For a long time, companies have been seeking to know the identities of their shareholders so that they can more efficiently communicate with them (many shareholders are OBOs, whose identities are shielded from the company). This is a desire that I always believed had little chance of becoming reality given the pushback by those investors who wish to remain anonymous.
Thus, I was surprised to see this Gibson Dunn memo, which describes the recent G8 Summit and how leaders agreed on eight core principles to clamp down on money-laundering, tax evasion and tax avoidance. The first principle is “companies should know who ultimately owns and controls them and that information should be adequate, accurate, and current.” So if the USA ultimately fully complies, companies would get their dream fulfilled. Wow!
FINRA’s New Private Placement Due Diligence Form
Last week, FINRA filed a proposal with the SEC that would amend Rule 5123, its private placement rule, to require that FINRA members file a Private Placement Form electronically via FINRA Firm Gateway – and the form would include “due diligence-related information concerning the offering, the issuer and its management” via a series of questions. These questions go far beyond the notice-type information required before this rulemaking.
Although FINRA states that a member can respond “unknown” if the member does not know the requested information, the rule filing references FINRA Regulatory Notice 10-22, which provided guidance on the scope of a firm’s responsibilities to conduct a reasonable investigation of private placement issuers in fulfillment of its suitability obligations. While some of the requested information should be found in the offering document, it appears possible that the inability of a FINRA member to respond to a question could be viewed by the FINRA Staff as indicating that the member has not conducted an adequate “reasonable-basis” suitability review of the issuer and the offering since FINRA designates the questions as “due diligence-related.”
FINRA requested immediate effectiveness of the rule change and has asked the SEC to waive an otherwise required 30-day delay on implementation so that the change can be imposed immediately. Thus, unless the SEC Staff disagrees with FINRA’s waiver request within 60 days and suspends the new rule, the rule change was effective as of June 20th. The SEC has not yet published its release regarding the rule change.
Specifically, the Private Placement Form includes these questions:
- Whether the offering is a contingency offering;
- Whether independently audited financial statements are available for the issuer’s most recently completed fiscal year;
- Whether the issuer is able to use offering proceeds to make or repay loans to, or purchase assets from, any officer, director or executive management of the issuer,
sponsor, general partner, manager, advisor or any of the issuer’s affiliates;
- Whether the issuer has a board of directors comprised of a majority of independent directors or a general partner that is unaffiliated with the firm;
- Whether the issuer has engaged, or does the member anticipate that the issuer will engage, in a general solicitation in connection with the offering or sale of the
- Whether the issuer, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor or any of the issuer’s affiliates has
been the subject of SEC, FINRA or state disciplinary actions or proceedings or criminal complaints within the last 10 years.
CII Petition: Bar Directors Who Don’t Get Majority Support to From Continuing to Serve
Last week, CII petitioned the NYSE and Nasdaq asking them to amend their standards for listed companies to require that directors who do not receive a majority of votes in uncontested elections resign promptly and not be reappointed.
This article from the New York Times provides a bit more color on the SEC Chair’s decision to refuse to allow defendants in some cases to settle without admitting wrongdoing. (See my blog from last week.)
In an interview, Mary Jo White said that admissions “will help with deterrence, and it’s a matter of strengthening our hand in terms of enforcement.” She did, however, repeatedly emphasize that that “most cases would still be settled under the prevailing ‘neither admit nor deny’ standard, which, she said, has been effective at encouraging defendants to settle and speeding relief to victims.” “Although she acknowledged that “‘Judge Rakoff and other judges put this issue more in the public eye, … it wasn’t his comments that precipitated the change….I’ve lived with this issue for a very long time, and I decided it was something that we should review, and that could strengthen the S.E.C.’s enforcement hand.'” In addition, the author quotes Ms. White as saying that “‘our aim is to apply this policy in appropriate cases, and we’ll do this in the public interest….Will this lead to more cases going to trial? It’s hard to say going in, but it might. We have to be prepared to go to trial, and we have to make people believe we’re prepared.'”
