June 30, 2011

Option Grant Practices: IRS Proposes Section 162(m) Changes

Last week, the IRS proposed new regulations under Section 162(m), which would significantly change the rule that applies to pre-existing stock option plans of private companies that then go public. Among other things, the proposal also reinforces that individual award limits must be stated in an option plan. The NASPP will be covering this proposal in detail (here's the NASPP's Blog if you haven't checked it out yet).

New movie on the horizon? Will Ferrell will star as "a narcissistic hedge fund manager who thinks he has seen God."

Yes, It's Time to Update Your Insider Trading Policy

We have posted the transcript of the webcast: "Yes, It's Time to Update Your Insider Trading Policy."

Mailed: May-June Issue of The Corporate Executive

The May-June Issue of The Corporate Executive includes pieces on:

- The Interplay of Section 162(m) and ASC 718
- RSUs and Unaccepted Grants
- Deferred RSUs and ERISA
- Tax Deposits for RS/RSUs

Act Now: Get this issue rushed to you by trying a "Half-Price for Rest of '11" No-Risk Trial today.

- Broc Romanek

June 29, 2011

More on "SEC Brings "Blue Ribbon" Enforcement Proceeding Against "Crowdsourcing" Offering"

Last month, I blogged about an SEC Enforcement action against two individuals who attempted to raise $300 million via a website, a Facebook page and a Twitter account, to finance a company which would purchase the Pabst Brewing Company. The SEC's order noted that the offering was attempted to be "crowdsourced."

A few members weighed in with similar stories from the old days. For example, Stephen Quinlivan notes that back in the late '90s, James Page Brewing Co. placed a small ad on the side of its six packs to sell securities in a Regulation A/SCOR deal. And here's an old NY Times article about the Boston Beer offering mentioned in last month's blog, courtesy of John Newell of Goodwin Procter.

I do remember other examples of companies selling directly to their customers back in the '90s (egs. Spring Street Brewing Company; Annie's Homegrown); some of which are referenced in the "Public Companies" section of this '97 study on technology and the markets that I helped draft back when I was at the SEC.

It's Here: Crowdsourcing Offerings Through Mobile Phones & Tablets

This recent piece from "The Atlantic" discusses a relatively new start-up - Loyal3 - which allows companies to create "Customer Stock Ownership Plans" similar to the ones described above, but with the twist that the plan is run through on an app for your smart phone, tablet, etc. As noted in this WSJ article, Nasdaq has partnered with Loyal3 to offer CSOPs to listed companies. [This piece entitled "Nasdaq Social Partner Was Called on the Carpet" from "Investor Uprising" notes the Loyal3's CEO's troubling past.]

The piece in "The Atlantic" notes that these CSOPs are "dolled-up Direct Stock Purchase Plans." DSPPs have been wavering in popularity - both among issuers and investors - over the past decade. The piece also notes that some companies may use CSOPs to give away stock to their customers for free, claiming Frontier Communications is planning to do. I haven't found any other information to indicate this indeed will happen (searching Google generally and SEC filings made by the company). Anyways, Travelzoo went this "free stock" route back in '98 before it went public six years later (here's a law review piece on "free Internet stock offerings" from back in the day).

SEC to TSRA (Trade Sanctions Reform and Export Enhancements Act of 2000): Back Off!

From a member: You should be aware of a development we've seen over the past few years - namely, Corp Fin searching company websites for any mention of countries on the state sponsors of terrorism list and then sending letters to those companies suggesting that they are violating both the export laws and SEC disclosure obligations. It seems that the Staff may be overlooking the fact that US export laws do not prohibit all business with any country on that list - as those laws permit certain business with certain such countries.

This blog provides an example. It explains that UPS received a letter from the SEC demanding an explanation about how UPS could do business in Iran, Sudan and Cuba when those countries are on the state sponsors of terrorism list. The SEC's diligence on this issue appears to be searching the UPS website for references to countries on the state sponsors of terrorism list. Although it's hard to see how the Staff would otherwise diligence this issue, this remains a concern for some companies.

- Broc Romanek

June 28, 2011

Say-on-Pay: 37th - 39th Failed Votes

We've now had three more companies file Form 8-Ks reporting failed say-on-pay votes: Blackbaud (45%); Freeport McMoRan Copper & Gold (46%); and Monolithic Power Systems (36%). I keep maintaining our list of Form 8-Ks for failed SOPs in CompensationStandards.com's "Say-on-Pay" Practice Area.

Internal Pay Disparity: House Committee Passes Bill for Repeal

In this Cooley news brief, Cydney Posner notes how the House Financial Services Committee passed the "Burdensome Data Collection Relief Act," the substance of which is a single paragraph that would repeal Section 953(b) of Dodd-Frank and make any regulations issued pursuant to it of no force or effect. Section 953(b) is the provision in Dodd-Frank that - once the SEC adopts related rules - will require companies to disclose in proxy statements and other filings the median of the annual total compensation of all employees of the issuer, excluding the CEO, the annual total compensation of the CEO and the ratio of the two.

SEC Continues Push for Enhanced Disclosure of Litigation Contingencies

Here's news culled from this Wachtell Lipton memo, repeated below:

We have previously noted the SEC's efforts to urge companies to enhance their disclosure of litigation contingencies and, in particular, to provide estimates of "reasonably possible" loss or range of losses in actions for which accruals have not been established and for exposure in excess of established accruals in other actions, or to explain why such estimates cannot be provided.

The SEC appeared to focus its earlier comment letter efforts on financial services companies, many of which have relatively extensive litigation disclosure. Now, however, the SEC appears to have extended its focus to at least some companies outside of the financial services sector, including companies whose litigation exposures are not as extensive as those of many financial services companies.

Needless to say, each company's disclosure of loss contingencies must be prepared in light of its own litigation exposures, and it is difficult to generalize concerning the nature of disclosures that should be made. The Chief Accountant of the SEC's Division of Corporation Finance has publicly stated that disclosure of a "reasonably possible" range of losses may be done in the aggregate.

Consistent with the Chief Accountant's position, some companies have disclosed an aggregate range of reasonably possible losses for cases for which they were able to provide such an estimate, while alerting investors that they were not able to provide a meaningful estimate of reasonably possible loss or range of loss for all of the litigation contingencies described in their quarterly (or annual) filing. These companies have not typically disclosed which of their litigation proceedings are included within the aggregate range. Providing aggregate disclosure without identifying the included versus the excluded cases helps minimize the prejudice to a company that would follow from adversaries being given potential insights regarding its views of the merits (or settlement value) of individual litigation matters. Where appropriate, companies may also explain in their disclosures that the estimated range of reasonably possible losses they have disclosed is based on currently available information and involves elements of judgment and significant uncertainties, and that actual losses may turn out to exceed even the high end of the range.

Relatedly, the FASB - last July - issued an exposure draft regarding proposed new accounting standards for litigation contingency disclosure. However, after the FASB received numerous comments critical of the proposed standards, it announced that it would postpone the adoption of new standards pending "redeliberations" on the topic. Most recently, the FASB stated that its project on "Disclosure of Certain Loss Contingencies," has been reassessed as a "lower priority" and that further action is not expected before this December.

This Davis Polk blog on the topic lists "several large financial institutions (American Express Company, Bank of America Corporation, Citigroup Inc., The Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Company) gave an estimate of possible loss or range of loss above their existing reserves for the first time in their Form 10-Ks for the 2010 fiscal year and updated those estimates in their 2011 first quarter Form 10-Qs."

- Broc Romanek

June 27, 2011

Unlucky #7: A Quasi-Say-on-Pay Lawsuit

Last week, a seventh company was sued regarding its pay practices - Bank of New York Mellon in a state court in New York (here's the complaint). One of the big differences in this lawsuit is unlike the six lawsuits filed against companies that failed to garner a majority of votes in support of their say-on-pay, Bank of New York Mellon received overwhelming support for its say-on-pay (although there was a huge number of broker non-votes). Here's the Form 8-K reporting the company's voting results.

