September 25, 2008

Year Two for the CD&A: Our “3rd Annual Proxy Disclosure Conference”

With executive pay a key negotiation point in the bailout bill, rest assured that next year’s executive compensation disclosures will be more important than even. Last week, Mike Melbinger blogged three times about how the SEC Staff is now commenting on CD&A and other compensation disclosures as part of its Year Two review under the SEC’s new rules. Don’t forget that Corp Fin Director John White will serve as the keynote speaker for our upcoming “Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference.” If you can’t make it to New Orleans on October 21st-22nd, you can still catch this important conference by video webcast.

So act now for both the “16th Annual Naspp Conference” and the combined “Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference” & “5th Annual Executive Compensation Conference.”

Stock Repurchase Programs: Full Speed Ahead?

Last Friday, as part of its temporary emergency actions, the SEC issued an emergency order temporarily suspending the timing restrictions and significantly increasing the volume limitation for issuer repurchases under Rule 10b-18. Since then, I’ve seen a few announcement of stock repurchase programs from companies of all shapes and sizes, including Microsoft ($40 billion) and 3Com ($100 million). The SEC’s order expires next Thursday.

South Dakota’s Short-Selling Ballot Initiative

Below is an excerpt from a Morrison & Foerster memo on short-selling:

Some contend that the SEC’s actions are too little, too late. This November, voters in South Dakota will consider a ballot initiative called Measure 9 that could impact short selling across the United States. Promoted by American Entrepreneurs for Securities Reform, or ESR, a non-profit organization backed by small businesses, Measure 9 would amend sections of the South Dakota Uniform Securities Act of 2002.

The initiative is cast by ESR as a consumer protection measure that will protect South Dakota’s small investors by curbing naked short selling. Opponents of Measure 9 argue that the initiative is unnecessary, impractical, poorly drafted and unconstitutional, with the potential to halt all legitimate short selling activity in the U.S.

Several commentators oppose Measure 9 on the grounds that, as written, the ballot measure would effectively ban short selling altogether. The proposed law would permit the state to take action against a seller of stock in a publicly traded company if that seller engaged in a pattern of commercially unreasonable delay in the delivery of securities sold, or “has sold securities that the person did not own or have a bona fide contract to purchase.” This language tracks the definition of a short sale in Regulation SHO. The law would apply to any brokerage registered in South Dakota even if it does not have an office there.

If interpreted to ban short sales altogether, a broker that transacts short sales with investors in South Dakota would violate the law, regardless of where the transaction takes place or whether the transaction takes place or whether the transaction complies with federal law. Because a broker-dealer’s South Dakota registration is all that would be required to trigger liability under the law, some have predicted that Measure 9 would result in broker-dealers leaving the state or, alternatively, ceasing all short selling activities.

ESR and its supporters contend that the SEC’s efforts to restrict naked shorting have been ineffective and support additional regulation at the state level. From their perspective, the purpose of Measure 9 is to ban naked short selling by permitting South Dakota regulators to take action against broker-dealers engaged in a pattern of fails-to-deliver. Opponents of Measure 9 argue that the trading of securities occurs on a national market and accordingly, should be regulated solely by federal law to preserve consistency, making additional state regulation both unnecessary and impractical.

They predict that the introduction of additional legislation in various states will result in a confusing patchwork of inconsistent and contradictory rules, choking the very markets they are designed to protect. Additionally, they contend that proposed law would be preempted by the National Securities Market Improvement Act (and thus would be unconstitutional). These opponents point out that litigation over the law after it has been adopted (on preemption grounds) would be costly and time-consuming for the parties opposing it, as well as for South Dakota taxpayers.


Measure 9 is not the first proposal of its kind. Measures seeking to limit shorting have popped up in other states such as Virginia and Arizona, where legislation was introduced and quickly withdrawn, and Utah, where such a measure was overturned. Despite setbacks for these similar proposals, ESR plans to lobby for similar legislation in 19 additional states. Opponents of Measure 9 are concerned that the initiative, which addresses relatively sophisticated matters of securities law, will pass due to a lack of voter understanding, leading to unintended consequences in the national markets. Even if Measure 9 is not approved by South Dakota voters or is subsequently overturned, it, and similar proposals, as well as continuing market pressures, will place additional pressure on the SEC to demonstrate that it is proactive in its efforts to curb abusive short-selling practices. The impact of the SEC’s newest regulations on shorting activities, legitimate or otherwise, and whether the results will satisfy activist groups like ESR remains to be seen.

– Broc Romanek