Monthly Archives: November 2011

November 30, 2011

SEC Brings Reg FD Action for Selective Disclosure of Trust Preferred Redemption

Last week, the SEC announced a settlement with Fifth Third Bancorp over some Reg FD violation allegations. No civil penalty was imposed upon Fifth Third based on its cooperation with the investigation. Here’s the SEC’s order. And here’s a Wachtell Lipton’s memo from Edward Herlihy and Matthew Guest about the action:

Last week, the SEC instituted a cease-and-desist order against Fifth Third Bancorp in connection with its redemption of trust preferred securities (TruPS) in May 2011. The SEC charged that in effecting the redemption Fifth Third “selectively disclosed,” in violation of Regulation FD, that it would redeem a class of its TruPS for about $25 per share. At the time the securities were trading at about $26.50 per share. The SEC stated Fifth Third did not issue a Form 8-K or other public notice of the redemption until it became aware that investors who appeared to have learned of the redemption had been selling the securities to buyers who appeared to be unaware of the redemption. Fifth Third, which compensated harmed investors and agreed to adoption and implementation of various additional policies and procedures, settled the SEC’s enforcement action without admitting or denying the allegations.

Fifth Third’s early redemption of their TruPS in May 2011 was triggered through Dodd-Frank’s phasing out of Tier 1 Capital treatment for TruPS generally. As indicated in our July 2010 memo “Potential Opportunities for Issuers of Trust Preferred Securities under the Collins Amendment,” bank holding companies have taken the opportunity presented by Dodd-Frank to redeem relatively costly TruPS under the regulatory capital provisions of their particular issuances where applicable. As noted in that memo, employing this redemption strategy requires careful coordination with regulators and consideration of all applicable circumstances, importantly including disclosure obligations.

Apart from their changing capital treatment and related redemptions, TruPS have frequently been a sort of fulcrum security in acquisitions of troubled institutions. Several notable transactions, including Ford Financial’s recapitalization of Pacific Capital in 2010, included conditions around effecting discounted tender offers of TruPS which have often proven difficult in execution. Several other deals, including BB&T’s recently announced BankAtlantic transaction, have attempted to solve the issue of TruPS at the holding company level by focusing on bank-level transactions.

It is clear that in the coming months TruPS will continue to be a focus in numerous capital and strategic transactions. Companies considering redemptions or other transactions involving their TruPS, while coordinating closely with their bank regulators and other relevant constituencies, should not lose sight of the various “capital treatment events” in the underlying trust documents as well as related corporate and securities law issues.

It’s been over a year since the SEC last brought a Reg FD enforcement case…

Study: Consequences of Private Meetings with Investors

In the “IR Web Report Blog” today, Pam Agnew summarizes how a new study has found significant evidence that hedge funds benefit from information they obtain in private meetings with company executives, adding to mounting research suggesting that selective access to management undermines regulators’ fair disclosure objectives. Check it out.

Poll: Which Development is More Crazy?

As we stare into the abyss of another financial crisis – and thus gear up for more reform down the road – below is an anonymous poll:

Online Surveys & Market Research

– Broc Romanek

November 29, 2011

Judge Rakoff Does It Again: Rejects SEC-Citi Settlement

As expected given his 9 specific questions that he wanted covered during a recent hearing, Southern District of New York Judge Jed Rakoff rejected the proposed $285 million settlement between the SEC and Citigroup related to the sale of mortgage securities yesterday. This Dealbook Blog includes the Judge’s 15-page order – and here’s a statement from SEC Enforcement Director Rob Khuzami. As noted in this WSJ article, the Judge is not kind to the SEC in his order – he has set a July 16th trial date.

Whistleblowers Coming Out of the Woodwork: To Both the SEC and Internally

As I blogged recently, the SEC’s Office of Whistleblower issued its first annual report in which it disclosed that it already had received over 300 tips in just a few months. Then there is this recent article noting that employees are reporting internally at a higher clip. It will be interesting to see if these trends continue – I think they will given that employees now have greater awareness about whistleblowing generally since companies are conducting campaigns for folks to blow the whistle internally first. We have posted memos analyzing this new report in our “Whistleblowers” Practice Area.

