It couldn’t happen to two nicer guys. Keith Higgins was tapped yesterday to become Corp Fin’s Director – and Acting Director Lona Nallengara was promoted to become SEC Chair White’s Chief of Staff! Keith brings a wealth of knowledge to the job – and quite an entertaining personality. Always a favorite at our proxy disclosure conference. And it’s great to have someone with a disclosure & deal background in the Chief of Staff position.
1. When it comes to the end-user exception to the clearing requirement for swaps and board review and approval of the decision to use the exception, our company:
– We have already implemented a board approval policy before the need for the exception arises – 11%
– We have started the process of adopting a board approval policy but have not done so yet – 63%
– We have decided that we don’t anticipate ever needing the exception so we have not adopted a board approval policy – 3%
– We have decided to seek board approval on a swap-by-swap basis rather than annually – 0%
– We have not yet decided what to do – 23%
2. For those companies that plan on relying on the end-user exception, will the company:
– Make an annual filing of the electing counterparty information ahead of the first swap transaction – 27%
– Report the electing counterparty information on a swap-by-swap basis – 6%
– We have not yet decided what to do – 68%
Relief Delayed is Relief Denied: Treasury Subsidiaries of Non-Financial Companies
I recently got this from a member: The frustration of the non-financial corporate community grows regarding the long-hoped-for but still elusive relief from a significant unintended consequence of Dodd-Frank regarding the availability of the very important End User exception from mandatory clearing requirements. Beginning as early as June 2013, certain transactions with bank counterparties such as interest-rate derivatives and credit default swaps may need to be cleared and full collateralized unless the End User exception is available. This important exception provides that a swap does not have to be cleared if one of the parties is a non-financial entity that is using the swap to hedge or mitigate commercial risk, and that party’s reliance on the End User exception has been approved by its board or an appropriate committee.
Background on “Financial Entity” v. “Non-Financial Entity”
Many non-financial companies are planning to rely on the helpful End User Exception. Some of them do not have any problem satisfying the “non-financial entity” requirement, which is determined under a very complicated definition. Under the provision most relevant for non-financial public companies, if 85% or more of the entity’s annual gross revenues is derived from activities that are “financial in nature” (as defined by banking regs) or 85% or more of its consolidated assets are related to activities that are “financial in nature” (same), then the entity is deemed to be a “financial entity” that cannot use the End User exception (there’s a 2 year lookback for each test).
The problem arises for non-financial companies that have separate legal entities for their in-house treasury operations. Even though there’s no legal requirement to use a separate legal entity for treasury operations, many companies have historically taken that approach for a variety of reasons including centralization, i.e., having one group of treasury professionals available to interface with a variety of outside banks. These so-called “treasury subsidiaries” are wholly owned by the parent company. They are often the subsidiaries that non-financial companies use as their bank-facing parties to hedge or mitigate commercial risk for the company and its subsidiaries. Because of the nature of their activities, treasury subsidiaries often fail the 85% test, and therefore are “financial entities” that cannot elect as End Users.
CFTC Aware & Looking for Solutions
On April 10th, CFTC Chairman Gary Gensler gave a speech to the US Chamber of Commerce where he acknowledged the treasury subsidiary issue and suggested that the CFTC may provide some relief. Here’s the relevant excerpt from Gensler’s speech:
“Treasury Affiliates. We’ve received many comments and had many meetings with non-financial end-users that [SIC] about required clearing if they use a treasury affiliate when entering into their market facing swaps. Though I don’t have any announcements today, let me assure you that the staff and Commission are taking a close look at how to appropriately address these issues in the context of the Dodd-Frank Act.”
CFTC, Here’s the Solution!
The CFTC does not need to be concerned about going beyond the Congressional mandate with regard to the scope of the End User exception. Instead, it can provide narrow relief to treasury subsidiaries by relying on certain language in the End User text of Dodd-Frank, specifically in Section 723(a) under clause (i) in “Treatment of Affiliates”.
