Monthly Archives: September 2008

September 16, 2008

Xcel Energy’s Climate Change Disclosure Agreement

Late last month, New York Attorney General Andrew Cuomo announced that Xcel Energy has reached an agreement with the State of New York to provide more disclosure about risks that the company faces as a result of climate change. In the press release announcing the agreement, Cuomo is quoted as saying “[t]his landmark agreement sets a new industry-wide precedent that will force companies to disclose the true financial risks that climate change poses to their investors.” The agreement with Xcel comes out of an effort launched by Attorney General Cuomo last September, when his office issued subpoenas to Xcel and four other energy firms – AES Corp., Dominion Resources, Dynegy and Peabody Energy.

As I noted in the blog a year ago, a group of state officials, state pension fund managers and environmental organizations had submitted a petition to the SEC (which was supplemented in June 2008), asking for interpretive guidance clarifying that, under existing law, companies are required to disclose material information related to climate change. To date, it does not appear that the SEC has acted on this petition. Now, the New York Attorney General has sought to compel climate change disclosure in a company’s SEC filings without the help of the SEC. There is no doubt that the precedent of the New York agreement with Xcel may push other utilities – as well as companies in other industries who face similar climate change issues – toward more disclosure regarding climate changes risks.

Under the terms of the “Assurance of Discontinuance” with New York, Xcel has agreed to provide specific disclosures in its Form 10-K, including an analysis of financial risks from climate change related to:

– present and probable future climate change regulation and legislation;

– climate-change related litigation; and

– physical impacts of climate change.

Xcel also agreed to beef up its climate change disclosures in a number of other areas, including:

– current carbon emissions;

– projected increases in carbon emissions from planned coal-fired power plants;

– company strategies for reducing, offsetting, limiting, or otherwise managing its global warming pollution emissions and expected global warming emissions reductions from these actions; and

– corporate governance actions related to climate change, including whether environmental performance is incorporated into officer compensation.

It remains to be seen whether the New York action will prompt the SEC to move forward with any sort of rulemaking or interpretive guidance as suggested in the petition filed last year. It always strikes me as interesting when some entity other than the SEC is prescribing specific disclosures to be included in periodic or current reports. What happens if the SEC or the SEC Staff disagrees with the New York Attorney General on the materiality of this information and whether it is necessary for investors? It could put Xcel and other companies that follow Xcel’s lead in a bind with Corp Fin when comments may be raised in the course of a Form 10-K review seeking to cut back or modify this sort of “mandatory” disclosure.

For more on this topic, be sure to check out our “Climate Change” Practice Area.

Big PIPEs: The New Weil Gotshal Survey

Weil Gotshal & Manges just published an inaugural survey of private investment in public equity (PIPE) transactions in which private equity sponsors, sovereign wealth funds and other financial investors invested $100 million or more, covering a total of 63 transactions (including 24 in the United States, 9 in Europe and 30 in Asia). The survey notes that 25% of the surveyed US transactions involved aggregate investments of greater than a whopping $5 billion, while almost half of the surveyed transactions involved aggregate investments of greater than $500 million! Many of the largest PIPEs were for investments in financial institutions seeking to bolster their capital. Interestingly enough, I notice that these very large transactions are rarely characterized as “PIPEs” when they are announced.

Of the United States deals surveyed, it is clear that PIPEs have served in some cases as vehicles for private equity sponsors to acquire significant (and sometimes controlling stakes) in companies. In this regard, some features of going private transactions have “migrated” to PIPE transactions. The survey notes that four recent PIPEs featured the retention of a “fiduciary out” by the board of the public company to accept a superior bid, and two included a “go-shop provision,” which permitted the board to solicit other bidders. While one of the transactions with a go-shop involved private equity sponsors acquiring a majority equity interest in the target company, another transaction only involved the acquisition of a significant minority interest.

At the other end of the PIPEs spectrum, US District Court Judge Graham Mullen in the Western District of North Carolina recently granted summary judgment to the defendant in SEC v. John F. Mangan, Jr., making things worse for the SEC in its cases against funds who sold short in anticipation of PIPE offerings. After the Securities Act Section 5 claims were dismissed last year, the case proceeded on insider trading claims that have now been shot down in this court. No word yet on the other two litigated PIPEs cases that remain out there.

Foreign Corrupt Practices Act: Latest Compliance and Investigation Developments

Tomorrow, catch our webcast – “Foreign Corrupt Practices Act: Latest Compliance and Investigation Developments” – to hear these panelists discuss all the latest developments regarding the FCPA:

Paul McNulty, Partner, Baker & McKenzie, LLP, former Deputy Attorney General, U.S. Department of Justice
John Soriano, Vice President-Compliance and Deputy General Counsel, Ingersoll Rand Company
Jeffrey Kaplan, Partner, Kaplan & Walker LLP

– Dave Lynn

September 15, 2008

This Could Get Ugly: Lehman’s Bankruptcy and Systemic Risk

Late last night, Lehman Brothers announced that it intends to file for Chapter 11 bankruptcy protection of the parent company, Lehman Brothers Holdings, capping off a tumultuous weekend of negotiations to sell the bank, which ultimately failed when the government decided that it would not back-stop any deal. Apparently, the concept of “too big to fail” has its limits. It seemed only a matter of time for the government bailouts to reach an end, and unfortunately for one of the most storied investment banks on Wall Street, that time is now. If Lehman is liquidated as many seem to expect, it is truly a tragic end for an institution known for being capable of surviving many ups and downs over its 158-year history.

