August 31, 2012

Delaware Supreme Court Affirms Damages and Fee Award in Southern Peru

Here are two items that I posted on my Blog this week: Earlier this week, the Delaware Supreme Court affirmed Chancellor Strine's decision from last year in Southern Peru. Justice Berger filed a brief partial dissent disagreeing with the Chancellor's attorney's fee analysis. Here's analysis from Richards Layton (we are posting memos in our "Minority Shareholders" Practice Area) - and here's a piece by Alison Frankel.

Corp Fin Issues No-Action Letter on Day-20 Pricing in Tender Offers

Here's news from Gibson Dunn's "Securities Monitor Blog":

The SEC's Division of Corporation Finance recently granted no-action relief to Sonic Automotive, Inc., allowing Sonic to utilize "Day 20" pricing in its recent exchange offer wherein the company offered to exchange common stock and cash for its outstanding convertible debt securities.

The exchange offer employed a VWAP formula pricing mechanism with the final price becoming fixed and publicly announced at 4:30 p.m. on the same day the offer was scheduled to expire at midnight. In addition, the exchange offer incorporated a fixed minimum and maximum purchase price where the company agreed to extend the offer by two business days should the formula result in a purchase price at the maximum amount specified.

Interestingly, it appears that counsel sought and obtained no-action relief during the pendency of the exchange offer. Thus, it seems the 20-day pricing issue may have caught the Staff's attention during its review. The letter serves as a steady reminder to issuers regarding the need for early consideration of whether to seek no-action relief and consulting with outside counsel before utilizing "Day 20" pricing in a tender offer. We have previously discussed the Staff's position regarding "Day 20" pricing.

Dodd-Frank: SEC Issues Financial Literacy Study

Yesterday, the SEC issued this financial literacy study as required under Section 917 of Dodd-Frank. Here's an excerpt from the press release:

The study identifies investor perceptions and preferences regarding a variety of investment disclosures. The study shows that investors prefer to receive investment disclosures before investing, rather than after, as occurs with many investment products purchased today. The study identifies information that investors find useful and relevant in helping them make informed investment decisions. This includes information about fees, investment objectives, performance, strategy, and risks of an investment product, as well as the professional background, disciplinary history, and conflicts of interest of a financial professional. Investors also favor investment disclosures presented in a visual format, using bullets, charts, and graphs.

Here's a depressing analysis of the study, courtesy of New York Magazine...

- Broc Romanek

August 30, 2012

SEC Proposes Rule 506/144A Changes Including Removing General Solicitation Ban

Yesterday, the SEC voted - 4-1 (Commissioner Aguilar dissented) - to propose a rule to eliminate the general solicitation and general advertising ban for offerings conducted under Reg D's Rule 506 and Rule 144A. This rulemaking was required by Section 201(a) of the JOBS Act, which did not provide much flexibility for the agency. There is a short 30-day comment period. Here's the press release - and here's the proposing release (we're posting memos in our "Regulation D" Practice Area).

As expected, the proposed rule doesn't mandate a specific verification method (nor list a series of acceptable ones) - companies would have the flexibility to determine what are reasonable steps based on the facts and circumstances (egs. nature of the purchaser, type of information known about the purchaser, and type of the offering). Meredith Cross noted that the SEC would form a multi-divisional task force to gauge what steps companies are taking to verify accredited investor status.

During the open Commission meeting, some Commissioners noted they wished this proposal had come out sooner and in the form of an interim final rule (Paredes and Gallager). Essentially, a vote "against" the process leading to the proposal. The need for speed for these Commissioners astonishes me given the importance of what we are talking about. During her remarks, Chair Schapiro noted that just over $1 trillion was raised in exempt offerings during 2011, comparable to the amount raised in registered offerings during the same period. I don't think 30 days worth of commenting will kill the capital markets. After all, the mission of the SEC is about investor protection. At least, the last time I looked...

Tune in on Wednesday, September 5th for the webcast - "JOBS Act Update: Where Are We Now" - that will cover this proposal, as well as analyze evolving market practices and all the latest from the SEC on the JOBS Act. The program features Corp Fin Deputy Director Lona Nallengara, Wilson Sonsini's Steve Bochner, Latham & Watkin's Joel Trotter, Davis Polk's Michael Kaplan and Dave Lynn of Morrison & Foerster and

SEC Posts Draft Taxonomy for Form SD

Yesterday, the RiskFin Staff posted draft Form SD taxonomy related to disclosure of payments by resource extraction companies. Comments are due by Halloween - and can be provided via this input form by including "Draft Form SD Taxonomy" in the "General subject matter" section.

California Rules Facebook's Instagram Acquisition is "Fair"

Keith Bishop gives us the news that the result of California Department of Corporations 's fairness hearing yesterday regarding Facebook's purchase of Instagram was favorable for the social media giant.

- Broc Romanek

August 29, 2012

IPO Process Overhaul: Chair Schapiro Responds to Rep. Issa

Related to this WSJ article, here's news from Cydney Posner of Cooley: The Wall Street Journal has posted SEC Chair Mary Schapiro's response letter to the inquiry from Darrell Issa, Chair of the House Committee on Oversight and Government Reform. [Broc's note: The WSJ's link to the letter is now dead.]

You may recall that Chair Issa's letter was prompted by concerns over the Facebook IPO and asked a number of questions regarding IPO pricing mechanisms, communications and other matters, with a view toward revamping the IPO process. Chair Schapiro indicates in her letter that the staff is monitoring the impact of the JOBS Act and that she has previously asked the staff to review the offering communications rules and to consider issuance of a concept release. She noted that "[e]nsuring that our communications rules facilitate, not hinder, the ability of an issuer to communicate with all investors is an important aspect of the staffs review of these rules." However, not surprisingly, she seemed to detect a few more benefits in the current system than did Chair Issa.

SEC: Today's Open Commission Meeting Could Be Interesting

As Dave blogged last week, the SEC pushed back consideration of changes to Rule 506 and general solicitation in the wake of a highly publicized fracas of whether the new rules should be proposed first or instead adopted as interim final rules. The open Commission meeting to consider these changes is today. Cooler heads seemed to have prevailed and the rules appear that they will be proposed first.

Here's a short WSJ opinion piece penned by Corp Fin Director Meredith Cross from earlier this week, defending the decision to first propose the rules. Heavy duty politics continue to place pressure on the SEC, during a time when the agency is adjusting to new demands placed upon it by the courts (as well as others including the Office of Information and Regulatory Affairs as noted in this WaPo article). Not a good mix.

Tune in next Wednesday for our webcast - "JOBS Act Update: Where Are We Now" - to discuss the results of this open meeting, plus much more about what the SEC has done lately - and what is becoming standard market practice - under the JOBS Act.

More on our "Proxy Season Blog"

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

- Proxy Advisor Regulation: European Style
- It Was Written in The Stars - Not the Merger Agreement
- The Future of Private Ordering of Proxy Access
- Exclusive Forum Provisions Update
- Mid-Season Proxy Season Update: UK and US

- Broc Romanek

August 28, 2012

Dave & Marty on Specialized Disclosures and Van Morrison

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

- Conflict mineral disclosure rules
- Disclosure of payments by resource extraction issuers
- Favorite Van Morrison song

Say-on-Pay: Now 57 Failures

I've added two more companies to our failed say-on-pay list for 2012 on as Applied Micro Circuits and Iconix Brand Group have failed during the past week or so. We are now at 57 companies in '12 that have failed to garner major support. Hat tip to Karla Bos of ING Funds for keeping me updated.

