Another nugget from Keith Bishop, a former Commissioner of California’s Department of Corporations: Recently, the Department of Corporations issued a proposed rule that would require the registration of hedge fund advisers under California’s Corporate Securities Law of 1968 (the “CSL”). As you might expect, there is a bit of history to this new proposal.
In 1971, the Department issued Policy Letter No. 151 (the “1971 Letter”) indicating that a general partner of a single limited partnership would not have to be licensed as an “investment adviser” under the CSL. The basis of the 1971 letter was the Department’s view that a general partner is, in effect, giving advice to itself rather than to “others” as required under Section 25009 of the CSL. The 1971 Letter had generally been relied on by California-based general partners of venture capital companies (“VCCs”) seeking an exemption from licensing in California as an investment adviser.
In April 1998, the Department issued Release No. 110-C (the “1998 Release”), which essentially revoked the 1971 Letter. In the 1998 Release, the Department indicated that the position taken in the 1971 Letter was contrary to the treatment of investment advisers by the SEC under the Investment Advisers Act of 1940.
I was no longer Commissioner and objected strongly to the Department’s revocation of the 1971 Letter on a number of grounds. In particular, I was concerned with the effect on general partners of VCCs. At my urging, the Department in 2002 adopted Rule 260.204.9 which exempts any investment adviser that:
– Does not hold itself out generally to the public as an investment adviser;
– Has fewer than 15 clients;
– Is exempt from registration under the Federal Advisers Act by virtue of Section 203(b)(3) of that act; and either has “assets under management” of not less than $25 million or provides investment advice to only “venture capital companies,” as defined in the rule.
In 2004, the SEC adopted a new rule (Rule 203(b)(3)-2) and rule amendments to require advisers to certain private investment pools (aka “hedge funds”) to register with the SEC under the Advisers Act. Prior to that time, these hedge fund advisers relied upon the so-called “private adviser” exemption set forth in Section 203(b)(3) of the Advisers Act. That section exempts advisers who (i) has had fewer than fifteen clients during the preceding twelve months, (ii) does not hold itself out generally to the public as an investment adviser, and (iii) is not an adviser to any registered investment company.
Two years later, the DC Circuit in Goldstein v. Securities and Exchange Commission vacated the regulatory framework for hedge fund advisers established by the SEC through its adoption of Rule 203(b)(3)-2 and related amendments. As a result hedge fund advisers can now rely again on the Section 203(b)(3) exemption from the federal registration requirements. The DOC’s rule currently exempts these advisers if they have assets under management of not less than $25 million (i.e., above the threshold for federal registration).
The Department’s proposal represents an attempt to refill the lacuna in regulation that resulted from the Goldstein decision. For those advisers that deregistered under the Advisers Act or who have not registered with the SEC since the Goldstein decision, the Department’s rule would require state-level registration. The comment period for the Department’s proposal ends on November 26, 2007. Here is the Department’s notice, proposed text and initial statement of reasons.
Remember that the SEC adopted IA Rule 206(4)-8 in August. This rule prohibits advisers to pooled investment vehicles from making false or misleading statements to, or otherwise defrauding, investors or prospective investors in those pooled vehicles.
FINRA/NASD’s Fairness Opinion Proposal: Finally Final
After a long wait – and four amendments – the SEC has issued an Order approving FINRA (formerly NASD) Rule 2290 on an accelerated basis (this rule was first proposed in mid-’05). As noted in Amendment No. 4, Rule 2290 addresses disclosures and procedures in connection with the issuance of fairness opinions by a broker/dealer firm. In that amendment, FINRA stated that it will announce an effective date for the new rule in a Notice to Members to be published no later than 60 days following the SEC’s approval and that the effective date will be 30 days following publication of the Notice, so we should know that date soon. Look for a DealLawyers.com webcast on fairness opinions coming soon…
Rep. Barney Frank Opposes a SEC Vote on Shareholder Access
Here is an excerpt from a Tuesday Dow Jones article: “The Securities and Exchange Commission should not vote this year to finalize a rule on a controversial shareholder-democracy issue, and it runs the risk of being overturned by Congress if it does, House Financial Services Committee Chairman Barney Frank said Tuesday.