Mark Borges notes "this lawsuit appears to be fundamentally different from the others that have been filed following a failed say-on-pay vote. This suit alleges that the company's board (and its Compensation Committee) acted in contravention of the terms of their long-term incentive plans. What's interesting to me is that the details of the complaint could only have been drawn from the Compensation Discussion and Analysis, so it's a classic example of the disclosure providing a roadmap for second-guessing the decisions of the directors." We continue to post pleadings from these cases in CompensationStandards.com's "Say-on-Pay" Practice Area.

By the way, two of the oldest of the say-on-pay cases have been settled. As noted in this Davis Polk blog: "KeyCorp agreed, according to Reuters, to pay $1.75 million in attorneys' fees and expenses to settle related suits and Occidental Petroleum, faced with three suits, settled one for an undisclosed amount and had two dismissed."

Purchasing from a Public Offering: Don't Forget the SEC's Credit Limitations

Here's a tidbit from Suzanne Rothwell: With broker-dealers and their bank affiliates often extending loans to issuers, I am hearing about situations where an officer of an IPO issuer or other intended investor has asked one of the underwriters of the company's IPO to extend a loan in order to purchase securities from the IPO or an almost simultaneous private placement. Section 11(d) of the '34 Act prohibits an IPO underwriter from making a loan to anyone to purchase IPO securities from the offering and also in the secondary market for 30 days after the IPO.

The provision even prohibits an underwriter from "arranging" for a loan by any other party. The purpose of the regulation is to prevent underwriters from encouraging the purchase of securities without a market by extending credit to its customers. While generally a loan is permitted to investors purchasing from a private placement, the SEC can take the view that a close-in-time private placement is integrated with the IPO for purposes of the credit limitations.

House Financial Services Committee Approves the "Small Company Capital Formation Act": Regulation A Revival Closer?

Last week, the House Financial Services Committee on Capital Markets and Government Sponsored Enterprises approved the Small Company Capital Formation Act of 2011. Several amendments were introduced and debated by the full House Financial Services Committee. This Morrison & Foerster memo explains more.

- Broc Romanek

June 24, 2011

My Dodd-Frank Act Tally Sheet: Some Down, Many More to Go

At this time last summer, we were watching the legislative process unfold that gave birth to the Dodd-Frank Act (aka FrankNDodd), and we were anxiously wondering what sort of post-apocalyptic world we might be living in once the various provisions of Dodd-Frank came into effect. With Dodd-Frank's first birthday fast approaching (I already have some Dodd-Frank birthday gigs on my calendar), we find ourselves in more of a state of limbo than "Mad Max." The SEC Staff has been working incredibly hard to develop rules to implement many provisions of the Act under difficult circumstances, most notably the ridiculous implementation deadlines set forth in the statute, the perennial problem of understaffing and intermittent threats of government shutdown. With all that, some progress has been made, and there will no doubt be much more progress coming soon. As for the corporate governance and compensation provisions of the Dodd-Frank Act affecting public companies, the lay of the land today is as follows:

1. The SEC has completed rulemaking on the Say-on-Pay provisions and whistleblower provisions of Dodd-Frank. Say-on-Pay turned out to be more like "Y2K" than the apocalypse, with significant support for Say-on-Pay resolutions at most companies.

2. The SEC expects to adopt rules with regard to the compensation committee and adviser independence provisions in the second half of 2011. It seems likely that the final rules on these provisions will be adopted this summer, to be followed by the exchanges' efforts to establish the applicable listing standards.

3. The SEC expects to adopt rules implementing the "specialized corporate disclosure" provisions (conflict minerals, payments by resource extraction issuers and mine safety) in the second half of 2011. It seems that the SEC wants to treat all of these disclosure provisions as a package deal, otherwise they probably would have adopted the mine safety rules by now, given that mining companies already have to comply with the statutory requirements. The conflict minerals disclosure provisions continue to present many challenges in coming up with workable rules for a potentially very large proportion of the universe of public companies, so we should all be thankful that the Staff and the Commission are taking their time to deliberate the outcome.

4. The SEC currently plans to propose rules in the second half of 2011 regarding pay for performance disclosure, the median employee/CEO pay ratio disclosure, compensation recovery listing standards (and related disclosure), and disclosure regarding employee and director hedging. With the press of other business under the Dodd-Frank Act and otherwise, I could see some or all of these provisions getting pushed back even further, perhaps even past the 2012 proxy season.

5. The SEC has not yet come out with any proposal as to the other significant matters which would be excluded from broker discretionary voting, although that one might be expected some time later this year in anticipation of getting something on the books for the 2012 proxy season.

6. A decision by the U.S. Court of Appeals for the DC Circuit in the lawsuit challenging Rule 14a-11 (adopted in August 2010 after authority issues were cleared up by Dodd-Frank) is still expected this summer.

Will Congress Help?

It doesn't seem that Congress will have much appetite to pare back the most onerous provisions of Dodd-Frank applicable to public companies, however earlier this week there was at least a sliver of hope when the House Financial Services Committee held a hearing to consider bills which included H.R. 1062, the Burdensome Data Collection Relief Act, which would repeal the pay ratio disclosure requirement in Dodd-Frank. At the hearing, the Financial Services Committee ordered that the bill be reported to the full House. It is anybody's guess as to whether the bill may ultimately get voted on, but at least it made it out of the Financial Services Committee.

Delaware Addresses Advance Notice For Shareholder Proposals

An interesting advance notice development from Steven Haas of Hunton & Williams:

Recently, the Court of Chancery issued an interesting decision in Goggin v. Vermillion, Inc. applicable to shareholder proposals and annual meetings. In denying a motion to enjoin a stockholders meeting, the court enforced an advance notice requirement for shareholder proposals that was set forth in the company's 2010 proxy statement rather than its bylaws.

By way of background, the company's 2010 proxy materials mailed last October provided that the advance notice deadline for shareholder proposals at the 2011 annual meeting was January 1, 2011. At the time, however, it wasn't clear when the company's 2011 annual meeting would be held. While the company traditionally had held its annual meetings in June of each year, it had filed for bankruptcy in 2009 and decided to hold its 2010 meeting in December--just weeks before the January 1, 2011, advance notice deadline disclosed in the proxy materials.

In February 2011, more than a month after the advance notice deadline had passed, the company announced that its 2011 annual meeting would be held on June 7, 2011. As a result, the January 1 deadline resulted in a 150-day advance notice requirement for the 2011 meeting--far more than the typical 90 or 120-day requirements found in many bylaws of Delaware corporations.

The court observed that Delaware law does not require that shareholders provide advance notice of proposals or of director nominations to be raised at an annual meeting. It also acknowledged that the company didn't have an advance notice bylaw, although it had since adopted one applicable to its 2012 stockholders meeting. Nevertheless, the court held that "the Company set forth its notice requirement for the 2011 Meeting in the October 20, 2010 proxy and that the plaintiff was unlikely to prevail on the merits by showing that the advance notice requirement was unreasonably long or unduly restrictive of [his] franchise rights."

The court seems to have been strongly influenced by the fact that 5 of the 6 directors were independent and there were no clear signs of entrenchment motives (e.g., the plaintiff did not signal his dissatisfaction with management until after the advance notice deadline had passed). Thus, the deadline was established on the "proverbial clear day" and conformed to the company's pre-bankruptcy practices.

Still, many observers may be surprised to see the court enforce an advance notice provision that was not set forth in the company's governing documents. It also is notable that shareholders had approximately 2½ months notice of the pending deadline (i.e., the time in between the mailing of the October 2010 proxy statement and the January 1, 2011, deadline), and that the deadline turned out to be 150 days before the then-unknown meeting date. In contrast, many advance notice bylaws provide that, if the date of an annual meeting significantly deviates from the prior year's meeting date, shareholders can provide notice of proposals or director nominations within 10 days after the announcement of the meeting date.

- Dave Lynn

June 23, 2011

Last Day: Early Bird Discount for our "Say-on-Pay Intensive" Pair of Conferences

Tomorrow is the last day for the early bird discount 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: 6th Annual Proxy Disclosure Conference" and "The Say-on-Pay Workshop Conference: 8th Annual Executive Compensation Conference." Save by registering by the end of Friday, June 24th at our early-bird discount rates. Note this early-bird discount will not be extended.

