Monthly Archives: February 2009

February 27, 2009

“Say-on-Pay” is On! Corp Fin Updates Its CD&Is

As I blogged on Tuesday, the SEC’s first batch of “say-on-pay” guidance wasn’t very clear. Yesterday, Corp Fin issued these updated CD&Is, which adds two new CD&Is to the ones issued on Tuesday. The new CD&Is now make it clear that the SEC is following the timeline outlined in Senator Dodd’s letter – and therefore all TARP companies will be required to conduct a “say-on-pay” advisory vote if they didn’t file their preliminary proxy materials before February 18th.

This is huge. Over 400 companies will now be doing “say-on-pay” this year! For TARP companies that have filed preliminary (and definitive) proxy materials since February 17th, I imagine they are freaking out. Shoot, I imagine all TARP companies are freaking out even if they haven’t filed yet – since their proxy materials must be close to final. Back to the drawing board. Chaos reigns supreme…how will RiskMetrics’ ISS suddenly come up with 400 recommendations they didn’t expect? Their say-on-pay determinations are case-by-case and fairly complicated. We’re posting memos on this new development in our “Say-on-Pay” Practice Area on

Wednesday Webcast: “Say-on-Pay: A Primer for TARP Companies”

To say there still are a number of open issues in how to frame say-on-pay in proxy materials this year is an understatement. But our experts will do their best to help you during this newly scheduled webcast to be held on Wednesday: “Say-on-Pay: A Primer for TARP Companies.”

On the Fast Track! NYSE’s Rule 452 Amendment to Eliminate Broker Non-Votes

Yes, the Schapiro SEC is a “new” SEC. Yesterday, the NYSE filed a fourth amendment to its Rule 452 proposal (there was also a third amendment filed accidentally the same day) – regarding the elimination of broker nonvotes in director elections – after the last amendment languished for nearly two years.

The 3rd amendment states the proposed effective date would be one that applies to shareholder meetings held after January 1st, 2010. It has a contingency that if the NYSE’s proposal is not approved by the SEC by September 1st, the effective date is then delayed for at least four months after the SEC’s approval – but it would not fall within the first six months of a calendar year. And it’s my feeling that the SEC is ready to approve the NYSE’s proposal, based on recent comments from a number of Commissioners.

This means that companies would not have the benefit of broker nonvotes for next year’s (ie. 2010) proxy season. This is even a bigger development than the item above! A “sleeper” in the sea of regulatory reform as this could be the “last straw” that alters the power struggle between shareholders and boards. However, note this recent NY Times article that brokers may be voting broker nonvotes against management this year! We’ll be posting memos on the NYSE’s proposal in our “Broker Non-Vote” Practice Area.

NYSE Adopts Temporary Suspends $1 Closing Price/Extends Reduced Market Cap Listing Standards

As rumored a few days ago, the NYSE filed an immediately effective rule change with the SEC yesterday that:

– Suspends the $1 average closing price requirement (requirement is couched in terms of being below a buck for a consecutive 30-trading day period) until June 30th. This may provide relief for companies now in the 180-day compliance period following notification of a $1 closing price deficiency.

– Extends existing temporary reduction of the $25 million average market capitalization requirement to $15 million (which was set to expire on April 22rd) to June 30th

– Broc Romanek

February 26, 2009

Some Pretty Wild Proposals in Delaware

In our “Delaware Law” Practice Area, we have posted some memos explaining the new proposed amendments to the Delaware General Corporation Law. The proposals include a number of interesting provisions, including proposed new statutes on proxy access and reimbursement bylaws, indemnification matters, judicial removal of directors and authorization to separate record dates for notice and voting at shareholder meetings.

Typically, proposals don’t become final in Delaware until early August. It will be interesting to see if these proposals get adopted as proposed…

Tips: Liquidity and Capital Resources Disclosure

Janice Brunner of Davis Polk notes these suggestions that the Corp Fin Staff gave during the recent PLI “SEC Speaks” regarding what companies should consider when drafting liquidity disclosures:

– Does the company have the ability to raise capital in the current markets?
– Has the company contemplated or is the company contemplating a sale of assets?
– Are the company’s customers paying or delaying payments? Is the company losing customers?
– Are goodwill or other long-term assets impaired? If an asset is impaired, what is important is not the non-cash charge but the reason for the impairment. The Staff wants to know the “story” behind the impairment.
– Is the company meeting its debt covenants?
– What is the impact of current market conditions on the company’s pension plans?
– Are there material uncertainties about the company’s ability to continue to operate as a going concern?
– What other stresses or trends are impacting the company’s ability to meet its operating needs? For example, does offering zero percent financing substantially impair the company’s liquidity?

