September 30, 2011

SEC's New Filing Fee Rates: Effective October 1st

Yesterday, the SEC issued Fee Rate Advisory #3 to remind people about the new filing fee rates become effective tomorrow, as I blogged about a few weeks ago (the rate slightly declines to $114.60 per million, a 1.2% price drop). As explained in this SEC order, these new rates become effective regardless of when Congress passes the government's budget. This is unlike past years, when the new rates didn't become effective until five days after the date of enactment of the SEC's appropriation for the new year, which often was delayed well beyond the October 1st start of the government's fiscal year as Congress and the President battled over the government's budget.

Court Order Available: Beazer Home's Say-on-Pay Lawsuit Dismissal

Earlier this week, I blogged about the dismissal of Beazer Home's say-on-pay lawsuit being dismissed and I noted that the judge rule from the bench. The judge has now issued a 24-page court order explaining the dismissal, which we have posted in the "Say-on-Pay" Practice Area on

SEC Sets Conflict Minerals Roundtable for October 18th

Yesterday, the SEC announced that it will hold a roundtable on conflict minerals on October 18th. A final agenda including a list of participants will be announced closer to the date of the roundtable. Before Section 1502 was dumped into the "Miscellaneous" section of Dodd-Frank, who would have thunk that the SEC would be grappling with this topic...

Congrats to Me! The NACD Directorship 100

Recently, I was honored to make the list of 100 most influential people in corporate governance according to Directorship, a publication recently bought by the NACD. There are many luminaries much brighter than me on the list but I'm happy to take what I can get...

- Broc Romanek

September 29, 2011

Survey Results: Director Resignations

Under at least two scenarios these days, a director may be required to submit a resignation letter - either when the company's corporate governance guidelines require it when a director has a change in his/her job responsibility or as part of a majority vote provision. Below are our recent survey results about director resignations:

1. If a director resignation scenario arises, the process our company uses to obtain the letter involves:
- Corporate secretary or general counsel reminds the director of the need to submit the resignation letter - 47.1%
- Board chair or governance committee chair reminds the director of the need to submit the resignation letter - 41.2%
- Full Board reminds the director of the need to submit the resignation letter at a board meeting - 0.0%
- Nobody reminds the director of the need to submit the resignation letter - 8.8%
- Other - 2.9%

2. After a director resigns, the process our company uses as part of an "exit" interview - and to ensure that a Form 8-K under Item 5.02(a) is not required - involves:
- Board meets in executive session without the "resigning" director - 2.9%
- Board chair meets with the resigning director - 14.7%
- Nominating/governance chair meets with the resigning director - 23.5%
- CEO meets with the resigning director - 11.8%
- General counsel meets with the resigning director - 26.5%
- Corporate secretary meets with the resigning director - 8.8%
- Other - 11.8%

Please take a moment to participate in this "Quick Survey on D&O Questionnaires and Director Independence."

Shame on Regulators: European Bank Blowups Hidden With Shell Games

From Lynn Turner: This Bloomberg article highlights what fools the European regulators and accounting standard setters now look like. The article rehashes how the banks and politicians ganged up together on both the FASB and IASB to immensely water down their rules three years ago, so that banks could prepare misleading financial statements that omitted losses on their investments. At the time, the SEC also failed to defend the FASB and in fact, when questioned, told a congressman they would see to it the FASB got the rule changes done in just 30 days.

Now, as the article highlights, this change has allowed (1) banks to avoid reporting the losses they have suffered on Greek Debt, (2) banks are slowing "dripping" their losses into their financials over a number of years including years to come, much like Chinese water torture, (3) resulting in banks failing to actively manage their problems, and (4) extending the problem and probably the magnitude of losses incurred. Back at the beginning of the 1990s, a report from the GAO noted the US government had engaged in similar financial shenanigans until Richard Breeden became chair of the SEC and forced the S&Ls and banks to report their true losses. Unfortunately, the politicians undid his work and the result is a negative outcome for investors.

September-October Issue: Deal Lawyers Print Newsletter

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

- The Down Economy: Special Negotiating and Diligence Items to Consider
- Changing Due Diligence Practices for Uncertain Times: An In-House Perspective
- Due Diligence: Implications of Dodd-Frank's Whistleblower Provisions for Acquirors
- $17.50 from Column A and $17.50 from Column B: "50/50 Split" Implicates Revlon

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

- Broc Romanek

September 28, 2011

Proxy Plumbing & Proxy Advisor Regulation: What is the Latest Timetable?

With the fate of mandatory proxy access behind us, the latest common question I have been hearing from members is: "what is the timing of Corp Fin's proxy plumbing project?" On a recent Glass Lewis webcast, Skadden Arps' Brian Breheny noted that rulemakings emanating from the proxy plumbing project will likely come in waves, with greater regulation of proxy advisory firms being one of the first. But Brian noted that even this was not likely to be proposed this year given so many Dodd-Frank rulemakings still to come. Brian thought it was likely to happen in '12 - but even then the timing is uncertain. So nothing will likely be in place until the proxy season in '13 at the earliest here.

As for what the SEC might propose, Brian believes companies may be disappointed if they are waiting for the SEC to change the relationship between proxy advisors and their investor clients. Rather, the SEC could modernize Rule14a-2(b)(3) by:

- Requiring more disclosure regarding potential conflicts of interest
- Requiring proxy advisor recommendations to be filed with the SEC, but on a delayed basis so as not to harm any competitive advantage for the proxy advisors
- Requiring proxy advisory firms to describe their review processes in filed reports

The SEC also could amend the investment advisor rules to remove a barrier to registration so that proxy advisory firms can - or are required to - register regardless if they have the requisite amount of assets under management that the rules currently require. So far, a number of commenters asked the SEC to consider requiring proxy advisors to provide a draft of their recommendations to issuers before publication. Brian thinks it's unlikely that the SEC would propose such a rule, if only because it would be difficult to craft and police.

Finally, Brian surmised that because Rule 14a-9 already applies to proxy advisors, the SEC could possibly bring actions for fraud under 14a-9 if solicitation material was deemed to be false or misleading - however, such actions are difficult to bring because the question as to whether proxy materials are false or misleading is dictated by the facts and circumstances of the matter. Here's the comment letters submitted to the SEC on proxy plumbing so far. Thanks to Darla Stuckey of the Society of Corporate Secretaries for taking notes on Brian's thoughts!

DOL to Repropose Changes to Its Fiduciary Definition Rule

Last week, the DOL announced that it will re-propose its rule on the definition of a fiduciary to collect more feedback from the public - and Congress. Given some of the language in the press release about giving folks time to comment on the agency's "updated economic analysis," it appears this extension was related to the recent proxy access court decision - particularly since the DOL already has received ample feedback. The press release notes: "This extended input will supplement more than 260 written public comments already received, as well as two days of open hearings and more than three dozen individual meetings with interested parties held by the agency." Anyways, this rulemaking has bearing on whether proxy advisors are considered fiduciaries. The new timing is that a new proposal is expected in early '12.

Changing Due Diligence Practices

In this podcast, Andrew Sherman of Jones Day - and co-author of a new book, "The AMA Handbook of Due Diligence" - provides some insight into how due diligence practices are changing, including:

- How do the deal markets look these days?
- How have due diligence practices changed over the past few years?
- What practices do practitioners often overlook?
- What is the best way to determine if someone doing diligence knows what they are doing?

- Broc Romanek

September 27, 2011

ISS's '12 Policy Survey Results: A Peek Into Pay Practice Views

Yesterday, ISS released the results of its latest policy survey, which both companies and investors are invited to fill out. Although investors and companies appear to be on the same page regarding some pay practices, there are many where they may not be. Among the findings per Mike Melbinger in his blog:

- A majority of both investor (60%) and companies (61%) cited executive compensation as one of the top 3 governance topics for the coming year, similar to last year.

- Investors and companies had different views on when companies should address shareholder opposition during "say on pay votes." On a cumulative basis, 72% of investors said there should be an explicit response from the board regarding pay practice improvements if opposition exceeds 30%. Among companies, 48% said an explicit response wasn't necessary unless there was more than 50% dissent. (The most commonly cited level of opposition on a say-on-pay proposal that should trigger an explicit response from the board regarding improvements to pay practices was "more than 20%" for investor respondents.)

- A majority of investors (57%) indicated more engagement activity with companies in 2011. When asked about engagement activity with institutional shareholders, companies almost equally cited "about the same as in 2010" and "more engagement in 2011."

- Pay levels relative to peers and a company performance's trend are relevant for both investors and companies when determining pay for performance alignment. When determining whether executive pay is aligned with company performance, an overwhelming majority of investors considered both pay that is significantly higher than peer pay levels and pay levels that have increased disproportionately to the company's performance trend to be very relevant. On the other hand, most companies indicated that both of these factors to be "somewhat relevant."

