Monthly Archives: October 2010

October 15, 2010

Compensation and Risk: Keeping up with the Joneses

Mike Melbinger noted yesterday on his blog that the disclosure of the relationship between compensation and risk will be an important element of consideration for ISS and investors in the upcoming proxy season, so now is the time to start thinking about how to “do it right.” One thing that I have found helpful in benchmarking risk assessments has been the plethora of data points that can be gleaned from the hundreds of comments letter responses that have been submitted on EDGAR in response to the Staff’s comment asking companies to explain what they did to reach their conclusions as to whether disclosure was required under Item 402(s) of Regulation S-K (which effectively resulted in disclosure that was not otherwise required). In most cases, these responses talk about a process whereby:

– compensation programs were reviewed, particularly focusing on incentive compensation programs;

– program features were identified which could potentially encourage excessive or imprudent risk taking;

– the specific business risks that related to such features were identified;

– mitigating factors (if any) were identified;

– an analysis was undertaken to determine the potential effects of the risks and the impact of the mitigating factors; and

– an analysis was undertaken of the particular situations described in Item 402(s) as they apply to the company.

The findings that companies often reached were similar, focusing on:

– the mix of compensation, which tended to be balanced with an emphasis toward rewarding long term performance;

– the use of multiple performance metrics that are closely aligned with strategic business goals;

– the use of discretion as a means to adjust compensation downward to reflect performance or other factors;

– caps on incentive compensation arrangements;

– the lack of highly leveraged payout curves;

– multi-year time vesting on equity awards which requires long term commitment on the part of employees;

– the governance, code of conduct, internal control and other measures implemented by the company;

– the role of the compensation committee in its oversight of pay programs;

– frequent business reviews;

– the existence of compensation recovery (clawback) policies;

– the implementation of stock ownership or stock holding requirements;

– the use of benchmarking to ensure the compensation programs are consistent with industry practice;

– the uniformity of compensation programs across business units and geographic regions, or alternatively, the differences employed to reflect specific business unit or geographic considerations; and

– the immaterial nature of some plans.

In terms of employee plans, there was a lot of discussion in the comment responses regarding sales incentive plans, often focusing on controls in place on those plans such as caps, negative discretion, prepayment review, and recovery in the event of error or fraud, etc. The responses often note that the analysis was conducted by management with the concurrence or consultation of the compensation committee, and they also frequently referenced the use of compensation consultants in performing the analysis, with that consultant in many cases being the same compensation consultant that the compensation committee used for other compensation matters.

Our Quick Survey on Clawback Policies

As noted above, one of the items cited often in response to the evaluation of compensation and risk is the existence of a clawback policy. Based on a number of requests from members, we have posted a “Quick Survey on Clawback Policies.” It’s anonymous and just takes a few seconds to complete. Once you participate, you will see a link to the running results.

And while you’re at it, please participate in this “Quick Survey on Disclosure Controls and Disclosure Committees.”

Getting Ready for Your Upcoming 10-Q

Broc blogged a couple of weeks ago about the SEC’s short term borrowings rule proposal and related MD&A interpretive release. One thing to keep in mind about the interpretive release is that is was no doubt timed to provide some guidance in advance of third quarter 10-Qs, so that companies could evaluate their liquidity disclosure in their interim period MD&A and make adjustments accordingly. One good thing about this approach is that you can “ease” into these disclosures by trying them out in the 10-Q, rather than incorporating potential changes for the first time in the 10-K. A few of the key points to keep in mind from the interpretive release as you are drafting or reviewing the 10-Q are:

1. Revisit whether more disclosure is necessary in the MD&A about cash management and risk management policies that are relevant to an evaluation of financial condition. The short-term borrowings disclosure concerns that the SEC has, in particular (but not limited to) the use of repurchase agreements, share-lending transactions and off-balance sheet arrangements or contractual repurchase obligations that may be accounted for as sales, all get back to one simple notion: cash is king. There is a concern, expressed in this release and also in comments on MD&A that the Staff has been issuing over the last couple of years, that the liquidity discussion in MD&A too often gives short shrift to the availability of cash, what companies are doing with their cash, where short-term cash is coming from and how risks related to liquidity are managed. This notion has manifested itself outside of the context of short-term borrowings, for example, in frequent Staff comments seeking more disclosure about the availability of cash balances held overseas.

