Monthly Archives: July 2009

July 31, 2009

Our “Q&A Forum”: The Big 5000!

In our “Q&A Forum,” we have reached query #5000 (although the “real” number is really much higher since many of these have follow-ups). I know this is patting ourselves on the back, but it’s nearly eight years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been over 17,000 questions answered.

You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis and that any answers don’t contain legal advice.

You’ve never seen me so happy! They’re bringing Jimmy back! New “Rockford Files” coming soon…

Changes in the SEC’s Misappropriations Theory? SEC v. Cuban

Many have been following the battle between Mark Cuban and the SEC over Cuban’s alleged insider trading, partly due to Cuban’s prolific personality as I blogged about a few months ago.

A few weeks ago, a federal court – US District Court for the Northern District of Texas – dismissed the SEC’s insider-trading complaint against Cuban in SEC v. Cuban. The decision has stirred quite a bit of debate over the future of the misappropriations theory. We are posting memos analyzing the case in our “Insider Trading” Practice Area.

In this podcast, Ken Winer of Foley & Lardner discusses the court’s decision in Cuban, including:

– Case’s implications for executives who are about to provide material, nonpublic information to a third party
– Whether the dismissal means that it will be safe for someone in Cuban’s position to trade based on information obtained from an executive

Consideration Delayed: Formation of a New “Consumer Protection Agency”

While the House gears up today to vote on a say-on-pay bill (here is the latest version of the bill; here is Mark Borges’ analysis of what amendments will be offered on the floor today), Rep. Barney Frank and his House Financial Services Committee have delayed a vote on the bill that would create a new “Consumer Protection Agency” amid concerns from the business community. A number of Senators (including Democrats) have already expressed concern over this agency. Over 20 business groups have also urged a delay including the Chamber of Commerce and the AICPA, as noted in this article.

As an aside, check out this recent blog from the FEI’s Edith Orenstein about the yin-yang of regulation.

– Broc Romanek

July 30, 2009

Differing Views on “Dark Pools”

Recently, I cautioned how “dark pools” may be one of the next big problems facing our markets. A member – who probably knows more about this area than I do – disagreed and says:

I have a number of friends working for dark pools – and I remember reading some of the initial SEC market reports on stock order preferencing and internalization back in the day that were precursors to this type of trading – and I don’t share your dire opinion. Because in the end, dark pools provide more liquidity and help narrow stock spreads and because, quite frankly, it’s inevitable that automated algorithmic software agents will disintermediate human market makers and specialists.

The biggest problem is that they need to get rid of that name “dark pools” as it sounds like something out of a Harry Potter book – and will one day result in Henry Waxman and Maxine Waters calling for a special House investigation. In the end though, dark pools will get more regulated – not so much because they are bad – but because institutional wholesale traders who made a living “working” large orders by calling up their Ivy League buddies on other trading desks can not, in the long run, compete with the automated algorithms associated with the dark pools so in order to preserve their “buggy whip”-like jobs stricter regulations will be demanded to protect them from the algorithm software engineer menace.

It’s Here: New Edition of Romeo & Dye’s “Section 16 Forms & Filings Handbook”

We just started mailing the new ’09 edition of the popular Romeo & Dye “Section 16 Forms & Filings Handbook,” with numerous new – and critical – samples to those that ordered it. If you don’t try a no-risk trial to the “Romeo & Dye Section 16 Annual Service,” we will not be able to mail this invaluable resource to you. You can use this order form or order online.

The Annual Service not only includes the “Forms & Filings Handbook,” it also includes the popular “Section 16 Deskbook” and the quarterly newsletter, “Section 16 Updates.” Get all three of these publications when you try a no-risk trial to the Romeo & Dye Section 16 Annual Service now.

SEC Offers Its News Via Email

For those of you that don’t feel pounded already with email alerts about breaking news, the SEC recently added a free service where you can subscribe to receive their latest developments via email. You can select from a menu as to what type of news you wish to receive (unfortunately, it doesn’t offer choices by type of law – rather, it’s by the type of document the SEC has released). This builds on pre-existing services that the SEC offers: RSS feeds and Twitter.