Updating Your Whistleblower Procedures: How to Apply Six Sigma and Lean Methodologies

Tomorrow, tune into our webcast – “Updating Your Whistleblower Procedures: How to Apply Six Sigma and Lean Methodologies” – to learn from Steve Pearlman of Seyfarth Shaw how to pare risks when developing whistleblower processes and procedures by utilizing Six Sigma and Lean principles and more…

– Broc Romanek

November 28, 2011

PCAOB Finds Higher Deficiency Rates at Half of Big 4

From Lynn Turner: “Investors should be concerned by the two new PCAOB inspection reports released last week that indicate a significant increase in deficient audits performed by half of the Big 4 audit firms. As this Bloomberg Businessweek article notes, PWC had deficiencies in 37% of its audits examined and KPMG had deficiencies in 22% of its audits. These reports raise a question as to whether investors are getting value for the money being spent on audits – and they follow the recent report criticizing audits by Deloitte & Touche. Here is a letter from Senator McCaskill raising questions with respect to Deloitte audits.

It is interesting to note these reports no longer discuss which specific issuer had a restatement, but rather just note how many restatements there were. This is apparently a step backwards away from transparency, making it harder for readers to determine which issuers restated and rendering the reports of lesser value. Another unanswered question is how many, if any, of the audit partners involved have become the subject of PCAOB disciplinary actions.

The PwC report notes several recurring deficiencies in basic testing of a company’s revenues, internal controls and support for asset values. On these audits, there is not just one partner, but a second partner as well as an experienced manager. It really raises questions about the quality controls of the firm, given the high deficiency rate.

The KPMG report notes deficiencies in auditing allowances for loan losses, asset valuations, and internal controls. The reports highlight how auditors fail to test, or to test adequately, the value of assets such as investments, including testing the information received by pricing services. Deficiencies in such testing and deficiencies in pricing services processes were recently discussed at a PCAOB SAG meeting.

On some of these audits, the deficiencies cited raise a question about whether the audit committees are really overseeing the audits performed in a reasonable manner or merely going through the motions. It also appears that efforts by Congress, the business community and the SEC (under a prior Chairman) to “dumb down” audits of internal controls has worked, and the audits of internal controls may not hold a lot of value given the number of deficiencies noted.”

The UK’s “Forward-Looking Say-on-Pay” Proposal

It’s worth repeating this blog from Mark Borges from Saturday:

This past week, the United Kingdom High Pay Commission (an independent inquiry into executive compensation) released the results of its year-long study of executive pay. Entitled “Cheques With Balances: why tackling high pay is in the national interest,” the report includes 12 recommendations on ways to combat spiraling executive compensation.

The one that I found most interesting is the recommendation that the current shareholder advisory vote on executive compensation be made “forward-looking.” By this, the Commission means that shareholders would be given the opportunity to vote on a company’s proposed remuneration arrangements for the next three years (following the date of the vote). This would include future salary increases, bonus awards, and all ancillary benefits (such as pension arrangements).

As the Commission notes, this approach would give shareholders a genuine say in the remuneration to be paid to executives, not just the ability to “approve” or “ratify” the pay packages that have already been implemented. It almost goes without saying that this would be a radical departure from the current structure of shareholder advisory votes on executive pay (both in the UK and the US). Given that the concept of shareholder advisory votes originated in UK a mere decade ago, the proposal bears watching – if only to see how it is received in the UK corporate and investor communities.

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:

– Who “Owns” Your Social Media Policy?
– The Reality of Section 220 Claims for Books and Records
– Accounting That Comes in Flavors
– “Fifth Call” as Effective Means of Communication
– Department of State Speaks on Conflict Minerals

– Broc Romanek

November 23, 2011

Time to Be Thankful: Let’s Stop the Madness

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– Broc Romanek

November 22, 2011

Senate Bill Would Require Greater PCAOB Transparency

Last week, as noted in this press release, Senators Jack Reed (D-RI) and Chuck Grassley (R-IA) introduced the “PCAOB Enforcement Transparency Act of 2011.” This bill will make PCAOB disciplinary proceedings public to bring auditing deficiencies at the firms they audit to light in a timely manner. This is in reaction with what happened with Deloitte recently, as I noted in this blog.

Sarbanes-Oxley requires PCAOB’s disciplinary proceedings to be kept confidential through charging, hearings, initial decision, and appeal, which enables firms that engage in misconduct to drag out the proceedings for years while the investors are kept in the dark. In comparison, nearly all administrative proceedings brought by the SEC against public companies, brokers, dealers, investment advisers, and others are open, public proceedings.