Survey: ISS & Glass Lewis Experiences

Ahead of our panel - "How to Work with the Proxy Advisors: Navigating the Say-on-Pay Minefield" - during our "Say-on-Pay Workshop: 9th Annual Executive Compensation Conference" on October 9th, Pearl Meyer & Ptrs is conducting this brief survey about your experience with proxy advisors during the past year. Please participate.

Register Now: Only six weeks until our action-packed pair of executive pay conferences - register now.

- Broc Romanek

August 27, 2012

SEC Staff's FAQs: Research Analysts and Underwriters

On Thursday, the SEC's Division of Trading and Markets issued this set of 14 FAQs about research analysts and underwriters. As noted in this memo, the FAQs are consistent with positions announced by the Staff at various conferences, but do contain some new information, and provide a helpful written statement of SEC staff positions on several important matters.

Facebook's California Fairness Hearing

The mass media has studiously covered the steady drop in Facebook's stock price - including the recent expiration of lock-ups last week (also see Robert White's blog regarding the lock-up lessons learned) - but only Keith Bishop has followed Facebook's request for a fairness hearing before the California Department of Corporations for its acquisition of Instagram. Check out Keith's program guide to the fairness hearing.

ISS Extends Policy Survey Period Til This Friday

ISS has extended its survey period through this Friday, August 31, and will be followed by an open comment period in October after which ISS will publish its draft policies. Unless specifically requested by the submitter, feedback received during the October open comment period will be made available publicly via ISS' online Policy Gateway.

- Broc Romanek

August 24, 2012

The State of Cybersecurity Disclosure: Is Congressional Action Next?

It is now going on a year since the SEC issued CF Disclosure Guidance: Topic No. 2, Cybersecurity, and since that time I have been interested in seeing how the Staff has followed up on the guidance in the course of the 10-K review process. It turns out that much like after the Commission issued its interpretive release on climate change disclosures back in 2010, there hasn't been a huge uptick in the number of comments directed at the topic. The Staff has said that the main focus of comments in this area has been on situations where there has been some reported breach, and the Staff is thus particularly interested in seeing specific disclosure about that breach and the related risk or MD&A disclosure. Given this focus, there have not been many instances that I have come across where the Staff is just fishing for cybersecurity disclosures, or commenting specifically on the sometimes vague or generalized risk factors that many issuers have now added.

It seems that perhaps Congress isn't too satisfied with the SEC' cybersecurity disclosure efforts, because a provision in the cybersecurity bill that stalled in Congress before the August recess addresses the SEC's guidance and implementation efforts in a "sense of Congress" statement. Notably, Section 415 of S. 3414 observes that information security risks and related events that are material to investors should be disclosed, and to this end the SEC (not later than 1 year from enactment) should evaluate existing guidance, including CF Disclosure Guidance: Topic No. 2, to determine whether the guidance should be updated or issued as an interpretive release. Under the Senate bill, the SEC would also have to provide an annual report to Congress describing the types of security risks and related events disclosed by issuers in the prior year, whether the Staff required additional information of issuers, any awareness efforts undertaken by the SEC , and any enforcement actions relating to disclosure requirements for information security risks.

Could a new "Form CS" be too far behind?

Digging into Form SD

It is not too often that a new Exchange Act form comes along, so the first thing I turned to in the conflict minerals and payments by resource extraction issuers adopting releases was the Form SD appearing at the back. Because the SEC adopted the rules in two separate releases, you have to look at both to get the full picture of Form SD, because it is pulling double duty for both conflict mineral disclosure and disclosure of payments by resource extraction issuers (technically, the conflict minerals release adopted Form SD and then the other release amended it). Here are some of my own questions and answers about Form SD:

Does the Form SD reference Regulation S-K?
No, the SEC opted to have all of the disclosure requirements resident in Form SD itself, rather than adopting separate Regulation S-K items or amending Item 601 of Regulation S-K with respect to the exhibits. In this regard, Form SD is similar to Form 8-K, which for the most part includes the disclosure requirements directly in the items of the form.

Who signs Form SD?
General Instruction F to Form SD provides that the report "must be signed by the registrant on behalf of the registrant by an executive officer." The form is not specific as to which executive officer must sign.

What exhibits are required with Form SD?
A Conflict Minerals Report (if required) and a Resource Extraction Issuer Disclosure Report are required to be filed with Form SD.

Are certifications required with the Form SD?
No certifications are required to be filed with Form SD.

What if the deadline for Form SD falls on a Saturday, Sunday or holiday on which the SEC is not open for business?
General Instruction B.2. of Form SD provides that, in this situation, the deadline for the form will be the next business day.

Does the Form SD have to filed on EDGAR?
Yes, and the Resource Extraction Issuer Disclosure Report must be tagged using XBRL.

Is the Form SD deemed "furnished" or "filed"?
The Form SD is deemed "filed."

What if the DC Circuit vacates either the conflict minerals rules or the payments by resource extraction issuers rules, would Form SD still be valid?
Both releases include the language: "If any provision of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application. Moreover, if any portion of Form SD not related to resource extraction disclosure is held invalid, such invalidity shall not affect the use of the form for purposes of disclosure pursuant to [Section 13(q) or Section 13(p)]."

The Second Deal Cube Tourney: Round One; 8th Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Large Ocean Ship
- Pillsbury Dough Boy
- Pink Shopping Bag
- House Shaped w/ Old Car & Offshore Drilling Rig

- Dave Lynn

August 23, 2012

Here Comes Form SD: The SEC Adopts Conflict Mineral Rules

At yesterday's Open Meeting, a divided Commission adopted the conflict mineral disclosure rules required by Section 1502 of the Dodd-Frank Act. The final rules are described in a fact sheet and the adopting release including the final rules has already been posted (we're posting memos in our "Conflict Minerals" Practice Area). The general contours of the final rules are similar to the proposed rules and are consistent with the statutory direction from the Dodd-Frank Act, however the Commission did make some notable adjustments in the final rules in response to comments, including:

1. The conflict mineral disclosures (including, if necessary, the Conflict Minerals Report) won't be channeled into the existing periodic reporting regime (i.e. Form 10-K) as was proposed, and will rather now be provided in a new Form SD, with "SD" standing for "specialized disclosure." (The SEC has been referring to the Dodd-Frank mine safety, conflict minerals and resource extraction disclosure provisions collectively as "specialized corporate disclosure.")

2. The Form SD will be deemed "filed," but there won't be any separate CEO/CFO certifications involved. At the Open Meeting, the Staff downplayed the "furnished" versus "filed" distinction which wasn't adopted with respect to the conflict mineral disclosures.

3. A new outcome is contemplated under the rules, at least on a temporary basis - "DRC Conflict Undeterminable." For a two-year period (four years for smaller reporting companies), if an issuer is unable to determine whether the minerals in its products originated in the covered countries (the Democratic Republic of the Congo and adjoining countries) or finance or benefited armed groups in those countries, then the company provides specified disclosures in the Conflict Minerals Report but doesn't have to obtain an independent private sector audit.

4. The SEC has made a number of accommodations in the case of minerals that come from recycled or scrap sources.

5. The SEC provided useful guidance in interpreting the term "contracting to manufacture," by specifically carving out situations where a company is not deemed to have influence over the manufacturing of the product.