So if you had this service, you would have seen Corp Fin Director Meredith Cross’ first written statement since she rejoined the SEC in this testimony – entitled “Protecting Shareholders and Enhancing Public Confidence by Improving Corporate Governance” – that she delivered yesterday to the Senate Banking Committee as soon as it was made available …

By the way, I can’t find a spot to “follow” (ie. sign-up) for the SEC’s Twitter feed on their site. However, you do get the option to do so when you subscribe to their email alerts or you can just do so by going to their Twitter page (they already have over 2700 followers). But most folks provide a link to their Twitter feed on their site or blog, like I do on the top left side of this blog for my Twitter feed. Am I missing something?

– Broc Romanek

July 29, 2009

Musings: SEC’s Proposal to Report Voting Results

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For those that regularly read this blog, you know I was happy to see the SEC propose a requirement that would force companies to disclose the voting totals from their shareholder meetings more timely. It has always amazed me that some companies stonewall on the vote results – it’s a poor PR move as it riles shareholders (see this example) and they have to disclose it eventually. But I imagine they do this in the hope that shareholders – and the financial press – will lose
interest in the story.

The SEC proposes that disclosure be made within four business days after the end of a shareholder meeting (on a Form 8-K or a periodic report). For a contested director election, the 8-K would be due within 4 business days
after the preliminary voting results are determined.  The proposal begs the question as to when “preliminary voting
results are ‘determined'” (i.e. trigger date). Maybe I’m missing it, but there doesn’t seem
to be any exception for other types of contested matters?
Anyways, if it’s a contested director election, there could be two Form 8-Ks – one within four business days after the meeting’s end based on a preliminary vote and another one within four business days of the final vote being certified.

Importance of Tabulation Process

On page 44 of the SEC’s proposing release, the SEC provides its discussion of this proposal – and a cost analysis is on page 96. Understandably, there is not a detailed discussion of the tabulation process and what’s involved. But as I wrote about in the Fall ’08 issue of – in my interview with Carl Hagberg (whose upcoming issue of the Shareholder Service Optimizer will provide pointers on the inspection process) – the time is now for companies to rethink how they process their votes as well as who they hire to do it.

For starters, you probably want to hire only those inspectors that have a well-defined process about how they inspect – and you probably should hire only those inspectors whom you feel comfortable would pass muster under the pressures of litigation (eg. an entity that is independent – perhaps one is not your transfer agent). With the loss of broker nonvotes, we can expect closer elections and more litigation over voting results. You need to protect yourself and not rely on procedures that historically have been pretty loose.

Is Four Days Enough?

I expect that we will see quite a few comment letters from companies that express concerns that a 4-day filing requirement is unrealistic for some meetings – particularly getting a preliminary vote for a contested election in that time period. In my opinion, companies should be able to meet a fairly short deadline (5 business days?) if there isn’t a close call since most votes typically come from “street-name holders” – where
virtually all the tabulation has been finished by Broadridge before the polls
close. And remember that the voting instruction forms
received from street-name holders aren’t even subject to
examination by the Inspector of Election – or by anyone else – unless the
Inspectors’ Report has been released and the results have been officially
challenged in court.

But I do agree that a reasonable exception needs to be carved out – not just for director  election contests,
but for any meeting where the preliminary results on one or more
proposals are “too close to be completely comfortable with” – to allow for more time (and of course, a true proxy contest – where both sides have the
right to examine the proxies and challenge their validity – is another matter
altogether). In fact, maybe there shouldn’t be a trigger for preliminary results – so these type of results are never required to be filed – because of their “preliminary” nature. Maybe the SEC’s rule should just focus on final results.

The trick here is to figure out how to properly define “too close” so that companies don’t regularly lean on this exception whenever they don’t like the voting results. Perhaps a specified voting percentage is the way to go (eg. 48/52% or closer)? 

If companies invoke this type of exception, I imagine investors may not be excited about a lack of a cap regarding how long a company can go without sharing a final result. Maybe a compromise is a filing standard that would require with
certification of final results – maybe within 10 business days from the date of the meeting?

What Next for Regulators?

since the
SEC is looking to adopt requirements related to the process by which votes
are inspected and reported, it seems like a prime opportunity to tackle
overvoting.  My sense is different tabulators use different methodologies
to resolve overvotes. A closer look at this process has been long overdue to
ensure that practices are fairly uniform.

By the way, one beef that investors have had is that some companies have presented the percentage of votes in favor of shareholder proposals as
a proportion of all votes cast, rather than as the standard RiskMetrics’ pro
forma calculation that excludes abstentions from the
total. The SEC should clarify what they want companies to disclose.