As noted in this WSJ article, the two leading contenders to save Lehman, Barclays and Bank of America, walked away when the government refused to provide financial support to any potential buyers. Bank of America didn’t walk away empty-handed though, picking up Merrill Lynch along the way for $50 billion – apparently Merrill Lynch saw the handwriting on the wall that it could be next. Meanwhile, AIG is struggling to raise capital as it faces a possible downgrade of its credit rating, taking the unprecedented step of trying to convince the Federal Reserve to lend it some of the $40 billion that it needs to survive.

Lehman’s imminent bankruptcy filing looked relatively certain by Sunday afternoon as no willing buyers emerged. The firm’s huge exposure in the credit derivatives market and in other derivatives led the ISDA to announce a “netting trading session” between 2 p.m. and 6 p.m. on Sunday. Under the protocol for the session, firms could seek other counterparties to take Lehman’s place on outstanding contracts as a means of beginning to unwind Lehman’s positions. But it appears that few contracts were offset through this process, and trades were conditioned on Lehman filing for bankruptcy before 11:59 pm New York time on Sunday. The SEC put out a statement last night, just a few hours before Lehman’s announcement, noting that it was taking steps to protect customers of Lehman’s broker-dealer subsidiaries. And the Federal Reserve announced some initiatives designed to increase liquidity, including allowing lower-rated collateral to be pledged to the Fed for borrowings.

While Lehman’s failure will certainly have an effect on the already jittery equity markets, I think that the big concern will be the extent to which the Lehman bankruptcy will damage the credit and derivatives markets, where Lehman’s exposures were huge. Presumably those same reasons that drove the government to push Bear Stearns into its shotgun wedding with JP Morgan are present with Lehman, including the potential for a shock to the credit default swap market of unprecedented proportions, as traders seek to unwind trades with Lehman in an environment where pricing may be difficult and where few counterparties may be willing (or able) to participate. Further, a back-to-back failure of AIG or another massive financial institution may have become more likely, now that it has been made abundantly clear that the government is not going to stand behind every deal. With many other Wall Street firms, commercial banks and presumably hedge funds facing capital crunches of their own, the large-scale orderly unwinding of Lehman’s positions that the Federal Reserve and Treasury appear to expect may prove difficult to pull off, raising the level of systemic risk in the financial system to what I think are unprecedented heights.

Now Effective: Changes to Form D

The amendments to Form D that the SEC adopted earlier this year are now effective, although electronic filing will remain optional until March 16, 2009. On Friday, the Corp Fin Staff put out a Small Business Compliance Guide on filing and amending a Form D, highlighting in particular the specific circumstances for when an amendment to Form D is – and is not – necessary. Under revised Rule 503 and the Form D instructions effective today, amendments to the Form D notice are required in the following three instances only:

(1) to correct a material mistake of fact or error in the previously filed notice (as soon as practicable after discovery of the mistake or error);

(2) to reflect a change in the information provided in a previously filed notice (as soon as practicable after the change), except that no amendment is required to reflect a change that occurs after the offering terminates or a change that occurs solely in the following information:

– the address or relationship to the issuer of a related person identified in response to Item 3 of Form D;
– an issuer’s revenues or aggregate net asset value;
– the minimum investment amount, if the change is an increase, or if the change, together with all other changes in that amount since the previously filed notice, does not result in a decrease of more than 10%;
– any address or state(s) of solicitation for a person receiving sales compensation;
– the total offering amount, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice, does not result in an increase of more than 10%;
– the amount of securities sold in the offering or the amount remaining to be sold;
– the number of non-accredited investors who have invested in the offering, as long as the change does not increase the number to more than 35;
– the total number of investors who have invested in the offering;
– the amount of sales commissions, finders’ fees or use of proceeds for payments to executive officers, directors or promoters, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice, does not result in an increase of more than 10%; and

(3) beginning March 16, 2009, annually, on or before the first anniversary of the filing of the Form D or the filing of the most recent amendment, if the offering is continuing at that time.

If you wish to try your hand at electronic filing over the next six months, it is necessary to first obtain a CIK and CCC number (otherwise known as a log in and password) in order to access the EDGAR system. If you choose to file in paper until electronic filing is mandatory, you can either use the old Form D, which has been revised slightly and is called “Temporary Form D,” or you can use the new Form D that contains all of changes to the information requirements adopted earlier this year.

The Staff has also provided this additional guidance on the Form D filing process.

– Dave Lynn

September 12, 2008

The Need for Hold-Til-Retirement Provisions

In the September-October issue of The Corporate Executive – which was just mailed – the primary focus of the issue was on the need for companies to implement hold-til-retirement provisions for equity awards and how to pick what’s right for your company. With much help from Marc Trevino and Joseph Hearn of Sullivan & Cromwell, this issue contains a roadmap of the considerations you need to analyze when adopting these provisions.

In connection with this issue, we have updated our list of companies that we have identified as having hold-til-retirement requirements and the total is now over 40 companies (thanks to Equilar for helping spot some new companies). In comparison, at least two-thirds of S&P companies have some form of traditional stock ownership guideline, whereby executives are required to acquire and retain a certain value of company stock (usually a multiple of salary).

