September 9, 2011

SEC Shifts Tack on Document Destruction

According to this WSJ article, the SEC has revised its controversial policy regarding deleting old MUIs (here’s my blog with commentary on the original story; here’s Bruce Carton’s debunking). This announcement comes ahead of the release of several damaging reports from the SEC’s Inspector General on a variety of matters, as reported in this WSJ article.

Here’s an excerpt from the article about the new MUI policy:

Late in the day, SEC General Counsel Mark Cahn issued a memo to Division of Enforcement staff telling them to stop existing record-destruction procedures for closed cases, until further notice. That’s according to people familiar with correspondence issued by Mr. Cahn.

An SEC spokesman confirmed the rules shift Wednesday night, saying: “We have been working with [the National Archives and Records Administration] on a new policy for records retention, and have determined to suspend the current policy out of an abundance of caution until a new policy is in place.”

As Jean Eaglesham and Jessica Holzer are reporting, the SEC’s internal watchdog is exploring the longstanding document-destruction policies–among a number of other matters–and plans to issue several widely awaited reports this month, including one on this.

The SEC’s directive from Mr. Cahn on Wednesday came after months of wrangling inside the agency, some of it personally involving document-destruction whistleblower Darcy Flynn, over various categories of investigative records, from initial to preliminary to formal. The differences in language are key, because categories–and what’s included in those categories–guide disclosure to the national archives agency, and rules about what can be tossed and what must be kept.

Mr. Flynn, whose job involves interpreting SEC policies and guiding enforcement lawyers on what to save or destroy, raised his hand, through his lawyer, on Tuesday to tell the SEC that improper document-destruction was continuing. Mr. Flynn’s lawyer, Gary J. Aguirre, himself a former SEC staff attorney and whistleblower, told Mr. Cahn at the SEC in a letter Tuesday that “we may need to seek injunctive relief” in federal court if the SEC doesn’t freeze its document-destruction policy, according to a copy of that correspondence reviewed by The Wall Street Journal.

TechCrunch as “Journalist”? Can There Be Insider Trading on Pre-IPO Exchanges?

Last week was a whirlwind of changes for TechCrunch – the popular Silicon Valley blog that got sold to AOL for $30 million last year – as it first announced that founder Michael Arrington would be investing in start-ups (with parent AOL also investing) under an exception to AOL’s “conflict of interest” journalism policies. As noted in this article (coming on heels of this David Carr column and TechCrunch rebuttal), this move was controversial and TechCrunch quickly announced some changes to what Arrington’s future role with the blog would be – and then a few days later, it’s been rumored that he was fired altogether.

As I tweeted, Arrington sounds both arrogant and naive at the same time, particularly when he was quoted as saying he didn’t consider himself a journalist. I even consider myself one and I’m not breaking much in the way of news – plus clearly not to as wide an audience as TechCrunch has.

For me, this debate should not only focus on potential conflicts of interest, it should also raise the specter of insider trading. Remember the R. Foster Winans case from the ’80s? He was a well-known WSJ columnist who wrote the influential “Heard on the Street Column” from ’82 to ’84 and was convicted of insider trading for leaking advance word of the contents of his columns to a broker. It’s possible that the same type of risk could be present in the TechCrunch type of scenario now that shares of pre-IPO companies can be traded via SecondMarket, Sharepost, etc.

Although caselaw hasn’t yet dealt with insider trading in the pre-IPO context, I believe it’s just a matter of time before this issue will reach a court. Note how Facebook has already adopted an insider trading policy as mentioned during our recent webcast, “Understanding the Private Company Trading Markets.”

EU Market Participants Oppose Mandates

Here’s news from Rob Yates of ISS’s Governance Institute and Martin Wennerstrom of Nordic Research:

In response to the Green Paper on the EU Corporate Governance Framework, the European Union has received a variety of comments from institutional investors, investor associations, accounting firms, national and European industry associations, professional associations, stock exchanges, proxy advisers, and national regulatory associations. Of the small subset of responses that have been publicly released so far, most said the EU should maintain its comply-or-explain approach to governance and avoid Europe-wide regulation.

The green paper was published in May in an effort to “assess the effectiveness of the current corporate governance framework for European companies.” The paper focuses on three areas: directors, shareholders, and the effectiveness of the comply-or-explain framework, and then outlines potential next steps. According to the paper, governance “is one means to curb harmful short-termism and excessive risk-taking.”

Among the responses that have been published thus far, several general themes have emerged. Most respondents agreed that companies function more effectively with a separate chair and CEO, although they did not believe this is something that needed to be regulated on an EU-wide level.

The Association of Private Client Investment Managers and Stockbrokers, in its response, said: “This model should broadly be followed but it is critically an area where there cannot be a single answer or one-size-fits-all solution and where there may be a division between the approach to SMEs [small and medium enterprises] on the one hand (especially when they are very small) and to larger companies on the other. We believe the question may be wrongly phrased because it does not appear to recognise this.”

Similarly, many respondents viewed board diversity, gender balance, and the size of the board as important issues, but not issues that, at this point, warrant wholesale, large-scale regulation. In particular, some respondents said the definition of board diversity should be expanded to include experience, background, and qualifications.

The respondents agreed that “say on pay” votes are an important topic, although many were reluctant to support mandatory votes, or argued that the votes should be advisory only. The European Association of Cooperative Banks, focused its response on the impact of the questions on cooperative banks and said, “In our opinion, it [mandatory votes on remuneration policy and the remuneration report] would be contrary to the principle of division of tasks and powers to strengthen the role of shareholders or members in our case in setting compensation policies for corporate officers.” Other respondents pointed to the need for a consistent policy on remuneration votes across Europe.

The role of regulation and the degree to which it should be implemented in Europe generated a wide array of responses. Many said that regulation, at this point, is not the answer to current issues, and that comply-or-explain is sufficient. For example, the U.K. Financial Regulating Council said in its response: “The comply-or-explain principle is recognised at the European level as an important tool for delivering good corporate governance but the Green Paper raises questions about its effectiveness. We believe that the flexibility that it offers is positive for economic activity . . . Indeed, a comply-or-explain approach depends on regulation to make it effective. There must be a formal requirement for transparency . . . ”

Also, most respondents said regulators should not be responsible for enforcing comply-or-explain adherence, but that shareholders should take an active role in ensuring the quality of corporate explanations. Those respondents argued that regulatory monitoring would lead to a set of boilerplate responses to fit in within the regulators’ guidelines.

The Institute of Chartered Secretaries and Administrators, in its response, stated: “We believe that codes can be more effective at raising standards than legislative solutions.” Those respondents who do support comply-or-explain regulation said it should be enforced on a national level. In its response, the London Stock Exchange Group said regarding EU-wide regulation, “Member states should be free to determine the best approach to applying corporate governance standards.

Only a small subset of the responses have been made public thus far. The European Commission plans to post the green paper comments on its Web site this fall. Here is the ISS response to the green paper.

– Broc Romanek