- A majority of investors (57%) and 46% of companies agreed that discretionary annual bonus awards (i.e., those not based on attainment of pre-set goals) to be sometimes problematic if the awards are not aligned with company performance.

- Regarding new equity plans, responses from investor and companies varied as to whether positive factors, such as above median long-term shareholder return; low average burn rate relative to peers; double-trigger CIC equity vesting; reasonable plan duration; robust vesting requirements, should be taken into account to mitigate an equity plan where shareholder value transfer (SVT) cost is excessive relative to peers. Most investors were reluctant to indicate that any of those factors would "very much" mitigate the cost.

- Where SVT cost is not excessive and whether negative factors, such as liberal CIC definition with automatic award vesting; excessive potential share dilution relative to peers; high CEO or NEO "concentration ratio"; automatic replenishment; prolonged poor financial performance; prolonged poor shareholder returns, weigh against the plan, a majority of investors indicated all of the factors, with the exception of high CEO/NEO "concentration ratio," should "very much" weigh against the plan.

- An overwhelming majority of investor respondents do not consider automatic accelerated vesting of outstanding grants upon a change in control or accelerated vesting at the board's discretion after a change in control to be appropriate. The vast majority of companies disagree, and consider both scenarios appropriate.

During our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices - both combined for one price), come hear investor views from the investors themselves during the panel - "Say-on-Pay Shareholder Engagement: The Investors Speak" - featuring T. Rowe Price's Donna Anderson; Cap Re's Anne Chapman; Blackrock's Michelle Edkins; CalSTRS' Anne Sheehan and AFL-CIO's Vineeta Anand. In addition, investors are sprinkled throughout the panels over the two days to help you learn their latest thinking.

Act Now: Come join 2000 of your colleagues in San Francisco - or thousands more watching live (or by archive) online - to receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.

Beazer Home's Say-on-Pay Lawsuit Dismissed

Last week, I blogged how the Cincinnati Bell say-on-pay lawsuit survived a motion to dismiss. Now the count is 1-1 since - as noted at the end of this Thomson Reuters article - a state court judge in Georgia dismissed the shareholder derivative say-on-pay lawsuit against Beazer Home with a ruling from the bench.

Meanwhile, Steve Quinlivan has analyzed the Cincinnati Bell decision and has identified errors in his "Dodd-Frank Blog" - and Marty Rosenbaum characterizes the decision as a "game-changer" in his "OnSecurities Blog."

Webcast: "How to Handle Contested Deals"

Tune in tomorrow for the webcast - "How to Handle Contested Deals" - to hear Chris Cernich of ISS, Joele Frank of Joele Frank Wilkinson Brimmer Katcher, David Katz of Wachtell Lipton; and Paul Schulman of MacKenzie Partners discuss planning for and responding to deal contests.

- Broc Romanek

September 26, 2011

More on "Should More Companies Be Going Public?"

A few weeks ago, I blogged both about the SEC's efforts to study a push to get more companies public - a push fueled by Congressional interest - as well as the Groupon gunjumping saga. Both of these blogs are related in a sense because some would view Groupon as a good example of a company not ready to go public.

On Friday, the company filed it's Pre-Effective Amendment #3 to its Form S-1. This amendment includes an Appendix A consisting of the information that the CEO sent to employees at the end of August - not the first instance of potential gunjumping for the company.

More importantly, the amendment changes the way that the company counts revenue - calling into question whether the company's accountants can be trusted, as noted in this WSJ article and this blog. Simply opening the floodgates to allow more companies to prematurely lure investors into parting with their money - before these companies develop the proper type of compliance culture - will not magically cure what is wrong with our economy and job situation. If anything, it will make it worse as the credibility of our markets will take yet another hit...

Last week, Corp Fin Director Meredith Cross and Deputy Director Lona Nallengara delivered this testimony before the House Subcommittee on Capital Markets in a hearing about small business capital formation and job creation. Meanwhile, Meredith has recused herself from any further deliberations about crowdfunding because of some work she did for Lending Club before she came to the SEC, even though she had been cleared by the SEC's ethics counsel.

Growing Activism on Corporate Political Spending Disclosure

For over a decade - well before the controversial Citizens United decision from the Supreme Court last year - there has been activism to elicit more disclosure from companies about their political contributions. The Center for Political Accountability has been successful in pressuring quite a few large companies into posting their political spending policies online. And there have been numerous rulemaking petitions submitted to the SEC, the latest coming last month from Professor Bebchuk and 9 others.

Activism through the shareholder proposal process on this topic has been growing, as reflected on pages 11-12 in this ISS post-season report.

And now we have this letter that recently was sent to all S&P 500 companies from the Sustainable Investments Institute (Si2) asking them to review their profile and provide feedback. Si2 is planning to release a report on November 10th based not only on the responses it receives, but on much drilled down data it has been collecting. The report, sponsored by the IRRC Institute, should be more comprehensive than research on this topic to date since it will focus on more than just the top tier companies - and it will enable us to see how things have moved from last year to this, now that companies have had a chance to react to Citizens United in their policies.

Ceres' New "Proxy Voting for Sustainability" Guide

Last week, Ceres released a "Proxy Voting for Sustainability" guide which is designed to assist investors respond to environmental, social and governance - aka "ESG" - issues. The guide lays out 4 sets of principles and provides sample proxy voting guideline language. It also includes more than 75 specific best practice examples of proxy guidelines. There have been 720 ESG shareholder proposals over the past 2 years - and I expect there will be more going forward...

- Broc Romanek

September 23, 2011

Whoa! First Say-on-Pay Lawsuit to Survive a Motion to Dismiss

Early yesterday, I tweeted that the first say-on-pay lawsuit has survived a motion to dismiss and boy, did a get a reaction as nearly everyone had predicted that these lawsuits would be seen as frivolous. As noted in this order, the US District Court for the Southern District of Ohio refused to grant Cincinnati Bell's motion because the company had not proven that it had met its fiduciary duties. The fiduciary duty standard in Ohio is a "deliberate attempt to cause injury to the corporation" or "reckless disregard for the best interest of the corporation." Pretty breathtaking that the court thought the complaint supported "deliberate intent to injure" or "reckless disregard." Thanks to Paul Hastings' Mark Poerio for pointing this lawsuit out.

What does this all mean? A few things to consider:

1. More Lawsuits Coming - There have been 9 say-on-pay lawsuits filed so far. But I hear there are more in the pipeline because these 9 didn't include demands on the board first. There are a slew of others that have first made demands - and if an agreement is not reached, lawsuits will be filed. And this development will likely encourage more suits to be filed as well.

2. More Failed Say-on-Pays in '12 - I've been saying that this year was a test year for say-on-pay and that companies who just had their say-on-pay pass should not rest easy for next year. Here are just some of the factors that have led me to this belief:

- Conversations with institutions who appear willing to fail more companies next year now that they have had real experience with voting on large numbers of SOPs and realize that more engagement is possible if necessary

- Increasing anger about income inequality generally, including ramped-up rhetoric in an election year

- A rapidly declining economy and stock market - compared with all boats rising earlier this year

- Throw into the mix that we don't know what positions ISS and Glass Lewis might change for the coming year. As well as investors and their policies.

- Directors were spared "against/withhold" vote campaigns this year in deference to say-on-pay. I wouldn't necessarily bank on that happening again. And directors are likely to take a large number of "no" votes personally compared to SOP votes.

As I have learned from the prep calls for our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices - both combined for one price), I can tell you that we are still in the infancy of how say-on-pay will ultimately play out. And you will hear for yourself the horror stories when a company does fail its say-on-pay - and how the say-on-pay lawsuit really shakes up a boardroom - during the "Failed Say-on-Pay? Lessons Learned from the Front" panel during the conference.

Act Now: Come join 2000 of your colleagues in San Francisco - or thousands more watching live (or by archive) online - to receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.

For Good Reason: Prominent Lawyers Support David Becker

A group of prominent member of the securities bar sent this letter yesterday to the House committees who held a hearing on the David Becker matter that I have been blogging about. A quick read of the letter illustrates pretty clearly how the SEC Inspector General's investigation - and criminal referral - have all the trappings of a witch hunt.

In private conversations with lawyers more senior than me - those that know David far better than me - I have learned even more to support the notion that David might be the most ethical lawyer in the bar. So it clearly is no time to be idly sitting by and watch those not interested in justice and fairness do whatever they wish to accomplish personal (and unprofessional) goals. Here is David's testimony - and SEC Chair Schapiro's testimony - from yesterday's hearing. Both are worth reading. And here is David Kotz's testimony...

Tweeting Away! A Fake SEC Inspector General Employee

And apparently someone else think that the SEC's IG referral is a crock. A few days ago, someone created this Twitter account pretending to be in Kotz's IG office - Bill Hanrahan - and he has been sarcastically tweeting since. The fake guy's tagline is "Bucking for a promotion since '85." Here are a few of the tweets so far:

- I can't read lips so well but I think Schapiro asked my boss if he'd conduct an investigation into how he got to be so awesome. #madoff

- Need suggestions for new, totally appropriate venue to announce investigation. Used Fox Business on Goldman; maybe sit in Rick Perry's lap?

