August 31, 2011

The SEC Uses Stop Orders Against Two Chinese Companies

Recently, I have blogged about the risks involved in some Chinese companies, more recently because the US exchanges have listed questionable companies even when the Chinese regulators would not. So it's noteworthy that the SEC's Division of Enforcement recently issued two stop orders to prevent effectiveness of the registration statements of two Chinese companies (whose auditors had resigned and trading had been halted several months earlier). Stop orders are fairly rare but certainly seem warranted in this case (here's stop order for China Century Dragon Media and here's stop order for China Intelligent Lighting and Electronics).

What might a Chinese company - one incorporated in the Cayman Islands - do when accused of fraud? How about move the assets to another company and leave 8000 employees stranded...

The Problems of Chinese Reverse Mergers

In this podcast, Matt Orsagh of the CFA Institute talks about reverse mergers for some Chinese companies that have implications for investors:

- What has the PCAOB said about Chinese reverse mergers?
- What do you think is the biggest risk for investors in these companies?
- How should investors go about analyzing these companies?

Enforcement Actions: Compare PCAOB vs. SEC

In a trio of recent enforcement actions, the PCAOB recently barred three certified public accountants for 2-3 years. It is a positive development to see the PCAOB take action against CPAs in such instances. In one of the actions, an audit partner was fined $50,000 for providing misleading documents to the PCAOB and not being truthful with respect to whether documents had been changed. The PCAOB can fine an individual up to $750,000 and a firm up to $15 million. In this case, the fine for misleading the PCAOB was 1/15th of the maximum. It will be interesting to see if the state boards of accountancy take action.

Lynn Turner notes "the enforcement actions do not name the company being audited. That is in contrast to SEC enforcement actions which do often name the company. I don't believe there is anything in Sarbanes-Oxley that prevents the PCAOB from informing investors as to the name of the company. IT will be interesting to see if that is a trend."

- Broc Romanek

August 30, 2011

New Bill Would Moderate the Dodd-Frank Whistleblower Provisions

Here's the latest on attempts in Congress to tweak Dodd-Frank, courtesy of this alert by Cooley's Cydney Posner which is repeated below:

They're at it again! H.R. 2483, the ''Whistleblower Improvement Act of 2011,'' takes another stab at remaking Dodd-Frank, this time by modifying the whistleblower provisions set forth in Section 21F of the Exchange Act. The bill would require, as a prerequisite to receiving a whistleblower bounty, that the employee first report the matter to his or her employer. The bill was introduced at the end of last week by Representative Michael Grimm (R-NY) and is co-sponsored by four other Congressman, Reps. John Campbell (R-CA), Bill Flores (R-TX), Scott Garrett (R-NJ) and Steve Stivers (R-OH). The bill was referred to the House Committees on Financial Services and Agriculture.

The bill is designed to address the most contentious aspect of the SEC's final whistleblower rules - the SEC's decision not to mandate internal compliance reporting, prior to or contemporaneously with SEC reporting, as a prerequisite to eligibility for a whistleblower bounty. Critics charged that mandatory internal reporting would deter many whistleblowers, while advocates contended that allowing whistleblowers to bypass companies' internal compliance programs would have a corrosive effect on these programs (including those mandated by SOX) and undermine companies' ability to address the wrongdoing. The SEC's decision not to mandate internal reporting arose out of its concern that employees could be hampered in internal reporting if, for example, management were involved in the misconduct.

The bill would amend Section 21F to require that, to be eligible for a whistleblower award, an employee who provides information relating to a violation of the securities laws that was committed by his or her employer (or by another employee of his or her employer), must first report the information to his or her employer before reporting to the SEC and then must report that information to the SEC within 180 days after internal reporting.

However, the bill does attempt to address the SEC's concern regarding potential deterrents to internal reporting. Under the bill, whistleblowers who did not comply with the internal reporting requirement could still be eligible for awards if the SEC determined the following:

- that the employer lacked either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting; or
- that internal reporting was not a viable option for the whistleblower based on either (i) evidence that the alleged misconduct was committed by or involved the complicity of the highest level of management, or (ii) other evidence of bad faith on the part of the employer.

The bill would also amend Section 21F to make ineligible any whistleblower who had legal, compliance or similar responsibilities and had a fiduciary or contractual obligation to investigate or respond to internal reports of misconduct or violations (or to cause the entity to do so), if the information learned by the whistleblower in the course of duty was communicated to the him or her with the reasonable expectation that he or she would take appropriate steps to respond.

Currently, Section 21F requires that awards be at least 10% and no more than 30% of the total monetary sanctions collected on an action. The bill would eliminate the minimum award requirement and cap awards at 30% of the amount collected. Also, under Section 21F, any whistleblower convicted of a criminal violation related to the matter is ineligible for an award. The bill would expand the exclusion from eligibility for culpable whistleblowers to include civil liability or other determination by the SEC that the individual committed, facilitated, participated in or was otherwise complicit in the misconduct.

Under the bill, the SEC would be required to notify the entity prior to commencing any enforcement action related to a whistleblower complaint to enable the entity to investigate the alleged misconduct and take remedial action, unless, based on evidence of bad faith or complicity in the misconduct at the highest levels of management, the SEC determined that notification would jeopardize the investigation. If the notified entity responded in good faith, which may include conducting an investigation, reporting its results to the SEC and taking appropriate corrective action, the SEC would be required to treat the entity as having self-reported the information and its actions in response to the notification evaluated accordingly.

With regard to the anti-retaliation provisions of Section 21F, the bill would make clear that employers would not be prohibited from enforcing any established employment agreements, workplace policies or codes of conduct against a whistleblower, and that any adverse action taken against a whistleblower for violation of those agreements, policies or codes would not be considered retaliation, as long as enforcement was consistent with respect to other employees who were not whistleblowers.

The bill would also make corresponding changes to Section 23 of the Commodity Exchange Act.

Be sure to tune into our upcoming webcast - "Preparing for the SEC's New Whistleblower Rules: What Companies Are Doing Now" - on September 13th. We will be joined by Sean McKessy, Chief of SEC's Office of the Whistleblower, as well as a great panel of outside counsel.

FINRA's New Social Media Guidance: Guidance for Companies?

From Suzanne Rothwell: Recently, FINRA issued updated guidance to broker/dealer firms on social networking websites in Regulatory Notice 11-39. This Notice supplements guidance issued early last year in Regulatory Notice 10-06. Although the FINRA requirements are specific to the regulatory environment for broker-dealers, companies may nonetheless find some of the guidance useful in developing a social media policy for themselves - particularly where employees use social media sites for business purposes - and in reviewing the company's website.

The most recent FINRA Notice clarifies that broker-dealer employees may use smart phones or tablet computers and other personal communication devices to access the firm's business applications so long as the business and personal communications can be separated on the device thereby enabling the firm to retrieve and supervise the business communications without accessing the employee's personal communications.

In addition, a principal of the broker-dealer firm must review prior to use any social media site that an associated person intends to employ for a business purpose. A broker-dealer firm is responsible for training its associated persons on its social media policies and must follow up on "red flags" that might indicate non-compliance with firm policies.

FINRA points out that some firms require that associated persons annually certify compliance with the policies and some firms randomly spot check the websites of associated persons to monitor compliance with firm policies. The Notice also warns that a broker/dealer firm is responsible for ensuring that a data feed to the firm's website does not contain inaccurate information and should not include a link on its website to a third-party site that the firm knows has false or misleading content (for which the firm will be responsible if it endorses the content on the third-party site).

SEC Decides to Rescind Form F-9

Recently, as noted in this Paul Weiss memo, the SEC decided to eliminate Form F-9, effective as of December 31, 2012. Form F-9 is the SEC's Multijurisdictional Disclosure System form used by some Canadian companies to register investment grade debt and preferred securities. One of the reasons for the SEC's decision is Dodd-Frank's Section 939A that directs the SEC to propose alternative criteria to replace rating agency criteria. Thus, Form F-9 had become largely duplicative of Form F-10. Still, it's notable because it's pretty rare that the SEC rescinds a form.

- Broc Romanek

August 29, 2011

Corp Fin Comments on Fracking: A Special Disclosure Review Project?

Last week, the WSJ ran this article about how Corp Fin is peppering oil & gas companies with comments about fracking. Members were quick to ask: "Is Corp Fin pulling the '34 act reports for all oil & gas companies as part of a special targeted review project?"

Personally, I don't think that these is a "special" review project and that these comments are being delivered in the normal-course review process. Clearly, this has been a big topic for the oil and gas industry for some time. For example, the Interfaith Center on Corporate Responsibility ran this press release on Friday noting the WSJ article and that an investor coalition has been pressing 2 dozen companies on this issue through shareholder proposals since '09. So it's become a high profile issue and perhaps Corp Fin's actions will help head off any Congressional action in this area.

Here are some random examples of comment letters that Corp Fin has sent recently:

- ExxonMobil
- Lone Pine Resources
- Bill Barrett Corp.
- Cabot Oil & Gas

Proxy Access: CII Urges SEC to Appeal Court Decision

As noted by Ted Allen in ISS's Blog, the Council of Institutional Investors has sent this letter to SEC Chair Schapiro urging the agency to seek an en banc rehearing from the full US Court of Appeals for the D.C. Circuit over the adverse decision by a 3-judge panel of the DC Circuit Court last month. The SEC has until September 6th to decide whether to appeal the Business Roundtable/Chamber of Commerce case.

More Thoughts on Proxy Access and Judicial Review

I've blogged several times recently about the DC Circuit's proxy access decision in the Business Roundtable/Chamber lawsuit and its implications far beyond proxy access. Here's some thoughts on the topic - as well as proxy access itself - from Prof. Larry Hamermesh of the Widener University School of Law, fresh off his stint as a Corp Fin Fellow at the SEC.