This is another example of the fine contributions being made to the “Proxy Season Blog,” as this was posted there last week. Members should input their email address on the left side of the “Proxy Season Blog” to get it pushed out to them regularly.

Deal Cubes: Fond Memories

This commentary by Christine Hurt on the “Conglomerate Blog” brought back fond memories regarding my long lost collection of deal toys. Well, not really “lost.” More like “tossed” after a few years passed and I began to realize that those 3000 billable hours per year perhaps weren’t the best days of my life.

I had quite a collection as I worked on an average of one IPO per quarter as issuer’s counsel and one more as underwriters’ counsel. Plus a bunch of secondary offerings and M&A thrown in. So after 5 years, I had over 100 cubes. There I go again, glamorizing my status as a dutiful slave. Anyways, feel free to share your deal cubes stories with me – I’ll keep them confidential. And if you’re feeling sentimental about not receiving any toys lately, you can always look at the pictures

The “Deal Cube” Poll

Please take a moment to take this anonymous poll; current results are provided after you’ve made a choice:

Online Surveys & Market Research

– Broc Romanek

February 25, 2009

Corp Fin Issues “Say-on-Pay” Guidance: Slim Pickings

Late yesterday, Corp Fin issued this set of “American Recovery and Reinvestment Act of 2009″ CD&Is, which contain three Q&As regarding how to implement the “say-on-pay” provision of ARRA. Unfortunately, these Compliance and Disclosure Interpretations don’t answer many of the questions we have been hearing. The three Q&As boil down to:

– Say-on-pay only applies to shareholder meetings at which directors are to be elected
– Addresses how the rules apply to smaller reporting companies that are not subject to CD&A disclosure requirements
– Notes that “a company that determines to comply” must file a preliminary proxy statement – and you should contact the Assistant Director of your industry group if that causes timing problems (for me, this begs the question – how can a company determine not to comply?)

As for the effective date of Section 7001 of ARRA (which amends Section 111 of EESA), the CD&Is are semi-silent; they just note Senator Dodd’s letter that I blogged about recently, which states his views about the effective date. I’m not sure how much precedential weight to put on a letter from a Senator. Does it get bolstered by a mention from the Staff? Do they teach this stuff in law school now-a-days (e.g. a Senator letter is bigger than a bread basket, but smaller than a Conference Report; yes, I’m feeling cheeky today)?

The third Q&A suggests that there is some other way to comply with Section 111(e)(1) – could a company possibly just include a shareholder proposal that asks a company to adopt say-on-pay? Probably not. There are lots of open issues and we may have to wait until the SEC conducts its required rulemaking under Section 7001 until we have firm answers.

For the academics out there, it could be interpreted that Section 7001(h) allows Treasury to adopt say-on-pay regulations to fill in the gap before the SEC adopts rules under Section 7001(f)(3)(under which the SEC has one year to adopt rules). Unlikely, but anything is possible…

Slowing the Delisting Tide: NYSE May Suspend $1 Price Requirement

As noted in this Bloomberg article, the NYSE is weighing whether to temporarily suspend its requirement that listed companies maintain a share price of more than a $1 to prevent a wave of delistings. This would follow last month’s temporary lowering of the market cap requirement.

The Direction of Mary Schapiro’s SEC – and the Proposed IFRS Roadmap

On Monday, the NY Times ran this pretty interesting article on the new SEC Chair Mary Schapiro, some of which was based on an interview. Lots was said about enforcement.

If she lands current PCAOB board member Charles Niemeier to serve as the SEC’s Chief Accountant (he used to be the SEC Enforcement Division’s Chief Accountant) as mentioned in the article, I wonder what that means for IFRS in the US given his well-known unfavorable views of it. This past week, the IASB was in DC urging IFRS adoption by the SEC before Sir Tweedie steps down as IASB Chair.

Here is a counter-view from a group that raises serious questions about the existing plan advocated (and here is another one) and suggests a different approach. A few weeks ago, the SEC extended the comment deadline for its IFRS roapmap proposal to April 20th – but comments have dribbled in already…

Lessons Learned from the BCE Buyout: Bondholder Rights, Litigation Issues, Etc.