Application of conflict mineral disclosure rules to companies seems pretty complicated, however check out the flowchart on page 33 of the adopting release - it does a nice job of laying out the various disclosure outcomes. Also, as companies are considering whether these rules apply to them, it is important to consider the lack of any di minimis standard in the statute or rule, and just how ubiquitous the four minerals (tantalum, tin, gold or tungsten) in products and manufacturing processes. All public reporting companies, including foreign issuers and smaller reporting companies, will be subject to the rules, and whether any disclosure will be required at all turns on whether the minerals are "necessary to the functionality or production" of a product that the subject company manufactured or contracted to be manufactured.

There was a lot of discussion at the Open Meeting about the costs involved with compliance, with estimates in the range of $3 billion to $4 billion!

Companies must comply with the final rule for the calendar year beginning January 1, 2013, with the first reports due May 31, 2014. All conflict mineral reporting will be on a calendar year basis and the Form SD will be required annually on May 31st.

More Form SD: The SEC Also Adopts Resource Extraction Payment Rules

The SEC also adopted the final rules requiring disclosure of payments by resource extraction issuers as directed by Section 1504 of the Dodd-Frank Act. The final rules are described in a fact sheet and the adopting release including the final rules has already been posted. This rulemaking was also a source of contention for the Commission (albeit a much smaller Commission, because two Commissioners were recused), and in the end the SEC did make a few tweaks to the proposals in response to commenters. Like the conflict minerals disclosures, the required disclosures about payments be resource extraction issuers are filed on Form SD (rather than on Form 10-K as proposed), in an exhibit that is electronically tagged using XBRL. These rules likewise apply to domestic and foreign issuers, as well as smaller reporting companies (and include payments made by a subsidiary or another entity that the issuer controls). A de minimis threshold for disclosure was established at $100,000, rather than based on some notion of materiality as some had hoped.

Resource extraction issuers will need to comply with these new rules for fiscal years ending after September 30, 2013. For the first report, the SEC has said that most resource extraction issuers can provide a partial report disclosing only those payments made after September 30, 2013, and then thereafter reports covering the full fiscal year will be required no later than 150 days after the end of the fiscal year.

The Second Deal Cube Tourney: Round One; 7th Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Fancy Single Malt Whiskey Bottle
- Gnomes
- House
- Standard w/ Tender Offer Announcement

- Dave Lynn

August 22, 2012

SEC Delays Consideration of JOBS Act Rules

Yesterday, the SEC removed from today's Open Meeting agenda the consideration of rules to eliminate the prohibition against general solicitation and general advertising in offerings conducted pursuant to Rule 506 of Regulation D and Rule 144A, as mandated by Section 201(a) of the JOBS Act. In a separate notice, the SEC indicates that it will now consider whether to propose rule changes under Title II of the JOBS Act on Wednesday, August 29th. The new notice clarifies that the changes to Rules 506 and 144A will be proposed, rather than published as interim final rules. I would expect that, given all of the fireworks over the last couple of weeks, there will be a short comment period with the expectation of moving to final rules relatively quickly, perhaps by the end of the year.

Remaining on the calendar for today's Open Meeting, unfortunately, are the final rules implementing the conflict minerals and resource extraction disclosure provisions of Dodd-Frank.

Payday at the SEC: The First Dodd-Frank Whistleblower Award

The SEC announced that it has paid its first financial award to a whistleblower who provided "documents and other significant information that allowed the SEC's investigation to move at an accelerated pace and prevent the fraud from ensnaring additional victims." The anonymous whistleblower will receive at least $50,000 (30% of the amount collected by the SEC), and the award will continue to go up as the SEC is able to collect more in disgorgement and penalties in the case. This first whistleblower award comes a year after the SEC's whistleblower rules under the Dodd-Frank Act were effective.

The Second Deal Cube Tourney: Round One; 6th Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Gatorade Bottle (Lemon Lime)
- Friendly Monster
- Tuxedo
- Octogan

- Dave Lynn

August 21, 2012

Beware of EDGAR Glitch Holding Up "Duplicative" Filings

I have been hearing from the financial printers for a while now about an odd automated EDGAR screening criteria which looks to see whether a registration statement filing is "duplicative" of another registration statement filing that the issuer has made, and sometimes when duplication is detected, the new filing is suspended until someone at the SEC can override the suspension and allow the filing to be accepted and disseminated. As this recent Weil Gotshal & Manges LLP alert notes, this process can be particularly problematic when an issuer is renewing its automatic shelf registration statement (which must be done periodically because the SEC's rules provide that the registration statement expires every three years), because the delay in acceptance of the purportedly duplicative filing can mean a delay in the effectiveness of the automatic shelf registration statement, which can of course wreak havoc on the marketing and pricing of a transaction taking place around the time of the shelf filing.

When filings are made during ordinary business hours this is usually not a big problem, because the printers can work with the Staff to override the suspension. However, if the issuer is filing outside of the SEC's hours (e.g., at night or first thing in the morning) in anticipation of a transaction with tight timing, there is a risk that the Staff might not be reachable to do the manual override. The Weil alert notes that the Corp Fin EDGAR Staff may be reached in the morning beginning at 7:30 am to address this issue, but in any event it seems best to avoid the potential disruption altogether by filing the new shelf registration statement when there is plenty of time to deal with EDGAR's peculiarities.

We understand that the Staff in Corp Fin is aware of this issue and is looking into fixing the glitch with respect to automatic shelf registration statements, although it is not clear at this point when and if a repair will be implemented.

All Eyes on the Commission Tomorrow for Dodd-Frank and JOBS Rulemaking

If you had told me last winter that the SEC's consideration of final rules implementing the Dodd-Frank Act conflict minerals provision would have been overshadowed by a debate about the removal of the general solicitation ban in Rule 506 offerings, I would have never believed you. But that is where we find ourselves as the Commission is set to consider tomorrow final rules for the remaining "specialized corporate disclosure" provisions of the Dodd-Frank Act, along with what at this point would appear to be proposed rules to implement Title II of the JOBS Act. I don't want to get anywhere near the "debate" that is ongoing about the timing of the SEC's JOBS Act rulemaking and in particular the implementation of Title II, but suffice it to say that whatever happens tomorrow will give us plenty to talk about on our upcoming webcast "JOBS Act Update: Where Are We Now" which will take place on Wednesday, September 5th from 2:00 - 3:00 pm eastern.

The Second Deal Cube Tourney: Round One; 5th Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Wrigley Field
- Ye Olde Medicine Bottle
- Yellow Telephone
- Submarine

- Dave Lynn

August 20, 2012

IRRC and GMI Ratings Study Looks at Director Election Outcomes

A recent study by the Investor Responsibility Research Center Institute and GMI Ratings found that only five percent of corporate directors receiving majority withhold votes are removed from boards, however approximately fifty percent are unseated at companies with majority voting standards. The study looks at the causes of withhold/against votes for directors, finding that fifty percent of withhold votes are attributable to corporate specific issues, and more than seventy-five percent of withhold votes can be attributed to six main factors: (1) poison pill adoption without shareholder approval; (2) failed attendance; (3) related party transactions; (4) overboarding; (5) company-specific compensation concerns; and (6) discontent regarding board oversight of a company's affairs. The remaining portion are very much situational, where the circumstances leading to discontent with directors vary widely.

