continues to ask about the consistency of information presented in the course of its filing reviews, in an attempt to steer 10-Ks and 10-Qs away from being merely "compliance" documents.

Conduct of the Annual Meeting

We have posted the transcript for our recent webcast: "Conduct of the Annual Meeting."

- Dave Lynn

March 16, 2011

Parsing General Electric's 2011 Proxy Statement

If you are not among the many who have inputted their email address to receive notification of Mark Borges' analysis of compensation disclosures as they are filed with the SEC, you are missing out. Here is the latest from Mark from his "Proxy Disclosure Blog" on (you can input your email address on the left side of the blog to receive notifications):

Who says that there's nothing new in proxy statement design and content? Just when you think you've seen it all, companies come along with an innovative idea that has the potential to catch on big (sort of like the iPad).

I'm referring to General Electric's proxy statement, which was filed on Monday. GE starts its proxy statement with a four-page "proxy summary." It's a CD&A Executive Summary on steroids; that is, it summarizes all of the key information from the proxy statement, not just executive compensation information related to its "Say on Pay" proposal.

As such, it covers the following topics:

- the date, time, and location of the Annual Meeting of Shareowners;

- the meeting agenda;

- the matters to be voted on at the meeting. along with Board of Directors' voting recommendation and a cross-reference to where the item is addressed in the proxy statement;

- the nominees for the Board of Directors, including summary information on their occupation, qualifications and experience, independence status, committee membership, and other directorships;

- the identity of the company's auditors, as well as a breakdown of their audit and non-audit-related fees for 2009 and 2010;

- the shareholder advisory votes on executive compensation and the frequency of future shareholder advisory votes on executive compensation (by the way, GE's Board of Directors is recommending that future "Say on Pay" votes be held annually;

- a compensation elements table, with a brief description of the form and terms on each principal compensation component;

- a brief description of the key executive compensation actions and decisions for 2010; and

- a 2010 compensation table for the company's Named Executive Officers, which is similar to the required Summary Compensation Table, but also provides a "Total Realized Compensation" column to show to difference between reported and realized pay in 2010.

It's probably a natural progression in the evolution of proxy statements, as this year (perhaps for the first time) we've been forced to step back and look at the document as a communication tool first and foremost. I'm currently working with a couple of companies that are planning to do something similar in their proxy statements, so it's obviously an idea that many companies have seized upon as they respond to the new shareholder advisory vote requirements of the Dodd-Frank Act.

It's also a concrete example of the often-discussed concept of "layered disclosure." While not a substitute for the substantive content of the proxy statement itself, it offers readers an additional way to obtain information about the annual meeting and related matters. I expect that some investors will be perfectly satisfied to rely on this summary as their primary (if not only) source of information.

At the same time, they have access to the full proxy statement for further detail. And, in addition to the full Compensation Discussion and Analysis, they have an Executive Summary for reference (as in past years, GE focuses on the details of its CEO's compensation to illustrate its approach to "ay for performance").

GE is the first company out of the gate with this disclosure and has, as usual, done an excellent job in presenting this new item. I expect that it may become a template that other companies (particularly GE's peers) use, tailored to their own specific circumstances.

Join Mark, Dave Lynn and Ron Mueller for this webcast - "The Latest Compensation Disclosures: A Proxy Season Post-Mortem" - that I just calendared for June 21st on

The SEC's Focus on Loss Contingency Disclosure

Lately, I've blogged several times about the controversy over loss contingency disclosures (eg. this recent blog on audit response letters). Here is an excerpt from this Cooley alert by Cydney Posner:

You might be interested in this article from The New York Times, which discusses the more extensive 10-K disclosure provided by big banks regarding their potential litigation and other legal exposure. Not only are the numbers enormous (e.g., $4.5B for JPMorgan), but what's most interesting is that there are so many numbers disclosed at all. The quantitative specificity was apparently prompted by 2010 "Dear CFO" letters from the SEC reminding the banks that they are required to make disclosures when there is a "reasonable possibility" of a loss. The article reports that the SEC actually "followed up to make sure they would provide deeper information. One executive remarked the agency's reminders were, put politely, forceful." Only Morgan Stanley decided not to provide a catch-all number, opting instead to provide only its estimate for two separate lawsuits with potential aggregate exposure of $518M.

