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Monthly Archives: November 2011

November 14, 2011

Madoff Fallout: 8 SEC Disciplinary Actions – A Rare Occasion?

On Saturday, the Washington Post ran this front-page article about how 8 SEC Staffers have been disciplined by the agency for their failure to uncover Bernie Madoff’s fraud – but no one has been fired. Here is an excerpt:

The SEC’s head of human resources and a law firm hired to advise the agency had recommended that SEC Chairman Mary L. Schapiro fire one person, whom the SEC described as a manager in the office that inspects investment firms. But the chairman decided not to fire the employee, because doing so “would harm the agency’s work,” SEC spokesman John Nester said.

Should someone have been fired? I don’t know because I don’t know the circumstances involved. But as reflected by some of the other inside-the-beltway commentators on the article – there are nearly 600 comments – it is very rare for someone to be fired at a federal agency. During my two tours of duty at the SEC, the only instances of someone being fired occurred during the probationary period after their initial hiring.

And even that was rare – maybe two cases in five years. We would always joke around about how hard it was to be fired in the government, primarily due to the liability risks involved. And I don’t remember any instances of discipline. So as minor as the actions described in the WaPo piece seem to outsiders, it’s actually a big deal for those that work at the SEC…

Nuns Who Won’t Stop Nudging

Great piece in yesterday’s NY Times about the nuns who are shareholder activists. It’s a lengthy piece that covers their history, accomplishments and goals. Here’s an excerpt:

The Sisters of St. Francis are hardly the only religious voices challenging big business. They have teamed up on shareholder resolutions with other orders, including the Sisters of Charity of St. Elizabeth and the Sisters of St. Dominic of Caldwell, both in New Jersey. The Interfaith Center on Corporate Responsibility, the umbrella group under which much of Sister Nora’s activism takes place, includes Jews, Quakers, Presbyterians and nearly 300 faith-based investing groups. The Vatican, too, has weighed in with a recent encyclical, condemning “the idolatry of the market” and calling for the establishment of a central authority that could stave off future financial crises.

“Companies have learned over time that the issues we’re bringing are not frivolous,” said the Rev. Seamus P. Finn, 61, a Washington-based priest with the Missionary Oblates of Mary Immaculate and a board member of the Interfaith Center. “At the end of every transaction, there are people that are either positively or negatively impacted, and we try to explain that to them.”

As the article notes, the topics that the nuns typically select are not ones that attract much support from shareholders. And in talking to some experienced corporate secretaries over the years, I have heard that they are difficult to negotiate with because they often don’t budge from their views coming into a meeting…

Are Some Members of Congress Engaging in Insider Trading?

There’s been news for quite some time that some members of Congress have been engaging in insider trading – a few days ago, convicted lobbyist Jack Abramoff claimed that as many as a dozen have done so. “60 Minutes” included a segment on this topic last night – and as indicated in this transcript of the segment, “insider trading” is defined differently for Congress than the rest of us due to a difference in the laws that apply. Some seek to change that, including this bill called “The STOCK Act.”

Here are three academic studies, with various views on the subject:

Insider Trading, Congressional Officials, and Duties of Entrustment
Insider Trading Inside the Beltway
Cashing in on Capitol Hill: Insider Trading and the Use of Political Intelligence for Profit

– Broc Romanek

November 10, 2011

The Appearance of Reality: Shareholders & Ownership

Bob Monks is one of the long-time warriors in the battle for corporate governance reform. Ever since creating ISS a long time ago, Bob has been on the front lines to get corporate governance even considered when the need for some type of market reform seemed necessary. That’s why I find his recent piece where he asks ” What does it mean to be a shareholder or owner in 2011?” so interesting. Under that umbrella question, he also asks these four questions:

1. What do owner and shareholder mean in regards to corporations and governance?

2. Can we lump all stock owners together or do we need multiple classes of stock to accommodate owners with different levels of interest and participation?

3. To whom does management owe fiduciary duty when considering the interest of owners? Does having one class of ownership work in management’s favor because it keeps shareholders from ever truly working together to enact change?