- Proud of our new Becker precedent: if 7 or fewer people know you are not doing anything are committing wrongoing.

- Heard DOJ paid for $8 muffins at conferences. Scones at my testimony prep right now taste like Harvey Pitt's beard. Will 'vestigate. #javert

- Need investigation re SEC failure to build time machine so it can predetermine all the unwitting mistakes it should not have made #TerraNova

- Working out a lot at #SEC gym a lot recently (you've got to be in shape to drag people through the mud)...

Let me be clear that this fake tweeter is not me! I do have a fake alter ego to have a little fun - @MrPoorCEO - but just the one. But these fake Twitter accounts can be worth real money - read this article.

- Broc Romanek

September 22, 2011

New FINRA Guidance: Corporate Actions Can Lead to Underwriter Problems

From Suzanne Rothwell: A few weeks ago, FINRA published Regulatory Notice 11-41 warning broker-dealers that their regulator will closely scrutinize the research issued by an underwriter for compliance with FINRA and SEC research analyst regulations when an issuer has made advance public statements explicitly or implicitly indicating that participation in the issuer's anticipated public offering is conditioned on the broker providing favorable research.

Although FINRA recognizes that "such uninvited pronouncements place prospective offering participants in a challenging situation," FINRA nonetheless warns that "even tacit acquiescence to such overtures to be a violation of NASD Rule 2711(e)," the FINRA rule prohibiting brokers from promising favorable research to a company as an inducement or consideration for receiving business. Such acquiescence may also violate NASD Rule 2711(c)(4), which prohibits brokers from soliciting investment banking business, and the SEC's research analyst certification.

The specific situation of such an issuer's statements discussed in the FINRA Notice related to a recent WSJ article that reported that AIG "Chief Executive Robert Benmosche has complained to senior executives at investment banks about the unfavorable stock research . . ." and quoted Mr. Benmosche as saying: "For the next offering, I want to make sure there is a clear understanding of who AIG is and our trajectory, and why AIG is a stock that investors should own."

Are there other areas where an issuer's demands could lead to regulatory problems for their underwriters? Yes. When an issuer conditions a broker/dealer's participation in its underwriting on a pre-offering purchase of the issuer's unregistered securities, FINRA Rule 5110 will generally treat such purchases within 180 days prior to the issuer filing its offering with the SEC as additional underwriting compensation (valued on the difference between the purchase price and the offering price) and the securities will be locked-up for 180 days following the issuer's offering.

At times, the value of the securities does not, when added to the discount and other compensation, make the arrangement unreasonable under FINRA underwriting compensation limits - but at times it does. If the compensation is unreasonable, sometimes the only solution is for the purchasing broker/dealer to withdraw from the underwriting. Not a good result. These situations can generally be avoided by the underwriter's counsel reviewing the proposed pre-offering purchase and ensuring that the arrangement would not create later problems.

House Bill Seeks to Relieve Smaller Companies of Internal Controls Obligations

As noted in this Cooley alert, a new House bill introduced by Rep Benjamin Quayle (R-AZ) - "Startup Expansion and Investment Act" - would make internal control reporting and assessment requirements of SOX 404 optional for "smaller" companies. Have I lost count of many bills before this seeking the same thing or was that just a dream?

Congress wants smaller companies to go public more frequently. Congress wants smaller companies to not have strong financial controls. Congress wants investors to lose their money...

RSUs Don't Constitute a Separate Class for Purposes of Section 12(g)

A few weeks ago, Corp Fin granted no-action relief to Twitter - allowing the company to treat restricted stock units as a separate class for Section 12(g) purposes. The Staff has taken the position that options aren't counted either for Section 12(g) purposes for some time, going way back to '01 - and this RSU position has been taken since this Facebook response in '08.

- Broc Romanek

September 21, 2011

Proxy Access: Why Did the SEC Publish a Release to Lift the 14a-(8) Stay?

Yesterday, the SEC's release on lifting the Rule 14a-8 stay on proxy access shareholder proposals was published in the Federal Register - so it's now "live." I was in the midst of cross-country travel last week when I blogged about the SEC's rulemaking that related to the lifting of the stay. Given that it was a 4:45 am blog before I jumped on a plane, I wondered - but didn't have time - to research the technical question of why the SEC issued a release titled "Final rule; notice of effective date" that seemed to time the lifting of the stay with publication of that release in the Federal Register. Since the SEC did post a separate order granting the stay - and its language didn't seem to require any further release or publication - I was left with curiosity.

Administrative law is not my bailiwick so I admit that I still don't know the answer. I have perused some of the numerous law firm memos that have been drafted in the wake of the order, but the only thing that I have found somewhat related was an excerpt from this Sullivan & Cromwell memo:

The SEC's effectiveness order relates not only to Rule 14a-8, but also to the other related rules adopted as part of the proxy access rule changes (other than Rule 14a-11). Many of these related rules seem to have no practical impact because they relate only to the now-vacated Rule 14a-11 - these include the exemptions from the proxy rules for solicitations by nominating shareholders to form a nominating group or in support of a candidate, as well as the safe harbor for Schedule 13G eligibility. As they now stand, these provisions do not apply to nominations made through a company's proxy access bylaws.

Some of the new rules, however, will have an impact on nominations made through a company's proxy access bylaws. These include Rule 14a-18, which requires the nominating shareholder to file a Schedule 14N containing specified information and representations, and Rule 14a-6, which confirms that inclusion of a proxy access nominee will not require filing of a preliminary proxy.

By the way, here are the results from my poll regarding how many proxy access proposals folks think there will be in '12: 30% - less than 10 proposals; 30% - 11-20; 20% - 21-30; 7% - 31-100; 7% - over 100.

The Witch Hunt Continues: The SEC's IG Report on Madoff

Six months ago, I blogged about the ridiculous witch hunt regarding former SEC General Counsel David Becker. In what may be one of the low points for the SEC in its history, the SEC's Inspector General David Kotz released his 123-page report on the matter - which states that he has made a referral to the Department of Justice under a criminal conflict of interest provision. I received emails all day long from former Staffers bemoaning the state of affairs at the agency.

Beginning on page 100, the report notes that David Becker did, in advance, seek an answer from the SEC Ethics Counsel as to whether he should work on Madoff matters. He fully disclosed the fact that he had been a beneficiary of his mother's estate which had invested in Madoff funds. The Ethics Counsel told him he did not need to recuse himself. And as noted on pages 10 and 11 of the report, SEC Chair Shapiro knew of the investment too - the Chair issued this statement yesterday. Here is an excerpt from this NY Times article:

Mr. Becker's lawyer, William R. Baker III, said in a statement that the report confirmed that Mr. Becker had notified seven senior SEC officials about his late mother's Madoff account, including Ms. Schapiro and the agency's designated ethics officer.

"The inspector general concluded that 'none of these individuals recognized a conflict or took any action to suggest that Becker consider recusing himself from the Madoff liquidation,' " wrote Mr. Baker, a lawyer at Latham & Watkins who worked at the SEC for 15 years, working alongside Mr. Becker at times. He said the report contained "a number of critical factual and legal errors," but declined to enumerate them. Mr. Becker left the SEC last February.

There will be a joint House Financial Services Committee and Committee on Oversight and Government Reform hearing tomorrow regarding the report, where IG Kotz can once again demonstrate that he somehow is the most important person at the agency, assisted by some on the Hill. Simply amazing. And depressing as David did what he was supposed to do and they're continuing to put him through the ringer...

More Congress Nonsense on SEC Modernization, Accountability

Mommy, please make it stop! Last week, the House Financial Services Committee dragged down senior officials once again - this time for a hearing entitled "Fixing the Watchdog: Legislative Proposals to Improve and Enhance the SEC" - to discuss two bills: the "SEC Regulatory Accountability Act" and "SEC Modernization Act of 2011." I've already blogged bashing the latter and the former would require the SEC to engage in additional cost-benefit analysis before promulgating any new regulation. Here's SEC Chair Schapiro's testimony - and it's worth reading this Washington Post article about former SEC Chair Harvey Pitt's blasting of both proposals (he also had sharp words - indirectly - for SEC Inspector General Kotz).

Meanwhile, season senior SEC Staffers continue to make their way to the exits. 25-year vet Jamie Brigagliano, Deputy Director of SEC Division of Trading and Markets, is the latest to make a departure announcement. John Walsh also recently left after 25 years of service in OCIE...

- Broc Romanek

September 20, 2011

Been a Long Time! The 41st Failed Say-on-Pay (Barely)

With the proxy season long over, it's been a long time - 9 weeks - since we've seen a company fail to garner majority support for its say-on-pay. But as Mark Borges reported last week in his blog, Exar has become the 41st company to do so this year.