Our New "Related Party Transactions Disclosures Handbook"

Spanking brand new. Posted in our "Related Party Disclosures" Practice Area, this comprehensive "Related Party Transactions Disclosures Handbook" provides a heap of practical guidance about how to navigate under Item 404 of Regulation S-K. This one is a real gem - 63 pages of practical guidance...

The Second Deal Cube Tourney: Round One; 4th Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Crib, High Chair and Changing Table
- Takeout Cup
- Coffin
- Standard

- Dave Lynn

August 17, 2012

Study: Ten Years of Audit Fees

As noted in this study posted in our "Audit Fees" Practice Area, Audit Analytics found that for 2011 the ratio of non-audit fees over revenue was the lowest calculated for the ten years analyzed and the same ratio of audit fees was the lowest since 2004. Here is a summary of Audit Analytics' findings:

- Non Audit Fees as Compared to Audit Fees: In 2002, non-audit fees represented 51% of the total fees paid by research population, but after three years of steady decline non-audit fees appear to have leveled off at about 20% of total fees. To some extent, the drop in non-audit fees as compared to audit fees is attributable to the Auditor Independence Rules adopted by the SEC in 2001, which precluded the principal independent accountant from performing certain non-audit services to ensure auditor independence when performing the independent audit.

- Non-Audit Fees as a Percentage of Revenue: After six consecutive years of decreases in the cost of non-audit fees as a percentage of their revenue, accelerated filers experienced a slight uptick in 2009, but the uptick was due to a decrease in revenues instead of an increase in fees. After the 2009 uptick, both 2010 and 2011 experienced decreases. The 2011 figure was the lowest value calculated for the ten years under review: $121 of non-audit fees for every million dollars in revenue.

- Audit Fees as a Percentage of Revenue: The ratio of audit fees over revenue peaked in 2005, when the average amount of audit fees paid per $1 million of revenue was $597. After three consecutive years of decline the figure increased slightly in 2009, but as with non-audit fees, the uptick is due to a decrease in revenues instead of an increase in fees. Both 2010 and 2011 experienced decreases and during 2011 experienced the lowest value since 2004: $466 of audit fees for every million dollars in revenue. The fees declined despite the extra work demanded of the auditors during the same period when more and more companies were required to obtain auditor attestations pursuant to SOX 404(b).

More on "The Mentor Blog"

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

- FINRA Proposes Corporate Financing Rule Changes for Deferred Comp Arrangements
- Study: Securities Class Action Filings Involving Accounting Allegations Increase
- Chamber of Commerce Goes After Glass Lewis
- FINRA Rule 2111 Becomes Effective July 9th
- Tips for SEC's New Confidential Submission Process

The Second Deal Cube Tourney: Round One; 3rd Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Bobblehead of Each Deal Participant
- Better'n Eggs Carton
- Telescope
- Top of Palm Tree

- Broc Romanek

August 16, 2012

PCAOB Adopts Auditing Standard No. 16, Communications with Audit Committees

On the heels of its informational release regarding auditors and PCAOB inspection reports, the PCAOB adopted Auditing Standard No. 16, Communications with Audit Committees yesterday to improve communications between auditors and audit committees. There is no new audit work required.

As FEI's "Financial Reporting Blog" noted, PCAOB Chair Jim Doty stated during the open Board meeting:

"Indeed, in my own experience as a counselor to boards, many an audit committee has wondered, with regret, why didn't the auditors tell us about this?"

The standard is subject to SEC approval and, if approved, would be effective for audits of fiscal periods beginning after December 15, 2012. Note this is the first auditing standard adopted by the PCAOB subsequent to the JOBS Act - and therefore, the SEC must separately determine whether it will apply to audits of emerging growth companies (as noted by Cooley's Cydney Posner in this news brief).

Congressional Pressure Ahead of the SEC's Open Commission Meeting Next Week

Next week, Dave will be manning the blog while I am on vaca. So he'll get to enjoy the fireworks during the SEC's August 22nd open Commission meeting. Jim Hamilton blogs about this letter to the SEC from three Senators about those proceedings...

The Second Deal Cube Tourney: Round One; 2nd Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Shopping Cart Filled with Product
- Bride in Cabinet
- Crane & Windmill Generators
- Standard

- Broc Romanek

August 15, 2012

The Second Deal Cube Tournament: Round One; 1st Match

The excitement in the air is palpable as we commence our second deal cube tourney. As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

- Hard Hat (with Enron as investor)
- Slinky
- Aladdin
- Half Moon

Visionary Board Leadership

In this podcast, Matt Orsagh talks about a new CFA Institute/Business Roundtable report entitled "Visionary Board Leadership: Stewardship for the Long Term":

- How long did it take to draft the report?
- What are the main lessons from it?
- How can boards use this report?
- Any surprises in putting it together?
- Long term, what should boards look like?

Nasdaq OMX Listing Center's New Reference Library

Recently, Nasdaq OMX launched a beta version of its new Reference Library which is powered by an advanced search engine that can look through hundreds of FAQs, staff interpretation letters and Listing Council decisions using filters and keywords. There also are two new guides: Initial Listing Guide and Continued Listing Guide (which replace older guides on the same topics). Check it out and provide them with feedback!

- Broc Romanek

August 14, 2012

Survey Results: HSR & Executives' Acquisitions from Equity Compensation Plans

We have posted the survey results regarding typical practices for company executives and HSR filing fees, repeated below:

1. Does your company require executives to comply with HSR filing requirements upon acquiring company shares:
- Yes, and they have been for a while - 39%
- Yes, but only recently because of this enforcement action - 16%
- No - 45%

2. If the answer to #1 above is "yes," who pays the HSR filing fee:
- Executive with no reimbursement by the company - 40%
- Executive with full reimbursement by the company - 20%
- Executive with partial reimbursement by the company - 0%
- Company - 40%

3. If the executive pays HSR filing fee but is partially reimbursed by the company, in what manner is the reimbursement:
- Specified percentage - 0%
- Specified dollar amount - 50%
- Specified Formula - 50%

Please take a moment to participate in this "Quick Survey on Insider Trading Policies: Pledges & Margin Accounts" (remember the recent attention on margin accounts used by insiders thanks to the Green Mountain Coffee chair's margin call) and "Quick Survey on Proxy Solicitors."

SEC Approves Nasdaq Rule Change for Independent Directors

As blogged recently by Gibson Dunn's Jim Moloney:

On July 19th, the SEC approved a proposed change to Nasdaq's rules regarding membership on a listed company's audit, compensation and/or nominations committee. Nasdaq sought to modify an exception to its Rule 5605, which allows a non-independent director to serve on such committees "under exceptional and limited circumstances" for up to two years. The amendment provides an exception allowing a non-independent director to serve on a company's audit, compensation and/or nominations committee, where the director has a family member serving as a non-executive employee of the company, so long as the listed company's board concludes that the director's membership on the relevant committee is "required by the best interest of the company and its shareholders."

The True Meaning of the Olympics

Here is an excerpt from the end of this fine column by the Washington Post's Mike Wise:

The second is of a woman who finished her 100-meter heat in less than 15 seconds after eight years of convincing her family and her nation that it was okay for a Muslim woman to leave the house and run as fast as her conviction would take her. Just four reporters, all of us from different countries, were standing there underneath the stadium, straddling a hip-high barrier separating the athletes and journalists, and I don't think any of us was waiting for her when she walked up to us.