Announcing Voting Results: California Style

From Keith Bishop: Apropos to the SEC’s recent proposal concerning timely announcement of voting results – California law already requires that for a period of 60 days following a shareholders’ meeting, the corporation must upon the written request of a shareholder “forthwith” inform the shareholder of the result of any particular vote.  Cal. Corp. Code Sec. 1509.  This applies to annual and special meetings.  The corporation must disclose the number of shares voting for, the number of shares voting against, and the number of shares abstaining or withheld from voting.  

In the case of election of directors, the corporation is required to report the number of shares (or votes in the case of cumulative voting) cast for each nominee.  Now you may be saying, well that is good for California corporations, but what about foreign corporations?  Foreign corporations that are qualified to transact intrastate business in California are required to provide this information at the request of a shareholder resident in California.  Cal. Corp. Code Sec. 1510(a).  

In addition to natural persons residing in California, a shareholder will be considered resident in California if it is a state bank, national bank headquartered in California or any retirement fund for public employees established or authorized by California law (think, CalPERS and CalSTRS). Cal. Corp. Code Sec. 1510(b).   Even if the foreign corporation is not qualified to transact business in California, it can be subject to the disclosure requirement if it has one or more subsidiaries that are domestic corporations or foreign corporations qualified to transact intrastate business in California.  Finally, California has expansive provisions for determining who is a shareholder for purposes of this requirement.  Cal. Corp. Code Sec. 1512.

Broc’s note: I wonder whether there is any “internal
affairs doctrine” applicability and case law on the subject? Anyone?

Poll: Can Four Business Days for Disclosing Preliminary Voting Results Be Done?

Here is an anonymous poll to see how you feel about the SEC’s proposal for reporting preliminary voting results of contested director elections:

Online Surveys & Market Research

– Broc Romanek

July 28, 2009

Kick-Off: The SEC’s Investor Advisory Committee

Yesterday, after receiving only a handful of comments on its formation, the SEC’s new “Investor Advisory Committee” met for the first time. Run much like an open Commission meeting (a Commissioner even gave a speech), this inaugural meeting was available by webcast (here is the archive). Note the Committee even has its own web page.

In connection with the meeting, the SEC Staff prepared a briefing paper entitled “Possible Refinements to the Disclosure Regime,” which included discussion questions for these topics:

– Disclosure related to investment products & financial intermediaries
– Mutual fund point of sale disclosure
– Mutual fund/broker fee disclosure
– Disclosure to investors in 401(k) plans
– Environmental, climate change and sustainability disclosure
– Climate change and other environmental issues
– Social, governance and other operational matters

As an aside, the SEC adopted amendments to Regulation SHO yesterday to permanently implement more short selling restrictions. The SEC is continuing to consider proposals on a short sale price test and circuit breaker restrictions.

Zacharias v. SEC: DC Circuit Adopts Expansive Meaning of “Underwriter”

Below is recent analysis of a new case excerpted from this Davis Polk memo (which we have posted in our “Securities Act Liability” Practice Area):

In Zacharias v. SEC, the U.S. Court of Appeals for the District of Columbia Circuit affirmed an SEC order finding that two officers and directors of a public company and an unaffiliated third party engaged in a “scheme” to sell securities in violation of the registration requirement of Section 5 of the Securities Act, despite the fact that the only shares sold to the public were freely tradable shares owned by the third party.

The Court’s praise of the SEC decision as “a triumph of substance over form” and the reasoning of the case (as well as the result) stand in contrast to the recent decisions of three U.S. District. Courts that rejected the SEC’s claims of Section 5 violations in the hedging of “PIPEs” securities.

SEC Names Dan Goelzer as PCAOB’s Acting Chair

Yesterday, the SEC announced the appointment of Dan Goelzer to serve as Acting Chair of the PCAOB. A few weeks ago, Mark Olson announced his resignation as Chair which takes effect at the end of this week. Dan has served on the PCAOB’s board since the PCAOB was born. Here is the PCAOB’s press release.

– Broc Romanek

July 27, 2009

Corp Fin Finishes Overhaul of its “Accounting Training Manual”

On Friday, Corp Fin posted an updated “Financial Reporting Manual” to include a new section — Topic 4: Independent Accountants’ Involvement — as well as other changes. So it looks like the Staff has finished its overhaul of what used to be called the “Accounting Training Manual,” a process that commenced at the end of ’08.

