Monthly Archives: May 2009

May 29, 2009

Proxy Season Developments: Ten Signs that Things are Changing Online

I spoke at a MidAtlantic Chapter meeting of the Society of Corporate Secretaries on this topic in Philly last week, so I thought I’d share my thoughts with you. For quite some time, I’ve been warning companies to be prepared for heated online campaigns related to their annual meetings (remember to read this free issue of on the topic). As I noted yesterday in my blog about Target’s campaign site, this didn’t happen much during this proxy season – but there were a number of developments that lead me to believe that next year could be a watershed one.

Here are ten things that happened this proxy season worth noting:

1. First Use of Live Internet Voting – In his “IR Web Report,” Dominic Jones brought us the news (and analysis) that Intel decided to tackle the challenges of allowing for “live” voting online at its annual shareholders meeting this season. Intel also has this “Stockholder Forum” to allow shareholders to submit queries in advance.

2. Soliciting Shareholder Feedback on Compensation Practices – Taking a page from Schering-Plough’s efforts to survey investors about pay practices, Amgen is inviting its shareholders to offer comments on TIAA-CREF’s “Ten Questions for Evaluating CD&As.” The invitation is presented on page 51 of the company’s proxy statement (page 59 of the PDF), directing shareholders to a survey questionnaire on the company’s site.

3. Soliciting Shareholder Feedback on Disclosures – Barclays used this “2009 Annual Report Survey” to solicit feedback on its annual report. The company promised provide responses directly to the questioners – and intends to post a selection of them.

4. Emergence of Proponent Sites Designed to Solicit Mutual is a new type of site, jointly created by the proponents of four ExxonMobil shareowner proposals (Bob Monks among them). Mutual fund holders who are concerned that ExxonMobil has not done enough to address climate change and address certain corporate governance issues can send a message to the 25 largest mutual fund families through the site.

5. Easier Ability to Track Voting Results – Smart companies like to predict how their voting results will be at shareholders’ meetings so that their board and senior managers are not surprised. Hiring a proxy solicitor that has shareholder intelligence abilities is the most common way to accomplish this – but some of the tools that solicitors use are now freely available. For example, a relatively new site – – tracks how mutual funds vote on specific types of proposals. And it’s free. The site tracks both management and shareholder proposals – and it tracks voting trends by specific fund families.

6. Use of “RSS Street” to Follow Developments – Dominic Jones blogged about the rise of a group of web monitoring services that help investors track online mentions of companies they follow. Companies should be doing the same to understand what is being said about them as the online media gradually displaces traditional mainstream media.

7. Use of Corporate Blogs (and Third-Parties) to Solicit Questions – As noted by Dominic Jones in his blog, Microvision used its blog to solicit queries for its upcoming earnings call. The same can be done for annual meetings. In fact, Warren Buffett tried something novel this year – soliciting queries by asking Berkshire Hathaway shareholders to send them to three reporters via email. As described in Warren’s annual letter to shareholders, these reporters – independent third parties – then choose the ones they deemed most interesting and important and posed them during the meeting.

8. Use of Twitter to Describe Live Events – Ebay became a pioneer when its resident corporate blogger tweeted the details of its earnings call as it happened, as described by Dominic Jones in his blog. Again, this can be done for annual shareholder meetings – and it helps if the company controls the messaging rather than only have third-parties tweeting during the event (which is becoming more common, like it was during Banc of America’s annual meeting this year. I’m not sure how they enforced it, but I hear that live-tweeting and blogging was banned from Target’s annual meeting yesterday. If it’s true, I think it’s not a good idea as that can garner bad publicity and will happen anyways).

9. Investors Communicating Through Social Sites – Another area where companies increasingly are going to have to keep an eye on are the social sites. Beyond the obvious ones – Facebook and MySpace – there is a new player, Broadridge’s “Investor Network.” It’s too early to tell if their social site will really take off, but it’s safe to say that social sites generally are here to stay and the likely place will a lot of shareholders will be venting in the future.

10. Much Easier Use of Video Changes Everything – With everyone now walking around with a camcorder in their pocket (ie. their cell phone), no one should presume that what happens at the annual meeting, stays at the annual meeting. As brought to my attention by this blog, an embarrassing moment at an annual meeting could cost an inhouse lawyer or corporate secretary their job. Be prepared for zaniness at meetings by being prepared.

This video below from Fortis’ annual meeting – held a few weeks ago – is real and is a “must” viewing. The meeting was delayed a half hour after the management team was pelted with shoes, coins, etc. I particularly liked the dismissive shake of the Chair’s head. Sometimes it’s uncanny the way that corporate life imitates Monty Python (remember this “Stoning” sketch):

– Broc Romanek

May 28, 2009

Target’s Annual Meeting Campaign: “Bringing It” Online

My first two blog entries today feature good and bad news. The good news comes from Target, whose annual meeting is being held today. This will be no “regular” annual meeting as William Ackman, whose Pershing Square Capital Management owns a 7.8% stake, is seeking a seat for himself and four other nominees on Target’s board (as noted in this article) as well is seeking the company to use a “universal ballot” (as noted in The Corporate Library blog).