4. How can you have “shareholder responsibility” when there is no possibility of shareholders having a common interest and working together. Because there are today so many different classes and categories of shareholders – arbs, derivatives, borrowed stock, etc – that common purpose is impossible.

Bob really does seek feedback on these queries – please post a comment on his blog to weigh in…

Mailed: September-October Issue of The Corporate Counsel

The September-October issue of The Corporate Counsel was recently mailed to subscribers. This issue includes important practical guidance on:

– It’s the Most Wonderful Time of the Year–Gifts of Securities and Rule 144
– Loss Contingency Disclosures–The Latest Lessons from the Staff’s Comments
– Failure to Timely Report Board’s Say-on-Pay Frequency Determination– Inadvertence or Confusion with the 14a-8 Proviso?
– The Staff Gives Accredited Investor/QIB Relief–The Alaska Permanent Fund Interpretive Letter
– Revisiting the Disclosure/Filing Requirements for Non-Compensatory Agreements– It’s Not Just Materiality
– Time to Update Your Shelf Registration Statement (Again)?
– Policing Insiders’ Stock Transactions–FINRA’s New Anti-Spinning Rule
– More on Choice of Forum–ISS Weighs In
– Section 162(m) Disclosure/Say-on-Pay Lawsuits–Time to Revisit Your CD&A Disclosure?

Act Now: Get the “Rest of 2011 for Free” when you try a ’12 No-Risk Trial now.

DOL Issues Guidance on the Use of Electronic Media to Satisfy ERISA Disclosure Requirements

A while back, as noted in this press release, the DOL issued this technical release which sets forth an interim policy regarding the use of electronic media to satisfy ERISA disclosure requirements.

– Broc Romanek

November 9, 2011

Failed Say-on-Pay #44: Regis Receives Only 29% Support!

As Ted Allen blogged yesterday, Regis Corporation received more than 71% opposition to its say-on-pay at its annual meeting, which is the greatest dissent seen so far this year. We have added the Regis Form 8-K to our list of failed say-on-pays in our “Say-on-Pay” Practice Area on CompensationStandards.com.

Venture-Backed Companies: Corporate Governance & Disclosure Practices in IPOs

Recently, Wilson Sonsini wrote this 19-page report on the governance and disclosure practices of 50 venture-backed companies that went public from January 2010 through June 2011, including those related to directors and independence, board committees and policies, stock plans, key metrics and non-GAAP measures and defensive measures.

You may also want to check out this presentation by Mark Suster called “The State of Venture Capital and the Internet,” as well as this recent Davis Polk survey on IPO governance practices.

Webcast Transcript: “Lyin’, Cheatin’ and M&A Stealin’: Negotiating the Fraud Exception”

We have posted the transcript for the DealLawyers.com webcast: “Lyin’, Cheatin’ and M&A Stealin’: Negotiating the Fraud Exception.”

Next Thursday – November 17th – is the Society of Corporate Secretaries’ “Issues Update,” which is an online event. Check it out!

– Broc Romanek

November 8, 2011

Survey Results: D&O Questionnaires and Director Independence

We have posted the survey results regarding the latest D&O questionnaires and director independence trends, repeated below:

1. Regarding the level of information that we request from directors in connection with their professional and personal affiliations (excluding immediate family member information):
– We ask each director to submit a list (at least annually) of their professional and personal affiliations – 47.9%
– We do not request a list of their affiliations, but ask specific questions related to the NYSE/SEC independence rules and have them confirm that there are no related issues – 50.0%
– Other – 2.1%

2. Regarding the level of information that we request from directors for their immediate family members:
– We ask each director to submit a list (at least annually) of their entire immediate family – 4.2%
– We ask each director to submit a list (at least annually) of their entire immediate family, including certain other information (such as the place of employment and/or job title) – 22.9%
– We define “immediate family members” and provide a list of the company’s subsidiaries and then ask each director to list any immediate family members doing business with these entities – 16.7%
– We define “immediate family members” and provide a list of the company’s subsidiaries and then ask each director to confirm that there are no related issues – 18.8%
– We do not request a list related to the immediate family members, but ask specific questions related to the NYSE/SEC independence rules and have them confirm that there are no related issues – 37.5%
– Other – 0%

