Monthly Archives: November 2010

November 11, 2010

The Role of the SEC’s New “Office of Investor Advocate”

One item in Dodd-Frank that I admit that I haven’t paid much attention is the SEC’s creation of a new “Office of Investor Advocate.” I imagine I shrugged it off because the SEC’s primary mission is investor protection. So shouldn’t the entire agency essentially should be in this new office? Not to mention that an “Office of Investor Education and Advocacy” already exists – and an “Investor Advisory Committee” was created just last year. Like so many things in Dodd-Frank, Section 915 seems to mandate things the SEC already does (or has done).

Anyways, as this NY Post article notes, the SEC is now searching for someone to head up this new Office (which makes sense given the SEC’s tentative schedule for Dodd-Frank implementation indicates that this Office will be created this month). Here’s the job description posted by Korn/Ferry, a recruiter hired to help in the search. It looks like a significant part of the Advocate’s job will be preparing reports for Congress, in addition to the primary task of serving in an ombudsman role to investors.

It is doubtful that this new Office will be combined with the existing Office of Investor Education for two reasons. One is that I believe Congress mandated this new Office because it wanted to function separately and independently from the existing Office of Investor Education. There are several signs of that (egs. new Advocate reports directly to SEC Chair and has power to hire “independent” counsel, etc.). In addition, the new Advocate job can’t be filled by someone already at the SEC, as Dodd-Frank mandates that the person shall not have worked at the SEC for at least two years prior to being hired. It will be interesting to see how the Advocate’s role evolves over time…

For some fun, watch this three-minute video entitled “Toxie’s Dead” from NPR’s show, Planet Money. It’s about Toxie, a personified toxic asset that helped burst the housing bubble.

More on “FASB: Proposed Loss Contingency Standard Won’t Apply to Calendar Year-End Form 10-Ks”

A few weeks ago, I blogged how the FASB advised that calendar year-end companies will not be required to comply with the FASB’s proposed new loss contingency disclosure standards in their 2010 Form 10-Ks. Here is an update on this development from PricewaterhouseCoopers:

At yesterday’s meeting, the FASB discussed the redeliberation plan for its loss contingencies disclosure project. The FASB staff summarized the feedback provided by respondents in the comment letter process. Many respondents recommended that the existing standard be retained and that the proposal not be finalized. The Board discussed whether the concerns raised by investors result from a compliance or standard-setting issue. The Board noted that the SEC has recently emphasized compliance with the existing standard through the SEC’s process of providing comment letters to registrants, and its recent “Dear CFO letter”, dated October 2010.

Prior to concluding on whether an amendment to the existing standard is still needed, the Board decided to evaluate whether there is improved disclosures of loss contingencies during the 2010 year-end financial reporting cycle. At that time, the Board will decide whether any future redeliberations are needed or whether additional outreach on the proposal should be made. This decision effectively delays the project until the second quarter of 2011 at the earliest, and most likely until the second half of 2011.

Poll: Which Flintstones’ Character Could Best Serve as the Investor Advocate?

Since it’s a holiday, take part in this “fun & easy” anonymous poll:

Online Surveys & Market Research

– Broc Romanek

November 10, 2010

Can Disclosure in a SEC Filing Waive the Attorney-Client Privilege?

What if a company touts in one of its SEC filings that – although several of its customers had sought indemnification from it for claims of patent infringement made against those customers by a third-party – the company had obtained opinions of counsel that concluded the company’s products did not infringe the asserted patents and the patents were invalid regardless? Would this disclosure of the conclusion of these opinions constitute a waiver of any claim to the attorney-client privilege and the work product doctrine?

It appears there are few cases addressing this waiver issue. But at least in one case, the answer is “yes.” In this order, the US District Court for the Middle District of Georgia found that – in AFLAC v. Intervoice – that the defendant had “let the cat out of the bag” by disclosing its counsel’s conclusions and ordered that the opinions be produced.

Section 304: Second Circuit Rules in Clawback Case of First Impression

Here is something I blogged on “The Advisors’ Blog” on a while back: I pulled the following from this press release from Carter Ledyard, the law firm which won this case:

On September 30, 2010, in an important case of first impression, the United States Court of Appeals for the Second Circuit held that public companies may not indemnify their CEOs or CFOs from liability under Section 304 of the Sarbanes Oxley Act, which mandates that if a public company is required to restate its financial reports as a result of misconduct, the CEO and CFO must reimburse the company for any bonuses, incentive compensation, or trading profits that they earned during that period.