Although it’s become fairly common for dissidents in the throes of a proxy fight to leverage the Web (see this list of examples I have collected), it’s still fairly rare for companies to do the same. That’s why it’s worth noting Target’s annual meeting page to point out how they “get it” when it comes to campaigning online in their defense.

A number of the items posted on the company’s annual meeting home page were recommended in my article from the Spring ’08 issue entitled “The Coming Online IR Campaigns: The Future of Director Elections” (which is still available for free). To begin with, Target bothered to create an annual meeting home page. That’s a critical first step. They highlight endorsements from proxy advisors. They even post a white paper making their argument why they think one proxy advisor’s report is flawed (as noted in this article).

Have a good look. I predict these types of shareholder meeting sites will become more of the norm for IR departments/corporate secretaries when we live in a proxy access world without broker non-votes (ie. next year)…

You want further proof that the Web is changing the job of a corporate secretary? How about when a shareholder proponent posts a transcript of his remarks from the annual meeting? Governance guru Bob Monks did just that yesterday on his blog, right after he presented five proposals at Exxon-Mobil’s annual meeting.

No Questions Allowed at TDS Annual Meeting: This Year’s Governance Posterchild?

Now the bad news. Remember the hubbub a few years back over Home Depot’s annual shareholder meeting and the then-CEO Bob Nardelli not allowing questions? Well, it looks like that publicity nightmare was forgotton by Telephone and Data Systems.

Here is what Gary Lutin reports in his “Shareholder Forum”:

Yesterday’s annual meeting of TDS shareholders did not provide the expected opportunity for shareholders to consider management responses to their questions. In an unusually restrictive process, the chairman limited business to the formal requirements of presenting matters noticed in the company’s proxy statement and announcing approval or rejection according to the controlling shareholder’s previously reported intentions, followed by a prepared management report of the company’s condition.

The Forum’s four questions for directors were presented at the meeting by a representative of Southeastern Asset Management as part of the legally allowed presentation of their shareholder proposal. The chairman, who had received a copy of the Forum’s questions on May 15, stated that “given other commitments I’ve had, I’m not in a position to speak to the questions the Shareholder Forum raised,” and further that “I also don’t believe it’s the time or place for a director or the chairman to answer those questions.” He did, however, assure a future response.

The chairman subsequently declined to hear other shareholder questions, saying that they could be addressed after the formal part of the meeting. The webcast ended at the conclusion of the formal agenda, though, and it was reported by attendees that shareholders were then simply told that any questions should be sent to the company’s corporate relations officer.

In his report on the meeting, Gary links to the audio archive of the meeting and provides specifics about when the TDS chair blows off the shareholders. Gary also notes that the day job of TDS’ non-executive chairman (who is also the brother of the CEO and co-trustee of the family trust that controls TDS through super-voting stock) is a partner of Sidley Austin, heading its Financial and Securities Litigation Group.

CalSTRS Breaks New Ground Announcing Votes

Yesterday, CalSTRS revealed that it has become the first institutional investor that will regularly announce its voting decisions regarding upcoming annual shareholder meetings on Broadridge’s ProxyEdge, a platform used by nearly all brokers. This is a big deal since it’s a step towards a fully integrated proxy voting system.

Imagine going to vote – and having access to endorsements, etc. at your fingertips just when you’re about to push the button. Useful – and much more influential than the annual meeting campaign sites I described above since this information will be available right at the crucial moment of voting. I certainly could use that type of information when I’m in the voting booth and I’m presented with candidates I’ve never heard of running for County Commissioner…

– Broc Romanek

May 27, 2009

Obama and Treasury May Strip SEC Down: Lynn Turner’s Ten Cents

The battle over the SEC’s future is heating up. Last week, the Treasury Secretary received this letter from 14 pension plans regarding the importance of maintaining the independence and oversight of the SEC.

Below is some interesting commentary from Lynn Turner regarding the latest developments in this battle:

This Bloomberg article highlights the efforts of Treasury Secretary Geithner, Larry Summers and the Obama Administration to strip the SEC of some of its powers. Changes being discussed include taking away the SEC’s regulation of mutual funds. Also perhaps giving a new consumer products commission some of the SEC’s powers.

About three years ago, the Treasury’s Paulson Blueprint Report, one from the Business Roundtable – as well as other reports – recommended that the SEC be weakened, with less protections afforded to investors in an effort to make the US capital markets more competitive and attractive to business. Those efforts seem to be in full swing again. There was a meeting last week in Washington DC between those individuals and others including Paul Volcker, Arthur Levitt and Elizabeth Warren to discuss the issues cited in the article.

The Federal Reserve is the Problem; Not the Solution

The financial meltdown – as the recent Frontline documentary aptly highlighted – was caused by banks making a lot of bad loans and Wall Street firms taking on huge risks and bets when they insured those loans through trillions of dollars of credit derivatives. The Fed stood idly by despite 1994 legislation that permitted the Fed to prevent these unsound lending practices. The Fed was the regulator for some of the biggest institutions that would have failed without taxpayers bailing them out. But then again, the Fed has never protected investors – and strongly advocated for legislation that allowed the creation of banks that became too large to fail and stopped any regulation of derivatives.

