Facing pressure by Congress and others who are impatient to see action (e.g. recent introduction of the “Authorizing the Regulation of Swaps Act” in the Senate), the Treasury Department outlined plans yesterday to regulate derivatives. Under these plans, the Commodity Futures Modernization Act of 2000 would be rolled back. The plans are detailed in this letter by Treasury Secretary Geithner to Congress and in this Treasury Department statement.
This action followed remarks by President Obama that he intends to rein in pay practices at all financial institutions, not just those receiving TARP money. It’s unclear yet what form these restrictions would take, although a few alternatives are posited in this WSJ article.
In this WSJ video, Joann Lublin does a great job explaining the futile consequences of past efforts by the government to rein in pay. Takes the words right out of my mouth…
SEIU Pushes for Clawbacks of Excessive Pay
Recently, the SEIU Master Trust – the pension funds managed on behalf of the SEIU – sent letters to the boards at 29 major financial services companies, demanding that they investigate more than $5 billion in compensation to their NEOs that may have been tied to derivatives and other instruments that are now worthless. The SEIU argues that if the payments – including cash and equity – are shown to be based on false economic metrics, they may be subject to clawbacks. They further demand that the boards overhaul their executive compensation practices so that the NEOs don’t reap bonuses and other incentivized pay regardless of corporate performance. A list of the 29 companies is at the bottom of this press release.
In this CompensationStandards.com podcast, Mike Barry of Grant & Eisenhofer and Stephen Abrecht of the SEIU explain this movement to seek clawback of excessive pay, including:
– How did the SEIU choose the targeted 29 companies?
– What legal theories are being used to seek recovery of excessive pay?
– What did the letters request? Do they seek responses from the boards of the companies?
Recently, the Council of Institutional Investors revised its governance policies regarding clawbacks to make it broader, asking companies to recapture compensation in circumstances beyond fraud. That’s all well and good, but it’s just as important for boards to adopt clawbacks with “teeth” (we outlined exactly how to do this in our Winter ’08 issue of Compensation Standards).
FINRA Proposes Changes to Conflicts of Interest Rules in Public Offerings
The SEC has finally published FINRA’s proposal to change its broker-dealer conflict of interest rules in public offerings of securities by a broker/dealer or an affiliate of a broker/dealer. FINRA has been seeking to change Rule 2720 since 2007. We have posted memos regarding the proposal in our “Underwriting Arrangements” Practice Area.
The SEC has announced that it will consider “whether to propose changes to the federal proxy rules to facilitate director nominations by shareholders” at an Open Meeting scheduled for next Wednesday, May 20. As Chairman Schapiro had promised, the SEC is moving forward quickly with its corporate governance agenda, with more proposals likely to follow in the next few months.
It is still hard to believe that the access debate has been going on for nearly 70 years. The debate originally kicked off with a Staff study in the early 1940’s that resulted in the solicitation of comments on a proposal to revise the proxy rules to provide that “minority stockholders be given an opportunity to use the management’s proxy materials in support of their own nominees for directorships.” Today, the SEC has thousands upon thousands of comment letters, as well as roundtables and other commentary, to draw upon resulting from the 2003 “universal” access approach and the 2007 Rule 14a-8 approach. I think that this remains one area where both sides are dug in, so we will still likely see fierce opposition to pretty much any proposal that the SEC puts forward.
Revised CDI Gives More Leeway on Selling Shareholder Disclosure
As Broc mentioned in the blog last month, the Staff recently updated a number of CDIs. Among the revised CDIs was Securities Act Rules CDI Question 220.04, which deals with how registration statements for secondary offerings should be revised to reflect the substitution or addition of selling shareholders. While the adoption of Rule 430B back in 2005 provided much more flexibility for issuers to deal with changes in the selling shareholder table, there remain situations where issuers do not meet the requirements for Rule 430B (i.e., when the issuer is not eligible for primary offerings under General Instruction I.B.1 of Form S-3).
The prior iteration of CDI Question 220.04 carried over some old concepts from a predecessor Telephone Interpretation and provided that issuers ineligible to rely on Rule 430B were required file a post-effective amendment (rather than a prospectus supplement) in order to add or substitute any selling shareholders, except that a prospectus supplement could be used to reflect donative transfers or de minimis transfers for value (e.g., less than 1% of outstanding) from a previously identified selling shareholder.