While attention may for the moment be focused on the big banks, there's no reason to assume that the interest in more quantitative disclosure will stop there. In several fairly recent presentations (in addition to one aimed specifically at financial institutions), the accounting staff indicated that the absence of historical disclosure regarding "reasonably possible" losses could well be subject to comment, particularly when settlements are disclosed in future periods.

The SEC Staff on International Issues

We just posted the transcript from our recent webcast: "The SEC Staff on International Issues."

Poll: How Many Chiefs of Corp Fin's Office of International Corporate Finance?

The webcast noted above featured the current and a former Chief of Corp Fin's Office of International Corporate Finance. Since the Office's formation in the early '70s, please guess how many Chiefs have served (including the current one, Paul Dudek):

- Broc Romanek

March 15, 2011

Our Conference Lineup: Say-on-Pay Intensive

We have announced the line-up for our annual package of executive pay conferences to be held on November 1st-2nd in San Francisco and by video webcast: "Tackling Your 2012 Compensation Disclosures: The 6th Annual Proxy Disclosure Conference" and "The Say-on-Pay Workshop Conference." Save 25% by registering now at our early-bird discount rates.

As you can see from our agendas, this year's pair of Conferences (for one low price) will be workshop-oriented more than ever before in an effort to provide the practical guidance that you need in the new say-on-pay world that we live in:

1. November 1st's "Tackling Your 2012 Compensation Disclosures: The 6th Annual Proxy Disclosure Conference" includes:

- "Say-on-Pay Disclosures: The Investors Speak"
- "Say-on-Pay: The Executive Summary"
- "Drafting CD&A in a Say-on-Pay World"
- "The In-House Perspective: Changing Your Processes for 'Say-on-Pay'"
- "Getting the Vote In: The Proxy Solicitors Speak"
- "Handling the New Golden Parachute Requirement"
- "The Latest SEC Actions: Compensation Advisors, Clawbacks, Pay Disparity & Pay-for-Performance"
- "Dealing with the Complexities of Perks"
- "Conducting - and Disclosing - Pay Risk Assessments"
- "Say-on-Frequency & Other Form 8-K Challenges"
- "How to Handle the 'Non-Compensation' Proxy Disclosure Items"

2. November 2nd's "The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference" includes:

- "The Say-on-Pay Process Playbook: Breaking It Down"
- "Say-on-Pay: How to Interpret Your Voting Results"
- "Say-on-Pay: How to Best Tell Your Story"
- "Say-on-Pay Shareholder Engagement: What's Working - and What Isn't"
- "How to Work with (or Against) the Proxy Advisors: Navigating the Say-on-Pay Minefield"
- "Pay-for-Performance Workshop: How to Properly Implement"
- "Plan Design Workshop: Hot Button Say-on-Pay Issues and More"
- "The Say-on-Pay Lightning Round: 50 Ideas to Implement Now"

In his "Proxy Disclosure Blog," Mark Borges gives us the latest say-when-on-pay stats: with 514 companies filing their proxies, 46.3% triennial; 4.1% biennial; 44.9% annual; and 4.6% no recommendation.

House Republicans Seek to Repeal/Modify Four Dodd-Frank Provisions

As noted in this Market Watch article, House Republicans have been working on four separate discussion draft bills to repeal or change parts of Dodd-Frank and one draft bill to ease smaller company capital raising that is not Dodd-Frank related (here's a piece from "The Hill" and a Reuters article). The article lists these 5 topics that would be addressed through the bills:

- No longer make credit-ratings firms liable if their initial ratings turn out to be faulty

- Exempt companies that use derivatives to hedge commercial risk from new requirements that they route their transactions through clearinghouses

- Exempt private-equity fund managers from registering with the SEC

- Overturn requirement requiring companies to disclose the median annual total compensation of all employees and calculate a ratio of how employee compensation compares with that of the CEO

- Increase the offering threshold for companies that don't need to register with the SEC to $50 million from $5 million

My Final Four Predictions...

Butler over VCU in final, North Carolina and Arizona. And for the record, I have an #11 seed for the Elite 8 too (Gonzaga) and #12 Richmond and #13 Oakland in the Sweet 16 (that's four double-digit teams for the Sweet 16). And I have Kentucky beating Ohio State to make the Elite 8 also...

