April 27, 2009

Here It Comes! Schumer’s Major Governance Legislation

According to this WSJ article from Saturday, Sen. Schumer intends to introduce legislation this week that would overhaul a number of governance areas. This is the legislation that we all have been expecting since the financial crisis broke – and, with a few exceptions, its components should come as no surprise since most of them have been proposed before in one form or another before.

According to the article – whose authors saw a draft of the legislation – it will include these significant provisions (bear in mind that actual proposals could change from the draft):

1. Say-on-Pay – require companies to give shareholders an annual nonbinding vote on executive pay practices
2. Say-on-Severance – give shareholders a nonbinding vote on severance packages for executives following mergers or acquisitions
3. Proxy Access – buttress potential SEC rules that would make it easier and cheaper for investors to nominate their own directors (article says SEC is considering a number of “proxy access” techniques and could issue a proposal in mid-May)
4. No More Classified Boards – require companies to hold annual director elections rather than putting only a portion of the board up to vote each year
5. Majority Vote Standard for Director Elections- require directors to resign if they don’t win a majority of shares voted
6. Independent Board Chairs – require board chair to be independent
7. Risk Management Board Committees – require boards to appoint special committees to oversee risk management

The article says that House Financial Services Committee Chair Barney Frank is working on say-on-pay legislation as well. And we already have seen SEC Chair Schapiro’s ambitious agenda for governance rulemaking that will take place in the near term.

This is all quite notable, particularly when combined with the high likelihood that the SEC will approve the NYSE’s proposal to eliminate broker non-votes in director elections which, according to this WSJ article, may come as soon as this week!

It will be interesting to see how hard corporate lobbying groups will fight the pay components of Schumer’s bill. There are numerous examples that reflect little change in executive compensation practices. For example, see today’s Bud Crystal note on Six Flags.

And speaking of Sen. Schumer, he and Sen. Shelby introduced an amendment to an existing anti-fraud bill last week that would increase the SEC’s budget by $20 million to allow it to hire 60 additional Enforcement Staffers and upgrade its technology.

Ca-Ca-Catfight! Banc of America vs. the Gov

Good heavens, who knows where to start commenting on the latest mess related to fixing this crisis. According to this WSJ article from Thursday, BofA’s CEO Ken Lewis says he was urged to lie to investors as part of testimony before New York Attorney General Andrew Cuomo. The NY AG’s office has released a slew of documents related to this testimony, including this letter to Congress.

Probably best to just fire off a few quick thoughts (mine and others) and not drone on:

– The obvious: If proven true, it would mean the Treasury Secretary and Federal Reserve Chairman urged a CEO to break US federal securities laws. And if true, these type of actions taken by senior government officials raise serious questions as to whether citizens can trust their government, and what can be done to hold them accountable and increase transparency such that they can no longer engage in such actions behind closed doors, even during a financial crisis.

– On December 4th, then-SEC Chair Chris Cox delivered this speech, in which the he warned of the danger of such actions by the government and how it would undermine the enforcment and regulatory regime in the US. It is notable this speech came during the timeframe the questionable practices were alleged to have occurred.

– WSJ’s article entitled, “Are Ken Lewis, Ben Bernanke and Hank Paulson Heroes or Goats?”

– D&O Diary’s blog entitled, “Ken Lewis, BofA and the Fed Strong-Arm: Ten Questions”

– This might have happened more than once. Last month, this Washington Post article outlined how the head of FHFA (which oversees Fannie Mae, Freddie Mac and the FHLB) urged Freddie and Fannie to make misleading disclosures.

– BofA, under the leadership of the CEO, has the ultimate responsibility for ensuring compliance with its obligations to provide disclosure to investors. Notwithstanding what he was told to do by government officials, it was ultimately the company’s decision as to whether or not to break the law. In the Freddie and Fannie case, it appears that they chose not to break the law and did make the required disclosures.

– Don’t leave the investigating to Congress or even the NY AG in this case. The SEC should investigate, subpoena all people in the discussions and all the relevant emails, documents and telephone records and get to the bottom of this and get us the truth. Anyone, including any government officials, that are found to have broken securities laws, should be held accountable by the SEC so they can ensure the investing public that this is not a rigged market.

– BofA’s annual shareholder meeting – to be held this Wednesday – surely will be one for the ages! Ken Lewis – and other BofA directors – already were the subject of a “just vote no” campaign before this latest maelstorm.

Here is a video clip of the “Seinfeld” scene where Kramer goes into his “catfight” routine. Classic. Perhaps not as good though as this “Friends” catfight. Or if you want some “cat love,” this “Christian the Lion” reunion video will surely make you weep with joy.

The Bank Stress Tests: Fed’s White Paper Outlines Standards

On Friday, the Federal Reserve issued a “Design and Implementation” White Paper, which includes the stress test standards for the 19 banks that are being subjected to the tests. While the stress test results will not be released until next Monday, the White Paper helps us somewhat understand how those tests are being carried out – particularly Table 1 which spells out the scenarios, etc. I indicate “somewhat” because some critics say the White Paper is too vague (eg. Bloomberg’s article, “Fed’s White Paper Leaves Questions Unanswered, Analysts Say.”).

For the most part, it seems like the government’s tests are based on two potential economic scenarios – a baseline scenario – based on a early ’09 consensus among economic forecasters – and a more “worser case” scenario, based on a longer, more severe recession. Here is the Fed’s related press release – and here is a list of the 19 banks.

Condolences to those that knew Professor Louis Lowenstein, who passed away last week and was a founder of Kramer Levin. Here is an obituary from the NY Times.

– Broc Romanek