2. Revisiting leverage ratio disclosure. The interpretive release gives some very specific guidance about disclosure of leverage ratios and the conditions under which such ratios can be disclosed. Now is a good time to revisit any disclosure along these lines to see if it is consistent with the Staff’s views.

3. A focus on the Contractual Obligations Table. While not necessarily an item for the 10-Q, it is not too early to start thinking about potential changes to the Contractual Obligations Table required in MD&A, to determine if you need to add to or revise your disclosure – through footnotes, a revised presentation, or otherwise – to provide “a presentation method that is clear, understandable and appropriately reflects the categories of obligations that are meaningful in light of its capital structure and business.” It has been my experience that this table hasn’t received a whole lot of attention (other than updating the numbers, adding new obligations and taking out old obligations) since it was adopted in the wake of Sarbanes-Oxley, so now might be the best time to take a hard look at what is being captured in the table and how it is presented.

For more tips regarding the implementation of the latest MD&A interpretive release, check out our “MD&A” Practice Area.

– Dave Lynn

October 14, 2010

Corp Fin Adds New Leadership

The SEC announced this week that the Division of Corporation Finance has added two new Associate Directors in the Division’s Disclosure Operations group. Karen Garnett and Mark Kronforst were promoted from within Corp Fin to the Associate Director positions – Karen was Assistant Director of the Office of Real Estate and Business Services, and Mark was Corp Fin’s Deputy Chief Accountant. Karen and Mark join Paul Belvin, Jim Daly and Barry Summer in the senior management ranks of the Disclosure Operations group, which is led by Shelley Parratt. These new leadership slots are in recognition of the fact that Corp Fin’s responsibilities keep growing and are becoming ever more complex. Filling these slots will undoubtedly now open the way for hiring folks to run the three Corp Fin new offices that were announced back in the summer.

More Dodd-Frank Rulemaking Underway

Yesterday, the SEC proposed (and adopted) more rules under the Dodd-Frank Act. The SEC proposed yet another set of asset-backed securities disclosure rules, this time in accordance with Sections 932 and 945 of the Dodd-Frank Act. Under these proposals: (1) issuers of asset-backed securities that are registered with the SEC would need to perform a review of the assets underlying the asset-backed securities; (2) proposed amendments to Regulation AB would require an issuer of asset-backed securities to disclose the nature, findings and conclusions of this review; and (3) the issuer or underwriter for both registered and unregistered asset-backed securities offerings would be required to disclose the findings and conclusions of any review performed by a third party that was hired to conduct such a review. The Commission also adopted interim final rules to require that certain swaps dealers and other parties report any security-based swaps entered into prior to the July 21 passage of the Dodd-Frank Act, as well as proposed rules (a new Regulation MC) intended to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities, and national securities exchanges that post security-based swaps or make them available for trading.

Dave & Marty on Governance, Proxy Access and British Cars

We just posted another edition of the Dave & Marty Radio Show, where Marty and I talk about the latest developments with proxy access, some of the interesting observations from the Report of the NYSE Commission on Corporate Governance and, believe it or not, British sports cars that Marty and I admire.

– Dave Lynn

October 13, 2010

Dodd-Frank and the Family Office

One of the significant changes to the financial regulatory system that Dodd-Frank will bring about is the regulation of advisers to private funds, through the elimination (effective July 11, 2011) of the 15-client exemption contained in Section 203(b)(3) of the Investment Advisers Act. The intent was to bring regulation to the advisers of hedge funds and private equity funds, but Congress recognized (with the help of some lobbying, no doubt) that the definition of “private fund” in Dodd-Frank potentially has a very broad reach. Thus was born the need for an exemption for family offices, which are commonly thought of as those entities that run the money for well-off families, and are presumably unlikely to be significant contributors to the systemic risk concerns that have now rained down regulation on the advisers to private equity and hedge funds.

