November 30, 2011

SEC Brings Reg FD Action for Selective Disclosure of Trust Preferred Redemption

Last week, the SEC announced a settlement with Fifth Third Bancorp over some Reg FD violation allegations. No civil penalty was imposed upon Fifth Third based on its cooperation with the investigation. Here's the SEC's order. And here's a Wachtell Lipton's memo from Edward Herlihy and Matthew Guest about the action:

Last week, the SEC instituted a cease-and-desist order against Fifth Third Bancorp in connection with its redemption of trust preferred securities (TruPS) in May 2011. The SEC charged that in effecting the redemption Fifth Third "selectively disclosed," in violation of Regulation FD, that it would redeem a class of its TruPS for about $25 per share. At the time the securities were trading at about $26.50 per share. The SEC stated Fifth Third did not issue a Form 8-K or other public notice of the redemption until it became aware that investors who appeared to have learned of the redemption had been selling the securities to buyers who appeared to be unaware of the redemption. Fifth Third, which compensated harmed investors and agreed to adoption and implementation of various additional policies and procedures, settled the SEC's enforcement action without admitting or denying the allegations.

Fifth Third's early redemption of their TruPS in May 2011 was triggered through Dodd-Frank's phasing out of Tier 1 Capital treatment for TruPS generally. As indicated in our July 2010 memo "Potential Opportunities for Issuers of Trust Preferred Securities under the Collins Amendment," bank holding companies have taken the opportunity presented by Dodd-Frank to redeem relatively costly TruPS under the regulatory capital provisions of their particular issuances where applicable. As noted in that memo, employing this redemption strategy requires careful coordination with regulators and consideration of all applicable circumstances, importantly including disclosure obligations.

Apart from their changing capital treatment and related redemptions, TruPS have frequently been a sort of fulcrum security in acquisitions of troubled institutions. Several notable transactions, including Ford Financial's recapitalization of Pacific Capital in 2010, included conditions around effecting discounted tender offers of TruPS which have often proven difficult in execution. Several other deals, including BB&T's recently announced BankAtlantic transaction, have attempted to solve the issue of TruPS at the holding company level by focusing on bank-level transactions.

It is clear that in the coming months TruPS will continue to be a focus in numerous capital and strategic transactions. Companies considering redemptions or other transactions involving their TruPS, while coordinating closely with their bank regulators and other relevant constituencies, should not lose sight of the various "capital treatment events" in the underlying trust documents as well as related corporate and securities law issues.

It's been over a year since the SEC last brought a Reg FD enforcement case...

Study: Consequences of Private Meetings with Investors

In the "IR Web Report Blog" today, Pam Agnew summarizes how a new study has found significant evidence that hedge funds benefit from information they obtain in private meetings with company executives, adding to mounting research suggesting that selective access to management undermines regulators' fair disclosure objectives. Check it out.

Poll: Which Development is More Crazy?

As we stare into the abyss of another financial crisis - and thus gear up for more reform down the road - below is an anonymous poll:


- Broc Romanek

November 29, 2011

Judge Rakoff Does It Again: Rejects SEC-Citi Settlement

As expected given his 9 specific questions that he wanted covered during a recent hearing, Southern District of New York Judge Jed Rakoff rejected the proposed $285 million settlement between the SEC and Citigroup related to the sale of mortgage securities yesterday. This Dealbook Blog includes the Judge's 15-page order - and here's a statement from SEC Enforcement Director Rob Khuzami. As noted in this WSJ article, the Judge is not kind to the SEC in his order - he has set a July 16th trial date.

Whistleblowers Coming Out of the Woodwork: To Both the SEC and Internally

As I blogged recently, the SEC's Office of Whistleblower issued its first annual report in which it disclosed that it already had received over 300 tips in just a few months. Then there is this recent CFO.com article noting that employees are reporting internally at a higher clip. It will be interesting to see if these trends continue - I think they will given that employees now have greater awareness about whistleblowing generally since companies are conducting campaigns for folks to blow the whistle internally first. We have posted memos analyzing this new report in our "Whistleblowers" Practice Area.

Updating Your Whistleblower Procedures: How to Apply Six Sigma and Lean Methodologies

Tomorrow, tune into our webcast - "Updating Your Whistleblower Procedures: How to Apply Six Sigma and Lean Methodologies" - to learn from Steve Pearlman of Seyfarth Shaw how to pare risks when developing whistleblower processes and procedures by utilizing Six Sigma and Lean principles and more...

- Broc Romanek

November 28, 2011

PCAOB Finds Higher Deficiency Rates at Half of Big 4

From Lynn Turner: "Investors should be concerned by the two new PCAOB inspection reports released last week that indicate a significant increase in deficient audits performed by half of the Big 4 audit firms. As this Bloomberg Businessweek article notes, PWC had deficiencies in 37% of its audits examined and KPMG had deficiencies in 22% of its audits. These reports raise a question as to whether investors are getting value for the money being spent on audits - and they follow the recent report criticizing audits by Deloitte & Touche. Here is a letter from Senator McCaskill raising questions with respect to Deloitte audits.

It is interesting to note these reports no longer discuss which specific issuer had a restatement, but rather just note how many restatements there were. This is apparently a step backwards away from transparency, making it harder for readers to determine which issuers restated and rendering the reports of lesser value. Another unanswered question is how many, if any, of the audit partners involved have become the subject of PCAOB disciplinary actions.