The reason CFTC relief is needed on this issue despite the clear intention of Congress as evidenced by Section 723(a) to allow affiliates of non-financial companies – which would include treasury subsidiaries – to benefit from the End User exception is solely because that affiliate provision in Section 723(a) has language requiring that the affiliate (in our case, the treasury subsidiary) be acting “as an agent…”
The way the swap world works is that the documentation between the treasury subsidiary and the counterparty bank identifies the treasury subsidiary as principal in the transaction, which means this scenario technically does not fit squarely within the parameters of this exception – despite the clear fact that when they enter into these swap transactions, treasury subsidiaries are, as a practical matter, acting on behalf of one or more non-financial parent company subsidiaries (i.e., hedging their commercial risk) and essentially are “defacto agents” as such.
Non-financial entities should not have to do unnatural contortions to be able to have their treasury subsidiaries benefit from the very significant End User Exception. Those contortions – not prohibited by Dodd-Frank – would include transferring sufficient non-financial assets to the treasury subsidiary so that it no longer is a “financial entity” under the 85% test and therefore can itself elect as an End User (after a two year period) without relying on the Section 723(a) affiliate exception.
Specific Relief Needed: Sooner Rather Than Later
For the reasons above, the CFTC should recognize the practical and economic realities concerning treasury subsidiaries. Specifically, it should issue guidance confirming that so long as a treasury subsidiary is entering into a swap to hedge or mitigate commercial risk for its parent or company affiliates who, in each case, are not financial entities, then the treasury subsidiary is “acting on behalf … and as agent” within the purview of Section 723(a), regardless of whether it may be identified as principal in the swap documentation with the bank.
As an aside, it was disappointing how long it took the CFTC to provide relief from certain reporting requirements that went into effect on April 10, 2013, which would have required, among other things, reporting of transactions between wholly-owned affiliates of non-financial entities. Fortunately, the CFTC provided significant relief from those reporting obligations with regard to these wholly-owned affiliates but not until April 5, 2013. To state the obvious, at the 5 day point before the reporting requirements became effective, companies had already devoted significant time and resources trying to ensure compliance. While the relief provided on April 5 was certainly appreciated, it was far less valuable from a work reduction and resources perspective than it would have been if it had been provided a reasonable amount of time before the compliance date. Let’s hope that the CFTC does not make the same mistake this time around with regard to allowing treasury subsidiaries to use the End User Exception.
COSO Updates Its Internal Controls Framework: Time to Pay Up!
Perhaps not a big a story as the reveal of “The Mother” on “How I Met Your Mother,” but it’s big: COSO issued its updated “Internal Control-Integrated Framework” yesterday. A framework which hadn’t been updated since ’92. This framework is the one most commonly used by companies for designing and implementing their internal controls. This update was authored by PwC, under the direction of the COSO board – and officially takes effect in 2014. Here’s a summary from FEI’s “Financial Reporting Blog.”
Here is the Executive Summary and related FAQs. To obtain the actual framework, you have to buy the three new volumes that comprise it from COSO. I know it takes a lot of work to develop a framework and that COSO is not a governmental body, but the fact that folks have to pay for what has become a regulatory framework bothers me. Perhaps I’m still scarred from when FASB’s accounting standards (here’s an example) and the AICPA’s auditing standards (back before the PCAOB was born) also were not free…
The Death of Corporate Reputation: How Integrity Has Been Destroyed on Wall Street
– Why write this book? How long did it take?
– What is your favorite part of the book?
– Any surprises along the journey of writing it?
– What are the biggest take-aways that public companies can derive from it?
Recently, SEC Chair White delivered this testimony to Congress to request $1.674 billion for the 2014 fiscal year, a 27% increase – which would be offset indirectly by transaction fees collected from regulated entities. The increased budget would enable the SEC to hire more Staffers, including many more economists to meet the growing burden of conducting economic analysis during the rulemaking process. Here’s an article from The Hill entitled “New SEC chief pushes dramatic budget increase to grow agency.” And here’s a DealBook article.
Also see this Reuters article entitled “SEC chief defends ‘neither admit nor deny’ but will review.”