Yesterday, the SEC proposed rules to implement the Dodd-Frank exemption for family offices, giving commenters just a little over 30 days to weigh in. Next up will probably be proposed rules to implement the exemption for advisers to venture capital funds, which are sure to bring about a lot of commentary given the difficulties in defining what exactly is a venture capital fund (as compared to other private funds).


With the expiration of the TARP program, it appears to be time to justify its existence and to explain how it really wasn’t as bad (or as costly) as everyone made it out to be. I don’t need much convincing on this one, just thinking back to how bad things were in the depths of the financial crisis and how I might have been selling apples on a street corner had it not been for some level of intervention. Nonetheless, we now have a full-scale retrospective on TARP, plus Treasury Secretary Timothy Geithner’s Washington Post opinion piece from last Sunday. In the op-ed piece, Secretary Geithner seeks to dispel the top five myths about TARP: that TARP cost taxpayers hundreds of billions of dollars; TARP was a gift for Wall Street that did not help Main Street; TARP was a quick fix for the market meltdown but left the financial system weak overall; TARP worsened concentration in the banking sector, leaving it more vulnerable to another crisis; and TARP was the centerpiece of a strategy by the administration to assert more government control over the economy. TARP also “lab tested” some of the “reforms” that have now been rolled out to public companies generally, such as the soon-to-be required Say-on-Pay resolution. Now that it is gone, let’s hope we never see it come to pass again.

Wall Street Pay

It is intriguing to juxtapose the TARP defense with the news earlier this week in the WSJ that Wall Street pay has hit a record level at $144 billion, up 4% from last year. This kind of news fans the flames of outrage of compensation levels, although it does appear that pay may be slowing down in the months ahead as some of the financial reforms and other regulatory actions kick in. It also seems that some of the compensation has been shifted to equity and deferred instruments, reflecting an effort toward mitigating risks of employees seeking only short term gains, which is hopefully some good news for these institutions in the long run.

– Dave Lynn

October 12, 2010

Getting Ready for Your Next Proxy Statement: Staff Comments on Governance Disclosure

Over the last few months, we have been so focused on Dodd-Frank Act and its regulatory aftermath, I think that now more than ever we should dedicate some continuing attention to what the Staff has been asking for in issuer disclosures through the review process, particularly given the Staff’s general view (notably expressed at last year’s Proxy Disclosure Conference) that we should all be cognizant of their positions as expressed through the comment process and act accordingly when drafting disclosures for any issuers. One area that was certainly ripe for Staff comments this year was the new corporate governance disclosures that were adopted at the end of 2009 as a part of the Proxy Disclosure Enhancements rulemaking.

Other than comments raising questions about disclosure items that were just missed entirely, the Staff’s comments on the governance disclosures tended to deal with a few common issues. On the disclosure requirement requiring a discussion of director qualifications, the Staff has raised comments asking for more details concerning how the qualifications were relevant to the determination that the person should be nominated as a director. The Staff seems to be very much looking for individualized disclosure with a fair amount of detail for each director. (And it wasn’t just the Staff commenting on the director qualifications disclosure – Chairman Schapiro incorporated a comparison of “good” disclosure and “bad” disclosure in a speech to the Stanford Directors’ College back in June 2010.)

With regard to the board leadership disclosure, it was usually the case that when a company has a combined Chairman and CEO, the company felt compelled to go in a lot of detail as to why that made sense for the company and this usually didn’t draw a Staff comment, unless the company failed to include an explanation of how the combined Chairman and CEO made particular sense for the company given its circumstances. By contrast, when companies had a split Chairman and CEO, there was a tendency toward providing less explanation, perhaps because that structure is perceived as the “good governance” structure. As a result, the Staff often raised a comment asking for more detail as to the rationale for the split Chairman/CEO leadership structure.

Another comment that the Staff has raised seeks disclosure of how the leadership structure affects the company’s risk oversight. Many companies seemed to have either overlooked this item or did not fully comprehend its meaning, and in fact it is perfectly fine to say that the leadership structure does not affect risk oversight — it is just that the Staff expects an affirmative obligation to say something about the relationship.

Lastly, if the staff saw the word “diversity” somewhere in a company’s disclosure regarding director qualifications, then it is likely that the Staff would ask for disclosure of the company’s diversity policy and how it is implemented and monitored.

