Monthly Archives: July 2011

July 29, 2011

Hilarious Skit: Jon Stewart on Dodd Frank’s Anniversary

Regardless of your political bent, you will enjoy’s last night’s 5-minute skit from “The Daily Show with Jon Stewart” that tackles the 1-year anniversary of Dodd-Frank. Jon Oliver is dressed up in a beaten-up costume representing the legislation and sings his answers to Jon’s questions about where the rulemakings stand now, etc. Pure comical genius:

The Daily Show – Dodd-Frank Update
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Canada’s Continuous Disclosure Review Program

Recently, the Canadian securities regulators issued a Staff Notice about how their continuous disclosure review program was faring (see this press release). The CSA (Canadian Securities Administrators) is a council of the securities regulators of Canada’s provinces and territories.

I don’t know enough about how the Canadian’s review program works to compare it to Corp Fin’s (both use some sort of risk-based approach), but the Staff Notice is interesting. For starters, note the example disclosures in the appendix – including examples of deficient disclosures! It’s rare that a regulator provides example disclosures of any kind (due to fear of one-size-fits-all disclosures, not blessing any particular disclosures in case they prove problematic, etc.) – but it definitely can be helpful to those of us drafting the darn things…

July-August Issue: Deal Lawyers Print Newsletter

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

– Tweeting Transactions: Social Media, Business Combinations & the Federal Securities Laws
– The Evolution of Poison Pills
– Advance Notice Bylaws: The Current State of Second Generation Provisions

If you’re not yet a subscriber, try a “half-price for rest of ’11” no-risk trial to get a non-blurred version of this issue on a complimentary basis.

– Broc Romanek

July 28, 2011

Risk Factors: Consider the Debt Ceiling Standoff

With the debt ceiling deadline approaching, a number of companies are likely considering the need to include risk factor or other disclosures in their Form 8-Ks (when reporting earnings) or Form 10-Qs – or already have done so. For example, EBay included a risk factor in its Form 10-Q filed last Friday. And Centene Corp. included the following risk factor in its Form 10-Q filed Tuesday:

The failure of the federal government to raise the federal debt ceiling could affect funding for Medicaid and our cash flow.

As has been widely reported, the United States Treasury Secretary has stated that the federal government may not be able to meet its debt payments in the relatively near future unless the federal debt ceiling is raised. If legislation increasing the debt ceiling is not enacted and the debt ceiling is reached, the federal government may stop or delay making payments on its obligations, including funding for Medicaid. A failure by the federal government to fund or a material delay in the funding for Medicaid could have a material adverse effect on our cash flows.

Whether a company should include this type of disclosure will depend on the potential impact of the debt crisis on its business. Brian Breheny of Skadden notes: “My general sense is that unless the company is in a specific industry that is reliant on government funding, holds a material amount of government securities, or can specifically identify a risk it may experience if the debt ceiling negotiations fail, then general disclosure regarding the debt ceiling negotiations is generic and probably unnecessary.”

More on “SEC Filings: What is the Difference Between a ‘Schedule’ and a ‘Form’?”

In response to my recent musings about the differences between an SEC “form” and “schedule,” Scott Cooper of Rayburn Cooper & Durham responded with this interesting note:

In reading your blog regarding Schedule 13Fs, I recalled that I was involved with that rule-making as a Investment Management Staff attorney under the direction of Lee Spencer. That project was a long time ago and I do not remember any extensive discussion of whether to call it a “form” or “schedule.” One distinction was that IM had responsibility for Section 13(f) while Corp Fin was responsible for the rest of the Williams Act. I believe that all IM reports and registration statements were called forms but I’m not sure about that.

A more important distinction – at least in my memory – is that Form 13F was to be one of the first forms/schedules designed to be filed in a computer format which meant at the time sending in a tape with the data. The idea was the market and the SEC would be able to manipulate the data and that it could be quickly dispensed if it was received on tape in a standard format. My principal mission was to design the standard format working with some of the few technology staff that the SEC had at the time. We also required a paper copy that was quite massive. Public dissemination became controversial as the SEC wanted to have an outside firm do it and there was a perceived economic benefit to having the data first.

In my undergraduate days, I had taken a computer science course and knew a little about programming, since the course work in the early 70’s was to actually prepare punch cards to run programs. You spent a lot of time in the computer lab printing cards and hoping that the result was correct. Not many of my attorney colleagues at the SEC had done so and I always assumed that is why I was asked to assist.