Journalism in the News: Bloomberg’s Privacy Invasion & More
Many are talking about how Bloomberg News reporters have – for years – used the company’s terminals to monitor when subscribers logged onto the service to find out what types of functions they had looked at. Here are related articles:
People are upset and understandably so. I can’t imagine what was going on in anyone’s head who thought this was an acceptable form of journalism. But even more crazy is the Justice Department’s sweeping subpoenas for the phone records of AP reporters in a terrorism investigation, as noted in this Washington Post article…
May-June Issue: Deal Lawyers Print Newsletter
This May-June issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Therapy for “Deal Fever”: An Objective, Disciplined Due Diligence Process
– Proposed DGCL Section 251 Amendments Should Lead to More Negotiated Tender Offers
– Setting the Record (Date) Straight
– How Today’s Technology Simplifies the M&A Agreement Process
– Delaware: Reverse Triangular Mergers Don’t Result in Assignment
– Economic Realism: Impact of Unvested Options on Purchase Price
If you’re not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Many have been warning about creating securities law liability for ERISA plan fiduciaries where a “Summary Plan Description” for a 401(k) plan that offers a “Company Stock Fund” investment choice incorporates SEC filings by reference (and the filings later turn out to be inaccurate). Here are the results from a recent poll about what companies are doing in response:
1. Our company:
– Recently separated the 401k SPD from the prospectus – 17%
– Always separated the 401k SPD from the prospectus – 27%
– Is considering separating the 401k SPD from the prospectus – 33%
– Has decided to not separate the 401k SPD from the prospectus – 23%
In this CompensationStandards.com podcast, Mike Melbinger of Winston & Strawn discusses the risks of not separating your 401(k) summary plan description from the prospectus, including:
– I have seen you blog on this issue of securities law liability and 401(k) Plan summary plan descriptions, but as a compensation and securities lawyer, what exactly is the issue we need to worry about?
– So what should companies do now?
– I have run this poll on the topic – but what are you seeing – are companies moving to separate the SPD from the prospectus?
Transcript: “D&O Insurance Today”
I have posted the transcript for our recent webcast: “D&O Insurance Today.”
In this podcast, Ginny Fogg of Norfolk Southern provides some insight into handling director expenses, including:
– Is there a policy for director expenses? Is it written?
– What processes are in place to handle director expenses?
– How are pre-approvals of expenses handled?
– What is your favorite way to celebrate the arrival of Spring?
– How do your directors decide what conferences to attend?
– Have you been to any director conferences yourself?
I rarely blog about pension plans. Not because there is nothing newsworthy. In fact, it’s probably because there is so much newsworthy and I have to draw the line somewhere or I’d be blogging 24 hours per day. The New York Times recently ran an article – entitled “Companies Substitute Intangibles, Like Cheese, for Investments” – describing the growing trend of the use of unusual assets to fund pension plans. Along those lines, check out this case study from Valuation Research Corporation which describes how TUI Travel plc – one of the world’s largest travel companies – is using intellectual property to shore up their pension plan.
9th-11th Say-on-Pay Failures of the Year
As noted in its Form 8-K, Stillwater Mining is the 9th company holding an annual meeting in 2013 to fail to gain majority support for its say-on-pay (32% support). And as noted in its Form 8-K, AXIS Capital Holdings is the 10th company (also 32% support).
And for the 11th failure, as noted in its Form 8-K, Comstock Resources had just 32% support this week – it also failed last year with 35% support.
As noted by Blank Rome’s Yelena Barychev in this blog:
It has been a long-standing practice of the NYSE to post on its website the forms of the documents required to be submitted in connection with the NYSE listing applications. On April 30th, the NYSE filed proposed rule changes to its Listed Company Manual, which, if adopted, will result in the Manual sections containing the listing application materials being deleted, and updated listing application materials will be posted only on the NYSE’s website.
Although the NYSE amends its Manual from time to time, forms of listing agreements contained in the Manual have not always been amended to reflect changes made to the NYSE listing documents. Some provisions in the listing agreements contained in the Manual are obsolete. The NYSE proposes to remove from the Manual (i) each of the agreements set forth in Sections 901.01 through 901.05, (ii) the form of original listing application contained in Section 903.01, and (iii) the form of supplemental listing application contained in Section 903.02.