For more analysis of the latest comment letter trends, be sure to join us on October 20th for the webcast “The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank

Beware of “Steven Cooper”

The SEC Staff recently put out an Investor Alert warning of yet another Staff impersonator, using the name “Steven Cooper” and some purported correspondence to a fake SEC employee by the name of “Gordon Green.” His rap is kind of messed up, because he is telling people that he can provide assistance with settling federal tax obligations with the IRS. It is odd to me that this imposter picked the SEC as his fake employer, since when you say you are from the SEC in some parts of the country they think you mean the Southeast Conference.

More on our “Proxy Season Blog”

Even with the proxy season mostly done, we are still posting new items regularly on our “Proxy Season Blog” for members. 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. Here are some of the latest entries:

– It’s Time for Summary Proxy Statements
– Lawmakers Consider Shareholder Approval of Political Spending
– Some Thoughts on How to Overcome the Challenges of Disclosing Voting Percentages
– Retail Investors Filed Most of 2010’s Majority-Backed Proposals
– 6 Directors Receive Support from Less than One-Third of Shareholders

– Dave Lynn

October 8, 2010

Cutting Corners During the Downturn: The New PCAOB Report

The PCAOB recently issued a report collecting findings from inspection reports concerning how audit firms may have failed to comply with PCAOB standards while conducting audits during the economic crisis. In looking back over the past three years of audits, the PCAOB noted a number of areas where audits were found lacking, including:

– fair value measurements
– impairment of goodwill
– indefinite-lived intangible assets and other long-lived assets
– allowance for loan losses
– off-balance sheet structures
– revenue recognition
– inventory
– income taxes

On a positive note, the PCAOB did find that firms had made an effort to respond to increased risks posed by the economic crisis. The PCAOB also noted that it will be evaluating whether efforts by firms to address deficiencies identified in PCAOB inspection reports have actually reduced or eliminated the subsequent occurrence of the same deficiencies.

The areas identified in the PCAOB report will no doubt be areas of increased diligence as we go into the audit cycle for the upcoming 10-K season.

The Dodd-Frank Rulemaking Train Keeps Rolling: Now, Asset-Backed Securities

In accordance with Section 943 of the Dodd-Frank Act, the SEC re-proposed a rule from the Regulation AB proposals issued earlier this year which would require that “securitizers” disclose fulfilled and unfulfilled repurchase requests across all transactions. Further, the SEC proposed a new rule which would require that credit rating agencies include, in any report accompanying an asset-backed securities credit rating (including a preliminary rating), disclosures about representations, warranties, and enforcement mechanisms available to investors (as well as how the representations, warranties and enforcement mechanisms differ from those in similar securities). The SEC must adopt these rules by January 14, 2011, so it has a very short comment period – comments are due on November 15, 2010.

The SEC is keeping this scorecard of the regulatory actions that it has taken to date under its Dodd-Frank Act mandates.

September-October Issue: Deal Lawyers Print Newsletter

This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– Drafting Board Minutes for M&A Transactions: Tips and Pitfalls
– The Lessons Learned: Poison Pills Post-Barnes & Noble
– Ripe for Disclosure? A 1933 and 1934 Act Analysis: Disclosure of Merger Negotiations
– DOJ and FTC Issue Revised Horizontal Merger Guidelines

If you’re not yet a subscriber, try a “Rest of ’10 for Free” no-risk trial to get a non-blurred version of this issue on a complimentary basis.

– Dave Lynn

October 7, 2010

FINRA’s IPO Abuse Rule Approved

Last week the SEC approved new FINRA Rule 5131, which when effective will regulate the list of initial public offering abuses that were so prevalent during the dot-com bubble. (Has it really been almost a decade since that bubble burst?) Rule 5131, which started out life as a NASD rulemaking first submitted to the SEC in September 2003, prohibits a variety of practices in connection with a “new issue” of an equity security, including: (1) quid pro quo allocations, which involve making allocations of securities in return for services provided to the broker-dealer selling the new issue; (2) spinning, or the practice of allocating new issue securities to executive officers and directors of public or certain non-public companies to curry favor with those executives or directors (subject to certain exceptions); (3) imposing inequitable penalty bids; and (4) acceptance by broker-dealers of market orders for new issue shares before commencement of secondary market trading. The rule also imposes a number of additional restrictions on the offering process and the activities of broker-dealers participating in the offering of a new issue, including a requirement to establish walls between investment banking personnel and those making the new issue allocation decisions.

