TheCorporateCounsel.net

On Thursday, the SEC issued this interpretive release concerning prohibited conduct in connection with securities distributions under Regulation M, particularly with a focus on IPO allocations.

The release is a reminder that Reg M prohibits any attempts to induce aftermarket purchases during a restricted period and it lists 7 activities that the SEC believes violates Reg M (based on three enforcement actions the SEC recently brought). Section V (page 19) covers policies, procedures and systems underwriters should have, and states that firms also should take corrective action if breaches occur. The release says that the SEC will continue to solicit comments on its guidance – until June 7th – as it continues to monitor IPO allocation practices.

SEC Barely Adopts Regulation NMS

Last Wednesday, the SEC passed controversial Regulation NMS with another close 3-2 vote (Chairman Donaldson sided with the Democratic Commissioners). Reg NMS is a set of market-structure reforms that will force brokers and exchanges to guarantee the best available price to investors, so long as that price is immediately executable. Also known as the “order-protection rule,” it will apply to all marketplaces – including the Nasdaq Stock Market – and will require markets to go to a competing market if there is a better price. Opponents wanted the freedom to choose “speed” and “certainty of execution” over best price. Here is the related press release.

The SEC set a April 6, 2006 effective date, which some believe will eventually have to be pushed back because the technology won’t yet be available.

A Few Thoughts on Director Compensation

One hot topic today is how much to pay directors. I’m not sure I agree with the tone of this article from the Pittsburgh Gazette Review, which indicates that directors are lining their pockets. Directors face long hours these days, and more importantly, a heap of potential liability – and should be compensated accordingly.

One key to director’s pay is independence. Because of the unique nature of the who sets board pay – the directors themselves – the amounts and processes of setting pay are more susceptible to attack than CEO pay. In the complaints filed against directors for setting excessive CEO pay packages, their independence universally is assailed, with their own pay package being used as exhibit #1 against them.

And although the basic tools of board pay often are identical to those used for CEO pay (i.e. cash and equity), the primary goals of the two types of pay differ considerably. I believe director pay should be designed to incentivize directors to act independently and preserve the company’s value; whereas CEOs should be rewarded for superior corporate performance and growing the company’s value. I am no expert, but I don’t think this is an area that is well understood and likely will evolve over the next few years.