SEC Moves Forward with More Dodd-Frank Rulemaking

Yesterday was another big day in the annals of Dodd-Frankdom, as the SEC adopted rules that require advisers to hedge funds and other private funds to register with the SEC. The rules also establish new exemptions from SEC registration and reporting requirements for some advisers, and change the allocation of regulatory responsibility for investment advisers between the SEC and states. The Dodd-Frank Act directed the SEC to adopt these rules in order to close a perceived regulatory gap, in that certain advisers to large hedge funds and private equity funds had been able to avoid SEC registration over the years. This fact sheet describes the new rules, and the SEC has already published the release for the rules related to the Investment Advisers Act amendments and the release for the exemptions applicable to advisers to venture capital funds, private fund advisers with less than $150 Million in assets under management, and foreign private advisers.

SEC Defines "Family Office"

In a related rulemaking, the SEC adopted a definition of "family offices" for the purposes of excluding them from the application of the Investment Advisers Act. With the package of rules adopted yesterday, the SEC has accomplished the rulemaking relating to the fund-related provisions of Title IV of the Dodd-Frank Act that will become effective on the one year anniversary of the Dodd-Frank Act on July 21, 2011.

- Dave Lynn

June 22, 2011

PCAOB Launches Effort to Revamp Reports on Audited Financial Statements

Yesterday, the PCAOB issued a concept release on possible revisions to PCAOB standards related to reports on audited financial statements. As noted in this statement by PCAOB Chairman James Doty, the effort to look at the PCAOB standards applicable to audit reports comes out of concern as to "whether audits adequately served investors' needs in the months and years before and during the [financial] crisis."

The concept release highlights several alternatives to the auditor reporting model that would facilitate the communication of information from the auditor to investors. The concepts include: (1) an Auditor's Discussion and Analysis to be included as a supplement to the auditor's report, in order to provide the auditor with the ability to discuss his or her views regarding significant matters, as well as information about the audit (such as audit risks identified in the audit, audit procedures and results), auditor independence and the auditor's views regarding the company's financial statements; (2) required and expanded use of "emphasis paragraphs" in all audit reports that would highlight the most significant matters in the financial statements and identify where those matters are disclosed in the financial statements, such as significant management judgments and estimates, areas with significant measurement uncertainty and other areas that the auditor determines are important for a better understanding of the financial statement presentation; (3) auditor assurance on information outside of the financial statements, such as MD&A, non-GAAP information or earnings releases; and (4) clarification of the standard auditor's report, whereby clarifying language would be added about what an audit represents and the related auditor responsibilities, including language regarding reasonable assurance, the auditor's responsibility for fraud, the auditor's responsibility for financial statement disclosures, management's responsibility for the preparation of the financial statements, the auditor's responsibility for information outside of the financial statements, and auditor independence. The PCAOB has noted that these potential alternatives are not mutually exclusive, therefore a revised auditor's report could include any of these alternative concepts or a combination of concepts, as well as elements of these concepts.

The PCAOB is soliciting comments on the concept release until September 30, 2011, and plans to convene a roundtable in the third quarter of 2011 to discuss these issues.

Unfinished PCAOB Business and Your Proxy Statement

With the PCAOB now taking on such a significant topic as the content of auditor's reports, it is still important to keep in mind that, 8 years into its existence, the PCAOB continues to slog through many of the auditing standards that pre-dated the creation of the Board for the purpose of adopting new PCAOB standards.

Some confusion can arise, however, because the AICPA (who used to the the principal arbiter of all auditing standards for public and private companies) continues to promulgate its own auditing standards, notwithstanding the fact that the PCAOB has taken over as the sole authority on auditing standards for public companies. In this regard, I continue to see incorrect auditing standard references in proxy statements in the context of the audit committee report required by Item 407(d)(3) of Regulation S-K. Among the items required in the audit committee report is that "[t]he audit committee has discussed with the independent auditors the matters required to be discussed by the statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T."

In complying with this requirement, some issuers have become confused because in December 2006, the AICPA issued Statement on Auditing Standards No. 114, The Auditor's Communication with Those Charged with Governance ("SAS 114"). SAS 114, by its terms, supersedes SAS 61, but because the standard was adopted after April 16, 2003 and was not subsequently adopted as an Interim Auditing Standard by the PCAOB, SAS 114 is not applicable to the audits of public companies. As a result of the understandable confusion about the applicability of this standard, some issuers have incorrectly replaced the reference to SAS 61 in their proxy statement with a reference to SAS 114.

To compound the problem, in March of last year the PCAOB proposed a new auditing standard, Communications with Audit Committees, which if adopted would supersede the Board's interim standards on the topic. The comment period for this proposed standard closed in May 2010, and commenters suggested that the PCAOB needed to gather more information regarding the operation of the proposed standard. The PCAOB conducted a roundtable on auditor communications with the audit committee in September 2010. A final standard has not been adopted to date, and as a result the Interim Auditing Standard pursuant to PCAOB Rule 3200T firmly remains SAS 61 (as in effect on April 16, 2003).

More on our "Proxy Season Blog"

Even though the proxy season is winding down, we still 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:

- They Held a Revolution and Nobody Came
- Proxy Season: The Latest Voting Results
- More on "Annual Meetings: The Use of Floor Proposals"
- The Best Annual Report of 2011? Acuity's "Storybook Year"
- Advisory Votes Help Shield Directors From Investor Dissent

- Dave Lynn

June 21, 2011

New Staff Observations on XBRL Released in Advance of Final Phase-in

The last round of phase-in for interactive data is now just around the corner, with upcoming quarterly reports for companies below the large accelerated filer threshold now subject to XBRL reporting requirements. Over the last couple of years, the Staff of the Commission's Division of Risk, Strategy and Financial Innovation (Risk Fin) has completed reviews of interactive data financial statement submissions and has published general observations about those reviews.

In the latest set of observations published June 15th, the Staff addresses a wide range of XBRL issues including negative values, extending elements when an existing US GAAP taxonomy element is appropriate, "axis" and "member" use, and tagging completeness in the context of using parenthetical amounts. All pretty techie stuff, but nonetheless worth checking out and reviewing XBRL practices accordingly.

No Sign of an Interactive Data Reprieve

There is no sign of any XBRL reprieve for smaller companies, or for the need to perform detailed tagging of financial statement notes for larger companies, so it remains full-steam ahead for interactive data implementation efforts, with heavy reliance placed on third-party service providers. Given the reliance on third parties, this upcoming quarter-end could present some challenges for companies, given that so many issuers are seeking to create interactive data files all at once, and many for the first time.

It is a good idea to build some extra time into the filing schedule to account for any potential delays in turning last minute changes to financial statements and notes to financial statements, even if you are an experienced XBRL filer. Also, first-time XBRL filers should not overlook the requirement to post the interactive data files on the company's website on the same calendar day that the interactive data files are submitted with the periodic report.

First time XBRL filers can also take some comfort in the availability of a one-time, 30-day grace period to submit the interactive data files (as well as a 30-day grace period for the first detailed tagging of the financial statement notes by already phased-in filers), although avoiding having to be in a position to use the grace period is still the best bet.

The most common XBRL question that I receive is who uses the XBRL files that companies go to such great lengths to create? To this day, I still don't have a good answer for that one.

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:

- Insider Trading Analysis of Sokol Charges
- When Should an Investment Relations Officer Just Quit?
- FASB and IASB Significantly Revise Lease Accounting Proposals
- SEC Extracts Fines, But Not Confessions
- Fourth Circuit Holds Partial Disclosures Must Relate to Misrepresentations to Satisfy Loss Causation

- Dave Lynn

June 20, 2011

The Need to Change Your ID/Password for this Site

Starting today, due to an upgrade in our database, all individual login and passwords for our various sites have been reset. Your new username will be the email address that was in an email that was sent to on Friday. Your temporary password will be your five-digit, billing zip code. Beginning today, on your first login, you will be asked to reset your password as part of a simple process.