Many of these practices have already gone the way of the dinosaur thanks to all of the attention paid to them in the post-dot-com bubble fallout, including lots of litigation. Nonetheless, FINRA finally has some additional rules to keep them from happening again. FINRA will announce an effective date within 60 days of the SEC’s approval.

The FSOC Meets

As Dodd-Frank Act landmarks go, it seems like last week’s inaugural meeting of the Financial Stability Oversight Council was certainly a big one. The FSOC, comprised of all of the significant financial regulators, was created by Dodd-Frank to provide comprehensive monitoring of the overall financial system, hopefully so that emerging risks or issues won’t fall through the regulatory cracks. Much of the inaugural meeting was just housekeeping, including adopting bylaws and a transparency policy and setting in motion various tasks mandated under Dodd-Frank.

Mailed: September-October Issue of The Corporate Counsel

The September-October issue of The Corporate Counsel was just mailed and includes pieces on:

– The Requirement to File Revised Financials Ahead of a Shelf Filing–A Trap for the Unwary
– Identifying NEOs–Former CEO/CFO Can’t Also be One of Three Most Highly Compensated Executive Officers
– Form 8-K Requirement(s) upon Reassignment, Later Termination, of Principal Officer/NEO
– Risk Factor Updating in Form 10-Q–Repeat in Subsequent Qs?
– Former Affiliate’s Sale of Issuer Stock Within 90 Days After Termination–Chapter 2 (or 20?)
– Dodd-Frank–Whatever Happened to Principles-Based?
– Enforcement’s 1933 Act Batting Average Now .250
– Roth Conversion Follow-Up

Act Now: Get this issue on a complimentary basis when you try a “Free for Rest of ’10” no-risk trial today.

– Dave Lynn

October 6, 2010

The Boston Globe’s Scoop: Many Companies Can’t Do the Executive Pay Math

On Monday, the Boston Globe ran this breathless story at the top of page one. I went into it expecting an analysis about the judgment calls we all make in drafting compensation disclosure and thought there might be journalistic oversimplification as typically happens in the mass media. Some might say that pay disclosure is not necessarily a science, but an art.

However, one has to concede that math is still a science – and the Globe’s research certainly raises eyebrows about how seriously some companies are taking their pay disclosures. The Globe looked at about 210 local company proxy statements, adding up the columns in the summary compensation tables. It turns out that 55 times – at 34 companies – the totals of the columns did not match the number the company reported in the “Total” column. Um, that’s over 15%.

At most of these companies, the Globe determined (or the company conceded) that it was some sort of math or clerical error – transposed numbers, extra digits, etc. In some cases, when the company updated the stock compensation numbers for the past years using the SEC’s new methodology, they just changed the column in the middle of the table but didn’t update the total. Truly, the devil is always in the details and I would urge companies to double-check their numbers this year as I imagine a lot of newspapers are going to be following the Globe’s lead and do the math themselves in their local areas. Thanks to Mike Andresino of Posternak for bringing the article to my attention!

Our Timely Ten Tips: Preparing Say-on-Pay Disclosure Now

We have just posted the Fall 2010 issue of the Compensation Standards newsletter, in which Mark Borges provides ten timely tips for preparing say-on-pay disclosure. Note that we are making a big change for for 2011 – we are moving the online version of “Lynn, Borges & Romanek’s Executive Compensation Disclosure Treatise & Reporting Guide” onto that site. So that when you try a no-risk trial or renew for 2011 – remember that all memberships expire at the end of the year – you gain immediate access to it. The 2011 version of the Treatise will be posted within the next few weeks; the 2010 version is posted now.

Poll: How to Handle Rating Agency Communications After Reg FD Repeal?

On Monday, the SEC’s recent Regulation FD adopting release was published in the Federal Register – so October 4th is the effective date for the removal of the rating agency exemption that I blogged about last week.