Tune in tomorrow for this webcast: “Lessons Learned from the BCE Buyout: Bondholder Rights, Litigation Issues, Etc.” Please print off these course materials in advance.

And stay tuned for this March 19th webcast on “The SEC Staff on M&A.”

– Broc Romanek

February 24, 2009

With Scant Apologies to the Pay Apologists

One of the more disappointing aspects of this market meltdown has been the lack of leadership from the top of Corporate America. So few CEOs have spoken publicly about what can – and should be – done to fix what ails us. There has been panic in the air for over six months, and this may well accelerate if some of our biggest banks are nationalized. Where is the leadership? Hence, the “Slap a CEO” game.

Even more perplexing to me is that a few lawyers are finally speaking up about executive pay – but they are speaking up to defend past practices and urge that they be continued (in comparison, many tell me privately that they agree with our mission to rein in excessive pay). Lawyers have long ago given up the mantle of being perceived as responsible leaders in the community. This surely will not help the profession’s cause.

I’m not saying that Congress’ (and Treasury’s) latest approach to reining in executive pay is without fault. I firmly believe that Congress should not legislate executive pay and have long said that. But I don’t blame them for trying to stem the tide because those involved in setting pay have long ignored the fact that the pay-setting processes are broken (here’s my explanation for how they are).

Change Won’t Happen Until Boards Want Change

Unfortunately, the sad truth is that even if the legislated/regulated pay fixes were perfectly set so that pay would be aligned with performance, etc., the fixes still wouldn’t work until boards and their advisors wanted them to work. They always seem to find a “work around” to keep the excessive practices flowing. Part of the problem is a culture of “all CEOs are deities and couldn’t possibly be replaceable” as well as a failure to recognize that the client is the company, not the CEO. The current state of executive pay remains a huge corporate governance problem – as pay has unintentionally racheted up over the past two decades – and needs to be rolled back.

Unmasking the Myths

These pay apologists continue to argue that CEOs will run to the nearest private equity/hedge fund if they aren’t paid along the lines of the past. I say let’s see. I think most boards will find that their CEOs aren’t going anywhere fast if given the option to depart, particularly given the state of those funds.

Most of the arguments against responsible pay arrangements revolve around the fact that CEOs have amassed so much wealth that they don’t need the company anymore. Which is exactly the point. I hear the argument that hold-through-retirement won’t work because it incentivizes a CEO to retire and collect their accumulated equity now (Note that our approach encourages long-term holding until “the later of” – and Exxon Mobil has shown that it works. Here’s our analysis on how to implement hold-thru-retirement). That may be the case for this generation of CEOs who have amassed ungodly sums of money – but if pay packages are brought back to Earth, this won’t be a continuing problem because your CEO won’t have amassed $100 million in a few short years and will need to keep the job.

There has to be a modicum of common sense in negotiating these pay packages. How can one be motivated to do a better job getting paid $10 million per year versus $5 million? If you earned 5 mil, wouldn’t you give 100% of your effort? Boards need to get off the peer group survey train and do their own homework, starting from scratch and using internal pay equity as an alternative benchmark.

Now that so many responsible tools and processes have been identified, it’s time that companies start using them. Fortunately, some companies have started – as Mark Borges recently identified in his “Proxy Disclosure Blog.”

Compensation Arrangements in a Down Market

Tune in on March 24th for this webcast: “Compensation Arrangements in a Down Market.” Among the important topics, the webcast will cover these types of common situations:

– A company’s stock is down 60% and due to a goodwill impairment, it will report a loss of close to $900 million. The committee decided to exclude the impairment in the annual incentive plan calculation, and now the bonus is being paid at 75% of target. The committee decided to pay the bonus in stock, so the non-equity incentive column for 2008 shows zero, and the stock award shows up in the GPBA table next year. Is that permissible?

– A company is concerned about ISS and the pay-for-performance test, so they are ensuring total compensation is less than for the prior year. What should be considered?

– A company does not want to disclose its business unit performance targets, but it’s afraid that the SEC Staff will reject their competitive harm arguments. What can – and should – it do?

– A CEO does not want to look “grabby,” so she wrote a check for personal use of the aircraft in order to fall below an ISS limit of $110,000. What is there to consider?