In the event that in the future the NYSE makes any substantive changes to those documents that are being removed from the Manual, it will submit a rule filing to the SEC to obtain approval of such changes, except for typographical or stylistic changes. The NYSE also plans to maintain all historical versions of those documents on its website after changes have been made, so that it will be possible to review how each document has changed over time.
In addition, the NYSE proposes to state certain requirements, which it has been imposing as a matter of practice, in the Manual to add transparency to the listing process. For example, the NYSE proposes to include in the Manual a new Section 107.00, Financial Disclosure and Other Information Requirements, which will contain the following requirements, among others:
– Section 107.03 (SEC Compliance): No security shall be approved for listing if the issuer has not for the 12 months immediately preceding the date of listing filed on a timely basis all periodic reports required to be filed with the SEC or Other Regulatory Authority or the security is suspended from trading by the SEC pursuant to Section 12(k) of the Exchange Act.
– Section 107.04 (Exchange Information Requests): The NYSE may request any information or documentation, public or non-public, deemed necessary to make a determination regarding a security’s initial listing, including, but not limited to, any material provided to or received from the SEC or Other Regulatory Authority. A company’s security may be denied listing if the company fails to provide such information within a reasonable period of time or if any communication to the NYSE contains a material misrepresentation or omits material information necessary to make the communication to the NYSE not misleading.
The NYSE also proposes to no longer require the following supporting documents in connection with an original listing application (see Section 702.04):
– Stock Distribution Schedule (the stock distribution schedule requirement is obsolete because the NYSE obtains the distribution information it needs from the applicant’s public filings and from its transfer agent).
– Certificate of Transfer Agent/Certificate of Registrar (the information that the NYSE needs about the applicant’s outstanding shares is available in its prospectus or periodic SEC reports, as well as the report of the applicant’s outstanding shares that will be required to be delivered to the Exchange once a quarter after listing).
– Notice of Availability of Stock Certificates (all transactions in listed securities in the national market system are conducted electronically through DTCC).
– Prospectus (final prospectuses are publicly available on the SEC’s website).
– Financial Statements (financial statements are included in the applicant’s SEC filings which are publicly available on the SEC’s website).
On the Rise: “Foreign Indefinitely Reinvested Earnings” (IRE) Balances
Apple recently chose to borrow a record $17 billion in the US bond market instead of using available overseas cash because paying interest on the bonds was a better choice than paying the repatriation tax. Since many companies maintain “Foreign Indefinitely Reinvested Earnings” (IRE) balances, Audit Analytics has put together this chart with the amounts of Foreign IRE balances held by the Russell 3000 since 2008. The percentage has increased yet again.
Our Executive Pay Conferences: 15% Early Bird Discount Ends Tomorrow Night
The full agendas for the Conferences are posted – but the panels include:
– Q&A with ISS
– Q&A with Glass Lewis
– Say-on-Pay Shareholder Engagement: The Investors Speak
– Compensation Committees & Advisors: The NYSE & Nasdaq Speak
– Realizable Pay Disclosure: How to Do It
– How to Improve Pay-for-Performance Disclosure
– We Don’t Have a Good Pay Story: What Do We Disclose?
– How to Avoid Executive Pay Disclosure Litigation
– Peer Group Disclosures: What to Do Now
– In-House Perspective: Strategies for Effective Solicitations
– The SEC Staff Review Process
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– The Art of Supplemental Materials
– Dealing with the Complexities of Perks
– Say-on-Parachute & Post-Deal Disclosure Developments
– Compensation Accounting, Tax & Risk Assessment Disclosures
– Shareholder Proposals & Executive Pay
– The Rise of Political Contribution Disclosures
CEO Gives Bonus to Employees: Motivational Tool or Gift of Shareholder Assets?
This Telegraph article describes how a CEO of a UK company – Lord Wolfson of Next – recently gave away his bonus to the 19,400 employees of his company. It got me thinking. On the one hand, that certainly helps the pay gap – and could prove to be a great motivational tool. On the other hand, maybe that bonus to employees should have come from the company directly to drive loyalty to the company and not that particular CEO? What do you think?
