Monthly Archives: November 2008

November 12, 2008

Your Upcoming Proxy Disclosures – The EESA Effect: What You Need to Do Now

Mark Borges and Dave Lynn are wrapping up the first issue of the Quarterly “Proxy Disclosure Updates” Newsletter, which is free for all those that try a no-risk trial to Lynn, Romanek and Borges’ “The Executive Compensation Disclosure Treatise & Reporting Guide.”

The first issue will tackle all that you need to be prepared to do now with your proxy disclosures, in the wake of EESA and other likely regulatory responses to the crisis. Subscribers will receive a second issue of the Updates newsletter in early January, with plenty of last-minute critical pointers for your proxy disclosures.

Try a No-Risk Trial Now: Order your Treatise now so we can rush it to you today – and we can send you the first issue of the Updates newsletter as soon as it’s done. Note there is a reduced rate if you are ’09 member of If at any time you are not completely satisfied with the Treatise, simply return it and we will refund the entire cost.

An Explosion of Unsponsored ADRs

I always thought unsponsored ADRs were a bad idea, because I think it’s very confusing for investors. As illustrated in this podcast with Rich Kosnik of Jones Day, it can be confusing for companies too. Rich explains why there is an explosion of unsponsored ADRs during the past few weeks – and provides some insight into how to handle them, including:

– What is happening with unsponsored ADRs?
– What caused this new development?
– How can companies know if unsponsored ADRs exist for them?
– What implications does this development have for companies (ie. crossing 300 US investor limit under Rule 12g3-2(a)? Is there anything that companies do to protect themselves?

We have been posting memos on this development in our “Unsponsored ADRs” Practice Area.

Revealed: My Real First Name

Long story, but the gist is that I was born “Barak Romanek” and I got tired of teachers botching my name growing up. So when I went to college, I changed it to “Broc” – although legally, it’s still “Barak” (pronounced with two syllables – but not the same as the President-elect’s name since he spells it with a “c” in the middle). Hence, my Avvo profile includes my real name (but according to Martindale Hubbell, I don’t exist anymore).

According to this NY Times article, there now will be a bunch of kids with something similar to my unique name. I have to admit that this freaks me out since I went all these years without once meeting someone with the same name. Anyways, I’m sticking to “Broc” as I love one syllable names…

– Broc Romanek

November 11, 2008

No Exit – No Venture Capital?

The IPO market for startup companies has been in the doldrums for some time – it’s been over 4 months since the last IPO in the US (although there could be this one soon)! According to this report from the National Venture Capital Association, there were only 6 venture-backed IPOs through the first three quarters of 2008. In contrast, in 2002, after the “dot-com bust”, there were 22 venture-backed IPOs.

The recent extreme volatility in the stock market hasn’t made the market for new issuances any easier. It’s now reported that there were no IPOs in the month of September, the first time that has happened since this data has been tracked, starting in 1980.

IPOs have long been the favored exit strategy for venture capital investors – they provide liquidity and allows VCs to invest their money again. And the splashy returns of an offering – read Google IPO – don’t hurt their ability to raise new money either. But even the traditional alternative strategy to an IPO – selling your startup to a big public company – hasn’t been easy this year either. The NVCA reports that M&A activity is also down – even companies with strong balance sheets are getting more cautious about spending their cash.

If market turmoil continues into 2009, and the IPO market remains virtually closed, will VC investors scale back their investments in start-up companies? A potential slowdown in VC investing is just one of the many unanticipated results of the current volatility in the market. Thanks to Linda DeMelis, our new Silicon Valley hire for this entry!

Latest Developments in Capital Market Deals

We have posted the transcript for our recent popular webcast: “Latest Developments in Capital Market Deals.”

Wanna Try Financial Suicide?

I got crazy a week ago and tried “day trading” for the first time in an effort to recoup some of my market losses. I bought an ETF that gives you two-times leverage selling short last Monday. Needless to say, I sweated through Election Day when the market rose 3% and then got lucky when the market dove the next two days in the biggest point drop over two days ever. I sold my position near the end of that second day and make out nicely.