In the revised version of the CDI, the Staff notes that an issuer not eligible to rely on Rule 430B when the registration statement is initially filed must still file a post-effective amendment to add selling shareholders to a registration statement related to a specific transaction that was completed prior to the filing of the resale registration statement. However, the Staff now says that a prospectus supplement can be used to update the selling shareholder table to reflect any transfer from a previously identified selling shareholder, so long as the new selling shareholder’s securities were acquired or received from a selling shareholder previously named in the resale registration statement, and the aggregate number of securities or dollar amount registered has not changed.
The revision to this CDI provides significantly more flexibility for issuers that are not eligible to use a shelf for primary offerings to update the selling shareholder information in the prospectus for the type of normal course transfers that happen all of the time. By avoiding the filing of post-effective amendments, issuers are not faced with potential delays in the completion of secondary sales during the waiting period before the Staff declares the filng effective.
Staff Guidance on Dealing with Preliminary Earnings Estimates
Situations sometimes arise where an issuer may feel compelled to put out preliminary earnings numbers, which may at the time of issuance represent estimates of the potential results. In new Form 8-K CDI Question 106.07, that Staff notes that when an issuer reports “preliminary” earnings and results of operations for a completed quarterly period, the issuer must comply with all of the requirements of Item 2.02 of Form 8-K, even when those preliminary results may be estimates.
Further, while not discussed in the CDI, it should be noted that when the issuer provides the “final” earnings numbers, a separate Item 2.02 of Form 8-K obligation would be triggered. Instruction 1 to Item 2.02 specifies that the requirements of Item 2.02 are triggered by disclosure of material non-public information regarding a completed fiscal year or quarter, and that the release of any additional or updated material non-public information regarding a completed fiscal period would trigger an additional Item 2.02 Form 8-K.
Yesterday, Treasury released details of the Obama Administration’s tax proposals, including a wide variety of proposed tax cuts and tax revenue raisers included as part of the 2010 budget. The Treasury’s document provides additional details regarding the Administration’s efforts, announced last week, to shut down overseas tax havens. In describing this initiative, which is estimated to raise $95.2 billion over the next 10 years, President Obama said “[f]or years, we’ve talked about shutting down overseas tax havens that let companies set up operations to avoid paying taxes in America. That’s what our budget will finally do. On the campaign, I used to talk about the outrage of a building in the Cayman Islands that had over 12,000 business – businesses claim this building as their headquarters. And I’ve said before, either this is the largest building in the world or the largest tax scam in the world.” (The White House press release notes that one address in the Cayman Islands houses 18,857 corporations, few of which have any actual presence on the island.) As noted in this Bloomberg article, the proposals seeking to close corporate tax “loopholes” face some stiff opposition and an uncertain future in Congress.
Among the proposals discussed in more detail in Treasury’s summary include:
– limiting deductions associated with deferred profits retained in foreign subsidiaries of U.S. corporations;
– disallowing foreign tax credits for taxes paid on income that is not yet subject to U.S. tax; and
– treating interest payments received by low-taxed foreign affiliates from high-taxed foreign affiliates as subject to current U.S. tax.
SEC’s Brings Proxy Voting Case Against an Investment Adviser
The SEC recently brought a settled administrative proceeding against INTECH Investment Management LLC and its Chief Operating Officer for exercising voting authority over client securities without having written policies and procedures “that were reasonably designed to ensure it voted its clients’ securities in the best interests of its clients” and also failing to adequately disclose the voting policies and procedures to clients.
The case was brought under Investment Advisers Act Rule 206(4)-6, which was adopted in 2003 and requires that advisers adopt and implement policies and procedures reasonably designed to ensure that they vote their clients’ proxies in the clients’ best interests, including addressing material conflicts that may arise between the adviser’s interests and those of its clients. The rule also requires that advisers disclose to clients how they can obtain information about how the adviser voted proxies, and describe to clients the adviser’s proxy voting policies and procedures.
In the case, the SEC alleged that INTECH had used ISS recommendations for its voting policies, but had moved from ISS General Guidelines to ISS Proxy Voter Service (PVS) under circumstances involving a potential conflict of interest. The SEC alleged that INTECH chose to follow the voting recommendations of ISS-PVS while the adviser was participating in the annual AFL-CIO Key Votes Survey that ranked investment advisers based on their adherence to the AFL-CIO recommendations on certain votes, and the adviser believed that an improved score in the AFL-CIO Key Votes Survey would be helpful in maintaining existing and attracting new union-affiliated clients, without considering the impact on clients not affiliated with unions.
It will be interesting to see if this case represents one isolated incident, or if it reflects a broader area of SEC interest, given the ongoing concerns with proxy voting.