Based upon the Form 13F experience, I transferred to Corp Fin’s Office of Disclosure Policy and worked to develop other Williams Act rules with John Granda and John Huber and then in Integrated Disclosure projects. Thanks for letting me take a trip down memory lane (for at least the parts that I can remember!)

Understanding Corporate Espionage

In this podcast, Carolyn McNiven of DLA Piper – a former federal prosecutor – explains how companies can better protect themselves from corporate espionage, including:

– What are the most common types of corporate espionage?
– What steps can boards take to ensure that management is protecting corporate assets against these acts?
– When does a company have a duty to disclose that something has been stolen from them?

– Broc Romanek

July 27, 2011

Short-Form Registration: SEC Removes References to Credit Ratings

Yesterday, the SEC unanimously voted to adopt rule changes that remove references to credit ratings from some of its rules and forms to implement Section 939A of Dodd-Frank. These changes help preserve the availability of shelf and short-form registration – Forms S-3 and F-3 – for companies widely followed in the market. To replace the credit ratings criteria, the SEC created four new tests, one of which must be satisfied to use short-form/shelf registration – and subsidiaries of WKSIs do qualify. The rules include a transition 3-year grandfather period. Here’s the SEC’s press release (the adopting release is not out yet).

Here’s an excerpt from a Davis Polk alert:

According to SEC Chairman Mary Schapiro, the SEC expects just about all issuers that currently rely on the existing test also to continue to qualify under the new criteria. While this may be the case, there are issuers of investment grade debt securities that do not meet the Form S-3 or Form F-3 public equity requirements and will not meet the new criteria adopted today. Once the grandfathering period is over, these issuers will lose access to Form S-3 or Form F-3 until they issue substantial amounts of registered debt. We expect, however, that most of these issuers will issue debt pursuant to Securities Act Rule 144A if they are not able to use Form S-3 or Form F-3, given the potential time delay in making registered offerings using a long form registration statement, and thus will likely never satisfy the new criteria adopted today.

SEC Re-Proposes Shelf Eligibility Requirements for Asset-Backed Securities

Yesterday, the SEC also issued this re-proposing release related to shelf-eligibility requirements for asset-backed securities. There is a 60-day comment period. Here’s the SEC’s press release.

The GAO’s Study on Securities Fraud Liability for Secondary Actors

Last week, as required by Section 929Z of Dodd-Frank, the GAO published this study on the impact of creating a private right of action against secondary actors who aid and abet violations of the federal securities laws.

– Broc Romanek

July 26, 2011

Survey Results: More on Regulation FD Practices

We have posted the survey results regarding the latest Regulation FD trends, repeated below. This new survey supplements several prior surveys that we have conducted on this topic:

1. Our company has a written policy addressing Reg FD practices:

– Yes, and it is publicly available on our website – 11.8%
– Yes, but it is not publicly available on our website – 62.7%
– No, but we are in the process of drafting such a policy – 13.6%
– No, and we do not intend to adopt such a policy in the near future – 11.8%

2. Regarding reaffirmation of earning announcements, our company uses one of the following rules of thumb regarding private reaffirmations:

– We do not allow private reaffirmation – 63.6%
– Rule of thumb allowing for private reaffirmations of one week or less – 10.9%
– Rule of thumb allowing for private reaffirmations of one to two weeks – 10.9%
– Rule of thumb allowing for private reaffirmations of two to three weeks – 5.5%
– We permit private reaffirmations – but never use a rule of thumb, instead we require confirmation of no material change with CEO, GC, etc. – 9.0%

3. At our company, our CEO and other senior managers: (multiple answers apply, may total more than 100%):

– Are not permitted to meet privately with analysts – 6.9%
– Are only permitted to meet privately with analysts so long as someone else accompanies them (such as general counsel or IR officer) – 63.8%
– Are permitted to meet privately with analysts after briefing by IR officer, general counsel, etc. – 32.8%
– Are only permitted to meet privately with analysts during certain designated times – 25.9%

Please take a moment to participate in this “Quick Survey on Whistleblower Policies & Procedures.”