But I got lucky. Trying to time the market like that would never work in the long run – and it’s my opinion that these leveraged ETFs shouldn’t be available to retail investors. In this market crash, retail investors in other countries got killed more than here because CDO-like securitizations were sold to them that were fortunately not sold in the US (and only because the SEC didn’t allow Wall Street to sell them here; the Street pushed hard to get them approved). Which leads me to wonder why the SEC has approved the new three times leverage ETFs that began trading last week. Even this WSJ article notes they are not appropriate for retail investors…

– Broc Romanek

November 10, 2008

Game On! The “Blue Justice League”

Something that I’ve been wanting to do for years is create a competitive environment under which we all can learn. I don’t want to use the term “game” because I don’t want to scare those of you with kids that live behind a console. I have built something simple and fun – the “Blue Justice League” is born!

Under two methods of ranking (ie. quantitative and qualitative), the “Blue Justice League” allows you to compete against your colleagues and peers – and lifelong enemies – in feats of professional strength and skill (and learn much in the process). I think it will be a lot of fun, whether you are a deal lawyer with nothing to do right now – or a jammed in-house officer with the need for some stress release.

How to Play: Here are simple instructions on how to participate in the “Blue Justice League.” Know that you can participate anonymously – in fact, you can use more than one “screen name” to play. For example, one of my names is “Jimmy Funk.”

How to Contribute: When you participate in the contests that make up the “BJL,” you will note that some of them have been drafted by members of our advisory board. My profound thanks to them. I’m more than happy to add contributions from you (you don’t need to be an experienced practitioner to do so) – so consider whether you want your name in lights. I’m happy to walk you through the process. Enjoy – and suggestions/criticisms of the BJL are more than welcome!

Corp Fin Issues More Shareholder Proposal Guidance – and Posts Incoming Requests!

On Friday, Corp Fin issued Staff Legal Bulletin 14D, the latest installment in pre-proxy season guidance on shareholder proposals from the Staff. This is the first SLB on proposals since ’05. The Staff Legal Bulletin tackles these topics:

– Inability of proponents to seek companies to amend board charters if state law empowers board to initiate amendments
– Sending defect notices if registered owner proponent hasn’t met holding period
– Requirement that proponents send copy of their correspondence to the SEC Staff
– New e-mail address for the Staff to which no-action requests and correspondence can be sent

In addition, Corp Fin has created a new page that contains incoming no-action requests that the Staff has not yet processed. This will be helpful for those in-house folk who like to track the other companies that have received a similar proposal during the proxy season.

More on Reforming Securities Class Actions Via Shareholder Proposals

Last week, I blogged about a Professor who claims to have developed this model proposal to reform the class action process through the Rule 14a-8 process. Shareholder proposal pro Marty Dunn weighs in by asking: How would such a provision not violate the anti-waiver provision of the ’34 Act?

Marty goes on to explain: Professor Pritchard proposes that shareholders “could adopt an unjust enrichment model by making a partial waiver of the FOTM presumption of reliance in the corporation’s articles of incorporation.” Because the proposed waiver would limit the extent of possible recovery by shareholders under the Exchange Act, the proposal’s waiver would run up against the anti-waiver provision in Section 29 of the Exchange Act. Professor Pritchard addresses this issue in his paper and dismisses it; however, given the SEC’s position regarding Section 29 and mandatory arbitration provisions in company charters, it seems unlikely that the SEC would agree with his reading of Section 29.

– Broc Romanek

November 7, 2008

John White: Short-Timer

Yesterday, Corp Fin Director John White announced he will be leaving the SEC at the end of the year, after working at the SEC for nearly three years. I understand that John will return to the law firm for which he spent over 30 years, Cravath Swaine & Moore. Like his predecessor, John has overseen an enormous amount of regulatory change on his watch – and we thank John for all he has done for the corporate community, including speaking out about responsible executive compensation disclosures.

Rumors: Who Will be the Next SEC Chair?

With the Democrats about to take over the White House, the media has commenced to guessing who will be the next Treasurer, SEC Chair, etc. As noted in this WSJ article that muses on regulatory reform, SEC Chairman Cox will likely leave in February.