House Bill Would Require Shell Companies & LLPs to Disclose Contact Information

Last week, as reported in this Reuters article, a new bill has been introduced in the House would require shell companies and limited liability partnerships to provide names and contact information when they are formed. This is at least the 3rd time that this type of bill has been introduced and it’s heavily supported by law enforcement agencies.

Judges Needed for Fordham Securities Law Moot Court Competition

Each spring, Fordham Law School hosts the Kaufman Memorial Securities Law Moot Court Competition, which has a rich tradition of bringing together complex securities law issues, talented student advocates and top legal minds. Next year’s Kaufman Competition will take place on March 23-25, with a final round panel of Judge Kelly of the Tenth Circuit; Chief Judge Kozinski of the Ninth Circuit; Judge Martin of the Sixth Circuit; Judge Posner of the Seventh Circuit; Judge Jane Richards Roth of the Third Circuit; and SEC Commissioner Paredes.

They are currently soliciting folks to judge oral argument rounds and grade competition briefs. No securities law experience is required to participate and CLE credit is available – here is contact information to participate.

– Broc Romanek

November 21, 2011

Corp Fin Meredith Cross Speaks at ABA’s Fall Meeting

On Friday, I attended the always useful “Dialogue with the Director” session during the ABA’s Business Law Section’s Annual Fall Meeting. Here are a few notes:

– It was standing-room only in the room, quite a difference from recent years. This was surprising given the dearth of recent final rulemakings – so my take it that this may be a more of a byproduct of fewer deals rather than increased interest in what is happening at the SEC.

– Meredith noted she recently participated in her 8th testimony on the Hill during her tenure, which is quite a lot. Her latest was a Senate Banking subcommittee hearing last week where all six Division Directors and the head of OCIE gave updates about their activities. Here is the testimony given during that hearing.

– Corp Fin has finalized most of its required Dodd-Frank rulemakings that had a deadline. They are now actively writing proposals and final rules for the topics that they are still required to tackle under Dodd-Frank in the wake of the SEC revising its processes to ensure future rulemakings comply with the dictates of the court’s decision in the proxy access lawsuit.

– For these remaining rulemakings, there are no timetables yet for when they would be proposed or finalized – but Meredith noted that Senator Menendez pressed her during the hearing last week to propose the pay disparity rules by the end of the year, noting that Corp Fin would try mightily to meet that timeframe but there were no promises (my note: remember that even if Corp Fin made a recommendation to the Commission on a rulemaking, it is out of the Division’s control as to when the Commission acts upon it). There is also the compensation committee/advisor proposal that is outstanding – even when the SEC finalizes its rules on that, the exchanges then have to revise their listing standards.

– Any no-action requests related to shareholder proposals that deal with private ordering of proxy access will be processed within Corp Fin in the normal course. Meredith intends to read them herself too.

– On proxy plumbing, a proposal regarding proxy advisors would likely be the first output from the concept release commentary. Meredith reminded the audience that the SEC’s jurisdiction in this area only extends so far – so that an item like conflicts of interest with a company or proponent could be the subject of a rulemaking, but that others like lack of competition within the industry is not. Regarding complaints that proxy advisor recommendations are made often based on inaccurate information, Meredith noted that there didn’t seem to be much evidence to support those claims – rather, those situations typically involved disagreements based on judgment calls.

– The SEC likely won’t conduct rulemaking in areas where Congress has a bill floating right now, such as restrictions on general solicitation and Section 12(g) thresholds.

Yesterday, this NY Times article slammed the way that law schools teach and noted how “for decades, clients have essentially underwritten the training of new lawyers, paying as much as $300 an hour for the time of associates learning on the job.”

SEC Releases Long-Awaited IFRS Comparison Papers

As described in this article on “Accounting Today,” the SEC Staff released two papers a few days ago. One 52-page paper compares IFRS with US GAAP and the other 65-page paper analyzes IFRS in practice at foreign companies. FEI’s blog includes some comments from the SEC’s Chief Accountant Jim Kroeker related to these papers.

November-December Issue: Deal Lawyers Print Newsletter

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

– Nevada: Delaware of the West?
– Caveat Investor for Private Equity: Pointers for Investing Additional Capital
– Delaware Chancery’s $1.3 Billion Damage Award: 19 Take-Aways

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

– Broc Romanek

November 18, 2011

SEC Obtains Another Clawback Without “Misconduct”

Earlier this week, the SEC announced that the former CEO of CSK Auto Corporation had agreed to return $2.8 million in bonus compensation and stock profits that he received while the company was committing accounting fraud. Steve Quinlivan notes in his blog how the SEC initially was seeking $4 million to be returned.