The Second Circuit held that Section 304, whose purpose is to prevent CEOs and CFOs from profiting by misleading investors and regulators about the financial health of their companies, does not provide a private cause of action and may only be enforced or waived by the SEC. Allowing a public company to indemnify and release its officers and directors from liability under Section 304 would nullify the SEC’s authority to pursue the Section 304 remedy or to grant exemptions from the statute.

The case before the Second Circuit, In re: DHB Industries, Inc. Derivative Litigation, Docket No. 08-3860-cv (2d Cir. Sept. 30, 2010), was an appeal from the approval by the United States District Court for the Eastern District of New York of a settlement of derivative lawsuits brought on behalf of shareholders of a public company formerly known as DHB (now Point Blank Solutions, Inc.) against former CEO David H. Brooks, former CFO Dawn Schlegel, and other former officers and directors of the company. One of the key provision of the settlement was that DHB would indemnify Brooks and Schlegel from any liability under Section 304 of the Sarbanes Oxley Act.

On September 14, 2010, Brooks and former COO Sandra Hatfield were convicted on 31 criminal charges stemming from their participation in a conspiracy involving massive securities fraud and theft of company assets. Schlegel had earlier pled guilty to having participated in this conspiracy. The SEC currently has actions pending against Brooks, Schlegel and Hatfield in the Southern District of Florida, in which it seeks disgorgement of $186 million under Section 304. The effect of today’s ruling by the Second Circuit is that DHB, which is currently undergoing bankruptcy proceedings in the United States Bankruptcy Court for the District of Delaware, In re Point Blank Solutions, Inc., Case No. 10-11255-PWJ, is no longer bound by the terms of the settlement to reimburse its officers and directors for their liability under Section 304, and is instead eligible to recoup those funds itself if the SEC’s pending actions are successful.

The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank

We have posted the transcript of our popular webcast: “The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank.”

– Broc Romanek

November 9, 2010

Analysis: What Frequency for the Say-on-Pay Vote?

Here is something that I blogged recently on’s “The Advisor’s Blog“: What should be the frequency of our say-on-pay vote? This is a question being mulled at most companies these days. Perhaps we are starting to get an answer when ISS issued its draft policy updates last week for comment, which included this statement, an excerpt of which is below:

The MSOP is at its essence a communication vehicle, and communication is most useful when it is received in a consistent manner. ISS supports an annual MSOP for many of the same reasons it supports annual director elections rather than a classified board structure: because it provides the highest level of accountability and direct communication by enabling the MSOP vote to correspond to the information presented in the accompanying proxy statement for the annual shareholders’ meeting. Having MSOP votes only every two or three years, potentially covering all actions occurring between the votes, would make it difficult to create meaningful and coherent communication that the votes are intended to provide. Under triennial elections companies, for example, a company would not know whether the shareholder vote references the compensation year being reported or a previous year, making it more difficult to understand the implications of the vote.

Recently, I caught up with a proxy solicitor – Dave Bobker of Phoenix Advisory Partners – to get his analysis of what companies should be considering regarding the frequency of their say-on-pay vote in this podcast, in which Dave addresses:

– What frequency do you think most companies will pick? Least?
– What frequency do you see most investors asking for?
– What would you recommend?
– What factors should companies consider when picking a frequency?

Nugget #2: Board Evaluations – Consider Splitting “Questionnaire” into Two Components (One Oral and One in Writing)

A few months ago, I started dribbling out some of the gems that Alan Dye and I shared a number of years ago during a series of “50 Nuggets in 50 Minutes” webcasts. Here is #2:

Board Evaluations – Consider splitting “questionnaire” into two components: one oral and one in writing – A number of companies split the format of their board evaluations. They use a written questionnaire for administrative issues, such as whether the length of meetings is appropriate and whether materials are sent out timely. The more sensitive and substantive questions are asked in an oral interview (“substantive” questions are those that directly relate to the company’s recent performance issues). This can allow for more candid and valuable feedback as some directors might balk if asked to reduce their concerns to writing due to perceived liability concerns.

One member notes that since they began board self-evaluation, they have used the bifurcated model of survey and interview – the survey helps identify areas to explore in the interviews and the interviews have provided the most value to the board.

We have sample board evaluations – and sample board committee evaluations – posted in our “Board Evaluations” Practice Area.