Frank, Democrat-Mass., said it would be ‘a great mistake’ for the SEC to act on such issues without a full complement of Democrats on the five-member commission. He added that it’s possible Congress could act this year to suspend any SEC action on proxy access.
SEC Chairman Christopher Cox last week reiterated plans to have the commission vote this year to clarify whether shareholders should be able to propose proxy-access measures, allowing them to place the names of their own candidates for corporate boards on company proxy ballots.”
Perhaps I am too close to it (yes, way too close), but what is the appropriate measure to determine whether a conference was worth its salt? To me, the most important measure is the feedback we receive from attendees. So far, feedback from our three Conferences has been very positive – but we’re always looking to improve; please feel free to email me with any criticism you might have. [I feel the same way about our sites; we can only improve if we know what you are looking for.]
Another measure – albeit far less important than the attendee’s experience – is whether the conference received any media coverage. In this category, some of our speakers indeed created some news – the NY Times ran an article based on coverage of our Conferences on no less than three days! And other reporters told me that our Conferences continue to be on their “must attend” list for the content they hear and contacts they make. Here are links to the NY Times articles:
– Comp consultant Ira Kay and our own Jesse Brill discussed a variety of executive compensation practices during several panels of the “4th Annual Executive Compensation Conference”: see Saturday’s article entitled “What if C.E.O. Pay Is Fair?”
– SEC Enforcement Director Linda Chatman Thomsen discussed 10b5-1 plans during her keynote and the succesive panel on those plans: see Thursday’s article entitled “Stock Sales by Chief of Lender Questioned”
– SEC Corp Fin Director John White’s keynote analyzed executive compensation disclosures under the new SEC rules: see Wednesday’s article entitled “S.E.C. Finds Fault on Pay Disclosures”
Of course, the sheer number of attendees is another indicator of a conference’s success. In that department, the result continues to be overwhelming. We had over 2400 in San Francisco (we pulled off a nice wave cheer before Wednesday’s plenary session), with another 3500 online.
Status of Shareholder Access: Open Commission Meeting Soon?
With over 20,000 comment letters in (many of them “form” letters), the SEC appears to be set to hold an open Commission meeting sometime in November to consider at least some of the shareholder access ideas floated this summer. According to a Dow Jones article from last week, SEC Chairman Cox wants some rules in place for next proxy season – here is an excerpt from that article:
“Cox has said that he favored the second approach, under which investors with a 5% stake in a company for at least one year could propose changing bylaws in a way that would allow shareholder-backed candidates to appear on corporate proxy ballots. But the departure of one Democratic commissioner and the planned departure of the other may complicate matters.”
Here is a NY Times article from Sunday – and here is an article from the RiskMetric’s Governance Blog about the future on nonbinding proposals.
An Opportunity to Comment on RiskMetric’s ’08 Proxy Policies
Yesterday, RiskMetrics (formerly known as ISS) put up its “Request for Comment” tool for a number of potential modifications to its policies for 2008. Take advantage of this opportunity to influence these important proxy voting policies through an easy-to-use online form. This year, the topics include:
– Aggressive Accounting Practices (U.S.)
– Cumulative Voting (U.S.)
– Director Attendance (Japan)
– Independent Chair (U.S.)
– Non-Employee Director Limit on Equity Plan Participation (Canada)
– Stock Options for Non-Executive Directors (Belgium and the Netherlands)
– Poor Pay Practices (U.S.)
– Stock Option Overhang in ISS Governance Services’ Binomial Option Pricing (“SVT”) Model (U.S.)
– Say on Pay – Principles for Evaluating Remuneration (U.S. and International)
– Product Safety (U.S.)
When I saw Peggy Foran at our Proxy Disclosure Conference last Tuesday, I was excited to hear that Pfizer planned to unveil a mock proxy statement that had been made more “usable” during Friday’s Center for Plain Language Symposium; Pfizer took its most recent proxy statement and reformatted it. Here is a keynote speech from SEC Chairman Cox at the Symposium.