In anticipation of Treasury issuing its exec comp regulations in the near future, we have calendared a webcast for March 11th – “New Treasury Regulations and the American Recovery Act: Executive Compensation Restrictions” – so you can get guidance as soon as it comes out.

Nell Minow on Outrageous CEO Pay—and Who’s to Blame

For this BusinessWeek article, Maria Bartiromo recently conducted this interview with Nell Minow of The Corporate Library:

Anger over enormous executive compensation has been rising for years. Are we at a watershed moment?

Yes, I think so. All the scandals I have lived through going back to the savings and loan crisis, insider trading, Enron, and WorldCom seemed very localized—they were about something that everyone could understand. There were people who behaved unethically, and we got to see some very satisfying perp walks. But in this case, because the problem seems so systemic and there has been no indication that anyone has done anything illegal, that has fueled a level of rage I have never seen before.

I used to compare some of these executives to Marie Antoinette, but a better comparison is Nero. When the stories came out about [former Merrill CEO John] Thain and his $1,400 wastebasket and the corporate jets and the bonuses, that makes people feel that not only did the business community create this problem, but they don’t care how bad it gets. I will tell you that the biggest disappointment I’ve had in this mess has been the absolute vacuum of leadership on the part of the business community.

The public may be angry, but don’t stockholders have to get angry, too, for there to be any dramatic changes?

I’m so glad that you brought that up because all the reforms going back to Enron and before always focus on what they call the supply side of corporate governance, which is what the boards must do, what the corporations must do, what the accountants and lawyers must do.

And we have completely failed to address the demand side of corporate governance, which is what shareholders must do. Shareholders have reelected these directors, have approved these pay plans, and have been enablers for the addictive behavior of the corporate community.

The stimulus bill reins in compensation for executives of banks or companies receiving bailout money. Is that fair?

I think there are two important points to make about it. The most important is that this is not the government regulating CEO pay. This is capitalism. This is the provider of capital insisting on some improvement in CEO pay. And whether you are a distressed company that goes to a private equity firm for help or to your Uncle Max for help, those people are going to insist on some kind of a giveback with regard to pay. So this is a business partner negotiating.

Caps don’t really have much of an impact, but they send a powerful message. To me, the interesting part is the restricted stock. The fact that there’s no limit on the restricted stock means that you can earn a zillion dollars under this program as long as you earn it. And the fact that it cannot vest until the government gets [paid back] is very, very good. It really does the best job possible of aligning the interests of the managers with the interests of investors and taxpayers.

Can you explain how compensation contributed to the mess we are in now?

Certainly. With regard to the subprime mess, compensation was structured so that people were paid based on the number of transactions rather than the quality of transaction. And it doesn’t take a rocket scientist to figure out that that is going to lead to disaster.

How has executive pay ratcheted up to such a level?

In part, the answer is that the last time the government tried to fix [outsized executive compensation], there was no limit on stock options. At the time you didn’t have to expense stock options, and they just mushroomed. So we want to have some humility going forward about efforts to correct this problem we helped to create the last time we tried to correct it. And there was a cultural element that led to this as well. I always say that investment bankers are the geishas of the financial world because they sit next to the CEO and laugh at his jokes and talk about what a big strong man he is and wouldn’t it be fun to buy something together.

And so CEOs looked at the investment bankers and said to themselves, “This guy’s making more than I am. I am a titan. I’m the CEO of a great big company. I’m responsible for all these employees and customers, and all this guy does is move numbers around. I should be paid as much as he is.” And then we have what we call the virus directors—directors who move from company to company and bring bad pay plans with them. So you have people like [Home Depot (HD) founder] Ken Langone, and you find him on the compensation committees of GE (GE), approving Jack Welch’s retirement plan, Dick Grasso’s at the NYSE (NYX), and [Bob] Nardelli’s at Home Depot (HD). He personally was involved in three of these outrageous plans.

So compensation committees are at fault?

Yes. I absolutely blame them 100%. I’ve given up on any other reform other than the ability to replace directors who do a bad job. Without that, as long as you still have this very cozy interlocked system of having CEOs control who is on their boards, you’re going to have no incentive for directors to say no to bad pay.

I mean, when Warren Buffett says that he has knowingly voted for excessive compensation because collegiality trumps independence, you know that there’s something really wrong with the system.