The Latest Trends in Dow 30 Governance Disclosure

A few weeks ago, Davis Polk teamed with The Conference Board and issued this press release about disclosure trends of the Dow 30 over the past year. The findings included:

– Risk oversight models vary, but boards tend to directly review strategic risk issues.
– Non-financial companies typically report having a dedicated Chief Risk Officer.
– The CEO/chairman combination remains the prevalent leadership structure in the Dow 30.
– Specific industry expertise is cited as critical in director selection, and all companies say they consider diversity when identifying director nominees.
– Companies recognize a correlation between top-executive compensation and risk behavior, using an array of measures to mitigate such risk including clawbacks and stock-holding guidelines.
– A number of non-financial companies retain compensation consultants through their governance, rather than compensation, committees.
– Compensation consulting fees can be small relative to other disclosed fees paid to the same consultants for, e.g., actuarial or HR services.

– Broc Romanek

November 8, 2010

It’s Proxy Season: Do We Need to Update Our D&O Questionnaire?

A question you need to ask yourself every year. Here is some input from Richard Blake of Wilson Sonsini:

Once Dodd-Frank rules are finalized and effective, there will be a number of changes to the D&O questionnaires including – but not limited to – compensation committee independence requirements. But for now, the only thing that has been proposed that could affect proxies, and that likely will be effective for this proxy season, are the say-on-pay rules – and note that say-on-pay is mandatory for this proxy season even if the SEC doesn’t finalize its rules (although that’s not the case for say-on-golden parachute).

I think the only thing that could affect D&O questionnaires apart from say-on-pay is the inclusion of new Reg. S-K Item 402(t) – disclosure of “golden parachute compensation” – which would be different and broader than the disclosure in Item 402(j), which is likely already included in the questionnaires. The Item 402(t) disclosure need only be provided if the company wants to take advantage of the SEC rules that say that they don’t need to take a say-on-golden-parachutes-payments vote upon an acquisition event if they previously received a favorable say-on-pay vote that included Item 402(t) disclosure. So sort of a company’s choice as to what it wants to do, particularly since some companies don’t ask about compensation in the questionnaire since they already know what they are paying their executives.

Our Proxy Season Checklists

Like every year, don’t forget that we post a number of checklists from law firms and consulting firms, along with our own, in the “Proxy Season” Practice Area. And don’t forget our sample D&O questionnaires posted in our “D&O Questionnaires” Practice Area.

Gearing Up for Say-on-Pay: What Clients Are Asking Now

Tune in tomorrow for this webcast – “Gearing Up for Say-on-Pay: What Clients Are Asking Now” – featuring Towers Watson’s Eric Larre; Semler Brossy’s Blair Jones, Pay Governance’s Ira Kay, Deloitte Consulting’s Mike Kesner and Verizon’s Mary Lou Weber as they provide guidance about how you can put your best foot forward with shareholders to help gain their approval on the ballot. This is the first of a trio of say-on-pay webcasts on – renew now for 2011 as all memberships expire at year end. Or if you are not yet a member of that site, try a 2011 no-risk trial and gain access to this webcast for free.

– Broc Romanek

November 5, 2010

We Win Top Blog Honors (Again)!

As I belatedly blogged on Tuesday, this blog was selected by LexisNexis as a “Top 25 Business Law Blog” last week – and then the 25 blogs were pitted against each other in a short voting contest. I’m proud to say that we easily emerged as #1 – as noted in this announcement – garnering 36% of the total vote! Thanks to those that bothered to vote – your karma will be rewarded. We are now 2-for-2 as this blog won the ABA Law Journal’s voting contest for the best legal blog earlier this year.

The son of a friend of mine has kicked off a new webisode series called “Naked Man” on YouTube and iTunes. Despite the title, the videos are “clean” and thus safe for work. The series’ tag line is “In a world full of danger, a hero arrives. But why is he naked?” Subscribe to receive new episodes as they are rolled out…

Political Spending Shareholder Proposals: Chamber Board Members Targeted

Yesterday, a group of investors issued this press release noting that shareholder proposals regarding political spending were being filed at four companies – Accenture, IBM, Pepsi and Pfizer – who have directors that also sit on the board of the Chamber of Commerce. This tactic of challenging companies more broadly to review their policies and oversight of political expenditures by targeting a specific trade association is interesting and perhaps a harbinger of things to come.

According to the press release, these companies were selected due to their strong governance records (as well as vendor policies in three of the cases). The release also notes that more proposals likely would be filed (did you know that the Chamber’s board has representatives from over 100 companies?). Finally, the release has a sample shareholder proposal at the bottom of it…

Yesterday, the SEC extended the compliance date for amendments to Regulation SHO by pushing it out a few months to February 28th. The original compliance date was next Wednesday, November 10th.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor 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:

– Apple’s Earnings Release: Did It Go Out on the Wire?
– Is Your CEO Being Arrested for DWI/DUI Material?
– Whistleblower Complaints: Likely to Rise with Heightened Emphasis on Corporate Bounty Hunters
– Delaware Court Permits Stockholders to Shorten Term of Airgas Staggered Board
– Disclosure of Adviser Conflicts: When Is It Enough?