Now Treasury Secretary Geithner – who as head of the NY Fed oversaw these very banks that needed bailouts – and who was involved with the decisions on Bear Stearns, Lehman Brothers and AIG, is now proposing to give the Fed even greater powers while stripping those powers away from the SEC. Geithner speaks in the Bloomberg article of enforcement – but the Fed has a terrible enforcement track record and has never protected consumers and investors.

That is specifically why I understand the Congressional Oversight Panel has said the government needs to create yet another government agency to protect consumers – because the Fed and other banking agencies (which are captives of the industry) have refused to do so depite legislation such as the ’94 Hoepa Act and Truth-in-Lending laws. You don’t need the fingers on one hand to count the number of banking executives – whose major banks have required taxpayer-subsized bailouts – that have been targeted by the Fed for their unsound lending practices.

What is the Treasury’s Case?

What the Treasury has not done is make a case as to what problems they are seeking to fix with this change in powers. And explain why – other than for political reasons and due to their close ties to the banking industry – they would make changes to the SEC’s powers. On the other hand, the mutual fund industry has attracted large sums of money away from what use to be deposits at banks during the past two decades. And with those investments, mutual funds have invested in the commercial paper of many public companies, replacing bank financing in some instances. It appears what may be occurring is an effort on the part of the banking industry to get the government to decide “winners” and “losers” and try to bring those deposits back. But it will be costly for investors in terms of their future returns.

What people seem to forget is that there was one and only one money market fund that went under: the Reserve Primary Fund. That fund had invested heavily in Lehman debt in the prior year. Perhaps if the credit rating agencies had properly rated Lehman’s debt, that would not have happened – but that is another issue. (Also as Frontline documented, Geithner failed to understand the major issues associated with Lehman debt when he – along with Paulson and Bernanke – decided to let them fail.) In addition, the Reserve Primary Fund had a few very large institutional investors who withdrew their money, thereby forcing the fund to “break the buck” and create a liquidity issue. (Professor Mercer Bullard, a former SEC Staffer, gave some excellent testimony before the Senate Banking Committee on this issue a few months ago.)

However, this is but one fund. At the end of 2007, according to the ICI 2008 Fact Book, there was $3.1 trillion in money market funds invested in the US, up from $1.3 trillion ten years earlier. There were 38.8 million individual money market accounts. Having just one fund go under in this very severe downturn is a real statement on how well these funds – and the mutual fund industry generally – have weathered the storm.

At the same time, literally over a hundred banks have required a government-backed bailout with actual cash investments, as well as insurance of their debt. Dozens of banks have now failed this year – and without hundreds of billions of taxpayers dollars, other banks (including many deemed to big to fail) would have as well. Clearly mutual funds have turned out to be a safer and better deal for investors.

The Bottom Line: Let Investors Decide “Winners,” Not the Government

Why one would want to strip regulation of money market funds from the SEC and place it with the banking regulators or another agency is highly suspect and questionable. It clearly appears to be a play by the banks to recapture lost deposits, deposits they lost because their product was of an inferior quality to what mutual funds have offered. The government should not interject themselves into this fight between banks and mutual funds, but rather let the customer – the investing public – decide which is the best product. We need less of the government deciding who the winners and losers are, not more.

As the Bloomberg article notes, the current Chairman of the SEC has curiously been excluded from the negotiations and has argued against any changes through the mainstream media.

SEC’s Unpopularity: All-Time High?

Although I’m not convinced this type of survey has been conducted frequently enough so that we can really tell that the SEC’s unpopularity is at an all-time high, I would be surprised if that wasn’t the case given the phenomenal amount of negative publicity that the SEC has received during the past year.

As noted in Michael MacPhail’s blog, a recent Persuasion Strategies survey of potential jurors captured their opinions of six federal agencies. The SEC was the most negatively-viewed agency of the six, with 55% of respondents expressing an unfavorable opinion – compared with 46% expressing an unfavorable opinion towards the oft-despised IRS.

I completely agree with what Tom Gorman wrote in his “SEC Actions Blog” in his piece entitled “Remaking The SEC For Tomorrow” and couldn’t have said it better. The mission of each Division needs to be rethinked, including whether their focus should be broadened or even new Divisions need to be created (think asset-backed securities)…

– Broc Romanek

May 26, 2009

Carpenters Push Triennial Alternative for Say-on-Pay

One of those things I’ve been meaning to blog about – and no one else was blogging about until Mark Borges covered it in his blog recently. A few weeks ago, Ed Durkin and the United Brotherhood of Carpenters Pension Fund has submitted a new shareholder proposal to 20 companies seeking a triennial vote on pay rather than an annual one. The rationale is that this would help shareholders by reducing the number of companies they would have to analyze each year – and would help companies as they wouldn’t have to face an annual battle over their pay practices.

As Mark notes, the triennial executive pay (known as “TEP”) proposal would require:

– In addition to an overall vote on named executive officer compensation, separate votes on a company’s (i) annual incentive plan, (ii) long-term incentive plan, and (iii) post-employment benefits (including retirement, severance, and change-in-control payments); and

– A “forum” between the compensation committee and shareholders on at least a triennial basis to discuss senior executive compensation policies and practices.