– Broc Romanek

February 23, 2009

No-Action Letters for Shareholder Proposals: The Challenge of Reading the Tea Leaves

One of the toughest jobs that Corp Fin faces ahead of every proxy season is making hundreds of no-action determinations related to Rule 14a-8 exclusion requests. These requests from companies seek to exclude shareholder proposals from their proxy statements.

The number of Staffers processing these requests is surprisingly small (i.e. slightly less than two dozen) and they take their job seriously, creating lots of internal documentation to back up the ultimate decision on a particular request. As a result, these Staffers work very hard over a three-month period. Each decision of the Staff hinges on the specific facts and circumstances related to the proposal and supporting statement – and it is not unusual for the Staff to conduct its own research beyond the arguments provided by the company and the proponent.

Since each response is so fact-specific, the response letter often is quite brief and doesn’t get into the specifics of “why” a proposal was allowed to be excluded or vice versa. The Staff simply doesn’t have the resources to take their responses this extra step. Due to this process, it’s not uncommon for folks to detect a new trend in the Staff’s thinking that might not really be there – some of the close calls that the Staff is required to make is akin to splitting hairs. If the Staff reverses course on a particular line of responses, it typically signals such a change in a speech or other communication (or at least, this is something that it should do).

What is the Meaning of Regions Financial?

That’s why it’s my hunch that the Staff’s recent Regions Financial response on a TARP-related proposal was not a reversal of an earlier response provided to SunTrust, as each response was based on the facts unique to each request. I can understand why RiskMetrics could have interpreted it otherwise (as others have done), because the proposals themselves are very similar. Plus, there is the backdrop of institutional investor clamoring for Presidential pressure on the SEC to overturn its exclusion of a variety of meltdown/risk related proposals (eg. December letter from 60 institutional investors to Obama).

As noted in the SunTrust response, the Staff explained that exclusion was permitted in that case under Rule 14a-8(i)(3) because the proposal was deemed vague and indefinite since it failed to “impose a limit on the duration of the specified reforms.” The Regions Financial proposal seemingly could have been permitted to be excluded due to the same rationale.

But it wasn’t. I think the reason for that is based on the different arguments set forth by the respective proponents in their correspondence. Note how the Staff took extra efforts in its response to note this quote from the proponent’s own argument: the “intent of the proposal is that the…reforms…remain in effect so long as the company participates in the TARP.” In comparison, the proponent in Regions Financial provided arguments about why such a duration limit is unnecessary and perhaps won the day based on that. Perhaps this is hair-splitting, but my hunch is that this indeed was going the other way on a close call – and not really a more formal Staff reversal of position. But I could be wrong…

By the way, I keep getting asked which Staffers are heading up the “Shareholder Proposal Task Force” this season. We always list who is heading up the Task Force at the bottom of our “Corp Fin Organization Chart.”

SEC Commissioner Walter: A Noteworthy Speech

A few weeks ago, SEC Commissioner Elisse Walter delivered this speech entitled “Restoring Investor Trust through Corporate Governance.” Under the new Chair’s reign, it appears that Elisse will have more influence than a typical Commissioner due to her long-standing relationship with Mary Schapiro, as well as the fact that Elisse had spent considerable time working in high-level Staff positions at the SEC earlier in her career (including Corp Fin Deputy Director).

Here are the main points from Elisse’s speech:

– Supports shareholder access – not only indicated support for access but she’s open to new approaches other than the ones that the SEC proposed in ’07 (which she is troubled by), even wants to reconsider original ’03 access proposal

– Supports enhanced disclosure about director nominees – this falls in line with what SEC Chair Schapiro mentions in this Washington Post article from Friday

– Wants to fix e-proxy to improve shareholder participation – agrees with Commissioner Aguilar on this one

– Wants to consider NYSE’s proposal to eliminate broker non-votes from director elections

– Believes “tone at the top” can be improved through “say-on-pay” when it comes to executive compensation

“Say-on-Pay”: SEC Guidance Coming Soon?

Section 7001 of Title VII of Division B of the “American Recovery and Reinvestment Act” – which amends 111 of EESA – requires TARP recipients to permit a non-binding say-on-pay vote. It also requires the SEC to issue rules to govern this requirement within one year. We have received many questions from members seeking input into how this should be accomplished during this proxy season in the absence of SEC guidance.