Yes, the PDF version of the Manual still bears that legend “For Division of Corporation Finance Staff Use Only” and includes a disclaimer about the informal nature as guidance, even though the SEC now makes the Manual publicly available. But the HTML version does not…

Deutsche Bank’s Internal Investigation: Shareholder Engagement, Austin Powers Style

Recently, it has been reported that Deutsche Bank is conducting an internal investigation regarding potential improper surveillance (see the articles in the WSJ and NY Times). What caught my eye was that an activist shareholder appeared on the list of “targets.”

Allegedly, DB hired private investigators to pose as vacationers renting the shareholder’s house in order to spy on him. This raises some important questions: What are the ethical obligations of a company? Is this an isolated or widespread problem? Are corporate-shareholder hostilities on the rise? Did the investigators get their rental deposit back?

In his IR Café, Dick Johnson provides analysis about the ethical implications of this type of investigation. Here is an excerpt:

My point on ethics and personal responsibility is this: In the heat of battle, when the company is under attack and the world looks like “Us vs. Them,” be careful. Go back to your core principles: telling the truth, obeying the law, treating others as you would want to be treated, whatever convictions shape your outlook on life. Seek guidance in places like the NIRI Code of Ethics: Although codes won’t offer a specific rule for something like hiring a private eye, they do provide principles.

And consider how any action you take might appear in the harsh light of public disclosure a year or two later. Your responsibility to decide on your actions isn’t erased because you’re part of a larger corporate staff. Taking a stand just might save the company from serious reputational damage. And, down the road, it might keep you out of a headline that says “… Fires Two in (Whatever) Probe.”

The United Kingdom’s Financial Services Authority: Death Row?

In the US, the Securities & Exchange Commission has been under fire for its role in the financial crisis. I count the SEC Chair as having testified on the Hill four times in just the past two weeks alone. But I don’t think abolishing the SEC is really on the table. Compare that with the potenial fate of the UK’s Financial Services Authority (just as the FSA is pushing harder). Here is some commentary from Neil Macleod of Fried Frank:

On 20 July, the opposition Conservative Party, which is currently viewed as likely to win the next UK election (which must be held by next June), and so likely to form the next government, published its proposals to reform the structure of UK financial regulation.

The most striking proposal is that Conservatives will abolish the Financial Services Authority (the “FSA”) and the current tripartite structure under which regulatory responsibilities are divided between the Treasury, the Bank of England and the FSA. At the same time, they will increase the powers of the Bank of England. The Bank will be responsible for macro-prudential regulation – i.e., monitoring and controlling risks to the financial system as a whole. The regulation of all banks, building societies and other significant institutions, including insurance companies, will also be transferred to the Bank. Many of the remaining functions presently exercised by the FSA will be transferred to a new Consumer Protection Agency.

The reasoning behind these proposals is that the Conservatives view the FSA as having failed to identify or prevent the problems in the UK banking system. They also consider that there was a failure in the coordination between the tripartite authorities, and that there was a lack of effective procedures to deal with failing banks.

The Conservatives therefore propose that any institution whose regulation requires prudential judgment will be regulated by the Bank of England. Those small firms such as insurance and mortgage brokers, stockbrokers and small asset managers whose regulation is not mainly concerned with prudential judgment, but primarily concerned with protecting consumers, will be overseen by the new Consumer Protection Agency.

The Conservatives have said that they will consult on which regulatory authority should take on the FSA’s various other responsibilities, including markets and securities regulation, the registration of individuals and the FSA’s listing authority responsibilities.

The reaction to the proposals has been mixed. Whilst many have welcomed the idea of transferring banking regulation back to the Bank of England, others have pointed out the disruption that these proposals are likely to bring to the industry. There is also concern that the FSA will become a lame duck regulator if it is widely viewed as being likely to be abolished.

– Broc Romanek

July 24, 2009

Launch of Social Media Comes to Retail Holders

Launch of Social Media Comes to Retail Holders

Recently, a new social media site – – was launched with the hopes of binding retail shareholders together. Although this is not the first such site (eg. Broadridge’s “Investor Network“), this one might take off. And just the fact that these attempts to have investors network online bears close watching as it may someday soon dramatically impact activist efforts.

In this podcast, Rich Ferlauto, AFSCME’s Director of Corporate Governance and Pension Investment Policy, describes the new social media site, including:

– What is
– What is your goal with the site?
– Any surprises so far?