When it comes to the next SEC Chair, I’ve seen some suggestions that I know are a non-starter – but others that may very well happen. Here’s some rumor fodder from the Legal Times:

– John Olson, Senior Partner, Gibson, Dunn & Crutcher
– New Jersey Governor Jon Corzine
– Mary Schapiro, FINRA CEO and Former SEC Commissioner and CFTC Chair
– Former SEC Commissioner and General Counsel Harvey Goldschmid
– MFS Investment Management Chair Robert Pozen

35% of Professionals Would Choose BlackBerry Over Spouse

Dave sent me this ABA Journal article that reveals the awful truth about many of you BlackBerry addicts out there. Although I’m proud to not own one, trust me that I have my own problems and work way too much. I mean waaay too much. Maybe I need a BlackBerry to keep me company…anyways, here is our own poll:

Online Surveys & Market Research

– Broc Romanek

November 6, 2008

Will They Ever Learn? TARP Participants and Perverse Compensation Amendments

For those financial institutions participating in the Treasury’s TARP Capital Purchase Program, you will be disturbed to learn that I have heard through the grapevine that some companies might take the opportunity to play it “cute” with how they revise their executive compensation arrangements in response to EESA.

In a perverse irony, these companies would amend their existing “double trigger” change of control arrangements to make them pure single triggers. Single triggers have been widely discredited in recent years and most companies have replaced them with more investor-palatable double triggers (ie. compensation is payable only (i) after a control change actually takes place and (ii) if a covered executive’s job is terminated because of the control change).

Apparently, some view single trigger payments as not being prohibited “golden parachute payments” under the Treasury’s program. I find it hard to believe that a movement back to single triggers is the result that Congress wanted – and I doubt investors will take kindly to this development if it indeed occurs.

Coming Soon: Mandatory E-Proxy

Since the end of last year, larger US companies (ie. large accelerated filers) have been required to post their proxy materials on their corporate websites. Soon, all companies engaging in proxy solicitations will need to do so as the SEC’s mandatory e-proxy rules for smaller companies become effective commencing on – or after – January 1st of ’09.

In this podcast, Matt Dallett of Edwards Angell discusses how smaller companies need to get ready to comply with mandatory e-proxy for the first time, including:

– What is mandatory e-proxy?
– What will be absolutely required and what is still voluntary?
– What do smaller companies need to do to get ready for mandatory e-proxy?

Reforming Securities Class Actions Via Shareholder Proposals

Bruce Carton’s “Securities Docket” includes this interesting piece on how Professor Adam Pritchard has developed this model proposal to reform the class action process through the Rule 14a-8 process (here is a paper on this topic too).

– Broc Romanek

November 5, 2008

Treasury’s Capital Infusions: Important Changes to Its Term Sheet

From Davis Polk: Last week, Treasury completed its investment in the nine systemically important banks – and, on October 31st, Treasury posted standardized final documents on its website. The final documents, reflecting comments from the nine systemically important banks, clarify a number of points and contain certain differences from the Term Sheet originally published on October 14th.

Although the final Term Sheet is little changed from the Term Sheet that Treasury originally published, an analysis of the underlying documents – the securities purchase agreement, the Warrant and the certificate of designations for the Preferred Stock – reveals some significant differences between those documents and the published Term Sheet. A revised Term Sheet, which has been marked to reflect the important differences between the Term Sheet and the final documents for the Capital Purchase Program, is set forth as Annex A of this memo (which also reviews those differences and certain other significant issues that financial institutions should consider before applying for funding under the program).

Treasury has stated that it will invest in each publicly-traded financial institution that participates in the program on the same terms in a “one-size-fits-all” approach, without change for individual financial institutions. We believe, however, that Treasury will consider modifications to accommodate important institution-specific issues, but otherwise will not agree to changes. Each financial institution will need to review carefully the final terms and the underlying documents to see if it can and would want to comply with them.

The application deadline for publicly-traded financial institutions is 5:00 pm Eastern next Friday, November 14th. Treasury has stated that it will post application information for privately-held financial institutions at a later date and establish a reasonable application deadline for them. Learn more from this memo (and the many others) posted in our “Credit Crunch” Practice Area.

Also note that Treasury – once the investment agreements are complete and the investment is authorized – will publicly disclose the name and capital purchase amount for each participating financial institution within two business days. The information will be posted here and updated daily at 4:30 pm Eastern as needed.