Thanks to Marc and Joseph, we have posted a slew of new sample documents in our “Hold-Til-Retirement” Practice Area on, including:

Sample Reports to Shareholders Describing HTR Requirements

Sample Proxy Disclosure of HTR Requirements

Sample HTR Requirement Policies

Sample Letters to Executives Announcing HTR Requirements

Sample Agreements Incorporating HTR Requirements

In addition, we have posted a number of other illustrative documents courtesy of ExxonMobil.

The September-October issue of The Corporate Executive specifically includes articles on:

– “Hold ‘Til Retirement” Requirements for Equity Awards: How to Pick and Implement What’s Right for Your Company
– Forms of HTR Requirements
– Reasons to Adopt
– Addressing Potential Criticisms
– Ten Steps to Designing the Program That Is Right for You
– An Additional Comment on ExxonMobil’s Approach
– Proposed Regulations for Section 6039 Returns
– Proposed Regulations for ESPPs
– A Roadmap to Comply with the SEC’s New Regulation FD Guidance

Take advantage of a “Rest of ’08 for Free” no-risk trial to have this issue sent to you immediately.

House Passes the Securities Act of 2008

Seventy-five years after passage of the “original” Securities Act, the House passed a bill yesterday titled the “Securities Act of 2008.” In a statement, SEC Chairman Cox applauded the House for passing legislation that seeks to enhance investor protections and provide more tools for the SEC’s enforcement program, noting that the bill incorporates recommendations that the SEC made to Congress. The bill was introduced earlier this summer by Representative Paul Kanjorski (D-PA).

It appears that the principal aim of the bill is to add provisions to the federal securities laws that would permit the SEC to assess and impose civil penalties in cease and desist proceedings, ranging in amount under a three-tier system from $65,000 to $650,000.

The remainder of the bill includes tweaks to a wide variety of provisions. For instance, the bill would authorize the SEC to censure, place limitations on the activities or functions of, or investigate any person who at the time of specified alleged misconduct was: (1) a member or employee of the Municipal Securities Rulemaking Board; (2) a person associated or seeking to become associated with a government securities broker or dealer; (3) a person associated with a member of a national securities exchange or registered securities association; (4) a participant of a registered clearing agency; (5) an officer or director of a self-regulatory organization; and (6) an officer or director of an investment company. In addition, the bill would amend the Exchange Act and the Investment Advisers Act to permit the SEC to bar certain persons from being associated with a broker, dealer, investment adviser, municipal securities dealer, or transfer agent who has engaged in alleged misconduct.

On the Corp Fin side of things, the bill would amend the Securities Act of 1933 to exempt from blue sky regulation any warrants or rights to subscribe to or purchase covered securities.

In addition to making amendments to the Securities Investor Protection Act, fingerprinting requirements and provisions relating to the nationwide service of subpoenas, the bill seeks to make a large number of technical corrections, some of which arising from the repeal of the Public Utility Holding Company Act. The bill would enhance protections for the confidentiality of material submitted to the SEC. Finally, a provision in the bill would require the SEC, the FASB, and the PCAOB to give oral testimony annually to the House Financial Services Committee on efforts to reduce the complexity in financial reporting.

– Dave Lynn

September 11, 2008

Just Posted: Notes from the 2008 JCEB Meeting with the SEC Staff

Be sure to check out these notes from the May 2008 meeting between the ABA’s Joint Committee on Employee Benefits and the SEC Staff. Mark Borges previously noted a number of the notable executive compensation disclosure interpretations coming out of this meeting in his blog, and several interpretations discussed at the May meeting were included in the Regulation S-K Compliance and Disclosure Interpretations posted in July.

The topics covered by the JCEB and the Staff go beyond Item 402 of Regulation S-K, and not all of the interpretations from the meeting make it into the Compliance and Disclosure Interpretations. The topics covered at this year’s meeting included Form S-8, Regulation S, Rule 701, Rule 144, Section 16 and the new Rule 12h-1(g) exemption.

On the Form 8-K front, the Staff noted that an Item 5.02(b) Form 8-K is not required when an executive officer is moved to a different executive officer position, unless the executive officer is moving into or out of one of the specified “principal officer” positions or is being demoted to a non-executive officer position. Further, the Staff confirmed that an Item 5.02(c) Form 8-K announcing the appointment of one of the specified officers must include disclosure about “any grant or award” made in connection with the event, even if it is a non-material, routine equity grant made to the officer at the time of appointment to the position.

The Freddie Mac and Fannie Mae Exit Packages

From Broc: As could be expected, the phone started ringing off the hook when it was announced that the government would be taking over Fannie Mae and Freddie Mac. These journalists posed the big question: what would the departing CEOs be taking home with them?

And they are not the only one posing the question – as this WSJ article notes, the Presidential candidates and some US Senators have weighed in by writing letters urging the Federal Housing Finance Agency to stop payment (the GSEs have their own regulator, the FHFA). Under a new law enacted in July, the FHFA has the authority to approve pay packages and prohibit or limit severance pay.

It’s too early to tell what will happen – although some outsiders have made calculations regarding what they are entitled to. According to the WSJ article, in an interview with the PBS “Nightly Business Report” on Monday, the FHFA Director James Lockhart said, “We’re not going to try to get part of the money back.” According to media reports, it seems like one CEO seems willing to rein in his own package (and has hired his own lawyer with his own money) whereas the other doesn’t appear as willing (and has hired his own lawyer with his former employer’s money).

It is noteworthy that the new Freddie and Fannie CEOs “will have salary and benefits significantly lower than the old CEOs,” which is great news since it’s the type of leadership that Corporate America has been sorely lacking. Someone stepping up and not demanding the excessive pay of peers.