US Supreme Court Rejects Structure Requirement for RICO Enterprise

Recently, the US Supreme Court – in Boyle v. United States – held that an association-in-fact RICO enterprise must have a “structure” – but it need not be an “ascertainable structure beyond that inherent in the pattern of racketeering activity in which it engages.” More importantly, the Court stated that the jury isn’t required to be told many specifics.

As noted by the “White Collar Crime Prof Blog,” this decision is very helpful for government prosecutions in that it allows RICO cases to be brought with the jury being told a minimal amount of what is required for a RICO enterprise. We are posting memos regarding this decision in our “White Collar Crime” Practice Area.

Moving Forward: Credit Rating Agency Legislation

Earlier this week, as noted in this WSJ article, the Obama Administration proposed legislation to enhance oversight of the credit rating agencies. For the most part, it mirrors legislation introduced earlier by Senator Reed, except it deviates with one major exception: Senator Reed’s bill establishes greater accountability on the part of credit rating agencies by giving investors a private right of action against the credit rating agencies and the Obama administration doesn’t do that. In addition, the Obama Adminstration’s legislation doesn’t give authority to the SEC to levy fines and penalties against the rating agencies for failure to perform.

– Broc Romanek

July 23, 2009

Clawbacks: SEC Finally Provides Clues re: “Misconduct” under Section 304

Yesterday, the SEC announced an action to clawback bonuses and stock profits from a former CEO under Section 304 of Sarbanes-Oxley. The SEC asked the U.S. District Court for the District of Arizona to order the former CEO of CSK Auto Corporation, Maynard Jenkins, to reimburse the company for more than $4 million that he received in bonuses and stock sale profits while the company was committing accounting fraud. This is the third Enforcement action that the SEC has brought regarding CSK’s alleged accounting shenanigans, which resulted in two restatements – one of them charges four of the company’s executives with wrongdoing (but not the former CEO).

Although this is not the first Section 304 action from the SEC, it’s the first one where the “clawee” isn’t alleged to have violated the securities laws. The SEC has brought very few 304 actions since the provision was enacted seven years ago, mainly because of the uncertainty over what constitutes the “misconduct” required by the provision. Here is how Section 304 opens:

If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer…

As noted in the “D&O Diary” Blog, “there is no requirement in Section 304 that the CEO or the CFO from whom the reimbursement is sought have any involvement in the events that necessitated the restatement. Indeed, the statute doesn’t require any showing of wrongdoing or fault at all.” And remember there is no private right-of-action under 304 – only the SEC can enforce it.

Okay, so what type of “misconduct” did the SEC find here? For openers, the SEC’s press release refers to the CEO as the “captain of the ship.” Did the SEC decide that the captain is responsible for the ship and that alone is enough to find “misconduct”? I don’t think so.

Based on a cursory reading of the SEC’s complaint, I believe the SEC found that the captain engaged in some “misconduct” – but that misconduct didn’t amount to a violation of the securities laws. I get to this conclusion by noting that a number of the allegations (i.e. #43-47) in the SEC’s complaint explain the “conduct” and “misconduct” by the company that led to this action and then #48 states: “By engaging in the conduct described above, Jenkins violated, and unless ordered to comply will continue to violate, Section 304(a) of the Act, 15 U.S.C. § 7243(a).”

There’s not a lot of meat in the SEC’s allegations to explain what role the former CEO actually had in the accounting fraud, leaving the SEC open to criticism (such as this Ideoblog commentary). But maybe that’s the SEC’s point – that merely being captain of the ship while rampant fraud occurs on your watch is “misconduct” enough. We’ll be posting memos analyzing this case in’s “Clawback Policies” Practice Area.

At a minimum, the SEC’s action seems like a wake-up call to CEOs and CFOs of companies that have had restatements due to some accounting misconduct: you are not safe – the SEC may come after you. And hopefully, this action will spur companies to attempt to enforce their own clawback policies (Equilar reports more than 64% of the Fortune 100 now have them; compared to just 17% in ’06). I’m not aware of any company that ever has (although it’s possible it has happened behind closed doors). I imagine companies sometimes deal with situations where it’s not clear if their own clawback policy – or Section 304 – applies. Or if it does apply, whether it’s prudent to seek recapture from the executive (weighing cost/time of litigation; indemnification issues, etc.).

Rather than decide to just move on and not do anything, it’s time to put teeth into those clawbacks as I wrote about in my article “Ten Steps to a Clawback Provision with “Teeth.”