The PwC report notes several recurring deficiencies in basic testing of a company's revenues, internal controls and support for asset values. On these audits, there is not just one partner, but a second partner as well as an experienced manager. It really raises questions about the quality controls of the firm, given the high deficiency rate.

The KPMG report notes deficiencies in auditing allowances for loan losses, asset valuations, and internal controls. The reports highlight how auditors fail to test, or to test adequately, the value of assets such as investments, including testing the information received by pricing services. Deficiencies in such testing and deficiencies in pricing services processes were recently discussed at a PCAOB SAG meeting.

On some of these audits, the deficiencies cited raise a question about whether the audit committees are really overseeing the audits performed in a reasonable manner or merely going through the motions. It also appears that efforts by Congress, the business community and the SEC (under a prior Chairman) to "dumb down" audits of internal controls has worked, and the audits of internal controls may not hold a lot of value given the number of deficiencies noted."

The UK's "Forward-Looking Say-on-Pay" Proposal

It's worth repeating this CompensationStandards.com blog from Mark Borges from Saturday:

This past week, the United Kingdom High Pay Commission (an independent inquiry into executive compensation) released the results of its year-long study of executive pay. Entitled "Cheques With Balances: why tackling high pay is in the national interest," the report includes 12 recommendations on ways to combat spiraling executive compensation.

The one that I found most interesting is the recommendation that the current shareholder advisory vote on executive compensation be made "forward-looking." By this, the Commission means that shareholders would be given the opportunity to vote on a company's proposed remuneration arrangements for the next three years (following the date of the vote). This would include future salary increases, bonus awards, and all ancillary benefits (such as pension arrangements).

As the Commission notes, this approach would give shareholders a genuine say in the remuneration to be paid to executives, not just the ability to "approve" or "ratify" the pay packages that have already been implemented. It almost goes without saying that this would be a radical departure from the current structure of shareholder advisory votes on executive pay (both in the UK and the US). Given that the concept of shareholder advisory votes originated in UK a mere decade ago, the proposal bears watching - if only to see how it is received in the UK corporate and investor communities.

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:

- Who "Owns" Your Social Media Policy?
- The Reality of Section 220 Claims for Books and Records
- Accounting That Comes in Flavors
- "Fifth Call" as Effective Means of Communication
- Department of State Speaks on Conflict Minerals

- Broc Romanek

November 23, 2011

Time to Be Thankful: Let's Stop the Madness

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- Broc Romanek

November 22, 2011

Senate Bill Would Require Greater PCAOB Transparency

Last week, as noted in this press release, Senators Jack Reed (D-RI) and Chuck Grassley (R-IA) introduced the "PCAOB Enforcement Transparency Act of 2011." This bill will make PCAOB disciplinary proceedings public to bring auditing deficiencies at the firms they audit to light in a timely manner. This is in reaction with what happened with Deloitte recently, as I noted in this blog.

Sarbanes-Oxley requires PCAOB's disciplinary proceedings to be kept confidential through charging, hearings, initial decision, and appeal, which enables firms that engage in misconduct to drag out the proceedings for years while the investors are kept in the dark. In comparison, nearly all administrative proceedings brought by the SEC against public companies, brokers, dealers, investment advisers, and others are open, public proceedings.

House Bill Would Require Shell Companies & LLPs to Disclose Contact Information

Last week, as reported in this Reuters article, a new bill has been introduced in the House would require shell companies and limited liability partnerships to provide names and contact information when they are formed. This is at least the 3rd time that this type of bill has been introduced and it's heavily supported by law enforcement agencies.

Judges Needed for Fordham Securities Law Moot Court Competition

Each spring, Fordham Law School hosts the Kaufman Memorial Securities Law Moot Court Competition, which has a rich tradition of bringing together complex securities law issues, talented student advocates and top legal minds. Next year's Kaufman Competition will take place on March 23-25, with a final round panel of Judge Kelly of the Tenth Circuit; Chief Judge Kozinski of the Ninth Circuit; Judge Martin of the Sixth Circuit; Judge Posner of the Seventh Circuit; Judge Jane Richards Roth of the Third Circuit; and SEC Commissioner Paredes.

They are currently soliciting folks to judge oral argument rounds and grade competition briefs. No securities law experience is required to participate and CLE credit is available - here is contact information to participate.

- Broc Romanek

November 21, 2011

Corp Fin Meredith Cross Speaks at ABA's Fall Meeting

On Friday, I attended the always useful "Dialogue with the Director" session during the ABA's Business Law Section's Annual Fall Meeting. Here are a few notes:

- It was standing-room only in the room, quite a difference from recent years. This was surprising given the dearth of recent final rulemakings - so my take it that this may be a more of a byproduct of fewer deals rather than increased interest in what is happening at the SEC.

- Meredith noted she recently participated in her 8th testimony on the Hill during her tenure, which is quite a lot. Her latest was a Senate Banking subcommittee hearing last week where all six Division Directors and the head of OCIE gave updates about their activities. Here is the testimony given during that hearing.

- Corp Fin has finalized most of its required Dodd-Frank rulemakings that had a deadline. They are now actively writing proposals and final rules for the topics that they are still required to tackle under Dodd-Frank in the wake of the SEC revising its processes to ensure future rulemakings comply with the dictates of the court's decision in the proxy access lawsuit.