In this Form 8-K, Exar reports that it was a close vote with the company receiving more "for" votes compared to "against" - but as Mark notes, the Delaware company counted its "abstentions" as "against" votes back when the company filed its proxy statement (see pg. 4) - thus resulting in the receipt of 49% in support. A list of the Form 8-Ks of the "failed" companies is in's "Say-on-Pay" Practice Area.

Are Companies Doing Their Say-on-Pay Homework for '12?

As I prepared to speak on social media to the crowd last week at the Society of Corporate Secretaries' Western Regional Conference, I took in a say-on-pay panel - and almost dropped to the floor when Janice Hester-Amey of CalSTRS said no one that they had voted against say-on-pay wise had bothered to contact them yet to ask why they had voted negatively. Since CalSTRS voted "no" for 24% of the 3000 US companies in its portfolio, this means that not a single company out of hundreds has bothered to pick up the phone yet.

As I've learned from my prep calls ahead of our pair of executive pay conferences, other institutional investors have been getting calls asking "why" - but this still is startling considering how large CalSTRS is. And it begs the question whether companies who held say-on-pay votes this year remember that they will be required by Regulation S-K Item 402(b)(1)(vii) to disclose whether, and if so how, they considered the say-on-pay advisory vote in determining compensation policies and decisions and how that affected their executive compensation decisions and policies. Maybe some companies are just intending to disclose that they didn't consider the advisory vote in their deliberations? A dangerous prospect if you ask me...

A Careful Orchestration: Two Days of Intensive Say-on-Pay Workshops

I've now been in this business quite a long time and I can honestly say that the upcoming pair of say-on-pay conferences will be a career peak for me. I'm proud of the high caliber of panelists that I have procured - and I'm now spending several months carefully orchestrating what topics each panel will cover so that there is minimal overlap. In fact, any overlap is intentional as there are numerous panels that have a distinct perspective.

There is a panel comprised solely of institutional investors; two panels with just ISS and Glass Lewis. There is a great panel with experienced corporate directors. But that's not all - I have tailored many of the panels so they will drill down on practical topics that you hold dearly, such as "How to Work with ISS & Glass Lewis: Navigating the Say-on-Pay Minefield" and "Failed Say-on-Pay? Lessons Learned from the Front." Check out the agendas for the conferences and see for yourself.

With the economy going into another funk - and anger over CEO pay likely to hit a fever pitch in an election year - I do believe that next year will bear out that this year was just a "test year" and many companies whose pay sailed through in '11 could experience real struggles next season. This pair of conferences - focusing on both disclosures and practices - takes place on November 1st-2nd in San Francisco and by video webcast. Register now.

If you are experiencing budget woes but recognize that these conferences are a "must" - drop me a line as always.

- Broc Romanek

September 19, 2011

Crowdfunding: Should More Companies Be Going Public?

Recently, I've blogged several times about the SEC's upcoming efforts to engage in capital-raising reform - particularly for pre-IPOs. This is a big topic for Rep. Darrell Issa. Thanks to Michelle Leder of for catching the 25 words that President Obama devoted to this topic during his recent jobs speech. Here's the President's Fact Sheet that also references it.

Soon afterwards, the SEC announced the formation of the Advisory Committee on Small and Emerging Companies - this press release included this note:

The committee is intended to provide a formal mechanism through which the Commission can receive advice and recommendations specifically related to privately held small businesses and publicly traded companies with less than $250 million in public market capitalization.

Then on Friday, the House Oversight & Government Reform committee held hearings on crowdfunding (see this Cooley alert previewing the hearing) at which Corp Fin Director Meredith Cross delivered this testimony. As noted in this WSJ article:

SEC Corporate Finance Division Director Meredith Cross, in a House hearing, said the key to easing restrictions on crowd-funding would be to create an exemption "that wouldn't present significant concerns of fraud." "Then I see real benefits," Ms. Cross told a subcommittee of the House Committee on Oversight and Government Reform. "If it becomes viewed as a tainted market where people go to fraudulently steal money, then that won't help anyone." The SEC is currently looking at easing restrictions on crowd-funding as part of a wide-ranging review of its rules governing capital-raising. Cross said her remarks reflected her personal views, and that the SEC hadn't yet weighed in on the matter. She said she expected the agency to complete its broad review in the near future.

This Cooley alert covers Meredith's testimony in greater detail. And this Cooley alert covers another House effort to end the ban on general solicitation. Love this excerpt from that memo:

And you think you already get a lot of junk mail? So can we now look forward to seeing clever entreaties for funding pasted onto every frozen burrito at Safeway and every pair of socks on sale at Target?

The ironic part about this Congressional obsession with getting more companies public is that it was widely reported on Friday that this year has become a record one for scrapped IPOs. As noted in this article, a total of 215 IPOs have been withdrawn or postponed so far in 2011. These were scrapped due to market conditions, not SEC regulatory restrictions.

Groupon's Gun-Jumping Saga: Will It Ever End?

Back in June, I blogged about potential gun-jumping by Groupon in the wake of the company filing a Form S-1. Since then, there have been several other instances of Groupon potentially gun-jumping (eg. memo to employees leaked to this popular blog). I imagine some are questioning whether Groupon's management team has tough enough skin to run a public company as they can't seem to take criticism. Anyways, DealBook reported that the company was considering delaying its IPO, with gun-jumping cited as one of the factors.

As for Groupon's Form S-1 amendments, it's too early to tell if the company's filings have caught up with the potential gun-jumping incidents (and Corp Fin comments on such) as the last amendment was filed a month ago: Pre-Effective Amendment No. 2. I didn't read this latest amendment too closely - but at a glance, the only unusual part seems to be this "Letter to Potential Stockholders" from the company's CEO filed as an exhibit. Let me know if you spot anything else unusual...

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:

- Internal Pay Disparity: Comments Coming In Ahead of SEC Proposals
- Say-on-Pay Post-Mortems
- An Analysis of Recently Adopted Clawback Provisions
- AFL-CIO's White Paper: "Why CEO-to-Worker Pay Ratios Matter for Investors"
- Study: Companies Change Peer Groups Often

- Broc Romanek

September 16, 2011

Proxy Access: SEC's Rule 14-a(8) Stay Lifted (Almost)

Sure enough, not long after I blogged yesterday about how the US Court of Appeals for the District of Columbia Circuit had not yet finalized its decision, I got word that the court had indeed done so in this brief ruling on Wednesday. But trust me, no one knew about it - so I have my excuse. So yesterday, the SEC posted this release and order lifting the stay - and thus the Rule 14-a(8) stay will be lifted once the new rules are published in the Federal Register. That might be today or next week sometime...

MSCI Slides Over Chief Administrative Officer to Head ISS

As I get ready for an early flight cross-country, I'm bashing out this blog. I thought this press release was notable yesterday - that MSCI has moved over its Chief Administrative Officer Gary Retelny to head ISS. It has long been rumored that MSCI would unload ISS after it bought RiskMetrics, but I guess the right buyer hasn't yet emerged. By the by, Gary will remain as the corporate secretary of MSCI...

Poll: How Many Shareholder Proposals on Access Do You Expect in '12?

Now that the SEC's stay is being lifted, it's a good time to gauge how many shareholder proposals dealing with proxy access do you think will be submitted to companies next proxy season:

- Broc Romanek

September 15, 2011

New Form of Corp Fin Guidance: If It Walks Like a Duck & Talks Like a Duck...

Yesterday, Corp Fin issued an entirely new form of guidance entitled "CF Disclosure Guidance: Topic No. 1 "Staff Observations in the Review of Forms 8-K Filed to Report Reverse Mergers and Similar Transactions." It looks similar to a Staff Legal Bulletin in format - but the type of guidance is a bit different because it essentially provides helpful hints on how to prepare disclosure in fairly narrow circumstances. In comparison, the SLBs tend to deal more with "legal issues."

Although this "Staff Observation" - maybe that will be the shorthand reference to these? - is merely informal guidance and not blessed by the Commission, it likely is somewhat of a higher level of guidance than CDIs because of the format (eg. one tip is the "Supplementary Information" section). It appears that this will be an ongoing form of guidance since the Staff bothered to label this as "No. 1."

You may recall Dave wrote two great pieces in The Corporate Counsel back in '08 (March-April and May-June issues) explaining all the various flavors of informal guidance that Corp Fin offers. At one point, there was a Staff movement afoot to begin consolidating these forms of guidance - but Corp Fin recently issued this WKSI Waiver Statement and now we have this new form of guidance...

Proxy Access: Is the Court's Decision "Final" and the SEC's Shareholder Proposal Stay Lifted?

When the SEC decided last week to not appeal the adverse proxy access decision by the US Court of Appeals for the District of Columbia Circuit, the SEC's statement noted that the court's decision was likely to be finalized on September 13th. That finalization is significant because - as noted in the SEC's statement: "Accordingly, absent further Commission action, Rule 14a-8 will go into effect and a notice of the effective date of the amendments will be published." In other words, the stay on shareholder proposals regarding access would be lifted. As I flew across the country yesterday, I fielded numerous member queries asking if this indeed has happened - and to my knowledge, it has not yet. I'll let you know when I hear differently...