Although Maynard Jenkins was not personally charged with “misconduct,” he was still required under the clawback provision – Section 304 – of Sarbanes-Oxley to reimburse CSK Auto for incentive-based compensation and stock sale profits that he received during the company’s fraudulent period. As you may recall from a series of blogs on this case (here is the first blog), this action marked the SEC’s third SOX clawback case against someone who was not alleged to have otherwise violated the securities laws (this Beazer Home CEO settlement was the first and this Beazer Home CFO settlement was the second one obtained by the SEC, even though the CSK Auto case was originated before those two). The Jenkins settlement is now subject to court approval.

The SEC previously charged 4 former CSK Auto executives who perpetrated the accounting fraud, and separately charged the company for filing false financial statements for fiscal years 2002 to 2004. The company settled the charges, and the litigation against three of the former executives is continuing (CSK’s former chief operating officer has since died). The U.S. Department of Justice brought a criminal indictment against those same executives, who have pleaded guilty to various charges. CSK Auto recently entered into a non-prosecution agreement with the DOJ in which it agreed to pay a $20.9 million penalty.

Senators Introduce “STOCK Act” to Stop Congressional Insider Trading

In the wake of the news that some members of Congress are trading on nonpublic inside information – and the fact that it’s legal for them to do that, but for the rest of us – two separate bills have been introduced in the Senate to stop Congressional insider trading, as noted in this article.

Dodd-Frank: GAO Report Urges More Agency Coordination

In the “Dodd-Frank Blog,” Ethan Mark notes a new GAO report analyzing how the federal regulators are coordinating their rulemaking, etc. Here is an excerpt from Ethan’s blog:

GAO examined the 32 final Dodd-Frank Act rules in effect as of July 21, 2011; the regulatory analyses conducted for 10 of the 32 rules that allowed for some level of agency discretion; statutes and executive orders requiring agencies to perform regulatory analysis; and studies on the impact of the Dodd-Frank Act. GAO also interviewed regulators, academics, and industry representatives.

The GAO report found that regulators had coordinated on some of the rules that were effective as of July 2011. It noted such coordination is a positive stepping stone for future coordination. However, GAO also found that most of the coordination, to date, had been informal and ad hoc. GAO also found that most of the federal financial regulators included in its review, including the CFPB, did not have formal policies to guide interagency coordination. According to GAO, while informal and ad hoc coordination can produce the desired results, such coordination can break down when disagreements arise or other work becomes pressing.

Formal policies can institutionalize informal coordination practices and provide a framework for coordinating, helping to ensure that regulators are appropriately consulted and that their views, including conflicting viewpoints, are addressed in a consistent and transparent fashion. Given its membership and charge to help facilitate coordination among its member agencies, GAO believes FSOC is positioned to work with the federal financial regulatory agencies to establish compatible policies that would guide and facilitate interagency coordination among its members throughout the course of Dodd-Frank Act rulemakings.

– Broc Romanek

November 17, 2011

ISS Releases 2012 Proxy Voting Policies

The new phone book is here! The new phone book is here! Moments ago, ISS released its 2012 updates for its US, Canadian, European and international proxy voting guidelines.

By the way, ISS’s Ted Allen blogged yesterday that a second proxy access proposal has now been submitted to a company – this time to Textron – by the US Proxy Exchange.

The SEC’s Office of the Whistleblower Issues Its First Annual Report

As blogged by Vanessa Schoenthaler yesterday, the SEC’s Office of the Whistleblower has issued its first annual report as required by Dodd-Frank. The report only covers a 7-week period, from the effective date of the final whistleblower rules through the SEC’s fiscal year-end even though tips reported before the final whistleblower rules went into effect are potentially eligible for whistleblower rewards.

Vanessa notes that “During the seven weeks for which data is available, the Commission received 334 whistleblower tips. Among these, the most common complaints related to market manipulation (54), offering fraud (52) and corporate disclosures and financial statements (51). Note, however, these tips were categorized by the whistleblowers themselves, not the Commission, and there are 84 that were submitted under the category of “other” or without a category at all, so it’s hard to say how accurate this information really is.”