In that blog, I noted that companies may want to pursue stand-alone confidentiality agreements with the agencies. Now I’m hearing from some companies that they have approached a few agencies and have heard pushback from them about entering into stand-alone agreements. Rather, I hear these agencies believe that companies can rely upon the internal confidentiality policies that the agencies already have. Here is a poll on what your company intends to do:

Online Surveys & Market Research

– Broc Romanek

October 5, 2010

Proxy Access: SEC Stays Ahead of Court Review – Dead for 2011

Yesterday, in this 2-page order, the SEC granted a stay of its proxy access rules pending resolution of the Business Roundtable and Chamber of Commerce petition for review with the DC Circuit Court of Appeals (I blogged about the lawsuit last week) so that the SEC could join the groups in seeking an expedited review by the court. As expected, the SEC’s order does not address the merits of the plaintiff’s claims.

In its order, the SEC also delayed the amendment to Rule 14a-8, which would have allowed shareholders to file bylaw proposals that seek more permissive access procedures. That rule change was not challenged by the plaintiffs – but he SEC said it decided to delay the implementation of this rule change, “because the amendment to Rule 14a-8 was designed to complement Rule 14a-11 and is intertwined, and there is a potential for confusion if the amendment to Rule 14a-8 were to become effective while Rule 14a-11 is stayed.”

Proxy Access: What is the Timing for the Court’s “Expedited Review”?

Prior to this stay, the new rules were scheduled to become effective November 15, 2010 – and apply to companies that mailed proxy materials mailed for its last annual meeting after March 13, 2010. As the SEC’s order was silent about how to determine the manner in which the stay will ultimately impact the effective date of the rules, I have been bombarded with questions about what the possible timing of the expedited review.

Here is what Cooley is saying – excerpted from this memo – about timing: “Even in highly expedited cases, in most of the courts of appeals, each party will have about three weeks for their principal briefs and a week or more for the reply. We think that, in a case like this, there is likely to be argument heard. As a result, we estimate that it may take a few months to resolve, which means that the potential application of proxy access for this proxy season will likely be in limbo for many issuers until more is known about the schedule. The court has not yet set a briefing schedule, nor is there anything on the Court’s docket showing that it has received a motion to expedite the briefing schedule.”

This seems right as this BusinessWeek article notes a SEC spokesperson as saying this will be resolved in “late Spring”…

Interestingly, dozens of law firms already have sent out emails regarding this development – but these firms had remained silent when the lawsuit was filed last week. Notably, very few of the emails dealt with this timing issue, which I imagine is the one item that folks want to know about most.

Proxy Access: Corp Fin’s Position on the Application of Advance Notice Bylaws

Below is a Corp Fin position as repeated from this memo from Cooley (a position which was also articulated by Corp Fin Director Meredith Cross at a New York Chapter meeting of the Society of Corporate Secretaries on Friday):

An SEC staff member has just responded to a question I had posed to the staff about a month ago with regard to the viability of advance notice bylaws in connection with Rule 14a-11 (proxy access) nominations. While it’s clear that advance notice bylaws apply with regard to nominations made outside of the proxy access rules, it was not clear whether the company could, in the SEC’s view at least, preclude a proxy access candidate’s nomination at the meeting if the nominating shareholder did not comply with the company’s advance notice bylaws. Most firms took the position that proxy access “trumped” the advance notice bylaws and that the company could not preclude the nomination and election of the candidate at the meeting, even if the nominating shareholder did not comply with the advance notice provisions. The staff member told me that, to the contrary, the staff’s position is that the advance notice bylaws cannot be ignored.

Moreover, a predicate to Rule 14a-11 is that there is a state law right to nominate, and failure to comply with the advance notice bylaw means, in effect, that there is no state law right to nominate. As a result, not only could the nomination of the candidate be precluded at the meeting, but, surprisingly, the company could use the fact of noncompliance to exclude the nominee from the proxy, subject to the company’s following the process outlined by the SEC for exclusion of nominees, including notice to the SEC.