And what am I telling the journalists who call me? I explain how to implement a clawback provision with “teeth” – as laid out in our Winter 2008 issue of Compensation Standards. The WSJ article cites statistics of the growing numbers of companies with clawback provisions – but I wonder how many of those really have teeth to avoid the sort of media crisis that happens when a company falls in the toilet and the CEO heads off to the links.

By the way, check out the investor relations’ home pages for Fannie Mae and Freddie Mac. Not a word – or link to something that mentions – the government takeover. And the IR profession wonders why it’s importance is diminishing…

Establishing GAPP: Principles for Sovereign Wealth Funds

The recently-formed International Working Group of Sovereign Wealth Funds announced last week that it has reached a preliminary agreement on a draft set of Generally Accepted Principles and Practices (GAPP), otherwise known by the catchier name of the “Santiago Principles.” The IWG was set up back in May to establish a set of voluntary standards for governance, accountability and investment practices of sovereign wealth funds. Now, the group has come up with principles and practices that the group says will “promote a clearer understanding of the institutional framework, governance, and investment operations of SWFs, thereby fostering trust and confidence in the international financial system.”

As noted in this transcript of the press conference announcing the Santiago Principles, the governance and accountability arrangements are geared toward providing comfort that sovereign wealth funds are separate from their owners, and that “the investment policies and risk management together with other things are intended to make it clear that sovereign wealth funds act from a commercial motive and not other motives.”

The GAPP will be presented to the Internal Monetary Fund’s International Monetary and Financial Committee on October 11th, once the respective governments with funds making up the IWG have had a chance to consider the preliminary recommendations. After that, the group expects to make the principles publicly available.

Tune into the webcast – “The Rise of Sovereign Fund Investing” – on October 2nd to find out about the latest strategies and investment techniques used by sovereign funds, as well as the latest issues raised in doing these types of deals.

– Dave Lynn

September 10, 2008

An Insider’s Perspective: How to Avoid a Yahoo-Like Tabulation Nightmare

As part of the Fall issue of, I got to spend some quality time with my good friend, the independent inspector Carl Hagberg to conduct an interview entitled, “An Insider’s Perspective: How to Avoid a Yahoo-Like Tabulation Nightmare.” In the interview, we get access to Carl’s many years of experience to better understand how the tabulation and inspection processes work. As borne out by the media attention to the voting result snafu at last month’s Yahoo annual meeting, this could be wisdom that saves you from a needless crisis at your own shareholder meeting. In Yahoo’s case, Carl explains how that snafu could have been easily avoided.

If you try a no-risk trial for for 2009, you get access to this Fall issue for free. Note that membership rates are very reasonable, starting at $295 for a single user through the end of ’09. And membership gets you free admission to the upcoming webconference: “The SEC’s New Corporate Website Guidance: Everything You Need to Know – And Do NOW.”

If you already have received an ID/password for this year, you can renew your membership for 2009 now (and get free access to this webconference, etc. for another year).

Survey Results: Disclosure Committees

Back in mid-2004, we conducted a survey on disclosure committees (here are those older results) – we recently canvassed folks again on this topic and here are the results:

1. Our company:
– has a disclosure committee – 97.8%
– doesn’t have a disclosure committee – 2.2%

2. Our disclosure committee has:
– more than 10 members – 37.2%
– between 8-9 members – 27.9%
– between 6-7 members – 27.9%
– between 4-5 members – 6.9%
– has less than 4 members – 0.0%

3. Our disclosure committee has the following types of members:
– CEO – 18.2%
– CFO – 70.5%
– Controller – 93.2%
– General Counsel – 75.0%
– Securities Counsel – 79.6%
– Compliance or Risk Management – 36.4%
– Investor Relations Officer – 77.3%
– Internal Auditor – 68.2%
– Officer from a Business Unit – 50.0%
– Other – 63.6%

Comparing the two surveys, it looks like the size of the disclosure committee has grown slightly (not surprising given the SEC’s 2006 exec comp rule changes that likely brought in some new members) – and more internal auditors joining the committee and some CEOs dropping off…

Please take a moment to take this “Quick Survey on CEO Succession Planning.”

– Broc Romanek

September 9, 2008

Our Roadmap: How to Comply with the SEC’s New Regulation FD Guidance

I just wrapped up the Fall issue of, which includes an article entitled, “Our Roadmap: How to Comply with the SEC’s New Regulation FD Guidance.” The article doesn’t merely summarize what the SEC just issued – it goes far beyond that. It includes numerous specific examples of what you should – and should not – be doing to comply with the SEC’s new guidance.

In particular, the article provides detailed implementation guidance about how you can build a “recognized channel of distribution” and “broadly disseminate” under the SEC’s new guidance. Among other topics, I address:

– Website Marketing and Maintenance: The Disclosure Committee’s Role
– The IR Web Pages: Search, Design and Accessibility
– The Challenges of Media Awareness
– Web 2.0: Pushing It Out

If you try a no-risk trial for for 2009, you get access to this Fall issue for free. Note that membership rates are very reasonable, starting at $295 for a single user through the end of ’09. And membership gets you free admission to the upcoming webconference: “The SEC’s New Corporate Website Guidance: Everything You Need to Know – And Do NOW.”

If you already have received an ID/password for this year, you can renew your membership for 2009 now (and get free access to this webconference, etc. for another year).