Once you have reset your password, it will automatically carryover to each of the following websites (if you're a member of them):

- CompensationStandards.com
- TheCorporateCounsel.net
- Naspp.com
- Section16.net
- DealLawyers.com
- InvestorRelationships.com

Our HQ is handling questions on this (not me - I don't even have access to our database) and their phone lines are open for extended hours this week: 925.685.5111. They have posted FAQs regarding this change.

If you use our popular Romeo & Dye's Section 16 Filer software, you will need to download a new version of the software starting today and will automatically be prompted to do so.

Why Were the SEC's New Whistleblower Rules Published Late in the Federal Register?

A member recently asked why the SEC's new whistleblower rules were seemingly delayed in being published in the Federal Register until June 13th - since the agency issued its adopting release back in May after the Commission blessed them at a May 25th open Commission meeting (note: link to Fed Reg version is not yet posted on the SEC's site)? To get something published in the Federal Register, the Office of Management & Budget (OMB) must conduct a review and then the adopting release moves to the Federal Register people (Government Printing Office).

Even though there seemed to be a delay for the whistleblower rules, it's not really anything to complain about because it just pushed out the effective date for the rules. In other words, a delay would never have any bearing on whether an approved set of rules were indeed final - there would not be a reprieve from the Governor...

Gun-Jumping: Did Groupon Break SEC Rules?

This Forbes' article notes how the timing of a lengthy NY Times piece on Groupon - that included behind-the-scenes access for the reporter - came out just a few days before Groupon filed a Form S-1 with the SEC for an IPO.

I haven't seen any other commentary on this fact pattern - probably because most realize that the playing field has changed a bit due to the '33 Act reform that took place in '05. You may recall the infamous interview with the Google founders in Playboy a few days before that company filed its Form S-1 back in '04. At first, Google was determined to fight the SEC regarding gun-jumping allegations - but the company ultimately backed down and included the entire Playboy interview in Google's IPO prospectus.

Here's an excerpt from the letter sent by SEC Chair Schapiro to Rep. Issa recently regarding more '33 Act reform - the excerpt addresses this type of situation:

In April 2004, less than a week before Google initially filed its registration statement for its initial public offering, Google's two founders were interviewed by Playboy magazine. Google informed the staff of the interview in August 2004 and advised the staff that the interview would appear in the September 2004 issue of Playboy, which was scheduled to hit newsstands after the offering period for Google's innovative "Dutch auction initial public offering closed.

Under the rules in effect at the time of this offering, the publication of an article such as this in connection with an initial public offering could raise concerns about inappropriate market conditioning and the potential need for a cooling-off period. For a variety of reasons, primarily based on (l) the timing of the release of the article after the completion ofthe offering period for the auction; and (2) Google filing the article as an exhibit to its registration statement (thereby including it as part of its offering materials), the staff determined that the publication of the article would not inappropriately condition the market for Google's initial public offering.

As such, the staff did not impose any cooling-off period or otherwise delay the offering as a result of the article. Beyond this, it is important to note that, had the 2005 communications rules described above been in effect at the time, even if the Playboy article was published before Google's offering period for the auction had closed, Google's initial public offering would not have been delayed.

By contrast, another initial public offering in 2004 had a different result under the rules in existence at the time. Salesforce.com, Inc. had planned to go effective on its registration statement in May 2004 when an article appeared in The New York Times featuring an interview with the company's CEO. The CEO had invited a reporter to follow him for a day during the road show for the offering, and the article, which was published during the road show, included substantial information about the offering. It appeared to the staff that the interview was granted - and the reporter was given access to the road show process - in an effort for Salesforce.com or its CEO to communicate with prospective investors through the article, which was not permitted under the rules at that time.

To address gun-jumping concerns, the staff imposed a cooling-off period. Under the communications rules adopted in 2005, this media coverage would not have required delay of the offering if certain filings, such as filing a copy of the article or its contents as a free-writing prospectus, were made.

Webcast: "The Latest Compensation Disclosures: A Proxy Season Post-Mortem"

Tune in tomorrow for the CompensationStandards.com webcast - "The Latest Compensation Disclosures: A Proxy Season Post-Mortem" - to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.

I've got a quote in this interesting column in yesterday's NY Times by Gretchen Morgenson in which she analyzes a fascinating report that compares CEO pay with a number of different metrics. For example: "24 companies where cash compensation last year amounted to 2 percent or more of the company's net income from continuing operations."

- Broc Romanek

June 17, 2011

Supreme Court Ends SEC's Theory of "Implied Representation"

On Monday, the US Supreme Court dealt a final blow to the SEC's theory that third parties may be held to a standard of primary liability under the SEC antifraud rules (called "implied representation") for statements in a prospectus (we are posting memos in our "Securities Litigation" Practice Area). In a 5-4 decision in Janus Capital Group v. First Derivative Traders, the Court rejected a shareholder class-action lawsuit that argued that Janus Capital Group and a subsidiary should be held liable under the SEC antifraud rules for allegedly false statements in the prospectuses of subsidiary mutual funds.

The Court stated that the "maker of a statement" that violates SEC Rule 10b-5 "is the person or entity with ultimate responsibility over the statement . . . " and that "One who prepares or publishes a statement on behalf of another is not its maker." The Court reached this determination despite the close affiliation of the defendants to the mutual funds and their involvement in the preparation of the prospectuses.

Suzanne Rothwell notes that while private investors may be limited in their ability to recover directly from third parties, broker-dealers that distribute offerings later found to be fraudulent nonetheless remain vulnerable to an enforcement action by FINRA (as indicated in Regulatory Notice 10-22) for failure to comply with FINRA product suitability standards and, if the broker-dealer assisted in the preparation of the offering document, the FINRA advertising regulations. In addition to sanctions such as fines and suspensions, FINRA has authority to require that a broker/dealer or a broker make restitution to investors.

If you're a fan of "The Office," this video is hilarious. It reengineers the standard opening of the show as if it was an old-fashioned sitcom...

SEC Continues Work on Section 13(d) & (g) Modernization Project

Last week, the SEC re-adopted changes to Rules 13d-3 and 16a-1 to preserve the application of the existing beneficial ownership rules to security-based swaps after July 16th, the effective date of new Section 13(o) that was created under Section 766 of Dodd-Frank. Thus, security-based swaps will remain subject to these rules following the July 16th effective date. As noted in the re-adopting release, the SEC continues to work on its modernization project for Section 13(d) and (g) - and as noted in this press release, the SEC will be "taking a series of actions in the coming weeks to clarify the requirements that will apply to security-based swap transactions as of July 16 - the effective date of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act - and to provide appropriate temporary relief." This relief began to happen on Wednesday as noted in this press release.

Last Call: Early Bird Discount for our "Say-on-Pay Intensive" Pair of Conferences

There is only one week left for the early bird discount 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: 6th Annual Proxy Disclosure Conference" and "The Say-on-Pay Workshop Conference: 8th Annual Executive Compensation Conference." Save by registering by Friday, June 24th at our early-bird discount rates. Note this early-bird discount will not be extended.

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: 6th Annual Proxy Disclosure Conference" includes:

- Say-on-Pay Disclosures: The Proxy Advisors 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:

- SEC Chair Mary Schapiro's Keynote (via pre-taped video)
- Say-on-Pay Shareholder Engagement: The Investors Speak
- Say-on-Pay: The Proxy Advisors Speak
- How to Work with ISS & Glass Lewis: Navigating the Say-on-Pay Minefield
- Putting Your Best Foot Forward: How to Ensure Your Pay Practices Pass
- Say-on-Pay: Director (and HR Head) Perspectives
- Failed Say-on-Pay? Lessons Learned from the Front
- Say-on-Pay: Best Ideas for Putting It All Together

- Broc Romanek

June 16, 2011

A Sixth Say-on-Pay Lawsuit

Last week, a sixth company that failed to garner majority support for their say-on-pay was sued - Hercules Offshore in a district court in Texas (here's the complaint). We continue to post pleadings from these cases in CompensationStandards.com's "Say-on-Pay" Practice Area.

