TheCorporateCounsel.net

I am at the ABA Annual Meeting in San Francisco, and, not surprisingly, the conversation at the meetings is dominated by the Dodd-Frank Act. One of the provisions of particular note in the Dodd-Frank Act is Section 957, which requires that each national securities exchange amend its rules to prohibit its member organizations from voting shares without specific client instructions on matters related to executive compensation and in the election of directors (as well as in any other matters determined by the SEC).

Section 957 was effective upon enactment, so the NYSE has now issued an information memorandum to indicate how the provision will be interpreted while rule changes are in the works. The information memorandum notes that the NYSE intends to file an amendment to Rule 452 to prohibit members from voting uninstructed shares if the matter to be voted on relates to executive compensation, including “say-on-pay” proposals, at meetings occurring after July 21, 2010. The NYSE notes that an exception will be made for those meetings on which the NYSE has issued a “may vote” ruling prior to July 21, 2010, however, effective immediately, those proposals involving executive compensation matters for which brokers had previously been allowed to vote uninstructed shares will be treated as “may not vote” rulings going forward.

The NYSE notes that it has already amended Rule 452 to eliminate discretionary voting in director elections, and that the SEC may prescribe further areas where discretionary voting by brokers must be eliminated.

SEC Fight Over Clawbacks

Before we had Section 954 of the Dodd-Frank Act (which will require the adoption of compensation clawback polices by listed companies), we of course had Section 304 of the Sarbanes-Oxley Act, which provided the SEC with the means for recouping incentive compensation in the event of a restatement involving someone’s misconduct. Several years went by before the SEC started using that particular Sarbanes-Oxley provision in Enforcement proceedings, perhaps recognizing the legal uncertainties involved with the statute. To date, the SEC has sought to clawback compensation under Section 304 in only a handful of cases. At the same time, Section 304 has no doubt inspired quite a few companies to adopt compensation recoupment policies in one form or another.

Now, according to this WSJ article from over the weekend, Commissioner Aguilar is expressing concern that the SEC is not utilizing the clawback provision enough in enforcement cases, and he has threatened to recuse himself from consideration of cases where he doesn’t agree with the Staff’s recommendations. The Staff, meanwhile, has been trying to come up with a policy as to how it will use its clawback authority going forward.

It remains to be seen whether the implementation of Section 954 of the Dodd-Frank Act will lessen the need for the SEC to use its clawback authority, given that listed companies will now be mandated to recover previously paid compensation under a broader set of circumstances.

PCAOB Adopts New Auditing Standards on Risk Assessment

Last week, the PCAOB announced that it has adopted Auditing Standards No. 8 through No. 15, all of which relate to the effectiveness of an auditor’s assessment of, and response to, the risks of material misstatement in the financial statements. These standards, which replace six interim standards, will become effective for audits of fiscal periods beginning on or after Dec. 15, 2010, if approved by the SEC.

– Dave Lynn