3. Regarding the method(s) of due diligence review that we perform for director independence:
– We rely solely on each director to alert us to any potential independence issues – 36.2%
– We conduct a review (at least annually) of our accounts payable and receivable for ALL professional/personal affiliations (excluding immediate family member relationships) provided by our directors – 8.5%
– We conduct a review (at least annually) of our accounts payable and receivable for ALL transactions related to professional/personal affiliations and immediate family member relationships provided by our directors – 23.4%
– We conduct a review (at least annually) of our accounts payable and receivable for certain transactions related to professional/personal affiliations and/or immediate family member relationships; however, we only perform such a review of selected affiliations/relationships (i.e., we may not conduct a detailed review of certain relationships, such as that in connection with an immediate family member who is employed by WalMart and not in an executive position) – 12.8%
– All – or some combination – of the above – 19.2%

Please take a moment to participate in this “Quick Survey on Disclosure Committees” and this “Quick Survey on Stock Buybacks.”

Catch-Up Now: “Say-on-Pay Workshop Conference”

The video archive of last weeks’ pair of Conferences – the “6th Annual Proxy Disclosure Conference” & “Say-on-Pay Workshop: 8th Annual Executive Compensation Conference” – are posted. Hopefully, you’ve talked to some of the many that attended this event and heard how much practical guidance was imparted. Our panels really delivered this year – and it’s not too late to watch them as you can still register and watch the panels now or when you are gearing up to draft your proxy materials.

Our Week of Conferences: Sights & Sounds

Here are three short videos from our week of Conferences this week – this first one shows the sheer size of our “Investors Speak” panel on Wednesday (2000 attendees in person and many more online):

A groovy exhibit from E*Trade in our Exhibit Hall:

Also liked this set-up in the Exhibit Hall from Bank of America/Merrill Lynch:


– Broc Romanek

November 7, 2011

Small Business Capital Formation: House Passes Four Bills

Last Thursday, as noted in this blog by Jim Hamilton, the House passed the “Access to Capital for Job Creators Act” (H.R. 2940) and the “Entrepreneur Access to Capital Act” (H.R. 2930). The first bill would remove the prohibition against general solicitation for private offerings of securities if all purchasers were accredited investors – and the second bill would require those seeking crowdfunding to notify the SEC, who would then notify state regulators, of any new offerings (but registration would not be required).

Also, as noted in this press release, on Wednesday, the House passed the “Small Company Capital Formation Act of 2011” (H.R. 1070), which would increase the Regulation A offering threshold from $5 million to $50 million (another pending bill is HR 2671, which would increase the total assets threshold from $1 million to $10 million – and the class of equity security holders of record threshold from 500-750 to 1000 – before companies would be required to register under the ’34 Act). The House also passed a bill with no name as far as I can tell (H.R. 1965), which would modify the threshold for ’34 Act registration and deregistration for bank and bank holding companies.

Given that all four of these bills were presented in the magical name of “job creation,” they passed with flying color margins. If they become law (after being combined in some fashion when reconciled with any similar Senate bills that pass), then guys like Angel from Rockford Files can run around selling stock in local brewpubs without looking over their shoulders so much…

On Saturday, the Breeders Cup featured this race that is one of the most exciting ever. Watch the light grey horse in the back of the pack named “Turallure.” And don’t stop laughing about the one called “Compliance Officer”…

DOJ Won’t Probe Ex-SEC General Counsel David Becker

Here’s a Bloomberg article with the latest on the David Becker- SEC IG saga (here’s my last blog on this):

Federal prosecutors have told former U.S. Securities and Exchange Commission General Counsel David Becker that they won’t open an investigation into whether he violated ethics laws, his attorney said. The SEC’s inspector general, H. David Kotz, in September called for the Justice Department to review whether Becker should be criminally charged for having a financial interest in a policy he worked on relating to Bernard Madoff’s Ponzi scheme. Becker inherited profits from the fraud through an account held by his late mother. “We are gratified at the decision, and it’s consistent with our view that Mr. Becker did exactly what he was supposed to do under the circumstances,” Becker’s attorney, William Baker III, said in an interview today.