In addition, in a memo to the enforcement staff, the co-directors of the SEC’s enforcement division said “there might be cases that ‘justify requiring the defendant’s admission of allegations in our complaint or other acknowledgment of the alleged misconduct as part of any settlement….Should we determine that admissions or other acknowledgment of misconduct are critical, we would require such admissions or acknowledgment, or, if the defendants refuse, litigate the case.’ The article reports that the memo “cites three criteria: ‘misconduct that harmed large numbers of investors or placed investors or the market at risk of potentially serious harm’; ‘egregious intentional misconduct’; or ‘when the defendant engaged in unlawful obstruction of the Commission’s investigative processes.'”
The author of the article contends that “[r]elatively few of the high-profile financial crisis cases, including the big mortgage fraud cases …, would seem to meet those criteria, because the misconduct that was alleged wasn’t that egregious, the evidence in some cases was ambiguous, and the victims were limited to a few sophisticated financial institutions rather than large numbers of the investing public.” However, Ms. White declined to comment on any specific cases, indicating that “[n]o one case precipitated this. From this point forward, we’ll be looking for appropriate cases in which to apply the policy.”
Meanwhile, SEC Chair White testified about the agency’s budget for fiscal year 2014 before the Senate Appropriations Subcommittee on Tuesday. As noted by Steve Quinlivan in this blog, the budget would finance 25 new Corp Fin positions.
Rulemaking Cost & Benefit Analysis: Appeals Court Rules Against ICI & Chamber of Commerce
A few days ago, the US Court of Appeals for the DC Circuit upheld the District Court’s summary judgment order dismissing challenges from the Investment Company Institute and the Chamber of Commerce to CFTC rules requiring SEC-registered investment companies engaging in the activities of a commodity pool operator to register with the CFTC. Here’s a Morrison & Foerster memo – and here’s an excerpt from this Knowledge Mosaic blog:
In doing so, the Court made two notable points: agencies can change their minds (especially when authorized by Congress to do so), and the Administrative Procedures Act’s cost-benefit requirements cannot be used to challenge an agency’s method for obtaining data on the ground that the agency has not yet obtained the necessary data.
The Court’s opinion principally addressed two of the four challenges presented by the Investment Company Institute and the Chamber: that the CFTC’s rules violated the Administrative Procedures Act by failing to address why it was changing an existing rule that exempted investment companies from the CPO registration requirements, and offering an inadequate evaluation of the rule’s costs and benefits.
House Financial Services Committee Approves Ban on Mandatory Auditor Rotation
The House Financial Services Committee has approved a bill that would prohibit the Public Company Accounting Oversight Board from imposing mandatory auditor rotation. The bill, which passed with bi-partisan support, provides that the PCAOB shall have no authority “to require that audits conducted for a particular issuer in accordance with the standards set forth under this section be conducted by specific auditors, or that such audits be conducted for an issuer by different auditors on a rotating basis.” As with all proposed legislation, it is, at best, uncertain whether this bill will become law. But it does send something of a signal to the PCAOB.
Yesterday, Delaware Chancellor Strine delivered this eagerly awaited decision on forum selection bylaws. I’m posting memos in our “Exclusive Forum Bylaws” Practice Area. Here’s a brief summary from Claudia Allen of Neal Gerber:
Chancellor Strine’s opinion upholds the facial validity under the DGCL of the forum selection bylaws adopted by Chevron and Fed Ex, and holds that such bylaws are contractually valid even though adopted without shareholder consent. This is an important decision since it will help corporations address the inevitable strike suits and associated forum battles that follow the announcement of mergers and acquisitions. Both parties indicated during oral argument that any decision would be appealed, so the Delaware Supreme Court will likely have the last say.