In talking to company representatives, they obviously find a vote every three years (with a forum in between periods) more palatable than an annual vote (eg. Intel recently launched a stockholder forum leading up to last Wednesday’s annual shareholders meeting).

I agree with Mark that this idea’s weakness is how to deal with corporate implosions between the triennial votes. My solution would be a safety valve where shareholders could gather and trigger a vote, much like the idea of triggering proxy access. In other words, if a group of shareholders got together that met a ownership threshold and filed some type of certification with the SEC that states they seek a say-on-pay vote (with the filing made by a particular deadline), the company would be forced to put say-on-pay on the ballot for the upcoming meeting.

But note that I’m still dubious whether say-on-pay is really meaningful anyways. I would rather rely on votes “against” compensation committee members as the signal to the board that shareholders are unhappy over pay practices. In a say-on-pay world, I worry that board will routinely get their pay packages blessed (see this recent WSJ article) and that excessive pay practices won’t change.

Welcome to Barbara Nepf!

We’re very excited to have Barbara Nepf join our staff! Most recently, Barbara worked for DLA Piper as a Knowledgement Management lawyer, specializing in all those areas that you find on this site. Barbara will be working part-time from the NYC area. Give her a “shout out” at

Spring Issue of the Compensation Standards Newsletter

On a complimentary basis, we recently posted the Spring Issue of the Compensation Standards Newsletter. The lead article is entitled “Compensation Arrangements in a Down Market: Insights into Latest Practices.”

Please note that we also have posted all the archives of this publication for members to access.

– Broc Romanek

May 22, 2009

The New “Financial Crisis Inquiry Commission”

From Davis Polk: Legislation that creates an independent commission to examine the causes of the financial crisis was signed into law by the President on Wednesday. Section 5 of the “Fraud Enforcement and Recovery Act of 2009” makes only one notable change to the bill discussed in Davis Polk’s May 15th alert. Earlier versions of the bill required only a simple majority vote of the Commission for a subpoena to be issued – but the final version requires at least one affirmative vote of a Commission member appointed by the Republicans.

Congressional Democrats will appoint six members of the ten-member commission and Congressional Republicans will appoint four members. Whether this change has a material impact on the Commission’s operations is uncertain, and will likely depend on the Commission’s ability to secure voluntary production of witnesses and evidence.

“Early Bird” Conference Rates: Expires at End of Today

Note that in response to our generous early bird offer for the “4th Annual Proxy Disclosure Conference” (whose pricing is combined with the “6th Annual Executive Compensation Conference”), we are on pace for a record number of attendees (despite the economy). A true reflection of how important executive compensation is this year! These Conferences will be held at the San Francisco Hilton and via Live Nationwide Video Webcast on November 9-10th.

Act now, as this tier of reduced rates will not be extended beyond the end of today! With the SEC intending to propose new executive compensation rules in the near future – and Congress looking to legislate executive compensation practices this year, these Conferences are a “must.” Register today. If you’re in need of a few days to get a check cut, email me today to hold this rate.

Whistleblower’s Fight over Definition of Risk

As has forever been the case, most scandals see the light of day because someone was brave enough to speak out. I don’t know enough to know the merits of this situation, but this fight between a Deutsche Bank employee and his employer has many lessons for all of us in the corporate world. In this letter, the employee – Deepak Moorjani – shares his perspectives on his firm’s risk policies and the culture and reward structure that he claims encouraged practices that were not in the company’s best interests.

– Broc Romanek

May 21, 2009

SEC Proposes Shareholder Access Again: Third Time’s a Charm?

For the third time this decade, the SEC proposed a proxy access rule – Rule 14a-11 – yesterday in an open Commission meeting (Dave blogged about the proposal’s long history last week). The vote was 3-2 – with Commissioners Casey and Paredes dissenting – and there is a 60-day comment period. Here is the SEC’s press release in a nice Q&A format – and here are statements by Chair Schapiro and Commissioners Aguilar, Walter, Casey and Paredes.

Ahead of the proposing release being available, here are the basic of the proposal:

Sliding Scale Ownership Requirements – The ownership threshold would vary depending on a company’s size: 1% of voting shares for large accelerated filers; 3% for accelerated filers; and 5% for non-accelerated filers.

One-Year Holding Period – Nominating shareholder (or group) must have held the requisite percentage for at least one year at the time of providing notice to the company.

Up to 25% of the Board – Shareholders can nominate the greater of one nominee or the number that equals up to 25% of the board. If shareholders nominate too many candidates, it’s “first in, first on the ballot.”

120-Day Deadline – Nominating shareholders must provide notice to the company and the SEC at least 120 days before the first anniversary of the date that the prior year’s proxy materials were first released (i.e. the Rule 14a-8 deadline), unless the company has an advance notice bylaw that provides a different timeframe.

Schedule 14N Certification– Nominating shareholders must file a Schedule 14N reporting the percentage beneficially owned, period of time held, intent to hold shares through date of the shareholders meeting and other disclosures and certifying that the nomination is not intended to result in a change in control or result in more than minority representation on the board.