Chairman Schapiro’s Outline for Regulatory Reform
With Congress moving slowly on the financial regulatory reform front, it certainly gives regulators an opportunity to fight for their position in the new reformed landscape. Chairman Schapiro took that opportunity in a speech last Friday before the Investment Company Institute. In the speech, the Chairman outlined her vision of the SEC’s role in the new world order as an independent capital markets regulator that is united, and not divided, in approaching the regulation of the products, disclosure and intermediaries. Chairman Schapiro also endorsed FDIC Chairman Sheila Bair’s call for a single regulator for systemically significant firms coupled with a systemic risk council to provide macro-prudential oversight of risk.
As the proxy season progresses, we are starting to see the results from efforts by activist investors to move Say on Pay forward through the shareholder proposal process. Not surprisingly, proposals asking companies to implement an advisory vote on executive compensation have been garnering significant levels of support this season, as the outrage over pay levels continues largely unabated.
Last week, AFSCME issued a press release noting “[w]ith 29 Say on Pay proposals voted on since the start of the 2009 shareholder season, ten have received a majority of the votes cast (out of FOR and AGAINST votes). These 29 proposals have averaged more than 46 percent support, and this level of support is expected to increase as companies release their final voting numbers. Approximately 80 Say on Pay shareholder proposals are expected to be voted on this year.” Generally, the level of support this year has been higher than the support received for similar proposals in the very short history of the Say on Pay shareholder proposal.
Ted Allen of RiskMetrics Group recently provided some additional insights in the RMG Risk & Governance blog, noting “[t]he best showing so far this season was 62 percent support for a shareholder proposal at Hain Celestial; the lowest were 30 percent votes at Eli Lilly and Burlington Northern Santa Fe, according to RiskMetrics data. The two votes appear to reflect the firms’ ownership mix. At Lilly, a family endowment holds an 11.9 percent stake; at Burlington Northern, Berkshire Hathaway owns a 22.6 percent stake. In the coming weeks, ‘say on pay’ proposals are scheduled for a vote at Chevron, ConocoPhillips, Exxon Mobil, Home Depot, McDonald’s, Qwest Communications, Raytheon, Target, UnitedHealth, and Yum! Brands.”
For at least one company that has already implemented Say on Pay, apparently not all shareholders are on the warpath – as noted in this Washington Post article, last week shareholders overwhemingly supported executive pay at Verizon Communications with a 90% vote in favor!
CalSTRS Calls for Pay Reforms at 300 Companies
Say on Pay features prominently in a new initiative announced by CalSTRS last week. CalSTRS is calling on 300 of its portfolio companies to develop executive compensation policies and to allow shareholders advisory votes on those policies.
As part of the initiative, CalSTRS has published model executive compensation policy guidelines, as well as some broad executive compensation principles for the targeted companies to follow. CalSTRs plans to step up its engagement with the 300 targeted companies on executive pay issues, and in the event that the companies are unresponsive, the pension fund will ultimately vote against or withhold votes in directors’ re-election.
Deal Protection: The Latest Developments in an Economic Tsunami
On Tuesday, the SEC held its Roundtable on Short Selling (you can still catch the archive of the four hour session), where the Commission solicited the views of a variety of interested parties, including representatives of public companies, broker-dealers, SROs, funds and academics. In her opening remarks, Chairman Schapiro noted that short selling has outpaced any other issue “in terms of the number of inquiries, suggestions and expressions of concern.” Chairman Schapiro noted that an evaluation of short sale regulation is a priority for the Commission.
As could be expected, the views expressed on short selling were diverse and there was not necessarily a lot of common ground. The one exception is with respect to naked short selling, where the panelists lauded the SEC’s efforts in 2008 to try to address abusive naked short selling. As for other issues, representatives of the investment industry seemed to favor the less dramatic individual stock circuit breaker approach, while some issuer representatives seemed to favor market-wide measures. One of my favorite quotes from the session was from William O’Brien, CEO of the stock trading platform Direct Edge, who said of broad scale short selling restrictions: “Nobody likes being stung by a bee, but you don’t kill all the bees and then wonder why all the flowers have died.” Yet another issue that received some attention was the cost and time that would be necessary to implement any new short sale regulations.
With the Roundtable out of the way, now it is time for the SEC to start considering the comments and narrowing down the options to one workable approach. The comment period closes June 19.
If you are looking for a more “blow-by-blow” account of the Roundtable, then you should check out the tweets of SEC Investor Ed on twitter. Staff in the Office of Investor Education and Advocacy at the SEC are busy twittering away, including providing an account of the Roundtable in 140 character increments.