- Broc Romanek

March 14, 2011

How You Find New Directors: "True Independence" Under the Microscope

I recently got this from an anonymous member (here are related thoughts from Cydney Posner and Marty Lipton):

You may have seen the stories regarding ISS' recommendation that shareholders withhold against the entire Hewlett-Packard nominating committee for the way new directors were selected. I haven't seen the ISS report, but the news stories (eg. WSJ article) probably describe it pretty well.

At issue seems to be the fact that five new directors of H-P were identified by an ad hoc committee, which according to H-P's proxy statement "consisted of the CEO and three non-employee directors, which was formed in November 2010 to assist in identification of new director candidates and to facilitate the process of evaluating those candidates as potential directors."

ISS and Glass Lewis criticize the addition of the CEO to this committee, since only the independent directors of the Nominating and Governance Committee are supposed to responsible for director nominations. While CEOs play a role in nominations, it does seem unusual to formally include the CEO on the search committee. It likely also didn't help that, as according to this Bloomberg article, many of the new directors had connections to the CEO. None of those relationships are disclosed in the proxy, as much of it relates to the CEO's former company.

In additional soliciting materials filed on Friday, H-P responds to ISS's recommendation.

More on "Should the SEC Be Reorganized? If So, How?"

On Thursday, the SEC released the 263-page Congressional study from the Boston Consulting Group that I blogged about a few weeks ago regarding the SEC's organization and operations, as required by Section 967 of Dodd-Frank. Here's Chair Schapiro's statement on the study. Here's analysis of the consultant's report from Vanessa Schoenthaler's "100 F St. Blog."

So how did the study address my original question of reorganizing the SEC? The section of the study regarding "reshape of the organization" begins on page 84. As Vanessa notes, there is a lot of "consultant speak" in the study (eg. "layer-by-layer redesign and role chartering exercise") and I get the sense that this study was halfway done when BCG got hired as they probably make the same types of recommendations to a lot of their clients (who probably all need to make similar changes, so the recommendations fit).

And I don't really blame BCG for making what seem like general recommendations as I imagine it's awfully difficult to come in and really learn an organization and make sweeping suggestions within a relatively short period of time. So I read the study with that bias in my mind. And then I admit I'm further biased having been forced to participate in a similar study in a prior life (which was not at the SEC). In that situation, the consultant came in, took up six months of valuable senior management time - and then got paid $20 million to make suggestions that those "in the know" could have made in 15 minutes. I don't know if that is the case here - but I do have that bias too.

So with so much bias weighing on me, it's all I could do to scan the 263 pages to see if something leaped out at me that felt "specific" - but nothing jumped out before I decided to go on with my day and leave the real analysis to those out there with real organization management experience. I'm sure the study is fine and could lead to meaningful change, I'm just not the person to tell you what that is...if you are, drop me a line!

More on "The Mentor Blog"

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

- What Needs to be Disclosed About Data Privacy and Security in SEC Filings?
- FINRA Proposes New Private Placement Requirements
- Delaware Supreme Court Reverses Precluding Books & Records Inspections After Commencement of Derivative Litigation
- Delaware Supreme Court Dismisses Claims against PricewaterhouseCoopers
- More on "Facebook's Raw Deal"

- Broc Romanek

March 11, 2011

Lynn Turner on the Setting of Accounting Standards

Here are some thoughts from former SEC Chief Accountant Lynn Turner:

Recently, the Council for Institutional Investors submitted this letter to the IASB Trustees. It points out a couple of important issues. First, there is a growing group who are pressing for the accounting standard setters to have to consider financial stability when writing their standards. For example, the IASB and FASB would need to consider if it were more important to have the financial statements actually reflect the economics of the transactions they had entered into (commonly referred to as "representational faithfulness") or would have to let companies (eg. banks) smooth their earnings in down times and avoid reporting losses so as to try to create an image of financial stability.

In the past, standard setters have attempted to be neutral and not reflect the desires of macro economic policy. That is because when financial statements do not reflect faithfully what a company has done, it results in investors allocating capital to companies that probably should not receive it - and away from those that should - reducing the returns investors can achieve and market efficiency.