The SEC’s B-Day Party: Rum Baba with Tropical Fruits & Berry Coulis

As I blogged recently, the SEC Historical Society held a pricey dinner to celebrate the 75th anniversary of the birth of the Commission (too expensive for a home gamer like me). Given the heat that the agency is feeling, the timing was not good – as portrayed in this Politico article. From what I hear, Chair Schapiro’s speech perhaps reflected the mood among the Staff these days as it was quite short. Here is a more playful review of the event.

How Do You Look Up a SEC Rule?

A member recently emailed about how fast the Government Printing Office responded when he emailed them that one of the SEC’s rules was unreadable online (eCFR is what the SEC’s site links to for the SEC’s rules). It seems that the GPO gets right on these things as the correction was quickly made. It led me to wonder how folks typically look up a SEC rule these days – and hence this anonymous poll:

Online Surveys & Market Research

– Broc Romanek

July 22, 2009

Summer Issue: “Proxy Disclosure Updates” Newsletter

Summer Issue: “Proxy Disclosure Updates” Newsletter

On, we have just posted a complimentary copy of the Summer 2009
issue of the “Proxy Disclosure Updates” which analyzes how
the latest proxy disclosures looked, particularly noteworthy in the wake
of ARRA, EESA and the other regulatory responses to the crisis. This valuable
quarterly newsletter is part of the Lynn, Borges & Romanek’s “Executive
Compensation Annual Service.” The other part is the 1000-plus page Treatise…

Coming Soon: 2010 Executive Compensation
Disclosure Treatise and Reporting Guide
: Now that we have seen the SEC’s
proposals and Treasury’s legislation – that will force you to radically change
your executive compensation disclosures and practices before next proxy season
– we are wrapping up the ’10 version of Lynn, Borges & Romanek’s “Executive
Compensation Disclosure Treatise and Reporting Guide,” which we will deliver to
subscribers by early October.

Act Now for $100 or More
: To obtain this hard-copy ’10 Treatise when its printed in October
(as well as get online access to the ’09 version right now on, as well as the valuable
quarterly “Proxy Disclosure Updates“), you need to try a no-risk
to the Lynn, Borges & Romanek’s “Executive Compensation
Annual Service” now. If you order now, you can take advantage of
a $100 or more discount.

Will Facebook Sidestep Google’s Pre-IPO Problems?

Google certainly has had a nice run since its novel Dutch-auction IPO. But for those with good memories, you might recall that Google had to make a rescission offer about the time of its IPO because Google apparently crossed the Section 12(g) threshold well before its IPO and should have registered its common stock under the ’34 Act at that time (companies that have more than 500 shareholders and $10 million in assets at calendar year end must register under Section 12(g)).

In reading this WSJ article last week about how Digital Sky Technologies is taking a stake in Facebook by purchasing shares from current and former Facebook employees, I saw the disclosure that the number of current Facebook employees is now 850.  I hope the company doesn’t encounter the same issue that Google confronted, where it should have registered its shares sooner given the number of holders and that that Facebook is being valued at $6.5 billion based on Digital’s purchase campaign.

SEC Charges Investment Advisor for Buying Votes with Section 13(d) Violations

Yesterday, as noted in this press release, the SEC charged – and settled – Section 13(d) violations with an investment adviser – Perry Corp. – for failing to disclose that it had purchased substantial stock in a M&A target, King Pharma. Perry purchased the shares in order to vote them in favor of a merger from which Perry stood to profit. Here’s the cease-and-desist order, under which Perry agreed to pay $150,000.

The SEC was able to bring charges because the Mylan shares were not acquired by Perry in the “ordinary course of its
business,” which is one of the requirements of Rule 13d-1(b)(1). However, I was a little surprised that the SEC didn’t shoot Perry down by
finding that it either (i) did not acquire the shares in the ordinary course or (ii) was not “passive” (since “passive” is also a requirement of the rule). Instead, the SEC focused exclusively on the “ordinary course” requirement of the rule. 
So I wonder why the SEC didn’t use “not passive” as the hook and avoided the seemingly circuitous path
to “not in the ordinary course”? I would think the SEC could have made its case by stating that Perry was not passive –
and therefore could not be acting in the ordinary course. Let me know what you think.