Well, we might get guidance from the SEC soon enough. On Friday, Senator Dodd sent this letter to the SEC sharing his views on the intent and application of the say-on-pay provisions in ARRA and asking the Staff to provide guidance “as soon as practicable.” Senator Dodd stated that:

– “Say-on-pay” voting applies to preliminary and definitive proxy statements filed after February 17th except for definitive proxy statements regarding preliminary proxy statements filed on or before February 17th

– CEO/CFO certification requirement is not effective until Treasury releases its upcoming guidance the FSP’s executive compensation restrictions

In “The Advisors’ Blog” on, I identify a few of the issues that the SEC hopefully will address in their guidance…

– Broc Romanek

February 20, 2009

What is the Proper Board Size?

There hasn’t been any debate over “what is the appropriate board size” for years – not since companies that had too many directors (eg. 20) reduced their board size, primarily through attrition. Many boards trimmed down to a range of 9-13 directors (see our “Board Composition” Practice Area).

I found it interesting that Eddie Bauer has announced that it’s reducing the size of its board from ten to seven. This change is primarily a cost-cutting measure as the company is also cutting the compensation of its remaining directors. On its face, this makes sense when you’re cutting employees and undertaking other cost-savings measures.

On the other hand, boards are under pressure to be more actively involved in overseeing the company and many have enhanced committee duties. In fact, I imagine that many boards will be adding members to better manage risk and perhaps be needed to sit on new risk management committees. So I’m not suggesting that cutting board compensation is not a good idea, but I do wonder whether cutting the board’s size is appropriate.

Tune in March 4th for our webcast – “How Boards Should Manage Risk” – and learn more about one of the hottest topics out there today.

Dividend Reduction or Elimination

In this podcast, Ben Preston of Womble Carlyle explains what actions companies should consider when reducing/eliminating their dividends, including:

– What factors should management and the board consider before cutting a dividend?
– What board actions, including resolutions, are required to cut a dividend?
– What type of other shareholder or employee communications may be necessary?

Khuzami Named Enforcement Chief – and a Corp Fin Director Poll

Yesterday, the SEC named former federal prosecutor Robert Khuzami as the new Director of the Division of Enforcement as previously reported.

Next up? A new Director of Corporation Finance…please cast your vote for who’d you like to see in that position (here is a video for those not familiar with the “Man from Glad”):

Online Surveys & Market Research

– Broc Romanek

February 19, 2009

The PCAOB’s International Inspections: Heightened Importance Post-Satyam?

Last month, the PCAOB adopted an amendment to Rule 4003 (as well as proposed a separate amendment to that rule) relating to the timing of certain inspections of registered non-US companies. Given the breath-taking revelation by Satyam’s CEO of prevalent fraud perpetuated by the CEO, it’s unfortunate that the PCAOB has not been inspecting the foreign affiliates of the US audit firms, such as the Indian firm auditing Satyam, because the budget that the PCAOB submits to the SEC has not provided sufficient funds for such inspections.

As we saw in the past month with Madoff’s auditor who was not undergoing inspections, a lack of independent inspection of auditors has led to undesirable results, and is a major shortcoming on the part of the regulator and regulatory system. This is also especially interesting as the major auditing firms are now outsourcing portions of their audit work to India. With the developments below, this should give investors great concern. Especially at a time when some on the PCAOB have espoused a view that the agency should just rely on their foreign counterparties thru a system referred to as mutual recognition.

Lynn Turner teaches us about how audits of non-US companies are conducted:

There are two types of foreign audits. The first one is one in which a foreign company that lists in the US, is audited by a foreign audit firm, who renders the auditors report on the financial statements. That could be one of the large international audit firms or a local firm in that foreign country.

The second type of foreign audit work, often called “referral work” is when a US audit firm, such as one of the Big 4, audits a large international conglomerate such as IBM or Coca Cola. The US audit firm audits the revenues, assets, internal control and accounting systems in the US. The US audit firm then refers the audit work on the foreign operations to one of the audit firms affiliated with them in the respective foreign countries where the foreign operations exist and are accounted for. These are two separate and distinct firms, with separate management but affiliated for marketing and branding purposes.

Referral work is becoming more significant and having additional risks evolve for investors as the US audit firms are now also farming out to foreign affiliates, such as in India where the cost of labor lower, some of the audit work that in the past, would have been performed on the audit of the US operations of these companies. They are in essence, now outsourcing a portion of the US audit work and writing into their audit engagement letters that this can be done.