- For these remaining rulemakings, there are no timetables yet for when they would be proposed or finalized - but Meredith noted that Senator Menendez pressed her during the hearing last week to propose the pay disparity rules by the end of the year, noting that Corp Fin would try mightily to meet that timeframe but there were no promises (my note: remember that even if Corp Fin made a recommendation to the Commission on a rulemaking, it is out of the Division's control as to when the Commission acts upon it). There is also the compensation committee/advisor proposal that is outstanding - even when the SEC finalizes its rules on that, the exchanges then have to revise their listing standards.

- Any no-action requests related to shareholder proposals that deal with private ordering of proxy access will be processed within Corp Fin in the normal course. Meredith intends to read them herself too.

- On proxy plumbing, a proposal regarding proxy advisors would likely be the first output from the concept release commentary. Meredith reminded the audience that the SEC's jurisdiction in this area only extends so far - so that an item like conflicts of interest with a company or proponent could be the subject of a rulemaking, but that others like lack of competition within the industry is not. Regarding complaints that proxy advisor recommendations are made often based on inaccurate information, Meredith noted that there didn't seem to be much evidence to support those claims - rather, those situations typically involved disagreements based on judgment calls.

- The SEC likely won't conduct rulemaking in areas where Congress has a bill floating right now, such as restrictions on general solicitation and Section 12(g) thresholds.

Yesterday, this NY Times article slammed the way that law schools teach and noted how "for decades, clients have essentially underwritten the training of new lawyers, paying as much as $300 an hour for the time of associates learning on the job."

SEC Releases Long-Awaited IFRS Comparison Papers

As described in this article on "Accounting Today," the SEC Staff released two papers a few days ago. One 52-page paper compares IFRS with US GAAP and the other 65-page paper analyzes IFRS in practice at foreign companies. FEI's blog includes some comments from the SEC's Chief Accountant Jim Kroeker related to these papers.

November-December Issue: Deal Lawyers Print Newsletter

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

- Nevada: Delaware of the West?
- Caveat Investor for Private Equity: Pointers for Investing Additional Capital
- Delaware Chancery's $1.3 Billion Damage Award: 19 Take-Aways

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

November 18, 2011

SEC Obtains Another Clawback Without "Misconduct"

Earlier this week, the SEC announced that the former CEO of CSK Auto Corporation had agreed to return $2.8 million in bonus compensation and stock profits that he received while the company was committing accounting fraud. Steve Quinlivan notes in his blog how the SEC initially was seeking $4 million to be returned.

Although Maynard Jenkins was not personally charged with "misconduct," he was still required under the clawback provision - Section 304 - of Sarbanes-Oxley to reimburse CSK Auto for incentive-based compensation and stock sale profits that he received during the company's fraudulent period. As you may recall from a series of blogs on this case (here is the first blog), this action marked the SEC's third SOX clawback case against someone who was not alleged to have otherwise violated the securities laws (this Beazer Home CEO settlement was the first and this Beazer Home CFO settlement was the second one obtained by the SEC, even though the CSK Auto case was originated before those two). The Jenkins settlement is now subject to court approval.

The SEC previously charged 4 former CSK Auto executives who perpetrated the accounting fraud, and separately charged the company for filing false financial statements for fiscal years 2002 to 2004. The company settled the charges, and the litigation against three of the former executives is continuing (CSK's former chief operating officer has since died). The U.S. Department of Justice brought a criminal indictment against those same executives, who have pleaded guilty to various charges. CSK Auto recently entered into a non-prosecution agreement with the DOJ in which it agreed to pay a $20.9 million penalty.

Senators Introduce "STOCK Act" to Stop Congressional Insider Trading

In the wake of the news that some members of Congress are trading on nonpublic inside information - and the fact that it's legal for them to do that, but for the rest of us - two separate bills have been introduced in the Senate to stop Congressional insider trading, as noted in this article.

Dodd-Frank: GAO Report Urges More Agency Coordination

In the "Dodd-Frank Blog," Ethan Mark notes a new GAO report analyzing how the federal regulators are coordinating their rulemaking, etc. Here is an excerpt from Ethan's blog:

GAO examined the 32 final Dodd-Frank Act rules in effect as of July 21, 2011; the regulatory analyses conducted for 10 of the 32 rules that allowed for some level of agency discretion; statutes and executive orders requiring agencies to perform regulatory analysis; and studies on the impact of the Dodd-Frank Act. GAO also interviewed regulators, academics, and industry representatives.

The GAO report found that regulators had coordinated on some of the rules that were effective as of July 2011. It noted such coordination is a positive stepping stone for future coordination. However, GAO also found that most of the coordination, to date, had been informal and ad hoc. GAO also found that most of the federal financial regulators included in its review, including the CFPB, did not have formal policies to guide interagency coordination. According to GAO, while informal and ad hoc coordination can produce the desired results, such coordination can break down when disagreements arise or other work becomes pressing.