The question of director qualifications is, from the staff’s perspective, a slightly different animal. It’s clear from the release that if the bylaws include reasonable director qualifications that relate to the nominee’s ability to serve as a director, then a Rule 14a-11 nominee must be included in the proxy statement even if the nominee does not satisfy the qualifications. The company could, however, refuse to seat the director, even if elected, in compliance with Delaware (or other state) law. But what if the bylaws were phrased to prevent not only service as a director, but the nomination of a director that did not meet the reasonable qualifications in the bylaws? Again, if the bylaws cut off the right to nominate the director, then the 14a-11 nominee could be excluded, not just from nomination, but also from the proxy statement.

However, in advising the SEC that the company intended to exclude the nominee, the company would need to show that the qualification was generally applicable across the board, not one that could be satisfied prior to nomination (such as a qualification that the nominee be a shareholder) and that the qualification would be a valid limitation on the right to nominate under Delaware (or other state) law. (I assume that the difference with regard to advance notice provisions is that it’s widely accepted that reasonable advance notice provisions are permitted under Delaware law to preclude nominations, whereas qualification requirements for the nomination of directors was less clear (at least to the staff if not to Delaware counsel), so the threshold to convince the staff regarding qualifications would be higher.)

The staff member said that the staff would, however, look askance at a bylaw provision that suggested that the company was really just trying to “opt out” of Rule 14a-11. His example of that type of circumvention was a director qualifications bylaw that provided that an individual could not be nominated if the nomination occurred during the open window period for proxy access nominations, thus creating an unavoidable conflict with Rule 14a-11.

This interpretation seems to open up the field for bylaw limitations on the right to nominate, provided that they would could be supported as valid under Delaware law. Of course, the summary above is just the staff’s take on the matter. A nominating shareholder that wants to contest a company’s attempt to exclude a nominee could well end up seeking a judicial determination, which could easily have a different result.

Proxy Access: The Debate Over What to Do If the Rules Stick

While we wait to see what happens with the SEC’s new proxy access rules, I thought it might be useful to point out the heated debate over what types of actions that companies might take if access “sticks.” Professor JW Verret has been publishing his ideas about what type of defenses companies might consider adopting in the wake of access – and here is some commentary in response.

– Broc Romanek

October 4, 2010

Corp Fin Updates Financial Reporting Manual (Again)

On Friday, Corp Fin updated its Financial Reporting Manual for issues related to Regulation S-X Rule 3-09, Rule 3-10, and Rule 3-16, as well as other changes (eg. Topic 1500 of the Manual). The revisions are reflected as of June 30th and aren’t attributable to Dodd-Frank. Corp Fin has been updating the Manual much more frequently than in the past, deciding to do so a little bit at a time rather than major rewrites as in the past.

Dodd-Frank: The SEC Fleshes Out Its October Rulemaking Schedule

On Friday, the SEC listed the specific rulemakings that are planned for October in this schedule. As noted earlier, the schedule includes proposals for say-on-pay and say-on-golden parachutes, as well as disclosure of voting by institutional money managers on executive pay. Proposals regarding compensation committee/advisor independence; mine safety and disclosure relating to resource extraction issuers are not coming until November.

Among other planned rulemakings, October also includes a request for comment on a study regarding reducing the costs of smaller companies complying with Section 404 of Sarbanes-Oxley (ie. internal controls). The SEC will also establish five new Offices this month: Whistleblowers, Credit Ratings, Investor Advocate, Women and Minority Inclusion and Municipal Securities. Here is testimony before the Senate Banking Committee from SEC Chair Schapiro regarding how the rulemaking is proceeding.

On Friday, the SEC also issued its report on why the market suddenly crashed back in May – as noted in this NY Times article, a single $4 billion trade led to the “flash crash.” Scary…

Holding the Virtual Annual Meeting: Factors to Consider and Practice Pointers

We have posted the transcript for the recent webcast: “Holding the Virtual Annual Meeting: Factors to Consider and Practice Pointers.”

– Broc Romanek

October 1, 2010

Mea Culpa: Proxy Access’s Lookback Test – March 13th, 2010 is the D-Day

Showing just how hard this blogging stuff can be, I am blogging a slight correction to my recent blog in which I complained how folks were coming to the wrong conclusion about which companies will have to deal with proxy access during the upcoming proxy season – and then I mentioned March 15, 2010 as the D-Day, which is technically incorrect.