I was excited because I believe not enough attention has been paid to the usability of disclosure documents. In fact, this is the subject of our next webcast on November 15th: “Annual Reports: How to Create Them for an Online World.” Of course, substance is king – but format plays a role in how investors learn more about a company too. And as I’ve written before, in this new era of e-proxy, etc., the art of writing usable is a skill set that we all need to learn. Studies show that humans read differently online than in paper.
Anyways, I was dumbfounded to see this NY Times article on Saturday that poked Pfizer for creating a mock usable document. From reading the article, it appears that Pfizer was approached to volunteer to create this example – Pfizer was a logical choice because the company has long led the league in trying to push the envelope and serve as this country’s governance leader, particularly under Peggy’s leadership.
True, the Pfizer board made a misstep with its former CEO’s post-retirement pay package – but you still have to give Peggy and company credit for all they have done over the past decade. Today’s hot topic might have been majority vote legislation without Pfizer leading the way in voluntarily adopting a director resignation policy for majority withheld votes. There are numerous other examples of innovation, both big and small. I hope criticism in the press doesn’t stop Pfizer or any other company from trying to do the right thing, particularly something as benign as mocking up last year’s proxy to make it more usable.
[Pfizer hasn’t made it publicly available yet. I intend to post it when I get it and will blog when it’s up so you know since I’ve had so many requests.]
President Bush Attacks CEO Pay (Again)
On Thursday, President Bush attacked CEO pay in an interview, according to this WSJ article. He had first broached the topic in a speech on Wall Street back in February.
I also heard that Hillary Clinton spoke out about the pay disparity between CEOs and the work force while she was stumping in Iowa last week. Clearly, this issue could become one of the issues used to attract voters next November.
Jackpot for History Buffs: Old NY Times Articles Now Free
Recently, the NY Times made its archive of old articles – going back to 1851 – available to the public for free (despite the fact that it says you must pay when you search their archives, it indeed is free). For example, check out this 1935 article about the then new incoming SEC Chairman James Landis. Pretty cool stuff…
Tune in today for more of the same with: “4th Annual Executive Compensation” Conference. The Conference opens with a keynote from John Olson and then gets right into the practical “nitty gritty” of what boards and advisors should be doing vis a vis CEO pay. Plenty of implementation examples, such as how companies have implemented internal pay equity, wealth accumulation analyses, “walk away” number calculations and clawback provisions with teeth.
To watch, come to the home page of either TheCorporateCounsel.net or CompensationStandards.com and click the prominent link that says “Enter the Conference.” Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or RealPlayer) and the speed of the connection that you have.
Here’s an agenda for today’s Conference; note that times are Pacific/West coast. Panels will be archived a day after they are shown live.
COSO Releases More Internal Control Guidance
A few weeks ago, the Committee of Sponsoring Organizations of the Treadway Commission released its latest Guidance on Monitoring Internal Control Systems. Called a discussion document, the guidance is the first phase of COSO’s attempt to improve the understanding of internal control system. COSO is taking comments this latest guidance.
Ten Years: It Goes By Fast…
It’s hard to believe that a decade has passed since the SEC submitted this Study to Congress about how technology – in particular, the Internet – impacts the securities markets. If my memory serves, I believe the SEC was required to produce a study as mandated by a provision of NSMIA.
Yours truly did the leg work on the Corp Fin chapter of the study; some of the more interesting stuff is in the footnotes, as they describe the pioneers that leveraged the Web. I had a box of really cool stuff that documented those examples (and many more that didn’t make it into the final cut of the Study), but a flood in my basement wiped them out a while back…
Lots of big doings yesterday for our “2nd Annual Proxy Disclosure” Conference. Tune in today for more of the same with: “Hot Topics: The Corporate Counsel Speaks” Conference. The Conference opens with a blockbuster keynote from SEC Enforcement Director Linda Chatman Thomsen.
To watch, come to the home page of either TheCorporateCounsel.net or CompensationStandards.com and click the prominent link that says “Enter the Conference.” Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or RealPlayer) and the speed of the connection that you have.
Here’s an agenda for today’s Conference; note that times are Pacific/West coast. Panels will be archived several hours after they are shown live.
John White’s Speech, Etc.