Formal policies can institutionalize informal coordination practices and provide a framework for coordinating, helping to ensure that regulators are appropriately consulted and that their views, including conflicting viewpoints, are addressed in a consistent and transparent fashion. Given its membership and charge to help facilitate coordination among its member agencies, GAO believes FSOC is positioned to work with the federal financial regulatory agencies to establish compatible policies that would guide and facilitate interagency coordination among its members throughout the course of Dodd-Frank Act rulemakings.

- Broc Romanek

November 17, 2011

ISS Releases 2012 Proxy Voting Policies

The new phone book is here! The new phone book is here! Moments ago, ISS released its 2012 updates for its US, Canadian, European and international proxy voting guidelines.

By the way, ISS's Ted Allen blogged yesterday that a second proxy access proposal has now been submitted to a company - this time to Textron - by the US Proxy Exchange.

The SEC's Office of the Whistleblower Issues Its First Annual Report

As blogged by Vanessa Schoenthaler yesterday, the SEC's Office of the Whistleblower has issued its first annual report as required by Dodd-Frank. The report only covers a 7-week period, from the effective date of the final whistleblower rules through the SEC's fiscal year-end even though tips reported before the final whistleblower rules went into effect are potentially eligible for whistleblower rewards.

Vanessa notes that "During the seven weeks for which data is available, the Commission received 334 whistleblower tips. Among these, the most common complaints related to market manipulation (54), offering fraud (52) and corporate disclosures and financial statements (51). Note, however, these tips were categorized by the whistleblowers themselves, not the Commission, and there are 84 that were submitted under the category of "other" or without a category at all, so it's hard to say how accurate this information really is."

Tune into our upcoming webcast - "Updating Your Whistleblower Procedures: How to Apply Six Sigma and Lean Methodologies" - that will be held on Wednesday, November 30th.

Compensation Standards Newsletter: Fall Issue Now Available

For members of CompensationStandards.com, we have posted the Fall 2011 Issue of our Compensation Standards newsletter that contains practical guidance pulled from our successful pair of executive pay conferences. With Dave Lynn and Mark Borges wrapping up the 2012 Edition of Lynn, Borges & Romanek's "Executive Compensation Disclosure Treatise & Reporting Guide"- about half of the updated Chapters of the Treatise are already posted on CompensationStandards.com - we thought it was best to compile a select group of the Talking Points as our Fall issue (attendees of the Conferences received the entire 200-page set; you can still register to watch the archived video of the Conferences) since it's too late to insert them in the upcoming edition of the Treatise.

If you wish to order a hard-copy of the Treatise so you receive it as soon as it's printed, try this No-Risk Trial to the Hard-Copy of Executive Compensation Treatise.

- Broc Romanek

November 16, 2011

Study: Going Concerns Going Down

In this study (posted in our "Going Concerns" Practice Area), Audit Analytics estimates the number of New Going Concerns for fiscal year 2010 (a going concern filed for 2010 when one was not filed for 2009). New Going Concerns most recently peaked in 2007 and has been decreasing in number each year thereafter. As of May 31st, fiscal year 2010 received 584 new going concerns, which results in a estimated amount of 637 total new going concerns for 2010. Therefore, going concerns appear to be trending to the lowest amount in ten years.

Reverse Mergers: SEC Approves New Exchange Listing Requirements

Last week, the SEC approved additional listing requirements for companies that apply to list on the NYSE, Nasdaq or Amex following completion of a reverse merger with a shell company.

Cleaning Up Your Internal Controls Checklists: The New SAS 70 is SSAE 16

As noted in the NASPP Blog, the Standards on Standards for Attestation Engagements No. 16 (SSAE 16) replaced SAS 70 as of June 15th. Although this appears mostly to be just a technical change, a lot of companies have references to SAS 70 in their internal control checklists and subcertifications - and sometimes even their audit committee charters - so some cleanup might be warranted...

- Broc Romanek

November 15, 2011

Proxy Access Proposal Filed at MEMC Electronics

Ted Allen of ISS blogged yesterday:

A retail shareholder activist has filed a proxy access proposal at MEMC Electronics, according to the U.S. Proxy Exchange, a group that represents retail investors. The proposal is the first 2012 proxy access resolution to be made public and suggests that U.S. companies may see more access proposals next season than governance observers have expected.

The resolution was filed Nov. 11 by long-time activist Ken Steiner, said Glyn Holton, executive director of the group. Steiner's measure is based on a model proposal that U.S. Proxy Exchange members developed over the past month as a more permissive alternative to the SEC's universal access rule, which would have required investor groups to hold a 3 percent stake for at least three years. While some institutional investors have expressed support for these thresholds, retail activists have argued that those hurdles would be too high and would disenfranchise small shareowners.

The U.S. Proxy Exchange's model proposal urges a company's board to adopt a proxy access bylaw that would permit director nominees from: any party of one or more shareowners that has held continuously, for two years, 1 percent of the company's securities eligible to vote for the election of directors, and/or any party of shareowners of whom 100 or more satisfy SEC Rule 14a-8(b) eligibility requirements (i.e., those who hold at least a $2,000 stake for one year). Any such party may make one nomination or, if greater, a number of nominations equal to 12 percent of the current number of board members, rounding down.

Just last week, the U.S. Proxy Exchange, released a revised model proxy access shareholder proposal as blogged upon by CorpGov.net's Jim McRitchie, who is involved with this organization. Here are some thoughts on that from Professor Larry Hamermesh...