New California Law: Time to Consider Charter Provisions to Exempt Preferred Stock Preferences

Recent amendments to California Corporations Code Section 500 et seq. look like they will have broad application to companies doing business in California as a result of Section 2115 for pseudo-California corporations. John Tishler of Sheppard Mullin notes "there is a "sleeper" in here allowing California corporations - and presumably foreign corporation subject to Section 2115 - to include language in the articles of incorporation permitting distributions (that is, dividends in cash or property, repurchases and redemptions of shares) without regard to preferences of senior series of preferred stock. Presumably, such language could also be included in the certificate of designation for a newly authorized series of preferred stock.

We speculate it will become market standard to include that waiver language, since preferred stock protective provisions will generally do a better job protecting preferred holders than Section 500. Although AB 571 is not effective until January 1st, we are recommending that companies now adopt or amend their charters or authorize new series of preferred stock consider including language permitting distributions without regard to preferred stock preferences."

Here's an excerpt from this Sheppard Mullin memo:

Recently, California Governor Jerry Brown signed Assembly Bill No. 571, which simplifies restrictions on dividends, repurchases and redemptions of shares. The restrictions are set forth in Sections 500 to 509 of the California Corporations Code, and are commonly referred to collectively as "Section 500." These provisions are designed to protect the interests of creditors and senior equity holders against transactions that might undermine their seniority in the capital structure. Section 500 applies to companies incorporated in California and to companies incorporated elsewhere but deemed subject to the same restrictions by virtue of satisfying the requirements of Section 2115 of the California Corporations Code for "pseudo-California corporations." Section 500 uses the term "distributions" to encompass dividends of cash or property (other than shares of the corporation) and repurchases and redemptions of shares.

Section 500 has served as a trap for the unwary, a significant impediment to the ability to effect many transactions that do not intuitively threaten the interests of creditors or senior equity holders, a substantial risk for directors who face personal and potential criminal liability for distributions made in violation of Section 500, and a source of frustration to lawyers and clients who struggled to explain, apply and perform the financial gymnastics required under Section 500. In extreme cases, companies incorporated in California have had to reincorporate in other jurisdictions prior to effecting a transaction because the transaction would otherwise be prohibited under Section 500.

The changes to Section 500 create an opportunity for issuers of preferred stock (e.g., companies receiving venture capital in its most common form) to exempt the preferences of classes or series of preferred stock from the application of Section 500. This would have the potential to improve companies' flexibility to undertake various actions that would otherwise require unanimous consent of holders of a class or series of preferred stock.

- Broc Romanek

September 14, 2011

Proxy Access: How Many Shareholder Proposals Will Be Filed in '12?

When I blogged last week about the SEC deciding to not appeal the proxy access court decision, I noted that one importance of the SEC's announcement was that the stay on Rule 14a-8 access proposals was being lifted. And I used the phrase "opening floodgates" in my title to intimate that a lot of shareholder proposals touting access might be forthcoming in '12.

I'm now doubting myself for using that phrase as it remains to be seen just how many access proposals will be submitted next year. On the one hand, CII issued a press release that stated: "Council member funds and the broader investor community are ready and willing to seek access to the proxy to nominate directors judiciously, at companies where boards have been asleep at the switch or chronically unresponsive to shareowner concerns."

On the other hand, ISS's Ted Allen's blog on the topic notes:

Amy Borrus, CII's deputy director, said she expects to see "probably not more than a handful" of access proposals in 2012. "I expect that shareowners will file proxy access proposals selectively at companies where boards have a history of not being responsive to shareowners or have been asleep at the switch," she said.

This view is supported by this statement in Ted's blog:

There is concern among some activists that corporate advocates will argue that federal access standards are not needed if investors file a large number of access resolutions next year.

But you never know what will really happen until it happens - so it's too early to tell, although not too early to poll (I'll post a poll soon). But one thing is sure, as noted in Ted's blog:

Even with the revised Rule 14a-8(i)(8) in place, it appears likely that shareholder access resolutions will face no-action challenges from companies on proof-of-ownership or other procedural grounds. Some companies may try to argue that an access proposal conflicts with state law or is impermissibly vague and misleading.

Second Circuit Clarifies Materiality Requirement in Securities Fraud Cases

Just ahead of our upcoming webcast - "Materiality: The Hardest Determination" - the Second Circuit recently affirmed the dismissal of a class action alleging violations of Sections 11(a), 12(a)(2), and 15 of the '33 Act in Fait v. Regions Financial Corp. (2d Cir.; 8/23/11). As noted in this Paul Weiss memo:

The Second Circuit held that defendants' alleged failures to write down goodwill in a timely manner and to increase loan loss reserves sufficiently during the financial crisis were not actionable, because defendants' challenged statements were matters of opinion rather than fact. Thus, plaintiffs had to allege that defendants did not believe the statements were true at the time they were made, something the complaint failed to do. Fait promises to be a useful tool in defending claims under the Securities Act, as well as claims that a defendant otherwise misstated financial figures, when those figures depend on the judgment of management rather than strictly objective criteria. The decision may be particularly important with respect to claims against accounting firms, whose conclusions based on their audits of financial statements and internal control regularly take the form of an expression of opinion.

The SEC's New "MAP": Organization Reform is Coming!

On Monday, the SEC posted this 25-page report entitled "Implementation of SEC Organizational Reform Recommendations" as required by Section 967 of Dodd-Frank and in response to a 267-page Boston Consulting Group study provided to Congress earlier this year (I've blogged about that twice - here and here).

At 25-pages, I was more willing to spend more time with this report than the formidable Boston Group Study - but it still wasn't my type of "quiet read." Here are a few notes based on a skim of this new report:

- Implementation of the recommendations will be expensive - $42-55 million over two years, per pg. 6 - and the SEC is budget-constrained right now.

- Program formally named the "Mission Advancement Program" aka "MAP" (pg. 10)

- Corp Fin seems to have escaped any further reshaping since it recently did some realignment (pg. 13)

- SEC will seek flexibility from Congress when creating four new Offices as required by Dodd-Frank (and since stalled due to budget limits)(pg. 17)

- SEC is following up on its momentum towards technological sophistication by devoting more attention to developing a technology strategy including eventually forming a "Technology Center for Excellence" (pgs. 19-20)

- SEC focused on addressing high priority hiring needs - those "hard to recruit or hire" (pg. 23)

A great compilation of highlights for those that want to relive Michigan's epic win over Notre Dame on Saturday...

- Broc Romanek

September 13, 2011

The 9th Say-on-Pay Lawsuit - and More!

Last week, the 9th company that failed to garner majority support for their say-on-pay was sued - Dex One Corp in a federal district court in North Carolina (here's the complaint). We continue to post pleadings from these cases in's "Say-on-Pay" Practice Area.

But that's not all in the area of lawsuits over pay practices. Last week, Chesapeake Energy's board was sued for allegedly bailing the company's CEO out of financial trouble by awarding him bonuses - as well as buying his personal art collection for $12.1 million and relying only on the CEO's art dealer for determining the value of the art - in a federal district court in Oklahoma. Not sure why, but it doesn't seem like the mass media has caught up with this one. Thanks to Paul Hastings' Mark Poerio for pointing it out!

And then as I blogged last week on's "The Advisors' Blog," arguments where just made in a lawsuit in the Delaware Chancery Court over Goldman Sach's pay practices. If the case survives, it should be interesting - as will the Citigroup case where discovery ended last week and now we're just waiting for a trial date to be set before VC Glasscock...

Our Conference Hotel is Nearly Sold Out!

Our pair of popular executive pay conferences - "6th Annual Proxy Disclosure Conference" & "The Say-on-Pay Workshop Conference" - is quickly approaching and the Conference hotel is nearly sold out; register for the Conference today and make your hotel reservations online or by calling them at 800.445.8667 or 415.771.1400. Be sure to mention the Conferences to get the best rate. The Conferences will be held on November 1-2 in San Francisco and by video webcast. If you have difficulty securing a room, contact us at 925.685.5111.

With Conference registrations going strong - on track to reach nearly 2000 attendees - you don't want to be caught unprepared as we head into next year. The last time we held our Conferences in San Francisco - two years ago at the height of the recession - we sold out a month in advance: the Conference itself, not just the hotel! And that was without the reality of Dodd-Frank and mandatory say-on-pay hanging over our heads. Register today to ensure you don't miss out.

Webcast: "Current Developments in Capital Raising"

Tune in tomorrow for the webcast - "Current Developments in Capital Raising" - to hear John Jenkins of Calfee Halter, Michael Kaplan of Davis Polk, Louis Lehot of Sheppard Mullin, and Dave Lynn of and Morrison & Foerster explore the latest developments in the capital markets, including alternatives such as PIPEs, registered direct offerings, "at-the-market" offerings, equity line financing and rights offers.

