March 30, 2012

The SEC's Dunkin' Donuts Conspiracy

Members often ask what are the pressing issues being discussed down at the SEC. And those issues typically are not what people would think they would be. Sometimes they are about morale, sometimes they are about limited resources (by the way, Corp Fin is hiring accountants right now). But often they are about the types of things that folks are concerned about at their own job. The little things.

The buzz right now is that Dunkin' Donuts has moved out of its internal location within the SEC's HQ and replaced with an inferior tenant. And I can understand that. They didn't have a Dunkin' Donuts either time I worked there and I would have killed for one! Instead, they had a McDonalds and other fast-food joints that couldn't hold a candle to the master of donuts. So far, no word of a strike or any other meaningful way to try to persuade Dunkin' Donuts to return.

No, this is not an April Fool's joke. A tad too early for that. Thanks to Dave for handling the blog next week as I am off for Spring Break 2012...

dunkin donuts.jpg

PCAOB's Updated Standard-Setting Timeline

On Monday, the PCAOB updated its timeline for expected action on standard-setting projects. Here is Congressional testimony by Chair Jim Doty - and testimony from SEC Chief Accountant James Kroeker - on this topic from Wednesday (as part of a hearing on a draft bill that would amend Sarbanes-Oxley's Section 103 to eliminate the PCAOB's authority to mandate audit firm rotation - here's a related Reuters article)...

- Broc Romanek

March 29, 2012

Stock Act: For $9 Million, Congress to Have Own Trading Database Open to the Public

As the sleepers of the STOCK Act continue to get visibility in the memos posted in our "Insider Trading" Practice Area (and this blog), hat tip to Bridgeway Software's Blane Erwin for pointing out this excerpt from the Act (on pages 12 and 13):

Not later than 18 months after the date of enactment, the Secretary of the Senate and the Sergeant of Arms of the Senate and the Clerk of the House of Representatives shall develop systems to enable (A) electronic filing of reports... (B) public access to financial disclosure reports... (ii) allow the public to search, sort and download data contained in the reports.

As noted in this Washington Examiner article, the new software and hardware will be developed at a cool cost of $9 million ($3.2k per Congressman per year per this article). Wonder if the new system will be like the SEC's Edgar? Take part in the anonymous poll below...

Latest Developments in Use of Supplemental Proxy Materials

In this podcast, Jim Kroll of Towers Watson discusses the latest developments in using supplemental proxy materials for say-on-pay votes (here's our ongoing list of supplemental materials), including:

- How many companies have filed them so far this year?
- Is the approach that companies are taking any different than last year?
- What are the pros and cons of using supplemental materials?

Poll: What Should the Name of the New Congressional Trading Database Be?

Did you know that the SEC had an internal contest to name its filing database back in the '80s? Then Corp Fin'er Herb Scholl won that contest with his "EDGAR" entry. Now it's your turn. Note that the suggestion of "Crotch" below is an acronym for "Congressional Recordkeeping of Trades, Changes & Hooch":

- Broc Romanek

March 28, 2012

House Passes Senate-Amended JOBS Act: Next Up is President Signature

Yesterday, as noted in this Washington Post article, the House passed the version of the JOBS Act as amended by the Senate last week by a vote of 380 to 41. So the Senate's version stands and the bill has gone to President Obama for signature. Meanwhile, we continue posting memos explaining the Act in our "JOBS Act" Practice Area - and we have two webcasts coming up dealing with this rewrite of the '33 Act: "The Art of Regulation D and Private Placements" on April 24th - and "The New World of IPOs: Dissecting the JOBS Act" on May 2nd.

Dave & Marty on the JOBS Act

In this podcast, Dave Lynn and Marty Dunn discuss the JOBS Act including:

- The new category of "emerging growth company" and the IPO "on-ramp" available to these companies
- The repeal of the prohibition on general solicitation and general advertising in Rule 506 private placements
- Crowdfunding
- A new Regulation A-style offering exemption for offerings up to $50 million
- Changes to the Exchange Act registration/reporting thresholds

Supreme Court Rejects Open-Ended Tolling of Section 16(b) Claims

On Monday, the US Supreme Court limited the ability to bring Section 16 short-swing profit claims years after the alleged improper trading in Credit Suisse Securities (USA) v. Simmonds. On the issue of whether equitable tolling even applies to the two-year period for bringing claims under Section 16(b), the Court split 4-4 - Chief Justice Roberts did not participate in the decision. The Court thus left that issue for another day. Nevertheless, the eight voting Justices held unanimously that, assuming the two-year period can be extended, the tolling rules articulated by the Ninth and Second Circuits impermissibly deviated from ordinary equitable tolling principles.

Alan Dye and Peter Romeo will now be able to finish their 4th Edition of the "Romeo & Dye Section 16 Treatise" as this is the first SCOTUS opinion to deal with Section 16 in decades - and is an important decision. Order your hard copy of the Treatise now so you can get your hands on a copy as soon as it's hot off the presses...

- Broc Romanek

March 27, 2012

How the New Congressional Insider Trading Law - STOCK Act - Might Impact You

Last week, I blogged that Congress had finally passed a watered down version of the STOCK Act. Here's some analysis courtesy of Ken Gross and his team at Skadden Arps about how this might impact companies:

The version of the STOCK Act passed by Congress includes the provisions from the Senate's initial version that the insider trading provisions in Section 10(b) of the '34 Act and Rule 10b-5 apply to Congressional Members and staff, and federal executive and judicial branch officials, and that these Members, officials and employees owe a duty with respect to material, nonpublic information derived from the person's position with the federal government.

This raises an interesting question as to the companies with whom these Members, officials and employees share the nonpublic information. Do the companies become liable if they act on such information, similar to certain "tipees" in a traditional insider trading case? We believe that the STOCK Act could indeed create liability for the company under certain circumstances that are highly fact-specific. This also raises a question as to how extensive the protection is under the Speech or Debate Clause.

The Act includes a requirement (also in the Senate's initial version) that the Comptroller General submit a report to Congress within 12 months of the date of enactment on the role of "Political Intelligence" in financial markets. It does not include the provisions from the Senate's initial version that would have amended the Lobbying Disclosure Act of 1995 (by adding a new category of activities, "Political Intelligence Contacts," that would trigger registration and reporting) and the illegal gratuities statute (by broadening the scope of the statute).

Given that they do not specify an effective date or reference a date by which an implementing regulation must take effect, the insider trading provisions take effect upon the date of enactment.

SEC's Enforcement Gives First Person Credit for Cooperation

As noted in this Gibson Dunn memo, the SEC's Enforcement Division gave the first individual credit for cooperation in an investigation, over two years after its cooperation policy statement was announced. Note that companies have received cooperation credit before - and it's possible that other individuals have too that weren't publicly announced. As the Gibson Dunn memo notes, the unique facts of this investigation might limit its application to other situations...

SEC Files Rare Subpoena Enforcement Action against Wells Fargo

In this blog from David Smyth of Brooks Pierce, we learn the latest about the SEC's Enforcement Division wielding its subpoena power to compel production...

March-April Issue: Deal Lawyers Print Newsletter

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

- Assessing the Locked Box Approach to Purchase Price Adjustments
- Just Enough To Be Dangerous: An Overview of M&A Tax Basics
- Shareholder Approval of Small Private Acquisitions: Has Omnicare Been Rendered a Farce?
- Boilerplate Matters: Giving Notice

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

- Broc Romanek

March 26, 2012

Credit Ratings: S&P Considering Making Governance a Factor

Recently, Standards & Poors posted this request for comment as it proposes to score companies as "Strong/Fair/Adequate/Weak" in the area of management & governance. Here are a few items to note:

- The reason S&P is proposing to do this is to enhance transparency. Stage One would be to evaluate "Management & Governance" and assign a score. Stage Two (to likely come later this year) would be to directly link this score to a credit rating. The ultimate objective is to take the most qualitative part of their analysis and remove any mystery.

