October 31, 2011

A Global Experiment: Integrated Reporting

Last week, the International Integrated Reporting Committee (IIRC) announced that over 40 leading companies from around the world - including some in the US - have been chosen as participants in the IIRC Pilot Programme initiative. The Pilot Programme will run for two years as companies network, exchange knowledge and share experiences to help develop the Framework, which ultimately is intended to result in innovative reporting and investor practices and drive convergence in international reporting guidance.

ISS has extended the comment period by a week for its '12 policies, with a deadline of next Monday.

A Dodd-Frank Sleeper? Large Trader Reporting

Section 13(h) of the '34 Act was amended by Dodd-Frank to include "large trader" reporting requirements, and persons who exercise investment discretion over an account are required to file certain reports with the SEC if they trade (i) two million shares or $20 million during any day or (ii) 20 million shares or $200 million during any month. Recently, the SEC finalized rules implementing this Section and there does not appear to be an exception for operating companies that trade as part of ordinary course balance sheet management activities - thus, this could be a sleeper for many. Learn more in our "Large Trader Reporting" Practice Area.

SEC Staff Guidance: SEC and DOL Advertising Rules Interpreted Similarly

Last week, the SEC's Division of Investment Management issued this no-action letter, at the request of the Department of Labor, confirming that disclosures made in compliance the DOL's regulation concerning investment-related disclosures to plan participants will be treated as being consistent with the SEC's restrictions on advertising under Rule 482. The no-action letter resolves a number of potential inconsistencies between DOL and SEC rules. Thanks to Amy Moore of Covington & Burling for the heads up!

- Broc Romanek

October 28, 2011

Report: Corporate Disclosure of Political Spending Now Norm for Largest Companies

According to a report released this morning by the CPA-Zicklin Index of Corporate Political Disclosure and Accountability - a joint effort of the Center for Political Accountability and Wharton's Zicklin Center for Business Ethics Research - the S&P 100 are voluntarily moving to disclose their corporate expenditures on politics. This report is important in the wake of calls upon the SEC to enhance disclosure requirements in this area in the wake of the controversial Citizens United decision. Among the report's finding are:

- Disclosure & Board Oversight - 57 companies, or almost three-fifths, disclose on their websites their direct corporate political spending and have adopted board oversight, or they prohibit spending corporate cash on politics.

- Limits on Political Spending - Almost one-third place some limits on how they spend corporate dollars on politics. Nearly one in four companies declines to make independent political expenditures, which Citizens United permits. Colgate-Palmolive and IBM decline to spend corporate funds on political activity completely.

- Top 10 Best Disclosure Companies - Based on seven key indicators, the top 10 for political transparency and accountability: Colgate-Palmolive, Exelon, IBM, Merck, Johnson & Johnson, Pfizer, UPS, Dell, Wells Fargo and EMC.

- Indirect Spending - 43 companies disclose some information about their indirect spending through trade associations or other tax-exempt groups, including 501(c)(4)s.

- Independent Expenditures - 24 companies, or one-quarter, state on their websites that they will not make independent expenditures, as Citizens United allows.

Last month, a different Zicklin Center - the Robert Zicklin Center for Corporate Integrity - was behind this report based on "The Baruch Index," which rates the S&P 100 companies from "transparent" to "opaque," with a system of 57 items measuring corporate political activity at all levels and branches of government.

The Latest Anti-Corruption Developments (and Benchmarking)

In this podcast, Jeff Kaplan of Kaplan & Walker explains the latest developments in the anti-corruption area including the results of a benchmarking study conducted with the FCPA Blog, including:

- What's new in anti-corruption enforcement?
- You've recently completed a benchmarking survey in this area. Why did you do it?
- What are some of the interesting findings from this survey?

Judge Rakoff Questions the Citigroup-SEC Settlement: Hearing Scheduled

As covered well by Kevin LaCroix today in his "D&O Diary Blog," Southern District of New York Judge Jed Rakoff has scheduled a November 9th hearing at which the SEC and Citigroup are directed to be prepared to answer 9 specific questions about the settlement that they reached a few days ago. Yes, this is the same judge who refused to accept a prior settlement of the SEC"s action against BofA a few years back...

- Broc Romanek

October 27, 2011

A "Wow": CEO Pushes Reg FD Limits on Twitter

This blog from Dominic Jones of IR Web Report is a "must" read. I'm going to tease it out by excerpting the first few paragraphs below:

ALAN Meckler, CEO of WebMediaBrands Inc. (NASDAQ: WEBM), may be single-handedly redefining how corporate executives in the buttoned-down world of public companies communicate with their investors. The 64-year-old media entrepreneur, whose company owns interests in a number of online businesses and blogs, has been using Twitter to talk about his micro-cap company in ways that have stunned some observers and even drawn questions from the SEC.

While some in the conservative world of corporate disclosure have speculated about how Twitter might meet the SEC's Reg FD requirements, Meckler appears to have made up his mind that Twitter is as good a channel as any to break news about everything from pending acquisitions to his next quarter's results. The result is that investors in WEBM are being treated to a new level of access to their chief executive and board chairman, as well as unprecedented commentary and news about the company's business in a real-time, abbreviated format that was previously unheard of.

It's worth noting that Dominic just helped launch a free online IR ranking service - Investis Online IR Rankings - that should help companies gauge how they are doing with their online presence in investor relations. The initial launch includes the S&P 100, as well as a bunch of European companies. The US companies do not do well...

Time to Vote: Vote for This Blog Today

I'm excited to note that this blog was selected by LexisNexis yesterday as a "Top 25 Business Law Blog" - and that there is a voting contest among the 25 that ends on November 5th (we won the voting contest last year!) Here is the announcement - and more importantly, here's where you can vote. Simply scroll down and click on the circle to the left of "TheCorporateCounsel.net" (it's the 3rd bullet from the bottom) - then click "Vote" at the bottom of the page. I'm also excited that my DealLawyers.com Blog made the Top 25...

Mailed: September-October Issue of "The Corporate Executive"

We just mailed the September-October Issue of The Corporate Executive and it includes pieces on:

- What's in Store for Say-on-Pay in 2012?
- Modifying Awards in Response to Say-on-Pay
- Trap for Unwary Executives: Cost-Basis Reporting Going Into Effect in 2012
- Tax Deposits for RS/RSUs

Act Now: Get this issue for free when you try a 2012 No-Risk Trial today.

- Broc Romanek

October 26, 2011

The SEC-Citi Settlement: A Cautionary Tale for Corporate Lawyers

Below are some interesting thoughts from Vince Pisano of Troutman Sanders:

Last week, the SEC announced the settlement with Citigroup Capital Markets of an action related to the formation and marketing of a largely synthetic collateralized debt obligation, with the collateral consisting primarily of credit default swaps referencing other collateralized debt obligations, themselves collateralized by subprime residential mortgage backed securities. Similar to the case of the SEC's earlier action against Goldman Sachs involving the same general allegations, Citi, as the arranging bank, selected many of the assets underlying the CDO with, according to the SEC, misleading disclosure.

Also as in the case of the earlier action against Goldman Sachs, the SEC brought an individual action against the senior banker on the transaction, which has not been settled. Without delving into the intricacies of these transactions, which are very clearly designed for extremely sophisticated investors, all securities and other lawyers should take note of some important points highlighted by these actions.

The first is that we have an obligation to our clients to understand their transactions completely and to assure that the details of which we are aware are disclosed properly. We are the ones who are entrusted with understanding and explaining the details and risks of any securities transaction in which participate. We are advisors to market participants and not just deal execution assistants. It is a principle that applies to everything we do as corporate lawyers.

Second, we need to more actively help our clients engage in risk management, whether we are in house or outside counsel. There are deals that probably should not be done. When a transaction has no obvious connection to any corporate purpose, when it raises no capital or at least serves as an aide to the production of capital, we should at least make sure the proper people at our client appreciate the risks and rewards. We are not simply in place to help minimize risk in any transaction, but to help the institution understand whether any level of risk is acceptable. It is one of the things that separates the great corporate lawyers from the field.