- Broc Romanek

August 26, 2011

Dodd-Frank: Mitt Romney Looking for a Repeal

The leading Republican contender for his party's nomination - Mitt Romney - apparently would like to roll back the clock, take another swing at regulatory reform and repeal Dodd-Frank, or at least parts of the year-old law. Here are excerpts from a recent Boston Globe article:

In the past, Romney has criticized the bill for creating uncertainty in the financial industry and causing bankers and the financial service employees to pull back. Today, he went further and said he would repeal Dodd-Frank, if he were elected president. "The extent of regulation in the banking industry has become extraordinarily burdensome following Dodd-Frank," Romney told a roundtable of 18 businessmen at The Common Man Restaurant.

"I'd like to repeal Dodd Frank, recognizing that some revisions make sense," Romney said. In July, Romney was unable to name specific parts of the bill that he liked or disliked. When asked, he said only, "It's 2,000 pages. I'm sure there's something in there that's good...I'd be happy to take a look at it perhaps line by line at some point and lay out the provisions that I think are unfortunate.''

Today, he was more specific. Romney said he believes it does make sense to regulate derivatives. He said it also makes sense to have different capital requirements if someone is holding a home mortgage compared to someone holding high-risk securities. "Some features have to be addressed," he said. At the same time, he said, the 2,000 pages of the bill are "overwhelming" for community banks and the fact that pages of rules must still be written creates too much uncertainty.

It's always fascinating to see which business issues become focal points in the Presidential campaign. Last time around, CEO pay became a high profile issue and that may well happen again. I'm not sure why the length of Dodd-Frank itself should be an issue. I suppose it has to do with the "smaller & less intrusive government" movement - and the sheer length of a bill somehow becomes a proxy for its true impact. Candidate Herman Cain initially wanted bills to be limited to 3 pages!

I guess Romney is betting that most of the voting public won't recall that it took Congress over two years to pass anything in response to the financial crisis (not that I think that Dodd-Frank is perfect by any stretch of the imagination). So the question remains: "How long a piece of legislation did that near-Depression warrant?" Take the poll below...

In more political news, according to this LA Times article, Rick Perry will be hamstrung by new SEC rules that inhibit donations from financial services company employees to sitting governors.

The PCAOB's Upcoming Roundtable on the Auditor's Reporting Model

Yesterday, the PCAOB announced that it will host a roundtable on September 15th to discuss its recent concept release on possible changes to the auditor's reporting model. Here's the related briefing paper. Here's some thoughts from Jim Peterson's "Re:Balance" Blog on the concept release.

Poll: Congressional Legislation & Does Size Matter?

Please take a moment for this anonymous poll:

- Broc Romanek

August 25, 2011

More on "The PCAOB's New Concept Release on Auditor Rotation & Independence"

Last week, I blogged about the PCAOB's concept release on mandatory audit firm rotation - which essentially floats the idea of mandatory firm rotation every 10 years, at least for large companies. Here's some thoughts from a Forbes' article penned by Francine McKenna. And here's a reaction from an inhouse member:

The thing that surprised me the most as I read through this release is that it essentially admits that not only have the regulators not found any correlation between audit failures and long-term audit firm tenure -- but academic studies essentially have found the opposite. On a related note, the concept release quotes heavily from a detailed GAO study issued in 2003 that recommended against mandatory rotation for a variety of reasons, including estimates that initial year audit costs would increase by over 20% and that there would be an increased risk of audit failures in the early years of the audit. The concept release even admits that based on its experience conducting inspections since the GAO report, the PCAOB believes that audit quality has improved since then -- yet they still put out this release, stating generally that "more can be done to bolster auditors' ability and willingness to resist management pressure."

In light of all this, I have to believe that some comment letters will be tempted to quote from the recent proxy access decision, to remind the regulators that they must adequately consider the effect of any new rules upon efficiency, competition and capital formation. In addition, that case reminds the regulators that they must rely on sufficient empirical evidence when claiming benefits of a new rule - the agency must examine the relevant data and articulate a satisfactory explanation for its action, including a rational connection between the facts found and the choices made. I understand that we are just at the concept release phase - and do not even have proposed rules never mind final rules to fight at this stage. But I think the PCAOB really has an uphill battle on this one, and I can't figure out why they are pursuing something like this at this time.

Voluntary Early Disclosure of Material Events: Is it OK to Stop?

I just finished reading the July-August issue of The Corporate Counsel that was just mailed and I was struck by this question because it's something I've often been asked. In other words, whether an issuer that chooses to report under Item 8.01 of Form 8-K material events that are not required to be reported on Form 8-K has created a duty to continue filing voluntary 8-Ks when similar events occur in the future? The theory is that the duty would be based on an implied representation to investors that such events will be disclosed promptly rather than after the end of the quarter, on Form 10-Q/K. This question is different from the question of whether an issuer has a "duty to update" previously disclosed information. Check out your copy of the July-August issue to read Alan Dye's analysis on this challenging topic (or if not yet a subscriber, try a "Rest of 2011 for Free" when you try a '12 No-Risk Trial).

Mailed: July-August Issue of The Corporate Counsel

The July-August issue of The Corporate Counsel was just mailed to subscribers. This issue includes important practical guidance on:

- What You Should Be Doing Now With Respect to Proxy Access
- Staff Confirms/Clarifies 8-K and S-K Item 401 Interpretations
- Disclosure of Broker Non-Votes on the Say-on-Frequency Proposal
- Use of Non-GAAP Financial Measures to Demonstrate (vs. Explain) Pay for Performance
- The CSX Case--Still Not Clear Whether Cash-Settled Equity Swaps Confer 13(d) Beneficial Ownership
- Voluntary Early Disclosure of Material Events--Is it OK to Stop?
- Whither the Devon Energy Corp. 701 No-Action Letter?
- Communications with Auditors: Citing the Right Auditing Standard

Act Now: Get the "Rest of 2011 for Free" when you try a '12 No-Risk Trial now.

- Broc Romanek

August 24, 2011

Earthquake! SEC's EDGAR Temporarily Suspended!

Wow. Two earthquakes in a year over here in DC. After none for the first three decades that I have lived here. Maybe not a big deal for those out in California, but yesterday's quake scared this bald guy (and broke a few vases). Many workers were sent home early after being evacuated, making the commute a real mess. And some national treasures suffered damage, like cracks in the Washington Monument and broken spires on the National Cathedral.

Even the SEC felt the "shakes," as this notice was posted on the agency's home page last night:

The SEC has temporarily suspended operation of its EDGAR filing system as a precautionary measure due to Tuesday's earthquake activity in the Washington, D.C. area. The system will be available tomorrow (Wednesday, 8/24) during regular business hours. For specific filer questions, SEC staff will be available to provide filer support for those filers attempting to submit documents during the temporary shutdown. Please contact Filer Support at 202-551-8900 for assistance.

At this point, it's unclear if any "live" filings were impacted by the Edgar suspension since this notice was posted after the 5:30 pm cut-off. So, we don't know at what time Edgar went off-line. If there were any missed filings that need backdating, sometimes the SEC allows for a blanket exemption - and sometimes requests for relief are needed. I imagine that the SEC will advise on this today.

Earthquake: The Aftershock Picture

Many pictures have been posted in the wake of what was a historical event in DC ("where were you during the quake of '11?"). Here is my aftershock "crazy-eyes" picture:

broc shock 2.JPG

Poll: What Caused the Quake?

Please take a moment for this anonymous poll regarding what caused the DC earthquake:

- Broc Romanek

August 23, 2011

The Future is Here! E-Forums for Shareholders Meetings

Want to hear some mind-blowing numbers when it comes to shareholder participation for an annual meeting online? In this podcast, Jared Brandman of The Coca Cola Company describes his company's experience using an e-Forum for an annual shareholders meeting for the first time, including:

- What was your first year's experience with the e-Forum like?
- How much work did the Forum end up being, both before and after the annual meeting?
- How hard was it to convince senior management to try the e-Forum?
- For those out there considering a Forum, what pointers would you give them now?

The "Man U" IPO: Singapore Bound!

Although relatively rare, there certainly are precedents for sports teams to sell stock to the public (egs. Green Bay Packers; Florida Panthers). But it's big news that the most popular team in the world - Manchester United, a UK football (ie. soccer) team - is selling a minority interest in an IPO. No, this high profile company will not be listed in the US - nor will it be listed in the United Kingdom. The owners have chosen Asia - but not even Hong Kong. It will be Singapore as noted in this Business Insider article.

Did you know that the Boston Celtics even sold securities to the public at one point in time? It was structured as a limited partnership, but the LP owners were all bought out in '02 when the team's controlling ownership changed hands. The Cleveland Indians were also publicly traded for a time in the '90s.

SEC Adopts Rules to Suspend Duty To File Asset-Backed Reports Under Section 15(d)

Last week, the SEC adopted rules under Section 942(a) of Dodd-Frank to provide certain thresholds for suspension of the reporting obligations for asset-backed securities issuers.

- Broc Romanek

August 22, 2011

A Disturbing Trend: Congress Forcing Corporate Disclosure for Social Issues

On Friday, I blogged a member's negative reaction to the obscure provision in Dodd-Frank that requires the SEC to adopt rules eliciting disclosure regarding "conflict minerals" in the Congo. Many corporate lawyers and others in the corporate community (which includes many shareholders) share that member's reaction. Now, Rep. Carolyn Maloney (D-NY) has introduced a House bill entitled the "Business Transparency on Trafficking and Slavery Act" (H.R. 2759) that would require companies to disclose efforts to identify and address the risks of human trafficking, forced labor, slavery and child labor in their supply chains.