If the decision is upheld on appeal, we can expect to see more public companies adopt forum selection bylaws providing for intra-corporate disputes to be litigated exclusively in the Court of Chancery (or any state or federal court located in Delaware). The court acknowledged that a plaintiff might still chose to sue in a different jurisdiction and then argue in response to a motion to dismiss that enforcing the forum selection bylaw would be unreasonable or that the forum selection provision is being for an inequitable purpose in inconsistent with the directors’ fiduciary duties.
Here’s Kevin LaCroix’s blog about the case – and Keith Bishop’s blog about why a California Court might not follow Delaware. And for a “bigger picture” perspective, this blog by Prof. Brian Quinn predicts that this decision – combined with arbitration provisions in bylaws – could ultimately harm Delaware’s position as a corporate law leader in the long run.
SEC’s Money Fund Proposals May Significantly Impact Corporate Treasuries & Commercial Paper Issuers
Most of the law firm memos on the SEC’s proposed rule on money market funds have been authored by our cousins in the 1940 Act bar and focus on the regulatory impact on the funds themselves. So far, this Hunton & Williams memo is the only one I have seen that tackles the potential impact on public companies that either use the product for cash management or look to “prime” institutional money funds to buy their commercial paper.
Transcript: “Conflicts of Interest: How to Handle in Deals”
We have posted the transcript for our recent DealLawyers.com webcast: “Conflicts of Interest: How to Handle in Deals.”
Spanking brand new. Posted in our “E-Proxy” Practice Area, this comprehensive “E-Proxy Handbook” provides a heap of practical guidance about how to deal with Rule 14a-16. This one is a real gem – 39 pages of practical guidance.
On Thursday, the Senate will hold a confirmation hearing for SEC Commissioner nominees Kara Stein and Michael Piwowar…
Retail Voting: Still Down
As noted in this ProxyPulse report from Broadridge and PwC, there are still challenges in getting retail shareholders to vote, with only 30% of retail shares voting recently. Notice & access is a factor in the drop – with only 17% of retail holders receiving a notice voting compared to 36% of those retail holders who received full paper packages. Learn more during tomorrow’s webcast.
Webcast: “E-Proxy Practice Tips: Five Years Later”
Tune in tomorrow for the webcast – “E-Proxy Practice Tips: Five Years Later” – to hear Tom Ball of Morrow & Co., Chuck Callan of Broadridge Financial Solutions, Keir Gumbs of Covington & Burling and Paul Schulman of MacKenzie Partners provide practice tips and cover the latest e-proxy developments.
Tune in tomorrow for the CompensationStandards.com webcast – “Law Firms & Independence: What to Do Now” – as law firms – and their compensation committee clients – are scrambling to comply with the new rules regarding independence for consultants. Hear from Troutman Sanders’ Brink Dickerson; Gibson Dunn’s Ron Mueller; Bryan Cave’s Randy Wang and Skadden’s Joe Yaffe.
Now 51 Say-on-Pay Failures This Year
There have been many more failures during the past few days, including:
Thanks to Karla Bos of ING for the heads up on these!
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net 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:
– Combating Tech’s Conflict Minerals With Disclosure
– Rethinking the Annual Meeting
– Project: Create Sustainability Standards for 10-K Disclosures
– How to Open & Close Annual Meeting Polls
– What Will You Do if a Proponent Does Not Show to Present the Shareholder Proposal?
– Goldman Sachs to Enhance Lead Director Duties in Deal with CtW
Recently, I blogged not only that Nabor Industries had failed to gain majority support on its say-on-pay for three years in a row – but two comp committee members also failed to receive majority support and tendered their resignations, which were not accepted by the board. And as noted in this WSJ article, the company engaged in some shady vote counting on its proxy access proposal. Here is a Forbes article from Paul Hodgson on this situation.