SEC Chair Schapiro Speaks at Our Conference

Last week, the SEC posted a transcript of the remarks made by SEC Chair Mary Schapiro at our "Say-on-Pay Workshop: 8th Annual Executive Compensation Conference."

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:

- Limited Support: The SEC's Proposal to Replace Reg M Investment Grade Securities Exemptions
- Who's Soft on White Collar Crime!
- Special Litigation Committees & Insider Trading Claims
- FINRA Guidance on Compliance with New IPO Abuse Rule
- FASB & IASB Repropose Revenue Recognition Standard

- Broc Romanek

November 14, 2011

Madoff Fallout: 8 SEC Disciplinary Actions - A Rare Occasion?

On Saturday, the Washington Post ran this front-page article about how 8 SEC Staffers have been disciplined by the agency for their failure to uncover Bernie Madoff's fraud - but no one has been fired. Here is an excerpt:

The SEC's head of human resources and a law firm hired to advise the agency had recommended that SEC Chairman Mary L. Schapiro fire one person, whom the SEC described as a manager in the office that inspects investment firms. But the chairman decided not to fire the employee, because doing so "would harm the agency's work," SEC spokesman John Nester said.

Should someone have been fired? I don't know because I don't know the circumstances involved. But as reflected by some of the other inside-the-beltway commentators on the article - there are nearly 600 comments - it is very rare for someone to be fired at a federal agency. During my two tours of duty at the SEC, the only instances of someone being fired occurred during the probationary period after their initial hiring.

And even that was rare - maybe two cases in five years. We would always joke around about how hard it was to be fired in the government, primarily due to the liability risks involved. And I don't remember any instances of discipline. So as minor as the actions described in the WaPo piece seem to outsiders, it's actually a big deal for those that work at the SEC...

Nuns Who Won't Stop Nudging

Great piece in yesterday's NY Times about the nuns who are shareholder activists. It's a lengthy piece that covers their history, accomplishments and goals. Here's an excerpt:

The Sisters of St. Francis are hardly the only religious voices challenging big business. They have teamed up on shareholder resolutions with other orders, including the Sisters of Charity of St. Elizabeth and the Sisters of St. Dominic of Caldwell, both in New Jersey. The Interfaith Center on Corporate Responsibility, the umbrella group under which much of Sister Nora's activism takes place, includes Jews, Quakers, Presbyterians and nearly 300 faith-based investing groups. The Vatican, too, has weighed in with a recent encyclical, condemning "the idolatry of the market" and calling for the establishment of a central authority that could stave off future financial crises.

"Companies have learned over time that the issues we're bringing are not frivolous," said the Rev. Seamus P. Finn, 61, a Washington-based priest with the Missionary Oblates of Mary Immaculate and a board member of the Interfaith Center. "At the end of every transaction, there are people that are either positively or negatively impacted, and we try to explain that to them."

As the article notes, the topics that the nuns typically select are not ones that attract much support from shareholders. And in talking to some experienced corporate secretaries over the years, I have heard that they are difficult to negotiate with because they often don't budge from their views coming into a meeting...

Are Some Members of Congress Engaging in Insider Trading?

There's been news for quite some time that some members of Congress have been engaging in insider trading - a few days ago, convicted lobbyist Jack Abramoff claimed that as many as a dozen have done so. "60 Minutes" included a segment on this topic last night - and as indicated in this transcript of the segment, "insider trading" is defined differently for Congress than the rest of us due to a difference in the laws that apply. Some seek to change that, including this bill called "The STOCK Act."

Here are three academic studies, with various views on the subject:

- Insider Trading, Congressional Officials, and Duties of Entrustment
- Insider Trading Inside the Beltway
- Cashing in on Capitol Hill: Insider Trading and the Use of Political Intelligence for Profit

- Broc Romanek

November 10, 2011

The Appearance of Reality: Shareholders & Ownership

Bob Monks is one of the long-time warriors in the battle for corporate governance reform. Ever since creating ISS a long time ago, Bob has been on the front lines to get corporate governance even considered when the need for some type of market reform seemed necessary. That's why I find his recent piece where he asks " What does it mean to be a shareholder or owner in 2011?" so interesting. Under that umbrella question, he also asks these four questions:

1. What do owner and shareholder mean in regards to corporations and governance?

2. Can we lump all stock owners together or do we need multiple classes of stock to accommodate owners with different levels of interest and participation?

3. To whom does management owe fiduciary duty when considering the interest of owners? Does having one class of ownership work in management's favor because it keeps shareholders from ever truly working together to enact change?

4. How can you have "shareholder responsibility" when there is no possibility of shareholders having a common interest and working together. Because there are today so many different classes and categories of shareholders - arbs, derivatives, borrowed stock, etc - that common purpose is impossible.

Bob really does seek feedback on these queries - please post a comment on his blog to weigh in...