Finally, two individual bankers, one at Goldman and one at Citi, have been charged by the SEC individually for disclosure issues. We as lawyers cannot lose sight of the fact that we must intercede to protect our clients, even over the objections of our clients. We cannot afford not to challenge and question and counsel those with whom we work. It's what makes us part of a profession.

Chinese Regulators Battle SEC Over Document Production

According to this Reuters article, China's Ministry of Finance and Securities Regulatory Commission have asked auditors to review their US-listed company work and provide details of any information the China-based offices may have given to foreign regulators in an effort to reminding them of Chinese confidentiality laws in the face of the SEC's efforts to compel document production by the Shanghai office of Deloitte Touche Tohmatsu concerning a Chinese company audit.

How to Conduct Stock Repurchase Programs

In this podcast, Rachel Smydo of Thorp Reed & Armstrong discusses what to consider when conducting a stock repurchase program, including:

- Which action items should be considered ahead of a stock repurchase program?
- Through whom can a company execute actual repurchases? Does it have to be a third party?
- What type of documentation (eg. SEC filings) is the company required to prepare every time there is an actual repurchase?
- Is any documentation required when repurchases are completed?

Coming early next year is an entire webcast devoted to this topic: "Company Buybacks: Best Practices."

- Broc Romanek

October 25, 2011

Two More Failed Say-on-Pays: Up to 43 For the Year

Last week, two more companies failed to gain majority support for their say-on-pay, although one of the companies failed for the second time this year - further obscuring how to count how many failures there have been so far. In this Form 8-K, Synaptics reports that it received 44% in support. And then there's this news from Ted Allen of ISS:

Hemispherx Biopharma, a micro-cap biotech firm based in Philadelphia, has failed to win majority support (based on votes present) for its executive compensation practices for the second time. The company, which restated its 2009 results, conducted its 2011 annual meeting on Oct. 13 after holding its 2010 meeting in March 2011. Hemispherx is the first issuer with a failed Dodd-Frank Act advisory vote to face shareholders again.

At the most recent meeting, as reported in this Form 8-K, the company said it received 44.1 percent support for its pay practices, while there was 37 percent opposition and 18.9 percent in abstentions. The company pointed out that there was "very little stockholder voting on this resolution, with only 20.7% of the outstanding shares eligible voted."

The company's CEO, William A. Carter, received a 72 percent base salary increase in 2012, according to the proxy statement, while the company has posted negative one-, three-, and five-year total shareholder returns. In its proxy statement, the company pointed out that the CEO agreed to a 50 percent reduction in base salary during the first five months of 2009. At the same time, the CEO's 2010 salary and fees still represent a significant increase from the 2008 level, according to the ISS report on the company.

The company also said that its compensation committee had acted "to better align the compensation options with our stockholders' interests in supporting long-term value creation." Hemispherx pointed out that it renewed expired stock option grants for a 10-year term at the same exercise price of the original option grants, rather than at current market price, and the company said that future non-executive employee compensation could include company stock.

While Hemispherx shareholders used the advisory vote again to express concerns over pay, most of them did not withhold support from directors. The directors all were reelected by more than a 8-1 margin. Some institutional investors have said they may take a "red card/yellow card" approach and withhold support from directors in 2012 if companies fail to adequately address significant opposition during 2011 advisory votes.

A list of the Form 8-Ks filed by the "failed" companies is posted in CompensationStandards.com's "Say-on-Pay" Practice Area.

Course Materials Now Available: Over 50 Sets of Talking Points!

For the many of you that have registered for our Conferences coming up in just one week, we have posted the Course Materials (attendees will receive a special ID/PW later today via email to access them; but copies will be available in San Fran). The Course Materials are better than ever before - with over 50 sets of freshly written talking points comprising 200 pages of practical guidance. Our expert speakers certainly have gone the extra mile this year!

For those seeking CLE credit, here's a list of states in which credit is available for watching the Conferences live in San Francisco and by video webcast. Note that the list is broken out for each of the Conferences - and note two states are listed as "pending" (check back to determine if the Conferences are approved in those states).

Act Now: As happens so often, there is now a mad rush for folks to register for these Conferences that begin on Tuesday, November 1st. With an aggregate of over 50 panels (including the "19th Annual NASPP Conference"), if these Conferences don't help get you prepared for the upcoming proxy season, nothing will. You can either register for the three days of the "19th Annual NASPP Conference" (in San Francisco) - or the two days of the "6th Annual Proxy Disclosure Conference" & "8th Annual Executive Compensation Conference" (in San Francisco or by video webcast, or a combination of both). Register Now.

Say-on-Pay in the UK

In this CompensationStandards.com podcast, Euan Fergusson of White & Case and Tony Gilbert of the Hay Group discuss how say-on-pay has fared in the United Kingdom, including:

- How did say-on-pay start in the UK?
- How does the UK say-on-pay regime differ in the UK compared to the US?
- What have been the most recent say-on-pay developments in the UK?

- Broc Romanek

October 24, 2011

Senate Confirms Luis Aguilar and Dan Gallagher as SEC Commissioners

As noted in this Bloomberg article, on Friday, the Senate finally confirmed SEC Commissioner Luis Aguilar's reappointment and Dan Gallagher's initial appointment; both unanimously despite the six-month delay from when President Obama nominated them. Here's Chair Schapiro's statement.

SEC to Hold Revenue Recognition Roundtable

On Friday, the SEC announced it will hold a roundtable to consider financial statement measurements (and associated disclosures) that incorporate judgments about future events on November 8th, with comments being collected from the public until December 8th. This is the inaugural roundtable in the SEC Chief Accountant's Financial Reporting Series. Here's the roundtable's briefing paper - and here's more info about what the Financial Reporting Series is all about...

ETFs: Under the SEC Spotlight

It's worth reading this testimony by SEC IM Director Eileen Rominger - she testified before a Senate Banking subcommittee last week - about ETFs as the SEC engages in a general review of these financial products. ETFs have been widely criticized as turning the stock markets into more of a casino than they already were...

- Broc Romanek

October 21, 2011

Yikes! Hacking of Nasdaq's Board Portal Database Worse Than Thought

Back in February, I blogged about how Nasdaq's Directors Desk database had been hacked. In this Reuters article, it is reported that an ongoing investigation has found that the hacking was worse than originally reported. Here is an excerpt from that article:

Hackers who infiltrated the Nasdaq's computer systems last year installed malicious software that allowed them to spy on the directors of publicly held companies, according to two people familiar with an investigation into the matter. The new details showed the cyber attack was more serious than previously thought, as Nasdaq OMX Group had said in February that there was no evidence the hackers accessed customer information.

It was not known what information the hackers might have stolen. The investigation into the attack, involving the FBI and National Security Agency, is ongoing. "God knows exactly what they have done. The long term impact of such attack is still unknown," said Tom Kellermann, a well-known cyber security expert with years of experience protecting central banks and other high-profile financial institutions from attack.

Smaller Companies: House Financial Services Subcommittee Passes Five Bills

As noted in this press release, the House Financial Services Capital Markets and Government Sponsored Enterprises Subcommittee passed five bills recently to ease the regulatory burden on smaller companies. The bills are:

- HR 2167, the Private Company Flexibility and Growth Act, introduced by Rep. David Schweikert
- HR 2940, the Access to Capital for Job Creators Act, introduced by Rep. Kevin McCarthy
- HR 2930, the Entrepreneur Access to Capital Act, introduced by Rep. Patrick McHenry
- The Small Company Job Growth and Regulatory Relief Act, introduced by Rep. Stephen Fincher
- HR 1965, introduced by Rep. Jim Himes

Recently, the American Bankers Association posted this Dodd-Frank tracker and calendar.