The CII letter points out that convergence to a single set of accounting standards cannot occur without consistent, uniform enforcement of the standards, something that does not exist today - and the CII letter also points out that independent funding for the IASB is necessary, again something that does not exist today.

For some historical perspective, consider this article from the 1980s by a retired Deloitte Senior Partner and retired member of the FASB and its predecessor discussing this topic and the implications of what some propose today. It notes how some, such as banks, have been arguing for eliminating neutral accounting standard for as long as accounting has been around in the United States.

Are Auditors Becoming Irrelevant?

Here's an interesting article from entitled "Are Auditors Becoming Irrelevant?" Jim Peterson has been consistently pounding away at the theme that "the audit model is broken" in his "Re:Balance Blog."

Spencer Stuart's 25th Annual Board Study

Recently, Spencer Stuart issued its 25th annual study of S&P 500 boards - that certainly is a long time for corporate governance given it's only become a well-known term for the past decade. Obviously, much has changed over this period - in 1986, the focus was on the "outsider/insider composition" of the board rather than the larger concept of "independence." The average board size was 15 with a 3:1 ratio of outsiders to insiders. Today the average board size is 11 with a 5:1 ratio of independents to non-independents.

In 1986, only three boards of the 100 reviewed had the chairman/CEO as the sole insider. Today, the chairman/CEO is the only insider on more than half of S&P 500 boards and 40 percent of boards split the chair and CEO roles with 19 percent of chairs truly independent. There are plenty of other interesting stats in the study...

- Broc Romanek

March 10, 2011

Crowdfunding: A New Avenue for Venture Capital

If you haven't heard of crowdfunding, you probably don't do venture capital work. As noted in Wikipedia, "crowd funding (sometimes called crowd financing or crowd sourced capital) describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations. Crowdfunding occurs for any variety of purposes, from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns, to funding a startup company or small business."

Recently, the SBE Council sent this letter to Corp Fin to encourage the SEC to adopt a new "small offering safe harbor/regulation modification" to facilitate crowdfunding. [Pet peeve for me - when someone refers to the SEC as the "Security and Exchange Commission".]

Finally, this article lists these nine crowding sites:

- KickStarter
- RocketHub
- Quirky
- Fundbreak
- CatWalkGenius
- Fans Next Door
- IndieGoGo
- CoFundos
- Profounder

As noted in the "Both Sides of the Table" Blog, one hot site is AngelList, which pairs start-ups with angel investors (and is operated by the same folks that write for Venture Hacks.

Study: The Rise of Social Shareholder Proposals

In this podcast, Heidi Welsh of the Sustainable Investments Institute analyzes the results from a recent forecast of the "social" side of proxy season from a report entitled "Proxy Preview 2011: Helping Foundations and Endowments Align Investment and Mission," including:

- What is the Sustainable Investments Institute (Si2)?
- Why did Si2 and As You Sow jointly prepare this new shareholder proposal report?
- What were the report's major findings?

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 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:

- Second Circuit Rules on MD&A Trend Disclosure Requirements
- 2011 Proxy Season Field Guide
- An Early Look at Social Issues Proposals
- More on "A Proxy Is Not A Vote and Why It Matters"
- Governance Proposals Face Various Challenges

- Broc Romanek

March 9, 2011

Concerns Raised with SEC about Upcoming XBRL Filing Crunch

In his "IR Web Report," Dominic Jones reports about how "some in the industry expect the SEC will be forced to modify some of the more onerous detailed tagging requirements and extend the limited liability treatment of filings. However, some relief may also come as new technologies and service providers emerge. The Committee on Corporate Reporting of Financial Executives International (FEI) has written to SEC chair Mary Shapiro expressing concern that the XBRL filing requirements have led to delays in companies releasing reports to investors and compromised the accuracy of company filings." Time is running short for the 8000 companies that will begin filing XBRL documents with the SEC in July.

And I don't think companies will be given a postponement as noted in this blog entitled "Hoping for an XBRL break? Don't hold your breath." Finally, it's worth reading Dominic Jones' report about how a "Patent casts doubt on investor access to XBRL."