Thanks to Todd Bloomquist of Winston & Strawn, who bothered to do the math and notes that “if a company mailed its proxy materials on Saturday, March 13, 2010, then the 120-day count would fall on November 13, 2010. Because November 13, 2010 is a Saturday, the proxy access notification window would actually be open for one day on Monday, November 15, 2010 under Instruction 1 to Rule 14a-11(b)(10).” In practice, I’m not sure it matters much because a quick Edgar search reveals that no companies mailed on that Saturday (so March 15th essentially is the threshold date in practical terms).

In erroneously pegging March 15th as the D-Day, I did what I think a lot of other folks have done – simply took the example provided by the SEC Staff during its open Commission meeting and moved the dates without thinking about how the weekend stuff would impact the calculation (in other words, few folks bothered to do the math themselves – I still haven’t!). Of course, this analysis is moot if the Business Roundtable and Chamber of Commerce are victorious in their motion for a stay of the effectiveness of the SEC’s new access rules (as I blogged about yesterday).

Trust me, it’s hard to blog daily and not occasionally get something wrong or offend someone accidentally. Particularly since most breaking news items come at the end of the day – and therefore the window to conduct research to ensure your analysis is correct is somewhat limited (and sometimes feels like a moving target). The community adds much more value than I possibly could alone – please keep it coming.

Thankfully my blogs have never been so controversial that I had to quit in order to protect my family, as recently happened to Prof. Todd Henderson of the “Truth on the Market” blog (see this Forbes blog).

More on “Dodd-Frank: SEC Removes Rating Agency Exemption from Reg FD”

A prime example of the challenges of blogging is how I needed to update my Reg FD piece yesterday morning to add some thoughts from Nancy Wojtas that I hadn’t seen anyone else muse about. In that updated blog, I noted the possibility that a Regulation FD obligation may be triggered if a rating agency were deemed to be acting as an agent of the issuer (I did call it a “stretch”). A member emailed these thoughts on that issue:

Even if a rating agency would be deemed an agent of the issuer, there should not be a problem, because the communication to the rating agency (as an agent) should be covered by the “trust and confidence” exception, and then the rating agency’s disclosures (at least for Moody’s, S&P and Fitch) would be FD compliant, since they always announce their ratings in press releases.

Rating agencies are not in the fourth category of covered persons under FD (a person “Who is a holder of the issuer’s securities, under circumstances in which it is reasonably foreseeable that the person will purchase or sell the issuer’s securities on the basis of the information.”) because of the requirements of being an NRSRO. Specifically, Section 15E(g) and Rule 17g-4 under the Securities Exchange Act of 1934 requires that NRSROs implement and maintain policies prohibiting its employees from inappropriately communicating information they learn when providing ratings services or engaging in transactions in securities (including derivatives) when they possess material, non-public informa┬Čtion or confidential information concerning the issuer of such securities. Thus, there is a reasonable basis for concluding that NRSROs and their employees would not be expected to trade securities based on information that issuers furnish an NRSRO.

Ironically, it was a prior Congressional action, the Credit Rating Agency Reform Act of 2006, that took rating agencies out of FD. That was the Act that amended the definition of investment adviser so that Section 2(a)(11)(F) of the Investment Adviser’s Act specifically excludes NRSROs (unless such organization engages in issuing recommendations as to purchasing, selling, or holding securities or in managing assets, consisting in whole or in part of securities, on behalf of others, which the major ratings agencies don’t). That was the same Act that created 15E(g) imposing the confidentiality requirements on NRSROs.

I do note that the few law firm memos I have seen so far on this topic vary in their analysis of this rule change – so I don’t feel so bad about needing to update my blog early yesterday. Note that if you read this blog via RSS feed or through Knowledge Mosaic (which populates its list of blogs thru RSS feeds), you likely are not reading the “final” product. I often tweak the blog once or twice right after it’s posted. You may be better off inputting your email address on the left side of this blog – which alerts you to when our daily blog is posted and you can read the genuine article.

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