Although these bills are well-meaning, attempting to solve the world's problems through SEC filings simply is the wrong - and very expensive - way to go. How in the world did Congress start thinking they should influence foreign policy, as well as domestic social and environmental issues, through SEC filings to the determent of shareholders? Well, before Dodd-Frank, Rep. Frank Wolf (R-Va.) used an omnibus appropriations bill in early '04 to require companies to disclose business activities in countries designated by the State Department as sponsoring international terrorism (Wolf particularly was targeting Iran). Corp Fin's "Office of Global Security Risk" was born.

And even before that, the SEC's Y2K interpretive release in '98 that elicited MD&A disclosures regarding risks associated with potential computer problems (yours truly is the contact person on that release!) was essentially forced upon the agency behind closed doors by some members of Congress. And before that, I would imagine there have been other closed door situations (perhaps the SEC's interpretive guidance in '88 that elicited disclosure of illegal or unethical activities relating to government defense contract procurements).

These older examples, however, didn't involve actual legislation and thus could be quickly unwound by the SEC if found problematic. In comparison, the SEC doesn't have any leeway to change a legislative provision that elicits unwarranted - and expensive - immaterial disclosures. When it comes to foreign policy or social issues, Congress should leave the disclosure process alone and not try to stick its pet projects on the backs of companies and their shareholders!

Rating Agencies Under Fire: Former Moody's Analyst Breaks Silence

On top of the DOJ and Congressional investigations of S&P in the wake of the downgrading of the United States - one can only wonder how all three of the credit rating agencies have not been fully investigated in the years since the subprime crisis hit tilt - it appears that a former senior Moody's analyst, William Harrington, has blown the whistle on his former employer in the form of his 78-page comment letter submitted to the SEC (read beyond the odd cover page), as described in this Business Insider article. Here is an excerpt from that article:

We've included highlights of Harrington's story below. Here are some key points:

- Moody's ratings often do not reflect its analysts' private conclusions. Instead, rating committees privately conclude that certain securities deserve certain ratings--and then vote with management to give the securities the higher ratings that issuer clients want.

- Moody's management and "compliance" officers do everything possible to make issuer clients happy--and they view analysts who do not do the same as "troublesome." Management employs a variety of tactics to transform these troublesome analysts into "pliant corporate citizens" who have Moody's best interests at heart.

- Moody's product managers participate in--and vote on--ratings decisions. These product managers are the same people who are directly responsible for keeping clients happy and growing Moody's business.

- At least one senior executive lied under oath at the hearings into rating agency conduct. Another executive, who Harrington says exemplified management's emphasis on giving issuers what they wanted, skipped the hearings altogether.

Will Corp Fin Comment on XBRL Exhibits?

Jill Radloff of Leonard Street & Deinard reports the following in her " Blog":

A review of many comment letters issued to date indicates so far the SEC has not routinely issued comments on the interactive data file, or XBRL, exhibits. The most frequent comment we found was regarding incorrectly checking the XBRL question on the cover page of Forms 10-K or 10-Q. Some of the other comments we found are set forth below.

Hyatt Hotels


Please tell us how you determined you are not required to submit electronically and post on your corporate Web site, Interactive Data Files pursuant to Rule 405 of Regulation S-T. Refer to Item 601(b)(101) of Regulation S-K.


Item 601(b)(101) of Regulation S-K states that an Interactive Data File is required to be submitted to the Commission and posted on a registrant's corporate Web site based on the phase-in schedule outlined in Item 601(b)(101)(i)(A - C). Item 601(b)(101) of Regulation S-K also states that an Interactive Data File first is required for a periodic report on Form 10-Q.

Reference is made to Question 105.07 of the Commission's Compliance and Disclosure Interpretations ("C&DIs") of the Commission's interactive data rules. The Company completed its Initial Public Offering in November 2009. As such, the Company first qualified as a "large accelerated filer" as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of December 31, 2010. Following the guidance set forth in Question 105.07, because the Company did not qualify as a large accelerated filer until December 31, 2010 the Company was not required to submit Interactive Data Files until its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011 (the "1Q2011 Form 10-Q"). The Company filed its 1Q2011 Form 10-Q with the Commission on May 3, 2011. The Company then filed Amendment No. 1 to its 1Q2011 Form 10-Q with the Commission on May 20, 2011, the sole purpose of which amendment was to furnish Exhibit 101 to Form 10-Q in accordance with Rule 405 of Regulation S-T. In accordance with Rule 405(a)(2) of Regulation S-T, Amendment No. 1 to the 1Q2011 Form 10-Q was filed with the Commission within 30 days of the filing date of the 1Q2011 Form 10-Q.

Amdocs Limited


We note that you did not file the certifications required under Rules 13a-14(a) and 15d- 14(a) of the Exchange Act with your amendment to the Form 20-F for the fiscal year ended September 30, 2010. Please tell us how you considered including the required certifications in your amended Form 20-F and the reason for omitting such certifications.


Pursuant to Rule 405(a)(2) of Regulation S-T, the Company filed the Amended Form-20-F solely for the purpose of submitting its interactive data file for the fiscal year ended September 30, 2010 (the "Interactive Data File"). The Interactive Data File was prepared under the same disclosure controls and procedures in place during the Company's preparation of the Form 20-F and reflects the same information about the Company's financial condition, results of operations and cash flows that was reported in the Form 20-F. The Company believes that the certifications filed as exhibits to the Form 20-F, pursuant to Rules 13a-14(a) and 15d- 14(a) of the Exchange Act, are also applicable to the disclosure contained in the Amended Form 20-F.

According to the Commission's Compliance and Disclosure Interpretations, Question 130.1 related to Rule 405 under the Securities Act of 1933, as amended (issued May 29, 2009) (the "C&DI"), in an amendment filed for the sole purpose of submitting its interactive data file, the Commission requires an issuer to include the cover page, an explanatory note, the signature page, an exhibit index, and exhibit 101. The C&DI does not state that that new certifications must be filed with such an amendment. Lastly, although the Company acknowledges that the practices of other issuers are not dispositive, the Company's review of other public filings suggests that numerous other issuers take the position that new certifications are not required to be filed with an amended filing filed for the sole purpose of submitting an interactive data file.

Dr. Pepper Snapple Group


We note you calculated the aggregate market value of common equity held by non-affiliates to be $5,382,637,225 as of June 30, 2009, and that you did not indicate by check mark whether you have submitted electronically and posted on your corporate Website, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T. Please tell us whether you have filed such interactive data, and if not, explain to us why you have not provided the interactive data files pursuant to Rule 405 of Regulation S-T.


As more fully discussed in our public filings, we became a public company on May 7, 2008 with the spin-off by Cadbury plc of its beverages business in the United States, Canada, Mexico and the Caribbean. We became a "large accelerated filer" on December 31, 2009 under Rule 12b-2 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934.

Under Regulation S-K (Item 601(b)(101)(i)) an Interactive Data File is required to be submitted to the Commission and posted on the registrant's corporate Web site in the manner provided by Rule 405 of Regulation S-T by "a large accelerated filer that had an aggregate worldwide market value of the voting and non-voting common equity held by non-affiliates of more than $5 billion as of the last business day of the second fiscal quarter of its most recently completed fiscal year that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States and the filing contains financial statements of the registrant for a fiscal period that ends on or after June 15, 2009", except that an Interactive Data File is first required for a Form 10-Q.

Since we first became a large accelerated filer on December 31, 2009 and had market value in excess of $5 billion as of last day of our second quarter in calendar year 2009, under our reading of the above-noted rule, the first filing for which we would be required to file an Interactive Data File would be our Quarterly Report on Form 10-Q for the first quarter ended March 31, 2010 ("our next Form 10-Q"). As a result, we will file an Interactive Data File with our next Form 10-Q.

With respect to our decision to not indicate by check mark on the facing page of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 ("our 2009 Form 10-K") whether or not we had submitted the Interactive Data File electronically and posted it on our corporate website, we relied on Question 105.04 of the Compliance and Disclosure Interpretations posted by the Division of Corporation Finance, which provides that "[a] company should not start checking the cover page box relating to Interactive Data File compliance until it is required to submit those files". In our view, at the time we filed our 2009 Form 10-K, we were not then required to comply with Rule 405 for the reasons noted above. We will check mark the facing page of our next Form 10-Q to indicate our compliance with the Interactive Data File rules.

- Broc Romanek

August 19, 2011

A Little Debunking of the SEC's Records Destruction: "What is a MUI?" & More

Yesterday, I blogged about the story sweeping the mass media about how a SEC Enforcement attorney had blown the whistle to Sen. Grassley regarding how the agency had been routinely destroying records relating to MUI's that hadn't panned out for formal investigations. A lot of sexy components to this story, but when you stop and think about it, it seems like a "made for the media" story based on the facts as reported so far. Below are a few of my thoughts (in addition, here's thoughts from Prof. David Albrecht and Bruce Carton).

1. What is a MUI? - To best understand what the hubbub is all about, it's essential that one knows exactly what a MUI is. A MUI - stands for "Matter Under Inquiry" - is simply a database entry by a SEC Enforcement Staffer anytime a Staffer comes across anything remotely suspicious. It plants a flag for the rest of the SEC Staff to know that someone else came across something about the same incident/person - this enables the Staff to avoid duplication of effort and allows for coordination. In the vast majority of cases, the MUIs are really nothing at all - some Staffer read a newspaper article perhaps that sounded a little curious and inputted it into the database in case another Staffer comes across something more suspicious.