Did Bill Gates Wiggle His Tush? That’s Some Nonverbal Communication

Not many marketing types think highly of the new Microsoft advertisement featuring Bill Gates and Jerry Seinfeld (see this WSJ article). Personally, I liked it – particularly when Jerry fitted Bill’s feet for shoes. A size ten!

If you haven’t seen it, the TV commercial ends with Jerry soliciting nonpublic material information from Bill regarding whether Microsoft will be launching edible personal computers that are moist and chewy in the future. He asks Bill to give him a “sign” if something big is on the horizon, something like adjusting his shorts. And then Bill wiggles his tush.

This presents a perfect example of the type of nonverbal communication that Regulation FD applies to. I’m sure some of you remember the SEC’s 2003 enforcement case against Schering-Plough which focused on nonverbal cues. In that case, the company’s then-CEO disclosed “negative and material, nonpublic information regarding the company’s earnings prospects” at private meetings “through a combination of spoken language, tone, emphasis, and demeanor.” Bill, keep those hips in check!

The Impact of Regulation FD on the Flow of Information

A while back, ran this article that described a 2007 study on Regulation FD, which concluded that investors received less information after the adoption of the disclosure rule compared to before it. Given that growing numbers of companies are foregoing earnings forecasts, I can believe the report’s findings.

– Broc Romanek

September 8, 2008

21st Century Disclosure: Grundfest and Beller Weigh In with “Evergreen” Questionnaire

Back when the SEC announced its new “21st Century Disclosure Initiative” at the end of June, Chairman Cox credited former SEC Commissioner Joe Grundfest and former Corp Fin Director Alan Beller with originating the idea (which was named “Project Alpha” back in the day). Now, Joe and Alan have published a brief 8-page summary of their model for reinventing the SEC’s disclosure system (they plan to expand it into a more extensive article later).

With a somewhat dramatic flourish, Grundfest and Beller suggest that the SEC should abandon “all vestiges of the world of paper-based filings” in favor of a Web-based questionnaire. This questionnaire would replace the forms-based filing framework that currently exists (and could be accomplished without any legislative action or change to liability standards). Here is a summary of their summary:

– On-line questionnaire would be comprised of a combination of yes/no responses, pull-down menus, predefined fields and narrative responses; many of the questions would require “free form” narrative disclosure (e.g. MD&A).

– Going forward, companies would only need to update any items that have changed since the last reporting period – there would no longer be a need to repeat unchanged information.

– When a change occurs, this would be highlighted – so period-to-period comparisons would be possible.

– All exhibits would be centralized in a single location.

– Companies wouldn’t need to file their questionnaire responses directly with the SEC – rather they would post the responses either on an SEC website or on their own websites, with a ‘hash’ that authenticates the document as well as the date and time of posting.

The notion of “company-based disclosure” rather than periodic or current reporting is not a new one. It’s been battered around for quite a while. But with the Web facilitating things, it’s exciting to see that the SEC is seriously considering such a radical change. The SEC will be holding its first roundtable on the “21st Century Disclosure Initiative” in October.

My Ten Cents: “21st Century Disclosure Initiative”

Here are a few of my thoughts on the general notion of reforming the periodic/current reporting regime (note these do not relate to the Grundfest/Beller model specifically):

1. Don’t Overpromise Savings – Whatever ideas are floated to change the reporting regime, don’t sell it as a cost-saver. Even if you cut out the financial printers, etc., there will be new vendors that will have to be paid. And the time that lawyers haggle over language will continue to exist in bountiful numbers.

2. Don’t Underestimate Technological Challenges – If my memory serves, some of these ideas were kicked around back in the mid-90s when I was at the SEC. One hurdle that continued to pose insurmountable problems was how to enable companies to avoid filing all of their disclosure with the SEC. One of these concerns was security – can companies (or their vendors) post information on their own websites in a manner that couldn’t be hacked? Another type of example – Dominic Jones recently wrote about a possible tech snafu with the SEC’s XBRL proposal.

3. The Tricky Issue of Duty to Update – If a new regime requires companies to post their disclosure on their IR web pages rather than in the form of a Form 10-K and Form 10-Q, consider what investors will expect? Even if the SEC adopts rules clearly stating that this disclosure is not subject to a duty to update except on a quarterly basis (or more frequently for Form 8-K-like items), investors won’t necessarily know – or care – about that – particularly retail investors. They will be expecting the information they read on a company’s site to be current.

4. Cut to the Chase for Investors – This point really is the bottom line. If the SEC is gonna bother to rework their reporting regime, I think the focus should first be on delivering the type of information that investors covet most – i.e. forward-looking information, what is the company’s strategy going-forward, how is employee morale, a sense of what management is really like, do the directors really kick the tires, etc.

In other words, only a few discrete pieces of Reg S-K have been updated since the movement to integrated disclosure thirty years ago. Why not focus on whether the required information is still material in this day and age and whether the information is what investors truly want, rather than keep tinkering around with how the information gets delivered?

These are really tough issues to parse and have been tackled before. But this should be the starting point for the discussion and debate. I fear that the SEC may focus on “form” rather than “substance”…

– Broc Romanek

September 5, 2008

The Other Side(s) of the FAS 5 Coin: The Auditor and Investor Viewpoints

A few weeks ago, I blogged about how lawyers were not happy about the FASB’s proposal to reform FAS 5. Now that the comment period has expired, the views of the auditors and investors are available – some of which side with lawyers (and management) and most of which that don’t. For example, ran this article that summarized some of the objections.