– Broc Romanek

November 4, 2010

The SEC’s New PCAOB Appointment Procedures: Time for New Board Members?

It was way back in June that the constitutionality of the SEC’s oversight over the PCAOB was upheld by the US Supreme Court. As I noted in this blog, the Sarbanes-Oxley fix dictated by SCOTUS was that the SEC can remove PCAOB board members at will going forward.

While the SEC waited for the outcome of that decision, the openings on the PCAOB board piled up. That was understandable given the uncertainty over the outcome and it may have been difficult to find a qualified candidate. But time has passed since certainty has been restored. Today, there are three openings – although two of them are filled by board members whose terms have expired (Bill Gradison and Charley Niemeier’s terms ended one and two years ago, respectively). Dan Goelzer has been Acting Chair since July 31, 2009.

On Monday, the SEC issued these written procedures for appointment of a member or chair of the PCAOB. These procedures are actually a little abbreviated from the procedures announced during Chair Cox’s term – so I doubt their development was a roadblock to filling board slots. Maybe now with the mid-term elections behind us, there will be some movement on this important task…

Dodd-Frank: SEC Proposes New Whistleblower Bounty Program

Yesterday, at an open Commission meeting, to propose a new whistleblower program as required by Dodd-Frank. The proposing release is already available – comments are due by December 17th. Here is the press release – and here’s SEC Chair Schapiro’s opening remarks.

We’ll be posting memos on this proposal in our “Whistleblowers” Practice Area. Here is an excerpt of initial analysis from Cooley:

The SEC found the development of these rules especially challenging because of the potential for unintended consequences (e.g., the possibility that the rules would undermine internal corporate compliance programs – how about those developed under SOX– or that the SEC would be inundated with spurious or other leads that are not “high quality,” requiring the limited enforcement staff to triage tips.) As a result, the rules attempt to provide balance. For example, the rules propose that, among the criteria for determining the amount of an award, the SEC would take into account whether the matter was first reported internally; however, internal reporting would not be a predicate to making a whistleblower claim. Does this mean that companies will now offer their own financial incentives? Will there be a new wave of lawyers making their livings from these procedures, as with Section 16 and Prop 65?

New York Court of Appeals: Declines to Expand Outside Advisor Liability

A few weeks ago, the New York Court of Appeals ruled on certified questions in two cases: Kirschner v. KPMG (certified by the United States Court of Appeals for the Second Circuit) and Teachers’ Retirement System of Louisiana v. PricewaterhouseCoopers (certified by the Delaware Supreme Court). In the decision, the Court strengthened the in pari delicto defense, which is available to third-party professionals – including accountants or attorneys – who are accused by companies of colluding with, or negligently failing to detect the wrongdoing of, the company’s own management. We are posting memos on the decision in our “Auditor Liability” Practice Area.

– Broc Romanek

November 3, 2010

Whistleblowers: Change in the Playing Field?

Last week, the SEC released this first annual report to Congress regarding the state of its whistleblower program – the report shows that the SEC has put $451.9 million into a new fund to pay whistleblowers (Dodd-Frank requires a minimum of $300 million).Today, the SEC will hold an open Commission meeting to consider proposals to implement Dodd-Frank’s whistleblowing provision, Section 922.

In our “Whistleblower” Practice Area, we’ve posted numerous memos about the SEC’s new bounty program under Dodd-Frank. Perhaps this provision is the “sleeper” of the Act because so many folks have complained about it. For example, read this entry in “The Mentor Blog,” this piece from the “D&O Diary” or this one in Mike Melbinger’s blog on (or this WSJ article or this NY Post piece). All of these express concerns over the provision – and note how companies may want to change their internal whistleblower procedures in response.

Some entrepreneurial lawyers have caught on to the potential pot of gold offered by the new bounty program. For example, as noted in this New York Post article, there is a whistleblowing ad appearing in the theaters of Manhattan. The lawyer’s “SEC Snitch” site includes the commercial. I imagine we are just starting to scratch the surface of how this area will evolve…

Check out this interesting blog from Harvard Business Review about how crowdsourcing could potentially help the SEC’s whistleblowing efforts.