GOP Candidates Seek to Kill Dodd-Frank (and Even Sarbanes-Oxley in Some Cases)

A member sent this in: Republican presidential candidates have been calling for a repeal of the entire Dodd-Frank Act. Former Massachusetts Gov. Mitt Romney and Texas Gov. Rick Perry both have called for repeal, according to The New York Times. Rep. Michele Bachmann of Minnesota regularly points out that she introduced the first Dodd-Frank repeal bill this year. Former Gov. Jon Huntsman of Utah said he would go one step further and repeal the entire Sarbanes-Oxley Act, the NY Times reported.

Meanwhile, this "Globe & Mail" article is entitled "A desperate Obama kicks Sarbanes-Oxley halfway to the curb."

Senate Legislation Would Expand Unfunded Mandates Reform Act to Bring SEC and CFTC Within Its Embrace

As Jim Hamilton blogged back in August: "Legislation introduced by Senator Rob Portman (R-OH) would strengthen the Unfunded Mandates Reform Act of 1995 by bringing the SEC, CFTC and other independent federal agencies within its mandate. UMRA was a bipartisan effort to prevent Congress and federal regulators from blindly imposing major economic burdens on the private sector and on state, local and tribal governments without weighing the costs and benefits, said Senator Portman. Signed by President Bill Clinton in 1995, the Unfunded Mandates Reform Act was bipartisan legislation that basically says that regulators have to evaluate a regulation's cost and find less costly alternatives before adopting a major rule."

- Broc Romanek

October 20, 2011

Coming Soon: #Occupy [Name of Your Company Here]

As we all begin to plan for another wild proxy season, I wonder how many are planning for the potential of major disruptions at their annual shareholder meetings as Occupy Wall Street-type protests quickly spread to avenues that we never dreamed of. Are you planning for protests at your annual meeting? How about one of your board meetings? Your CEO's house? Your CEO's golf game? Or when your CEO lands in the corporate jet at the airport? Or any of these for one - or more - of your directors?

I truly believe that some of these things could happen this proxy season. Here are a few stories that lend credence to my belief:

1. Protestors in general are getting bolder and fairly savvy. Earlier this week, a trio posed as golfers to allow themselves to approach House Speaker John Boehner during his golf game at California's Pelican Hill Resort. Here's a video of that confrontation.

2. Protestors already have targeted the homes and offices of those they want to make a statement about during the "Billionaires Walking Tour" in Manhattan a few weeks ago, as noted in this article.

3. A friend recently described to me how he attended a bankers conference in Newport Beach last month where protestors actually spent the night at the ritzy conference hotel and then stormed through the doors of the conference the following day, carrying signs, etc. Here's the only media mention of this episode that I could find.

4. Check out this new site - OccupytheBoardRoom.org - which lists 200 CEOs and asks the public to send in their personal horror stories (loss of job, etc.) so they can be hand-delivered to the executive. All the messages, videos, etc. received will eventually be posted according to the site.

The Coming Protests: What You Should Be Doing Now

Yes, these risks mean that you should revisit your security plans. But it also is a red flag that should prompt you to start thinking about what all this anger towards the Top 1% really means (see this Bloomberg article about income inequality and its meaning for the economy). It looks like the protests have staying power even if there are no well-defined unifying goals. As the upcoming proxy season forces pay packages back into the limelight, the growing anger likely will turn to CEOs and those that pay them.

What can you do? For starters, compensation committees and their advisors should be doing an internal look to counterbalance the heavy use of peer group benchmarking. Peer group benchmarking is a practice that continues to be a primary cause of runaway CEO pay levels - and one that continues to be the crutch for many directors who don't want to have the hard conversation with CEOs about the Lake Wobegon excesses that boards have inadvertently caused over the past two decades.

Conducting this exercise now is particularly important with the SEC's pay disparity ratio rulemaking on the horizon. If a company's board hasn't even bothered to see what types of ratios they might need to disclose in the not-so-distant future - and determine if any adjustments to pay levels are warranted now ahead of forced disclosure - it only has itself to blame when the SEC's rulemaking takes effect and shareholders, stakeholders and the general public have a negative reaction to what it ultimately discloses.

And as we've repeatedly warned, it's just a matter of time before the plaintiff's bar successfully challenges boards who continue to rely heavily on peer surveys given the widespread evidence that they have been tainted when so many boards strive to pay their CEOs in the top quartile, year in and year out. When the excesses caused by peer group surveys is front page news - as it was a few weeks ago in the Washington Post - the cat clearly is out of the bag on this one! We have resources about how to conduct an internal pay look in our "Internal Pay Equity" Practice Area on CompensationStandards.com.

The SEC's Conflict Minerals Roundtable

On Tuesday, the SEC held its conflict minerals roundtable - and then extended the comment period for its related proposal through November 1st to obtain any additional comments that the roundtable provoked. Here's archived video from the roundtable - and a Shearman & Sterling memo, Cooley alert and Gibson Dunn memo capturing some notes from the proceedings.

Meanwhile, a group of 11 Senators wrote a letter to the SEC, urging the agency to quickly adopt rules, as noted in this Reuters article. Also see this Cooley alert for other interesting views on this topic...

- Broc Romanek

October 19, 2011

Corp Fin Issues a New "Shareholder Proposals" Staff Legal Bulletin

As it often has in recent years, Corp Fin issued a Staff Legal Bulletin relating to shareholder proposals. This year's installment covers these topics:

1. Guidance on introducing brokers and who constitutes a "record" holder under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a proposal under Rule 14a-8 (reversing the Staff's prior position in Hain Celestial back in '08 - going forward, for purposes of Rule 14a-8(b)(2)(i), only DTC participants will be considered record holders)

2. Tips for proponents so they can avoid common errors when submitting proof of ownership

3. Guidance on how to submit revised proposals

4. Guidance on how to withdraw no-action requests when there are multiple proponents

In addition, the Staff Legal Bulletin announces Corp Fin's new process for transmitting their Rule 14a-8 no-action responses. Going forward, Corp Fin is sending those by email rather than paper - so it's important that you include email addresses in any correspondence so the Staff knows where to send their response. If you don't include email contact information, the Staff will send its response by snail mail, which is not good for you during the compressed time-frames that exist during the proxy season...

As posted on Corp Fin's incoming Rule 14a-8 no-action requests page, the first requests for this proxy season have already dribbled in...

Time to Comment on ISS's '12 Policies: Time to Speak Up

Yesterday, as noted in this blog, ISS opened the comment period for it's 2012 policies, as it has for the past several years. Here is their policy gateway where you can input your views - and here are the draft policies. The comment period is short - ending on October 31st. Given the importance of this proxy season, this would be a good time to get involved if you haven't before.

Come hear from ISS and Glass Lewis about their policies during our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices - both combined for one price) that takes place in less than 2 weeks. You can attend online or in San Francisco. Register now.

Webcast Transcript: "Materiality: The Hardest Determination"

We have posted the transcript of our popular webcast: "Materiality: The Hardest Determination."

- Broc Romanek

October 18, 2011

A First: PCAOB Releases a Part II Inspection Report for a Big 4 Auditor

Here's news from Lynn Turner: Yesterday, the PCAOB issued its first ever Part II of an inspection report on a Big 4 audit firm to the public - it relates to Deloitte & Touche. Here's the PCAOB's related statement. Such reports do not become public unless the auditor fails to address and remediate the deficiencies noted in the report. One would think a firm would be incented to do so. The report notes a number of deficiencies and questions the judgments of Deloitte. This is important as auditors have been clamoring for greater latitude in their ability to make judgments - the PCAOB's report seriously calls that into question.

The report notes deficiencies in Deloitte's internal systems for monitoring independence on a global basis. In the spring of 2001, the then SEC Chief Accountant called each of the auditing firms down to the SEC to discuss weaknesses in controls that the SEC had identified. That meeting was subsequent to a 1998 letter sent to the CEOs of each of the Big 5 firms. Yet 8 years later, Deloitte still has not addressed and remedied the identified weaknesses. Tough to figure out an excuse for that.