Former SEC Chief Accountant Lynn Turner tells me: “The comments from the investor community are solidly in the camp favoring complete and timely information on loss contingencies. Now it is the unenviable task of the FASB to decide which camp they are in as their proposed statement was strongly supported by investors, and is consistent with their own conceptual framework. The question is whether the FASB will now water down what they have proposed.

As several of the investor comment letters note, it appears some companies are not currently complying with the current standards which raise the question of where is the enforcement. This issue also highlights that is probably not correct to say that there is an “expectation gap” difference between companies and their auditors and those in the investment community, as much as there is an out right ideological difference on what management of companies should have to report and disclose to the owners of the business.

And in the past, when on statements addressing such issues as off balance sheet SPEs, derivatives (No. 133), stock options (No. 123) and leasing, and the FASB chose to give companies what they asked for, it always seemed to come back to kick them on the backside when those standards had significant shortcomings or outright failures as a result of the compromises made.”

Here are other notable comments and analysis:

CFA Institute

Deloitte & Touche



BDO Seidman

Grant Thornton

AICPA’s Accounting Standards Executive Committee

AICPA’s Private Companies Section



Investors Technical Advisory Committee

John Feeney’s “ Blog”

Francine McKenna’s “Re: The Auditors” Blog

The Intersection of Rule 701 and Section 409A

Getting lots of great feedback on the new “The Advisors’ Blog” on, with new content from the 30-plus experts being posted daily. Yesterday, Gregory Schick of Sheppard Mullin blogged a great piece on the intersection of Rule 701 and Section 409A. Below is an excerpt from that blog:

The potential securities law compliance issue that is the source of my musings relates to Rule 701 of the Securities Act of 1933. Rule 701 is the easiest and primary way that companies obtain exemption from the registration requirements of the Act with respect to their compensatory stock options. Rule 701 imposes numerical limitations on the magnitude of equity securities that can be issued in reliance on Rule 701 in a twelve month period.

In particular, the aggregate sales price or amount of securities sold in a twelve month period cannot exceed the greater of: (i) $1 million, (ii) 15% of total assets or (iii) 15% of outstanding securities. Moreover, if relying on either (ii) or (iii) and the aggregate sales price of Rule 701-issued securities exceeds $5 million, then Rule 701 requires that additional disclosures (in essence, a prospectus) be provided to grantees. Such additional disclosures need to have been provided to grantees before they exercised their Rule 701 options and acquired shares.

The sales price for stock options awarded for purposes of these numerical tests is computed at the time of option grant and is calculated by multiplying the number of option shares by the per share exercise price. The SEC’s April 1999 adopting release of amendments to Rule 701 provides that “In the event that exercise prices are later changed or repriced, a recalculation will have to be made under Rule 701.”

Normally, such a recalculation would be performed (with favorable results) when there is an option repricing to lower the exercise price to equal a share fair market value that has declined since the grant date. But, what about if the option is repriced upwards in order to accommodate 409A? Presumably, options whose exercise price is increased to avoid being treated as a discounted option under 409A must also be recalculated for purposes of Rule 701 using the higher option exercise price. Would the recalculation be retroactively performed for the period when the initial grant was made or would the value of the amended option be included in Rule 701 numerical analysis as of the date of the amendment?

In either case, the effect of such an upward adjustment could result in the aggregate sales price exceeding the $1 million and/or total assets thresholds of Rule 701 whereas computations applying the pre-adjusted exercise prices did not. And, perhaps even more troubling, if the Rule 701 $5 million threshold was breached as a result of the recalculation, it could be problematic or even impossible for the company to comply with the additional disclosure requirements imposed by Rule 701 since it is quite possible that some grantees may have already exercised their stock options absent the benefit of the requisite additional disclosure.

Private companies that have increased their option exercise prices in order to comply with 409A may want to also re-examine their compliance with the numerical limitations of Rule 701 particularly if they are considering going public or being acquired since their historical securities law compliance will come under closer scrutiny. While it is possible that the company may be able to avail itself of another exemption under the Act (e.g., Regulation D for certain qualifying option grants), will these recurring 409A-related headaches never end?

The Battle Over Online Ratings

A while back, I blogged about the initial unhappiness over Avvo’s rating system – that service has evolved since then and seems to be doing well with consumers (and the litigation has been dropped). Now, the “Wired GC” Blog describes the latest dust-up regarding ratings involving TheFunded, a site that purports to offer information on VC firms and deal terms from anonymous entrepreneurs. This dispute involves anonymous online feedback…

– Broc Romanek

September 4, 2008

The SEC’s New Corporate Website Guidance: Everything You Need to Know – And Do NOW

I’m pretty excited about our upcoming webconference for “The SEC’s New Corporate Website Guidance: Everything You Need to Know – And Do NOW.” The agenda is jam-packed, ranging from the SEC’s Corp Fin Chief Counsel Tom Kim – to online experts Dominic Jones and Ryan Lejbak – to legal wunderkinds John Huber and Stan Keller, and many more.

This webconference will not just parrot the SEC’s new guidance (as most firm memos have done). Instead, all of the panels will provide detailed analysis and guidance about how to implement the SEC’s new positions. They will explore what the possibilities now are for companies – and how you can (and should) leverage them.

If you try a no-risk trial for for 2009, you get access to this webconference for free (including the upcoming Fall issue of our quarterly newsletter, in which I provide a detailed roadmap of how you can comply with Regulation FD under the SEC’s new guidance). Note that membership rates are very reasonable, starting at $295 for a single user through the end of ’09 (this gets you this webconference as well as the quarterly newsletter, and more to come on the site).