I did some real-time blogging during yesterday’s “2nd Annual Proxy Disclosure” Conference, noting this speech by Corp Fin Director John White (fyi, here is the Cleary Gottlieb memo on performance targets mentioned during a few panels). The archived panels from that Conference are being uploaded soon and will be accessible from a link at the top of the home pages of TheCorporateCounsel.net and CompensationStandards.com. Today’s NY Times ran this article on John’s speech and other remarks made at yesterday’s Conference.
Problems with our Online CLE Tracking Tool
If you have registered for video webcast attendance to any our three Conferences this week, please be aware that we are experiencing some difficulties with our new online tracking tool. Rest assured that you can still earn CLE credit if your state bar has accredited our program (most states have).
If you are experiencing problems, simply send us (1) the name(s) of any lawyers who watch the Conference, (2) list which Conferences were watched (and number of hours attended), (3) the state bars for which CLE is sought, and (4) the bar numbers for those states. You can send these to info@naspp.com. We will be sending out CLE certifications out in about a month or so. We apologize for any inconvenience. Sometimes I truly despise technology…
Fictitious? Fishy 409A Guidance
This fictitious IRS notice about death and 409A made the rounds recently…
Here is text of the speech from Corp Fin Director John White that he is delivering right now at our Conference. It’s entitled “Where’s the Analysis?” and I urge everyone to read it (and watch the video, live or archived)…
It’s not too late to register (or upgrade your Confernce license to add more people; you can do so online through a form available on this site’s home page) – and even if you can’t watch it live, each panel’s video will be archived several hours after its shown live. Register Now!
How to Attend Today’s Conference Online
Come to the home page of either TheCorporateCounsel.net or CompensationStandards.com and click the prominent link that says “Enter the Conference.” Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or RealPlayer) and the speed of the connection that you have.
Here’s an agenda for today’s Conference; note that times are Pacific/West coast. Panels will be archived several hours after they are shown live.
For Those Watching by Video Webcast (and Want CLE Credit)…
All three of our Conferences have been accredited in nearly every state which requires barred lawyers to earn CLE credit. The exception being one state where our application is pending (Kansas) and two states that don’t recognize our online CLE (Delaware and Pennsylvania). In our FAQs, there is a complete list of CLE credit hours available via web attendance for each Conference.
However, there are two “catches” to earn CLE credit via web attendance:
1. Need to Watch Live – Nearly every state requires “live” – and not “archived” – attendance, which can be a pain for those on the East Coast as the Conferences are on a West Coast schedule (but partial CLE credit can be earned for many states as noted below).
2. Need to Click Periodic Pop-Up Boxes – To comply with the verification requirements of many of the state bars, we have built a system which requires those seeking CLE credit to click on a periodic prompt as they watch. These prompts – in the form of “pop-up boxs” – will occur every 10-15 minutes and last about a minute. By clicking each pop-up box you see, you have proved to your state bar that you attended (yes, this is annoying – complain to them, not us). Each pop-up box will be prominent and will say “You must click me.” Keep clicking each one you see; don’t stop after just clicking one.
Exception to the Two Catches Above: If you are in a self-study state, you can spare yourself from the hassle of watching with the “periodic prompt” – read yesterday’s blog to learn more.
A few other items to note:
– Register for CLE Every Day – If you want CLE credit for web attendance, when you first enter the conference page on the day of the conference and click on one of the video feed links; from there, you must click the prominent link in the red box entitled “How to Earn CLE Credit for Web Attendance” and follow the steps. You will need to do this each day if you watch more than one Conference.
– Earn Partial CLE Credit – If you can only watch a portion of the Conference, you can still earn CLE credit for the amount of time watched (assuming you click on the prompts as noted above and your state bar allow for this; most state bars do); this is particularly relevant for those on the East Coast.
– Limits on Group Watching – You must click the periodic prompts yourself so you can prove to the state bar that you indeed attended (so you can’t earn CLE by sitting in a conference room unless you have your computer with you; unless you are in a “self study” state as noted above).
– CLE Certificate Mailed Out Next Month – If you followed our online CLE system, we will be mailing a CLE certificate to you – but it’s gonna take us a while to get those out (at least a few weeks).