Becker, who left the SEC in February to return to private legal practice, has said he had no financial interest in the agency’s Madoff policy. He had received clearance from the regulator’s ethics counsel to work on the matter in 2009. He had also informed SEC Chairman Mary Schapiro about the account. Kotz referred his report to the Justice Department’s public integrity section, which reviewed it and concluded a formal probe wasn’t warranted. A department spokeswoman, Laura Sweeney, declined to comment; Kotz didn’t respond to a request for comment.

Also check out this Bloomberg article entitled “SEC Enforcers Frozen as Internal Watchdog Kotz Unleashes ‘Chilling’ Probes.”

PCAOB Chair Speaks: Challenge Our Culture

Last week, PCAOB Chair Jim Doty delivered this speech entitled “Prizes Captured, Shops Sold, Et Cetera: Importance of Keeping Investors Properly Informed.”

Last week, the PCAOB posted this briefing paper on auditor rotation and independence, as well as these slides regarding pricing services for the Standing Advisory Group meeting set for this week…

– Broc Romanek

November 3, 2011

Egregious Executive Pay Via Stock Options

We have posted the remarks from Albert Meyer of Bastiat Capital regarding “Egregious Executive Pay Via Stock Options” that were made in connection with yesterday’s “Say-on-Pay Workshop:8th Annual Executive Compensation Conference” for general consumption (the video archive of that Conference is now posted). It’s great to see investors speaking out.

Australia’s New “Two Strikes” Say-on-Pay Law

As roughly 40 companies in the US face the prospect of failing say-on-pay for a second time (and perhaps one company already has, depending on the math – also see this blog about the large number of abstentions), this article about Australia’s new “two strike” law bears reading, repeated below:

Australia’s new “two strikes” law giving shareholders more power to curb excessive executive pay packets, promises to shake up some businesses. Homewares company GUD Holdings has already been hit with a protest vote from 42% of shareholders over the company’s remuneration report, under the new legislation introduced in July.

Under the new amendment to the Australian Corporations Act, if 25% or more of votes cast at two consecutive AGMs oppose the adoption of a remuneration report, then the company must formally respond by asking all board members except the managing director to stand for re-election within 90 days. In addition, key management personnel whose remuneration is disclosed in the remuneration report are excluded from voting, ensuring those with an obvious interest in the outcome cannot vote.

There are few more controversial issues than executive pay. Here in Australia, Qantas chief executive Alan Joyce found himself in the firing line for his large pay increase despite a damaging industrial dispute. Last week, the Australian Shareholders Association indicated it would oppose the remuneration package of Wesfarmers chief Richard Goyder and financial officer Terry Bowen at the company’s AGM in November.

Non-binding vote

Since 2005, Australian shareholders have had the right to vote on the remuneration report of their companies at an AGM. The tougher Australian laws parallel similar moves in the Netherlands, Norway, Sweden and the United Kingdom which have responded to public outrage about executive pay levels. The US has also introduced similar legislation effective from the 2011 proxy season in the wake of public concern about the role of excessive remuneration in the global financial crisis.

New research

Our new research backs the idea that shareholder voting is an effective way to discipline boards over unsatisfactory executive pay arrangements. Using a sample of 240 ASX listed firms between 2001 and 2009, fellow UQ researchers Peter Clarkson, Shannon Nicholls and I investigated the pay-for-performance relationship and its effect on governance. Pay-for-performance is an important metric because it measures how much executive pay changes or varies with firm’s performance. That is, it captures the incentive effect of the remuneration structure. Not surprisingly, a weak pay-for-performance relationship is a focus for shareholder dissent.

Research around the effects of the UK advisory vote, for instance, showed shareholders were more likely to vote “no” on remuneration packages that are excessively high, had a weak pay-for-performance link or were greatly dilutive. We found the average “no” vote on the remuneration report for our sample has increased steadily from 5.4% in 2005 (the first year of the vote) to 11.4% in 2009.

Pay-for-performance

The pay-for-performance relation strengthened across the nine year period, with enhanced remuneration disclosure and the non-binding shareholder vote the most important avenues to achieve greater monitoring and greater shareholder control of the executive remuneration process. Our research findings have important implications for Australian regulators and company directors. Shareholders are increasingly voicing their concerns about excessive executive pay and have used the advisory vote effectively to flag inappropriate remuneration packages to the board.