Here’s ten cents from inspector of elections Carl Hagberg: “Further to the good advice of “looking harder” at Charter and By Law or Bye Law provisions, look at my “Primer” on tabulating and reporting voting outcomes. A major problem in recent years has to do with the perfectly awful language that’s snuck into so many proxy statements along the way – and which has been mindlessly copied by brain-dead &/or lazy-bones drafters – is the statement that non votes – and abstentions – count (or, slightly better) “have the same effect as Votes NO.” This is sort of correct – to the extent that they take votes away from the pool of votes that must vote YES in order to PASS…or (more correctly, to “approve” a proposal, since, unless it’s a binding by-law proposal it’s the Directors who must officially “pass it” …But clearly, they can not be COUNTED in the total of Votes NO….since they are NOT.”
And another member notes: “Nabors has about 9% of their outstanding shares as treasury stock. If those shares are held by a subsidiary, under Bermuda law, they can actually vote those shares in favor of management’s proposals, as noted in this article. If that is the case (and it is unclear where the treasury shares are held), the vote may have even been worse than it appears.”
Voting Counting: How to Interpret Bermuda Law
Here’s one reaction that I received from a member:
It is tough to defend a lot of what Nabors has done, and I think their investor relations person may well have the toughest job in America. Nevertheless, Nabors has said that it has counted its votes in “very strict conformance” with Bermuda law, and there does seem to be at least some uncertainty among Bermuda issuers about how non-votes should be treated. Perhaps more importantly, there also appears to be language in Nabors’ charter documents that it can point to in support of the way it handled broker non-votes this year.
For an example of the uncertainty among Bermuda corporations about how to treat non-votes, take a look at a company called Lazard Ltd. Lazard has a provision in its Bye-laws (that’s how they spell it in Bermuda) on voting that is similar to the language included in Nabors’ Bye-laws.
– Section 1701 of Lazard’s Bye-laws says that “Except as otherwise provided by the Act or these Bye-Laws, in all matters other than the election of Directors, the affirmative vote of a majority of the combined voting power of all of the Shares present in person or represented by proxy at the meeting and entitled to vote on the matter, voting together as a single class, shall be the act of the Shareholders.”
– Section 22 of Nabors’ Bye-laws says that “Except as may otherwise be provided for in these Bye-laws, and subject to Applicable Law, at each meeting of Shareholders if there shall be a quorum, the affirmative vote of the holders of a majority of Shares present in person or represented by proxy and entitled to vote thereat, shall decide all matters brought before such meeting.”
Until recently, Lazard interpreted Bermuda law in exactly the way that Nabors now does, but changed that interpretation in 2012. See page 2 of the 2011 proxy statement (non-votes count as “no” votes) v. page 2 of the 2012 proxy statement (non-votes don’t even count as being present at the meeting). Nabors appears to have changed the way it interprets Bermuda law and its bylaws as well, but in the exact opposite direction. In its 2012 proxy statement, it said that non-votes wouldn’t count on the one proposal (ratification of its auditor) requiring the approval of a majority of the shares present or represented by proxy and entitled to vote thereon. In this year’s proxy statement, Nabors said that a broker non-vote would count as a no vote on all proposals requiring this level of approval.
What Nabors may be hanging its hat on for this interpretation is the language in its Bye-laws that I highlighted. Instead of speaking in terms of the votes of a majority of shares “entitled to vote on the matter,” as a company like Lazard does, Nabors’ Bye-laws say that matters presented to shareholders generally must receive the approval of a majority of the shares “entitled to vote thereat,” which they may interpret to mean “entitled to vote at the meeting.” They may be taking the position that these non-voted shares are present and entitled to vote at the meeting, and therefore it is appropriate to take them into account in determining the outcome of all matters presented at the meeting, regardless of whether they are non-voted on a particular matter.