Comp Committee & Advisor Independence: Actions to Take Now
We have mailed the March-April Issue of The Corporate Executive, featuring a comprehensive article by Mark Borges about the new comp committee & advisor rules, including:
– Compensation Committee and Advisor Independence Standards: Actions to Take Now
– What’s Covered by the New Requirements
– When the New Requirements Take Effect
– Ensuring the Independence of Your Compensation Committee Members
– Assessing the Independence of Compensation Committee Advisers
– Updating Your Compensation Committee Charter
– Disclosing Compensation Consultant Conflicts of Interest
– The Initial Disclosures–Examples
– Final Cost-Basis Reporting Regs–Bad News for Stock Compensation
Act Now: Get this issue rushed to when you try a 2013 No-Risk Trial to The Corporate Executive.
Tune in tomorrow for the webcast – “Social Media: Parsing the Hypos” – during which two legal pros (Dave Lynn & Davis Polk’s Joe Hall) and two IR pros (Q4’s Darrell Heaps & IR Web Report’s Dominic Jones) will join an in-house lawyer – Zillow’s Brad Owens – to parse a group of hypotheticals to determine what is feasible – and what is not – under the SEC’s Regulation FD framework. The panel will also cover what are effective IR strategies to leverage social media and more. Please print off the hypotheticals in advance.
Meanwhile, there are now 11 companies that have filed Form 8-Ks announcing the use of social media channels. Here is my list with links to all those 8-Ks.
Survey: Corporate Leadership Lacking on Social Media
A while back, The Conference Board put out these survey results that found limited use and understanding of social media among officers and directors. The survey notes that while 90% of respondents claim to understand the impact that social media can have on their company, just 32% monitor social media to detect risks to their business activities and 14% use metrics from social media to measure corporate performance – and only 24% of senior managers and 8% of directors receive reports containing summary information. Notably, half of the companies don’t collect this information at all.
If It Didn’t Happen on Twitter, It Didn’t Really Happen. Here’s Why.
Great food for thought from Mark Suster’s blog entitled “If It Didn’t Happen on Twitter, It Didn’t Really Happen. Here’s Why.”
According to this Bloomberg article, SEC Chair Mary Jo White may go the unusual route of adopting the rule lifting the prohibition against general solicitation and general advertising in exempt securities offerings – first proposed back in August last year – as an interim final rule. Here is an excerpt from that article:
White, who became SEC chairman on April 10, has suggested the commission pass the existing plan without major changes and add additional protections later, said the people, who declined to be identified because the deliberations are private. The approach would placate congressional Republicans who have complained the SEC has slow-walked the rule, which was required to be completed by July 2012.
Approving the regulation would allow White to make good on a promise she made in her Senate confirmation hearing to prioritize rules mandated by the Jumpstart Our Business Startups Act, which was designed to boost capital-raising and job creation. At the same time, it could anger advocates for small investors and at least one Democratic commissioner.
But then you have this MarketWatch piece, which describes Chair White as saying that investor protections are key to the JOBS Act – in essence, “haste makes waste” as noted by Steve Quinlivan. So I don’t know what to believe…
Learn more about “what is an ‘interim final rule’?” from this paper…
1788 Annual Meetings in May: How Many Protests?
Thanks to CorpGov.net and CookESG Research, here is a list of the 1788 annual meetings to be held in May. Davis Polk’s Ning Chiu blogs about protests at bank annual meetings as the 99% Power group gets back into action. Here’s the first sprinkling of media accounts of protests:
Meanwhile, on BeyondProxy.com, investor Tom Russo provides a preview of the Berkshire Hathaway annual meeting. Here’s a nice pic of shareholders arriving for the meeting in their private jets – and this DealBook “live meeting” blog has pics from the meeting itself. Berkshire Hathaway’s annual meeting has gotten so big that 2000 people ran a 5k related to the meeting…
Webcast: “FCPA Issues in Deals Today”
Tune in tomorrow for the DealLawyers.com webcast – “FCPA Issues in Deals Today” – to hear Mauricio Espana and Derek Winokur of Dechert and Rebekah Poston of Squire Sanders explain how FCPA diligence is being conducted, how reps & warranties related to FCPA violations are being negotiated, and more.