Short Sale Studies: Mixed Results from Last Year’s Emergency Actions
The SEC recently posted a study performed by its Office of Economic Analysis regarding the impact of last July’s ban on naked short selling of the securities of 19 large financial institutions. After comparing the performance of the securities subject to the ban to control groups of securities not subject to the ban, the SEC’s economists concluded that “imposing a pre-borrow requirement may have had the intended effect of reducing fails but may have resulted in significant costs on all short sellers even those whose actions were not related to fails.”
With another perspective, Abraham Lioui recently published an EDHEC-Risk Position Paper presenting a study of last year’s short sale bans. Lioui notes in the Summary:
“As a result, short sellers perhaps did not really merit the punishment that, by simply banning the shorting of the shares of financial institutions, the market authorities recently meted out. It also seems (and this study confirms it) that the shares that were the object of the ban were relatively unaffected by it. All the same, this drastic measure cast the market authorities in a particularly negative light. After all, the reasons for this measure are unclear, a lack of clarity that adds to the bewilderment of the market. The market, of course, reacted accordingly.
The ban on short selling was followed by a sharp rise in the volatility of the markets, and on the stock markets concerned the impact of the ban was systematic; the impact on volatility was greater than that of the financial crisis. In general, the risk/return possibilities of investors worsened. And although it is hard to substantiate the impact on the volatility of the shares, the rise in the volatility of these shares, which is undeniable, is a result of the rise in idiosyncratic risk and thus of the noise in the markets. As a consequence, share prices deviate yet more from their fundamental value. Finally, the desired effect on market trends has not been achieved (no reduction of the negative skewness of returns is being observed) and there is no evidence of the possible impact of this measure on extreme market movements. What is clear is that stock market indices now have components that are subject to different rules, differences that make them even less representative and relevant.”
New Delaware Decision: Reaffirmation of Pre-Suit Demand Precluding Challenge to Board Independence
Here is some commentary from Brad Aronstam of Connolly Bove Lodge & Hutz: Recently, the Delaware Court of Chancery issued this letter opinion in FLI Deep Marine LLC v. McKim (C.A. No. 4138-VCN) affirming the well-settled principle that shareholders making a demand upon a board of directors concede the independence of a majority of the board and, as such, will be precluded from later arguing that demand should be excused because the directors were conflicted. While this holding is far from revolutionary, the action involved atypical facts that warrant attention by practitioners counseling boards and shareholders in this common setting.
The minority shareholders of Deep Marine Technology alleged that the Company’s majority shareholders and their designees had looted the Company. Rather than pleading demand futility based upon the board’s lack of independence, the minority shareholders made a pre-suit demand requesting that the Company’s directors take immediate action to, among other things, investigate the alleged wrongdoing and bring appropriate action to recover the funds wrongfully diverted from the Company. The directors responded to the demand the following day by forming a special committee comprised of two directors – who themselves were accused of wrongdoing – to investigate the allegations of the demand. Three weeks later, “before the special committee had completed its investigation and before the Board took any action concerning the demand,” the minority shareholders filed suit alleging that demand was futile and should be excused.
As noted by Vice Chancellor Noble, “[t]he requirement of demand effectuates the ‘cardinal precept’ that directors manage the business and affairs of the corporation.” Delaware could “hardly be clearer” that a plaintiff’s pre-suit demand “conclusively concede[s] the independence of the Board, and . . . preclude[s] [the shareholder] from [later] arguing that demand should be excused because the directors are conflicted.”
The Court rejected the plaintiffs’ request for an exception to this “well-settled” rule on the grounds that “the Board and its special committee [we]re comprised of allegedly conflicted directors” and thus “the Board’s consideration of their demand [wa]s ‘a farce meant to giver the illusion of independence where none exists.'” While recognizing that the plaintiffs “might well be correct” concerning the alleged lack of independence and disinterestedness among the board given the Complaint’s allegations, the Court categorized the plaintiffs’ decision to make a demand as “inexplicable” and “improvident.” The Court refused to “grant the plaintiffs relief from a strategic decision they now regret,” as doing so would “part ways with established Delaware law.” The Court implied that it might have reached a different decision if the plaintiffs could establish that “their plea . . . [was] based on new information” concerning the Board’s lack of independence.
The decision reaffirms that shareholders who make a demand cannot later (absent new information) challenge director independence and wrestle control of potential claims from a special committee prior to that committee’s findings (if at all). Shareholders must therefore continue to think long and hard about whether to make a demand or allege demand futility.