2. Gary Aguirre's Involvement - One interesting angle is that the complaining SEC lawyer - Mr. Darcy Flynn - is being represented by none other than former SEC lawyer Gary Aguirre, who you may recall was the rabble-rouser who kicked off the whole firestorm over the Pequot/John Mack insider trading fiasco several years ago and ended up getting a big dollar settlement from the SEC to resolve his claim of wrongful and retaliatory termination (with a lot of help from the grandstanding of Grassley & Co.). I guess Gary has been around the block as a SEC whistleblower and maybe he'll be representing all SEC Staffers who bring allegations to light?

3. Some Oddities Do Exist - While my overall sentiment is that there doesn't appear to be anything too nefarious about this situation as reported, it does raise the legitimate question of whether the SEC has been complying with federal record retention laws when it comes to MUIs. I have no idea what those laws require, but presumably they exist (see today's NY Times' article that says the National Archives and Records Administration has written 3 letters to the SEC since July 2010 on the matter) - and it does seem odd that the Enforcement Staff would routinely discard documents relating to MUIs immediately upon closing the matter out. You'd think they'd want to keep them in case a week later another complaint comes in about the same subject matter or company, and the new complaint is convincing that the matter deserves closer scrutiny after all.

4. 60-Day Lifespan for MUIs - Note that under current SEC Enforcement policy, a MUI has a maximum life span of only 60 days (unlike the old days when I was there when I think the lifespan was indefinite). Within the first 60 days, the Staff must either close the case or convert it to an "investigation" (either formal or informal), or the computer system automatically converts it to an "investigation" at 60 days. Once it becomes an investigation (regardless of how), I assume the record retention policy is a bit more strict. For general and official background on MUIs and their conversion to investigations, see Section 2.3 of the Enforcement Manual.

How Congress Devastated the Congo

A member sent this reaction to this NY Times op-ed while I was away (also see this Cooley alert):

While I do understand and agree with the laudable intentions of its proponents, I believe that the "conflict minerals" section of Dodd-Frank is the worst securities law I have ever seen. I think it is unwise to try to address this issue through a disclosure law. When the NY Times (not The Wall Street Journal) publishes an editorial that states that the law is hurting rather than helping the people it is supposed to benefit, it makes me doubly angry.

I do appreciate that many well-intentioned activists in the environmental and social causes communities believe that they should have a way to pressure corporations and their boards to consider their views, some of which I share. The conflict minerals law, however, is a quantum leap from the social activism inherent in much of the Rule 14a-8 process. The law seeks to use the US securities regulatory regime to solve a problem it is ill-equipped to solve, with unforeseen and unintended consequences and unjustifiable costs. That the problem is horrendous does not mean that securities disclosure is the way to address it.

Nuggets from "The Advisors' Blog"

We continue to post new items daily on our blog - "The Advisors' 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:

- Senate Bill: An End to Tax Breaks for Stock Options?
- SEC Commissioners Reject Enforcement Staff Proposal to Settle Clawback Case
- Clawbacks: Open Issues for the SEC
- Senate Democrats Defend Pay Equity Disclosure Provision
- View from the Equilar Conference Summit

- Broc Romanek

August 18, 2011

Not a Good Headline: "SEC Destroyed Files on Wall Street Probes"

Going through the news headlines as I return from vacation, I can see that it's more of the same for the SEC: getting pummeled in the press. The latest is a story broken by "Rolling Stone" magazine - of all things - about how the Enforcement Division destroyed thousands of documents when things didn't pan out on a MUI ("matter under inquiry"). The story broke due to an investigation led by Sen. Grassley - who's been gunning for the SEC for quite some time - after he learned of revelations by a current Enforcement Staffer who works in the records preservation area of the Division and who's claiming protection under whistleblower laws.

This excerpt from an article in today's NY Times tells the story as we know it so far (here's the WSJ article fyi):

An enforcement lawyer at the Securities and Exchange Commission says that the agency illegally destroyed files and documents related to thousands of early-stage investigations over the last 20 years, according to information released Wednesday by Congressional investigators. The destroyed files comprise records of at least 9,000 preliminary inquiries into matters involving notorious individuals like Bernard L. Madoff, as well as several major Wall Street firms that later were the subject of scrutiny after the 2008 financial crisis, including Goldman Sachs, Lehman Brothers, Citigroup and Bank of America. The S.E.C. is the very agency that is charged with making sure that Wall Street firms retain records of their own activities, and has brought numerous enforcement cases against firms for failing to do so.

The agency's records were routinely destroyed under an S.E.C. policy, since changed, that called for the disposal of records of a preliminary inquiry that was closed if it did not get upgraded to a formal investigation, according to Congressional records and people involved in inquiries into the matter. The agency believes that both the original policy and the new rules comply with federal document-retention laws. John Nester, an S.E.C. spokesman, said that while the agency was not required to retain all documents, it changed its policy last year regarding destruction of files for "matters under investigation," the category of initial inquiry by the S.E.C.'s enforcement division that is the subject of the current scrutiny.

Changes were made to the S.E.C. policy after questions about the document destruction were raised in early 2010 by Darcy Flynn. Mr. Flynn, an employee of the S.E.C.'s enforcement division for 13 years, began a new job in January 2010 helping to manage the disposition of records for the division. Mr. Flynn, who continues to work at the S.E.C., has sought protection under federal whistle-blower laws.

Dodd-Frank: Business Groups Targeting Next Batch of Rules to Attack in Court

As I blogged several weeks ago, the DC Circuit's proxy access decision in the Business Roundtable/Chamber lawsuit could have implications far beyond proxy access. This article from today's NY Times notes that business groups have been meeting in DC - one meeting was dubbed "Dodd-Frank Excesses" - to determine which rules to haul into court next, with the SEC's new corporate whistleblower program and a provision surrounding the extraction of oil and natural gas from foreign countries being identified as two potential targets. According to the article, the SEC will be hiring 8 economists over the next 2 years to help with its new burdens during the rulemaking process.

How Much Time Did the SEC Spend on Proxy Access Rulemaking? 21,000 Staff Hours

As I blogged two weeks ago, a trio of House Representatives sought information about how many SEC Staff hours were spent on proxy access rulemaking via this letter. Now, the SEC has responded that 21,000 Staff hours - valued at $2.2 million - were spent writing the rule and $315,000 defending it against a court challenge, as noted in this Bloomberg article.

- Broc Romanek

August 17, 2011

The PCAOB's New Concept Release on Auditor Rotation & Independence

Yesterday, the PCAOB issued a concept release on auditor rotation and independence, as first warned was coming by Chair Jim Doty in a speech shortly after he arrived at the agency two months ago. This is bound to be quite controversial and it appears that the PCAOB will take its time considering the concept as a roundtable on the topic isn't scheduled until March '12. Comments made by some of the newer PCAOB Board Members during the open meeting yesterday indicate that the PCAOB's inspection staff has found numerous problems with independence that has led to this concept release.

The perceived independence issues associated with a company paying the fees of an auditor who performs the company's audits were dealt with in Sarbanes-Oxley in '02 when the lead audit partner and audit review partner were required to be rotated every 5 years. Here's an excerpt from Board Member Steven Harris' remarks during the meeting:

Over the years, many alternatives have been considered to further strengthen auditor independence. For example, prominent individuals such as Paul Volcker and Michel Barnier, the European Commissioner for Internal Market and Service, have suggested at various times consideration of "audit-only" firms. Under this concept, in exchange for the statutory franchise given to the audit profession, auditing firms would perform only accounting and audit related services and not provide non-audit services. Others have suggested lengthening the list of prohibited non-audited services. And it has also been suggested that the mandatory tendering of audit contracts could be required at regular intervals.

While some of these or other alternatives may merit further consideration, they do not address the fundamental conflict of interest inherent in the system. The auditor is paid by the company that he or she audits. And, as a natural and inevitable result of that arrangement, auditors know that if they push management too hard, they risk losing the fee not just for the current audit but, potentially, the fees for an unlimited number of audits in the future. In essence, they risk losing an annuity.

And the stat in this excerpt from Chair Doty's remarks surprised me as I thought changing auditors was fairly rare:

To be sure, when auditors change, there may be a learning curve for the new auditors. But consider this: according to the research firm Glass Lewis, between 2003 and 2006, more than 6,500 public companies, or nearly 52 percent of all public companies, voluntarily changed their auditors. How did auditors and companies manage those changes? What did auditors, and the audit committees that oversee them, do to make sure the new auditors were in a position to provide reasonable assurance in the early years of an engagement? This experience should inform the responses of preparers and auditors to this concept release. The learning curve, and cost-based issues involved in changing audit firms, cannot be fairly described as uncharted waters.

SEC Approves NYSE Rule Allowing Exchange to Favor Certain IR Services

As noted by Dominic Jones in his "IR Web Report," the SEC's Division of Trading and Markets recently approved new Section 907.00 of the NYSE's Listed Company Manual, which will result in the NYSE including information about a suite of "complementary" investor relations services available to listed issuers, including investor relations website and news distribution services from giant Thomson Reuters and shareholder identification services from Ipreo.

Although I didn't submit a comment letter, I did blog my disapproval of the concept that the NYSE's rules should favor secondary services offered by the exchange. And I agree with Dominic's conclusion expressed in this excerpt from his blog:

In its decision, the SEC conceded that by subsidizing the services of some vendors and not others, the NYSE would cause some companies to shift their business to its preferred service providers, but it said that competition between exchanges would lead the NYSE to provide better quality services. The SEC also said it recognized that "some small service vendors may be placed at a disadvantage" by its approval of the rule given that the NYSE contracts only with large vendors capable of providing services to all of its listed companies.