Mailed: September-October Issue of The Corporate Counsel

The September-October issue of The Corporate Counsel was recently mailed to subscribers. This issue includes important practical guidance on:

- It's the Most Wonderful Time of the Year--Gifts of Securities and Rule 144
- Loss Contingency Disclosures--The Latest Lessons from the Staff's Comments
- Failure to Timely Report Board's Say-on-Pay Frequency Determination-- Inadvertence or Confusion with the 14a-8 Proviso?
- The Staff Gives Accredited Investor/QIB Relief--The Alaska Permanent Fund Interpretive Letter
- Revisiting the Disclosure/Filing Requirements for Non-Compensatory Agreements-- It's Not Just Materiality
- Time to Update Your Shelf Registration Statement (Again)?
- Policing Insiders' Stock Transactions--FINRA's New Anti-Spinning Rule
- More on Choice of Forum--ISS Weighs In
- Section 162(m) Disclosure/Say-on-Pay Lawsuits--Time to Revisit Your CD&A Disclosure?

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

DOL Issues Guidance on the Use of Electronic Media to Satisfy ERISA Disclosure Requirements

A while back, as noted in this press release, the DOL issued this technical release which sets forth an interim policy regarding the use of electronic media to satisfy ERISA disclosure requirements.

- Broc Romanek

November 9, 2011

Failed Say-on-Pay #44: Regis Receives Only 29% Support!

As Ted Allen blogged yesterday, Regis Corporation received more than 71% opposition to its say-on-pay at its annual meeting, which is the greatest dissent seen so far this year. We have added the Regis Form 8-K to our list of failed say-on-pays in our "Say-on-Pay" Practice Area on CompensationStandards.com.

Venture-Backed Companies: Corporate Governance & Disclosure Practices in IPOs

Recently, Wilson Sonsini wrote this 19-page report on the governance and disclosure practices of 50 venture-backed companies that went public from January 2010 through June 2011, including those related to directors and independence, board committees and policies, stock plans, key metrics and non-GAAP measures and defensive measures.

You may also want to check out this presentation by Mark Suster called "The State of Venture Capital and the Internet," as well as this recent Davis Polk survey on IPO governance practices.

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

We have posted the transcript for the DealLawyers.com webcast: "Lyin', Cheatin' and M&A Stealin': Negotiating the Fraud Exception."

Next Thursday - November 17th - is the Society of Corporate Secretaries' "Issues Update," which is an online event. Check it out!

- Broc Romanek

November 8, 2011

Survey Results: D&O Questionnaires and Director Independence

We have posted the survey results regarding the latest D&O questionnaires and director independence trends, repeated below:

1. Regarding the level of information that we request from directors in connection with their professional and personal affiliations (excluding immediate family member information):
- We ask each director to submit a list (at least annually) of their professional and personal affiliations - 47.9%
- We do not request a list of their affiliations, but ask specific questions related to the NYSE/SEC independence rules and have them confirm that there are no related issues - 50.0%
- Other - 2.1%

2. Regarding the level of information that we request from directors for their immediate family members:
- We ask each director to submit a list (at least annually) of their entire immediate family - 4.2%
- We ask each director to submit a list (at least annually) of their entire immediate family, including certain other information (such as the place of employment and/or job title) - 22.9%
- We define "immediate family members" and provide a list of the company's subsidiaries and then ask each director to list any immediate family members doing business with these entities - 16.7%
- We define "immediate family members" and provide a list of the company's subsidiaries and then ask each director to confirm that there are no related issues - 18.8%
- We do not request a list related to the immediate family members, but ask specific questions related to the NYSE/SEC independence rules and have them confirm that there are no related issues - 37.5%
- Other - 0%

3. Regarding the method(s) of due diligence review that we perform for director independence:
- We rely solely on each director to alert us to any potential independence issues - 36.2%
- We conduct a review (at least annually) of our accounts payable and receivable for ALL professional/personal affiliations (excluding immediate family member relationships) provided by our directors - 8.5%
- We conduct a review (at least annually) of our accounts payable and receivable for ALL transactions related to professional/personal affiliations and immediate family member relationships provided by our directors - 23.4%
- We conduct a review (at least annually) of our accounts payable and receivable for certain transactions related to professional/personal affiliations and/or immediate family member relationships; however, we only perform such a review of selected affiliations/relationships (i.e., we may not conduct a detailed review of certain relationships, such as that in connection with an immediate family member who is employed by WalMart and not in an executive position) - 12.8%
- All - or some combination - of the above - 19.2%

Please take a moment to participate in this "Quick Survey on Disclosure Committees" and this "Quick Survey on Stock Buybacks."

Catch-Up Now: "Say-on-Pay Workshop Conference"

The video archive of last weeks' pair of Conferences - the "6th Annual Proxy Disclosure Conference" & "Say-on-Pay Workshop: 8th Annual Executive Compensation Conference" - are posted. Hopefully, you've talked to some of the many that attended this event and heard how much practical guidance was imparted. Our panels really delivered this year - and it's not too late to watch them as you can still register and watch the panels now or when you are gearing up to draft your proxy materials.

Our Week of Conferences: Sights & Sounds

Here are three short videos from our week of Conferences this week - this first one shows the sheer size of our "Investors Speak" panel on Wednesday (2000 attendees in person and many more online):

A groovy exhibit from E*Trade in our Exhibit Hall:

Also liked this set-up in the Exhibit Hall from Bank of America/Merrill Lynch:


- Broc Romanek

November 7, 2011

Small Business Capital Formation: House Passes Four Bills

Last Thursday, as noted in this blog by Jim Hamilton, the House passed the "Access to Capital for Job Creators Act" (H.R. 2940) and the "Entrepreneur Access to Capital Act" (H.R. 2930). The first bill would remove the prohibition against general solicitation for private offerings of securities if all purchasers were accredited investors - and the second bill would require those seeking crowdfunding to notify the SEC, who would then notify state regulators, of any new offerings (but registration would not be required).