Yesterday, I traded tweets with someone regarding the probability that all companies that fail to earn majority support will be sued. I'm not convinced that will happen since these cases are brought in such diverse venues and by different plaintiff's firms. Does anyone know of any guiding hand behind the scenes of these six lawsuits?

It's also interesting to note that I haven't seen a single law firm memo yet about these say-on-pay lawsuits even though it appears they are the talk of the town whenever I am out and about. Let me know if you see one...

Let the Wild Rumpus Begin! Competing Bills to Upsize '34 Act Registration Threshold

Yesterday, I blogged about a new House bill (HR 2167) that would raise the '34 Act registration threshold to 1000 shareholders (from 500) and exclude employees and accredited investors. In doing so, I neglected to mention another recent House bill (H.R. 1965) that would raise the threshold to 2000 shareholders and also raise the deregistration threshold from 300 to 1200 shareholders. As noted in Jim Hamilton's blog, there also is a Senate companion bill (S 556) for this one.

For a view questioning the wisdom of raising the threshold, check out Suzanne Rothwell's entry yesterday on "The Mentor Blog."

SEC Enforcement Director Receives Delegated Power to Immunize Witnesses

A few days ago, the SEC Commissioners gave delegated authority to the agency's Enforcement Director to immunize witnesses. I'm not certain that immunization happens all that happen at the SEC - since these are just civil cases - and in conjunction with 18 U.S.C. sections 6002 and 6004, I think this essentially allows Rob Khuzami to immunize any witness who is "pleading the Fifth" in an SEC investigation, thereby disallowing them to continue to assert the Fifth Amendment with the caveat that their testimony can't be used against them in any criminal case.

- Broc Romanek

June 15, 2011

SEC Commissioner Nominations Blocked (Games Congress Plays)

Because he can, Senator Vitter temporarily blocked the nominations of Luis Aguilar and Dan Gallagher yesterday during a Senate Banking Committee hearing because he doesn't like the pace of recovery for victims of Allen Stanford's fraud. Strike that. I'm not sure it was "during" the hearing because Senator Vitter didn't bother to show up to it, as noted in this Reuters article.

Yes, a single senator can hold up a nomination - but just temporarily as the Senate Banking Committee can still advance the nominations to the full Senate (so is that really a "hold"?). Doesn't this make for some great gaming (last year, one Senator put an extraordinary "blanket hold" on at least 70 nominations)? I'm not sure what parliamentary procedure allows a nomination to be blocked when the Senator doesn't even attend the hearing, but that surely compounds the waste of time that insincere holds are...

House Bill: Upsizing the 500 Shareholder '34 Act Registration Threshold

During the past few months, I've blogged several times about the SEC's upcoming capital-raising reform efforts, particularly in the area of pre-IPOs. Perhaps that's not good enough for Congress as this Fortune article tells of a bill in the House that would boost the number of shareholders that trigger registration to 1000 shareholders, up from 500 - and would exclude exempt employees and accredited investors from counting towards the threshold. The bill was introduced yesterday and has six sponsors from both sides of the aisle. There is no corresponding Senate bill at this time.

Webcast: "Deals: The Latest Delaware Developments"

Tune in tomorrow for the DealLawyers.com webcast - "Deals: The Latest Delaware Developments" - to hear Rick Alexander of Morris Nichols, Stephen Bigler of Richards, Layton & Finger and Kevin Shannon of Potter Anderson discuss all the latest from the Delaware courts and legislature.

- Broc Romanek

June 14, 2011

Welcome to Suzanne Rothwell!

We're very excited to announce the addition of Suzanne Rothwell to our editor staff. Suzanne brings a wealth of experience to our team. She recently retired from Skadden Arps after a decade of service here in DC. Previously, she served for 20 years in increasingly responsible positions with FINRA, including Associate Director and Chief Counsel of the Corporate Financing Department. At Nasdaq, she served as Special Counsel on the PORTAL Market and the development of trade reporting for debt securities. You'll be seeing Suzanne on this blog - and our other blogs - as well as other parts of our sites.

The On-Going IPO Pricing Discussion: The Issuer's Responsibility

And here's a blog from Suzanne:

There has been quite a bit of commentary on the pricing of the LinkedIn IPO, which went public at $45 a share and closed at $94 on the first day of trading (including this entry in our "Mentor Blog"). The stock has traded as high as $122.69 and has since declined to close on June 7th at $77.82. One columnist questioned whether the underwriters of the LinkedIn IPO severely and intentionally underpriced the public offering in order to benefit customers who then immediately sold the stock to lock in the profit. ("Was LinkedIn Scammed?," Joe Nocera, NY Times).

Another view was that possibly the IPO price for LinkedIn was too high as it resulted in a valuation of $8 billion for a company that made only $15.4 million in 2010. ("Why LinkedIn's Price May Have Been Right," Andrew Ross Sorkin, NY Times). Mr. Sorkin correctly points to the inherent conflict of IPO underwriters in meeting the interests of the company they are taking public and of their customers. He states that this is an "untenable position" and asks for a conversation on developing a better method. These statements reflect an on-going disagreement expressed over many years about the IPO pricing process.

The underwriters' balancing of interests of the issuer and the need to price in some relation to the intrinsic value of the company in the interests of their customers has worked effectively for many years except when the underwriters have decided to game the distribution process or the aftermarket. In my experience, the regulation of IPO pricing is a difficult matter and it is better that the regulators limit their involvement to oversight for possible manipulation of the distribution process and the aftermarket as well as ensuring appropriate disclosures. FINRA's predecessor, NASD, requested comment in 2003 on recommendations of the NYSE/NASD IPO Advisory Committee on three possible alternative approaches to promote transparency in pricing offerings, including whether to use an auction system--which is an oft-mentioned alternative.

What was not mentioned in the discussions of the LinkedIn IPO pricing was the responsibilities of the LinkedIn board of directors for that pricing, since the general view is that the issuer will accept the pricing determinations of the underwriters. However, this is where a new FINRA rule will likely make changes. Instead of proposing rules to adopt any of the alternative pricing methods, FINRA recently implemented new FINRA Rule 5131, which (among other things) requires that underwriters provide the IPO issuer's pricing committee or board of directors with a regular report of indications of interest in order to assist the issuer to make an informed decision as to the pricing of the offering. As stated by the NASD in 2003, ". . . greater participation by issuers in pricing and allocation decisions would better ensure that those decisions are consistent with the fiduciary duty of directors and management, and would provide management with more information to evaluate the underwriter's performance." Clearly, it was FINRA's intention to enhance the corporate governance responsibilities of issuers in the setting of the IPO price for the company.

We shall see whether the new rule, which became effective at the end of May, will have an impact on IPO pricing. In any event, any future discussions of the IPO pricing issue will have to take into account the fact that the issuer's board of directors was part of an informed decision on the final pricing determination.

Supreme Court Rules Loss Causation Need Not Be Proven at Class Certification Stage

In the midst of my computer meltdown last week, the US Supreme Court held that securities fraud plaintiffs need not prove loss causation at the class certification stage in Erica P. John Fund v. Halliburton. We have been posting memos on this decision in our "Securities Litigation" Practice Area.

- Broc Romanek

June 13, 2011

Say-on-Pay: 32nd - 35th Failed Votes

We've now had four more companies file Form 8-Ks reporting failed say-on-pay votes: Nabors Industries (43%): Tutor Perini (49%); Cadiz (38%); and BioMed Realty Trust (46%) . I keep maintaining our list of Form 8-Ks for failed SOPs in CompensationStandards.com's "Say-on-Pay" Practice Area.

SEC Brings "Blue Ribbon" Enforcement Proceeding Against "Crowdsourcing" Offering

With thanks - and permission to blog - from the ABA's State Regulation of Securities Committee:

This recent press release announcing the SEC's entry into a cease and desist order with two individuals who attempted to raise $300 million via a website, a Facebook page and a Twitter account, to finance a company which would purchase the Pabst Brewing Company. While the respondents purportedly raised over $200 million in pledges from more than 5 million pledgors, they never collected any monies. A unique feature of the offering was the respondents' promise that investors would not only receive a certificate of ownership in the acquisition company, but beer of a value equal to the amount invested (at least the SEC didn't allege that the beer was a "security," too - note, however, the old "whiskey warehouse receipt" cases).