"Nonetheless, the Commission does not believe that the proposal harms the market for the complimentary products and services in a way that constitutes an inappropriate burden on competition or an inequitable allocation of fees, or fails to promote just and equitable principles of trade, in a manner inconsistent with the Act," it said.

My view is that the SEC's decision is disappointing as it will lead to a continuation of the broad stagnation we have seen in the US investor relations services market over the past few years.
Smaller IR service providers will continue to struggle to compete against those vendors subsidized by the NYSE. Meanwhile, the big, subsidized vendors will have little incentive to improve their services when no other vendors are large enough to replace them.

Query: How Many Bald Guys Does It Take To...

Just back from vacation and digging out. Enjoyed our time in Seattle, including a visit with the Pacific Northwest Chapter of the Society of Corporate Secretaries to talk social media. Great pic of the three wise bald men, PACCAR's Kevin Fay; me; and Microsoft's Peter Krause:

- Broc Romanek

August 16, 2011

More on Credit Rating Removal: Rule 134

Another aspect of the credit rating removal rulemaking that I blogged about yesterday is the amendment of Securities Act Rule 134 to remove paragraph (a)(17), which permitted the disclosure of a security rating assigned, or reasonably expected to be assigned, by a nationally recognized statistical rating organization (NRSRO) in a Rule 134 notice (or "tombstone" as some like to call it). Rule 134, of course, provides that a communication published after a registration statement with a Section 10(a) prospectus is on file and limited to the Rule 134 content will not be considered a prospectus or free writing prospectus for the purposes of the SEC's rules.

Rule 134(a)(17) appears to be arguably an innocent bystander in the quest to remove credit ratings from SEC rules and forms prompted by Section 939A of the Dodd-Frank Act, which required the SEC to "review any regulation ... that requires the use of an assessment of the credit-worthiness of a security or money market instrument and any reference to or requirements in such regulations regarding credit ratings." Nonetheless, the SEC believed that the presence of the reference in Rule 134 represented reliance on credit ratings, and ultimately determined that the change would not have a material impact on the information available to investors "because issuers will (as is common now) be able to disclose a credit rating in a free writing prospectus." In fact, the free writing prospectus is now pretty much the only place where a credit rating can be disclosed in a securities offering, because Dodd-Frank's repeal of Rule 436(g), as a practical matter, prevents the disclosure of credit ratings in a prospectus (or report incorporated by reference into a prospectus) for the purpose of offering the security.

The SEC did note that the removal of the safe harbor for the credit rating reference did not necessarily result in a communication that included rating information being deemed to be a prospectus or a free writing prospectus, rather the issuer would have to make the determination now based on all of the facts and circumstances. While that statement is helpful, I am not sure if it provides too much comfort in the Rule 134 context, so that by and large I expect that we will say goodbye to ratings in Rule 134 notices come September 2. (Note that the SEC did not rescind or otherwise amend Item 10(c) of Regulation S-K as part of the quest to remove credit ratings, which governs how disclosure of credit ratings should be provided when an issuer elects to include disclosure of credit ratings in an SEC filing)

Testing the Bounds of the Disqualification Waiver

A few weeks back, the SEC denied Xerox Corporation's request for a waiver of the disqualification provisions of forward looking statement safe harbors found in Securities Act Section 27A and Exchange Act Section 21E, which arose because Xerox acquiree Affiliated Computer Services, Inc. had settled a civil action with the SEC, which subjected Affiliated Computer Services to an order prohibiting future violations of the antifraud provisions of the federal securities laws.

The SEC decided to deny the waiver request on the grounds that the disqualification provisions in the forward looking statement safe harbors did not apply to Xerox, because Xerox acquired Affiliated Computer Services after the violations alleged in the SEC's action were committed and Xerox did not otherwise become subject to the SEC's order. This appears to be the first time that the SEC has addressed this issue.

Large Trader Reporting Rules Adopted

With all of the volatility in the markets over the past few weeks, it reminds us that much of the concern coming out of the financial crisis focused on identifying and evaluating systemic risk. A few weeks back, the SEC moved a bit closer to having enhanced insight into market movements with the adoption of the large trader reporting rules. As this Alston & Bird memorandum notes:

The large trader reporting requirements are intended to provide the Commission with data to support its investigative and enforcement activities, as well as to facilitate its ability to assess the impact of large trader activity on the securities markets, to reconstruct trading activity following periods of unusual market volatility, and to analyze significant market events for regulatory purposes. The Commission has had the authority to adopt a large trader regime for 20 years. In response to the market crash of 1987 (and the less severe break of 1989), Congress passed the Market Reform Act of 1990, which, in part, added Section 13(h) to the Exchange Act.3 Section 13(h) specifically authorized the Commission to establish large trader reporting and was intended to provide the SEC with the ability to identify causes of market disruption. The Commission proposed a large trader registration and reporting regime for the third time shortly before the flash crash of May 6, 2010, in which the Dow Jones Industrial Average fell about 900 points and then recovered those losses within minutes. The flash crash and the recent financial crisis prodded the Commission to finally and unanimously adopt these new requirements.

The rule's effective date is October 2, 2011. Those entities identified as "Large Traders" must comply with the self-identification requirements of Rule 13h-1(b) by December 1, 2011. Broker-dealers must comply with the recordkeeping, reporting and monitoring requirements by April 30, 2012.

- Dave Lynn

August 15, 2011

Dave & Marty on Proxy Access

In the latest installment of the Dave & Marty radio show, Marty and I are in Manhattan discussing the DC Court of Appeals decision in the proxy access case and the implications for the SEC. We also date ourselves yet again with a discussion of our favorite songs from The Allman Brothers Band.

Upcoming Changes to S-3 Eligibility: Staff Relief Possible?

A few weeks back, Broc blogged about the changes to Form S-3/F-3 eligibility adopted by the SEC in response to Section 939A of the Dodd-Frank Act, which directed the SEC to remove credit ratings from its rules and forms. The changes go into effect on September 2, however the rules provide for a 3 year "grandfathering" period whereby issuers with a reasonable belief that they would have been eligible under the old criteria can continue to use the Form. Under the new criteria, S-3/F-3 is available for:

1. An issuer that has issued (within 60 days of the registration statement filing date) at least $1 billion of non-convertible securities other than common equity ( e.g., debt, preferred), in primary offerings for cash (not exchange offers) registered under the Securities Act (excluding, e.g., Rule 144A, Reg. S offerings) over the last 3 years; or
2. An issuer that has outstanding (again within 60 days of the filing date) at least $750 million of the same securities referenced above; or
3. The issuer is a wholly-owned subsidiary of a WKSI; or
4. The issuer is a majority-owned operating partnership of a REIT that qualifies as a WKSI.

Some have expressed concern that, despite the SEC's efforts to address commenters' concerns and keep as many issuers on S-3/F-3 as possible, there are still some investment grade debt issuers who will be excluded going forward, once the grandfathering period comes to an end. We heard from the Staff at the ABA Annual Meeting last week that they would be amenable to considering requests for relief from any issuers who would otherwise lose their status as a result of the changes to the Forms. We also heard from the Staff that issuers relying on the grandfathering provision should generally not be concerned about the need to obtain consents from rating agencies when they are providing required disclosure concerning the reasonable belief that the issuer would have satisfied the investment grade eligibility criteria if it were still in effect (i.e., by referencing the issuer's rating, the actual or anticipated rating for the securities or the belief that the securities would be rated "investment grade").

The bottom line here seems to be that the Staff is going to be somewhat flexible in implementing these particular Dodd-Frank Act-mandated rule changes, so give them a call if you have a concern.

Director Pay Climbs a Bit and Shifts More to Equity

More and more these days, I get questions about director compensation issues, perhaps reflecting the trend toward making director pay more complicated than the old days of cash retainers and meeting fees. As noted in this recent study of 2010-2011 director pay conducted by the NACD and Pearl Meyer & Partners, director pay recently rose 5% at larger firms and 20% smaller firms, with an increasing emphasis on equity compensation in the form of full value shares.

- Dave Lynn

August 12, 2011

W-Day is Here: The SEC's Whistleblower Rules Are Now Effective

Over one year after enactment of the Dodd-Frank Act, the SEC's whistleblower rules go into effect today, establishing a process for lucky whistleblowers to cash in with bounties of up to 30% of the government's recovery when cases involve in excess of $1 million. The SEC's whistleblower website is expected to be updated later today to provide a link to the new Form TCR and FAQs about what the whistleblower rules require with regard to submitting information to the SEC, to submitting a claim for an award under the program and the procedures and considerations in connection with assessing award claims. According to this Reuters article, the SEC Staff has indicated that it will seek to remedy problems with the whistleblower program if they arise.

What will be the hot buttons for whistleblowers? Most likely, alleged Foreign Corrupt Practices Act violations will represent a large portion of whistleblower claims, given the high SEC penalties in those cases and the potential for individuals within an organization to be directly aware of bribes and other potentially illegal conduct. The opportunities are so great that U.S.-based plaintiffs' lawyers are ramping up their advertising throughout Europe, Asia and Africa in order to bring SEC whistleblowers out of the woodwork. Some plaintiffs' lawyers have set up websites or retooled their websites to become SEC whistleblower lawyers - here are just a few:

What will the SEC's whistleblower program mean for companies? At this point it may be too soon to tell, but certainly the specter of whistleblower recoveries puts a premium on (1) having an effective internal reporting program that employees have confidence in, (2) establishing the right tone at the top and (3) educating employees about the internal reporting mechanisms and how they interact with the SEC's whistleblower rules. Further, every manager in the organization should be versed in the anti-retaliation provisions of the SEC's whistleblower rules, so that no inappropriate employment actions or threats are carried out when someone either comes forward internally or goes directly to the SEC. Finally, we will be watching how the whistleblower program affects self-reporting by companies to the SEC, as the prospect of highly motivated whistleblower claims may compel companies to "head them off at the pass" by going directly to the SEC first.