It will interesting to see how the state boards of accountancy react to this - and what, if any, action they take. It also raises a question as to inspections of private audits being performed by the AICPA.

This report - relating to inspections conducted in 2007 about 2006 audits, with Part I released in May 2008 - raises a serious public policy issue of why is such a Part II report citing such serious deficiencies in audit work permitted to remain confidential until almost five years after those audits were performed. And even with the release of this report, investors are not told which companies received deficient audit reports and which partner led those audits. Presumably, Deloitte told the audit committee chairs which audits were determined to be deficient - and yet that information was not provided by audit committees to investors.

Here's a list of all the Part II reports that the PCAOB has issued over the years - you can see how they are mostly unheard of firms other than Deloitte. Here's today's NY Times article about this development.

Webcast Transcript: ""How to Handle Contested Deals"

We have posted the transcript of our DealLawyers.com webcast: "How to Handle Contested Deals."

EU to Break Up the Big 4 Auditors?

Some pretty wild stuff from this article from "The Economist" that is repeated below:

HOW to improve the work of audit firms, on which investors in public companies depend? Should clients be forced to change them every so often, so auditors and management will not get too cosy? Should two auditors be appointed to especially important companies, so they can check each others' work? Should, perhaps, auditors even be forbidden from offering any other services, to force them to stick to the knitting so important to investor confidence?

"All of the above" is the answer from the European Commission, according to a leaked proposal from the directorate-general for the European Union's single market. Michel Barnier, the commissioner in charge, is due to unveil a formal set of proposals for the audit industry in November. The leaked document suggests that he thinks the industry is overdue for reform from top to bottom.

The proposal for mandatory rotation of audit firms has been floating around for the better part of a year. There is little evidence to suggest that it will improve audits, and some weak evidence (based on national experiences in countries like Italy) that it will not help, or make things slightly worse. The big audit firms say that their work improves as they get to know their clients over the years. Their critics say that these years stretch into decades, with auditors forgetting that they serve investors, not company management.

But by far the most radical proposal would be to forbid audit firms from providing non-audit services, even to clients that they are not auditing. In America, providing most non-audit services to audit clients is already forbidden under the Sarbanes-Oxley financial reform passed in the wake of the meltdown of Enron, an energy-trading company. In some European jurisdictions, selling both audit and, say, consulting to a client is still permissible. Mr Barnier's leaked proposal would not just go down the route of Sarbanes-Oxley and forbid this, but force the creation of pure audit firms.

This would be a huge change to the business model of the "big four" audit firms: PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG. These are technically networks of firms, rather than single global entities. All have seen robust growth in their consulting business in recent years, which now accounts for around a third of total revenues for most of them, whereas the mature audit business has grown more modestly. Forcing the break-out of pure audit firms would separate an exciting and growing business from a plodding but vital one, in Europe at least.

Would that force the big four to split elsewhere? Joe Echevarria, the new head of Deloitte in America, merely says that policy pendulums will swing, sometimes overshooting their ideal mark. Well might his parent network, Deloitte Touche Tohmatsu, not want to lose its consulting work. In the year ending in May 2011, the consulting business grew by 14.9%, against 4.7% for the audit business, a result in line with recent years. If such a trend continued for another decade, Deloitte (like its rivals) would go from being an audit business with a consulting arm to a consulting business with an audit arm.

Mr Barnier's proposals are still in draft, and may change before formal unveiling. After that, the EU's Council of Ministers (representing national interests) as well as the European Parliament will take a crack at modifying it. It is unlikely that the leaked draft will become final law in its entirety. But it does represent a marker: the mood in Europe (reflected elsewhere) that auditors have a crucial function that is being weakened by distractions like consulting, and even by over-long audit engagements.

- Broc Romanek

October 17, 2011

Corp Fin Issues "Legal & Tax Opinion" Staff Legal Bulletin

On Friday, Corp Fin issued Staff Legal Bulletin No. 19 that provides guidance on Legality and Tax Opinions in Registered Offerings. Stan Keller of Edwards Wildman Palmer notes:

The Corp Fin Staff has long had internal guidance on legal opinions that made its way around to some people on the outside. This is the first time the Staff has made opinion guidance available publicly. Not only does issuance of the guidance increase transparency that will be helpful to practitioners, both as to Exhibit 5 legality opinions and Exhibit 8 tax opinions, it updates the Staff's positions to reflect current opinion practice and to address some specific issues.

For example, the guidance addresses opinions on interests in non-corporate entities and recognizes the necessary flexibility to deal with the unique aspects of these entities. The guidance also shows flexibility in dealing with the difficulties of providing Exhibit 5 opinions in continuous or frequent medium-term note (MTN) programs and sets out one alternative for handling opinions in these programs. The Staff is to be applauded for developing this updated guidance that accomodates the federal securities law requirements for opinions with prevailing opinion practice and the practical needs of particular securities offerings.

Corp Fin Issues Cybersecurity Risk Disclosure Guidance

Last Thursday, Corp Fin issued the second installment of its new type of informal written guidance - "CF Disclosure Guidance: Topic No. 2 - Cybersecurity" - to direct companies to review, on an ongoing basis, the adequacy of their cybersecurity risk disclosures (here's a blog about the first installment).

The cybersecurity guidance doesn't create new standards - and other than a few accounting cites, it doesn't really add anything new to what was covered in this blog (and this Sullivan & Worcester memo cited in it). But now that Corp Fin has articulated standards in this new guidance, the expectations of providing disclosure in this area should rise akin to the higher expectations (but perhaps not the reality) after the SEC's climate change guidance came out in February. Thanks to Jim Brashear of Zix Corp and Howard Berkenblit of Sullivan & Worcester for their input.

More on "The Mentor Blog"

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

- More on "Putting an Overall Pricetag on XBRL"
- The Need for Continuing Disclosure by Private Companies
- Second Circuit: Rating Agencies Are Not "Underwriters" Under the '33 Act
- Galleon and the Recent Scrutiny of Expert Networks
- Fraudulent Private Placements: Court Finds Distinction Between Broker and Underwriter
- Even More on "Insider Trading Analysis of Sokol Charges"

- Broc Romanek

October 14, 2011

Going Even More Electronic: Corp Fin's New No-Action Request "Upload" Framework

Yesterday, Corp Fin launched a new way for practitioners to send in formal exemptive, interpretive and no-action requests to its Office of Chief Counsel - they can now be uploaded via this form. A caveat is that Rule 14a-8 shareholder proposals requests are not permitted to be uploaded via this form - they should continue to be submitted via email to shareholderproposals@sec.gov (to the extent that they are submitted electronically at all). Before yesterday, electronic submission of no-action requests were required to be sent by email via cfletters@sec.gov rather than uploaded. Of course, paper submissions are still permitted.

From the stats I have heard, the vast majority of no-action requests are being submitted electronically these days, which is not surprising considering how correspondence related to SEC filings has been submitted electronically via Edgar for quite a while now. In addition, we all have been accustomed to submitting comments on proposed rules electronically for years. [In comparison, most requests for informal guidance are still made by phone rather than electronically.] So I am sure the transition to uploading instead of emailing will be fairly smooth...

ISS Releases Final '11 US Postseason Report

Yesterday, ISS released its Final 2011 U.S. Postseason Report, which includes vote results for meetings held before September 1st, with findings that include:

- During 1st year of mandatory say-on-pay, investors overwhelmingly endorsed companies' pay programs, providing 92.1% support on average.

- 38 Russell 3000 companies, or just 1.6% of the total that reported vote results, had their say-on-pay voted down. The primary driver of these failed votes appears to be pay-for-performance concerns, which were identified at 28 companies. Almost half of the failed-vote firms have reported double-digit negative three-year total shareholder returns. Also contributing to investor dissent were issues like tax gross-ups, discretionary bonuses, inappropriate peer benchmarking, excessive pay, and failure to address significant opposition to compensation committee members in the past.