8-Year Study: Audit and Non-Audit Fees

In this podcast, Don Whalen of Audit Analytics discusses the latest audit and non-audit fee study from his firm, entitled “Study: Audit Fees/Non-Audit Fees – 8 Years,” including:

– What is the research population for the latest study?
– What do audit fee trends look like?
– What about non-audit fee trends?
– What were the biggest surprises from the latest study?

Cancelled: SEC Adopting Institutional Investment Manager Vote Reporting Rules

The SEC has amended its agenda for today’s open Commission meeting and will not be voting on adopting rules requiring institutional investment managers to disclose their voting records yet (the proposal came out last October). No word on why the sudden cancellation of this agenda item – but I imagine adoption of these rules is merely postponed as they don’t appear controversial looking at the comments submitted. The remaining three agenda items will still be dealt with at the meeting.

– Broc Romanek

July 25, 2011

DC Circuit Vacates SEC’s Proxy Access Rule: Now What?

On Friday, the US Court of Appeals for the DC Circuit issued its much-anticipated opinion in the Business Roundtable’s and Chamber of Commerce’s challenge to the SEC’s proxy access rule (we are posting memos in our “Proxy Access” Practice Area). The court found that the SEC “was arbitrary and capricious” under the Administrative Procedure Act in promulgating Rule 14a-11 and vacated it.

The news was greeted with much glee by the corporate community, much like Steve Martin when he received a new phonebook in “The Jerk” – even though the decision to vacate was not much of a surprise to those who followed the harsh line of questioning from the three judges during oral argument back in April (see this blog). The only surprise may have been that this decision was reached in July – more folks in my poll on when the decision would be rendered selected August.

Obviously, the SEC is not happy as reflected in this statement (nor are investor groups like CII – see their statement). As I blogged before, the SEC has various alternatives available to it going forward. This excerpt from a Skadden alert drives this point home:

It remains to be seen how the SEC responds to the decision. It is possible that the SEC will refine its economic analysis and re-propose a proxy access rule. In light of the SEC’s continuing work load relating to the implementation of the Dodd-Frank Act and other time constraints, it seems likely that any new proxy access rule would not be effective in time for the 2012 proxy season.

It is worth noting that when the SEC adopted the proxy access rule, it also amended Rule 14a-8 in a way that would permit stockholders to propose additional proxy access (by narrowing the so-called “election exclusion” under Rule 14a-8(i)(8)). This amendment was not challenged by the Business Roundtable and Chamber of Commerce. When the SEC granted the stay of the proxy access rule in October 2010, it also stayed the effectiveness of the Rule 14a-8 amendment because the amendment was “designed to complement” the proxy access rule and the SEC viewed the two as “intertwined.”

It is not known whether the SEC will keep this part of the stay in place while it considers its next steps on a proxy access rule or, alternatively, if it will allow the Rule 14a-8 amendment to take effect and open the door to proxy access stockholder proposals for the 2012 proxy season. A statement released by the Director of the SEC’s Division of Corporation Finance, expressing disappointment in the Court’s decision, specifically noted that the Rule 14a-8 amendment was not affected by the Court’s decision.

Insider Trading: Cuban Loses Unclean Hands Defense

It’s been a while since we heard of a development in the insider trading case, SEC v. Cuban (here’s the last one I blogged about). Here’s news from Knowledge Mosaic:

On July 18th, the Court overseeing the SEC’s insider trading case against Mark Cuban, the owner of the Dallas Mavericks, held that Cuban cannot assert unclean hands as an affirmative defense to the SEC’s action. The defense is strictly limited to cases where the SEC’s misconduct is egregious, the misconduct occurs before the SEC files the enforcement action, and the misconduct results in prejudice to the defense rising to a constitutional level and established through a direct nexus between the misconduct and the constitutional injury.

The SEC’s Report on Credit Ratings Reliance

On Thursday, the SEC issued this 24-page report on the reliance on credit ratings, as required by Section 939A(c) of Dodd-Frank.

– Broc Romanek

July 22, 2011

Happy Anniversary Dodd-Frank!

Happy anniversary Dodd-Frank! For those of us that received job security when Dodd-Frank became law a year ago, today should be a day of celebration (the anniversary was yesterday, but it seems more appropriate to celebrate on a Friday). I’m celebrating by not being too serious in today’s blog. [Here’s a Morrison & Foerster memo; Davis Polk memo; O’Melveny & Myers memo; and a Sullivan & Cromwell memo on “what’s happened” in different areas – how far we’ve come and how much we have to go kind of thing. Certain provisions of Dodd-Frank become effective today and are identified in the memos. SEC Chair Schapiro delivered this anniversary testimony yesterday before the Senate Banking Committee.]