Be sure to tune into our upcoming webcast "Preparing for the SEC's New Whistleblower Rules: What Companies Are Doing Now" on Tuesday, September 13th. We will be joined by Sean McKessy, Chief of SEC's Office of the Whistleblower, as well as a great panel of outside counsel.

Is it a Crisis Because They Say it is So?

The events of the last couple of weeks have inevitably drawn comparisons to the Fall of 2008 (see, e.g., this New York Times article from yesterday), when the bottom fell out of the global financial system and by all accounts we came way too close to the end of the economic world as we know it. Who knows where things will go from here, but there are certainly a few things we can learn from our foggy memories of the 2008 fiasco.

First, things appear to be somewhat different this time - at least for larger companies - because their cash balances are high and leverage is lower, making it easier to weather the storm of volatile markets. In 2008 and 2009, portions of the capital markets were shut down at various times, making it exceedingly difficult for companies to raise capital, turn over maturing obligations, etc.

Second, the dark days of a few years ago taught us the value of having a shelf registration statement on file with the SEC. During and ever since the financial crisis, offerings are generally conducted with as much speed and stealth as can be mustered, because of market volatility and hedge funds that are always looking for a reason to short a company's stock. Many of the offering techniques that are in vogue today, such as over-the-wall deals and registered directs, generally work best when a shelf registration statement is already on file and a takedown can be done quickly and quietly. Getting a shelf on file when you are a WKSI is best, because you generally want to avail yourself of the advantages of that status, which means that the shelf should be filed before your stock price plummets and you know longer qualify for WKSI status (e.g., $700 million or more of worldwide public float).

And finally, August is just a terrible month to try to do a deal or to have bad stuff happen in the economy and the markets, given that so many traders around the world often decamp for their holiday during August, particularly in the last two weeks of the month. It always strikes me as interesting how such a human element - the overriding desire to take a vacation - can have such a significant impact on the markets as a whole.

Webcast Transcript: "Key Disclosure Policies: The Dangers of Standing Pat"

We have posted the transcript for our recent webcast: "Key Disclosure Policies: The Dangers of Standing Pat."

Poll: What Would You Do With Your SEC Whistleblower Bounty?

- Dave Lynn

August 11, 2011

Academics Call for Political Spending Disclosure

A group of 10 academics submitted a rulemaking petition to the SEC earlier this month, asking the agency to consider adopting rules that would require disclosure of corporate political spending. Activism has driven quite a few large companies to disclose details of political contributions in the last few years, but that trend is apparently not enough for this group which calls themselves the "Committee on Disclosure of Corporate Political Spending."

To read our take on this proposal, check out the upcoming July-August 2011 issue of The Corporate Counsel. If you are not a subscriber, take advantage of our "Free for Rest of 2011" no-risk trial to The Corporate Counsel.

The Big GAAP/Little GAAP Debate

While the debate goes on over whether the US will ultimately cede authority for setting GAAP to the IASB with a move to IFRS, an equally vehement debate is raging in the US over the future of standard setting for GAAP applicable to private and public companies. Edith Orenstein discusses the latest round of comments on this issue in the FEI Financial Reporting Blog. The Financial Accounting Foundation (FAF) (the body which oversees the Financial Accounting Standards Board, FASB) is considering whether to establish a private company standard setter that is separate and apart from the FASB.

A Blue Ribbon panel recommended earlier this year that an optional set of modifications and exceptions to standard GAAP be established for private companies, however the question of who would actually establish such modifications and exceptions has created controversy, as various groups consider the FASB to be best suited to the task, while others believe that a separate standard-setting body would be preferable. The AICPA and a number of state CPA societies support the idea of setting up a whole new standard setter for private company GAAP, while others such as FEI's Committee on Private Company Standards suggest a more moderate approach of working within the existing FASB framework.

Of course we have had two standard setters for GAAS for some time, with the PCAOB being the exclusive authority for GAAS applicable to the audits of public companies, while the AICPA continues to establish auditing standards that apply to the audits of private companies. This dichotomy can be somewhat confusing for all of us non-accountants out here (as we also discuss in more detail the upcoming July-August 2011 issue of The Corporate Counsel - so sign up for a free no risk trial today).

More on our "Proxy Season Blog"

Even though the proxy season is over, we still 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:

- 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

August 10, 2011

More from the ABA Annual Meeting: Proxy Mechanics

I am just back from Toronto, and as always there were lots of informative sessions at the ABA Annual Meeting. One session was centered on a roundtable recently conducted by the University of Delaware's John L. Weinberg Center for Corporate Governance, which led to a document entitled "The Report of Roundtable on Proxy Governance: Recommendations for Providing End-to-End Vote Confirmation." This report identifies steps toward improving the shareholder voting process in response to the SEC's proxy mechanics concept release. The report talks about taking the following steps with the shareholder voting process:

1. Early-Stage Entitlement Confirmation: All parties that anticipate submitting votes for a shareholders' meeting should confirm their voting entitlements with the meeting tabulator within a defined period (six days) following the record date.

2. Encouragement of Early Voting: All shareholders are encouraged to cast votes early in the solicitation period and, in any event, no later than three business days before the shareholders meeting.

3. Enhancements to Exception Processing: Tabulators should promptly (within one day) communicate to vote-reporting entities the reasons vote reports are being rejected.

4. Vote Confirmation: The proxy process should enable investors to obtain, via the Internet or other electronic means, a vote confirmation on a demand or as needed basis, utilizing, e.g., existing Voting Instruction Form (VIF) control numbers.

More on FINRA's Plate: Social Media

Yesterday, Broc blogged about a number of things on FINRA's corporate financing agenda. As this Morrison & Foerster memo notes, FINRA Chairman and CEO Richard Ketchum recently noted that FINRA's Social Networking Task Force continues to examine issues relating to the use of social media by member firms, and that FINRA intends to provide further guidance on social media issues later this year. The last guidance that FINRA provided on social media issues was in Regulatory Notice 10-06, and the MoFo memo summarizes the current landscape on social media issues for FINRA-member firms.

Webcast Transcript: "Understanding the Private Company Trading Markets "

We have posted the transcript for our recent webcast: "Understanding the Private Company Trading Markets."

- Dave Lynn

August 9, 2011

From the ABA Annual Meeting: FINRA Corporate Financing Update

Here's a briefing, thanks to Suzanne Rothwell: Yesterday, Joseph Price, Senior Vice President, FINRA's Corporate Financing/Advertising Regulation, briefed the ABA Subcommittee on FINRA Corporate Financing Rules on current rulemaking and matters related to the Corporate Financing Department's review of public offerings. Joanie Ward, Shayna Richardson, and Bleecker Hawkins from FINRA's Corporate Financing Department also participated.

Amend Rule 5110 to Address Terminated Offerings

Mr. Price explained that FINRA staff are developing amendments to Rule 5110 that will: (1) delete a provision that permits a broker/dealer to receive "tail fees" in the event of a terminated offering and(2) amend the Rule to allow the underwriting agreement to include provisions providing for liquidated damages and a right of first refusal (ROFR) in the case of terminated offerings on condition that these provisions shall not become effective if an issuer terminates a broker/dealer for cause. Termination for cause would include a failure by the firm to provide customary services.

Mr. Price stated that the staff hoped to present the proposal to the FINRA Board in September for approval of a Regulatory Notice requesting comments. After comments are considered, FINRA will present a final version of the proposal for Board approval that would be filed with the SEC for additional comment and approval.

Proposed Amendment to NASD Rule 2340 re: DPPs and REITs

The FINRA Board recently approved the publication for comment of proposed amendments to the account statement rule (NASD Rule 2340) that would require changes in how valuations are provided on account statements in the case of unlisted DPPs and REITs. Currently, NASD Rule 2340 allows broker/dealers to use the offering price or par value on customer account statements for the duration of the securities offering (which generally are at least four years and sometimes longer using two or more consecutive registration statements) until 18 months after completion of the offering. Thereafter, the issuer must provide an estimated value for broker/dealers to use on the account statements.

Mr. Price advised that the proposal would require that the account statement valuation for the security during the offering must be a net par value that is the offering price minus any front-end fees. This net par value may only be used on account statements during the "initial" offering period covered by the first registration statement. The proposal would also clarify that a broker/dealer that knows that the issuer's estimated value is unreliable is permitted to refrain from including the issuer's value on the firm's customer account statements. Mr. Price stated that broker/dealers are not required to monitor each valuation for validity.

Based on Mr. Price's explanation of the preparation of the Notice, it appears that the Notice may be published before the end of September.

Proposed Rule 5123: Filing of Private Offerings

Mr. Price advised that SEC staff have provided informal comments on a draft of FINRA's proposal to adopt new Rule 5123 that would require that FINRA members file private placements with FINRA, unless the offering comes within a filing exemption provided in current FINRA Rule 5122, and that the offering document must disclose the intended use of proceeds and offering expenses (including placement agent compensation). FINRA's changes to the proposal would:

1. Clarify that refilling of an amended PPM would only be necessary in the case of a "material" amendment to the PPM, such as a major change that requires recirculation or a new offering.

2. Clarify that each firm participating in a private placement will be responsible for filing because different firms may charge different fees and it may be difficult for a firm to confirm that a PPM was previously filed by another firm.

3. Revise the timing of the filing requirement to be no later than 15 days after the date of first sale in order to be consistent with Form D filing with the SEC.