One interesting point not mentioned in the press release - but raised in the actual Order - is that the SEC describes the offering as being effected "via crowdsourcing" (see paragraphs 3 and 5). Query whether this is the first enforcement proceeding by any securities regulator against a "crowdsource" offering? In any event, it sounds like the respondents never consulted with a reputable securities (or any?) attorney before commencing their offering; I would hope that any member of our Committee would have dissuaded them from attempting this venture in the chosen manner.

Here is a pun related to this case that I received: "I understand that the SEC went after the respondents when they heard that this offering was brewing on the Internet. Unfortunately for the SEC staff, they were only able to bottle up the respondents with their cease-and-desist order, the Justice Department decided the case wasn't worth throwing them in the can with a criminal action."

And another member noted: My foggy memory thinks that the Boston Beer Company tried to do something that was the then-equivalent of that back in the (maybe?) early 1990s when it was organized. I think they had "solicitation" language on their labels or something goofy like that...

Senator Grassley: How Does the SEC Treat Enforcement Referrals from Fellow Agencies?

As noted in this Reuters article, Senator Grassley's recent investigation of SAC Capital Advisors is not really about the private investment firm but rather is a look into how the SEC treats referrals from other agencies. Here's a letter from Grassley to reporters about how he believes that this response from the SEC into questions about how the SEC handled a referral from FINRA about suspicious trades by SAC Capital.

There are two Congressional hearings this week related to the SEC. Tomorrow, the Senate Banking Committee takes up the Commissioner nominations of Luis Aguilar and Dan Gallagher.

And then on Thursday, the House Transportation Committee hearing is holding a hearing entitled "The SEC's $500 Million Fleecing of America" regarding the SEC leasing a building after it was directed to hire many more Staffers under Dodd-Frank - and then Congress reversed ship on the SEC's budget (and is now blaming the SEC for thinking it was staffing up). This briefing memo relies heavily on the SEC Inspector General report about the lease that has been mentioned in the mass media lately. Note that it's pretty rare that this House Committee gets involved with SEC affairs...

- Broc Romanek

June 10, 2011

The SEC's New Whistleblower Rules: Should You Amend Your Whistleblower Policy?

In the wake of the SEC's new whistleblower rules, we are posting dozens of memos analyzing them in our "Whistleblowers" Practice Area. We also are addressing some questions on the new rules in our "Q&A Forum," including this one:

Question #6531: As a result of the SEC adopting final rules implementing the whistleblower provisions of Dodd-Frank, does anyone find it necessary or prudent to amend an issuer's Whistleblower Policy accordingly? Because the final rules will not be effective until probably later this summer, figure it isn't too early to start thinking about this.

Steve Pearlman of Seyfarth Shaw noted: I'm not aware of any publicly available. But my knee-jerk is that the potential down-sides of amending a whistleblower policy to take changes in the legal landscape into consideration are not readily apparent and likely well outweighed by the advantages. For example, it generally would be unreasonable for an employee to argue that a change in the policy amounts to an admission that the prior policy was ineffective or not legally sufficient and thus yields liability. Plus, it is worth noting that subsequent remedial measures generally are not appropriate evidence of liability.

Caveat: any revision to the policy needs to be carefully crafted so that it does not inadvertently invite or condone any sort of retaliation or otherwise run afoul of the new law (or any other laws for that matter).

By the way, you may want to see Keith Bishop's blog entitled "SEC's Whistleblower Release Misapprehends California Ethics Laws And Rules" - and this recent memo analyzing the latest Sarbanes-Oxley whistleblower case.

Which In-House Department Should Handle Whistleblower Complaints?

In this podcast, Steve Pearlman of Seyfarth Shaw describes how companies are grabbling with who handles whistleblower complaints under the new Dodd-Frank framework adopted recently by the SEC, including:

- Historically, which departments within a company handled whistleblower complaints?
- Is that changing and how?
- Can you give a specific example of how a company may create a hybrid model involving multiple departments?
- What factors should companies consider to determine what is the best model for them?

Delaware: Strine Nominated as New Chancellor; Glasscock as New Vice Chancellor

Yesterday's breaking news that I blogged on the DealLawyers.com Blog: Delaware Chancery Court VC Leo Strine tapped as the new Chancellor and Sam Glasscock, a long-time court master, nominated for Strine's VC slot. They now need to be confirmed by the Delaware State Senate. Here's articles from:

- Delaware Online

- Bloomberg

- WSJ Law Blog

- NY Times Dealbook

- Broc Romanek

June 9, 2011

Senators Ask SEC for Guidance on Information Security Risk Disclosure

While my computer recovers from a meltdown, here is a guest blog courtesy of Jim Brashear, General Counsel, Zix Corporation:

Spate of Data Security Incidents

The news media recently have reported many high-profile breaches of corporate data security. These incidents should prompt securities lawyers to focus on the potential materiality of public companies' risks concerning data security, data privacy and data breaches and the necessary disclosures when those risks are material.

Most of the recent data breach reports have focused on incidents in which consumers' personal information was exposed. In perhaps the most egregious example, Sony Corporation experienced multiple instances of hackers breaching several of its databases, potentially exposing the personal information of more than 100 million users, some of it in unencrypted plain text files. In another recent example, hackers targeting marketing services company Epsilon accessed email addresses for customers of dozens of major consumer brands.

Other data breaches indicate that hackers were looking for trade secrets or other valuable corporate information. Earlier this year, hackers targeted five multinational oil companies, apparently seeking proprietary data about global oil discoveries. Data security firm RSA was hacked, putting at risk the SecurID token security used by the firm's clients. That incident apparently allowed hackers to attempt to penetrate networks at Lockheed. Moreover, Google reported this month that hackers accessed personal email accounts of senior White House officials, which was likely an attempt to penetrate sensitive U.S. Administration systems.

Confidential information is not only at risk on companies' own internal networks. Companies and government agencies are increasingly storing confidential data with third party "cloud" services providers. A recent Trend Micro survey reportedly shows that nearly half of IT executives have reported a security lapse or issue with their cloud services provider in the last year. There are also indications that law firms are becoming targets for hackers, because those firms hold confidential data of many clients and may use relatively less-sophisticated data security procedures - potentially making them a weak link in the cybersecurity chain. The same may be true of other corporate advisors and business partners. So, companies evaluating data security risks need to consider "Who else has our confidential data and where is it?"

Potential Materiality of Data Security

Why are data breaches potentially material? As the Inside Investor Relations blog points out, "hackers can bring down your networks - and your stock price." A data breach can remove an competitive advantage, through the loss of proprietary information. A data breach can seriously impair a company's brand and reputation. If consumers or business partners lose confidence in the ability of a company to protect information, they may move their data and business elsewhere.

A data privacy breach can expose companies to significant disclosure and remediation costs, averaging over $7 million per incident and over $200 per individual whose personal data is compromised. A data breach can subject companies to fines and penalties, such as the $4.3 million HIPAA fine imposed on Cignet Healthcare. Last month, the White House issued its U.S. cybersecurity legislative proposal, which promotes a federal standard for data breach notification to individuals.

Letter Seeks SEC Guidance on Cybersecurity Disclosure

In a May 11th letter to SEC Chair Mary Schapiro, five Democrat members of the Senate Committee on Commerce, Science & Transportation asked the SEC to "issue guidance regarding disclosure of information security risk, including material network breaches." The letter opines that "Federal securities law obligates the disclosure of any material network breach, including breaches involving sensitive corporate information that could be used by an adversary to gain competitive advantage in the marketplace, affect corporate earnings, and potentially reduce market share." [Original emphasis]

The letter cites a 2009 survey by Hiscox which concluded that 38% of Fortune 500 companies made a "significant oversight" by not mentioning privacy or data security exposures in their public filings. The letter criticizes the lack of disclosure about steps being taken by companies to reduce those risk exposures.