By the way, the SEC’s charges unfortunately didn’t address concerns regarding Perry’s strategy. In an effort to lock in the merger premium it would receive on its holdings of King Pharma shares, Perry purchased a substantial block of the acquiror’s shares (Mylan) that it intended to vote in favor of the merger while contemporaneously entering into hedging transactions that minimized its economic exposure to a decline in the value of those Mylan shares.

In essence, Perry intended to vote its Mylan shares in favor of a transaction that was not in the economic interests of other Mylan shareholders because it had a more substantial economic interest in the merger being consummated as a result of its holdings in King Pharma. Similar issues arose in connection with AXA’s acquisition of MONY. 

Although this issue has received considerable attention in the US and the UK, no clear solution has been found. Rather, the focus has been on enhanced disclosure obligations. The SEC’s charges solely relate to Perry’s failure to file a Schedule 13D with respect to its acquisition of more than 5% of Mylan’s shares with the intent of influencing the direction or management of Mylan. Hopefully, manipulation of the voting process will be examined as part of the SEC’s plan to rethink the proxy plumbing this Fall. We have resources on share lending, overvoting, empty voting, etc. in our “Share Lending/Overvoting” Practice Area.

– Broc Romanek

July 21, 2009

Auditors May Finally Get an Annual Reporting Obligation

Recently, the PCAOB issued a press release noting that it had proposed rules way back in June ’08 that would require the auditors registered with the PCAOB to submit an annual report by June 30th of each year. Since the SEC hadn’t yet acted to approve the PCAOB’s proposal, auditors were able to avoid filing an annual report this year, as well as avoid paying an annual fee for ’09.

Not too long after the PCAOB’s press release, the SEC acted by posting this notice to finally solicit comments on the PCAOB’s proposal. Assuming no comments sway the SEC otherwise, I imagine the SEC will approve the PCAOB’s proposal in a few months – and then registered auditors will be required to submit their first annual report on Form 2 to the PCAOB by June 30, 2010 (and the first annual fee, in an amount to be announced by the PCAOB, will be due in that same year). A separate obligation to file any required special reports on Form 3 will commence as soon as the SEC approves the PCAOB’s proposal.

Note that the Nasdaq is holding a webcast tomorrow (with a repeat performance the following Wednesday) for those that want to learn how to navigate their new “Application Center.” Among many other topics, the new application process was discussed during our recent webcast with senior Nasdaq Staff, but these Nasdaq webcasts will drill down more deeply into the application topic.

RiskMetrics’ Governance Exchange

In this podcast, Jill Lyons and Stephen Deane of RiskMetrics describe their new social media tool called the “Governance Exchange,” including:

– What is the “Governance Exchange”?
– Who can belong to it?
– Why are members joining?
– Any surprises so far?

Sleepers in the SEC’s Proposals?

When the SEC puts out a big proposal, there inevitably are some sleepers because that’s the way of the world. I recently received this note from a member about the SEC’s recent proxy solicitation proposals:

There are some potent changes in the proposed proxy amendments that will generally make contests easier to conduct. One amendment codifies a recent no-action letter to Carl Icahn that allows insurgents to include nominees of other insurgents on their proxy cards.

And the amendments also overrule a 2004 case (i.e. Mony Group v. Highfields Capital Management) where a court ruled that a shareholder conducting an exempt solicitation can’t send shareholders management’s proxy card and encourage them to vote as suggested by the insurgent.

– Broc Romanek

July 20, 2009

New Treasury and SEC Regulations and ARRA: Executive Compensation Restrictions

Things are moving fast on the legislative front as Rep. Barney Frank circulated a “discussion draft” on Friday of his “Corporate and Financial Institution Compensation Fairness Act of 2009” to the House Financial Services Committee. This bill is the House version of what Treasury sent to the Hill last Thursday.

Tune into tomorrow’s webcast – “New Treasury Regulations and the American Recovery Act: Executive Compensation Restrictions” – to hear these experts analyze the latest on the proposals coming out of Congress, Treasury and the SEC:

Dave Lynn, Partner, Morrison & Foerster and Editor,
Mark Borges, Principal, Compensia
Jeremy Goldstein, Partner, Wachtell Lipton Rosen & Katz
Jannice Koors, Managing Director, Pearl Meyer & Ptrs
Mark Trevino, Partner, Sullivan & Cromwell LLP

Our “6th Annual Executive Compensation Conference“: Now that we have a sense of what Congress will likely pass before next year kicks off, you need to register now to attend our popular conferences and get prepared for a wild proxy season:
4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference.” You automatically get to attend both Conferences for the price of one; they will be held November 9-10th in San Francisco and via Live Nationwide Video Webcast. Here is the agenda for the Proxy Disclosure Conference. Register now.