Practitioners should also note that although the Court refused to endorse a specific timetable for a special committee to conduct and complete its investigation (see Op. at 11 noting that “whether the board has taken more than a reasonable amount of time to conduct its investigation is a fact question, and one for which no formula exists”), a committee should be prepared to offer a “persuasive reason” for the length of its investigation.
Before we all move on with the next phase of the SEC’s revived enforcement efforts, we still have occasion to review what may have helped get use into this mess. As reported in this Bloomberg story from yesterday, the GAO released a report at the end of March outlining the headwinds faced by the Enforcement Staff over the past several years. (Broc mentioned the report in the blog last month.) Today, the Senate Subcommittee on Securities, Insurance, and Investment of the Committee on Banking, Housing, and Urban Affairs will hold a hearing on strengthening the SEC’s enforcement responsibilities.
The Bloomberg story points out how the GAO found that the SEC instituted policies that “slowed cases and led enforcement-unit lawyers to conclude commissioners opposed fining companies.” As one unidentified Staffer put it, there was a feeling that the Commissioners prevented Enforcement from “doing its job.” The findings of the GAO’s report bear out my own experience during those years, not only with respect to Enforcement but also with respect to all other regulatory matters – hostility toward the Staff and its recommendations became institutionalized, which served to not only demoralize the Staff but also to result bad decisions being made at all levels.
The report also notes the use of executive sessions during former Chairman Cox’s tenure, where some Enforcement Staff were barred from participating. The report indicates that executive sessions occurred on 40% of the days when the SEC met to vote in closed Commission meetings in 2008, more than three times the rate in 2005 when Cox was appointed Chairman (but equal to the rate from 2003 and 2004).
As for the future of Enforcement, Chairman Schapiro reiterated her agenda for the Division of Enforcement in an address last week to the Society of American Business Editors and Writers. She noted that she has streamlined SEC enforcement procedures by no longer requiring full Commission approval to launch an investigation, and eliminating the need for approval by the full Commission before negotiating a settlement. She stated “before these directives, enforcement attorneys will tell you that they worried about red lights at every turn — now they see green.” This is sure to mean many more inquiries and, in all likelihood, much speedier cases as the Enforcement Division ramps up again.
SEC Brings First Credit Default Swap Insider Trading Case
Earlier this week the SEC filed a complaint alleging insider trading in credit default swaps. The SEC noted in its Litigation Release that this case is the first of its kind – and I suspect that it is certainly not the last case we will see regarding the much-maligned credit default swap market. Not only is the case novel in the sense that the alleged insider trading and tipping occurred with respect to credit default swaps, but it is also another notable case of the SEC alleging insider trading in fixed income markets. The SEC’s interest in this area was highlighted two years ago in the settled case of SEC v. Barclays Bank PLC, Litigation Release No. 20132 (May 30, 2007). (For more on the implications of that case, check out our “Insider Trading” Practice Area.)
In terms of the SEC’s jurisdiction over the trading in the OTC derivatives, the SEC noted in the complaint that “[t]he CDSs at issue in this matter qualify as security-based swap agreements under the Gramm-Leach-Bliley Act of 2002 and are therefore subject to the antifraud provisions set forth in Section 10(b) of the Exchange Act and the rules promulgated thereunder.”
Cracking Down on an Opinion Mill
While on an Enforcement theme here, I note that the SEC brought an action earlier this week against the operators of what the SEC called a Rule 144 “opinion mill.” In its Litigation Release, the SEC notes that it has filed a complaint against the operators of 144 Opinions, Inc., which runs the website www.144opinions.com. They are alleged to have “issued fraudulent legal opinions used by promoters in a pump-and-dump scheme, and others, to sell securities in violation of the registration provisions of the federal securities laws.” Rule 144 opinions over the Internet – what will they think of next? Maybe we will have to start twittering Rule 144 opinions some day…
As noted in this CFO.com article, FASB Chair Bob Herz noted in a recent Financial Crisis Advisory Group meeting, consisting of accounting regulators from around the world, how hard it would be to push the convergence of global accounting standards in the US, mainly due to politics in the wake of the financial crisis. Herz’ statement that it make take 10-15 years to pull it off surprised the room since the so-called Norwalk Agreement, a memorandum of understanding between the FASB and IASB, calls for the completion of all “major joint projects” by 2011.