If you already have received an ID/password for this year, you can renew your membership for 2009 now (and get free access to this webconference, etc. for another year).

Here Come the E-Forums!

It appears that some companies intend to take advantage of the SEC’s new rules clarifying how to apply the securities laws to e-forums. This will be surprising to many who predicted that only investors would be sponsoring e-forums.

For example, Amerco has used an e-forum for its annual shareholders’ meeting the past two proxy seasons (see this description from the first year). And Michael O’Brien of iMiners (who will be speaking at our webconference) notes in his blog that Oxygen Biotherapeutics will soon be launching an e-forum via iMiners’ turnkey eShareholderForum solution. Looks like the smaller companies will be leading the way here.

Broadridge’s New Social Network?

Kudos to Dominic Jones of IR Web Report for catching Broadridge’s announcement about a proposed social network/e-forum called “Investor Network” during the company’s August analyst conference call. Chuck Callan of Broadridge will be explaining what this is all about at our upcoming webconference.

Below is an excerpt from an unofficial transcript of the conference call; scroll down for the portion that deals with the social network since I included additional comments at the top because they seemed interesting as well:

Rich Daly (CEO of Broadridge): Now, let’s move on to the business segment overview. I’ll start with our largest segment, Investor Communication Solutions. As I mentioned earlier, the ICS segment represents over 70% of Broadridge’s revenue and operating profits. We anticipate fee revenue growth for this segment in a range of 5% to 9% which feels great. Overall revenue growth will be in a range of 2% to 4%, but that’s just given the decline in postage.

We are anticipating close sales in a range of $100 million to $110 million, of which 50% is expected to be recurring and 50% is expected to be event-driven. Event-driven sales will primarily be related to mutual fund proxies. For the second year in a row, we’re expecting solid sales for both registered equity proxy and transaction reporting, which we expect will drive our recurring sales activity.

Our strategic leadership around Notice & Access in the core communications business has increased the chasm between Broadridge and our competitors. Our leadership in Notice & Access has resulted in industry-wide savings of an additional $140 million. The 600 or so companies that took advantage of the program realized significant savings in postage and print costs. Our industry leading Notice & Access solution gave us entre to sell our registered proxy services to over 350 new companies increasing our client count by 45% to approximately 1,200 public companies.

Despite the industry’s financial success from Notice & Access, the reduced rate of voter participation by retail shareholders that resulted remains an industry challenge, but it’s an opportunity for Broadridge to once again provide industry leadership. Notice & Access has had a slightly better financial impact on Broadridge than we originally anticipated. This was primarily due to winning new clients for our registered proxy services as well as selling a greater percentage of the ancillary services that are required to support Notice & Access.

Although other vendors offer these ancillary services, we believe we had a higher win ratio because of our strong one-stop shop value proposition and our subject matter expertise. In fiscal year 2009, we’re anticipating a 40% adoption rate for Notice & Access. The fact that we ended a full year with an adoption rate of 28% and we had an adoption rate during our fourth quarter proxy season of 31%, lead us to believe that 40% is a reasonable estimate.

Event-driven revenues are anticipated to be virtually flat to slightly down this year given the current economic environment we’re still in. Although we’re in a down market, we don’t expect to see the fall off in event-driven revenues that we experienced in fiscal year 2003, when it was down 30%. In fiscal year 2008, we did see a decline in proxy contest and M&A activity. However, the changes in mutual fund regulatory focus requiring more activity, our market share gains and our new products in the mutual fund space lead us to believe that there will be less volatility than we experienced in the past. As we exit this down market, we anticipate we’ll get back to realizing the greater than 10% CAGRs and event-driven revenue we experienced before in the past.

Now, I’ll talk about a few other product opportunities in this segment. Summary prospectus is a pending regulatory change related to how investment companies communicate with investors. It could result in mutual fund prospectuses going from 20 plus pages today down to, say, five or so pages. Although the regulatory change would most likely have a negative impact on our pick-and-pack fulfillment business, the change could drive opportunities for our print-on-demand business. Directionally, we view it similarly to the way we saw the Notice & Access regulatory change.

Our Investor Mailbox product which is part of our e-delivery solution is designed to streamline multiple delivery channels into a single visit financial portal that investors find on their broker’s Web site. This product is having a positive impact by converting investors from traditional hard copy delivery to electronic delivery. Investor Mailbox has been the primary driver for increasing our electronic delivery rate for proxies from 47% to 52% this fiscal year.

I believe one of the new and exciting opportunities is around what we’re calling the Investor Network. It’s really unusual for us to be talking about something so early in its development, but the range of this opportunity could be anything from negligible to a unique and meaningful financial social network which could be really big. The Investor Network is an online electronic form that will facilitate shareholder to shareholder communications with a unique feature that will differentiate it from the chat rooms in existence today. Investors who use our Investor Network will be validated as real shareholders. This feature will not only enhance shareholder to shareholder communications, but it will provide a new channel of communication between shareholders and companies.

When the SEC expressed a desire to enable better communications between shareholders using today’s online technology, Broadridge stepped up to help provide a workable solution by leveraging our unique capabilities. The Investor Network will validate shareholders through the core plumbing of the Investor Communications segment while allowing institutional, retail and professional investors to remain anonymous. We are uniquely positioned to create a vibrant social network that validates real shareholders while allowing both anonymity and accountability for any statements made online.