– Pending States – If you seek CLE credit for Kansas where our application is pending, you should sign-in for the prompt system in case they approve the Conference.
Here are a set of FAQs about earning CLE credit for web attendance.
Complete Set of Printable Course Materials Posted
You are now able to obtain – and print out – the course materials related to our three Conferences; on the Conference pages linked to below, there is a complete printable set of materials for each Conference if you look for the link in the upper right corner that has that title. Note that you will need your Conference ID and password to access the course materials (in many cases, your ID and password for TheCorporateCounsel.net or CompensationStandards.com will work if you have registered; if not, your Conference ID and password were e-mailed to you earlier this week).
If you’re watching online, obtain the Course Materials for the your Conference(s) either here – or directly at these links (if you’ll be in San Fran, a set will be handed out to you):
All three of the Conferences will be held at the San Francisco Marriott, which is at 55 4th Street (here is the hotel’s phone number if you get lost: (415) 896-1600 /(888) 575- 8934). Once you reach the hotel, you will want to check in to receive your badge, etc. – and if you are early enough, there is a continental breakfast available. This master agenda lists check-in and breakfast times for all three Conferences.
If you haven’t registered yet, but do plan to attend in San Fran – note that our HQ can’t accept registrations after 5 pm Pacific today. However, walk-in registration can be done at the SF Marriott – and bring a check or credit card. (Note: registrations for web attendance still can be done online at any time.)
Our new online CLE tracking system is causing a little confusion. So let me try to clarify a few things. We built the time-stamp system in response to the requirements of many state bars that require that we track whether or not a lawyer is actually watching the Conference.
However, we are aware some state bars only require self-reporting, so that lawyers in those states only need to attest that they attended a CLE program. If you are seeking CLE for one of those states (and you are certain of it, eg. Minnesota), you may skip our tracking system and save yourself a hassle. (This also means that you can watch in a group because you don’t have to click prompts from your own computer.) In other words, when you click a video feed for a Conference this week, you wouldn’t click the button that says “Earn CLE Here” and not fill out the CLE application.
If you fall under these circumstances – and still want a CLE Certificate – simply send an email next week (when we’re back in the office) with your contact information, state bars and bar numbers. If you are registered for the Conference, we can accommodate you as we have in the past.
On Friday, Glass Lewis was sold by its Chinese parent to the Ontario Teachers’ Pension Plan, one of Glass Lewis’ clients, for $46 million (here is the press release). With $106 billion in net assets, this investor is one of Canada’s largest and most aggressive institutional investors and shareholder rights advocates (the investor helped created a Canadian investor group dedicated to improving corporate governance). This is a pretty interesting development: I wonder if a change in ownership alone can help Glass Lewis grow (as well as allegations that conflicts may arise if an activist investor owns a proxy advisor).
Its been reported that RiskMetrics Group (which owns what used to be known as ISS) dropped out of the running to buy Glass Lewis shortly after it filed its Form S-1 to go public last month. Right before it filed the IPO registration statement, RiskMetrics announced a new company structure and brand framework under which ISS became a division and officially took the RiskMetrics name.
SEC Comments: Financials Prepared for International Financial Reporting Standards
It looks like Corp Fin continues to maintain links to comment letters it has issued to foreign private issuers containing financial statements prepared for the first time on the basis of International Financial Reporting Standards (commonly referred to as “IFRS”). The Staff also is posting links to the company’s correspondence. Scroll down on this Corp Fin page to see these links.
VP Cheney’s ’04 Testimony to the SEC’s Enforcement Division
Last week, it was revealed that Vice President Dick Cheney gave testimony to the Enforcment Division back in 2004, as part of the Staff’s investigation of Halliburton (where Cheney used to serve as CEO) over the accounting of cost overruns on several big projects back in ’98. The Staff’s investigation is now closed after the company settled with the SEC two days after Cheney’s testimony, paying a $7.5 million fine.