I have also been told by various sources that some of the Big 4 have been trying to set up structures internationally to avoid inspections of their foreign audits. Also some foreign entities such as the EU have been pushing the PCAOB to just go along with whatever independent oversight or inspections ( in many cases which is none) are done internationally. However, it is unlikely they will be bailing out the investors who have suffered losses in Satyam.

A New Angle: Investor Liability for Ponzi Schemes?

From Keith Bishop: In light of Bernie Madoff’s alleged Ponzi scheme, this recent opinion in Donell v. Kowell from the 9th Circuit Court of Appeals should be of some interest. The case addresses the liability of a good faith investor in a Ponzi scheme. The appellate court upheld liability under the Uniform Fraudulent Transfer Act as adopted by California.

Liability was based on a positive netting of the amounts paid by the Ponzi scheme to the investor against the initial investment. Then the court applied the applicable statute of limitations to determine the actual liability. The investor advanced several legal theories for why he shouldn’t be liable, but all were rejected on appeal. Here is a memo on the case.

Some Thoughts on the Madoff Scandal: Blame Thyself

A member recently sent me this: “I feel a rant coming on to the effect that any charitable foundation or endowment that lost 100% – or even 50% – of its entire net worth with Madoff has itself to blame. Prudent allocation theory would say that an institutional investor should have no more than 10-20% of its assets in alternative investments like private equity, and then that commitment should be diversified among at least several managers. The Madoff fund, I believe, was not sold as a diversified fund – so how could a prudent fiduciary invest all or even half of his or her assets with that one manager? At most, any institution should have lost maybe 5-10% of its assets to Madoff.”

– Broc Romanek

February 18, 2009

Cold Hard Fact: Investors Don’t Read Disclosures Today

As timely covered by Dominic Jones in his “IR Web Report,” SEC Commissioner Luis Aguilar recently delivered a speech in which he expressed concern over the huge drop in the number of retail investors who voted last year. This drop is mainly attributable to the SEC’s new e-proxy rules – and Commissioner Aguilar strongly suggested that “we move quickly to reconsider e-proxy, improving it if possible, repealing it if necessary, but with the goal of restoring investor participation.”

The drop in the retail vote should be a concern and it’s important that the SEC address it. But another concern is the level of shareholders even bothering to click on the proxy statements and annual reports posted online as part of the voting process. As Dominic wrote in the Winter issue of (sign up for a free copy):

In a recent survey among 1,000 retail investors commissioned by the SEC , fully 57% of investors said they rarely (28%), very rarely (13%) or never (16%) read annual reports when they receive them. For proxy statements, the results were somewhat better, with 44% saying they rarely (21%), very rarely (10%) or never (13%) read proxy statements.

When it comes to web-based proxy materials, statistics collected by Broadridge during the first year of notice-and-access meetings also present a dismal picture. First, only 1.1% of notice recipients bothered to ask companies to mail them paper documents. Meanwhile, just 0.5% of all recipients viewed the materials when they visited the URL provided in the notices. According to Broadridge, notice-and-access has resulted in a 96% reduction in information access by investors, which arguably has led to greater levels of voting without viewing proxy information.

Read Dominic’s article – “Online Annual Reports and Proxy Statements: What’s Wrong And How to Fix It” – to better understand why these statistics are so poor and what your company might be able to do to fix that. And Jim McRitchie added some thoughts after this was posted this morning…

How to Implement E-Proxy in Year Two

We have posted the transcript from our recent webcast: “How to Implement E-Proxy in Year Two.”

Put It on the “Wish List”: Communicating IDEA/Edgar Problems

A member recently told me about a few anxious minutes between the filing of a company’s earnings release on a Form 8-K and the start of its conference call. Actually, it was more than a few minutes – it was a half-hour gap between the time that the SEC’s IDEA/Edgar indicated that it had accepted the filing and public availability of the filing on the SEC’s site.

In theory, under Regulation FD, if you have an Edgar acceptance message that says 10:30 and the call starts at 11, I would argue that the company can go ahead and start – even if investors can’t yet see the filing. However, there is some risk with this approach given the rule’s purpose of investors having this information before the earnings call starts.

As I understand it, this is not a new problem. In fact, EDGAR/IDEA was down yesterday starting ~12:17 eastern for over an hour. This occurs regularly enough that it should be on the list of issues that the SEC’s new brain trust should tackle right away.