"My taxi driver throw me out on the street when I told him I was training for Olympics," said Tahmina Kohistani, Afghanistan's only woman at the Games, in the halting English she had learned through mail-order language courses. "He said, 'Get behind the man. You are disgrace to Muslim women.' My coach fought other men outside the stadium where I train because they do not think I should run. But my country will remember me forever one day. They will see I am the right one and other girls will watch me and I will tell them, 'Come, run with me. Run with me, Tahmina.' "

About 25 minutes later, after we heard the most harrowing journey anyone could have taken to run 100 meters at the Games, one of the male reporters began weeping. He finally said, "You're a hero. You're a hero to your country and women everywhere." Beneath her hijab, Tahmina sheepishly said, "Thank you," and began to cry. We were all choked up and didn't know what else to say.

As I type this now, I still don't know what to say, except that I knew in that very moment, for one of the few times in my job, I was in the presence of a greatness and a courage as real and inspiring as anything I've ever seen in sports or life.

"Hey, who was that?" a colleague of mine from the United States asked.

I opened my mouth, but I couldn't talk. I just walked a few steps away, turned away from him, and started crying -- for a woman who finished 31st in the world in her event. A minute later, when he came to see if I was okay, he asked again, "Who was that?"

I swallowed hard and said, "That's why I came here."

- Broc Romanek

August 13, 2012

What Happens to Whistleblower Tips at the SEC

On Friday, the SEC's Office of the Whistleblower posted this friendly video (along with this transcript) featuring Chief Sean McKessy that goes through the steps it takes when it receives a whistleblower tip. Sort of an evaluation checklist. For the most part, it provides comfort to the potential whistleblower - until you get to this phrase near the end of the video: "SEC enforcement actions can take years to be finalized." That is a true statement that may scare off a few folks...

The SEC's Consolidated Audit Trail: Too Little & Too Late

Last month, the SEC approved a new rule that requires the securities exchanges and FINRA to establish a market-wide consolidated audit trail that will significantly enhance regulators' ability to monitor and analyze trading activity. Here's some commentary from Lynn Turner about this rulemaking:

Here are statements from two SEC Commissioners who opposed the recent SEC rulemaking as being too little (Aguilar and Walter) and it certainly has occurred too late. The third statement is from the SEC Chairman who supported the rule. It was the first time I recall one of the Democratic Commissioners voting against the Chair.

Some things worth noting in these statements includes:

1. In 1980, over three decades ago, the SEC itself issued a report saying it needed a comprehensive market surveillance system. Yet today, absolutely no such system exists and trading blow ups are becoming a regular event.

2. One of the Commissioners aptly states: " will likely take several more years before any consolidated audit trail system is finally in place.." The Commissioner goes on to point out that the system is years away, but will be based on the rule just adopted which the Commissioner comments: "...the rule we consider today is disappointingly weak..." The Commissioner goes on to state somewhat shockingly:

"the adopting release eliminates the requirement to report orders with a unique order identifier throughout the order's entire life cycle with a more general requirement that the repository be able to link together all life cycle events for the same order. Further, the rule replaces the use of unique customer identifiers, which could enhance the ability of regulators to reliably and efficiently identify the beneficial owner of the account originating an order, with a less effective identification of the account holder--which, in some cases, would only reveal the entity named on the account rather than the actual individuals controlling it. In short, the rule's flexibility may well result in less timely, complete and accurate information and therefore less effective market oversight."
3. The data to be provided is not due to the SEC until 8 am the next morning. By that time the trades will all be over with, and in the instances of the Flash Crash, the Facebook IPO, and now the Knightmare on Wall Street, will have been old history. The SEC will be waiting overnight, losing sleep, while the data comes in so they can figure out what went wrong the day before, and why people lost money. So while the trading firms can develop extremely complex algorithms (some of which obviously do not work as intended), and do thousands of trades in a nano second, it was felt the SEC needed to give them until the next (years, years from now) to report their trade data. As a result, it is likely there will be more, maybe even many more trading losses to be sustained by investors, before a proactive SEC steps in to ensure orderly, fair markets. In the meantime, the US capital markets are beginning to look and feel a little like the "casino" a former SEC Commissioner used to describe the London AIM markets.

Failure to Seek Shareholder Approval Lawsuit: Simon Property Group Sued by Pension Fund

I just blogged this on's "The Advisors' Blog":

Here's a recent article from Bloomberg:

Simon Property Group Inc. (SPG) directors were accused in a lawsuit by an investor of improperly increasing Chief Executive Officer David Simon's compensation last year without seeking shareholder approval. The board of the largest U.S. shopping-mall owner wrongfully authorized a compensation package for Simon that provided $1.25 million annual salary, a cash bonus of double his salary, and $120 million in special stock awards as an incentive to stay with the company through 2019, a Louisiana pension fund claimed in the suit, filed yesterday in Delaware Chancery Court.

The $120 million retention award "is not tied to the company's performance and instead guarantees enormous payments to Simon simply if he stays employed by the company" for seven more years, the fund alleged. Simon, based in Indianapolis, raised its dividend and increased its full-year forecast for funds from operations last month, citing increased demand for space from retailers at regional malls and outlet centers. Earlier this year, Simon bought a 29 percent stake in European shopping-center operator Klepierre SA and formed a venture with Rio de Janeiro-based BR Malls Participacoes SA (BRML3) to develop outlet centers in Brazil. Les Morris, a spokesman for Simon Property Group, said by e-mail that the suit is "meritless" and the company will defend itself against its claims.

The suit comes more than two months after Simon officials disclosed that 73 percent of the Simon shares voted at the company's annual meeting opposed the granting of the retention award to the company's chief executive.

Say-On-Pay Vote

Simon officials sought to defend the CEO's compensation plan prior to the so-called "say-on-pay" vote, noting that total stockholder returns for the past 10 years were 597 percent compared with 58 percent for the S&P 500. Simon had been one of the company's top executives during that period. Simon, son of the company's co-founder, has been CEO since 1995 and chairman since 2007. The Louisiana Municipal Police Employees Retirement System, a Simon shareholder, accused the company's directors of exceeding their authority by amending the company's stock- incentive plan, created in 1998, without seeking shareholders' approval.

The plan allowed the board to change its terms unilaterally unless shareholder approval was "required by law, regulation of listing requirement," the pension fund said.

Tax Implications

Since changes to executives' performance goals under the plan implicate tax laws, the board was required to have investors vote of them, the pension fund said. The investors filed a so-called derivative suit against Simon's board, which would return any recovery from insurance covering the company's officers and directors to the company's coffers. The case is Louisiana Municipal Police Employees Retirement System v. Bergstein, CA No. 7764, Delaware Chancery Court (Wilmington).

- Broc Romanek

August 10, 2012

Deal Cube Contest: A Winner Crowned!

The first deal cube tourney is over and we have a winner! This fine Black Jack Table submitted by none other than James Bond! Fitting ending for a riveting Olympics in London! The reality is that the winner was submitted anonymously, as some of the deal cubes were submitted that way and I affixed a name to them for fun.

We will kick off our second tourney in a week or so. I still have room for five more cubes for the third tourney - so if you have something that you want to see in bright lights, please email a picture to me. Thanks to all that submitted cubes for the first tourney - there were many upsets along the way based on how I had seeded the cubes. I will share some of that information soon enough...

I'm still looking for the oldest cube known to mankind. Right now, it's this 1969 cube from Arthur Katz. Check out the simplicity of the cube - and see if you can remember the underwriters!