- The Management & Governance analysis would consolidate their currently separate analyses of governance, accounting aggressiveness, operational capabilities, organizational effectiveness, risk management (ERM), and strategy. The proposed criteria does not address financial policy; that likely will come later.

- S&P analysts will base their assessments on publicly observable track records of management and boards as well as observations from meetings with management.

If S&P adopts this framework, I believe it will be the only rating agency to explicitly assess corporate governance from a credit perspective. Moody's used to publish ratings separately on governance - but these days, that agency uses its trained governance analysts to factor governance into its "normal" ratings as it deems appropriate (ie. when governance red flags arise) rather than on a separate basis.

More on the JOBS Act

A lot of members have been asking for a copy of the JOBS Act. In our "JOBS Act" Practice Area, we have posted the House version of the bill, as well as the Senate's amendment (thanks to Lorelei Cisne of Arnall Golden Gregory). And we have announced a May 2nd webcast - "The New World of IPOs: Dissecting the JOBS Act" - featuring the two lawyers that served on the Treasury's IPO Task Force that led to the JOBS Act, Wilson Sonsini's Steve Bochner and Latham & Watkin's Joel Trotter, as well as Davis Polk's Michael Kaplan. Tune in to learn what you need to know...

2nd Say-on-Pay Failure of the Year

As noted in its Form 8-K, International Game Technology is the second company holding its annual meeting in 2012 to fail to gain majority support for its say-on-pay with only 44% voting in favor. A list of the Form 8-Ks filed by the "failed" companies is posted in's "Say-on-Pay" Practice Area.

By the way, Semler Brossy is putting out these excellent weekly updates on the say-on-pay votes, summarizing all the latest voting results - including how they jibe with proxy advisor recommendations - and analysis of specific situations. Towers Watson also has put out this excellent memo analyzing the early vote results and how they indicate what is in store for the remainder of the proxy season...

- Broc Romanek

March 23, 2012

Senate Passes JOBS Act With "Registration of Crowdfunding Organizers" Amendment

Yesterday, the Senate passed the JOBS Act by a 73-26 vote with an amendment that would require web organizers of crowdfunding to register with the SEC. All other provisions of the original House version of the JOBS Act - that Dave blogged about a few weeks ago and as covered by the memos posted in our "JOBS Act" Practice Area - were all approved by the Senate without amendment. As noted in this NY Times article, "Because the Senate made several amendments to the House bill, the package will be sent back to the House to work out differences. House Republican leaders said Thursday that they expected to take up the amended bill next week and hoped to send it quickly to President Obama, who has said he will sign it."

So it's a done deal and I will stop my complaining about it. I know folks that work with start-ups and emerging companies are excited and deservedly so. But Congress in its haste has done some pretty awful things in this bill that we will learn about all too well in the days ahead. Hang on for a wild ride. Plenty of memos to be posted and webcasts to come...

Insider Trading: Senate Passes Watered Down STOCK Act

As noted in this NY Times article, the Senate yesterday finally passed the STOCK Act by a vote of 96-3 - accepting the changes that the House passed last month (ie. proposed regulation of "political intelligence" firms was scrapped). The article notes "The Senate majority leader, Harry Reid, Democrat of Nevada, said Republicans had blocked efforts to go to a conference to negotiate differences with the House." And this excerpt says it all: "The bill is meant to eliminate ambiguity, though lawyers said prosecutions would still be difficult." I'll fall out of my chair if this law is ever enforced...

Goldman Sachs Scans Internal Emails for the Term 'Muppet'

And just so I'm not a downer altogether in my blogging today, I bring you this funny piece from the Huffington Post entitled "Goldman Sachs Scans Internal Emails For The Word 'Muppet'...and this video is simply wonderful...

- Broc Romanek

March 22, 2012

Submissions to Corp Fin's Office of Chief Counsel: Use Online Forms, Not E-Mail Address

As Corp Fin Staffers have been warning folks at conferences, etc., the Office of Chief Counsel is shutting down its email address used to ask questions, submit no-action letters, etc. - - on April 1st. The reason is that the Staff has been getting too much spam at this email address, so it's no longer an efficient way for them to receive communications from the public.

Going forward, you should instead use this form to ask interpretive questions - and this form to submit no-action requests. And of course, you can still call OCC to ask questions by phone (at 202.551.3500, leaving your name, phone number and a phrase describing the topic on their voicemail) or submit no-action requests by mail...

CFTC Takes Down a Comment Letter: Is That Allowed?

As noted in this ZeroHedge blog, the CFTC deleted a comment letter that was allegedly posted by a JPMorgan employee in response to a rule proposal's request for comments (here is a Businessweek article mentioning it).

The purpose of my blog is not to delve into whether the alleged whistleblower letter was real, but rather whether a federal agency has the authority to pull comment letters posted by the public? The honest answer is "I don't know." I'm not aware of any legal limits on a federal agency to do this other than what Keith Bishop has just blogged - and I am not aware that the SEC ever has done so. But I definitely can envision a situation where someone posts a comment letter that is false and potentially harmful (remember this blog about forged comment letters) - and in those situations, it seems wise for the agency to act. The question remains what happens if a whistleblower posts something, how does the agency know if its real? I imagine in that case that the agency would try to do some diligence but that would be tough in a situation where the commenter is anonymous or the circumstances require some time to conduct an investigation.

Steve Quinlivan notes: Early on, when the SEC was soliciting comments on the whistleblower rules, some whistleblowers got confused and submitted their complaints in the form of comments to the whistleblower proposal. At least two that I recall. The SEC removed those comments.

PCAOB's Auditor Rotation Roundtable: Materials Available

Today is the second day of the PCAOB's roundtable on its vast reform project to consider mandatory auditor rotation, among other things. The PCAOB has been posting statements from the numerous participants as the roundtable unfolds. Here is an article describing the events from Day One, including former Fed Chair Volcker's support of auditor rotation.

March Madness Continues...

I didn't reveal my Final Four picks this year because I wanted my Michigan team to go all the way. We never get the respect we deserve, as illustrated by this photo:

michigan kid excluded.jpg

- Broc Romanek

March 21, 2012

The JOBS Act in the Senate: Progress Report

Yesterday, the Senate held a vote to amend the JOBS bill that was recently approved in the House. The amendments - proffered by Senators Reed, Landrieu and Levin - would include some very basic investor protections (protections which the Obama Administration originally had called for, but more recently has become deafening silent on). The vote today was 55-44 in favor, with one abstention - and was along party lines except for Republican Senator Brown (R-Mass.) who is in a tough reelection fight and he voted for these protections. That tally fell five votes short of the 60 needed to end debate on the measure.

In a surprise move, coming after Senate Republicans killed an amendment to reauthorize the Export-Import Bank, Senate Majority Leader Harry Reid (D-NV) canceled a remaining vote on the bill and called a meeting of Senate Democrats. As noted in this article from The Hill, there is some dissension among Democrats over the bill. This WSJ article states that the bill "is now expected to clear the Senate by week's end."

Mike Gettelman notes: "After the JOBS (jobbed?) Act, the Securities Act of 1933 should be called the Securities Act of 2012. Lots of late colleagues turning over in their graves."