And who knows, that might be conservative when you read this other CFO.com article in which it notes that CFOs are urging the SEC to drop a proposal mandating US companies to adopt IFRS. Here are the comments made on the SEC’s IFRS proposal; the extended deadline ended last Monday.
IASB: IFRS Rules Are Freely Available
It’s good to see that the International Accounting Standards Board is following the FASB’s lead and allowing free access to summaries of its core International Financial Reporting Standards. Unfortunately, the IASB’s additional guidance – which includes its rationale for its conclusions – are still subscription-based.
An IFRS’ E-Learning Website: This can be useful for those of you struggling to get up to speed on IFRS: Deloitte has an IFRS’s e-learning website. The site contains a series of IFRS training modules which are offered free once you register.
More Proxy Season Developments
If you haven’t signed up to get our new “Proxy Season Blog” pushed out to you, here are a few of the items you’ve missed during the past week or so:
– Swine Flu: Time to Have Electronic Shareholder Meetings?
– Survey Results: Number of Section 16 Officers
– Latest Trends: CEO-Chair Separation
– Barclay’s 2009 Annual Report Survey
– Dissecting the Citigroup Annual Meeting
– My Ten Cents: NACD’s “New” Key Agreed Principles
– Broadridge’s Latest Implementation of Householding
– Proxy Season Update
– Facing an Unpredictable World: How to Change Earnings Guidance Practices
Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog (just like you can accomplish that functionality for this blog).
As a “thank you” to members – and due to the importance of the analysis included in it – we have decided to share a complimentary copy of the March-April issue of The Corporate Executive with you. This issue includes pieces on:
– Grant Guidelines and Declining Stock Prices
– Excessive Windfalls in Compensation Once Stock Prices Recover
– Two Fundamental—and Very Relevant—Considerations for High Level Executives
– Executives Surrendering Underwater “Mega” Grants
– Important, Timely Guidance on the Accounting Treatment of Acceleration of Vesting—Including Ramifications for Underwater Options
– Important, Timely Suggestions from a Respected CEO
In addition, you should read this supplement as it contains our recommended key fixes to the SEC’s executive compensation rules.
Act Now: To continue receiving the practical guidance imparted in The Corporate Executive, try a no-risk trial now.
Congrats to Jesse Brill for appearing on “The Today Show” this morning during a piece on executive pay. Here is a video archive of the segment.
SEC May Reverse “December Surprise”: Equity Compensation Disclosure Methodology for the Summary Compensation Table
In her AP article, Rachel Beck notes how the SEC may be considering reversing the rules from the December ’06 “surprise” – this relates to equity compensation disclosure methodology for the Summary Compensation Table.
Here is some commentary from Cleary Gottlieb on this development:
Many of you will recall that when the SEC comprehensively revised the executive compensation disclosure rules in August 2006, equity awards were to be presented in the Summary Compensation Table based on the full grant date fair value of each year’s awards, computed in accordance with FAS 123R. This was the methodology set forth in the proposed rules in February 2006, and there was full consideration of the approach as part of the comment process before the final rule was adopted.
In an unexpected release on December 22, 2006, the SEC changed the rules to require that the grant date fair value of an equity award be reflected in the Summary Compensation Table based on the recognition of accounting expense in the reporting company’s financial statements as required by FAS 123R in respect of the award, typically over an amortization schedule that corresponds to the award’s vesting period. That revision was adopted without a public meeting, without notice and comment and without any adequate explanation as to why the change was being made. Beyond the procedural concerns, many considered that the revision undercut the purpose of the Summary Compensation Table by obfuscating the value of equity-based grants, which are of course a principal element of executive compensation, and led to unnecessary last-minute changes to the composition of the named executive officers, primarily because amortization under the accounting rules was typically not permitted for “retirement eligible” executives.
Fast forward two-plus years, and we learn that the SEC is considering a reversal back to the original August 2006 rule. Press reports on Friday stated, based on an interview with SEC Chairman Mary Schapiro, that the SEC “is considering changing a formula that critics say often allows public companies to low-ball in regulatory filings just how much top executives are paid.” If the reversal happens, it in fact should be a welcome development for critics and reporting companies alike. The inclusion in the Summary Compensation Table of the grant date fair value of equity awards granted in each year to named executive officers presents a clearer picture of compensation decisions in a given year, and makes the determination of the named executive officers more predictable and sensible.