Although not entirely clear, it appears that the SEC Staff recently updated its "Staff Interpretations and FAQs Related to Interactive Data Disclosure." It's not clear because "last modified" dates have not been affixed to each FAQ (like the Staff's other CDIs have) and there is a note at bottom of this FAQs page that says it was last modified in December. However, the FAQs were recently reorganized and I do believe B.13 is new - and E.19 and 20 probably are too since they do not have a "formally" tag like the others...

How Law Firms Can Provide XBRL Services

In this podcast, Raul Varela of Rivet Software provides some insight how law firms can be involved in providing XBRL services, including:

- Can law firms provide XBRL services to their clients, just like some provide EDGARization services?
- What kind of options do law firms have to incorporate XBRL into their current service offering?
- What factors should a law firm consider to determine which type of XBRL service is best for them to offer?

The Burden of XBRL Costs on Smaller Companies

As the deadline for mandatory XBRL draws nearer, I am hearing from some smaller companies about how the costs charged by XBRL providers are higher than they expected. David Feldman blogs that those costs can be as high as $4000-8000 per year (which can be 50% of the operating costs for a shell company). Send me your anecdotal stories as I'd like to hear more from folks (I'll keep them confidential as always unless you give me permission to attribute).

Poll: XBRL Filing Cost Estimates

Please take a moment to participate in this anonymous poll regarding your experience with XBRL filing costs/cost estimates so far:

- Broc Romanek

March 8, 2011

SEC's New Staff Accounting Bulletin No. 114: A Clean-Up

Yesterday, the SEC's Office of Chief Accountant and Corp Fin jointly issued Staff Accounting Bulletin No. 114, which revises or rescinds portions of the interpretive guidance included in the codification of the SAB Series. The update is intended to make the relevant interpretive guidance consistent with authoritative accounting guidance issued as part of FASB's Accounting Standards Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing throughout the SAB Series.

A List of Annual Meeting Dates & Locations: European-Style

Yesterday, I received this list of annual meeting dates and locations for companies located in Europe from an association for investors over there known as "VIP" (Vereinigung Institutionelle Privatanleger). It's pretty nifty and got me wondering whether such a list exists for US companies that is publicly available? Shoot me an email if you know of one...

SEC's Proposal: Incentive-Based Compensation for Large Broker-Dealers and Investment Advisors

Last week, the SEC proposed rule regarding incentive compensation for large brokers and investment advisors. Here's the SEC's press release - and here's the proposing release in draft form (since other regulators need to sign off on this, the SEC posted it in draft form, which I believe is a "first"). Here's Mike Melbinger's blog on the proposal and we are posting memos in's "Bonus" Practice Area.

- Broc Romanek

March 7, 2011

Corp Fin Issues 9 New CDIs

On Friday, Corp Fin issued nine new Compliance and Disclosure Interpretations on a variety of topics - including one on CD&A, two related to Rule 144, two on free writing prospectuses, two on director disclosures and two others - as follows:

- Section 139. Securities Act Section 5 - Question 139.32
- Section 132. Rule 144(d) - Holding Period for Restricted Securities - Question 132.18
- Section 136. Rule 144(h) - Notice of Proposed Sale - Question 136.09
- Section 228. Rule 430B - Prospectus After Effective Date - Question 228.03
- Section 232. Rule 433 - Free Writing Prospectuses - Question 232.13
- Section 232. Rule 433 - Free Writing Prospectuses - Question 232.14
- Section 116. Item 401 of Regulation S-K - Question 116.08
- Section 116. Item 401 of Regulation S-K - Question 116.09
- Section 118. Item 402(b) - CD&A - Question 118.07

In his "Proxy Disclosure Blog," Mark Borges gives us the latest say-when-on-pay stats: with 365 companies filing their proxies, 49.8% triennial; 4.6% biennial; 40.2% annual; and 5.4% no recommendation.

A 23-Page Proxy Statement? Amazon Proves It Can Be Done

With Form 10-Ks and proxy statements now flowing into the SEC at full throttle, it's worth pointing out how Amazon has its 2010 proxy statement boiled down to a mere 23 pages - just two pages longer than its '09 proxy (the company hasn't filed its '11 proxy yet). I haven't read it so I can't comment on quality (nor would I comment), but it's an amazing feat in an age of bloated filings. Hat tip to Luke Frutkin of Frost Brown Todd for pointing it out!