Anatomy of Another Groovy Proxy Statement: Pfizer

So many members enjoyed my blog dissecting Prudential's proxy statement on Monday that I decided to see what Pfizer is doing with that company's proxy statement. It also is a fine example of how to make a proxy statement more "usable," including:

- Overall usable design, including greater use of graphics and charts than in the past, particularly in the CD&A
- Committee reports from the Corporate Governance and Regulatory and Compliance Committees (pages 14-15), not just from the committees required to provide reports
- Excellent discussion of board leadership structure (pages 8-9; they recombined the CEO/Chair positions in December)
- Response to 2011 say-on-pay vote (page 34)
- Inclusion of CEO letter (3rd page from front)
- Use of proxy summary (page i) and CD&A executive summary (page 42)

The Latest Developments on Proxy Access Shareholder Proposals

In this podcast, Rebekah Toton of O'Melveny & Myers provides some insight into Corp Fin's recent no-action responses on proxy access shareholder proposals, including:

- What no-action responses has the Corp Fin Staff issued so far on proxy access proposals?
- Are there more responses expected this proxy season?
- Based on what has happened, what should companies be doing now?

- Broc Romanek

March 20, 2012

Two More Say-on-Pay Lawsuits Dismissed: Jacobs Engineering and BioMed Realty Trust Win

As I blogged last week on's "The Advisors' Blog": In our "Say-on-Pay" Practice Area, we have posted the court order issued last week in the Superior Court of California-LA that rules against the plaintiffs. We have also posted this week's order from the US District Court for the District of Maryland dismissing the lawsuit against BioMed Realty Trust. As Mark Poerio notes in his blog:

The directors and officers of Jacobs Engineering, and their compensation consultant, have successfully challenged a complaint alleging that poor corporate financial performance made their authorization of significant pay increases for executives "unreasonable, disloyal, and not in good faith, and violated the Board's pay-for-performance executive compensation philosophy."

A Los Angeles Superior Court dismissed the complaint for failure to adequately allege either (1) demand futility or (2) facts sufficient to constitute their claim. Notably, the court observed that "The Dodd-Frank Act did not create any binding obligation on the Board" [through its advisory say-on-pay vote requirement], and that there was "no actionable misrepresentation alleged or culpability" alleged to support claims based on false disclosures in the company's proxy statements.

Webcast: "What the Top Compensation Consultants Are NOW Telling Compensation Committees"

Tune in tomorrow for the webcast - "What the Top Compensation Consultants Are NOW Telling Compensation Committees" - to hear Mike Kesner of Deloitte Consulting, Jan Koors of Pearl Meyer & Partners, Blair Jones of Semler Brossy and Eric Marquardt of Pay Governance "tell it like it is. . . and like it should be."

Time permitting, the panel hopes to tackle all of these topics during the program:

- Weaknesses in ISS' P4P assessment
- How ISS over values options
- Whether to consider ISS's peer group in addition to their own
- How to best demonstrate pay/performance alignment (like Jan's "right" pay and "right performance")
- Rethinking severance (contracts, benefits, etc.) in a P4P world
- Whether to 'fight' a ISS recommendation with supplemental materials, etc.
- How and when to move away from a relative TSR program
- Whether to implement a clawback if they haven't already

Last week, 20 members of Congress sent this letter to the SEC urging the agency to prioritize the pay disparity rulemaking. As noted in this article, Sen. Robert Menendez - the author of Section 953(b) - is leading the charge...

Poll: How Many Companies Will Receive a "Failed" Say-on-Pay Vote in '12?

Now that we've already had one failed vote in 2012 - please take a moment to participate in this anonymous poll and express how you read the tea leaves for the number of failed say-on-pays to befall companies this year (last year, there were over 40 - many more than I expected, evident by how much I vastly underestimated the range of choices in last year's poll):

- Broc Romanek

March 19, 2012

Anatomy of Prudential's Groovy Proxy Statement

On Friday, Prudential filed its preliminary proxy statement and Peggy Foran has done it again. Here are some of the features of this year's proxy statement that make it a cut above:

1. Overall, there are even more charts than the many that Pru has included in the past (eg. book value)
2. As there has been in the past, there are both letters from the CEO and the board to shareholders (including each director's picture on the board letter this year - see page 2)
3. The board's letter explain its reaction to last year's say-on-pay vote and discusses shareholder engagement (page 2); and there is a shareholder engagement discussion on 25
4. There is a discussion on corporate political contributions and lobbying expenditures (page 27)
5. There are multiple discussions on sustainability (see pages 3 and 26). Sustainability also is now part of the director qualifications chart on page 22 (and the charter of the governance committee was changed to address sustainability too)
6. There is a new box devoted to board diversity on page 11
7. The board risk oversight disclosure has been expanded on page 24
8. There is a discussion about the courage of Pru's Japanese colleagues in the wake of last year's tragic earthquake on page 4

Overall, the proxy is very readable - and the online version will be quite functional once the definitive proxy is filed (see last year's proxy) - as always. A great example for the rest of us...

STA Petitions SEC Over Proxy Service Fees for Separately Managed Accounts

Last week, the Securities Transfer Association (STA) filed this rulemaking petition with the SEC regarding proxy processing fees being charged for managed accounts. The petition requests that the SEC either issue interpretive guidance prohibiting broker-dealers (and their agents - read Broadridge) from charging companies at the beneficial owner level for investment advisory accounts (where the beneficial owner has delegated proxy voting authority to an investment adviser) or have disputed fees placed into escrow until this managed accounts flap is resolved by the NYSE and SEC.

Webcast: "The SEC Staff on M&A"

Tune in tomorrow for the webcast - "The SEC Staff on M&A" - to hear Michele Anderson, Chief of the SEC's Office of Mergers and Acquisitions, and former senior SEC Staffers Dennis Garris of Alston & Bird and Jim Moloney of Gibson Dunn discuss the latest rulemakings and interpretations from the SEC.

- Broc Romanek

March 16, 2012

The JOBS Act: Congress on the Bizarro Fast Track

On Tuesday, I posted a list of links to articles and letters criticizing Congress and its proposed JOBS Act for planning to deregulate the securities markets. Since then, there have been hordes of articles reporting in a similar vein (there are have been over 2000 articles on the Act this week).

Rather than list another dozen pieces attacking the bill, below is an update from Lynn Turner explaining the bizarre process of this bill so far:

There have been many stories about how the Senate is conducting its business in recent days. The Senate has often claimed it is more reasoned and thoughtful than the US House of Representatives, but that is not necessarily so. In the case of the JOBS Act, its process has been much worse.

Usually a bill is introduced. To get any traction though, it needs to be introduced and sponsored by a Senator on the appropriate Senate Committee with jurisdiction over the subject matter of the bill. If the committee chair, and sufficient number of committee members are supportive, hearings about the legislation are held in the committee, as well as in subcommittees. The regulators are called to testify, as well as people who are expected to support or oppose the bill.

Typically the party in power picks most of the panel members testifying and the minority party is given one or at most two slots in which people they pick can testify. Then comes what is known as a "mark-up" when the committee members in a public meeting discuss the proposed bill, make proposed amendments and vote on those amendments. If approved, the marked up bill goes to the full floor for debate, when the Majority Leader puts in on the agenda and schedule for debate.

However, in the case of this legislation, a Senate hearing in a subcommittee planned for March 21st was canceled. And the legislation was pulled from the Senate circumventing any mark-up session and further hearings. None of the SEC Commissioners testified. The SEC Chair has written this letter to the Senate citing serious problems and deficiencies in the bill leaving investors further exposed to scams and schemes ala Bernie Madoff.

On Wednesday morning, I understand Harry Reid went to the floor saying he was pulling this out of the hands of the Banking Committee and he began pushing it through in rapid fire this week. That was not what some Senators expected. There was a caucus of the Democratic Senators on Wednesday over lunch at which Senators expressed concern with what Harry Reid and Charles Schumer were doing.