One might expect the SEC Staff to be particularly sensitive to the adverse impacts of a data breach that exposes consumers' personal information. After all, the SEC's own employees were recently affected by a data breach when the Department of the Interior's National Business Center sent out SEC employees' social security numbers and other payroll information in unencrypted emails. In response to the Senators' request, an SEC spokesperson reportedly said "companies do have a disclosure obligation when it comes to events such as cyber security or cyber vulnerabilities just like any other events that face a company in the normal course of business."

[News coverage did not disclose the identity of the of the contractor whose software failed to encrypt the Interior Department's email, but we can confirm that it was not Zix Corporation, which provides automated email encryption for SEC staff.]

Considerations in Improving Cybersecurity Disclosure

In light of the potential materiality of these issues, forward-thinking securities counsel have already been advising clients about the need to include in their public disclosure discussions about material data security, privacy and data breach risks. See, for example, the client advisory by Sullivan & Worcester, which provides several examples of SEC rules applicable to data security, privacy and data breach risk disclosure. We expect that more firms will begin advising public company clients to focus on the potential materiality of their risks concerning data security, data privacy and data breaches and to craft necessary disclosures when those risks are material.

Last year, the SEC Staff issued interpretive guidance regarding disclosure related to climate change. Based on the approach taken in that guidance, the SEC Staff may now suggest that companies must consider in their disclosure:

- The impacts of compliance with privacy and data security legislation and regulation, including federal, state, foreign and international rules,
- The indirect consequences of data privacy regulations or business trends (e.g., the implications of Do Not Track on web marketing),
- The impacts of mitigating data security, privacy and data breach risks, such as systems costs and training,
- The potential impacts of data breaches on the company's business,
- The steps that the company is taking to identify and mitigate those risks.

June 8, 2011

How is Morale at the SEC? A 2010 Job Satisfaction Survey

Last year, I blogged about the results of a biannual government-wide "Federal Human Capital Survey" as it pertained to the SEC. Now, a new government-wide survey is out - and here is the SEC's 2010 Federal Employee Viewpoint Survey. Overall, the SEC did not fare well compared to the other 36 federal agencies included in the survey - coming in 35th on Job Satisfaction; 33rd on Talent Management; 33rd on Results-Oriented Performance Culture and 26th on Leadership & Knowledge Management.

There are a lot of interesting items in this new Survey - enough to dribble out blogs for weeks - but I take it all with a grain of salt. Case in point: in the "Private Sector Comparison" on page 16, 86% of the respondents in the private sector replied that they like the work they do. That's certainly not the case when I talk to people. Talk someone out of going to law school today!

Webcast: "Yes, It's Time to Update Your Insider Trading Policy"

Tune in tomorrow for the webcast - "Yes, It's Time to Update Your Insider Trading Policy" - to hear Alan Dye of Hogan Lovells and Section16.net, Sean Dempsey of Sealed Air, Keith Higgins of Ropes & Gray, Isobel Jones of Del Monte Foods and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster provide practical guidance on revisiting your insider trading policy, as well as your insider trading training program for officers, employees and directors.

Trading Blackouts: Not Taken Seriously in Australia?

I recently received this from a member:

I pass this item on just for its "that's unbelievable" factor. The Australian government has asked a private sector advisory group to look into assorted matters that they think detract from the integrity of their market. One item is director trading during black-out periods. See Section 2.4 of this report, which indicates that there is a lot of trading by directors during blackout periods in that country, some approved by the CEO and some not - directors just ignoring the blackout period. Can you imagine that happening in the US? Just hang out a sign that says "Sue me, please."

- Broc Romanek

June 7, 2011

Where Are They Now? Corp Fin's Bill Morley

Over a 30-year career at the SEC, Bill Morley served as Corp Fin's Chief Counsel for many years and hired many generations of Staffers in the Division before he retired in '99. In this podcast, Bill provides some insight into what it was like to work in the Division of Corporation Finance, including:

- How did you wind up at the SEC?
- How do you recall the shareholder proposal process?
- Did you enjoy recruiting and hiring?
- What are among your fondest memories?
- What are you doing now?

IPOs: Rare Case of Poison Pill for Newly Public Company

John Laide of FactSet notes that "Lone Pine Resources went public recently. Lone Pine is a subsidiary of Forest Oil Corp. that is based in Canada but is incorporated in Delaware. Lone Pine is the first U.S. incorporated company to IPO with a poison pill in place since 2007. It used to not be uncommon for companies to go public with a pre-adopted poison pill - but no company had done so since Ulta Salon, Cosmetics & Fragrance in October 2007."

Federal Debt Ceiling & Another Government Shutdown? Securities Law Considerations

Here's analysis from this Holland & Knight memo:

We've seen it before. Our team is out of time outs. There's very little time left on the clock, and, absent a miraculous play, the home team is going down in defeat.

That's where the nation was on April 8, 2011. Many went home late that Friday night fully expecting to wake up Saturday morning to the first federal government shutdown since 1996 and wondering what would happen next. We all know what happened. Very late that evening - at literally the 11th hour - congressional leaders and the Obama Administration forged an agreement that prevented a federal government shutdown.

In March 2011, many government contractors were preparing their businesses, employees, subcontractors and team members for the looming shutdown. Even though the nation has a budget for fiscal year 2011, that doesn't mean that government contractors can put those contingency plans away until next September. The reality is that we may face another shutdown sooner than expected.

May 16, 2011, came and went without much fanfare, but it was nonetheless an important day. The Treasury issued about $72 billion in securities that day which would have eclipsed the federal debt ceiling - a statutorily imposed maximum amount the government may borrow at any one time - absent some maneuvers by the Treasury to suspend certain federal retirement fund payments to use that money to finance the nation's general obligations.

Trick plays sometimes work, but Administration officials will have exhausted their play book by the time the clock expires on August 2, 2011, which is when Treasury Department officials believe they no longer can suspend those payments. Absent an agreement to raise the federal debt ceiling by then, the United States would begin to default on its interest payments for the first time in our nation's history. The consequences could include an initial slow down in payments to federal government contractors. Delayed payments to government contractors could expose the government to interest charges under the Prompt Payment Act or other statutes. Government agencies may then need to refrain from making new contract awards or ordering additional work under existing contracts and, at some point, the government may need to terminate or significantly downsize some of its existing contracts. A slow trickle eventually could lead to turning the faucet off completely, and the nation could again face a government shutdown - even during a budget year.

In light of another looming federal government shutdown, public company government contractors need to examine their businesses and their disclosure and consider whether, and to what extent, they need to include disclosure about a government shutdown in filings they make with the Securities and Exchange Commission (SEC). Reporting companies should consider whether (i) as a result of a shutdown they should file new disclosure in order to correct material misstatements or to make what they said not misleading, and (ii) the government shutdown will trigger any new disclosure required by federal securities law.

- Broc Romanek

June 6, 2011

More on the "CEO as a Team Job?"

A while back, I conducted a poll on this blog asking whether people thought companies that allow the CEO to be held by multiple persons at once was a good idea. In response, 3% said "yes"; 18% said maybe in certain circumstances; and 77% said no (3% said "what me worry?).

I agree with the folks that said "no" - but maybe the poll awoke the CEO gods as articles came out right around when the poll was posted on this topic. First, there was this news about Warner Bros. creating a team-approach to the President role. They have three people sharing the "Office of the President." Possible issues to ponder: Do they share a single office? Do they take turns depending the day of the week? Perhaps they need a marital relations lawyer rather than a corporate lawyer to work out the schedule? Just having fun here.

Then, a few weeks later, this WSJ article described how UniCredit SpA's board is considering splitting the CEO position in two, with a general manager in charge of managing the bank's operations and a chief executive in charge of strategy.