Webcast: "3rd Annual Public Company M&A Nuggets"

Tune in tomorrow for the webcast - "3rd Annual Public Company M&A Nuggets" - to hear Jim Griffin of Fulbright & Jaworski, Keith Flaum of Dewey & LeBeouf, Hal Leibowitz of WilmerHale and Claudia Simon of Paul Hastings engage in a lightning round of practical advice, covering all the hot M&A issues you are grappling with today, including the latest on tricky deal provisions and the ultimate list of "do's" and "don'ts" during deal negotiations.

- Broc Romanek

March 4, 2011

Should the SEC Be Reorganized? If So, How?

With a government shutdown averted - at least for two weeks - SEC Staffers still have plenty to be concerned about. One of the Dodd-Frank studies - required by Section 967 of the Act - is being prepared by an independent consultant, the Boston Consulting Group. Expected to be published soon, the study's stated purpose is to "examine the internal operations, structure, funding, and the need for comprehensive reform of the SEC, as well as the SEC's relationship with and the reliance on self-regulatory organizations and other entities relevant to the regulation of securities and the protection of securities investors that are under the SEC's oversight."

Given that this study was commissioned at a time when it was expected that the SEC would receive more funds and would be in full hiring mode - and now the opposite is true - it will be interesting to see how the study handles this dramatic change in the current Congressional-regulatory environment.

And speaking of an underfunded SEC, you should read this editorial by former SEC Commissioner Bevis Longstreth entitled "Congress and the SEC's Starvation Diet." Here is an excerpt:

A horse forced to carry too heavy a load collapses. So too an agency. Far better, in such circumstances, for the public not to be misled, not to be lulled into complacency by reliance on the Government, but rather to be informed that the Government should not be counted on as a source of protection -- in short, to be told that one must fend for one's self.

Study: A Disconnect in Growing Shareholder Engagement

Last week, the IRRC Institute issued a study entitled "The State of Engagement Between US Corporations and Shareholders" that was conducted by ISS and shows that engagement is increasing. As Jim McRitchie notes, the study reveals there is a bit of disconnect for shareholder engagement practices so far. And that engagement is either a priority or a non-event for investors - asset owners and asset managers were most likely to report either that they had engaged with more than ten companies in the previous year or that they had not engaged at all.

Based on what I am hearing on the street, that certainly seems to be the case as many are trying new avenues of engagement for the first time due to say-on-pay with mixed results. I'm sure we will be seeing more of these studies after the proxy season is over, reporting many of the same things...

Alan Kailer's Latest Tables Chapter

Always popular, I have posted the latest annual update of Alan Kailer's chapter regarding preparation of the executive compensation tables in's "Tabular Disclosures" Practice Area.

- Broc Romanek

March 3, 2011

Mammoth F-Cubed Jury Verdict Overturned Under National Australia

As noted in this Wachtell Lipton memo by George Conway, a federal district judge in New York last week threw out most of a securities class action jury verdict that plaintiffs' lawyers had estimated was worth $9.3 billion. The jury's verdict was rendered 13 months ago - before National Australia was decided, and thus under now-overturned law - upheld claims that were predominantly "foreign-cubed" (asserted by foreign investors against a foreign issuer for losses on a foreign exchange) and "foreign-squared" (asserted by American investors against a foreign issuer for losses on a foreign exchange). In categorically dismissing all the claims of those investors, the decision in In re Vivendi Universal, S.A. Securities Litigation, according to Vivendi and its counsel, eliminated at least 80%, and perhaps up to 90%, of the liability that the verdict could have produced.

As George notes in his memo, this case marks the culmination of a series of district court decisions that have consistently rejected attempts by the securities class-action plaintiffs' bar to find loopholes in National Australia. Both of the main theories that have been advanced by plaintiffs' lawyers to evade the Supreme Court's decision have been repudiated by the courts, now repeatedly and sometimes scathingly.

Why Would Corp Fin Ever Deny a Registration Statement Withdrawal?

Last week, BlogMosaic ran this blog about how the SEC recently denied the withdrawal of a registration statement. It's a rare occurrence and might lead you to wonder why Corp Fin would do such a thing. I believe it happens when the SEC suspects foul play and by denying the withdrawal, it helps them maintain jurisdiction over a potential action.