Nominee Candidate Must Be Independent – Any nominee must meet state law and stock exchange independence standards and the nominating shareholder can’t have any agreement with the company regarding the nomination. However, there is no restriction on shareholders nominating persons with whom they have a relationship, including themselves.

Rule 14a-11 Trumps State Law – Rule 14a-11 would preempt any proxy access provisions set forth in state law or in a company’s charter or bylaws (as noted by Prof. Verret).

More Access Proposals Allowed Under Rule 14a-8 – Revised Rule 14a-8 would allow more shareholder proposals relating to the processes for the nomination and election of directors, requiring inclusion of proposals that would amend a company’s governing documents regarding election procedures.

Here are a few completely random thoughts:

– Regarding nomenclature, I guess “proxy access” is in and “shareholder access” is out.

– Although I didn’t go down to the SEC (I hear not too many did – it’s easy to watch via webcast), I do know that meetings now open with a slideshow warning about what to do in case of emergency, including the SEC’s “Shelter-in-Place” procedures. And that the SEC’s security guards now carry guns.

– A number of folks “live-tweeted” the meeting (eg. @nminow and @simonbillenness), thus putting pressure on the firms that rush out their firm memos hours after meeting to join the Twitter brigade. You can’t beat real-time! You can see a collection of tweets about proxy access using the hash tag of #proxyaccess.

– The “first firm to issue a memo” sweepstakes? Simpson Thacher over O’Melveny and Davis Polk in a sqeaker. I’ve seen a dozen more already. Of course, alacrity doesn’t equal quality…

The First Model Proxy Access Bylaw

Recently, Wachtell Lipton shared this model proxy access bylaw for those companies seeking to take advantage of the new amendments to the Delaware General Corporation Law, which allows companies to pick and choose their own proxy access process. I imagine we’ll see a few other models as we approach the August 1st effective date for the DGCL amendments and we’ll be posting them in our “Proxy Access” Practice Area.

Some Perspective on Shareholder Access

Recently, Ted Allen – RiskMetrics’ Director of Publications – wrote this nice recap of proxy access as it exists today:

Existing Corporate Provisions

A few U.S. companies have access provisions in place. Comverse Technology instituted an access bylaw in 2007 during an overhaul of its governance policies after an options backdating scandal. Under that bylaw, an investor group that owns a 5 percent stake for at least two years may nominate one director to appear on the company’s proxy statement. The Comverse bylaw also bars investor groups from making nominations for four years if its nominee fails to receive at least 25 percent support. (Editor’s note: RiskMetrics Group allows investors who hold a 4 percent stake for two years to nominate a candidate.)

In 2003, California-based Apria Healthcare adopted a policy to allow shareholders to submit names for inclusion on its ballot, but the company’s board can reject those candidates, according to Bloomberg News. In 2005, two shareholder nominees appeared on the company ballot at Gateway Energy, a small-cap natural gas firm based in Houston. UnitedHealth created an advisory committee in 2006 to allow investors to provide input on board nominees. In 2007, Pfizer held a town hall meeting with large investors to solicit their input on directors and other issues. Other firms, such as H-P, allow shareholders to suggest nominees, but investors have no recourse but to wage a costly proxy solicitation if management ignores those suggestions.

Activist investors have sought less rigorous ownership requirements. The proposals filed at H-P and UnitedHealth in 2007 called for allowing two nominations by investors who collectively own a 3 percent stake for at least two years. The Council of Institutional Investors supports a similar standard for access, provided that investors who nominate board candidates adhere to the same SEC disclosure requirements that now apply to proxy contests.

Access in Other Markets

Other major markets, such as the United Kingdom and Japan, allow investors to nominate board candidates to appear on management proxy statements. Under the U.K. Companies Act, investors can nominate candidates at an annual meeting if they collectively own at least 5 percent of a company’s share capital or are part of a group of at least 100 shareholders who each hold stakes worth 100 pounds ($146) or more. Since January 2008, investors have nominated board candidates at nine U.K. firms, according to RiskMetrics data. The most high-profile case was Aegis Group, where the Bollore Group, which now holds a 30 percent stake, nominated two board candidates who were not elected.

In Japan, shareholders who own at least 1 percent of a company’s capital or 300 share units for six months may propose business for a corporate agenda, including nominating board candidates or seeking the removal of directors. Nevertheless, dissident board slates are quite rare; one notable exception is the proxy fight now being waged at Japanese wigmaker Aderans Holdings by the Steel Partners Japan Strategic Fund.

– Broc Romanek

May 20, 2009

Schumer’s “Shareholder Bill of Rights”: Why, What, When and If

Yesterday, Senator Charles Schumer – along with Senator Maria Cantwell – finally introduced the “Shareholder Bill of Rights Act of 2009” (this is the final proposed bill). Here is my ten cents on your burning questions:

1. Why? – Typically, it would be expected that this type of legislation would originate in Rep. Barney Frank’s House Financial Services Committee. So why did Senator Schumer begin frontrunning his own bill a few weeks ago. The likely answer is that influential parties wanted governance reform as part of the discussion over Obama’s “First 100 Days” to keep these issues in the spotlight. And Frank was too busy with financial regulatory reform to drum up something as a placeholder.