Tune into our upcoming webcast – “Updating Your Whistleblower Procedures: How to Apply Six Sigma and Lean Methodologies” – that will be held on Wednesday, November 30th.

Compensation Standards Newsletter: Fall Issue Now Available

For members of, we have posted the Fall 2011 Issue of our Compensation Standards newsletter that contains practical guidance pulled from our successful pair of executive pay conferences. With Dave Lynn and Mark Borges wrapping up the 2012 Edition of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise & Reporting Guide”- about half of the updated Chapters of the Treatise are already posted on – we thought it was best to compile a select group of the Talking Points as our Fall issue (attendees of the Conferences received the entire 200-page set; you can still register to watch the archived video of the Conferences) since it’s too late to insert them in the upcoming edition of the Treatise.

If you wish to order a hard-copy of the Treatise so you receive it as soon as it’s printed, try this No-Risk Trial to the Hard-Copy of Executive Compensation Treatise.

– Broc Romanek

November 16, 2011

Study: Going Concerns Going Down

In this study (posted in our “Going Concerns” Practice Area), Audit Analytics estimates the number of New Going Concerns for fiscal year 2010 (a going concern filed for 2010 when one was not filed for 2009). New Going Concerns most recently peaked in 2007 and has been decreasing in number each year thereafter. As of May 31st, fiscal year 2010 received 584 new going concerns, which results in a estimated amount of 637 total new going concerns for 2010. Therefore, going concerns appear to be trending to the lowest amount in ten years.

Reverse Mergers: SEC Approves New Exchange Listing Requirements

Last week, the SEC approved additional listing requirements for companies that apply to list on the NYSE, Nasdaq or Amex following completion of a reverse merger with a shell company.

Cleaning Up Your Internal Controls Checklists: The New SAS 70 is SSAE 16

As noted in the NASPP Blog, the Standards on Standards for Attestation Engagements No. 16 (SSAE 16) replaced SAS 70 as of June 15th. Although this appears mostly to be just a technical change, a lot of companies have references to SAS 70 in their internal control checklists and subcertifications – and sometimes even their audit committee charters – so some cleanup might be warranted…

– Broc Romanek

November 15, 2011

Proxy Access Proposal Filed at MEMC Electronics

Ted Allen of ISS blogged yesterday:

A retail shareholder activist has filed a proxy access proposal at MEMC Electronics, according to the U.S. Proxy Exchange, a group that represents retail investors. The proposal is the first 2012 proxy access resolution to be made public and suggests that U.S. companies may see more access proposals next season than governance observers have expected.

The resolution was filed Nov. 11 by long-time activist Ken Steiner, said Glyn Holton, executive director of the group. Steiner’s measure is based on a model proposal that U.S. Proxy Exchange members developed over the past month as a more permissive alternative to the SEC’s universal access rule, which would have required investor groups to hold a 3 percent stake for at least three years. While some institutional investors have expressed support for these thresholds, retail activists have argued that those hurdles would be too high and would disenfranchise small shareowners.

The U.S. Proxy Exchange’s model proposal urges a company’s board to adopt a proxy access bylaw that would permit director nominees from: any party of one or more shareowners that has held continuously, for two years, 1 percent of the company’s securities eligible to vote for the election of directors, and/or any party of shareowners of whom 100 or more satisfy SEC Rule 14a-8(b) eligibility requirements (i.e., those who hold at least a $2,000 stake for one year). Any such party may make one nomination or, if greater, a number of nominations equal to 12 percent of the current number of board members, rounding down.

Just last week, the U.S. Proxy Exchange, released a revised model proxy access shareholder proposal as blogged upon by’s Jim McRitchie, who is involved with this organization. Here are some thoughts on that from Professor Larry Hamermesh…

SEC Chair Schapiro Speaks at Our Conference

Last week, the SEC posted a transcript of the remarks made by SEC Chair Mary Schapiro at our “Say-on-Pay Workshop: 8th Annual Executive Compensation Conference.”

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:

– Limited Support: The SEC’s Proposal to Replace Reg M Investment Grade Securities Exemptions
– Who’s Soft on White Collar Crime!
– Special Litigation Committees & Insider Trading Claims
– FINRA Guidance on Compliance with New IPO Abuse Rule
– FASB & IASB Repropose Revenue Recognition Standard

– Broc Romanek