Also, as noted in this press release, on Wednesday, the House passed the "Small Company Capital Formation Act of 2011" (H.R. 1070), which would increase the Regulation A offering threshold from $5 million to $50 million (another pending bill is HR 2671, which would increase the total assets threshold from $1 million to $10 million - and the class of equity security holders of record threshold from 500-750 to 1000 - before companies would be required to register under the '34 Act). The House also passed a bill with no name as far as I can tell (H.R. 1965), which would modify the threshold for '34 Act registration and deregistration for bank and bank holding companies.

Given that all four of these bills were presented in the magical name of "job creation," they passed with flying color margins. If they become law (after being combined in some fashion when reconciled with any similar Senate bills that pass), then guys like Angel from Rockford Files can run around selling stock in local brewpubs without looking over their shoulders so much...

On Saturday, the Breeders Cup featured this race that is one of the most exciting ever. Watch the light grey horse in the back of the pack named "Turallure." And don't stop laughing about the one called "Compliance Officer"...

DOJ Won't Probe Ex-SEC General Counsel David Becker

Here's a Bloomberg article with the latest on the David Becker- SEC IG saga (here's my last blog on this):

Federal prosecutors have told former U.S. Securities and Exchange Commission General Counsel David Becker that they won't open an investigation into whether he violated ethics laws, his attorney said. The SEC's inspector general, H. David Kotz, in September called for the Justice Department to review whether Becker should be criminally charged for having a financial interest in a policy he worked on relating to Bernard Madoff's Ponzi scheme. Becker inherited profits from the fraud through an account held by his late mother. "We are gratified at the decision, and it's consistent with our view that Mr. Becker did exactly what he was supposed to do under the circumstances," Becker's attorney, William Baker III, said in an interview today.

Becker, who left the SEC in February to return to private legal practice, has said he had no financial interest in the agency's Madoff policy. He had received clearance from the regulator's ethics counsel to work on the matter in 2009. He had also informed SEC Chairman Mary Schapiro about the account. Kotz referred his report to the Justice Department's public integrity section, which reviewed it and concluded a formal probe wasn't warranted. A department spokeswoman, Laura Sweeney, declined to comment; Kotz didn't respond to a request for comment.

Also check out this Bloomberg article entitled "SEC Enforcers Frozen as Internal Watchdog Kotz Unleashes 'Chilling' Probes."

PCAOB Chair Speaks: Challenge Our Culture

Last week, PCAOB Chair Jim Doty delivered this speech entitled "Prizes Captured, Shops Sold, Et Cetera: Importance of Keeping Investors Properly Informed."

Last week, the PCAOB posted this briefing paper on auditor rotation and independence, as well as these slides regarding pricing services for the Standing Advisory Group meeting set for this week...

- Broc Romanek

November 3, 2011

Egregious Executive Pay Via Stock Options

We have posted the remarks from Albert Meyer of Bastiat Capital regarding "Egregious Executive Pay Via Stock Options" that were made in connection with yesterday's "Say-on-Pay Workshop:8th Annual Executive Compensation Conference" for general consumption (the video archive of that Conference is now posted). It's great to see investors speaking out.

Australia's New "Two Strikes" Say-on-Pay Law

As roughly 40 companies in the US face the prospect of failing say-on-pay for a second time (and perhaps one company already has, depending on the math - also see this blog about the large number of abstentions), this article about Australia's new "two strike" law bears reading, repeated below:

Australia's new "two strikes" law giving shareholders more power to curb excessive executive pay packets, promises to shake up some businesses. Homewares company GUD Holdings has already been hit with a protest vote from 42% of shareholders over the company's remuneration report, under the new legislation introduced in July.

Under the new amendment to the Australian Corporations Act, if 25% or more of votes cast at two consecutive AGMs oppose the adoption of a remuneration report, then the company must formally respond by asking all board members except the managing director to stand for re-election within 90 days. In addition, key management personnel whose remuneration is disclosed in the remuneration report are excluded from voting, ensuring those with an obvious interest in the outcome cannot vote.

There are few more controversial issues than executive pay. Here in Australia, Qantas chief executive Alan Joyce found himself in the firing line for his large pay increase despite a damaging industrial dispute. Last week, the Australian Shareholders Association indicated it would oppose the remuneration package of Wesfarmers chief Richard Goyder and financial officer Terry Bowen at the company's AGM in November.

Non-binding vote

Since 2005, Australian shareholders have had the right to vote on the remuneration report of their companies at an AGM. The tougher Australian laws parallel similar moves in the Netherlands, Norway, Sweden and the United Kingdom which have responded to public outrage about executive pay levels. The US has also introduced similar legislation effective from the 2011 proxy season in the wake of public concern about the role of excessive remuneration in the global financial crisis.

New research

Our new research backs the idea that shareholder voting is an effective way to discipline boards over unsatisfactory executive pay arrangements. Using a sample of 240 ASX listed firms between 2001 and 2009, fellow UQ researchers Peter Clarkson, Shannon Nicholls and I investigated the pay-for-performance relationship and its effect on governance. Pay-for-performance is an important metric because it measures how much executive pay changes or varies with firm's performance. That is, it captures the incentive effect of the remuneration structure. Not surprisingly, a weak pay-for-performance relationship is a focus for shareholder dissent.