If the press reports are correct, interesting questions arise as to the transition from the current rule to the new rule. Will unamortized awards from prior years be entirely excluded from the Summary Compensation Table? Will companies be required or permitted to recompute the amounts disclosed for prior years, as if the changed rule had been in effect in the past? Could the basis of disclosure for 2009 (if that is the first fiscal year for which the change is effective) equity awards be different than the basis for the amounts set forth in the Table for earlier years? We would expect the SEC to address these and other transition issues as part of any rule change or in accompanying guidance. Stay tuned.
SEC Filing Fees: Going Up 28% for Fiscal Year 2010
Last week, the SEC issued its first fee advisory for the year. Right now, the filing fee rate for Securities Act registration statements is $55.80 million (the same rate applies under Sections 13(e) and 14(g)). Under the fee advisory, this rate will rise to $71.30 per million, a hefty 28% price hike. The new fees will not go into effect until five days after the date of enactment of the SEC’s 2010 appropriation – which often is delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battle over the government’s budget.
You might be asking, “How are the SEC’s fees set?” The SEC sets its filing fees annually under the “Investor and Capital Markets Fee Relief Act of 2002.” The SEC’s budget is not dependent on its fees; it’s not a self-funded agency. In fact, the SEC wishes it could use those fees as it brings much more in for the government than it’s allowed to spend. Learn more how this all works in this blog.
I recognize that the heavy media attention paid to last week’s Banc of America annual meeting of shareholders is an anomaly and will never be the norm for all companies- or even the norm for an individual company from year-to-year. Still, the heightened level of attention paid to the meeting – including details that many of us in the business would consider minor – should serve as a “wake-up call” to all companies that annual meetings are indeed changing.
Here are a few facts about the BofA meeting: four hours long; 2000 in attendance, with many disgruntled shareholders turned away (and some complaints that “insiders” displaced shareholders who traveled far to attend); two directors with over 30% withhold votes and four more with more than 20% (with those numbers likely higher if broker nonvotes were removed, per this article); and a binding “split the Chair/CEO” proposal garnering 50.3% support.
Here are some takeaways from the BofA meeting that relate to growing trends:
1. People Expect Immediate Voting Results – As just mentioned last week in this blog, there is a growing expectation that the voting results will be announced at the conclusion of the meeting – since the general public is conditioned by the immediacy of the results produced by our political elections.
I watched numerous news accounts on the day of Banc of America’s meeting and every single reporter spent considerable time about their frustration over how the voting results were not announced at the conclusion of the meeting. Can you imagine what those reporters would have said if they knew that the typical timeframe for reporting voting results from an April meeting was mid-August? Wisely, BofA recognized the public relations danger of waiting that long – and a few hours after the meeting, the company released its results in a press release.
2. The Nature of the Media is Changing – There was quite a bit of “live blogging” at the meeting (including live tweeting); this type of live coverage will undoubtably grow for many companies. Live bloggers/tweeters included: SEIU Blog; Rick Rothacker of the Charlotte Observer; and radio station WFAE (click on live blog link). And of course, other blogs covered the meeting after-the fact (eg. DealBreaker).
One consequence of coverage provided by others than the mass media is that the more interesting parts of the meeting were covered. For example, there was considerable commentary about Evelyn Y. Davis, who apparently was in classic form. Evelyn talked so much that people were shouting “Order!” at her – and at one point, the entire packed theatre started clapping in the middle of her antics in the hopes of getting her to sit down. Here is one blog that focused on Evelyn – and here is another blog.
3. Lack of Attention to CEO Succession Can Be News – As noted in this WSJ article, a reporter was able to sleuth that the board meeting held after the shareholders’ meeting did not include a discussion of CEO succession planning. CEO succession planning continues to be the least understood part of a board’s job – yet, probably the most important. Learn more about how to implement a succession plan during our June 17th webcast: “How to Plan for CEO (and Other Senior Manager) Succession.”
4. CEO Lewis Loses His Chair Title – As noted in this WSJ article, BofA’s shareholders voted in favor of a binding bylaw amendment requiring the board to split the CEO and Chair jobs at the company, mostly aimed at Ken Lewis who held both titles. After the shareholder meeting, BofA’s board acted in the wake of the vote and split the jobs (and a longtime director became the board chair). According to RiskMetrics, the vote marked the first time that a S&P 500 company was forced by shareholders to strip a CEO of his Chair duties.
5. The Media Might Push Shareholder for More Withholds – Check out this Bloomberg article entitled “Bank of America Owners Declare War on Taxpayers,” in which Jonathan Weil rails against those BofA shareholders that didn’t withhold their votes (despite the quote from Prof. Charles Elson in the article, who properly recognizes that the level of withhold votes here was quite significant compared to historical norms).