- Investors overwhelmingly supported an annual frequency for SOP, with a majority (or plurality) support at 80.1% of companies in the Russell 3000 index, as compared to triennial votes, which won the greatest support at 18.5% of issuers.

- Management preferences did not appear to have a significant influence on the outcome of this year's frequency votes. Investors had defied management recommendations for triennial votes at 538 of 892 Russell 3000 companies. Shareholders also were not swayed by biennial recommendations at 34 out of 47 Russell 3000 firms.

- The number of directors at Russell 3000 firms that failed to garner majority support fell by nearly half as say on pay votes presented shareholders with an alternative to votes against compensation committee members. Poor meeting attendance, the failure to put a poison pill to a shareholder vote, and the failure to implement majority-supported shareholder proposals were among the reasons that contributed to majority dissent against board members this year.

- Among governance proposals, the biggest story of this year was the greater support for shareholder proposals that seek board declassification. These resolutions averaged 73.5% support, up more than 12% from 2010, and won majority support at 22 out of 23 large-cap firms.

- Majority voting proposals averaged almost 60% support, while proponents reached settlements with more than 30 firms. Independent chair proposals fared better this year, winning majority support at four companies.

- Investor support for shareholder resolutions on environmental and social (E&S) issues continues to rise. This year, there was a 20.6% average approval rate for these proposals, the first time this support level had reached the 20% mark. Five proposals received a majority of votes cast, a new record.

- Investors were more receptive to the Center for Political Accountability's long-running proposal campaign for more disclosure on corporate political spending. This year, the average support for those resolutions was 32.5%, up from 30.4% for similar proposals in 2010.

Only Two Weeks Until the Big Conference! ISS & Glass Lewis on 4 Different Panels!

As happens so often, there is now a mad rush for folks to register for our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices - both combined for one price). Come hear the views of ISS and Glass Lewis, as representatives will sit on a total of 4 panels during the two days of action. See the agendas.

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.

- Broc Romanek

October 13, 2011

Contingent Legal Fees in Offerings: A Need for Disclosure?

Below are some interesting thoughts from Vince Pisano of Troutman Sanders:

The combination of economic pressures and the competitive environment among law firms in the capital markets arena may be creating an atmosphere which is going to cause problems for firms in the near future. Item 509 of Regulation S-K requires disclosure in a registration statement of the interest in the issuer of issuer's counsel or underwriters' counsel who are identified in the prospectus as having given an opinion in connection with the offering. It also requires disclosure if such counsel were retained for that purpose on a contingent basis. The reason is obvious - if counsel is to be paid only if the offering is successful, it could influence the judgment of the lawyers on matters which may have a negative impact on the offering.

Law firms have always been good about identifying stock ownership of lawyers in the firm who hold securities in the registrant, but I believe that market pressures on fees have resulted in situations where disclosure should arguably be made as to those fee arrangements, as they may be deemed to be contingent interests. Stories abound in certain markets, particularly in Asia, that major law firms in pitching for new business are agreeing that no fee will be paid unless an offering closes. Fee pressures have also caused many firms to agree to major busted-fee write offs - and, in fact, those agreements have long been the norm for underwriters' counsel.

I have never seen a prospectus that discloses these agreements - and in fact, I have never even participated in a conversation about whether that kind of disclosure is required or appropriate. In an age when law firms' exposure to litigation are greater than ever, it may be time to give more thought to and discussion of this problem. The pressure on individual partners to avoid large write-offs has not been greater at any time in the last 30 years and very significant amounts may be at stake.

FINRA Re-Proposes to Require Filing of Private Placements

From Suzanne Rothwell: As part of FINRA's continuing focus on sales by FINRA members of private placements, FINRA recently filed a proposal with the SEC to adopt new Rule 5123 that would require the filing of any private placement - in which a FINRA member or associated person participates - subject to certain exemptions, and require disclosure of the use of proceeds, offering expenses and offering compensation. Currently, FINRA Rule 5122 imposes similar requirements on FINRA members for private placements by the member of its own securities or those of a control entity. That rule would remain unchanged.

In comparison to the original proposal published by FINRA in Regulatory Notice 11-04, proposed Rule 5123 would:

1. Be in a rule separate from Rule 5122;
2. Not require that at least 85% of the offering proceeds be used for the disclosed business purposes;
3. Not require disclosure of any affiliation between the issuer and any participating FINRA member;
4. Narrow the application of the rule to only apply if a FINRA member offers or sells the security or participates in the preparation of any offering or disclosure document (thereby excluding offerings where members solely provide consulting services to the issuer, among other activities);
5. Require filing of the private placement disclosure document with FINRA consistent with the timing for SEC Form D of Regulation D instead of being required at the time the document is first provided to any prospective investor; and
6. Impose the filing requirement on each participating FINRA member instead of allowing members to rely on a filing by a managing member.

And here are some thoughts from Vince Pisano and Tim Kahler of Troutman Sanders:

The new Rule - Rule 5123 - will prohibit member firms and their associated persons from being involved in a private placement unless certain written information about the deal is provided to investors and filed with FINRA. Each member firm or person associated the firm will be required to deliver a private placement memo, term sheet or other disclosure document to each investor prior to any sale, and file the document, together with any exhibits, with FINRA within 15 days after the first sale. The document must describe "the anticipated use of offering proceeds, the amount and type of offering expenses, and the amount and type of compensation provided or to be provided to sponsors, finders, consultants, and members and their associated persons in connection with the offering." FINRA expects each firm involved in a private placement to make its own filing; thus, there will be multiple filings for any offering where more than one FINRA member firm is involved.

The proposal no longer has certain of the problematic aspects contained in FINRA's earlier proposal, such as a prohibition on participating in private placements where less than 85% of the offering proceeds are used for the business purposes described in the disclosure document, and an implied requirement to monitor the post-offering use of proceeds. Nevertheless, FINRA intends to reconsider numerical limitations on the use of proceeds depending on the substantive terms of private placements described in the initial filings under Rule 5123.

We have posted memos regarding this FINRA proposal in our "Private Placements" Practice Area.

SEC Proposes Volcker Rule and Swap Dealer Registration

Yesterday, at an open Commission meeting, the SEC proposed rules regarding proprietary trading and swap dealer registration. The SEC's action on the Volcker Rule follows proposals made by the banking regulators on Tuesday, as covered nicely in this Davis Polk 82-page presentation - also see this 32-page presentation from Davis Polk regarding how the Volcker Rule proposal impacts hedge funds and private equity firms. Here's the swap registration proposal - and the proprietary trading proposal.

- Broc Romanek

October 12, 2011

SEC Chair Schapiro to Stay Through Next Fall (At Least)

Tackling a frequently asked question, this WSJ article entitled "Schapiro to Stay at SEC Through Next Fall" puts to bed any rumors that SEC Chair Mary Schapiro is a short-timer. Here is an excerpt from the article:

Securities and Exchange Commission Chairman Mary Schapiro intends to stay at the securities regulator for at least another year, a spokesman said Monday. Ms. Schapiro's plans to remain at helm of the SEC come despite a series of stumbles for the agency in recent months, including an ethics scandal involving its former general counsel and a stream of critical court decisions and reports from an internal watchdog. In addition, House Republicans have sought to curtail the SEC's budget despite hundreds of new mandates under last year's Dodd-Frank financial-regulatory overhaul.

Outside observers of the SEC have quietly wondered for months if the setbacks would prompt Ms. Schapiro to step down. But John Nester, the SEC spokesman, said Ms. Schapiro has told colleagues she plans to stay another year, if not longer.

PCAOB Proposes Disclosure of Engagement Partners in Audit Reports & More

Yesterday, as covered in FEI's Financial Reporting Blog, the PCAOB proposed requiring audit firms to disclose the name of the engagement partner in audit reports (but not require the engagement partner's signature), as well as on the Annual Report - ie. Form 2 - they submit to the PCAOB. It would also require disclosure in the audit report of other accounting firms and other persons not employed by the auditor that took part in the audit. This follows a concept release with this idea from back in mid-'09. The PCAOB has posted this press release - and here is the proposal itself...