Blue Ribbon Report on Federal Sentencing Guidelines

In this podcast, Pat Harned of the Ethics Resource Center and Win Swenson of the Compliance Systems Legal Group explain the importance of the Blue-Ribbon Report entitled "The Federal Sentencing Guidelines for Organizations at Twenty Years," including:

- What was the process for preparing the report?
- What are the major lessons in the report?
- Any surprises when putting the report together?

More on our "Proxy Season Blog"

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

- Recent SEC Staff Guidance on Shareholder Proposals
- For Glass Lewis, More Proxy Clout Means More Heat
- Chart: Votes on Proxy Access Proposals
- Roosters Come Home for Chesapeake Energy
- Mid-Proxy Season Voting Review

- Broc Romanek

August 9, 2012

Congress Requires More Iran-Related Business Disclosures in '34 Act Reports

Here's news from Jonathan Newton of Baker & McKenzie:

Last week, both houses of Congress passed a new Iran sanctions bill, the "Iran Threat Reduction and Syrian Human Rights Act" (HR 1905), which is now headed to the President for his signature. This law once enacted is likely to have a significant impact on transactions with Iran, including companies in their '34 Act disclosures.

Prohibited Transactions

Under this new law, the U.S. government - within 60 days of its passage - must prohibit non-US foreign entities that are owned or controlled by US Persons from knowingly engaging in any dealings, directly or indirectly, with the Iranian government and with "any person subject to the jurisdiction of the Government of Iran" that are prohibited as to U.S. Persons, and would make U.S. parent companies subject to civil penalties for violations of this new prohibition by their owned/controlled entities. We interpret the language highlighted in the previous sentence to effectively prohibit transactions with Iran itself, as any person or entity within Iran would presumably be subject to the jurisdiction of the Iranian government.

Although we would have to see OFAC implementing regulations to understand the precise scope of the prohibition, this change would essentially convert the Iran sanctions program into something resembling the Cuba embargo, under which both US companies and their owned/controlled foreign subsidiaries are prohibited from doing business with the Cuba. In such case, the foreign subsidiaries of US companies would likely be subject to the same kinds of prohibitions on doing business with Iran as the US parent company itself.

The legislation allows for a 180 day grace period (before the civil penalties would apply) for US companies to end their owned/controlled entities doing business with Iran or to divest themselves from such entities. Implementing regulations will hopefully clarify whether a non-U.S. subsidiary's termination of Iran-related business within 180 days of H.R. 1905's enactment would remove potential liability for the U.S. parent company.

Required Disclosures

Effective 180 days after enactment, '34 Act reporting companies will be required to publicly disclose specific information about relevant Iran-related activities in annual and quarterly reports filed with the SEC. They will have an obligation to determine whether they or any affiliates have knowingly:

- engaged in any sanctionable activity under the ISA;
- engaged in any activities targeted by the Iranian Financial Sanctions Regulations ("IFSR");
- engaged in the transfer of goods or technologies or the provision of services to Iran or Iranian parties to commit serious human rights abuses against the people of Iran; or
- conducted transactions with blocked persons ("Specially Designated Nationals") designated for (i) involvement in activities related to terrorism or the proliferation of weapons of mass destruction or (ii) being part of the Government of Iran (including owned or controlled entities), except in the latter case for transactions authorized by the Office of Foreign Assets Control in the Treasury Department.

These companies will be required to describe in detail each activity listed above, which disclosure must include, at a minimum: (i) the nature and extent of the activity, (ii) the gross revenues/net profits, if any, attributable to the activity, and (iii) whether the company or any affiliate intends to continue the activity. To the extent a company includes such disclosure in its annual or quarterly report, the Act will also require it to submit a separate report with the same information to the SEC. The Act requires the SEC to promptly forward reports about such Iran-related activities to the President and Congress for further investigation and to post such reports on the SEC's website.

Head's Up: NYSE More Closely Screening Terms of New Preferred Stock

Here's news - and analysis - from Mark W. Jones of Troutman Sanders:

In connection with a recent offering, we have learned that the NYSE is reviewing the terms of preferred stock being submitted for listing more closely. The NYSE told us that it has concluded that many series of preferred stock have, in the past, been listed without complying as fully with its listing standards as the NYSE would like. In light of that, NYSE is now scrutinizing new series of preferred more closely to ensure better compliance.

From a practitioner's point of view, we think there are at least two morals to this story for those seeking to list preferred stock:

1. Use of a recently NYSE-listed precedent does not mean that NYSE will currently view your terms as compliant. In our deal, the NYSE objected to several terms - even though our preferred is substantively identical to a series listed by NYSE in late May 2012.

2. It is necessary to a smooth listing to submit draft terms to the NYSE for review as early as possible. Our NYSE listing rep did review the entirety of our articles and insisted on several (relatively minor) changes relating to voting rights across classes and contingent board rights.

The Latest Developments in Non-Profit Executive Pay

In this podcast, Christina Young and Sandra Pace of Steven Hall & Partners discuss how setting executive pay in the non-profit world differs from doing so for public companies, including:

- How do non-profit boards set pay compared to public company boards?
- What are some of the challenges non-profit boards face in developing peer groups in order to gather comparable compensation data?
- What practice pointers do you have for non-profit directors making compensation decisions?

- Broc Romanek

August 8, 2012

At the Printers: 1st Edition of Romanek's "Proxy Season Disclosure Treatise"

Wrapping up a project that I fevershly commenced six months ago - and have poured my heart and soul into - I am happy to say the inaugural 2013 Edition of Romanek's "Proxy Season Disclosure Treatise & Reporting Guide" is at the printers. You will want to order now so that you can get your copy as soon as it's done being printed in a few weeks. With over 1150 pages spanning 27 chapters, here is a detailed table of contents to help give you a sense of how practical it is. You can return it any time within the first year and get a full refund if you don't find it of value.

The Irony of "Emerging Growth Companies": Plenty of Examples to Go Around

Much has been written about Manchester United and other well-seasoned companies taking advantage of the new JOBS Act provisions that allow companies to go public as an "emerging growth company" without some of the regulatory burdens that they formerly would face (even ESPN has a Q&A on Man U's IPO). Sadly, there are another wave of companies using the EGC framework that clearly shouldn't be in the public market (as was predicted here and elsewhere when Congress was in the process of enacting this legislation without hearings, etc.).

Here is one example - WeRvaluecoupons - with some thoughts from Lynn Turner:

Here is the Form S-1 from yet another "emerging growth company" spawned by Congress (with a notice provision of ""). Its CEO is multifaceted as his title is a long one: President, Treasurer, Director, Chief Executive and Chief Accounting Officer. "Chief Bottle Washer" is about the only thing not on the list.

This company from Reno and incorporated in Nevada, has an auditor all the way across the country from Parsippany, New Jersey. The company has $5000 in cash and owes $2000 to venders (which coincidentally is the same amount as the auditor's fees). It looks like an investor in this company would have better odds making a bet in Vegas at a black jack table.

The company states it will rely on debt financing in the future. But how is that? It has no cash flow and no assets to secure debt financing with, unless it comes from generous friends and family who have nothing better to do with their cash. This has all the trappings of the penny stock companies that a couple decades ago cost investors dearly.

One the other hand, one can only ask what sane investor would buy this stock from the selling shareholders (it appears the company is not itself selling any shares). It will be interesting to see how many hundreds of jobs this company creates.