2. What? – As noted in this blog before, the bill is a virtual “wish list” for investors interested in reform (eg. CII’s press release and Paul Hodgson’s observations in “The Corporate Library Blog”) as it tackles every hot governance there is today (with the notable exception of CEO succession planning).

3. When? – The big question: “What are the odds of this bill getting passed?” I think the odds are fairly slim that this bill becomes law because it includes too many items that potentially contravene state law and open it up to a Constitutional challenge. However, if another big scandal suddenly surfaces, Congress could push this through unexpectedly (just as WorldCom’s implosion pushed Congress to adopt Sarbanes-Oxley).

The fact that only one other Senator placed her name on this bill is a “tell” that there might not be a lot of momentum for it. My guess is that Sen. Schumer wanted to make a mark within the first 100 days of the Administration – and that he wanted this bill to influence what Rep. Frank produces later in the year as well as influence the financial regulatory reform that is being crafted now. In the end, I think the chances of certain provisions of this bill becoming law by the end of the year is fairly high, including say-on-pay and shareholder access – just not as part of this bill.

4. If? – What if this bill gets passed? Wow…

Looks like the parameters of today’s proxy access proposal have been made available to the mainstream media since this NY Times’ article states: “The proposal would permit large shareholders — typically institutional investors like pension funds or hedge funds — or alliances of shareholders to nominate as many as one-quarter of the directors. For the 700 largest public companies, the proposal would require approval by 1 percent of the shareholders for a dissident slate to be nominated. For smaller companies, it would be either 3 percent or 5 percent, depending on the size of the business.

It Ain’t Over Til It’s Over: SCOTUS to Review Constitutionality of SOX

On Monday, the US Supreme Court granted certiorari and agreed to consider a constitutional challenge to ability of Sarbanes-Oxley to create the PCAOB. As you might recall, this is the long-standing case brought by a small auditing firm, Beckstead and Watts and the Free Enterprise Fund.

At issue is whether Congress treaded on the Constitution’s separation of powers, specifically Article 2, Section 2 known as the “Appointments Clause” because it gives power to the President to appoint and supervise executive-branch officials. The SEC appoints the members of the PCAOB’s board rather than the President – and the SEC can only remove the PCAOB board members “for cause.” Check out Professor Jay Brown’s blog on the chances of its success.

Last August, the US Court of Appeals for the DC Circuit – voting 2-1 – concluded that the SEC’s “comprehensive” oversight of the PCAOB satisfied the appointments clause. Then in November, the full DC Circuit voted 5-4 not to
reconsider the ruling. We continue to post the central pleadings in this case in our “Sarbanes-Oxley Reform” Practice Area.

May-June Issue: Deal Lawyers Print Newsletter

This May-June issue of the Deal Lawyers print newsletter is out and includes articles on:

– Reversing Course: Delaware’s Supreme Court Provides Comfort to Directors Regarding Revlon Process and Bad Faith
– Going In-House: Stewart Landefeld On His Time at Washington Mutual
– The Shareholder Activist Corner: Mario Gabelli’s GAMCO
– Are We There Yet? Issuer Debt Tender Offers and Offering Period Requirements
– Private Equity in 2009: “Back to Basics” Practice Tips

If you’re not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue for free.

– Broc Romanek

May 19, 2009

Looking Out for #1: How to Manage Your Career

With changes in the legal profession being accelerated by an economic downturn, I thought it was an appropriate time to hold a webcast to look at how these trends may impact how you approach managing your career. The days of sitting in a job for thirty years clearly is over.

Tomorrow’s webcast – “Looking Out for #1: How to Manage Your Career” – will explore the differences between working in firms, the government and in-house. It also will explain how to best pick a recruiter and what can be expected from that relationship. And it will analyze how you can best market yourself, including the use of new technologies. Join these experts:

Jim Brashear, Partner, Haynes and Boone LLP (and former Corporate Secretary of Sabre Holdings Corp.)
Selena LaCroix, Head of US Practice Group and Managing Partner for the Dallas Office, Egon Zehnder
Bob Major, Founding Partner, Major, Lindsey & Africa
Kevin O’Keefe, Founder and CEO, LexBlog
Broc Romanek, Editor,
Manny Strauss, VP & Assistant General Counsel, XO Communications

It doesn’t matter where you work today. Even being in-house is not safe, just yesterday I participated on a panel that I jokingly referred to as “Where Corporate Secretaries Go to Die” to a chapter of the Society of Corporate Secretaries and there was a high level of interest.

Survey Results: Corporate Lack of Enthusiasm for XBRL

With XBRL mandated for the largest 500 companies next month, XBRL USA conducted a survey recently that shows that two-thirds of these companies are ready. While the organization touted this as a good thing, my reading of the results is “surprise” since that’s quite a few companies unprepared to meet a requirement that is looming very soon.

On top of this frightening news is this Grant Thornton survey of CFOs and senior comptrollers that shows that 64% of the respondent public companies have no plans to use XBRL (the respondents seem to include a cross-section of all companies, not those mandated to implement it next month). Even more scary is that 35% of the respondents said they are “not familiar” with XBRL.