Later on as widely reported, a trade off of relief for blocked judges in exchange for deregulation of securities markets entered the fray making things even more confusing. First thing on Wednesday morning, some thought the Dems would introduce their own version of the bill, but Harry Reid in a nod of the cap to the venture capitalist and bio tech lobbyists (and their campaign contributions) decided that he would go with the House Republican's bill (probably following the White House's directions). While an amendment would be offered making it look like investors protections requested by the state regulators, the SEC and many investor and consumer groups would be entertained, that is merely a facade - a token effort which was dead on arrival before it was even introduced.

Perhaps the funniest thing, is that only people in Congress are calling this a jobs bill. It has become widely referred to in the media as "The Bucket Shop Reauthorization Act of 2012." Most of the people that the Dems did call to testify have said it will not create new jobs, (except perhaps among law enforcement agencies and prison guards)!!! As they say, God Bless America.

And if you want to read about more bizarre behavior from Congress, read this piece - entitled "What's Behind Congressional Freeze on SEC Funding?" - which explains how the House Financial Services Subcommittee has voted against the SEC's budget - not because the government doesn't have the money - but as a way to punish the SEC for conducting unnecessary rulemaking. Except that rulemaking was mandated by Congress in Dodd-Frank...

Second Circuit Stays Judge Rakoff's Citigroup Decision

Yesterday, in a sharply worded per curiam opinion, a three-judge panel of the Second Circuit granted the motions of Citigroup and the SEC to stay district court proceedings in the SEC's enforcement action against the company, so that the appellate court could consider the merits of the question of whether Judge Rakoff had properly rejected the parties' $285 million settlement agreement. Here's some analysis from Kevin LaCroix in his "D&O Diary Blog" and David Smyth's analysis from the "Cady Bar the Door Blog."

SEC Marks The Ides By Bringing Actions Involving Secondary Market For Private Company Shares

As noted in this blog, Keith Bishop has been writing about some of the issues related to secondary trading in private company shares for a few years. Two days ago, the SEC brought an action against several firms and individuals related to activities involving secondary trading of private company shares. Read more in Keith's blog as well as this analysis from Vanessa Schoenthaler's "100 F Street Blog."

- Broc Romanek

March 15, 2012

Corp Fin to Consider Tweaking Foreign Private Issuer Reporting System

Last week, Corp Fin Director Meredith Cross delivered this speech that kicks off with a quick recent history of the SEC's FPI rulewriting in various areas as a way to demonstrate that the Staff is always evaluating: does this make sense anymore? I'm not sure that I read this speech as the Staff seeking to undertake a "full review" of the SEC's FPI framework as noted in this Jones Day memo (although the memo does a great job of recapping the speech), particularly given all the Dodd-Frank rulemaking still ahead for the Staff...

Transcript: "Conduct of the Annual Meeting"

We have posted the transcript for the recent webcast: "Conduct of the Annual Meeting."

The Latest in GRC Software

In this podcast, John Banas and Bruce Olcott of MyComplianceManager provide some insight into how software can make GRC compliance easier, including:

- What are the biggest trends you're seeing in GRC over the past few years?
- We hear about GRC frequently, what does that term mean to you and what functions does it encompass?
- So what should a Compliance, Legal or Audit Executive look for when considering purchasing a GRC Suite or specific GRC modules?

Please take a moment to participate in this "Quick Survey on GRC Software" - and this "Quick Survey on Board Minutes & Auditors."

- Broc Romanek

March 14, 2012

Our New "Director Resignation & Retirement Disclosure Handbook"

Spanking brand new. And shiny to boot! If you have a director that is resigning, retiring, not standing for re-election, quitting in disgust, being appointed or dying, we have the Handbook for you. Posted in our "Director Resignations" Practice Area, this comprehensive "Director Resignation & Retirement Disclosure Handbook" provides practical guidance - including numerous hypotheticals - about how to handle these situations including how to prepare in advance for them. In particular, the Handbook focuses on the company's reporting obligations under Item 5.02 of Form 8-K when these inevitable situations arise...

A "Fresh Eyes" Restatement Report

Ahead of next week's PCAOB roundtable - on March 21st and 22nd - on whether it should propose an auditor rotation requirement for the largest companies, Audit Analytics prepared this report that examines the restatements disclosed by the Russell 1000 - as well as their auditor changes - in an attempt to determine if auditor changes in any way played a part in the discovery of outstanding accounting misstatements and, if so, to what extent. For the report, Audit Analytics reviewed 1,355 companies (a five-year aggregate), 378 restatements, and 173 auditor departures.

Some of the observations contained the report:

- About 7.5% (4 out of 53) of the Annual Restatements linked to an auditor departure were detected, in part, by the "fresh eyes" of the newly engaged auditor.

- About 64% (34 out of 53) of the Annual Restatements linked to an auditor departure were detected prior to the auditor's departure ("no fresh eyes").

- About 15% (8 out of 53) of the Annual Restatements linked to an auditor departure were detected by the companies themselves or their regulators, such as the SEC ("no fresh eyes").

- About 13% (7 out of 53) of the Annual Restatements linked to an auditor departure were restatements that corrected misstatements that occurred after the new auditor's engagement (no restatement of work during predecessor auditor engagement).

- About 82% (238 out of 291) of the Annual Restatements disclosed by the Russell 1000 were disclosed by companies that did not experience an auditor departure.

- The total auditor changes experienced by the Russell 1000 since January 1, 2005 had a "fresh eyes" restatement discovery rate of no more than about 3.0%.

Lynn Turner notes: "This report highlights just how poor quality audits really are today and just exactly what are they worth. Of 1335 Russell 1000 companies, 291 or 21.8% had errors in their financial statements that went undetected and had to be corrected. These audits are exclusively done by the Big 4 who are suppose to be the best of the best - one can only wonder then what an error rate for the worst is like.

Not only does these findings call into question the quality (or lack thereof) of audits, it also continues to call into question the competence of the CFO/Controller at these companies, the lack of internal controls, and the continuing unreliability and lack of oversight by the audit committees. Why was it the error was not detected at least by the auditors before the original financial statements with errors in them were released to investors? Were the auditors either incompetent or lacking independence or devoid of skepticism? Was the audit committee members merely going thru the motions and what steps did they take to establish accountability for the problems?

What the report is unable to report, as there is often no transparency in SEC 8-K and other reports, is just exactly what did turn up the errors in each of these instances where the restatement occurred prior or subsequent to a change in auditor. While a few instances are noted, such as the SEC finding three of the 291 errors, in most instances how the error is actually found and by whom is not disclosed.

Using Online Video to Announce a Restatement

Thanks to Howard Dicker of Weil Gotshal for turning me onto this restatement announcement study which used executive MBA students as guinea pigs. The study finds that although text-based press releases have been the norm for years, companies have recently begun using online video for such announcements. And that when a CEO accepts responsibility by making an internal attribution for a restatement, investors viewing the announcement online via video recommend larger investments in the firm than do investors viewing the announcement online via text. Pretty wild...

- Broc Romanek

March 13, 2012

The JOBS Act: Congress Being Congress

Yesterday, Dave did a great job in describing the JOBS Act and how it would fast-track capital formation reform (we are posting memos on the Jumpstart Our Business Startups Act in our "IPOs" Practice Area). Dave also noted that the Senate was fast tracking the bill - and that some were questioning the measures in the bill.