- Broc Romanek

September 12, 2011

Does a Federal Agency Need to Have a "Full" Commission to Conduct Business?

A few weeks ago, two senior members of the House Committee on Financial Services - Randy Neugebauer (R-TX) and Scott Garrett (R-NJ) - sent this letter to SEC Chair Shapiro requesting that the SEC "refrain from undertaking any important or controversial initiatives, including significant rulemakings" until Dan Gallager is confirmed by the Senate to fill the seat recently vacated by Commissioner Casey.

While on its face, this request appears noncontroversial and logical. But I don't recall ever seeing a similar request to any federal agency in this town - and the reality is that it's pretty common for a federal agency's Commission to be operating at less than "full strength." The appointment process is time-consuming and often not at the top of a Presidential agenda. In fact, I recall during an extended period of time during my last tour of duty at the SEC that the Commission only had two Commissioners - Chair Arthur Levitt and Commissioner Steve Wallman - from July '95 til February '96. President Bill Clinton left many agencies with unfilled slots during his initial years in office, a common occurrence when there is turnover in the Oval Office. [Here's a chart if someone wants to conduct the analysis and tell us how often the SEC has had less than 5 Commissioners.]

So if this request was to become the norm, at least one agency or another - if not many more - would be at a standstill for extended periods of time. And this also could lead to shady dealings such as a Commissioner threatening to quit - and thus stall a rulemaking - in order to pressure changes to a rulemaking that the other four Commissioners don't want. The SEC is supposed to be an independent agency but constant Congressional interference has made it challenging for it to do its job properly. Please make it stop...

The Battle of the New Corporate Entities: Flexible Purpose Corp vs. B Corp

As noted in the "Triple Pundit Blog," the Benefit Corporation (B Corp) - a new type of corporate entity that purports to use business to address environmental and social problems - passed the California State Assembly. California joins a few other states - Maryland, Vermont, New Jersey, Virginia and Hawaii - in passing Benefit Corp legislation.

I haven't been following the B Corp saga but quickly learned that the B Corp has been getting most of the publicity even though another new entity - the Flexible Purpose Corp - was introduced first before the California legislature by more than a year. Last week, the California bill creating FPCs (SB201) passed the California Senate unanimously and the Assembly by a vote of 52-21. Now, both the FPC and B Corp bills are sitting on the California Governor's desk for signature.

FPCs appear preferable over B Corps by those that know better. According to those that I talked to, there is nothing that the B Corp sponsors want to do under their bill that they can't do under the FPC bill - but the FPC is a broader entity that allows for greater shareholder rights (eg. the shareholders and not the legislature determines the social and environmental goals of the company). To learn more why the B Corp is a bit of a disaster, read this letter from the California Corporations Committee of the Business Law Section of the California State Bar. Given these flaws, the California Corporations Committee has stated that it prefers the Flexible Purpose Corp.

My sources tell me that Bar Associations of the other states that have adopted B Corp legislation now object to B Corps due to many of the same issues identified by the California Committee. So my money is on the Flexible Purpose Corp as the entity that could have staying power. Read more in "Flexible Spending Corp" Practice Area, including this B Corp opposition letter from Steve Hazen, FAQS on the California bill, etc.

Webcast: "Preparing for the SEC's New Whistleblower Rules: What Companies Are Doing Now"

Tune in tomorrow for the webcast - "Preparing for the SEC's New Whistleblower Rules: What Companies are Doing Now" - to hear Sean McKessy, Chief of the SEC's Whistleblower Office, David Becker of Cleary Gottlieb, Allegra Lawrence-Hardy of Sutherland Asbill, Steve Pearlman of Seyfarth Shaw, and George Terwilliger of White & Case explore the latest developments in what companies are doing, and the issues that companies should consider, when adopting changes to their whistleblower policies and procedures.

- Broc Romanek

September 9, 2011

SEC Shifts Tack on Document Destruction

According to this WSJ article, the SEC has revised its controversial policy regarding deleting old MUIs (here's my blog with commentary on the original story; here's Bruce Carton's debunking). This announcement comes ahead of the release of several damaging reports from the SEC's Inspector General on a variety of matters, as reported in this WSJ article.

Here's an excerpt from the article about the new MUI policy:

Late in the day, SEC General Counsel Mark Cahn issued a memo to Division of Enforcement staff telling them to stop existing record-destruction procedures for closed cases, until further notice. That's according to people familiar with correspondence issued by Mr. Cahn.

An SEC spokesman confirmed the rules shift Wednesday night, saying: "We have been working with [the National Archives and Records Administration] on a new policy for records retention, and have determined to suspend the current policy out of an abundance of caution until a new policy is in place."

As Jean Eaglesham and Jessica Holzer are reporting, the SEC's internal watchdog is exploring the longstanding document-destruction policies--among a number of other matters--and plans to issue several widely awaited reports this month, including one on this.

The SEC's directive from Mr. Cahn on Wednesday came after months of wrangling inside the agency, some of it personally involving document-destruction whistleblower Darcy Flynn, over various categories of investigative records, from initial to preliminary to formal. The differences in language are key, because categories--and what's included in those categories--guide disclosure to the national archives agency, and rules about what can be tossed and what must be kept.

Mr. Flynn, whose job involves interpreting SEC policies and guiding enforcement lawyers on what to save or destroy, raised his hand, through his lawyer, on Tuesday to tell the SEC that improper document-destruction was continuing. Mr. Flynn's lawyer, Gary J. Aguirre, himself a former SEC staff attorney and whistleblower, told Mr. Cahn at the SEC in a letter Tuesday that "we may need to seek injunctive relief" in federal court if the SEC doesn't freeze its document-destruction policy, according to a copy of that correspondence reviewed by The Wall Street Journal.

TechCrunch as "Journalist"? Can There Be Insider Trading on Pre-IPO Exchanges?

Last week was a whirlwind of changes for TechCrunch - the popular Silicon Valley blog that got sold to AOL for $30 million last year - as it first announced that founder Michael Arrington would be investing in start-ups (with parent AOL also investing) under an exception to AOL's "conflict of interest" journalism policies. As noted in this article (coming on heels of this David Carr column and TechCrunch rebuttal), this move was controversial and TechCrunch quickly announced some changes to what Arrington's future role with the blog would be - and then a few days later, it's been rumored that he was fired altogether.

As I tweeted, Arrington sounds both arrogant and naive at the same time, particularly when he was quoted as saying he didn't consider himself a journalist. I even consider myself one and I'm not breaking much in the way of news - plus clearly not to as wide an audience as TechCrunch has.

For me, this debate should not only focus on potential conflicts of interest, it should also raise the specter of insider trading. Remember the R. Foster Winans case from the '80s? He was a well-known WSJ columnist who wrote the influential "Heard on the Street Column" from '82 to '84 and was convicted of insider trading for leaking advance word of the contents of his columns to a broker. It's possible that the same type of risk could be present in the TechCrunch type of scenario now that shares of pre-IPO companies can be traded via SecondMarket, Sharepost, etc.

Although caselaw hasn't yet dealt with insider trading in the pre-IPO context, I believe it's just a matter of time before this issue will reach a court. Note how Facebook has already adopted an insider trading policy as mentioned during our recent webcast, "Understanding the Private Company Trading Markets."

EU Market Participants Oppose Mandates

Here's news from Rob Yates of ISS's Governance Institute and Martin Wennerstrom of Nordic Research:

In response to the Green Paper on the EU Corporate Governance Framework, the European Union has received a variety of comments from institutional investors, investor associations, accounting firms, national and European industry associations, professional associations, stock exchanges, proxy advisers, and national regulatory associations. Of the small subset of responses that have been publicly released so far, most said the EU should maintain its comply-or-explain approach to governance and avoid Europe-wide regulation.

The green paper was published in May in an effort to "assess the effectiveness of the current corporate governance framework for European companies." The paper focuses on three areas: directors, shareholders, and the effectiveness of the comply-or-explain framework, and then outlines potential next steps. According to the paper, governance "is one means to curb harmful short-termism and excessive risk-taking."

Among the responses that have been published thus far, several general themes have emerged. Most respondents agreed that companies function more effectively with a separate chair and CEO, although they did not believe this is something that needed to be regulated on an EU-wide level.

The Association of Private Client Investment Managers and Stockbrokers, in its response, said: "This model should broadly be followed but it is critically an area where there cannot be a single answer or one-size-fits-all solution and where there may be a division between the approach to SMEs [small and medium enterprises] on the one hand (especially when they are very small) and to larger companies on the other. We believe the question may be wrongly phrased because it does not appear to recognise this."

Similarly, many respondents viewed board diversity, gender balance, and the size of the board as important issues, but not issues that, at this point, warrant wholesale, large-scale regulation. In particular, some respondents said the definition of board diversity should be expanded to include experience, background, and qualifications.