According to this WSJ article, Cheney didn’t recall being told that Halliburton had booked millions of dollars in construction cost overruns as income, saying that the company’s CFO was “probably” the person “whose general area of responsibility this fell into.” Yeah, probably. And the CEO shouldn’t care about that type of thing…
The SEC released Mr. Cheney’s testimony under a Freedom of Information Act request filed by Dow Jones Newswires. I’d like to post a copy of the testimony, but that might take some doing. Let me know if you see a copy.
Last week, the SEC Staff revised its FAQs on Management’s Report on Internal Control over Financial Reporting. These FAQs were originally jointed issued by Corp Fin and the Office of Chief Accountant in late ’04. [Admittedly, this development snuck by us – it never showed up on Corp Fin’s “What’s New” page, etc. We are redoubling our investigative efforts and promise it will never happen again.]
The Staff eliminated twelve FAQs it believed were no longer relevant or necessary or that were addressed by the SEC’s recent interpretive guidance on management reports. The Staff also added four new FAQs pertaining to foreign private issuers.
Courtesy of Cleary Gottlieb, here is some analysis of the new foreign private issuer FAQs (as well as a blacklined copy of the overhauled FAQs, which is posted in our “Internal Controls” Practice Area):
– Scope of ICFR Evaluation Should be Based on Primary Financial Statements (New FAQ 12) – Management of an FPI that files home country accounts with a US GAAP reconciliation should plan and scope its ICFR evaluation based on the primary financial statements (i.e., home country GAAP). However, the evaluation should consider controls related to the preparation of the US GAAP reconciliation.
– Reference to “Interim Financial Statements” in Material Weakness Definition Does Not Apply to FPIs (New FAQ 13) – Since home country requirements vary significantly and there are no uniform requirements requiring FPIs to file periodic interim financial statements, the reference to “interim financial statements” in the definition of material weakness does not apply to FPIs (unless they are filing on domestic forms).
– Treatment of Entities for ICFR Evaluation Purposes Should Track Treatment in Primary Financial Statements (New FAQ 14) – If an entity is treated differently under primary GAAP (i.e., home country GAAP) than it is in the US GAAP reconciliation (e.g., consolidated in the home country accounts but equity method under US GAAP), the ICFR evaluation should be based on how the entity is treated in the primary financial statements.
– Scope Limitation Permitted for Certain Proportionately Consolidated Entities (New FAQ 15) – Some FPIs are required under home country GAAP to account for certain entities on a proportionate consolidation basis. Management’s ICFR report ordinarily should include all consolidated entities, even if they are consolidated on a proportionate basis. However, in cases where the company does not have the right or authority to evaluate internal controls of the proportionately consolidated entity and lacks the access necessary in practice to make that evaluation, the proportionately consolidated entity’s internal controls may be excluded from the scope of management’s assessment. (Management must still evaluate controls over the recording of amounts relating to the proportionately consolidated entity in the company’s consolidated financial statements). The FAQ specifies certain disclosure that must be provided regarding the exclusion of the internal controls of these entities from the scope of the ICFR assessment.
The remaining FAQs are substantially the same and have been renumbered as a result of the elimination of the 12 old FAQs.
Many of those attending the NASPP Conference next week have registered for a free ticket to a “Chicago” concert on Tuesday, October 9th. The concert is jointly sponsored by the NASPP and Fidelity Investments. Here are some logistics:
Attendees can pick up their tickets to the concert at Fidelity’s registration desk at the San Francisco Marriott until 6:45 pm on Tuesday, October 9th (the day of the concert). After 6:45, Fidelity will have a satellite registration desk at the San Francisco Concourse Exhibition Center (which is the site of the concert) and attendees can pick up their tickets there.
There will be shuttle service from the Marriott to the San Francisco Concourse Exhibition Center. Buses will begin departing from the Marriott after the reception in the Exhibit Hall ends (starting at 7:00 pm). It’s not walking distance, you will need to take a shuttle bus.
Advance registration for the concert is now closed – but attendees can still register at the Conference; remember that only full NASPP Conference attendees are eligible – here are the eligibility requirements. If you didn’t register in advance and show up at the concert site, you will need to prove that you are a NASPP Conference attendee to register there. You can do this by checking in for the NASPP Conference and picking up your Conference badge or by bringing the confirmation that you received when you registered for the NASPP Conference.