As I've blogged before, count me among those that think this is a wrongheaded thing that Congress is doing in the capital formation area. This bill has nothing to do with jobs and everything to do with fewer protections for investors. I am not the only one who feels that way as noted in these articles (note that last one that argues that the bill won't even be good for IPOs!):

- They Have Very Short Memories - NY Times
- Imaginary Problems - Motley Fool
- Extraordinary Popular Delusions and the Madness of Crowd (Funding) - Huffington Post
- Financial regulations gutted in new bill - San Francisco Chronicle
- Job-Creation Legislation Seen Eviscerating Shareholder Protections in U.S. - Bloomberg
- Alone in a Crowd: How Crowdfunding Could Strand Startups - Bloomberg BusinessWeek
- JOBS Act enables Chinese fraud - China Accounting Blog
- Sarbanes, Edwards say jobs bill hurts transparency - Baltimore Sun
- The JOBS Act and the IPO Off Ramp: Discouraging IPOs - Race to the Bottom Blog

And here are a bunch of letters from organizations arguing against the new legislation:

- Group of organizations, including Consumers Federation and AFL-CIO
- Americans for Financial Reform
- Council for Institutional Investors
- North American Securities Administrators Association (NASAA)

Yesterday, the SEC posted two sets of recommendations from its Advisory Committee on Small and Emerging Companies - one for reporting obligations and one for market access. And last week, Facebook filed its Pre-Effective Amendment No. 2 to its Form S-1

US Investors as an "Easy Mark": More Evidence

As noted in this blog, it's now pretty well known how scores of Chinese companies - that turned out to be fraudulent - listed their securities here in the US because they weren't able to do so in China. As noted in this article from "The Telegraph," the London Stock Exchange is exploring ambitious plans to push its junior AIM market into the United States. To be honest, I thought AIM was dead since so many of the companies that have gone public and listed there have since gone down the tubes. As noted in the article: "In 2007, Roel Campos, a commissioner at the Securities and Exchange Commission voiced his concerns that 30% of new firms listing on AIM "are gone in a year."

Transcript: "Company Buybacks: Best Practices"

We have posted the transcript for our recent webcast: "Company Buybacks: Best Practices."

- Broc Romanek

March 12, 2012

House Passes JOBS Act, Seeking to Fast-Track Capital Formation Reforms

Late last week, the House of Representative passed H.R. 3606, The Jumpstart Our Business Startups (JOBS) Act, with strong bi-partisan support. This bill was comprised of a collection of bills that have been introduced in the House over the past year, all of which focus in one way or another on the ability of companies to raise capital and stay private longer. The key measures included in the JOBS Act are:

Title I, Reopening American Capital Markets to Emerging Growth Companies. This portion of the Act is what is most commonly referred to as the "IPO On-Ramp" legislation, and it is meant to encourage smaller companies to go public through a process where public company obligations would be phased in over time (hence the on-ramp reference). This legislation would amend the 1933 Act and 1934 Act to create a new category of issuer referred to as an "emerging growth company," which is an issuer with total annual gross revenues of less than $1 billion, and would continue to have this status until (i) the last day of the fiscal year in which the issuer had $1 billion in annual gross revenues or more; (ii) the last day of the fiscal year following the fifth anniversary of the issuer's initial public offerings; and (iii) the date when the issuer is deemed to be a "large accelerated filer" as defined by the SEC. The legislation provides for scaled regulation to be applied to the emerging growth company for up to five years following the IPO, including breaks on compliance with things like Section 404(b) of the Sarbanes-Oxley Act, mandatory Say-on-Pay, and the Dodd-Frank CEO pay ratio rules (to come). On the 1933 Act registration front, the legislation would permit greater pre-filing communications, allow for expanded research at the time of the IPO by offering participants, and would provide for pre-filing confidential review of draft registration statements by the SEC Staff.

Title II, Access to Capital for Job Creators. This portion of the legislation would remove the prohibition against general solicitation and general advertising in private offerings under Regulation D, provided that all of the purchasers of securities are accredited investors. Similarly, general solicitation and general advertising would not be prohibited in secondary sales so long as only QIBs are purchasers in the offering. In addition, the legislation would provide that offline and online forums bringing together companies and investors would not be treated as broker-dealers unless they receive transaction-based fees for their activities.

Title III, Entrepreneur Access to Capital. This part of the bill would provide an exemption for crowdfunding, by permitting offerings up to $1 million ($2 million in some cases), provided that investor contributions are limited to $10,000 or 10% of the investor's annual income, whichever is less. Requirements targeted at investor protection are imposed on the issuer and/or the intermediary involved in the crowdfunding effort.

Title IV, Small Company Formation. This part of the legislation is what is commonly referred to as Regulation A reform, raising the limit for Regulation A offerings from $5 million to $50 million. Most importantly, the legislation would exempt Regulation A offering from state securities laws when the Regulation A securities are (i) offered or sold through a broker-dealer; (ii) offered or sold on a national securities exchange; or (iii) sold to a qualified purchaser as defined by the SEC.

Title V, Private Company Flexibility and Growth. This portion of H.R. 3606 increases the 1934 Act registration shareholder of record threshold from 500 to 2,000 (only 500 of which can be non-accredited investors). Employees receiving company securities under employee benefit plans would be excluded from calculating the number of record holders.

Title VI, Capital Expansion. This portion of the Act would increase the shareholder of record threshold from 500 to 2,000 for banks and bank holding companies, and would provide that a bank or bank holding company could terminate 1934 Act registration if the number of holders of record drops to less than 1,200.

Title VII, Outreach on Changes to the Law. This part of the Act requires SEC outreach to certain small and medium-sized businesses informing them of the effect of the law, so that these business are made fully aware of the benefits of the legislation.

What's Next for These Legislative Efforts?

The Administration issued a statement supporting the JOBS Act. Meanwhile, Senate Majority Leader Harry Reid (D-NV) has said that the Senate will move forward with its own legislation, most likely consolidating a number of the companion bills that have been introduced in the Senate over the last year, and Senate Banking Committee Chairman Tim Johnson (D-SD) said his panel will hold a hearing tomorrow on the content of the legislative package. All reports are pointing toward quick action in the Senate, although at this point it is difficult to say if and when a bill that can be reconciled with the House bill will be passed.

Questions Remain About These Measures

Not everyone is wild about the approaches contemplated by these JOBS Act measures. Beyond the obvious question of whether, as the name implies, these securities law tweaks will actually have any impact at all on the employment market, some have raised concern with the investor protections that might be compromised by some of these legislative initiatives. For example, last week Lynn Turner testified before the Senate Banking Committee on the state of IPOs and capital formation in the US and noted: "The proposed legislation is a dangerous and risky experiment with the U.S. capital markets, and the savings of over 100 million Americans who depend on those markets. The evidence does not support the need for it. In fact, it contradicts it. I do not believe it will add jobs but may certainly result in investor losses. ... As a result, I do not support the various bills including the IPO on ramp and crowd funding legislation." Similar concerns have been expressed by groups such as the Council for Institutional Investors, Consumers Federation, Americans for Financial Reform, and AFL-CIO.

- Dave Lynn

March 9, 2012

Proxy Access: The Staff Weighs In on No-Action Requests

Yesterday, the Staff posted responses to a number of no-action requests relating to proxy access shareholder proposals. This sort of "batch" posting of letters related to one particular topic tends to happen with shareholder proposals that relate to difficult policy issues for the Staff, and in this inaugural year of proxy access private ordering, this has certainly been the biggest issue of the season thus far. The requests that the Staff answered deal with several different bases for exclusion, reflecting the different approaches taken by the proponents and the particular issues raised by the wording of their proposals. Here is a summary of how the Staff came out on these letters:

1. More than one proposal. In responses to Bank of America Corporation, The Goldman Sachs Group, Inc. and Textron, the Staff indicated that there appeared to be some basis that the companies could exclude the proxy access proposals under Rule 14a-8(c), which provides that a proponent may submit no more than one proposal. In particular, the Staff noted that several paragraphs of the proponents' submissions contained a proposal relating to the inclusion of shareholder director nominations in the companies' proxy materials, while one paragraph of the submissions included a proposal relating to events that would not be considered a change in control. The Staff concurred with the view that this paragraph constituted a separate and distinct matter from the proposal relating to the inclusion of shareholder nominations for director in the companies' proxy materials.