I imagine some of the celebrations would remind us of the Seinfeld episode where Elaine took offense with the large number of office parties. “Get well, get well soon, we wish you to get well!”

Poll: How I Plan to Spend Dodd-Frank’s Anniversary

Online Surveys & Market Research

– Broc Romanek

July 21, 2011

SEC Commissioners Reject Enforcement Staff Proposal to Settle Clawback Case

According to this Washington Post article yesterday, the SEC’s Commissioners have disagreed with its Enforcement Staff to settle the CSK Auto clawback case because the penalty amount was too low. It’s relatively rare that the Commission disagrees with its Enforcement Staff – but certainly not unheard of – but it is rare that a closed Commission meeting outcome like this is made public.

The SEC’s Enforcement Process: How Does a Commissioner Dissent?

There are various steps in the SEC’s Enforcement process that requires blessing by the SEC’s Commissioners. That approval either takes place behind closed doors at a closed Commission meeting or ad seriatim. Last week, the Washington Post ran this article about Commissioner Aguilar dissenting in a settlement – the article notes that only two dissents in an enforcement action have been posted since ’04.

A public dissent by a Commissioner certainly is unusual, but it’s not unprecedented as noted in the article. Because this settlement was in the form of an administrative proceeding, there was an opportunity for Commissioner Aguilar to have a public airing. Otherwise (i.e., with a federal court action), there’s no public outlet to note a Commissioner’s dissent – it is merely recorded by the SEC’s Secretary in the minutes of the closed Commission meeting. But sometimes the press does get leaked information somehow – you may recall the news reports last year that the 2 Republican Commissioners dissented from the SEC-Goldman Sachs settlement involving the ABACUS CDO…

Next Tuesday: SEC to Adopt Institutional Investment Manager Vote Reporting Rules and More

As noted in ISS’s Blog, the SEC will hold an open Commission meeting on Tuesday to adopt rules requiring institutional investment managers to disclose their voting records; rules replacing credit rating references with alternative criteria and rules establishing a large trader reporting system. The SEC will also consider re-proposing rules relating to shelf-eligibility for asset-backed securities.

– Broc Romanek

July 20, 2011

Dave & Marty on Analyst Relations, SEC Comment Trends and Vacation

In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:

– Dealing with securities analysts
– The latest SEC trends in SEC comments on Exchange Act filings
– Favorite beach activities

The GAO’s Report on the SEC’s Revolving Door

Last week, the GAO issued this report about the SEC’s revolving door entitled “Existing Post-Employment Controls Could Be Further Strengthened.” This report was mandated by Congress in Section 968 of Dodd-Frank. As I’ve blogged recently, revolving doors at federal agencies have been in the news, particularly since it’s a pet peeve of Senator Grassley.

A couple of interesting facts from the report: 2127 staffers left the SEC between 2006-2010 – and there are 3729 staffers right now – so that’s a startling percentage of departures (but maybe that is normal for most organizations – I have no idea since it’s not my area of expertise). Of the 2127 departing staffers though, only 37% were attorneys or accountants (or other types of examiners); the rest were non-examination employees (egs. IT personnel, secretaries) – that was surprising to me too because I assumed most of the turnover was due to staffers leaving for more lucrative jobs in law and accounting firms. During this period, the average tenure of a staffer before departure increased to 13.5 from 8.3 years, mainly due to the recession.

Executive Compensation Disclosure During the ’11 Proxy Season: A Large Step Forward

On, we have posted the Summer 2011 issue of our Compensation Standards newsletter that contains practical guidance (and numerous specific examples) in the aftermath of a hectic proxy season. The Summer issue covers:

– The Evolving Role of the Executive Summary
– Coordinating the Executive Summary and the Say-on-Pay Supporting Statement
– The Newest Disclosure Tool – The Proxy Statement Summary
– The Second Round of Compensation-Related Risk Disclosure
– A Preview of the Coming Consultant Disclosure
– What to Expect in 2012

Act Now: This issue is available to all those with a membership – which is “half-price for the rest of the year” with this no-risk trial. Members should print it out now so they can read Mark Borges’ guidance today…