The Bizarre Filing Cabinet: Lawyer Acts Without Company's Knowledge

Once in a while you come across a strange SEC filing that makes you chuckle (eg. the classic is the fake Form F-1 filed by Apollo Corporation; more recent is this fake Form 8-K filing). Here's a Form RW filed by American Restaurant Concepts a few weeks ago seeking the withdrawal of a post-effective amendment filed by the company's lawyer - one that was not authorized by the company. Here's an excerpt from the request:

The Amendment was not filed at the direction of the Company. It was filed without our knowledge or consent by an attorney previously retained by the Company.

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:

- Annual Meetings: The Use of Floor Proposals
- Notes from the Council of Institutional Investors' Spring Meeting
- Diverse Director "DataSource" Announced, Dogged by Questions
- Environmental Proposals and Proponents: More Than Nuns in Tennis Shoes
- Annual Meeting Survey Results: Part II

- Broc Romanek

June 3, 2011

Thundershock! PCAOB's New Chair Floats Mandatory Auditor Rotation

Yesterday, new PCAOB Chair Jim Doty delivered this speech that should be considered the most profound public policy speech ever made by a PCAOB Chair. Jim talks about cultural challenges that still impede auditor independence and skepticism - and then calls for a broad public policy debate to repair the credibility and transparency of the audit. Jim lays out four areas that this debate should touch - auditor's reporting model, auditor independence, more context for audit committees and audit transparency - all of which have several items within them. But the one item that surely will get people talking is this excerpt from his speech:

The PCAOB's efforts to address these problems through inspections and enforcement are ongoing. But considering the disturbing lack of skepticism we continue to see, and because of the fundamental importance of independence to the performance of quality audit work, the Board is prepared to consider all possible methods of addressing the problem of audit quality -- including whether mandatory audit firm rotation would help address the inherent conflict created because the auditor is paid by the client.

The idea of a regulatory limit on auditor tenure is not new. Over the years, it has been considered by a variety of commentators and organizations. Through this public debate, the basic arguments both for and against mandatory term limits have been fairly well described.

I won't revisit all the history now. But most recently, in 2002, Congress considered requiring firm term limits during the debates that led to the Sarbanes-Oxley Act. It ultimately decided that the idea required more study and directed the GAO to prepare a report. That report, issued in 2003, noted that the SEC and the Board would need several years to evaluate whether the Sarbanes-Oxley reforms -- including audit partner rotation -- were sufficient, or whether further independence measures are necessary to protect investors.

The PCAOB has now conducted annual inspections of the largest audit firms for eight years. Our inspectors have reviewed more than 2,800 engagements of such firms and discovered and analyzed hundreds of cases involving what they determined to be audit failures. We have conducted more than 1,500 inspections of smaller domestic firms and of non-U.S. firms. These include multiple inspections of hundreds of those firms. And our inspectors have identified hundreds more cases involving what they determined to be audit failures.

Based on this work, I believe it is incumbent on the PCAOB to take up the debate about firm tenure and examine it, with rigorous analysis and the weight of evidence in support and against. I don't have a predetermined idea as to whether the PCAOB ultimately should adopt term limits. My only predilection is that the PCAOB deepen the analysis of how we can better insulate auditors from client pressure and shift their mindset to protecting the investing public.

As such, the Board plans to issue another concept release to explore whether there are other approaches we could take that could more systematically insulate auditors from the forces that pull them away from the necessary mindset. We expect to issue this concept release around the same time that we issue the concept release on the auditor's reporting model, in order that they can be considered together in a holistic manner.

Proxy Access: What If the SEC Loses the Lawsuit?

As we breathlessly wait for a decision in the proxy access lawsuit brought by the Chamber of Commerce and Business Roundtable in the US Court of Appeals for the DC Circuit, it is fair to consider what might happen in the wake of the decision - which is expected sometime over the next few months. As I blogged last month, the SEC was questioned pretty hard during oral argument by the three judges - giving some indication that the SEC may lose the case.

If the SEC loses, Brian Breheny of Skadden Arps notes that the agency's three options are:

1. Reapprove the Rule 14a-11 provisions and then have the 14a-11 rules and 14a-8 amendments become effective at the same time;

2. Lift the stay on Rule 14a-8 and allow those amendments to go into effect for the '12 proxy season and then approve the Rule 14a-11 amendments later; and

3. Do nothing.

It's possible that the SEC could hold off on lifting the stay on Rule 14a-8 at any time because the SEC imposed the stay on those amendments even though they were not the subject of the lawsuit. They could lift this part of the stay regardless if they win or lose. Meaning, if they lose, they could say "we are letting the 14a-8 amendments become effective while we consider what, if anything, we will do with the 14a-11 rules after the decision."

But they could also lift the 14a-8 stay if they win because of the timing of the decision. For instance, if the decision is issued after the deadlines for filing the Schedule 14N or other 14a-11 deadlines, the SEC may think it would be better to wait until next year. This scenario is highly unlikely - but anything is possible...

Poll: When Will the Proxy Access Lawsuit Be Decided?

It's expected that the US Court of Appeals for the DC Circuit will deliver its decision sometime this summer, but we don't know if that indeed will happen - or when within the summer it will take place. Take a moment for this anonymous poll to provide your own input on this hot topic:


- Broc Romanek

June 2, 2011

A Fifth Say-on-Pay Lawsuit

As I recently blogged, there has been a trend of companies that fail to garner majority support for their say-on-pay getting sued - a trend that started last year. In his "D&O Diary Blog," Kevin LaCroix provides details about a fifth say-on-pay related lawsuit - this one filed against Umpqua in a federal district court in Portland. We continue to post pleadings from these cases in CompensationStandards.com's "Say-on-Pay" Practice Area.

Dodd-Frank: 3rd Rulemaking Progress Report

Here is the 3rd progress report from Davis Polk regarding all of the various agencies engaged in Dodd-Frank rulemaking. This month, rules meeting 3 Dodd-Frank requirements were finalized and rules meeting 18 requirements were proposed. This report also details the 87 studies required under Dodd-Frank, two of which are overdue.

May-June Issue: Deal Lawyers Print Newsletter

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

- Appraisal Rights: The Complicated World of Corporate Law's Consolation Prize
- The Deal Lawyer's Guide to Hidden Employee Benefit Issues: An Update Regarding Successor Liability
- Delaware Case Highlights Need for Additional Due Diligence in Merger Acquisitions
- The Art of Written Consent Solicitations
- Helping Parties to Mergers Assess Risk and Negotiate Smarter Deals
- Proposed Reform of U.K. Takeover Regulation

If you're not yet a subscriber, try a "half-price for rest of '11" no-risk trial to get a non-blurred version of this issue on a complimentary basis.

- Broc Romanek

June 1, 2011

Just Added: SEC Chair Mary Schapiro to Our "Say-on-Pay Intensive" Conference Lineup

We are excited to announce that SEC Chair Mary Schapiro will open the second day of 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: 6th Annual Proxy Disclosure Conference" and "The Say-on-Pay Workshop Conference: 8th Annual Executive Compensation Conference." Save by registering by June 24th at our early-bird discount rates. Note this early-bird discount will not be extended.

For those attending, take a moment to RSVP on this LinkedIn Event - in the upper right corner - so your friends can know you are going...

Say-on-Pay: 27th - 31st Failed Votes

Last week, five more companies filed Form 8-Ks reporting failed say-on-pay votes: Constellation Energy (38%); Kilroy ReaIty (49%); Superior Energy (39%); Talbots (47%); and Weatherford International (44%). I keep maintaining our list of Form 8-Ks for failed SOPs in CompensationStandards.com's "Say-on-Pay" Practice Area.

Internal Pay Disparity: S&P 500 CFO Pay Up 26%

Recently, Equilar released this report on CFO pay strategies in the S&P 500 finding that:

- Median total compensation for S&P 500 CFOs grew by 26.1% from 2009 to 2010. In 2010, median total compensation for S&P 500 CFOs was approximately $3.0 million, up from approximately $2.4 million in 2009.

- Median total bonus payouts for S&P 500 CFOs increased to $710,864 in 2010, up 32.7% from the 2009 median of $535,625.

- Healthcare CFOs received the most compensation, having a median total pay of $3.5 million in 2010.

Our June Eminders is Posted!

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

- Broc Romanek