Our research suggests that boards of directors have listened to their shareholders and have adapted pay packages to be more in line with shareholder expectations. This season, the two-strikes rule gives shareholders an even stronger say on pay and there is every reason to believe that shareholders will use it. For their part, company boards need to listen closely to what shareholders have to say about the remuneration report and respond accordingly. Transparent and careful disclosure about remuneration is more critical than ever this reporting season if company boards are to avoid “striking out” with their shareholders.

– Broc Romanek

November 2, 2011

Today: “The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference”

Today is the “The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference”; yesterday was the “6th Annual Proxy Disclosure Conference” and the video archive of that Conference is posted. Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.

How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” on the home pages of those sites will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Adobe Flash Player).

Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s Conference Agenda; times are Pacific.

How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list for each Conference in the FAQs.

IPOs for Private Equity Firms

In this DealLawyers.com podcast, Ken Favaro of Booz & Co. provides some insight into why a private equity firm would go public, including:

– Why have private equity firms gone public?
– Why have private equity firms diversified into new asset classes?
– What is the outlook for their core business?

Corp Fin Comments on Regulation G

In the “Dodd-Frank.com Blog,” Anne Cotter of Leonard, Street and Deinard provides this recent analysis of Reg G comments from Corp Fin:

Prior to Sarbanes-Oxley, it was fashionable for public companies to issue press releases with “pro-forma earnings,” which generally excluded certain GAAP charges from the income calculation. To some, this measure was known as EBBS, or “Earnings Before Bad Stuff.” As a response, Sarbanes-Oxley required, and the SEC issued, Regulation G. Regulation G addresses “non-GAAP financial measures” and requires the most directly comparable GAAP measure be presented and a reconciliation of the most comparable GAAP and non-GAAP measures.

We reviewed some recent SEC comment letters on Regulation G. For the most part, the comments were not surprising on a technical level. One interesting point we noted is that the SEC, when conducting periodic reviews of issuers, is not shy about reviewing Form 8-Ks, including earnings announcements, and commenting on Regulation G deficiencies.

Some of the general categories of comments we noted were:

– The non-GAAP operating statement conveys undue prominence.
– All non-GAAP financial information (including forward looking information) was not reconciled to GAAP.
– Requests to present non-GAAP financial information consistent with Securities Act filings, with an explanation of why the information is useful.
– Where multiple non-GAAP financial measures are reported, a comment to reconcile each non-GAAP measure to the most directly comparable GAAP measure.
– A comment to present more information as to why certain matters are not representative of future performance and are non-recurring in nature.

We also noted several comments on issuers’ Schedule 14D-9s, which an issuer files in response to a third party tender offer. Those comments uniformly addressed projections which were presented on a non-GAAP basis (usually EBITDA) and required reconciliation to GAAP.

– Broc Romanek

November 1, 2011

Today: “Tackling Your 2012 Compensation Disclosures: The 6th Annual Proxy Disclosure Conference”

Today is the “Tackling Your 2012 Compensation Disclosures: The 6th Annual Proxy Disclosure Conference”; tomorrow is the “The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.

How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” on the home pages of those sites will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Adobe Flash Player).

Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s Conference Agenda; times are Pacific.

How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list for each Conference in the FAQs.

The “FINRA Disciplinary Actions Database”

Recently, FINRA initiated a web-based searchable system called the “FINRA Disciplinary Actions Database” that makes its disciplinary actions accessible online. A long time coming, the documents appear to be posted shortly after issuance and each document has a link to other related documents, such as the complaint when you access an Offer of Settlement. This new database will make it much easier for litigation attorneys to search for relevant FINRA cases and obtain copies of the relevant documents.

Before this development, one would have to dig hard to find these documents. The two avenues were taking a look at FINRA’s monthly listing of disciplinary actions and then trying to obtain a hard copy from FINRA with a “per page” copying charge or subscription services that took the time to copy these documents and upload them, and they were still often incomplete. Thanks to Suzanne Rothwell for her insights!

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!

– Broc Romanek