2. Vague and indefinite. In responses to Chiquita Brands, Inc., MEMC Electronic Materials, Inc. and Sprint Nextel Corporation, the Staff indicated that there appeared to be some basis for the view that the companies could exclude the proxy access proposals under Rule 14a-8(i)(3) as vague and indefinite. The Staff particularly noted that the proposals provided that the companies' proxy materials shall include the director nominees of shareholders who satisfy the "SEC Rule 14a-8(b) eligibility requirements," without describing the specific eligibility requirements. The Staff viewed the specific eligibility requirements as representing a central aspect of the proposals, and that while some shareholders voting on the proposals may be familiar with the eligibility requirements of Rule 14a-8(b), many other shareholders may not be familiar with the requirements and would not be able to determine the requirements based on the language of the proposal. Based on this ambiguity, the Staff believed that neither shareholders nor the companies would be able to determine with any reasonable certainty exactly what actions or measures the proposals required.

3. Website Reference Cannot be Omitted Under 14-8(i)(3). In responses to The Charles Schwab Corporation, Wells Fargo & Company and The Western Union Company, the Staff indicated that it was unable to concur with the view that the companies could exclude a reference to the proponent's website in the proposal under Rule 14a-8(i)(3), which permits the exclusion of a proposal or a portion of a proposal if it is materially false or misleading. The Staff particularly noted that the proponent had provided the companies with the information that would be included on the website, the companies had not asserted that the content to be included on the website was false or misleading, and the proponent represented that it intended to include the information on the referenced website when the companies filed their 2012 proxy materials. For these reasons, the Staff was unable to conclude that the companies demonstrated that the portion of the proposal was materially false or misleading and could be omitted.

4. One Proposal Not Excludable Based on a Substantially Implemented Argument. In a response to KSW, Inc., the Staff addressed a proposal seeking to amend the company's bylaws to require that the company include in its proxy materials the name, along with certain other disclosures and statements, of any person nominated for election to the board by a shareholder or a group of shareholders who beneficially owned 2% or more of the company's outstanding common stock and to allow shareholders to vote with respect to such nominee. The company had adopted a bylaw that allows a shareholder who has owned 5% or more of the company's outstanding common stock to include a nomination for director in the company's proxy materials. Given the differences between the shareholder proposal and the company's bylaw, including the difference in ownership levels required for eligibility to include a shareholder-nominated director nominee in the company's proxy statement, the Staff was unable to concur that the proposal could be omitted as substantially implement under Rule 14a-8(i)(10).

What's Next for Proxy Access?

What can we glean from these responses on proxy access proposals? Probably not much in terms of what will happen with private ordering in seasons to come. As we noted in the January-February 2012 issue of The Corporate Counsel, this current crop of proxy access shareholder proposals demonstrates the principle that it is important to focus on the specific language of the proposal itself, which often paves the way for substantive bases for exclusion that might be available even without the company having to go out and take defensive measures like adopting some sort of proxy access regime. As is usually the case with the type of exclusions that we see here on a number of these proposals, the proponents will no doubt get smarter next year and try to correct the language which led to exclusion this year, so the landscape might be quite different in 2013. Over the next few months, we will see how these proposals go over with shareholders, which of course will be the real test of whether shareholders really want proxy access in the first place.

Webcast Transcript: "Transaction Insurance as a M&A Strategic Tool"

We have posted the transcript for our recent webcast: "Transaction Insurance as a M&A Strategic Tool."

- Dave Lynn

March 8, 2012

Delaware Joins States Changing Escheat Laws: A Sleeper

With states hungry for money, many have changed their escheat laws to make it easier for them to grab dormant accounts. This has been widely covered in the mass media (egs. ABC's Good Morning America; NPR's All Things Considered; UK's Tonight Show with Sir Trevor McDonald).

In our "Q&A Forum," we recently got a question (#7007) stating: "It appears the State of Delaware is re-interpreting "period of dormancy." We have discussed the new interpretation with Delaware and according to the Delaware State Escheator, "period of dormancy means the full and continuous period of time during which an owner has ceased, failed or neglected to exercise dominion of control over property or to assert a right of ownership or possession or to make presentment and demand for payment and satisfaction or to do any other act in relation to or concerning such property." That is, the statue requires that accounts for which shareholders have not exercised dominion, control or any other act related to the account for three years be turned over to the State of Delaware. As a result of this reinterpretation, several thousand shareholder accounts not considered "lost" under rule 17Ad-17 have now been identified as eligible for escheatment if contact cannot be established with the holder. What is going on here?"

Since this is not my area of expertise, I turned to Bill Palmer - who knows this stuff cold - who answered:

Clearly the State of Delaware is attempting to cast the net out as broadly as possible with its new interpretation, but there are more than a few problems with it. The Unclaimed Property Law (UPL) statutes first purpose is to reunite lost and unknown owners with their unclaimed property, and the secondary purpose is to allow the states an opportunity to make use of the property while the primary purpose is accomplished. As a result, starting with the opening definitions, the statutes require that the individual shareholder or owner actually be "lost" and "unknown" to the financial institution or holder.

A review of the statutes will show that the definition includes the requirement that the shareholder is "lost/unknown" and that the specific dormancy period has run. There's an important conjunction in the definition with the word "and," so to the extent that the individual is part of a dividend reinvestment plan, an ESPP, a custodial trust, or any number of scenarios, then it is not reasonable to conclude that the individual is "lost" and "unknown" for purposes of escheating their stock or assets to the various states. Based on the short note below, there are potentially serious statutory and constitutional issues regarding Delaware's new interpretation of escheat.

Another problem is created by the State of Delaware's approach is in the area of corporate liability, because it places the holder and its transfer agent in a difficult position vis-à-vis their common law and statutory duties to the shareholders or owners. The corporation is acts under common law, federal and state securities laws that require it to operate with the utmost care regarding the shareholder, and to convey material information to the shareholder. This is the dilemma created by Delaware's new definition, because "known" shareholders are about to have their stock transferred potentially without proper notice, where the investment will be sold and permanently destroyed so that the funds from the sale may be used by the state.

Mailed: January-February Issue of "The Corporate Counsel"

We mailed the January-February Issue of The Corporate Counsel and it includes pieces on:

- Mine Safety Disclosure Is Here--And The Forms They Are A-Changin'
- New Four-Month Deadline for Form 20-F
- Staff Weighs In on Say-on-Pay Wording on the Proxy Card/Voting Instruction Form
- Proxy Summaries
- Proxy Access Private Ordering (Barely) Up and Running
- NYSE About-Face on Shareholder-Friendly Governance Proposals
- The Staff's Waiver Position on Item 5.07 8-K/A Evolves
- Global Section 12(g) No-Action Relief for RSUs
- Trading in Securities of Pre-Public/Private Companies
- Loss Contingency Disclosures--Latest Input from the Staff
- The Staff Clarifies New Standards for Confidential IPO Filings for Foreign Private Issuers

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

SEC Brings Increasingly Rare Financial Fraud Case

In his "Cady Bar the Door" blog, David Smyth of Brooks Pierce has been doing an excellent job and I've been learning a lot about SEC enforcement issues from reading his missives. Here's a recent one below:

A curious aspect of the SEC's enforcement program in recent years has been the lack of significant accounting fraud cases. The Enforcement Division has created a number of specialized units, including ones studying structured products and hedge funds, but dismantled its financial fraud task force in 2010, reasoning that accounting fraud was the specialty of the entire staff, and not just one group. Perhaps as a result of that, or maybe as a result of Sarbanes-Oxley or other reasons, accounting fraud cases just have not been brought in the numbers they were in years past.