These companies are lucky as SEC Chair Schapiro has indicated that XBRL is low on her priority list (as noted in this article), which I suppose could possibly mean a delay in the phase-in of mandatory XBRL for smaller companies.

Meanwhile, the SEC just calendared a seminar for June 10th to help companies learn how to comply with the new rules, to be held in DC and by webcast.

Meanwhile, XBRL is high up on Rep. Issa’s list as he seeks to use XBRL as a way to increase TARP’s transparency by introducing this bill. According to this letter, Rep. Issa thinks that standardized use of XBRL will prevent the next financial crisis. Wonder if I can get my hands on some of that Kool-Aid…

Hide n’ Go Seek? XBRL in Regulation S-K?

Here is a note I recently received from a member that I thought was worth pass ing on: Am I the only person who thinks it’s weird that the website requirement for XBRL wound up in Regulation S-K? Especially in Item 601? I have always thought of S-K as being only for cross-referencing from a form (i.e., 10-K, S-3, etc.), and surely Item 601 is only for describing exhibits. I am not sure why I care, but I am finding it annoying that they have sullied this system by placing a requirement in S-K that seems extraneous to the disclosure forms.

It’s with great sadness that I note the passing of Alison Youngman of Stikeman Elliott. Although I barely knew her, you can tell she was a special person by reading this memorial describing her. Condolences to her family and friends.

– Broc Romanek

May 18, 2009

Allegations about Insider Trading Within the SEC

Well, the latest thing to tarnish the SEC’s reputation is making the rounds. CBS broke the news on Friday with this report that two SEC Enforcement attorneys are under investigation by the FBI for possible insider trading, based on a 56-page report from the SEC’s Inspector General. The mainstream media (eg. WSJ) blogosphere is humming with the news (eg. Crooks & Liars).

Here are the basics that we know from the IG’s report:

– The IG started to look into this matter in January ’08 after the SEC’s Ethics Office informed it of an Enforcement attorney who pre-cleared voluminous trades.

– The IG reviewed more than two years of email and broker records and broadened the inquiry to two other Enforcement attorneys (one of whom didn’t trade nor respond to emails from the other two, but did communicate with them otherwise about the markets).

– The IG referred its investigation to the FBI and DOJ after it noted that some of the trades by the two Enforcement attorneys occurred around the time that the SEC opened investigations into the related companies.

Here are some interesting tidbits from the report:

– Although the report doesn’t identify the two targeted Enforcement attorneys, we know that the female has been with the SEC since 1981 (and was referred to as a “stock guru” by the others, page 34) and the male is in Enforcement’s Chief Counsel office.

– These two targets – plus the other enforcement lawyer – had a “standing lunch” for Monday where they often discussed stocks and which often lasted 90 minutes (the name of the restaurant was redacted on page 30).

– The two targets frequently emailed about stocks – an average of one per day – and even had folders in their Outlook entitled “Stocks” to archive their emails. Yet, they denied under oath that they used their SEC email accounts to discuss the market and denied knowing the SEC’s policy of limiting personal emails to de minimis use (page 33).

– The colleagues of the targeted attorneys said they thought them to have integrity and character and would be very surprised if either used information for personal purposes and that they were careful, experienced attorneys (page 29).

As if to prove the overreaching by the mainstream media over the IG’s report, the Washington Post ran a top story on the front page in the form of this article on Sunday that honed in on the SEC’s Deputy Secretary and the allegation that she might have wielded her title in a phone fight with a broker whom she believed mishandled her mother’s account. While its arguable whether this might be bad etiquette, it certainly isn’t criminal and definitely shouldn’t be headline news. People use their station in life during their daily routines every day.

In my opinion, I think the Post decided to highlight this story over the suspicious trading because it was able to uncover the identity of the party – potentially ruining her reputation in the process – and because the other media outlets had overlooked this item. Get real.

My Ten Cents: What Does This Alleged Insider Trading Scandal Mean?

In the wake of these insider trading allegations, I’ve had numerous friends and family members contact me to wonder:

– Whether I knew the two people involved? (No, their identities have not been revealed.)

– What type of safeguards exist at the SEC against such conduct? (Not much, as detailed in the IG’s report.)

– How could this happen? (Even with a much sounder compliance program, anything can happen in this world. But note these two haven’t even been charged with insider trading misconduct.)

– Is this type of conduct rampant at the SEC? (I highly doubt it. I’ve worked at the SEC twice – and still network with many of them – and I’ve never had a single conversation with anyone about whether to trade a stock.)

– What took SEC’s Ethics Office so long to refer the matter to the IG? (It’s one of the things that the SEC needs to fix. Since the female attorney was day trading – 247 trades in a two-year period – and properly filing her pre-clearance paperwork with the SEC’s Ethics Office for most of those trades, it should have raised a red flag earlier. I seem to recall a six-month holding period for trades during tours of duty at the SEC – is my memory faulty?)

– Did I know that Enforcement’s Office of Chief Counsel had “bagel” meetings every Friday? (No. But I do now due to page 26.)