Executive Pay Surveys

In this podcast, Susan Wolf of Schering-Plough describes her company’s experience with using a survey to canvas shareholders about their executive pay practices, including:

– Why did the company decide to try a survey?
– What was the reaction of shareholders?
– Were there any surprises? What would you change if you did it again?

Consultant Market Shares: An Analysis of Fortune 1000 Companies

For those that may not be aware of it, “The Advisors’ Blog” on is populated with new thoughts from compensation experts daily. For example, below is a blog from Equilar that was posted last week:

With executive compensation issues firmly in the public spotlight, the SEC is once again considering expanded CD&A disclosure requirements. The SEC’s most recent proposals include improved disclosure on the connection between compensation and risk, greater detail on overall compensation philosophy and design, and further insight into potential conflicts of interests between compensation consultants and the companies they advise.

With these developments in mind, Equilar recently used its “Compensation Consultant League Table” database to complete an analysis of executive compensation consultant market share at Fortune 1000 companies. In 2008, boards at 90.7% of Fortune 1000 companies retained the services of at least one compensation consulting firm.

The following table lists the Top 10 consulting firms, by executive compensation consulting market share during ’08, at Fortune 1000 companies:

1. Towers Perrin – 19.3%

2. Frederic W. Cook & Co. – 17.5%

3. Hewitt Associates – 14.5%

4. Mercer Human Resources Consulting – 11.4%

5. Watson Wyatt Worldwide – 7.5%

6. Pearl Meyer & Partners – 5.4%

7. Semler Brossy Consulting Group – 3.8%

8. Hay Group – 2.3%

T-9. Exequity – 1.6%

T-9. Deloitte Consulting – 1.6%

Note: FY 2008 market share percentages are based on a total of 867 engagements with boards of directors at 824 of 908 Fortune 1000 companies studied. See methodology statement below for more information. Also note that Towers Perrin and Watson Wyatt announced plans to merge into a new firm called Towers Watson on June 29, 2009. The combined firm would have a market share of 26.8 percent.

Additional Key Findings:

Top 10 Firms Lose Overall Market Share as Smaller Firms Proliferate – In 2008, Fortune 1000 companies listed a total of 53 executive compensation consulting firms as advisors to their boards of directors. Among these firms, the Top 10 consulting firms held a combined market share of 84.9 percent. In contrast, Fortune 1000 companies listed only 42 executive compensation consulting firms as advisors in 2006, when the Top 10 consulting firms held a combined market share of 93.8 percent.

Independent Firms Gain Market Share – In 2008, independent executive compensation consultants held 39.3 percent of engagements with boards of directors at Fortune 1000 firms, up from 37.4 percent of engagements in 2007. Market share for independent firms had increased from 35.0 percent to 37.4 percent between 2006 and 2007. Independent firms are defined by Equilar as companies that focus primarily on executive compensation consulting.

Full-Service Firms Maintain Market Share Above 60% – Full-service firms, which are defined by Equilar as companies that offer accounting, broad-based HR, retirement and/or benefits consulting in addition to executive compensation services (though not necessarily to the same client), held 60.7 percent of engagements with boards of directors at Fortune 1000 firms in 2008.

Readers of this analysis should take the following methodology notes into consideration:

– To study trends on the use of executive compensation consulting firms at public companies, Equilar reviewed disclosures at 908 firms listed in the Fortune 1000 index. Each firm covered by the study has an updated CD&A statement for fiscal year 2008.

– Among the companies included in this analysis, 824 firms (or 90.7 percent) retained an executive compensation consultant to advise their board of directors on executive pay. The remaining firms either have no consultant or a consultant retained by management. For the purposes of tracking market share at Fortune 1000 companies, Equilar only considers direct engagements between a board of directors and a consulting firm.

– In some cases, a board of directors may engage multiple executive compensation consulting firms during the course of a single year. Equilar counts these cases as a full engagement for all consulting firms involved. As such, the 824 companies with an executive compensation consultant for their board of directors produced a total of 867 engagements in fiscal year 2008.

Here is an extended version of Equilar’s compensation consultant market share analysis, including data on year-over-year changes in market share. Equilar is an information services firm specializing in executive compensation research.

– Broc Romanek