Webcast: "Lyin', Cheatin' and M&A Stealin': Negotiating the Fraud Exception"

Tune in tomorrow for the DealLawyers.com webcast - "Lyin', Cheatin' and M&A Stealin': Negotiating the Fraud Exception" - to hear Wilson Chu and Jessica Pearlman of K&L Gates and Srinivas Raju of Richards Layton discuss the fraud exception in M&A transactions. Please print off these "Presentation Materials" before the program.

- Broc Romanek

October 11, 2011

Survey Results: Whistleblower Policies & Procedures

Many members have been asking if we have heard what their peers are doing in reaction to the SEC's new whistleblower rules. These survey results should help answer those questions:

1. In the wake of the SEC's new whistleblower rules, our company:
- Has changed existing policies to address the new rules - 9.1%
- Hasn't yet, but intends to change existing policies to address the new rules - 27.3%
- Not sure yet if will change existing policies - 42.4%
- Has decided not to change existing policies because considerations under the new rules are adequately addressed by existing policies - 21.2%

2. The board committee charged with consideration of the SEC's new whistleblower rules is:
- Audit Committee - 68.8%
- Corporate Governance Committee - 18.8%
- Risk Committee - 0%
- Compliance Committee - 9.4%
- Compensation Committee - 0%
- Board as a whole - 3.1%

3. In the wake of the SEC's new whistleblower rules, our company:
- Has provided incentives for whistleblowers to report internally first - 0%
- Hasn't yet, but intends to provide incentives for whistleblowers to report internally first - 3.0%
- Not sure yet if will provide incentives for whistleblowers to report internally first - 60.6%
- Has decided to not provide incentives for whistleblowers to report internally first - 36.4%

4. In the wake of the SEC's new whistleblower rules, our company:
- Has created a system to alert employees of the benefits of reporting internally (eg. sign updated employee handbook, fill out compliance questionnaires) - 12.1%
- Hasn't yet, but intends to create a system to alert employees of the benefits of reporting internally - 24.2%
- Not sure yet if will create a system to alert employees of the benefits of reporting internally - 60.6%
- Has decided not to create a system to alert employees of the benefits of reporting internally - 3.0%

5. Since Dodd-Frank was enacted in mid-2010, our company has had:
- More whistleblower claims reported internally - 3.1%
- Same number of whistleblower claims reported internally - 90.6%
- Fewer whistleblower claims reported internally - 6.3%

Please take a moment to participate in this "Quick Survey on Stock Repurchase Practices."

DOL Adopts New "Adverse Employment Action" Standard for SOX Whistleblower Cases

As noted in this memo, the DOL's recent Menendez v. Halliburton decision substantially lowers the bar for SOX whistleblowers in terms of establishing that they suffered a legally actionable adverse employment action. In that case, the DOL's Administrative Review Board adopted a new standard governing "adverse employment actions" under Section 806 of Sarbanes-Oxley. Now, according to the ARB, an employee need not experience a "tangible" consequence as a result of protected activity.

In addition, the US District Court for the Western District of Washington continued the trend of granting employers summary judgment on a Section 806 claim on causation grounds in Kim v. The Boeing Co. Importantly, the Kim court also noted that the "definitely and specifically" standard federal courts have applied in determining whether a complainant engaged in protected activity is alive and well (at least within the Ninth Circuit), despite the finding in Sylvester v. Parexel International LLC.

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

We have posted the transcript for our popular webcast: "Preparing for the SEC's New Whistleblower Rules: What Companies Are Doing Now." The program was newsworthy, borne out by this Davis Polk blog regarding "Whistleblowers and Internal Certifications."

- Broc Romanek

October 10, 2011

Corp Fin Updates Financial Reporting Manual (Again)

Last week, Corp Fin updated its Financial Reporting Manual for issues related to reporting requirements in an acquisition or disposition made by a variable interest entity, subsidiary guarantee release provisions, transitional registration statement options for first-time IFRS adopters, as well as other changes. The good news is that Corp Fin continues to add a summary of changes that comprise the current update at the beginning of the Manual. Last revised in July (and April, December and October before that), Corp Fin has been updating the Manual much more frequently than in the past, deciding to do so a little bit at a time rather than major rewrites.

In addition, the SEC has posted the Charter for the new Advisory Committee on Small and Emerging Companies.

More on "STA's Beneficial Ownership Processing Study"

Last week, I blogged about a study from the Securities Transfer Association that evaluates 20 Broadridge invoices and claims that transfer agents can process beneficial ownership services cheaper than Broadridge. In this Securities Technology Monitor article, Broadridge responds as reflected in this excerpt:

"The latest survey by the STA consists of twenty imaginary prices for services it doesn't offer, has no idea how to perform, and would never have to deliver," says Chuck Callan, senior vice president of regulatory affairs for Broadridge in a statement to Securities Technology Monitor on Friday morning. "The STA continues to dodge requests to disclose its rate cards. Its data does not reconcile to any published rates."

Callan went on to say that although the STA has been interested in providing proxy distribution services for Street-name shareholders that are better, faster, cheaper and more accurate than competitors "its interest is free from any commitment to write the check."

He suggests that the "market-rates" for proxy mailings to Street name shareholders could come out to be far higher than the regulated rates. The reason: a study conducted by Compass Lexecon, an economics consulting firm on behalf of Broadridge which examined over 12,000 invoices for "actual work performed," showed that the market-based rates issuers pay Broadridge for delivering proxies to registered shareholders are "substantially higher" than regulated rates for sending proxies to Street-name shareholders.

Webcast Transcript: "Current Developments in Capital Raising"

We have posted the transcript for our recent webcast: "Current Developments in Capital Raising."

- Broc Romanek

October 7, 2011

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

I continue to get member feedback on my series of blogs about novel ways that companies can market their IPOs. Here's an excerpt from WilmerHale's David Westenberg's book on going public that provides more examples of companies using gimmicks to sell their IPO.

And here's a note from Michael Schley of Larkin Hoffman in Minnesota:

You recently blogged about the James Page Brewing SCOR offering from 1999. I did that deal. I thought you might like a little more info. It was federally exempt under 504 (not Regulation A) and state registered in Minnesota under SCOR. I still think SCOR is underused (see the book I wrote for the state about SCOR and Angel Tax Credit; also see my crowdfunding memo from May, written before the SEC's "Pabst" enforcement action). The brewery put a "stuffer" in their 6-packs in the liquor store coolers. We didn't expect it but a lot of investors bought the Units as Christmas gifts so we closed the deal early so we could get the certificates out timely.

The president of the company was great at marketing. Once he had all these owners/members (close to 1,000 if my memory serves), he sent them all several business cards with information about the brewery, the brands, etc. on one side and a "why don't you serve this great beer" statement on the other side for the investors to hand to restaurants and bars who didn't serve their beer. This led to a lot of bars telling their distributors that they wanted to add it as a tap beer.

Finally, we have this SCOR offering from Surly Brewing Company (see this article). I haven't seen one of those in some time - I have also never seen free beer for life offered in lieu of dividends...

SEC Enforcement Actions: Internal Control Violations

This settlement of Labarge with the SEC's Division of Enforcement involves internal controls at a company, prompting a member to ask in our Q&A Forum (#6613): Does anyone know if there have been many of these?

I believe the answer is that there are probably quite a few. This type of result is a convenient mid-point for settlement of cases where the staff thinks there was accounting fraud (or FCPA bribery) but either isn't sure it could prove it or agrees to drop the fraud (or bribery) charge as a reward for cooperation and willingness to settle.

XBRL Snafus: "My Public Float is Bigger Than Yours. A Quadrillion Dollars!"

This blog about XBRL errors by Anne Leslie-Bini is an eye-opener, particularly when its starts off by noting SEC Data Guy founder Ed Hodder has reported that 6 companies have submitted XBRL instance documents in their Q2 10-Q filing that disclosed public floats in the quadrillions of dollars. Sounds like something that Dr. Evil would disclose!