The respondents agreed that "say on pay" votes are an important topic, although many were reluctant to support mandatory votes, or argued that the votes should be advisory only. The European Association of Cooperative Banks, focused its response on the impact of the questions on cooperative banks and said, "In our opinion, it [mandatory votes on remuneration policy and the remuneration report] would be contrary to the principle of division of tasks and powers to strengthen the role of shareholders or members in our case in setting compensation policies for corporate officers." Other respondents pointed to the need for a consistent policy on remuneration votes across Europe.

The role of regulation and the degree to which it should be implemented in Europe generated a wide array of responses. Many said that regulation, at this point, is not the answer to current issues, and that comply-or-explain is sufficient. For example, the U.K. Financial Regulating Council said in its response: "The comply-or-explain principle is recognised at the European level as an important tool for delivering good corporate governance but the Green Paper raises questions about its effectiveness. We believe that the flexibility that it offers is positive for economic activity . . . Indeed, a comply-or-explain approach depends on regulation to make it effective. There must be a formal requirement for transparency . . . "

Also, most respondents said regulators should not be responsible for enforcing comply-or-explain adherence, but that shareholders should take an active role in ensuring the quality of corporate explanations. Those respondents argued that regulatory monitoring would lead to a set of boilerplate responses to fit in within the regulators' guidelines.

The Institute of Chartered Secretaries and Administrators, in its response, stated: "We believe that codes can be more effective at raising standards than legislative solutions." Those respondents who do support comply-or-explain regulation said it should be enforced on a national level. In its response, the London Stock Exchange Group said regarding EU-wide regulation, "Member states should be free to determine the best approach to applying corporate governance standards.

Only a small subset of the responses have been made public thus far. The European Commission plans to post the green paper comments on its Web site this fall. Here is the ISS response to the green paper.

- Broc Romanek

September 8, 2011

ISS's Influence on Voting Results: Overstated?

What if the influence of ISS on how institutional investors vote has been overstated? That's the upshot of this groundbreaking new study from Professors Stephen Choi, Jill Fisch and Marcel Kahan, the first to gauge the relationship between ISS and mutual fund voting on director elections. Bear in mind that mutual funds constitute the largest group of institutional investors, holding 27% of US equities and that they are relatively free of conflicts of interests compared to other types of institutions.

I'm not a big fan of academic studies, but this one weighs in at a mere 46 pages (before appendixes) and is easy to read. In fact, it's a "must read" as it could have profound implications for the SEC's proxy plumbing project, shareholder engagement and proxy solicitation practices - and perhaps change the views of those that harbor ill will towards ISS these days. And it should be helpful framing some of the discussions that will take place soon enough during the multiple panels during our pair of executive pay conferences that deal with proxy advisors, shareholder engagement, etc.

By examining the voting trends of mutual funds - who have been required to disclose how they vote annually on Form N-PX since '03 - the trio of Professors were able to confirm their earlier contention that ISS swings only 6-10% of the vote in uncontested director elections. That is far less than what others have concluded - they claim that ISS influences 20-30% in a typical election. That alone is significant, but the study has other interesting findings, including:

- More Lockstep Voting with Management than Blindly Following ISS - 25% of funds (as measured by asset size) blindly vote lockstep with management, compared to less than 10% that blindly follow ISS

- Funds Tend to Consider ISS Recommendations Rather Than Blindly Follow - Overall, ISS's influence is due more to investors evaluating and considering ISS recommendations rather than blindly following them

- Smaller Funds Tend to Blindly Side with Management - Smaller funds are more likely to blindly vote in lockstep compared to larger funds (with either ISS or management)

- Lack of Conflicts for Affiliated Funds - No evidence exists that funds affiliated with banks, etc. are more likely than independent funds to vote with management in an effort to maintain good business relations

- The Big Three Have Wide Influence - The largest fund families - Vanguard, Fidelity and American Funds, each of whom individually accounts for 11% of total fund assets - vote substantially differently both from each other and from what ISS recommends

High Number of Director "Withhold" Votes? How That Happens

One of the most interesting sections of the study starts on page 40. This section gets into what type of factors are present when a director receives a high level of withhold votes, an issue of great importance to directors concerned about their own reputation. Here is an excerpt from the study's abstract that highlights the findings here:

Finally, we examine the factors associated with high (in excess of 30%) withhold votes in director elections. An ISS withhold recommendation, in conjunction with at least one of four factors - a withhold vote by Fidelity, the director missing 25% of board meetings, the company having ignored a shareholder resolution that received majority support, and a Vanguard withhold vote on outside directors with business ties to the company - is associated with a 49% probability of receiving a high withhold vote. Directors in these groups account for 48% of all directors who received high withhold votes.

By contrast, an ISS withhold recommendation that is not combined with one of these factors is associated with only a 21% probability of a high withhold vote, and the general probability of a high withhold vote is a mere 2%. These findings suggest steps that companies and directors should take to try to avoid high withhold votes. They are also evidence that not all ISS recommendations have the same impact on voting outcomes.

ISS's Biggest Shortcoming? Be Careful What You Wish For...

For me, the largest mindblower of the study is on page 24. This is where the professors explain "perhaps the biggest shortcoming of ISS" - which is identified as ISS not providing sufficient details about why it is recommending a vote "for" a particular director. Without that explanation, it is more challenging for an investor to decide whether to not follow ISS's "for" recommendation - and thus decide to vote "against/withhold" instead.

For those on the "bash ISS at all costs" bandwagon, think about that for a minute. Imagine if ISS fixes this shortcoming and directors stop receiving so many "for" votes just because ISS recommended as such. Read my prior blog entitled "The Debate Over ISS's Role: Imagine a World Without" - and be careful what you wish for...

- Broc Romanek

September 7, 2011

Proxy Access: SEC Decides Not to Appeal - But Does Open "Private Ordering" Floodgates

"The Twittersphere is alive with the sound of #proxyaccess!" Sung to the tune of "The Sound of Music." Late yesterday, SEC Chair Mary Schapiro issued a statement that the SEC would neither seek a rehearing of the US Court of Appeals for the District of Columbia Circuit decision nor appeal the decision to the US Supreme Court. So the SEC chose "Door #4" of the options available that I laid out in a blog yesterday.

In her statement, Chair Schapiro reaffirmed her support for the proxy access concept - but she also pledged not to rewrite a proxy access rule anytime in the near future. While this means that "mandatory" proxy access is dead for now, the real story is that the SEC did allow the Rule 14a-8 amendments to go into effect (when the current stay expires next week), which means that the agency will allow access shareholder proposals ("absent further Commission action") for this proxy season. Private ordering, here we come - a nice boon for corporate lawyers. Here's the SEC's statement:

The Securities and Exchange Commission today confirmed that it is not seeking rehearing of the decision by the U.S. Court of Appeals in Washington, D.C. vacating a Commission rule, Rule 14a-11, which would have required companies to include shareholders' director nominees in company proxy materials in certain circumstances. Nor will the SEC seek Supreme Court review.

Chairman Mary L. Schapiro issued the following statement:

"I firmly believe that providing a meaningful opportunity for shareholders to exercise their right to nominate directors at their companies is in the best interest of investors and our markets. It is a process that helps make boards more accountable for the risks undertaken by the companies they manage. I remain committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards.

At the same time, I want to be sure that we carefully consider and learn from the Court's objections as we determine the best path forward. I have asked the staff to continue reviewing the decision as well as the comments that we previously received from interested parties."

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Last year, when the Commission adopted Rule 14a-11, it also adopted amendments to Rule 14a-8, the shareholder proposal rule. Under those amendments, eligible shareholders are permitted to require companies to include shareholder proposals regarding proxy access procedures in company proxy materials. Through this procedure, shareholders and companies have the opportunity to establish proxy access standards on a company-by-company basis -- rather than a specified standard like that contained in Rule 14a-11.

Although the amendments to Rule 14a-8 were not challenged in the litigation, the Commission voluntarily stayed the effective date of those amendments at the time it stayed the effective date of Rule 14a-11. The Commission's stay order provides that the stay of the effective date of the amendments to Rule 14a-8 and related rules will expire without further Commission action when the court's decision is finalized, which is expected to be September 13. Accordingly, absent further Commission action, Rule 14a-8 will go into effect and a notice of the effective date of the amendments will be published.

The SEC's Rethink of All Its Rules: The First Step

Yesterday, the SEC issued this press release announcing that it's seeking public comment on the process it should use to conduct retrospective reviews, such as how often rules should be reviewed, the factors that should be considered, and ways to improve public participation in the rulemaking process. Comments are due by October 6th - and can be submitted via this form.