But the SEC filed an interesting case last month in the Southern District of Florida, one that combines traditional accounting fraud with the problems underlying the most recent credit crisis. The Miami Regional Office sued BankAtlantic Bancorp and its CEO, Alan Levan, for making misrepresentations about the bank's loan portfolio and then using accounting tricks to conceal the misstatements. The case is not settled, so the facts that follow are unproven, and may not actually be true.

Disclosure Issues

In 2007, BankAtlantic had about $1.5 billion in its commercial residential real estate loan portfolio. The borrowers intended to develop large tracts of land for residential housing construction, and the portfolio included three types of loans: (1) Builder Land Bank loans, in which the borrowers' sole intent was to "flip" the raw land to a national builder at a later date. The bank usually required the borrower in one of these BLB loans to have option contracts in place in which the builder agreed to give a down payment and close on a minimum number of lots by a specific date; (2) Land Acquisition and Development (LAD) Loans, in which the borrower bought land and conducted "horizontal development" such as building utilities and roads; and (3) Land Acquisition, Development, and Construction (LADC) loans, which were the same as LAD loans, but also included financing for "vertical development," or houses, as well.

Signs of problems in BankAtlantic's commercial residential portfolio began to appear in early 2006. Builders were starting to walk away from their option contracts with BLB borrowers at other banks, and BankAtlantic started to scrutinize its own portfolio more closely. By the time BankAtlantic filed its first quarter 10-Q, the bank had granted extensions on eleven loans constituting a book value of $147 million, or 26% of the commercial residential portfolio. For most of these extensions sales had slowed or stopped, and borrowers were having to resort to entirely different development plans to salvage their projects. While these problems were affecting all three types of loans in the bank's commercial residential book, Levan didn't say as much publicly. In the bank's first quarter earnings call, Levan discussed the BLB segment and acknowledged that some problems were developing with the underlying projects. But when asked by an analyst whether the problems extended to the LAD and LADC loans, Levan said no, that those loans were "proceeding in the normal course" and the bank was experiencing no significant problems with them. The bank's 10-Q for that quarter discussed the commercial residential portfolio in board terms, but did not alert investors to the problems already existing at that time.

BankAtlantic's loans continued to be downgraded in the second quarter, and the value of the downgraded loans was nearly an even split between BLB and non-BLB loans. The second quarter earnings call continued the pattern from the first, as an analyst again asked if the bank was concerned about the non-BLB loans. Levan said again that the BLB side was the only one forecasting any problems. The 10-Q for that quarter also made no mention of any problems with the LAD and LADC loans, though those loans were having significant problems as well. BankAtlantic eventually released the extent of the bank's loan difficulties with an 8-K filed on October 26, 2007, that announced a $29 million loss due to the commercial residential loan portfolio. On the third quarter earnings call, Levan said the earnings release would have been very different if it had been done on September 30, 2007, suggesting that the problems were a surprise that came about after quarter-end.

Accounting Issues

This wasn't the end of BankAtlantic's problems, though. In the fourth quarter of 2007, the bank began efforts to sell many of its problem loans, and even engaged an investment bank, JMP Securities, in the effort. Unfortunately for the bank, the AICPA's Statement of Position 01-6 says that once a decision has been made to sell loans not previously classified as "held for sale," those loans should be transferred to the "held for sale" classification and carried on the books at the lower of cost or fair value. But that is not what BankAtlantic did. Instead, the bank changed its contract with JMP Securities to refer to the sales efforts as a "market test." At the end of 2007, the bank continued to record as held for investment the loans subject to the JMP engagement. The bank also represented to its auditor that "management had the intent and ability to hold loans classified as held-for-investment for the foreseeable future or until maturity or payoff." Meanwhile, JMP's efforts - to "sell" the loans or "test market" them or whatever - continued apace, and eventually some bids for the loans came in, all at 28-50% of book value.

BankAtlantic didn't like the bids enough to sell, but also did not like having the loans on the bank's books. So it made a deal to give an inactive subsidiary $100 million, which the subsidiary then gave back to the bank in exchange for the problem loans. For the bank, it was a perfect deal, in that it released the loans from BankAtlantic's books, and at the same time gave the bank an quick infusion of cash. JMP valued the loans for purposes of this transaction based on appraisals, and ignored the bids that came in at 28-50% of their book value. BankAtlantic continued to try to sell these loans, and even reached agreements to sell some of them, but never reclassified any of the loans as "held for sale."

The SEC has sued BankAtlantic for violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Levan for aiding and abetting all of those violations. The Commission has also sued Levan for direct violations of Section 13(b)(5) of the Exchange Act.

Lessons from the Case

One thing we can learn from the matter is that accounting fraud is alive and well, and the SEC is still pursuing it. Also, publicly traded banks in particular should take note that the contents of their portfolios have to be characterized accurately, both in public statements to investors and with respect to accounting conventions established by the AICPA. If particular loans are being shopped to other buyers, you have to say as much, or you're out of compliance with GAAP, and are breaking the accounting rules. Finally, the public misstatements did not go on for a terribly long time. It was only two quarters before BankAtlantic owned up (sort of) to the problems on its books. But that was enough. The case is being litigated; it will be interesting to see what happens as it proceeds.

- Broc Romanek

March 7, 2012

SEC Asks for 19% Budget Boost

As noted in this Reuters article, SEC Chair Schapiro testified before the House Financial Services Committee over the SEC's budget yesterday. The Chair seeks a 18.5% boost from its current fiscal 2012 budget to $1.56 billion to hire more Staff - 46 more Corp Fin Staffers - and implement multi-year technology initiatives including modernizing Edgar. Did you know the SEC's site gets roughly 20 million hits daily?

As seems to happen over the past decade, the SEC faces an uphill climb for more resources, particularly with recent press like this Reuters piece over how much Booz Allen and other consultants have been charging the SEC to reform its workflows, etc.

As I've blogged, the SEC would be freed from this annual dog-and-pony show with Congress if it were self-funded as an independent agency should be. Here is a blog entitled "Free the SEC" from another SEC alumni, accountant John Feeney.

Shareholder Proposals: Corp Fin Rules on Proof of Ownership for DTC Participants

Yesterday, Ning Chiu of Davis Polk wrote this blog:

The SEC Staff made several recent decisions on questions of proof of ownership for submission of shareholder proposals, in light of the requirement under Staff Legal Bulletin 14F, which we previously discussed. SLB 14F makes clear that only DTC participants are viewed as record holders of securities that are deposited at DTC.

The Staff declined to grant no-action relief to companies that argued that the proof of ownership was not from a DTC participant when the brokers' letters were from TD Ameritrade, Inc. instead of TD Ameritrade Clearing, the entity named on the DTC participant list. The proponents in some of these situations provided an additional letter of support from TD Ameritrade in response to the company's no-action letter request, but the SEC Staff gave the same ruling even when proponents did not. The Staff noted that the proof of ownership from TD Ameritrade, Inc. was sufficient since it was provided by a broker that provides proof of ownership statements of behalf of affiliated DTC participants.

But even when the Staff agreed with Allergen that the proponent, John Chevedden, failed to provide a statement from the record holder evidencing appropriate documentary support of continuous beneficial ownership, the Staff gave Mr. Chevedden seven additional days to address the deficiency. Mr. Chevedden had provided proof of ownership only from Ram Trust and not the DTC participant. The Staff indicated in its response that the company failed to informed the proponent of what would constitute appropriate documentation in its request for additional information from the proponent, and noted SLB 14F states that they will grant no-action relief to a company on the basis that a proponent's proof of ownership is not from a DTC participant only if the company's deficiency letter describes the required proof. It appears from the filed correspondence that while the company clearly pointed out the problem to Mr. Chevedden in its notice, only a copy of Rule 14a-8, and not a copy of SLB 14F, was included with the letter. The Staff denied the company's request to reconsider its decision.