– Broc Romanek

July 19, 2011

President Obama Directs SEC & Other Agencies to Review Their Regulations

As noted in Jim Hamilton’s blog, President Obama issued an Executive Order two weeks ago asking the SEC, CFTC and other independent agencies to follow the cost-saving, burden-reducing principles when proposing and adopting regulations as outlined in an earlier Executive Order issued in January that was addressed to other federal agencies (at that time, other agencies were encouraged to follow this order – but none of the independent agencies have submitted an action plan, so hence this new non-binding Order to push them). This new Executive Order also asks the independent agencies to analyze existing regulations to identify any that are outdated or too burdensome. The agencies have 120 days to report their findings to the Office of Management and Budget.

The SEC & the “Plain Writing Act of 2010”

A few days ago, I had just sat down to draft a blog about the Plain Writing Act of 2010 when Dominic Jones thankfully beat me to the punch with this “Coming soon: SEC advice you can (maybe) understand.” I say “thankfully” because I had never heard of the Act nor have I seen anyone else write about it (other than this piece by Lois Yurow) even though implementation is due in a few months, i.e. October 13th. Here’s the SEC’s report on implementing the Act – and here’s the SEC’s Plain Writing Initiative.

Dominic writes that investors are unlikely to benefit from simpler prose in disclosure documents under the Act and I agree that is important. But I would even take that a step further and simplify how documents on Edgar are presented, long a pet peeve of mine. How can ordinary investors understand what a “DEFA14A” means? Or even a “Form 10-K” for that matter? The SEC’s forms and schedules should have labels that more clearly identify what they are…

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:

– Is Going Public Going Out of Style?
– Corporate Political Spending Post-Citizens United
– A 12-Step Program to Truly Good Corporate Governance
– Study: “Bridging Board Gaps”
– Fifth Call Objectives, and Incremental Alternatives

– Broc Romanek

July 18, 2011

Congress Batters the SEC (Again) By Cutting Its ’12 Budget

As noted in this NY Times’ article on Saturday, the House Appropriations Committee cut the SEC’s fiscal 2012 budget request by $222.5 million, to $1.19 billion (the same as this year’s), even though the SEC’s responsibilities were vastly expanded by Dodd-Frank. As I’ve blogged about numerous times before, the SEC needs to be self-funded because Congress is all too willing to play politics with this independent agency.

As noted in the article, cutting the SEC’s budget doesn’t help Congress in its battle to cut the federal deficit. In fact, this move hurts that effort because the SEC is funded out of fees it collects – and Section 991 of Dodd-Frank limits the fees that the SEC can collect by now tying the amount it is able to collect to its budget. Congress really shot itself in the foot when it included that provision in Dodd-Frank, but Wall Street and the corporate world have good lobbyists. Here’s an excerpt from the NYT article:

By way of comparison, in 2009 Citigroup and JPMorgan Chase, two institutions the S.E.C. regulates, spent $4.6 billion each — four times the SEC’s entire annual budget – on information technology alone. Under the House’s proposed budget, the S.E.C.’s resources for technology would be cut by $10 million and a $50 million reserve fund earmarked for technology would be eliminated.

The Re-Introduction of the Shareholder Protection Act

Last week, several prominent members of the U.S. Senate and House of Representatives re-introduced the Shareholder Protection Act for debate. As noted in the Harvard Corporate Governance Blog, the bill – which originally passed the House last year – would establish corporate governance rules for deciding when corporate resources may be spent on politics. Although it appears that the bill is unlikely to be adopted during this Congress, its reintroduction might mean that it will continue to surface until a time comes when it has substantial support.

Meanwhile, as part of the efforts to reduce the federal deficit, Sen. Levin and Sen. Brown have introduced legislation – the “Ending Excessive Corporate Deductions for Stock Options Act” (S. 1375) – to end a corporate tax break allowing corporations to deduct stock option expenses on their tax returns in amounts greater than the expenses shown on their books

Proxy Season Results of Mobile Phone Voting

In this podcast, Joe Vicari describes how Broadridge facilitated voting by mobile devices during the proxy season (following up on this podcast), including:

– How many shareholders voted by mobile phone?
– Was this more than expected?
– Are you aware of any companies that made special efforts to notify their shareholders that they could vote by mobile phone?
– What do you recommend that companies do next year to boost their mobile phone voting rates?

– Broc Romanek