This forward-looking retrospective is due to President Obama's memo a few months ago recommending that independent agencies do this rethink (see Vanessa Schoenthaler's blog for the full background of Obama's memo). How the SEC will be able to undertake this project given its Dodd-Frank rulemaking burden - not to mention all the resources needed to constantly respond to various Congressional inquiries - is a mystery. But note that this request is just to help the agency develop a plan under which it will then review its rules and regulations - it is not soliciting comment on specific items at this time (although the SEC does have this webpage that solicits comments on specific rules & regs - so there is that opportunity).

To develop this review plan, the timeframe is tight. As noted in this blog, agencies have 120 days to report their findings to the Office of Management and Budget as well as the public - and that clock started ticking about 60 days ago...

Poll: Which Corp Fin Rules Should the SEC Reconsider?

Although it's early in the process of the SEC rethinking its rules, we can still conduct an anonymous poll about which rules you wish the SEC to review ("XBRL" seems to be popular write-in candidate):

- Broc Romanek

September 6, 2011

Today's the Deadline: Will the SEC Appeal the Proxy Access Decision?

Today is the deadline for the SEC to decide whether to appeal the decision of the US Court of Appeals for the DC Circuit in the Business Roundtable's and Chamber of Commerce's lawsuit over proxy access. The SEC can file a petition for rehearing (which seeks review before the panel) or a petition for rehearing en banc (seeking review of all judges of the DC Circuit) or both.

If the SEC doesn't not file anything today, the court's mandate (ie. final judgment) will issue seven days later and the case will be sent back to the SEC. Even in this scenario, the SEC could ask the Solicitor General to appeal the decision to the US Supreme Court - but that is fairly unlikely given that there is no split among the circuit courts on this issue and a statutory standard is involved that is fairly unique to the SEC and CFTC. Thus, it is improbable that SCOTUS would grant certiorari.

Although CII has urged the SEC to appeal, it also has urged the agency to continue the stay on Rule 14a-8 - even if the case is not taken up for rehearing. And now the ABA's Business Law Section has also submitted a letter to the SEC also urging that the stay be continued.

A Facelift! Corp Fin Reformats the "Financial Reporting Manual"

Last Thursday, Corp Fin posted a new and improved formatted "Financial Reporting Manual." The facelift didn't change the substance in the Manual...

Last week, the SEC also revised Form ID to allow for new applicant types to file the Form and make Edgar filings. The new Form ID requires the filer to select an entity type. Those that have already filed a Form ID are not required to re-file or otherwise revise what they already have filed.

Our September Eminders is Posted!

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

- Broc Romanek

September 1, 2011

Show Me the $$$: SEC's Filing Fees Essentially Flat for Fiscal Year 2012

Yesterday, the SEC issued its second fee advisory for the year (along with this methodology). Right now, the filing fee rate for Securities Act registration statements is $116.10 million (the same rate applies under Sections 13(e) and 14(g)). Under the fee advisory, this rate will slightly decline to $114.60 per million, a 1.2% price drop. Not bad, unless you recall last year's 63% price hike, the largest one-year rate hike in my experience.

As noted in this SEC order, the new fees will go into effect on October 1st - which is a departure from the past when the new rates didn't become effective until five days after the date of enactment of the SEC's appropriation for the new year, which often was delayed well beyond the October 1st start of the government's fiscal year as Congress and the President battled over the government's budget.

You might be asking, "How are the SEC's fees set?" Or more importantly, "Will the rate hike help the SEC's push for more resources?" The SEC sets its filing fees annually under the "Investor and Capital Markets Fee Relief Act of 2002." The SEC's budget is not dependent on its fees as it's not a self-funded agency. All of the fees go to the US Treasury. In theory, these fees could help convince Congress to allow the SEC to receive their requested budget - but that surely hasn't worked as of late. Learn more how the filing rate-setting process works in this blog.

Too funny. I had a brief conversation with an AP reporter last night and today I'm quoted in 468 newspapers, all of them in this same short piece. The power of the Associated Press! I wonder how @MrPoorCEO will take it...

Heating Up: Calls for More Political Contribution Disclosures

One topic that has been on the lobbyist agenda - but never quite on the hot seat - is greater disclosure about corporate political contributions. In the wake of the Citizens United decision by the Supreme Court, that is changing. As Ted Allen blogged a few days ago, the International Corporate Governance Network is the latest to weigh in with a letter to the SEC on the topic, commenting upon the rulemaking petition filed several weeks ago by a group of academics (here are other letters sent in about the petition).

Section 13(d) Reporting: CSX Case Highlights Need for SEC Action on Derivatives

Here's news culled from this Wachtell Lipton memo:

A divided panel of the U.S. Court of Appeals for the Second Circuit has finally issued its opinion in the CSX case in which the District Court addressed whether the long party in a cash-settled total-return equity swap should be considered the beneficial owner of the underlying shares for reporting purposes under Section 13(d) of the Williams Act. The majority opinion -- issued nearly three years after the appeal was argued -- declined to resolve the beneficial ownership issue, noting that there was disagreement within the panel on the subject. Instead, the panel considered only whether a "group" had been formed under Section 13(d) as to the shares held outright by the defendant activist funds.

The majority opinion also addressed whether and under what circumstances a party should be precluded from voting shares acquired during a period when it was in violation of its disclosure obligations under Section 13(d). CSX Corp. v. The Children's Inv. Fund Mgmt. (UK) LLP, Docket Nos. 08-2899-cv, 08-3016-cv (2d Cir. July 18, 2011).

As to the District Court's finding of a "group," the majority opinion, by Judge Newman, found insufficient for appellate review the District Court's finding that a group was formed by the activities of the two funds (TCI and 3G) that suggested "concerted action" vis-à-vis CSX. The Court therefore remanded the case to the District Court for additional findings on that limited subject, as well as to reconsider the appropriateness and scope of any injunctive relief should a group violation of Section 13(d) be found with respect to the purchase of shares outright. In connection with its consideration of the group issue, the majority ruled that "activities" resulting from group action were insufficient to form a group unless -- in the words of the rule -- the group "act[s] together for the purpose of acquiring, holding, voting or disposing" of equity securities of the issuer.

As to the availability of injunctive share "sterilization," the majority opinion adhered to prior precedent holding that an injunction prohibiting the voting of shares acquired while in violation of Section 13(d)'s reporting requirements was not an available remedy if the required disclosure is ultimately made in sufficient time for informed action by shareholders. The opinion rejected the arguments that sterilization may be necessary to provide a "level playing field" and to deter violations of Section 13(d), relying in part on the policy notion that sterilization might injure those stockholders who, after full disclosure, choose to support an insurgent's program.

Judge Winter filed a separate opinion concurring in the result, and, unlike the majority opinion, directly addressed the issue as to whether the long party in a total-return swap transaction may be deemed to beneficially own the shares purchased as a hedge by the short counterparty. Judge Winter's opinion rejected the District Court's view that equity swaps are (in Judge Winter's words) "an underhanded means of acquiring or facilitating access to [shares] that could be used to gain control through a proxy fight or otherwise." Judge Winter instead writes that, absent an agreement on acquiring or voting the short party's hedge position, "such swaps are not a means of indirectly facilitating a control transaction. Rather, they allow parties such as the Funds to profit from efforts to cause firms to institute new business policies increasing the value of a firm."

Judge Winter rejected the position that the shares acquired by the swap dealer to hedge the swap should be deemed beneficially owned by the long party based on a review of the statutory language; other legislation that has addressed swaps -- including Dodd-Frank, which granted new authority to the SEC to promulgate rules providing that "a person [] be deemed to acquire beneficial ownership of an equity security based on the purchase or sale of a security-based swap"; and the SEC's ongoing and, as yet, inconclusive consideration of derivatives and beneficial ownership under Section 13(d), including its recent repromulgation of Rule 13d-3.

The CSX majority's determination not to address whether the long party to a total-return swap may be deemed, for purposes of Section 13(d), the beneficial owner of the underlying shares underscores the need for SEC action. We have previously set forth detailed proposals on the subject, and continue to believe that SEC action is both necessary and overdue.

The concluding statement in Judge Winter's concurrence eloquently articulates the need for SEC leadership on the issue:

Total-return cash-settled swap agreements can be expected to cause some party to purchase the referenced shares as a hedge. No one questions that any understanding between long and short parties regarding the purchase, sale, retention, or voting of shares renders them a group -- including the long party -- deemed to be the beneficial owner of the referenced shares purchased as a hedge and any other shares held by the group.

Whether, absent any such understanding, total-return cash-settled swaps render a long party the beneficial owner of referenced shares bought as a hedge by the immediate short party or some other party down the line is a question of law not fact. At the time of the district court opinion, the SEC had no authority to regulate such "understanding"-free swaps. It has such authority now, but it has simply repromulgated the earlier regulations. These regulations, and the SEC's repromulgation of them, offer no reasons for treating such swaps as rendering long parties subject to Sections 13 and 16 based on shares purchased by another party as a hedge. Absent some reasoned direction from the SEC, there is neither need nor reason for a court to do so.

- Broc Romanek