Improving the Board Evaluation Process

In this podcast, Susan Shultz of the Board Institute describes how the Board Institute's methodology improves the board evaluation process, including:

- What is the Board Institute's methodology for board evaluations?
- What is the advantage of this over traditional evaluation techniques?
- How do evaluations that tend to be narrative and somewhat subjective work with numerical scales?
- How can boards best use this type of methodology?

- Broc Romanek

March 6, 2012

The Going In-House Handbook

In this podcast, multi-talented Susan Wolf describes her vast experience on being an in-house lawyer and corporate secretary (as explained in detail in her new book: "The Going In-House Handbook: A Concise Guide to Making Big Career Changes"), including:

- Why did you decide to write the book?
- What are the most important practical points you make?
- Any surprises while writing it?
- How do you suggest that readers use it?

SEC Warning: Beware the Fake Whistleblower Office

Recently, the SEC posted this warning about someone is impersonating its new Office of the Whistleblower by sending out bogus emails claiming that the recipient has a material misstatement or omission in their public filings or financials. It seems like such a bizarre and narrow topic to attempt to pull a hoax that you would think the bogus email would be sophisticated - but there are just enough oddities in it that I doubt the perpetrator comes from our industry. Here are what the emails said:

Dear customer, Securities and Exchange Commission Whistleblower office has received an anonymous tip on alleged misconduct at your company, including Material misstatement or omission in a company's public filings or financial statements, or a failure to file Municipal securities transactions or public pension plans, involving such financial products as private equity funds. Failure to provide a response to this complaint within 14 day period will result in Securities and Exchange Commission investigation against your company. You can access the complaint details in U.S. Securities and Exchange Commission Tips, Complaints, and Referrals portal under the following link:

SEC Posts Whistleblower List (Means Little)

In his "Cady Bar the Door" blog, David Smyth of BrooksPierce provides an explanation of why the SEC's Office of the Whistleblower is constantly updating its list of "potential whistleblower" candidates.

- Broc Romanek

March 5, 2012

Survey: HSR & Executives' Acquisitions from Equity Compensation Plans

Recently, as noted in this Sullivan & Cromwell memo (other memos are posted in the "Antitrust" Practice Area), the DOJ and FTC extracted their first publicized penalty for a corporate executive's failure to make a Hart-Scott-Rodino Act filing before receiving stock of his employer as part of his compensation. As a result, many members have been researching what the typical practice is for HSR filing fees that the corporate executive would have to pay to comply with the HSR filing requirement. To help in that effort, please take a few moments to participate in this anonymous "Quick Survey on HSR & Executives' Acquisitions from Equity Compensation Plans."

Greed is Not Good? Michael Douglas Rails Against Insider Trading

As noted in this NY Daily News article, Michael Douglas - aka Gordon Gecko from the "Wall Street" movies - is featured in a recent one-minute FBI commercial warning about the perils of insider trading.

The StockTwits CEO Explains His Social Media Platform

Recently, I blogged about how StockTwits was a game-changer for investors in the social media world. In this podcast, co-founder and CEO Howard Lindzon explains how to best use his StockTwits, including:

- What is StockTwits?
- When was StockTwits born and what is its growth rate?
- How can companies claim their "ticker page" - and why would they want to do so?
- Why should companies monitor what is being said about them on StockTwits?

- Broc Romanek

March 2, 2012

An Executive Pay Sleeper? The PCAOB's Related Parties Proposed Auditing Standard

On Tuesday, the PCAOB issued a proposed auditing standard that would change how an auditor evaluated a client's identification of, accounting for, and disclosure about its relationships and transactions with related parties. As noted in this Towers Watson alert, this proposal could bring added involvement of independent auditors into executive pay decisions. Under this proposal, a company's auditor would have to review its client's pay programs and determine if they might encourage excessive risk-taking.

I haven't read the proposal yet myself, but it seems that going down that slippery slope, might it be possible that an auditor would say to a company, "too risky, we can't sign off on the financials" - so auditors could possibly play a role of essentially pre-approving pay programs? Comments are due by May 15th.

Survey Results: Pay Ratios

We have posted the survey results regarding how companies are preparing now for the SEC's upcoming pay disparity rulemaking, repeated below:

1. At our company, the board:

- Does not consider internal pay equity when setting the CEO's compensation - 51.8%
- Does consider internal pay equity as a factor by comparing the CEO's pay to all employees - 1.8%
- Does consider internal pay equity as a factor by comparing the CEO's pay to other senior executives - 44.6%
- Does consider internal pay equity as a factor by comparing the CEO's pay to a formula different than the two noted above - 1.8%

2. Ahead of the SEC's mandated pay disparity disclosure rulemaking under Dodd-Frank, our company:
- Has not yet considered how we would comply with the rules - 58.9%
- Has begun considering the impact by assessing whether we could comply with the precise prescriptions in Dodd-Frank but we have not yet tested statistical sampling - 35.7%
- Has begun considering the impact by assessing whether we could comply with the precise prescriptions in Dodd-Frank including assessing whether we could use statistical sampling - 5.4%

3. As one of the companies that have assessed the impact of the SEC's mandated pay disparity disclosure rulemaking, our company:
- Believes we could comply with the precise prescriptions in Dodd-Frank without too great a burden - 13.5%
- Believes we could comply with the precise prescriptions in Dodd-Frank but it would be too burdensome unless statistical sampling is allowed - 13.5%
- Believes we could comply with the precise prescriptions in Dodd-Frank but it would be burdensome even if statistical sampling is allowed - 45.9%
- Believes we wouldn't be able to ever comply with the precise prescriptions in Dodd-Frank - 27.0%

4. In your own opinion, do you think that statistical sampling would have too high a potential for manipulation or material error:
- Yes - 38.2%
- No - 29.1%
- I don't have an opinion - 32.7%

Please take a moment to participate in this "Quick Survey on Board Minutes & Auditors" - and this "Quick Survey on GRC Software."

Transcript: "The Dynamics of Disclosure Claims"

We have posted the transcript for the recent webcast: "The Dynamics of Disclosure Claims."

- Broc Romanek

March 1, 2012

A Farewell to Corp Fin's Ella Phelps

I was very sad to learn that Ella Phelps passed away on Sunday after a long illness. Ella worked in Corp Fin as a secretary for 15 years - and then worked in the Office of Economic Analysis for another decade - before retiring last year. Ella was one of the secretaries in the banking group when I first started at the SEC out of law school in '88.

And Ella ran the place. With her great wit, she was always entertaining us. Her desk geographically was in the center of the group - so you joked around constantly with Ella throughout the day. But more importantly, Ella spoke to all of our loved ones as this was in the era before voicemail (and computers) and she knew more about our personal lives than we did! For a while, I dated someone down in Chapel Hill and Ella - hailing from North Carolina - got to know her so well that they remained friends even after we broke up! I remember Ella telling many loving stories about her husband Charles and her two children, as well as her fabulous cooking adventures. She will be missed.

Here is a picture of Ella in the midst of a banking pod party in '90. And here is a guest book where friends & family can post comments, as well as information about tomorrow's viewing.

Warren Buffett's Annual Letter to Shareholders

We now have the always fascinating annual shareholders' letter from Warren Buffett, coming in at 21 pages. And this one includes some musings on his successor as noted in this WSJ article. Here are reactions to the letter from Ny Time's DealBook and Kevin LaCroix's analysis - and here is a Bloomberg article analyzing Buffett's mea culpas.

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- Broc Romanek