Here is my ten cents:

1. Bad Stuff Happens – Putting aside the reality that these two have not even been charged with anything, I point out that if the allegations were true that wouldn’t really mean much in “normal” times because I can pretty safely say that this is an isolated occurrence based on my own personal experience. Trust me, there is no rampant insider trading at the SEC. Those that work there know how simple it is to track it. Nearly all communications these days are digital and easily uncovered – and if someone starts hitting home runs in the markets without a track record of doing so = big red flag.

As those that watch a lot of TV know, just because a cop turns “bad” doesn’t mean the entire department is bad. But these are not normal times and the SEC is under heavy fire, so some serious damage control is required and fast. The SEC’s compliance procedures clearly need an overhaul, just like a number of processes at the SEC.

2. How Did This Information Get Public? – It looks like Senator Grassley forced it out into the open. As noted in this response from the SEC’s Inspector General to Senator Grassley, due to the nonpublic nature of the report, the IG had to go through a process that delayed releasing the report for five weeks.

The IG asked that the report be kept confidential due to the potential harm to the agency. Yet, the Senator choose to release the information. At least that seems to be the way this has happened, since the redacted IG report is not available from the SEC’s IG page.

3. Should This Information Have Been Made Public? – Not until something can be proven. As stated in this letter from Senator Grassley to Chair Schapiro, the Senator himself says that “it’s hard to imagine a more serious violation of the public trust that for the agency responsible for protecting investors to allow its employees to profit from non-public information about its enforcement activities.”

If the Senator recognized the damage that releasing this information could cause to the markets, why did he force this information into the public domain prematurely? There hasn’t even been charges of misconduct yet. At most what we have is that some Staffers lied under oath, took lunches that lasted too long; spent some of their working hours on personal business and violated some of the SEC’s policies regarding trading in the markets (egs. not reporting all trades). It’s pretty clear that the approval process was not used properly, but the more serious suspicions aren’t obvious here.

I imagine that the SEC Chair would have acted on the IG’s recommendations to strengthen the SEC’s compliance procedures without this dirty laundry being aired. But those that follow the SEC know that Grassley has had an axe to grind against the SEC, going back to him pressing the Pequot Capital Management case.

As an aside, did you see how the SEC took action to drum fraudulent securities off Craigslist the day after Craigslist forced prostitutes from its site…

Your Ten Cents: Should the IG’s Report Have Been Made Public So Soon?

Okay, you have my ten cents. Let me know how you feel (all votes are anonymous; you can select more than one answer):

Online Surveys & Market Research

– Broc Romanek

May 15, 2009

Proposal Rumor: Proxy Access Threshold of 1% Ownership?

Rare is the occasion where I blog about rumors, partly because they are often wrong – partly because the truth is soon known thereafter (so blogging the rumor serves no purpose other than the vanity that comes with being among the first to break the news).

But since Wednesday’s open Commission meeting to propose yet another reincarnation of proxy access is something that our community can’t get enough of – here is a Bloomberg piece by Jesse Westbrook which states that 1% is the ownership threshold that the SEC “may” propose. The article does specify the SEC “may” propose that threshold – which also means that it “may not.” The article notes that the final decision on the proposal’s content has not been made – as stated by SEC spokesman John Nestor – which I do believe to be the case.

So in the end, the article doesn’t really say much of anything that can be considered concrete (although I think highly of Mr. Westbrook) and that’s why I normally don’t blog about rumors…

If you can’t wait until next week to see the final version of Senator Schumer’s proposed “Shareholder Bill of Rights,” here is a draft and Mark Borges posted a brief summary in his “Proxy Disclosure” Blog this morning.

The SEC’s 75th Anniversary: Wanna Party?

On June 25th, the SEC Historical Society is hosting a 75th annual dinner at the National Building Museum – and it’s sold out. Personally, I passed on the official dinner due to the steep price tag of $250. There’s a recession on! I think the 60th anniversary celebration was more in the area of $20, but didn’t include dinner. Does anyone remember?

Anyways, I’m toying with the idea of picking a place nearby for a more informal gig the night before – on Wednesday, June 24th (it would be free as you would buy your own drinks). If you would be interested in such a thing, shoot me an email and I’ll see if we can raise a quorum.

The Society’s museum committee has put together this list of “75 Memorables,” which essentially is a list of the federal securities law/Wall Street highlights over the years. It’s a hard list to concoct as it’s obviously subjective – rejection of PUHCA (#69) and real-time access to EDGAR made the cut (#65; remember that the SEC used to make investors wait 24 hours to get access to filings until they were able to get out of that contractual restriction in ’02; probably one of the craziest things the SEC has ever done); adoption of XBRL did not…

“Early Bird” Rates: Expire Next Friday, May 22nd

Note that in response to our generous early bird offer for the “4th Annual Proxy Disclosure Conference” (whose pricing is combined with the “6th Annual Executive Compensation Conference”), the conference hotel is close to being “sold out.” These Conferences will be held at the San Francisco Hilton and via Live Nationwide Video Webcast on November 9-10th.

Act now, as this tier of reduced rates will not be extended beyond next Friday! With the SEC intending to propose new executive compensation rules in the near future – and Congress looking to legislate executive compensation practices this year, these Conferences are a “must.” Register now.

– Broc Romanek