The Form 8-Ks: Participating in Treasury’s Capital Purchase Program

Below are some of the Form 8-Ks filed so far that relate to the EESA and the CPP. They include all nine of the original banks who “signed on” (the first six were filed on 10/30, the last three were filed on 10/31). Already more institutions have sought government money and their Form 8-Ks are included in our ongoing list in the “Credit Crunch” Practice Area:

1. Morgan Stanley

2. Wells Fargo

3. Bank of America

4. Bank of New York Mellon

5. Citigroup

6. Merrill Lynch

7. State Street

8. Goldman Sachs

9. JP Morgan Chase

Thanks to Todd Rolapp of Bass Berry for reminding me about these!

The NYSE Speaks ’08: Latest Developments and Interpretations

Tune in tomorrow for the webcast – “The NYSE Speaks ’08: Latest Developments and Interpretations” – to hear senior NYSE Staffers provide a wide range of practical guidance. Join these experts:

– John Carey, Chief Counsel –US Listings, NYSE’s Office of General Counsel
– Howard Dicker, Partner, Weil Gotshal & Manges LLP
– Carol Hoover, Managing Director, NYSE Regulation
– Cindy Melo, Managing Director, NYSE Regulation
– Bob Messineo, Partner, Weil Gotshal & Manges LLP

– Broc Romanek

November 4, 2008

Dissecting the SEC’s Ability to Rulemake During a Moratorium

During the past few months, a number of members have asked us about the SEC’s ability to rulemake during the White House’s ongoing moratorium on new rules by federal agencies. This moratorium was explained in our blog back in May. The extraordinary exception to the moratorium clearly isn’t responsible for all the SEC’s rulemaking during the past few months because some took place before the heightened crisis.

The issue of the applicability of an executive order to independent regulatory agencies has been a topic that recurs at the beginning – and the end – of every Presidential administration. The SEC has repeatedly tried to walk a fine line by taking the position that executive orders don’t apply, but that the Commission would adhere to the policy to the extent possible. For example, during early 2001, Laura Unger – when she was acting Chair at the start of the Bush Administration – announced that the SEC would abide by a rule moratorium imposed to freeze pending changes issued under the Clinton Administration. At the time, the SEC said that while the moratorium didn’t apply to independent regulatory agencies, the SEC would adhere to it to the extent possible (in fact, I thought that boilerplate for these types of executive orders typically requested that independent agencies follow it, but I don’t see that language in Bush’s May moratorium memo).

What About Rulemaking Before the New President Takes Office?

With the Presidential election upon us, the Congressional Review Act may now play a role (as this article notes, Bush is trying to cram down as many rules as possible now). It’s the law that created the Congressional rescission of an agency’s “major rule.” After rule adoption and publication, major rules must be submitted to Congress for a 60-day review period prior to becoming effective. The 60-day period is tolled
if Congress goes out of session for a 3-day or longer period. Since this is an election year, it’s possible that Congress will go “sine dei” until January, although Congress may well convene a lame duck session given the economic crisis. I think that for a rule to be effective, the SEC has to adopt it and the 60-day period has to run. This could cause a delay if there is no lame duck session.

Note there may be ways around the 60-day delay, such as an exigencies exception where the SEC can show a compelling reason to shorten the delay (there always seems to be this kind of exception). And bear in mind that this entire issue only arises if the rulemaking is “major” – there are alternate criteria, but “major” usually means a greater than $100 million annual economic effect in the aggregate. For example, to apply this litmus test to the SEC’s outstanding XBRL rulemaking, the efficiencies and benefits may be hard to quantify (and Chairman Cox likes to say that XBRL won’t cause much of an adverse impact to corporate bottom lines).

The art of rulemaking is not my area of expertise so some blanks may need to be filled in. If you scroll down on this “OMB Watch,” this legal quagmire may be better explained.

Regarding Bush’s push to adopt new rules before he leaves office, I couldn’t tell from the media reports whether the rules being pushed had been proposed back in June, in which case they would be consistent with his moratorium – or whether they were proposed by independent agencies that could make the same argument as the SEC. To me, aside from all of the technicalities, it’s just bad government to rush regulations just because the clock is ticking. Usually, that ends up with disastrous results…

Our November Eminders is Posted!

We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

– Broc Romanek

November 3, 2008

Mandatory XBRL: Coming Soon?