Mr. Price provided an explanation of FINRA's anticipated review methodology. FINRA appears to be developing sophisticated artificial intelligence technology to identify PPMs that meet a certain risk score, based on numbers of factors. PPMs that display sufficient risk characteristics will be reviewed by FINRA staff. All PPMs filed will also be available to FINRA examiners when they conduct an on-site examination of FINRA members.

Mr. Price explained that if FINRA identifies, for example, an issue related to the issuer's disclosure of the use of proceeds, FINRA review will focus on the broker/dealer's satisfaction of its due diligence obligations under FINRA Rule 2210 (the suitability rule) in light of the problematic disclosure. Mr. Price is hoping that FINRA will be able to identify problematic offerings during the offering period in order to better protect investors. In response to a question, Mr. Price explained that FINRA was not proposing to expand any of the filing exemptions in FINRA Rule 5122 despite recommendations for such changes in some of the comment letters FINRA received when it published the original version of the proposal in Regulatory Notice 11-04.

Implementation of the New COBRADesk System

Joanie Ward and Shayna Richardson provided updates on the status of the development of major changes to the COBRADesk system for use by attorneys to submit information on public offerings for review by FINRA staff under FINRA rules. FINRA staff believe that the new system will significantly facilitate the submission and review of offerings. Ms. Ward stated that she anticipated that the new system would be fully implemented by June 2012. She also stated that the COBRADesk explanatory and guidance materials will be posted on the part of the FINRA website that does not require a COBRADesk password so that they are accessible by all members and their attorneys. Ms. Richardson encouraged the attorneys to continue to provide feedback to the staff on ways to improve review procedures and advised that some of the frequent filers will be contacted to test out the new COBRADesk system.

Setting Up Government Meetings

In this podcast, Lisa Noller of Foley & Lardner discusses strategies to set up a meeting with the government, including:

- How hard is it to set up a meeting with the government?
- How do you know whether you have the appropriate people attending from the government?
- Who should you bring to the meeting?
- What should you tell the government at the meeting?
- How important is follow-up after the meeting?

Flying out early on vacation today. Dave will be manning the blog for the next week. Good time to get out of town! Sell, sell, sell...

- Broc Romanek

August 8, 2011

Proxy Access Decision: Major Impact on Other Rulemakings?

Much has been written about the DC Circuit's proxy access decision in the Business Roundtable/Chamber lawsuit - including conjecture about what the SEC might do now regarding proxy access (see my blog with Stan Keller's thoughts last week). As noted in this excerpt from this Covington & Burling memo, the court's decision could have implications far beyond proxy access itself:

The SEC and other agencies will need to redouble their economic analysis in the rulemaking process. The most significant aspect of the shareholder access decision is its impact on future rulemakings by the SEC and other federal agencies. At its core, this case was about the level of economic analysis that an agency must employ when considering the potential consequences of a rulemaking. The adopting release for Rule 14a-11 included a long and detailed analysis that was intended to address the very issues that the Court ultimately concluded had been inadequately assessed in the rulemaking.

While many will observe that the Court has given the SEC a roadmap for adopting future rules, including potentially a revamped shareholder access rule, a closer reading of the opinion suggests that any such rulemaking will have to be accompanied by substantial economic analysis that may be beyond the resources that the agency can reasonably expend on any one rulemaking. Moreover, the shareholder access litigation sets a high standard for rulemaking by any agency, finding that the arbitrary and capricious standard requires a federal rulemaking to explicitly address the major comments raised in opposition to the rulemaking and provide a detailed explanation of why the rulemaking was not changed in response to such comments. In effect, this decision further elevates the importance of comment letters and even statements by dissenting agency officials.

XBRL: Liability Exemptions Phase-Out for Larger Companies

I've been blogging about a lot of hand-wringing by smaller companies facing mandatory XBRL and the related costs. But there is also cause for concern among larger companies as the XBRL liability exemptions are now phasing out too. As noted in this Skadden Arp's memo:

When the SEC adopted the XBRL filing requirements in December 2008, it recognized the concerns that filers had raised about potential liabilities under the securities laws for errors and omissions in interactive data files by limiting certain liabilities for a two-year period. Each group of companies in the three-year phase-in period is provided the benefit of the two-year limited liability provisions. The limitations include deeming interactive data files "furnished" and not "filed" or part of a registration statement or prospectus for purposes of the liability provisions in Securities Act Sections 11 and 12 and Exchange Act Section 18, and exempting the interactive data file from the anti-fraud provisions of the securities laws if the company makes a good faith attempt to comply with the data tagging rules and promptly amends any deficiency after becoming aware of it.

The two-year limited liability period runs from the due date of the first Form 10-Q--exclusive of the available 30-day grace period for first-time filers noted above--for which a company was required to submit XBRL data. For the first group of companies that were required to comply with the XBRL requirements, large accelerated filers with a market cap of over $5 billion, these limited liability provisions will end on August 10, 2011. Because the filing deadline for the Form 10-Q for the period ended June 30, 2011 for large accelerated filers is August 9, 2011, the first group of companies will not lose the benefits of the limited liability provisions until they file their Forms 10-Q for the period ended September 30, 2011. Given the expiration of the limited liability periods, companies should evaluate their disclosure controls and procedures for interactive data files.

In the "Dodd-Frank Blog," Jill Radloff provides examples of SEC filings amended to include XBRL exhibits. And for those seeking to make XBRL easier, the XBRL Challenge Contest seeks the top open source app for analyzing financial data...

The S&P Report: US Downgraded

Here's a copy of the S&P research report that downgraded the US long-term securities late on Friday. By the way, we occasionally post research reports that are about the broader economy, etc. in the "Credit Quality Reports" section of our "Credit Rating" Practice Area.

Poll: The S&P Downgrade

Please give your anonymous vote on S&P's decision to downgrade the US long-term securities to AA+:

- Broc Romanek

August 5, 2011

A New Shareholder Activist Tactic? Kill the Corporate Charter

As noted in this Working Assets alert, a coalition of environmental groups, led by Rainforest Action and Appalachian Voices, is calling on Delaware Attorney General Beau Biden to revoke Massey Energy's corporate charter. According to this alert (which includes a petition for people to sign), a corporate charter can be revoked when there is "a sustained course of fraud, immorality or violations of statutory law" in Delaware. The activists are seeking to pressure Alpha Natural Resources, which acquired Massey earlier this year, to make changes to its mining operations and replace company executives. Thanks to Gibson Dunn's Beth Ising for pointing this development out.

Potter Anderson's John Grossbauer notes: "I don't believe this type of activist approach has been used before in Delaware. The only thing close are the circumstances in Oberly v. Kirby where the Delaware Attorney General tried to block the sale of a control block of stock of a public company by a Delaware nonprofit corporation. The Attorney General lost this 1991 case because the Delaware Supreme Court said it was not a sale of all or substantially all the nonstock corporation's assets given its purpose was not to hold the shares of a particular company and it needed to diversify its holdings (an issue with which the Hershey trust wrestled more recently)."

Shareholder Proposal Lawsuit: Merck Wins Summary Judgment Dismissal

As I blogged yesterday, oral argument was held in the US District Court of DC in the PETA v Merck shareholder proposal case. As reflected in this order from the court, Merck prevailed when Judge Jackson dismissed the case. People for the Ethical Treatment of Animals (known as "PETA") was seeking a court order to force Merck to hold a special meeting - since the annual meeting had passed and the company had excluded PETA's proposal after obtaining Corp Fin no-action relief - so that shareholders could vote on a proposal that sought to have the company disclose its use of animal testing in in-house and contracted research. As noted in this Legal Time blog:

Hall said this afternoon PETA is weighing appellate options. She noted that Jackson said during the hearing that a more appropriate remedy would have been to seek a preliminary injunction first, a strategy Hall said the group plans to employ if they bring similar suits in the future.

Moxy Vote's Report on Results of Shareholder Proposals

Yesterday, Moxy Vote released this report providing some stats and color commentary regarding the shareholder proposals submitted by its Advocates voted upon during annual meetings during this proxy season. It's a nice supplement to ISS's preliminary post-season report that I blogged about a few days ago...

- Broc Romanek

August 4, 2011

Dave & Marty on Choice of Forum, Crowdfunding and Breweries

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

- Choice of forum provisions
- The crowdfunding phenomenon
- Breweries we'd like to buy

Stan Keller on the Future of Proxy Access

In this brief memo, Stan Keller of Edwards Angell Palmer & Dodge weighs in on the future of proxy access, including the status of the Rule 14a-8 amendment. We have posted a number of memos on proxy access in the wake of the Business Roundtable/Chamber lawsuit in our "Proxy Access" Practice Area.

Speaking of lawsuits, there will be oral argument in the US District Court of DC held today in the PETA v Merck shareholder proposal case. Here's the complaint filed back in April.

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:

- Private Placements: New "Know Your Customer and Suitability Obligations" for Brokers
- "Fifth Analyst Call" and Reflexive Confrontation
- HSN Board Refuses to Accept Director Resignation
- The LinkedIn IPO: A Favorable Comparison to the Internet Bubble Years
- More on "Insider Trading Analysis of Sokol Charges"

- Broc Romanek

August 3, 2011

ISS Releases Its "Preliminary 2011 U.S. Postseason Report"

Recently, ISS released its "Preliminary 2011 U.S. Postseason Report," whose key findings include:

- During the first year of advisory votes on executive compensation under Dodd-Frank, investors overwhelmingly endorsed companies' pay programs, providing 91.2% support on average.

- Shareholders voted down management "say on pay" proposals at 37 Russell 3000 companies, or just 1.6% of the total that reported vote results. Most of the failed votes apparently were driven by pay-for-performance concerns.

- "Say on pay" votes spurred greater engagement by companies and prompted some firms to make late changes to their pay practices to win support.