Nabors’ spokesperson said that there was “no intentional change” in the way that it tallied non-votes. With all due respect, that just can’t be right. Some sentient being somewhere made a decision that the company would treat non-votes differently than it had in the past, since the disclosures in its 2012 proxy statement about that issue are just not consistent with the ones it included in this year’s filing. The timing is pretty suspicious and the optics are downright horrible – but on the other hand, if I knew that my company was facing a contentious annual meeting, I think I’d take a very hard look at all my proxy disclosures, and make sure that I was comfortable that we were doing things correctly, including tallying the vote in accordance with applicable law and charter provisions.
By the way, if TheCorporateCounsel.net would like to finance my investigation, I would be happy to go to Bermuda and personally get to the bottom of this for you. I can’t imagine it would take much more than three or four weeks. Among other things, I would need a cigarette boat and several cases of Goslings rum in order to properly investigate the situation. Just let me know and I’ll be on the next plane.
More Voting Counting: How to Interpret Bermuda Law
Here’s another reaction that I received from a member:
Having looked at 2012 Nabors proxy, it appears a change has been quietly made. The weird thing is that it’s a change from a rather odd interpretation to a more logical one. (I tried to verify this switch by looking at Nabors’ Item 5.07 8-K from last year, hoping that it would show how they actually counted the votes. Unfortunately, the company merely gave raw numbers and not percentages, so it’s impossible to be sure how they ultimately decided to count the votes last year.)
According to the company’s 2012 proxy, they counted (i) abstentions, (ii)”withheld votes” (essentially, votes against directors) and (iii) broker non-votes (BNVs) as being “present” for purposes of establishing a quorum. Arguably inconsistent with this analysis, however, they state that BNVs “will not affect the outcome” of the vote. The only way this could have been true was if they were not counting BNVs as shares “present” for voting purposes. Thus, they were excluding BNVs from the denominator when determining whether a proposal received a majority of votes “present.” It does not seem that this approach was even remotely mandated by their bye-laws, however, and certainly not by Bermuda law.
Obviously, the company feared that, had it stayed the course this year a number of shareholder proposals that management opposed would have passed, so in 2013 they seem to have opportunistically begun to count BNVs as “present” for voting purposes as well, with the (much desired) consequence of bumping up the denominator. The odd thing is that this new – and arguably manipulative – method seems more logical than the old one was. I mean, if BNV shares are deemed “present” for quorum purposes, shouldn’t they be “present” for voting purposes as well? Also, if you “abstain” from voting on an item and your shares are still counted as “present” at the meeting, isn’t it even more logical that having your shares actually voted “FOR” or “AGAINST”- even if by an uninstructed agent with discretion – means that they are “present” at the meeting?
One could argue both ways, of course, as to how much conscious participation is really needed to make one’s shares “present,” but it’s hard to say that counting BNVs as present for voting purposes is clearly wrong. It’s even harder – frankly impossible – to say that it violates their bye-laws or Bermuda law.
While it does look like a desperate move by a management feeling “cornered” – and thus may not “pass the smell test” – I don’t think that what Nabors has done can be attacked as illegal or a violation of charter provisions. Also, while the company didn’t exactly say in 2013 “for this year, we’re completely changing the way we count your votes” – it also expressly disclosed how it intended to handle things, without pointing out the change.
Ricky, The Honey Badger: Summer Solstice!
Last week, I blogged about Randall, the Honey Badger at NIRI’s Conference and how my wife said “we need that.” I found Randall’s brother – Ricky – and we have adopted him. Here he is enjoying the summer solstice:
On Tuesday, SEC Chair White make remarks – in a speech unpublished so far – indicating that Enforcement’s “settlement without admission” policy will undergo an “incremental” change. The change will only apply to “certain” cases – and decisions on when admissions will be required will be made on a case-by-case basis.