With the SEC’s proposed XBRL mandatory phase-in timeline looming – and SEC Chairman Cox likely a short-timer – it’s quite possible that the SEC will adopt final rules pretty soon. As you may recall, the SEC’s proposal would require the 500 largest US companies to start filing XBRL-tagged financial statements in the spring of 2009. A few weeks ago, Chairman Cox was a “no-show” as the keynote for the big XBRL International conference, but that likely had more to do with the demands of the credit crisis than the fate of XBRL. However, if final rules are not adopted soon, they may not get finalized on Cox’s watch (much to his chagrin) – and the SEC almost certainly will need to push back its timeline even they do.

Approximately 100 comment letters were submitted to the SEC on its XBRL proposal. A quick review reveals that the nature of the comments appear to be all over the lot. For example, CII’s comment letter voices concerns about the accuracy and reliability of XBRL (ie. the assurance issue) as well as the weaker standard of investor protection for XBRL compared to the financial data contained in traditional financial reports. Auditing firms – perhaps best reflected in this Deloitte letter – are understandably worried about their potential role in the assurance process.

In comparison, the 20-page comment letter from the ABA’s Federal Regulation of Securities Committee contains much commentary on the proposal’s liability provisions – and this Sullivan & Cromwell letter focuses squarely on this topic – and how they may expose companies to excessive liability. It will be interesting to see if Cox can pull off adopting something before he leaves.

Remember way back when the SEC decided it wouldn’t use “XBRL” anymore and instead use “interactive data” (because “XBRL” is too scary)? The SEC has held true to this change as the term “xbrl” is hardly used in the proposing release…

Whether the SEC Should Mandate Executive Compensation Data in XBRL?

Last week, Dave blogged about a company that has placed executive compensation data in XBRL for 4000 companies. As you may recall, in its XBRL proposing release, the SEC did not officially propose that executive compensation data be filed in XBRL, but it did solicit comment on this concept. Since it did solicit comment, the SEC arguably does have the latitude to adopt rules mandating XBRL for comp data without having to issue a re-proposing release under the Administrative Procedures Act (which is one of the many laws that govern agency rulemaking).

In footnote 94 of its proposing release, the SEC notes that Broadridge issued an XBRL taxonomy for proxy statements way back in December. I’m a member of many of the groups that would normally comment on SEC rulemakings of this nature and I don’t believe this Broadridge initiative hit many radars. Even now I haven’t reviewed this draft taxonomy, mainly because it’s not available unless you give Broadridge information about yourself – and I think that defeats the purpose of trying to obtain public comment on an idea. To date, Broadridge hasn’t provided any indication of what types of comments were collected (nor have I otherwise seen any evidence that anyone submitted comments to them).

Plus I find this reference odd because Broadridge is widely recognized as the leader in fulfillment, but it’s not considered an expert in drafting proxies. This is apples and oranges. In fact, Broadridge just went public last year and is so new of a public company, that it didn’t try e-proxy for its first annual meeting (nor will it do so for its upcoming second annual meeting).

Given the hubbub over the lack of “usability” for Broadridge’s e-proxy notices used during the past proxy season, I’m even more uncomfortable that the SEC is pointing to Broadridge to lead the way here. And it’s unusual that the SEC would seemingly use a third-party to solicit comments on its behalf. For all these reasons, the SEC should exercise restraint and not adopt rules mandating XBRL for executive compensation data until taxonomy in this area is more fully developed and that a more solid proposal is considered and commented upon.

Note that I remain a big Broadridge fan, as I continue to urge you to buy its stock, even though its been clobbered in this market downturn.

Some More XBRL Tools and Guidance

Hitachi has an “XBRL Blog,” which contains a bit of technical commentary. A lot of good stuff there if you want more information on the technical side.

On, RR Donnelley has partnered with EOL to tag ten years of data for all public companies. Once a company files financials (on either Form 10-Q or 10-K), this site tags the filings in XBRL within a 24-48 hour period and the information is available thru an Excel-based viewer.

XBRL Survey: Relative Levels of Preparedness

Recently, Compliance Week conducted a survey that revealed that of the 236 companies surveyed:

– 44% – just begun researching XBRL and their companies had done no previous testing
– 15% – no knowledge of XBRL at all
– 79% – no XBRL expert on staff at all
– 19% – have expert on the financial reporting team
– 2% – have expert in the IT department
– 7% – already participate in the SEC’s voluntary filer program
– 6% – done some small pilot tests
– 2% – testing their own systems comprehensively
– 30% – haven’t yet tested XBRL, but been following the topic closely

– Broc Romanek