After reading so many articles about the uphill climb that today’s law students have in finding a job, I thought I would ask one how bad it really is. Here are some thoughts from Kyle Flann (firstname.lastname@example.org) a 3L at the U. of Minnesota:
For the last 21 years of my life I have been in school. From graduating high school, to getting my undergraduate degree, to attending law school – which I will graduate from in less than a month. For the last 21 years I have been a student. Yet even after all the sleepless nights working tirelessly on term papers and preparing for final exams, little did I know what would be my next biggest challenge. The last 21 years have been attempting to prepare for this one moment… trying to land a job.
Finding My Passion
Going into college I hadn’t been completely sure what I intended to do with my life. I bounced around classes and majors until finally taking a course in business law, which changed everything. I discovered how much I love business and declared my major soon after. The ability of businesses to be innovative and analytical in trying to become the most efficient and successful business it can be appealed greatly to a mind like mine. My decision to go to law school and to pursue my JD with a concentration in business law sprang from this love of business, and I have found the variety of legal issues that business attorneys are exposed to extremely exciting.
From Day One of law school I have intended to pursue my career in corporate law – and that has been my job focus every step of the way. However, even with a clear vision of what I want – and using a variety of search techniques – I’ve struggled in this search as have a majority of my classmates.
Morale is Low
The job market for lawyers is tough right now. For law students it is even more difficult. The wavering morale of my classmates is reflected by the whisperings that permeate the lecture halls. Searching for jobs right now can be extremely frustrating. Not only do you need to distinguish yourself from your classmates, but also from previous years’ still unemployed graduates, as well as experienced attorneys many of whom have been forced back into the job market.
Just getting an initial interview is a big deal for most law students. And a student actually having a job lined up before graduation is increasingly rare. Not having the security of a job offer is very intimidating, especially with enormous student debt looming, some with payments starting just weeks after bar exam results are released.
Today’s Job Search Tools: Online
In trying to find a job, I believe I’ve been doing as much – or more – than most of my classmates. Most of my job search has included utilizing a variety of online resources. I’ve found many extremely useful job boards including my career services job board; the Association of Corporate Counsel job board; and the job board on FindLaw.com. In addition, I have utilized some of the more general job boards such as Indeed, Monster, The Ladders, Career Builder and Simply Hired – although these boards typically have less relevant positions than what I am looking for.
I’ve also identified a variety of law firms and companies around the Midwest that I am interested in working for – and have signed up for the mailing lists associated with their individual career boards. These actions have allowed me to identify hundreds of potential job opportunities – and I’ve applied to nearly every one.
In addition to this I have attempted everyone’s first piece of advice in conducting a job search: “networking.” This honestly has been one of the most useful steps I have taken. It has led to me meeting many kind folks, receiving useful advice, and on occasion has even led to some interviews.
Networking at events has been great, but again using online tools has also been successful for me. Utilizing my career services networking webpage has allowed me to meet many who have been in the same position as me and who can give me terrific advice. In addition, using social networking – primarily LinkedIn – to get introduced to others in my industry has been very effective. It seems like there is a way to reach just about anyone through these tools – and I’ve yet to find someone who isn’t at least willing to talk to me about how their career has progressed and to give me any advice they may have.
While my job search has been terrifying – and at times slightly depressing – in the end, I am confident that I will find a job that I will love and that will jumpstart my career. I know this because I know my own work ethic and I know my own desire to find the right job. I will continue to work in every way I know how until I find an employer willing to let me grow with them. I know it may take a while but I am willing to do what it takes (and I know my classmates are too). So while we will continue to grumble about this job market, be ensured that we will continue to apply – and that there are many terrific young lawyers coming out for hire.
Give Me the Bad News Please
If there is one thing that I could say to potential employers, it would be this: the worst thing about this job search for me personally is not hearing anything at all from a position I have applied for.
I would much rather get a rejection letter than to never hear anything. At least getting some correspondence reinforces the belief that at least someone took the time to look at my application and resume – and have taken me and my job search seriously. It is much appreciated by me and many others to at least have this closure in these situations, even if it means not getting an opportunity at a job we believe we are qualified for.