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 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:

- Updated: Links to Fortune 100 Investor Web Pages
- Proxy Impact Offers New Advisory Services
- Goodbye Proxy Governance! And Then There Were Two...
- A Final Review of 2010 ESG Shareholder Proposals
- Top 10 Questions for Audit Committees

- Broc Romanek

March 2, 2011

Directors Under Fire: SEC Charges Accounting Fraud & Insider Trading

Over the past two days, the SEC's beleaguered Enforcement Division has brought separate earth-shattering cases that go straight to the boardroom. On Monday, the SEC charged three of Point Blank Solutions' former outside directors (and audit committee members) for their complicity in a massive accounting fraud. Then yesterday, the SEC charged a former McKinsey head of using his position as director for Goldman Sachs and Procter & Gamble for being a tipper in the Galleon insider trading scandal. Here's an interesting excerpt from this NY Times article:

The case against Mr. Gupta has an unusual procedural twist. Under the Dodd-Frank Act, the S.E.C. can seek a full range of penalties against people not employed by a financial services firm through a relatively streamlined proceeding before an S.E.C. administrative law judge. Historically, if the agency sought penalties against a public company director like Mr. Gupta, it had to sue in federal court, where the defendant has full discovery rights of the SEC's case, including all of its witnesses.

And here is a sidenote - a quote from Preet Bharara, US Attorney for the Southern District of New York, that I shortened and tweeted last week: "Unfortunately from what I can see, from my vantage point as US Attorney, illegal insider trading is rampant" (this quote was lifted from this insider trading memo by Morrison & Foerster).

Webcast: "Conduct of the Annual Meeting"

Tune in tomorrow for the webcast - "Conduct of the Annual Meeting" - to hear Bret DiMarco of Coherent, Peggy Foran of Prudential, Carl Hagberg, an independent inspector of elections and Editor of The Shareholder Service Optimizer, Kathleen Salmas of Northrup Grumman and John Seethoff of Microsoft discuss all of the thorny annual meeting issues, such as what to do if you need to adjourn the annual meeting, how to handle common and troublesome tabulation issues and how to handle meeting attendees that act inappropriately. Carl has contributed this fantastic set of practical articles on annual meetings as course materials.

Conducting Meaningful Board Evaluations

In this podcast, Denise Kuprionis of Governance Solutions Group explains how to best handle board evaluations, including:

- What are the key elements of a board evaluation?
- What role should the corporate secretary/chief governance officer play in this review process?
- What are the metrics? How should the board measure itself?
- What's the "so what" after the evaluation is complete?

- Broc Romanek

March 1, 2011

A Government Shutdown: What Happens to the SEC?

With Friday's deadline for a government shutdown looming, it seems fair to start wondering how our community will function without the agency. Will EDGAR be operational? Will registration statements be declared effective so that deals can go forward? Will no-action requests related to shareholder proposals be processed?

I don't know the answers to these questions - but I imagine most of the news wouldn't be good. This article notes that the SEC is engaged in contingency planning - and this note to SEC union employees indicates that relatively few SEC Staffers are deemed "essential" (100-250) and would remain on the job. I presume Corp Fin will provide us with news about the impact of the shutdown if it does indeed occur. As this article notes, the House votes today on a temporary funding measure - but that may merely put off the shutdown for two weeks.

Interestingly enough, there is no precedent for the SEC here - at least not in the modern era - as the SEC somehow found funding to keep open back in 1995 when the government was last shut down. And I end with this note from a member:

Am I the only one who has noticed that the deadlines for the government shut-down and the NFL lock-out are both on March 4? I would think that political and sports pundits alike would revel in such a congruence of the stars. But maybe I just follow less informed pundits.

A New Shareholder Proposal Database:

One question I get asked often enough is where can one find a database that tracks shareholder proposals and their stats. Sites like this have existed but they tend to disappear within a year or two. Now there is a new one. In this podcast, Jim Copland of the Manhattan Institute's Center for Legal Policy provides some insight into, a new shareholder proposal database, including:

- What is
- How long did it take to create?
- Who do you envision using it?

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- Broc Romanek