Study: Endowments Doing Less Than Expected Given History as ESG Pioneers

Recently, the IRRC released this study that reveals college and university endowments' environmental, social and corporate governance (ESG) investments as being less prevalent than often believed, particularly given their history as sustainable investing pioneers dating back to 1970s anti-apartheid campaigns. As noted in this press release, these finding are particularly surprising at a time when active incorporation of ESG factors into investment decisions is increasingly widespread among mainstream investors.

- Broc Romanek

August 7, 2012

Study: SEC's Revolving Door Is No Biggie

Over the past few years, the revolving door at federal agencies has gotten a fair amount of Congressional and media attention - as noted in this blog - even though the tradition been around as long as there has been a government. It's only natural since one is quite likely to stay within your own profession when you leave the government. One doesn't leave the SEC to become a doctor.

As noted in this recent NY Times article, a group of accounting professors has issued a study showing that the revolving door actually toughens enforcement results at the SEC. The study also found no evidence that law firms that hire large numbers of SEC alumni are able to extract more lenient enforcement outcomes from the agency.

My Ten Cents: SEC's Revolving Door Is Not a Biggie

Personally, I'm not surprised in the least by the study's findings. Generally speaking, SEC alumni treat the agency with more respect than those that have not graced its hallways - and I imagine that translates into not trying to push the envelope beyond the grey areas of the law. And I can't imagine that the colleagues that they leave behind would cut corners for them. People that work at the SEC believe in the mission of investor protection. David Smyth agrees with my conclusion, noting that "financial industry defendants would respect (and be inclined to hire) staff who were smart and tough in their work, instead of unethical patsies who were willing to look the other way in exchange for a favor."

I'll add two observations. One is I've never had a conversation with anyone while working at the SEC or afterwards that somehow indicated that their future career played any kind of role in how they approached a situation while they worked at the SEC. And I'm a social guy and talked with hundreds of Staffers both during my two tours of duty at the SEC and afterwards.

The second is the SEC really benefits when someone that has been there before returns to the Staff. Unless you've worked at the SEC, you can't imagine how different it is than private practice (and vice versa). They truly are two different animals. So someone returning to the Staff will be able to contribute right away - and in a big way because they have the background of the dual experiences. The SEC Commissioner that I worked for - Laura Unger - was unique because she had served in the SEC's Division of Enforcement before she went to work on Capitol Hill. That gave her a huge leg up when she analyzed cases that came before her when she was in a position of deciding how to proceed on dozens of cases every month.

The bottom line is that it's all about integrity. Either you have it or you don't. And the fact that you're willing to take a huge pay cut and go back into the government more than likely reveals that you have a lot of it. Not the opposite...

Our New "Beneficial Ownership Table Handbook"

Spanking brand new. Posted in our "Beneficial Ownership Table" Practice Area, this comprehensive "Beneficial Ownership Table Handbook" provides a heap of practical guidance about how to navigate under Item 403 of Regulation S-K. This one is a real gem - 35 pages of practical guidance...

- Broc Romanek

August 6, 2012

How the Knight Algo-Glitch Might Impact You

On Friday, SEC Chair Schapiro issued this statement about Knight Capital Group's trading error, which is prompting the agency into conducting roundtables and investigations and hastening the SEC's efforts into proposing rules that would require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems. This in the wake of many retail investors giving up on playing the market - leaving machines to trade with each other in a high frequency trading world.

In our "Q&A Forum," a member recently asked: "We are an NYSE issuer whose specialist is Knight & Co. whom you have undoubtedly heard on the news. We are closely monitoring Knight's performance relating to the trading of our stock. I understand that Knight & Co. manages about 15% of our stock on the NYSE. How might this debacle impact us?"

Robert Rapp of Calfee Halter responded:

As one of the handful of NYSE "Designated Market Makers" (DMMs), Knight is a major market participant with the responsibility, among others, to conduct both physical and completely automated auctions for several hundred NYSE listed stocks assigned to it, and to maintain an orderly market in those stock. As a DMM, Knight also constantly competes as a market participant using "algorithmic" quotes, in an entirely automated process.

These computerized processes based on trading algorithms can go awry. Thus, as Knight has reported, on Wednesday morning it accidentally unleashed millions of orders to buy and sell stocks based on rogue algorithmic quotes. Characterized as a software glitch, Knight incurred some $440 million in losses for itself in the process, and caused major price volatility in a large number of listed stocks This in turn immediately adversely impacted Knight's capital base and threatened its ability to stay in business.

As the extraordinary volatility in some stocks was happening, incoming orders were directed away from Knight. Also during that period existing mechanisms to curb volatility in single stock prices were triggered to a limited extent, resulting in trading pauses for some of the affected stocks. Once stability returned, transactions by other market participants occurring at the artificial prices were canceled by the exchanges. Because of the sudden and significant impact on Knight's capital base, the issue now is the ability of Knight to continue in its role not only as a New York Stock Exchange DMM, but also as a major wholesale market maker generally.

As reported, Knight is actively engaged in efforts to shore up its capital base. If Knight were unable to remain a DMM, the stocks assigned to it would be allocated to other DMMs, and trading would continue as before, with another DMM having the same responsibility, commitments, and accountability in the market. However, because DMMs are active, competing market participants, and there are only a few of them, the quality of the market could be seen as diminished with the exit of a major player. The trepidation that has kept retail investors away in droves for some time would be amplified. Trading in individual listed securities, and price discovery, should not be impacted however, although as this most recent disruption reminds us, "algo" trading has fundamentally changed our stock markets. New "limit up-limit down" measures to curb volatility have been approved and are to be implemented on a pilot program basis effective February 4, 2013.

Hedge Funds & General Solicitation: The Brewing Controversy Over the SEC's Rulemaking Plans

As I blogged recently, the SEC has noticed an open Commission meeting for August 22nd to consider three rulemakings. As noted in this Institutional Investor article, it appears that the SEC may adopt an Interim Final Rule on that date rather than go through the normal proposal and comment period. As reflected in this Investment Company Institute letter to the SEC, there are some that are not happy about this fast-track approach to an important rulemaking...

More on "The Mentor Blog"

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

- The Endangered Public Company
- Officer Removal: California Weighs In
- Delaware Expedites Proceedings to Enjoin Enforcement of Advance Notice Bylaw
- SEC's Internal Controls Still Deficient
- Federal Judge Identifies Three Statement Categories That Are Not Actionable Under Securities Laws

- Broc Romanek

August 3, 2012

Survey Results: Audit Committees and Earnings Releases

Here are the survey results on audit committees and earnings releases (compare to 2008 results):

1.Does your Audit Committee review your company's earnings releases prior to their release to the media?
- Yes - 96.2%
- No - 3.9%

2. If the answer to #1 is "Yes," how many days prior to public issuance of the earnings release is a draft typically sent to the Audit Committee?
- One day or less - 20.0%
- Two days - 22.0%
- Three days - 36.0%
- Four days or more - 22.0%

3. Does the Audit Committee hold a meeting for the purpose of discussing each earnings release prior to their release to the media?
- Yes, and mostly (or all) by telephone meetings - 73.6%
- Yes, and mostly (or all) by face-to-face meetings - 18.9%
- No - 7.6%

4. If the answer to #3 is "No," is the Audit Committee informed about issues that will be discussed in the related earnings release?
- Yes, in writing - 30.0%
- Yes, at a meeting - 50.0%
- No - 20.0%

5. Does your Audit Committee hold a single meeting to review both the earnings release and draft Forms 10-Q and 10-K?
- Yes - 45.3%
- No - 54.7%

Please take a moment to participate in this "Quick Survey on Insider Trading Policies: Pledges & Margin Accounts" - and this "Quick Survey on Rule 10b-18 & Buybacks."