6. Coming Soon: Online Battle for Board Seats – Even though BofA knew in advance that its meeting would be contentious – a group of seven unions had announced a “just vote no” campaign beforehand – it still didn’t have a notable online campaign against it (other than a few efforts to get similarly-minded people together like this “call to action” to have BofA stop funding coal). Based on continuing trends in the political arena (see this Washington Post article about how the current Virginia Governor’s race is being waged primarily online), I think it’s worth reading my article – “The Coming Online IR Campaigns: The Future of Director Elections” – from the Spring ’08 issue of InvestorRelationships.com well before the 2010 proxy season so you can be prepared for some possible changes next year.
It’s worth wrapping up my thoughts on BofA with an excerpt from this commentary from Beth Young of The Corporate Library:
A second shareholder proposal, to give holders of 10% of B of A’s shares the ability to call a special shareholder meeting, nearly passed, garnering over 49% of the vote. What’s surprising about this proposal’s near-passage is that B of A, unlike the majority of companies we cover, already allows shareholders to call a special meeting, although it requires that holders of 25% of shares make the demand. Often, the fact that a company has gone a good part of the way toward implementing a proposal undercuts shareholder support for it because many shareholders are reluctant to micromanage. That was not the case at B of A this year, however.
Finally, B of A was required to put up a management proposal for an advisory vote on executive compensation as a result of its participation in TARP. About 71% of shares voted in favor of this proposal, a high proportion given the extent of shareholder anger. The ability of brokers to fill in votes for their customers who did not vote, the so-called “broker-vote,” likely boosted the vote on this proposal. (Broker voting, a creature of stock exchange rules, is not available on shareholder proposals.)
Although the SEC appears poised to approve changes to the broker-may-vote rule that will prevent its use in uncontested director elections—broker votes accounted for some of the support for Mr. Lewis and the other embattled B of A directors—those changes would not extend to the shareholder advisory vote on executive compensation. It seems likely that shareholders will press the SEC to keep broker votes from being cast on advisory votes in the 2010 proxy season.
Happy Anniversary Baby! #7 and Counting
Yes, today marks seven years of my blither and blother on this blog (note the DealLawyers.com Blog is nearly six years old – not shabby!). It’s the one time of the year that I feel entitled to toot my own horn – as it takes stamina and boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. I’m sure I won’t get more refined with age.
I’m excited about our upcoming webcast – “Looking Out for #1: How to Manage Your Career” – because it will enable me to share some insights about blogging that I have gleaned over the years. It will hopefully enable you to feel more “blog proud” rather than “blog tolerant,” two nice terms-of-art coined by “3 Geeks and a Law Blog” in this recent piece.
I’m excited to see that another of the old-timer bloggers, Mike O’Sullivan of Munger, Tolles & Olson, is back on the scene blogging again after a five year hiatus. Give his new “Provided However” Blog a try…
Our May Eminders is Posted!
We have posted the May issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
We just sent the March-April issue of The Corporate Executive to the printer. This issue includes pieces on:
– Grant Guidelines and Declining Stock Prices
– Excessive Windfalls in Compensation Once Stock Prices Recover
– Two Fundamental—and Very Relevant—Considerations for High Level Executives
– Executives Surrendering Underwater “Mega” Grants
– Important, Timely Guidance on the Accounting Treatment of Acceleration of Vesting—Including Ramifications for Underwater Options
– Important, Timely Suggestions from a Respected CEO
To have this issue rushed to you, try a no-risk trial to The Corporate Executive today.
Corp Fin’s Latest CD&I: XBRL Boxes for 10-Q/10-K Cover Pages
As we flagged early last week in this blog, companies need to place a new box on their Form 10-Q and Form 10-K cover pages, even if they won’t be filing in XBRL anytime soon (see our new cover pages available in Word). Yesterday, Corp Fin issued a new “Exchange Act Form” Compliance and Disclosure Interpretation – CD&I 105.04 – to deal with the many questions being asked on this new box.
The SEC’s New Risk Identification & Assessment Initiative
Yesterday, the SEC announced an enhanced effort to identify and assess risks in the markets by getting help for its Office of Risk Assessment through a new “Industry and Markets Fellows Program.”
Back in ’04, under former SEC Chair Donaldson’s tenure, the Office of Risk Assessment was created (after getting the idea from former Chair Pitt) – but it was only staffed with a handful of folks and the office chief left after a few years and was never replaced. Now it looks like this Office will be staffed more appropriately.