- Broc Romanek

October 6, 2011

More Compensation Lawsuits: This Time Relating to Section 162(m) Disclosures

From his "Melbinger's Compensation Blog" on CompensationStandards.com, Mike Melbinger provides us with this news:

In all the "excitement" over the recent epidemic of lawsuits over say on pay, I want to be sure that companies and their advisers do not overlook another type of shareholder derivative lawsuit being filed based on executive compensation and company performance. Like the Shareholder Say on Pay suits, the merits of these suits are highly questionable. However, fighting them can cost firms significant time and money, to say nothing of the embarrassment and bad publicity stemming from a firm being sued over its compensation practices.

In a similar vein to the SOP lawsuits, we have seen a reappearance of shareholder derivative suits based on companies' Code Section 162(m) disclosures in the proxy statement. The 162(m) lawsuits generally allege that the company's proxy disclosures of the performance goals and/or its claims to follow a pay-for-performance philosophy are false and misleading. Paralleling the SOP suits, the 162(m) suits further allege that because the disclosures are inadequate, the compensation in question is non-deductible and, therefore, it constitutes corporate waste, unjust enrichment of the executives, and a breach of the directors' duty of loyalty.

In April 2011, plaintiffs' lawyers filed a shareholder derivative ("strike") lawsuit (Abrams v. Wainscott) against AK Holdings alleging that its 2010 proxy statement contained false or misleading statements concerning compliance with Section 162(m)(here's the complaint). AK Holdings' 2010 proxy statement sought stockholders' approval of its Long Term Performance Plan and its Stock Incentive Plan, both of which the proxy claimed provided compensation to executives that was tax-deductible under Section 162(m). The complaint alleges that, while the shareholders had approved these compensation plans, portions of the plans allowed too much discretion to increase compensation and thus did not in fact comply with the tax deductibility requirements of Section 162(m). The complaint also alleged that the company would have paid this compensation regardless of the result of the stockholder vote, an interesting allegation considering that the shareholder vote in fact approved the compensation package.

In July, the US District Court for the District of Delaware allowed a similar shareholder derivative suit, Hoch v. Alexander, to continue against the officers and directors of Qualcomm, alleging that they issued a false or misleading proxy statement regarding the 162(m) tax-deductible status of executives' compensation (here's the court order).

We're only a few weeks away from our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices - both combined for one price) - so come join 2000 of your colleagues in San Francisco. Or join the thousands more watching live (or by archive) online - and receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.

Front-Page Article: Perils of Peer Group Benchmarking

On Tuesday, the Washington Post ran this lengthy article criticizing peer group benchmarking on the front page, in the upper left corner. The piece is well worth a read.

With an election year upon us and the unemployed becoming more willing to be vocal about perceived inequalities, I imagine we are going to see much more media attention to the processes by which CEO pay is set. Although much progress have been made over the past decade in corporate governance generally - and CEO pay specifically - I believe we are still in the infancy of the governance reforms that ultimately need to be made. There still are way too many stories of excesses - and not just by "outliers." And as we've been saying all along, the overreliance on peer group surveys is one of the biggest adjustments that boards need to make...

Say-on-Pay and Smaller Reporting Companies

Here's some good stuff from Mark Borges that he recently blogged in his "Proxy Disclosure Blog" on CompensationStandards.com:

A member inquiry came into the CompensationStandards.com "Q&A Forum" last week seeking data on how many smaller reporting companies had complied with the Dodd-Frank Act shareholder advisory votes on executive compensation (the "Say on Pay" vote and the Frequency vote) this year.

As you know, in late January, the SEC postponed compliance with these two votes for SRCs until 2013. Nonetheless, there were a number of SRCs that had filed their proxy materials prior to this announcement that contained proposals for the two votes. And, in spite of the Commission's relief, most of those companies (although not all) proceeded to conduct the votes at their annual meetings.

In addition, a handful of SRCs that filed their proxy materials after the SEC announcement included the shareholder advisory votes on a "voluntary" basis (query whether they are obligated to hold a vote next year (if their shareholders expressed a preference for annual "Say on Pay" votes, or can "pass" until 2013).

While I haven't been scrupulously looking for and identifying SRCs when I look for companies that are conducting the Dodd-Frank Act votes, I do note such companies when I see them. So here's an admittedly incomplete picture of the smaller reporting companies that have conducted (or are conducting) a "Say on Pay" vote and a Frequency vote this year.

Smaller reporting companies that filed their proxy materials before the SEC issued its final "Say on Pay" rules

I identified 49 SRCs that filed proxy materials containing the two shareholder advisory votes before the SEC issued its final "Say on Pay" rules. All of these companies that followed through and conducted a "Say on Pay" vote had the proposal approved. Apparently, five of these companies scrapped the vote after the SEC rules were issued, as they reported their annual meeting voting results but no Say-on-Pay (or Frequency vote) results.

As for the Frequency vote,

- 11 companies filed proxy materials recommending annual Say-on-Pay votes. Ten of these companies saw their shareholders express a preference for future Say-on-Pay votes to be held annually. One company saw its shareholders express a preference for future Say-on-Pay votes to be held biennially.

- Two companies filed proxy materials recommending biennial Say-on-Pay votes. Both saw their shareholders express a preference for future Say-on-Pay votes to be held biennially.

- 34 companies filed proxy materials recommending triennial Say-on-Pay votes. Twenty-seven of these companies saw their shareholders express a preference for future Say-on-Pay votes to be held triennially. Two company saw their shareholders express a preference for future Say-on-Pay votes to be held annually. And, as noted above, five companies appear to have not conducted the vote at all.

- Two companies filed proxy materials with no recommendation on future Say-on-Pay votes. One saw its shareholders express a preference for future Say-on-Pay votes to be held biennially and other saw its shareholders express a preference for future Say-on-Pay votes to be held triennially.

Smaller reporting companies that filed their proxy materials after the SEC issued its final "Say on Pay" rules

So far, I have identified 23 SRCs that have filed proxy materials containing the two shareholder advisory votes since the SEC issued its final "Say on Pay" rules. Once again, I haven't been tracking this particular item all that closely, so the actual number of SRCs that have conducted or are conducting the votes on a "voluntary" basis is, in all probability, slightly higher than this figure. As with the earlier group, all of these companies have had their "Say on Pay" proposal approved.

As for the Frequency vote,

- Six companies filed proxy materials recommending annual Say-on-Pay votes. Five of these companies have seen their shareholders express a preference for future Say-on-Pay votes to be held annually. One company has not yet reported its voting results.

- One company has filed proxy materials recommending biennial Say-on-Pay votes. This company has not yet reported its voting results.

- 13 companies filed proxy materials recommending triennial Say-on-Pay votes. Ten of these companies have seen their shareholders express a preference for future Say-on-Pay votes to be held annually. Three companies have not yet reported their voting results.

- Three companies filed proxy materials with no recommendation on future Say-on-Pay votes. Two of these companies have seen their shareholders express a preference for future Say-on-Pay votes to be held triennially and one has seen its shareholders express a preference for future Say-on-Pay votes to be held annually.

Final Thoughts

What does this data mean? Well, at least 67 SRCs have conducted "Say on Pay" votes this year, which is less than 3% of all the proxy statements that have been filed so far with the two Dodd-Frank Act shareholder advisory votes. As you might expect from smaller companies, all of the "Say on Pay" votes were approved; most with 85% - 90% shareholder support. I've seen only a couple of instances where the vote was close.

Second, as you also might expect, for the most part, companies that recommended that future "Say on Pay" votes be held every two or three years saw their shareholders agree with the recommendation (95%). This is in contrast with non-SRCs, where the company and shareholders agreed on this point only about half the time.

So even while almost three-quarters of the companies that held "Say on Pay" votes this year will be holding their next vote in 2012, about 60% of the SRCs that conducted votes this year will be sitting out this item next year.