Insider Trading for Dummies: Don't Google "How to Avoid Getting Caught"

Yesterday, the SEC issued this press release charging a guy in Bristol-Myers Squibb's Treasury department with insider trading on confidential information about companies being targeted for potential acquisitions.. Who googles how not to get caught when insider trading?!

Study: Whistleblowers Don't Do It For The $$$

This Cooley alert - entitled "Are Most Whistleblowers Just Rogue Employees Out For a Buck?" - delves into a study that found only 2% report observing misconduct externally and that whistleblowers are not necessarily motivated by money. The alert refers to a Compliance Week piece entitled "SEC's Whistleblower Bounties Will be Awarded Subjectively" also worth reading. Finally, check out this Forbes article entitled "Whistleblower Case Against GE, New Report Show Real Motives For Attacks on SEC Program"." This study seems significant because it debunks one of the main arguments against the SEC's whistleblower program - that it would eviscerate internal compliance systems.

- Broc Romanek

August 2, 2012

Deal Cube Tournament: The Big Finale

This is the only match of the final round - a winner will be decided! The Black Jack Table vs. the Toolbox (which squeaked out a victory over the Pink Clear Pig). Voting ends at COB next Wednesday. As noted in these rules (and keep sending more pics for the next tourney), please vote for one of the following two cubes below:

Inspection Reports: PCAOB Addresses Audit Committees Directly (A Rarity)

For as long as I can remember (or at least back to this blog in '05), I have been recommending that companies demand that their independent auditors inform audit committees when the PCAOB is reviewing a company's file during a PCAOB inspection of the auditor (the PCAOB doesn't require that auditors share inspection reports with their clients, but also doesn't prohibit them either - the reports are confidential merely in the hands of the PCAOB and SEC). Yesterday, the PCAOB issued an 26-page informational release that deals with this topic (here is the related press release).

As noted in FEI's "Financial Reporting Blog," it is rare for the PCAOB to issue guidance in the form of an "informational release." And at least equally as rare that the PCAOB issues guidance that pertains to audit committees directly.

In addition to listing 4 questions that audit committees should ask their auditors in its executive summary, the informational release goes on to explain its inspection process in depth and the possible implications for audit committees of those inspections. It is definitely a must-read document and something that should be shared with all directors, not just audit committee members...

Our New "10-K and 10-Q Exhibits Handbook"

Spanking brand new. Posted in our "Form 10-K" Practice Area, this comprehensive "10-K and 10-Q Exhibits Handbook" provides a heap of practical guidance about how to navigate under Item 601 of Regulation S-K. This one is a real gem - 58 pages of practical guidance...

- Broc Romanek

August 1, 2012

Sleeper: New York Proposes Limiting Executive Compensation of State-Supported Entities

On's "The Advisors' Blog," I've blogged a few times about these NY proposals that are a sleeper for many more companies than you would think. One of our members found it a bit challenging to try to explain in simple terms why this Executive Order and the promulgating agency regs are so problematic from the viewpoint of the corporate community - so she put together the Q&As below:

Q1. My company is incorporated in Delaware, and this is a New York Executive Order -- so this does NOT apply to my company, right?

A1. Wrong. The Executive Order applies to service providers that receive NY state funds or NY state-authorized payments -- regardless of where the companies are incorporated or headquartered.

Q2. But my company is public, and it does not provide health care or similar services -- so this does NOT impact my company, right?

A2. Wrong. The problem with the Executive Order and the proposed regulations is that many terms are either undefined or ill-defined, and the scope is potentially broad enough to cover any entity -- including public companies -- that receive NY state funds to provide any services. For example, companies that provide technology services, energy services, consulting services or financial services to New York State could be impacted.

Q3. If this applies to my company, what does it mean?

A3. There are three major items that companies reviewing the Executive Order and proposed regulations are concerned about:

1. Limits on Executive Compensation: A service provider cannot use more than $199K of state funds or state-authorized payments to pay any employee in the company;

2. Limits on Administrative Expenses: A service provider must use at least 75% (increasing to 85% in 2015) of the state funds or state-authorized payments to provide program services -- as opposed to administrative expenses such as compensation to staff that does not directly provide program services (including a CEO, CFO and controller), overhead expenses and office operating expenses; and

3. Disclosure Obligations: A service provider will be required to file certain reports but no specific information has been released yet about the contents of these disclosures.

Q4. You keep mentioning state funds and state-authorized payments - what do those terms mean?

A4. Wish we knew for sure. Like many of the provisions in the regulations, these terms are defined in a very convoluted manner. The definition of state funds refers to funds appropriated in the annual state budget - but excludes a limited subset of procurement contracts. State-authorized payments is very broadly defined, referring to any payments distributed upon approval by a NY state agency or a NY governmental unit (also excluding a limited subset of procurement contracts). As a practical matter, this would appear to pick up contract payments made by New York as a service customer to public companies for ordinary course business.

Q5. There must be some sort of an exemption for companies like mine, right?

A5. The rule applies to covered providers, and this definition has certain thresholds; if they are not met, then the company would be exempt from these provisions. An entity is a covered provider if it (1) receives state funds or state-authorized payments (as mentioned, not clearly defined) in an amount greater than $500K for at least 2 years and (2) at least 30 percent of the entity's total annual in-state revenues (undefined) for the most recent calendar year were derived from state funds or state-authorized funds. Therefore, given these broad terms and ambiguities, it is difficult to conclude definitively that a company is not a covered provider.

Q6. Where can I learn more about this - and what can I do about it?

A6. Here is the (i) January 2012 Executive Order issued by Gov. Cuomo, (ii) draft regulation implementing the executive order (there were over a dozen nearly identical proposed regulations by the various NY state agencies) and (iii) a helpful Proskauer memo.

We are hoping that companies, as well as legal and business organizations, will share their concerns about these issues in Albany. Specifically, they should consider contacting Gov. Cuomo's office to ask that the Executive Order be appropriately amended to clarify impacted entities (for e.g., it should not apply to public companies that are subject to SEC obligations, including Say on Pay votes). In addition, they should consider submitting a comment letter to the state agencies that have proposed these regulations. Even though over dozen state agencies have proposed implementing regulations, the proposals are virtually identical and therefore the same comment letter could be submitted to all the agencies. Also, even though the official comment period ends shortly, the Governor's Office has indicated that the agencies will consider comments submitted after that time.

Surprise! US OTC Companies Could Become Subject to Canadian Reporting Obligations

As noted in this Stikeman Elliott blog, the Canadian Securities Administrators recently adopted "Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets." Here is an excerpt from the blog:

The stated purpose of the Instrument is to discourage the manufacture and sale in the adopting jurisdictions of OTC quoted shell companies that can be used to facilitate abusive market practices. However, the Instrument will have the unintended but significant effect of subjecting major well-established issuers who have securities listed on exchanges outside of North America and that only trade OTC in the United States to Canadian public company reporting obligations. Significantly, these issuers may unknowingly become subject to Canadian public company reporting obligations, as it is common market practice for U.S. broker-dealers to apply to have a FINRA ticker symbol assigned to an issuer's securities without the knowledge or involvement of the issuer.

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