The SEC doesn’t seem to monitor its outages – and when these outages occur, the Staff that should be aware of them typically aren’t until they get calls en masse from filers. There’s an easy fix (besides fixing the database) – the contractor used by the SEC should alert the appropriate SEC Staffers, particularly those who take calls from filers (ie. Filer Support and Technical Filer Support). And, the SEC should promptly post a message on their web site that an outage is taking place. That’s an easy first step towards fixing this problem.

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– Broc Romanek

February 17, 2009

The American Recovery and Reinvestment Act

Late Friday, Congress finished its conferencing and passed the “American Recovery and Reinvestment Act” – and law firms went to work drafting their memos analyzing this stimulus package (we’ll be posting all these memos in our “American Recovery Act” Practice Area). The final text of the legislation is posted on the White House’s site in five parts, along with the ability for anybody to post comments!

The most relevant part of the legislation for our members is the tax provisions in Division B, which includes the controversial executive compensation restrictions among others (eg. see this Hodak Value commentary) – even President Obama is not happy with what Senator Dodd inserted as the final exec comp language. Oddly, the stimulus legislation went from no new executive compensation restrictions on Friday morning to more restrictive than previously contemplated by the end of the day. More coverage to come…

Developments in Debt Restructurings & Debt Tender/Exchange Offers

One impact of the Recovery Act is a reduced tax burden for those companies that restructure or cancel debt, which may complicate tax planning. To learn about this and more, tune in tomorrow for this webcast – “Developments in Debt Restructurings & Debt Tender/Exchange Offers” – featuring:

– Alex Gendzier, Partner, Jones Day
– Jay Goffman, Partner, Skadden Arps
– Richard Truesdell, Partner, Davis Polk
– Casey Fleck, Partner, Skadden, Arps

Heightened Enforcement Activity for Financial Fraud

In this podcast, Sharie Brown of DLA Piper discusses:

– What important legislation has been introduced lately to curb white collar crime?
– Why is financial fraud likely to be an area of increased government enforcement focus?
– What can companies do pro-actively to improve their own fraud detection efforts?

– Broc Romanek

February 13, 2009

Congress’ Attempt to Cap Executive Pay Meets Resistance?

There was plenty of new regulatory changes to talk about – mainly the Treasury’s executive compensation restrictions – during yesterday’s webcast, even as it was being reported that the pay restrictions in the still-not-really-completed stimulus bill had been cut during the Senate-House conference. Yet, others were reporting that the pay restrictions had survived the final cut – or at least, some of them (eg. today’s NY Times article that seems to think they are still in). We should know later today what really has happened.

Even if the executive compensation restrictions in the stimulus bill truly did die in conference, Jesse’s piece about key fixes still applies to the new Treasury guidelines and his points were recently picked up by Joe Nocera in the NY Times’ “Executive Suite Blog.” We encourage you to forward Nocera’s blog to key members of Congress and Treasury and other decisionmakers. We each have a responsibility to help the government “get it right.”

Survey Results: Recent Climate Change Disclosures

From Janie Sellers and Karl Strait, McGuireWoods: Our “Climate Change” Practice Group just released the results of its review of climate change disclosures made by public companies. They reviewed the 2008 10-Ks for approximately 350 S&P 1500 companies, across all industry segments and market cap sizes. Some of the highlights include:

– Only 42 out of 350 companies reviewed provided any climate change or greenhouse gas (GHG) emissions-related disclosures, and few of those were outside the energy and utility industries;

– The most common disclosures were impacts/risks of regulation of GHG emissions (34) and efforts to reduce GHG emissions (20), followed by the amount of GHG emissions (8), physical impacts/risks of climate change (6) and legal proceedings related to GHG emissions or climate change (2);

– Most disclosures were found in Item 101 – Business and Risk Factors (30 each), followed by MD&A (13), Forward-Looking Statement Safe Harbor (8) and Item 103 – Legal Proceedings (2). Eleven companies made disclosures in other parts of the 10-K, typically in the notes to the financial statements; and

– Out of the 42 companies that provided 10-K disclosure, the majority do not provide company-specific climate change information on their websites; on the other hand, out of the 50 companies (of the 350 reviewed) that provide information on their websites, most (62%) provided no disclosure in their 10-Ks.

The Big 4500!

In our “Q&A Forum,” we have reached query #4500 (although the “real” number is really much higher since many of these have follow-ups). Combined with the Q&A Forums on our other sites, there have been over 15,000 questions answered.

You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply.

– Broc Romanek