Research around the effects of the UK advisory vote, for instance, showed shareholders were more likely to vote "no" on remuneration packages that are excessively high, had a weak pay-for-performance link or were greatly dilutive. We found the average "no" vote on the remuneration report for our sample has increased steadily from 5.4% in 2005 (the first year of the vote) to 11.4% in 2009.

Pay-for-performance

The pay-for-performance relation strengthened across the nine year period, with enhanced remuneration disclosure and the non-binding shareholder vote the most important avenues to achieve greater monitoring and greater shareholder control of the executive remuneration process. Our research findings have important implications for Australian regulators and company directors. Shareholders are increasingly voicing their concerns about excessive executive pay and have used the advisory vote effectively to flag inappropriate remuneration packages to the board.

Our research suggests that boards of directors have listened to their shareholders and have adapted pay packages to be more in line with shareholder expectations. This season, the two-strikes rule gives shareholders an even stronger say on pay and there is every reason to believe that shareholders will use it. For their part, company boards need to listen closely to what shareholders have to say about the remuneration report and respond accordingly. Transparent and careful disclosure about remuneration is more critical than ever this reporting season if company boards are to avoid "striking out" with their shareholders.

- Broc Romanek

November 2, 2011

Today: "The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference"

Today is the "The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference"; yesterday was the "6th Annual Proxy Disclosure Conference" and the video archive of that Conference is posted. Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.

- How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it's shown live). A prominent link called "Enter the Conference Here" on the home pages of those sites will take you directly to today's Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Adobe Flash Player).

Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today's Conference Agenda; times are Pacific.

- How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online - and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic "prompts" all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few - but hours for each state vary; see the CLE list for each Conference in the FAQs.

IPOs for Private Equity Firms

In this DealLawyers.com podcast, Ken Favaro of Booz & Co. provides some insight into why a private equity firm would go public, including:

- Why have private equity firms gone public?
- Why have private equity firms diversified into new asset classes?
- What is the outlook for their core business?

Corp Fin Comments on Regulation G

In the "Dodd-Frank.com Blog," Anne Cotter of Leonard, Street and Deinard provides this recent analysis of Reg G comments from Corp Fin:

Prior to Sarbanes-Oxley, it was fashionable for public companies to issue press releases with "pro-forma earnings," which generally excluded certain GAAP charges from the income calculation. To some, this measure was known as EBBS, or "Earnings Before Bad Stuff." As a response, Sarbanes-Oxley required, and the SEC issued, Regulation G. Regulation G addresses "non-GAAP financial measures" and requires the most directly comparable GAAP measure be presented and a reconciliation of the most comparable GAAP and non-GAAP measures.

We reviewed some recent SEC comment letters on Regulation G. For the most part, the comments were not surprising on a technical level. One interesting point we noted is that the SEC, when conducting periodic reviews of issuers, is not shy about reviewing Form 8-Ks, including earnings announcements, and commenting on Regulation G deficiencies.

Some of the general categories of comments we noted were:

- The non-GAAP operating statement conveys undue prominence.
- All non-GAAP financial information (including forward looking information) was not reconciled to GAAP.
- Requests to present non-GAAP financial information consistent with Securities Act filings, with an explanation of why the information is useful.
- Where multiple non-GAAP financial measures are reported, a comment to reconcile each non-GAAP measure to the most directly comparable GAAP measure.
- A comment to present more information as to why certain matters are not representative of future performance and are non-recurring in nature.

We also noted several comments on issuers' Schedule 14D-9s, which an issuer files in response to a third party tender offer. Those comments uniformly addressed projections which were presented on a non-GAAP basis (usually EBITDA) and required reconciliation to GAAP.

- Broc Romanek

November 1, 2011

Today: "Tackling Your 2012 Compensation Disclosures: The 6th Annual Proxy Disclosure Conference"

Today is the "Tackling Your 2012 Compensation Disclosures: The 6th Annual Proxy Disclosure Conference"; tomorrow is the "The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference." Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.

- How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it's shown live). A prominent link called "Enter the Conference Here" on the home pages of those sites will take you directly to today's Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Adobe Flash Player).

Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today's Conference Agenda; times are Pacific.

- How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online - and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic "prompts" all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few - but hours for each state vary; see the CLE list for each Conference in the FAQs.

The "FINRA Disciplinary Actions Database"

Recently, FINRA initiated a web-based searchable system called the "FINRA Disciplinary Actions Database" that makes its disciplinary actions accessible online. A long time coming, the documents appear to be posted shortly after issuance and each document has a link to other related documents, such as the complaint when you access an Offer of Settlement. This new database will make it much easier for litigation attorneys to search for relevant FINRA cases and obtain copies of the relevant documents.

Before this development, one would have to dig hard to find these documents. The two avenues were taking a look at FINRA's monthly listing of disciplinary actions and then trying to obtain a hard copy from FINRA with a "per page" copying charge or subscription services that took the time to copy these documents and upload them, and they were still often incomplete. Thanks to Suzanne Rothwell for her insights!

Our November Eminders is Posted!

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

- Broc Romanek