Finally, here's another query to chew on: of the 37 companies where shareholders expressed a preference for triennial "Say on Pay" votes (consistent with the company's recommendation), will their next "Say on Pay" vote be in 2014, or, consistent with the SEC's vision for transitioning SRCs into compliance, will they be required to hold a vote in 2013 (essentially, mimicking the requirement that applied this year to all non-SRCs)?

- Broc Romanek

October 5, 2011

"Occupy Wall Street" Plans to March on DC: What The Protests Mean

As this NY Times article notes, over 700 people were arrested on Saturday on the Brooklyn Bridge as part of the "Occupy Wall Street" protests that began a few weeks ago. 700 arrested - that's a lot! On Monday, protestors dressed as "corporate zombies" eating Monopoly money - and the mass media is finally devoting attention to this movement after ignoring it initially.

In fact, Occupy Wall Street has now spread to most major US cities, as noted in this article. "Occupy K St" is planning to march on DC tomorrow, according to this Washington Post article. As I blogged when the protests started, it's been fascinating to follow the protest on Twitter as many thousands from all over the world continuously weigh in as part of a virtual protest (use #occupywallstreet to see).

Some have been critical of Occupy Wall Street because they say the protestors must be lazy if they don't have decent jobs. This Forbes article is the essence of that misguided view (watch this video and determine if you would characterize the protestors as lazy). As someone who recently stood for a semester before a group of bright young students at a Top 25 law school - a group who knew they had very little chance of getting a job in law anytime soon - I can tell you that view can't be correct. They simply don't have any meaningful opportunities because they don't exist - not because they aren't trying hard enough.

It's true that this protest is not as clear cut as opposing a war. But it's also clear that these protestors are angry about something - and it's a movement that will continue to grow as the media reports on boards doling out multi-million dollar severance packages to fired CEOs (eg. NY Times article) while laying off and cutting the pensions of the general workforce. Bailed out banks taking actions just to enhance the paychecks of senior management (eg. "article). There certainly are plenty of reasons to protest these days.

Andrew Ross Sorkin penned this piece yesterday, positing this about the protest's message:

At times it can be hard to discern, but, at least to me, the message was clear: the demonstrators are seeking accountability for Wall Street and corporate America for the financial crisis and the growing economic inequality gap. And that message is a warning shot about the kind of civil unrest that may emerge - as we've seen in some European countries - if our economy continues to struggle.

"Ultimately this is about power and greed, unchecked," said Jodie Evans, the co-founder of Code Pink. She, too, said she wanted to see Wall Street executives go to jail. Consider the protests a delayed reaction to the financial crisis that has now reached a fever pitch as the public's lust for scalp has gone unfulfilled. In Chicago on Monday, one sign read: "If corporations are people, why can't we put them in jail?"

Are Institutional Investors Part of the Problem or Part of the Solution?

A few days ago, the Committee for Economic Development (CED) and the Millstein Center at Yale's School of Management published this paper - "Are Institutional Investors Part of the Problem or Part of the Solution?" - authored by former GE General Counsel Ben Heineman and Stephen Davis. The paper argues that institutional investors have a significant impact on the market but not enough is known about how they are governed - and calls for construction of a database on the governance and practices of institutional investors.

SEC's OCIE's Report on Rating Agency Exams: "Apparent Failures"

Last Friday, as noted in this press release, the SEC's OCIE released this report based on exams of the 10 credit rating agencies - as required by Dodd-Frank - which created a stir because all 10 had "apparent failures" as noted in this Reuters' article. The SEC has requested remediation plans from each of the agencies within 30 days and is continuing its investigation. The good news is that OCIE reported that the Big 3 rating agencies have devoted sufficient resources to deficiencies identified in a '08 SEC report.

- Broc Romanek

October 4, 2011

PCAOB: Who Will Replace Dan Goelzer as a Board Member?

This Bloomberg article analyzes the current Board composition of the PCAOB - and notes how long-time Board Member Dan Goelzer's replacement may well tip the balance regarding new PCAOB Board Chair's Jim Doty's ambitious reform efforts (also see Francine McKenna's article on the topic). Here's input that I received from a member:

As this article indicates, the SEC Chairman is now faced with a clear decision - does she appoint a person who is dedicated to investor protection or does she select the candidate the accounting profession is supporting? The profession has put forward a candidate, a partner from one of the firms, a firm that recently hired the top advisor to Schapiro and who Schapiro has hired other senior staff from. Investors, including the CII, have also weighed in with their candidate as well.

And while it is a vote of all Commissioners, given the current composition of the SEC with just four - this is clearly the decision of the SEC Chairman. During the past year, Chairman Schapiro and the SEC have picked three members of the PCAOB. One was a partner from one of the firms who has expressed pro audit firm views, a law partner who defended the Big 4 firms and has expressed similar views, and Chairman Doty whose views to date have been pro-investor protection.

By the way, the PCAOB published Staff Audit Practice Alert #8 yesterday to increase auditors' awareness of risks when performing audits of companies with operations in emerging markets.

STA's Beneficial Ownership Processing Study

Yesterday, the Securities Transfer Association (STA) released this study that evaluates the costs of beneficial owner proxy processing services, as compared to providing those same services to registered shareholders. After evaluating 20 Broadridge invoices, the study concludes that transfer agents can probably do it cheaper if the model was one of competitive pricing rather than a regulatory fixed rate. Having visited Broadridge's processing facilities myself a few years ago, I imagine it would be hard for anyone to realistically compete with Broadridge's actual processing of accounts - but it seems that there could be pricing issues that the NYSE needs to address.

Webcast: "Materiality: The Hardest Determination"

Tune in tomorrow for the webcast - "Materiality: The Hardest Determination" - to hear Linda Griggs of Morgan Lewis, John Huber of FTI Consulting, Eric Olson of Morrison & Foerster, and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster provide practical guidance about how to make "materiality" determinations for disclosure purposes, as well as how to make those determinations after-the-fact (i.e., the litigator's perspective).

- Broc Romanek

October 3, 2011

SEC's Enforcement to Bring "Negligence Only" Cases?

On Friday, this WSJ article created a stir regarding a possible change in strategy by the SEC's Enforcement Division and how it brings cases. Here's an excerpt from the article:

Securities and Exchange Commission officials are trying to make it easier on themselves to hold more individuals responsible for wrongdoing during the financial crisis. In a major shift from the agency's traditional enforcement strategy, the SEC could file more civil cases in which defendants are accused of negligence only, rather than harder-to-prove charges of intentional wrongdoing or recklessness, according to SEC officials.

In the past, the SEC sometimes persuaded individuals to agree to narrow negligence charges in order to settle the case, rather than fight the agency in court over more-serious allegations, according to defense lawyers. The SEC generally wasn't willing to risk a courtroom defeat if the only allegation was negligence. The penalties for negligence typically are much less harsh than for intentional fraud, with smaller fines and less risk of a ban from working in the financial industry. A charge of negligence also can result in less reputational damage for a defendant than outright fraud.

So far, the strategic change has been evident in just one major enforcement action. But a flurry of negligence charges is possible as the agency pushes ahead with its investigations of Wall Street's behavior before and during the financial crisis, according to SEC officials.

SEC's Inspector General: The Mark Cuban Report

On Friday, the SEC's Inspector General issued this report absolving the Staff of any misconduct during the insider trading investigation of Mark Cuban. As I blogged a few years ago: "a complicated aspect of the Cuban case is the strange involvement of a SEC Enforcement Staffer who hadn't been working on the investigation into Cuban's alleged insider trading - but yet felt compelled to send emails to Cuban about various aspects of his life while the case was being put together. This eventually led to Cuban responding to this rogue Staffer via email, copying then-SEC Chair Chris Cox."

On Friday, the SEC's IG also released his report relating to the payment of living expenses of Henry Hu - and reimbursing the University of Texas for what Henry would be making there - for his one-year stint as head of RiskFin...

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- Broc Romanek