- Investors overwhelmingly supported an annual frequency for future pay votes, even though many companies recommended a triennial frequency.

- Among governance proposals, the biggest story this year was the greater support for board declassification. Shareholder resolutions on this topic averaged 73.5% support, up more than 12% from 2010, and won majority support at 22 large-cap firms.

- Shareholder resolutions on environmental and social issues reached a new high of 20.6% average support. Five proposals received a majority of votes cast, a new record.

- The arrival of "say on pay" contributed to a significant decline in opposition to directors. As of June 30, just 43 directors at Russell 3000 firms had failed to win majority support, down from 87 during the same period in 2010. Poor meeting attendance, the failure to put a poison pill to a shareholder vote, and the failure to implement majority-supported investor proposals were among the reasons that contributed to investor dissent.

Proxy Access: Will Shareholders Submit Shareholder Proposals in 2012?

In the wake of the proxy access court decision, Ted Allen of ISS blogs:

The July 22 federal appeals court ruling that struck down the SEC's marketwide proxy access rule, Rule 14a-11, did not affect the SEC's amendments to Rule 14a-8 that would permit shareholders to resume filing proxy access bylaw proposals. Those amendments were placed on hold by the SEC last October after two business groups brought a legal challenge to Rule 14a-11. At that time, the SEC said the 14a-8 changes were "intertwined" with the marketwide access rule.

If the SEC lifts its stay on its Rule 14a-8 amendments, shareholders will be able to submit access bylaw proposals in 2012. Investors would not face any additional ownership hurdles other than the requirements that already apply to proponents--i.e., owning at least $2,000 in company stock for more than a year.

Several investors said last week they are looking into submitting access proposals next season. Investors could file binding or non-binding resolutions, but some states require higher ownership thresholds for binding bylaw proposals. It appears likely that proponents would seek holding periods and ownership thresholds that are more permissive than Rule 14a-11's requirements of a 3 percent stake for at least three years. Labor funds generally prefer a two-year period, and some activists have argued for a lower threshold (such as 1%) at large-cap firms.

So far, it appears that the activist investor community is undecided about whether to file access proposals in 2012 and how many companies to target. There is a concern that the filing of dozens of access resolutions next season might bolster corporate arguments that the SEC should refrain from adopting a new marketwide access rule and just allow private ordering to work. There also is a concern that low support levels for poorly targeted proposals would be cited by corporate critics as evidence that most shareholders don't want access. Conversely, some activists argue that strong shareholder votes for access in 2012 could help prod the resource-stretched SEC to prepare a revised access rule. If activists do file access proposals next season, it appears that they may focus on a few high-profile companies with well-known governance issues.

Back in 2007, two well-targeted shareholder access proposals did attract broad investor support, winning at least 43 percent approval at UnitedHealth Group and Hewlett-Packard. There also was majority approval for access at Cryo-Cell International, a small-cap firm. However, the SEC, which then had a Republican majority, approved a rule in late 2007 to stop investors from filing access resolutions.

If shareholders bring access resolutions in 2012, no-action challenges by companies would be inevitable. Some companies may seek to exclude investor access proposals (as firms have done in response to special meeting requests) by offering their own management resolutions with greater hurdles to access - such as a 10% (or higher) ownership threshold.

Transcript: "Top IP Pitfalls in Deals: How to Avoid Them"

We have posted the transcript for our recent webcast: "Top IP Pitfalls in Deals: How to Avoid Them."

- Broc Romanek

August 2, 2011

SEC Pushes Back Dates for Executive Compensation & Other Rulemakings Under Dodd-Frank

As it has done before, the SEC has adjusted its tentative rulemaking calendar to push back some of the expected proposal and adoption dates for the remaining executive compensation and corporate governance items on its agenda. Thanks to Mike Melbinger, who blogged this information yesterday on (see Davis Polk's blog for more analysis):

On Friday, the SEC modified its schedule for adopting rules relating to the Dodd-Frank Act, including the key provisions applicable to executive compensation, as follows:

August - December 2011 (planned)

- §951: Adopt rules regarding disclosure by institutional investment managers of votes on executive compensation
- §952: Adopt exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence; adopt disclosure rules regarding compensation consultant conflicts

January - June 2012 (planned)

- §953 and 955: Adopt rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors
- §954: Adopt rules regarding recovery of executive compensation
- §956: Adopt rules (jointly with others) regarding disclosure of, and prohibitions of certain executive compensation structures and arrangements

July - December 2012 (planned)

- §952: Report to Congress on study and review of the use of compensation consultants and the effects of such use

Dates still to be determined

- §957: Issue rules defining "other significant matters" for purposes of exchange standards regarding broker voting of uninstructed shares

Thus, it seems unlikely that all five of the clawback, pay-for-performance, CEO pay ratio, incentive compensation rules for large financial institutions, and hedging by employees and directors provisions will be effective for next year's proxy season. However, if they meet this schedule, one or two of the provisions will be effective for proxies filed after January (as with the say on pay rules, published in January 2011). Fortunately, the SEC will propose rules first (and already has for a couple of the provisions), so we should know well in advance which provisions will be final for the 2012 proxy season.

1st Annual Reports: CIGFO and FSOC

As noted by Vanessa Schoenthaler in her "100 F Street Blog," Section 989E of Dodd-Frank created the Council of Inspectors General on Financial Oversight (CIGFO). Appropriately named, CIGFO is made up of the Inspector Generals of nine federal agencies-the Fed, CFTC, HUD, Treasury, FDIC, FHFA, NCUA, SEC and SIGTARP- involved in financial oversight. Last week, CIGFO released its 1st annual report.

In addition, as noted in the Blog, the Financial Stability Oversight Council, or FSOC, issued its 1st annual report last week too. The report fulfills the Congressional mandate to report on the activities of the Council, describe significant financial market and regulatory developments, analyze potential emerging threats, and make certain recommendations.

Lehman Case Hints at Need to Stiffen Audit Rules

Last week, Judge Kaplan of the Federal District Court for the Southern District Court of New York delivered his decision - In re Lehman Brothers Secs. and ERISA Litig. (SDNY; 7/27/11) - involving Lehman, its executives, its investment bankers and auditors. As noted in this NY Times article, Judge Kaplan's conclusion was "the company misled investors and its officers and directors may be held liable. But the company's auditor seems likely to escape any responsibility for an audit that wrongly concluded the company's financial statements were completely proper." As a result, some experts have opined that there could be shortcomings in a number of accounting standards including those on disclosures of risk, SOP 94-6, SFAS 107 and SFAS 140.

- Broc Romanek

August 1, 2011

Crazytown House Bill: "SEC Modernization Act of 2011"

Maybe the debt ceiling standoff is making everyone act a little strange in this town, as noted in this observation from Lynn Turner about the latest from Congress:

This newly proposed legislation - the "SEC Modernization Act of 2011" - raises serious questions in light of the fact members of Congress have proven themselves incapable of any resemblance of managing of the debt issues and their own spending bills. It also reflects badly on Congress which has seriously failed to carry out its own oversight functions and in light of those shortcomings, is "piling on" the SEC in a manner which is likely to increase its costs of operations significantly - and refocus significant attention away from its core mission of protecting over 100 million investors.

In this legislation, the sponsors - who apparently fail to have a basic understanding of the SEC - have nonetheless decided it is they who are best to:

1. Decide the structure for the SEC, rather than leaving it up to the CEO they nominate as Chair of the SEC.

2. Take away the revolving discretionary fund that the SEC has used to direct spending to top priorities and instead direct it should only be spent on information technology, notwithstanding the House is now proposing also to "starve" the SEC of sufficient funding for carrying out its duties.

Some of the sponsors are the same very people who have severely criticized the SEC for its failure to act on tips on the Madoff matter, yet they are also failing to give the SEC the money to do so, cutting off sufficient funding to staff the new office of whistleblowers. So they want to have their cake and eat it to, criticizing the SEC while at the same time, legislating that it cannot possible do what it is being criticized for not doing.

This legislation is duplicative of existing legislation that already requires the SEC to consider cost benefits. And as noted in the recent proxy access decisions of the DC district court, when the SEC has failed to do so to the satisfaction of the court, it is held accountable. Yet at the same time, the GAO has issued a number of reports (see this example) which highlight how the SEC is doing its job and doing it well. Given the vast magnitude of rule making that has been thrust upon the SEC, Chair Schapiro has done a tremendous job working through it, including seeking public comment from all the proposed rules.

When the Congress cannot even figure out how to deal with deficits and spending, one would think they would not have time for such unnecessary and duplicative legislation, that can only serve to impede the protections investors need, as highlighted by the lack of regulation directing contributing to the worst financial crisis in 75 years, which cost, and continues to cost, tens of millions of Americans their jobs. It is very clear the sponsors of this legislation want to return to unregulated markets which created this economic mess in the first place, putting their own jobs and campaign financing necessary to keep their jobs, well ahead of the interests of those on Main Street.

Piling On: Trio of House Reps Ask SEC for Report on Proxy Access Workload

In this letter to the SEC sent on Thursday, a trio of House Representatives seek information about how many Staff hours were spent on proxy access rulemaking over the past decade, including a dollar amount associated with that labor (and an estimate of these items for litigating over the rule) including any amounts spent on outside counsel. To me, it's funny how the letter mentions that the origins of the rulemaking were politically motivated - when it sure seems that this request after the SEC lost the Business Roundtable/Chamber case is...

Sidenote: The FEI has made this silly music video entitled "Hey There Bob Pozen," just in time for the 3rd anniversary of the 'Pozen Committee" report.

Our August E-minders is Posted!

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

- Broc Romanek