Dodd-Frank: SEC Moves Up “Accredited Investor” Rulemaking Schedule

On Monday, the SEC updated its “Implementation of Dodd-Frank page, mainly to provide more detail about which rulemakings will take place this month (whistleblowing; investment advisers; derivatives; Office of Investor Advocate) – many of which will be considered at today’s open Commission meeting.

The January-March schedule was also updated to move up proposals now set for that time period regarding Sections 413 and 926 that will revise the “accredited investor” standard and who is disqualified to offer securities in an exempt offering. Previously, these were set to come out in the April-July timeframe.

SEC Staff Report: A Review of XBRL Filings

On Monday, the SEC’s Division of Risk, Strategy and Financial Innovation issued this report that reviews interactive data filings submitted by companies during this past summer and lists a number of common issues in the form of “observations” (which I guess will be RiskFin’s terminology rather than any of the vehicles that Corp Fin uses; ie. Staff Legal Bulletins, “Dear CFO” letters, etc.). It doesn’t appear that individual comment letters were sent out to companies whose XBRL filings were reviewed by RiskFin, at least not at this stage of the XBRL roll-out…

– Broc Romanek

November 2, 2010

Time to Vote: Vote for This Blog Today

I’ve been remiss by not highlighting that this blog was selected by LexisNexis as a “Top 25 Business Law Blog” last week – and that there a voting contest among the 25 that ends today! Here is their announcement – and more importantly, here is where you can vote today. Simply click on the circle to the left of “” (it’s the 9th bullet down) – then click “Vote Now” at the bottom of the page. It takes only a second to do…

How Does Corp Fin Process Confidential Treatment Requests? The SEC’s Inspector General Weighs In

Recently, the SEC’s Inspector General posted this 51-page report that assesses how Corp Fin processes confidential treatment requests. The report contains eight recommendations – Corp Fin agrees with half of them, partially agrees with three others and disagrees with one (Corp Fin’s response starts on page 44 of the PDF).

The IG claims that Corp Fin “is not performing a robust review and examination of many confidential treatment requests.” The report notes that 68% of the CT requests during a discrete period were not reviewed at all after an initial screening – and only 8.5% were selected for a “full” review. Of the 3381 CT requests filed during this 26-month period, only one request was denied.

Based on statements made in the report, it appears that the IG reviewed the requests from companies and evaluated whether the requests were overly broad – but yet relief was granted. Another example of the IG’s inspection is that it criticized instances where the explanation from companies about why the subject matter of the CT request was not necessary for investor protection didn’t address both qualitative and quantitative factors. I’m not sure how the IG’s office has the expertise to fully evaluate how Corp Fin performs in this area – but I guess that is the case for all of their investigations (just like internal auditors). I wonder whether this report will cause Corp Fin Staffers to be less lenient in their grants of relief…

Don’t forget that yesterday, the US Sentencing Commission’s amendments to the Organizational Sentencing Guidelines – including the definition of what constitutes an effective corporate compliance program – went into effect.

The SEC Staff on M&A

Tune in tomorrow for the webcast – “The SEC Staff on M&A” – to hear Michele Anderson, Chief of the SEC’s Office of Mergers and Acquisitions, and former senior SEC Staffers Dennis Garris of Alston & Bird and Jim Moloney of Gibson Dunn discuss the latest rulemakings and interpretations from the SEC.

– Broc Romanek

November 1, 2010

Corp Fin’s “Dear CFO” Letter Regarding Foreclosure Exposure, Etc.

On Friday, Corp Fin posted this “Dear CFO” letter sent recently to companies regarding accounting and disclosure issues related to potential risks and costs associated with mortgage and foreclosure-related activities or exposures. The “Dear CFO” letter is a reminder of the related disclosure obligations to consider in upcoming Form 10-Qs, etc. given the foreclosure mess that has dominated headlines of late.

IFRS: SEC Staff Issues First Progress Report

On Friday, as noted in this press release, Corp Fin and the SEC’s Chief Accounting Office jointly released its first progress report on its Work Plan for consideration of incorporation of IFRS into the US financial reporting system. The Staff will continue to issue these progress reports over time.

Our November Eminders is Posted!

We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

The Rally to Restore Sanity: Sights & Sounds

Here are a few videos from Saturday’s Rally here in DC. The first illustrates the ingenious signs that people created – many were simply inane (this one features a guy in an Abe Lincoln costume with a sign protesting for “No Guns in Theaters”):

This one illustrates how crowded it was. The shot is taken from atop the National Gallery of Art steps – this museum was off to the side and 4 streets down from the stage:

– Broc Romanek