Through providing industry-wide technology-based solutions for Notice & Access, summary prospectus and the new Investor Networks, we continue to demonstrate that we are in the communications solution business and it’s so much more than merely an ink on paper or physical distribution business.

Operator: Our next question will come from Leo Schmidt with the Chubb Corp.

Leo Schmidt – Chubb Corp: First of all, very good quarter gentlemen. Could you give us a little more insight into this new product you’ve been talking about? I know you’ve been talking about growing sales through acquisitions and then through products you invest to networks. Could you give us some insight how big that you think you could grow that? Could you explain a little bit how that works? Would that be something that investors would pay for, companies would pay for, would this be mandated by the SEC? Would you page your goal or could you give us a little sense of how that works and I’m assuming the incremental cost would not be that much bigger additive to revenues? Could you give us some sense to that?

Rich Daly: Okay. Well, the first thing I’m going to give you the sense of, is really hard to say this early. I took the unusual step and we actually talked about it internally here, but I took the step of talking about it now since we will be meeting with so many new entities out there on this topic. I really had a need to make it public completely. So far, the experts we are working with view it as on a range as – some of them think, well, maybe it will work, maybe it won’t, maybe it will just be another social network. To some of them, their eyes bulge open and say, wow, this could really be a game changer.

The activity here is really going to be driven by, is the SEC going to deem that this is something that shareholders need to have the right to. And if that was the case, then I can’t imagine at getting done any other way than through the plumbing we have in place, and again that’s a chasm between us and any one else, no one else is close to connecting every investor to every public company.

If this is going to be something where it’s on a shareholder opt-in basis only, then the validation process becomes a little more complicated, but again we are uniquely positioned to create that validation. And that would be, I’ll called it, a more evolutionary process where we take longer for the network to gain hold.

Now, depending on which way it happens is depending on who will pay and what the model will be. If it’s an opt-in model, I expect it’s going to be probably similar to an eyeball model where there is going to be advertising, et cetera. If it’s a right of shareholders, then it could be a combination of fees and banner advertising or other related activities. We have a significant number of people internally and externally working on this. We are looking to use the best mind on this activity outside of here. But let me be very clear. I think it’s upside, I think there’s very little downside, but we’re certainly not putting anything in any numbers we are representing to you to related to the future as it relates to this activity. But it is meaningful enough that if it was to become a real deal, we would be uniquely positioned with a high quality social network with real investors who are validated accountable and have an amenity, and I will call it a place where serious people could have serious conversations about their investments.

Leo Schmidt – Chubb Corp: I am assuming that some regulator somewhere has made noise about how making this happen and this is part of the reason why you have interest in this. This is not — is that a fair assumption?

Rich Daly: I have had meetings with the SEC staff and the chairman of the SEC on this topic.

– Broc Romanek

September 3, 2008

The Mad Rush: Changing Your Advance Notice Bylaws

Now that the Delaware Supreme Court has affirmed the Chancery Court’s decision in Jana Partners (as well as the holdings in the Office Depot and CSX cases), as noted in this article, a number of companies are now crafting bylaws designed to flush out the actual size of activist stakes.

In the article, Professor Charles Elson notes that he wouldn’t be surprised if more than half of all US companies revise their advance notice bylaws in time for the 2009 proxy season. Tune in on Thursday for this webcast – “How to Change Your Advance Notice Bylaws” – so that you will be able to fully evaluate what you should be doing now.

This webcast is important because advance bylaw provisions are not boilerplate. Even if two companies have identical language in their advance notice bylaws, they may operate differently because companies in their shark repellent arsenal may (or may not) allow shareholders to call special meetings or act by written consent, etc., and because many companies have adopted a majority voting standard.

Here are a dozen questions that the panelists will be addressing during the webcast:

– Should companies that have their bylaws tied to the mailing of the prior year’s proxy statement consider revising their bylaws?
– What do the Delaware cases say about how long the advance notice period can be?
– How should companies deal with the interplay between Rule 14a-8 and their advance notice bylaws?
– In the wake of the CNET and CSX cases, are companies starting to incorporate the concept of “cash-settle only” and similar derivative instruments into their advance notice bylaw provisions?
– If so, how broadly are such concepts applied in their bylaws?
– Are you seeing companies incorporate the swap and derivatives concept into their poison pills?
– Are there any loopholes in these organic shark repellent provisions that the courts have not addressed?
– Are you seeing hedge funds and their investment banking and other institutional counterparties starting to shy away from total return swaps and similar derivatives arrangements in view of the CSX case?
– Apart from the recent judicial decisions, what mistakes do targets sometimes make with respect to their advance notice bylaws?
– What are the SEC Staff’s views on what is happening?
– At the end of the day, are the decisions in Openwave, C-Net and Office Depot contract construction and drafting error cases – or do they speak more broadly to Delaware corporate policy?
– Are folks over-reacting to all of this?

How Common are Rule 10b5-1 Plans that Buy?

In Bruce Carton’s new “Securities Docket,” he carries this item about a founder and chair of a company that has set up a 10b5-1 plan to buy his company’s stock because he believes it’s undervalued.

It’s not uncommon for companies to set up 10b5-1 plans to buy, but it is for executives. In talking this over with Alan Dye and Dave, this certainly isn’t a “first of its kind,” but it is rare. Slightly more common are 10b5-1 plans for directors to help them meet their stock ownership guidelines.

Our September Eminders is Posted!

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– Broc Romanek