The Wall Street Journal is reporting that, at a WSJ CFO Network conference, SEC Chair Mary Jo White said that, while the ability to settle cases without insisting on an admission of guilt remains an important tool, the SEC plans to “require certain defendants to admit to wrongdoing as a condition of settling securities-fraud charges.” Ms. White said that the new policy “would apply to only a select number of cases, and suggested they would have to involve allegations of egregious fraud or significant harm to investors.” The Staff will be developing guidance regarding the types of cases that would require admissions of guilt. The SEC has already changed its long-standing practice by precluding defendants from denying guilt when, at the same time, they have admitted to, or have been convicted of, criminal violations in parallel cases brought by the Justice Department.
The SEC’s long-standing position that allowed defendants in settlements to neither admit nor deny wrongdoing has come under recent scrutiny. For example, in considering the settlement in the Citigroup case, Judge Rakoff issued a blistering criticism of the practice. In addition, the House Financial Services committee had indicated at one time that it was planning to hold hearings to examine the practice. The article reports that another federal judge “questioned the practice in March, saying it is ‘counterintuitive’…. In May, Sen Elizabeth Warren (D., Mass.) said she worried the policy could undercut regulators’ ability to crack down on financial fraud.”
SEC officials’ rationale for the SEC’s historic position has been that “pursuing litigation solely to obtain an admission of guilt isn’t likely to result in greater penalties, noting that the agency’s enforcement attorneys only recommend the commission settle a case when they believe they have negotiated for roughly the same amount in penalties that they could reasonably expect to win at trial. Officials also have cited the agency’s limited resources.”
A surprising element of this announcement is that it wasn’t made in a scripted speech – although the speech may eventually be posted. It’s been a while since a SEC Chair made an announcement of this magnitude that wasn’t in writing. Of course, there is no requirement to post a speech – but it helps spare the SEC’s Office of Public Affairs some phone calls.
As an aside, I just realized that the SEC has posted speeches going way, way back – back as far as 1929, four years before the SEC was even born! Here is the oldest speech posted – from a conference held in French Lick, Indiana, the home of Larry Bird! I guess they weren’t worried about holding a conference in a city with a major airport back then…
SEC Enforcement Co-Chief Calls ‘Em Like He Sees ‘Em
Meanwhile, this Morrison & Foerster memo starts off with: “Led by a new team of co-directors, the Enforcement Division of the SEC is poised to create new initiatives dedicated to efficiency, greater staff discretion and specialized areas of focus. This was co-director George Canellos’ message as he addressed a panel of SEC alumni and other practitioners sponsored by the Federal Bar Association’s Securities Law Section on June 17th. While Canellos laid out some ambitious plans for the SEC, he stressed the limits of those plans and the challenges that the agency may face in implementing them. And he also tried to satisfy the attendees’ desires to hear some Division ‘inside baseball’.”
I’ve been wanting to get more into video for a long time. A really long time. And now that most of us have iPads and other devices attached to our hips, I am making that push with the launch of my regular series entitled “Take Two.” The idea is very short videos – two minutes long (hence the series name) – on random topics, with the arthouse production of someone working out of their garage. In other words, for me to have fun – and hopefully you too. I’m sure my process and production will evolve as I experiment – so please feel free to share criticism, ideas and feedback.
Are Severance Agreements Violating the SEC’s Whistleblower Laws?
Jill Radloff of Leonard Street gives us this news via this blog:
Two partners from a self-described law firm that specializes in the representation of whistleblowers have sent a letter to the SEC Commissioners complaining about the use of severance agreements to prevent employees from participating in the SEC whistleblower program. The letter complains about contractual clauses inserted in severance agreements with departing employees such as:
– Employee agrees that he will not use or disclose any Company information at any time subsequent to the execution of the Agreement, except as required by law. Company information does not include information or knowledge which Employee is required to disclose by order of a governmental agency or court after timely notice of the order has been provided to the Company.
– Employee represents that he has not filed any lawsuit, claim, charge, or complaint regarding the Company with any local, state, or federal agency, self-regulatory organization, or court.
– Employee hereby irrevocably assigns to the federal government, or relevant state or local government, any right Employee may have to any proceeds, bounties or awards in connection with any claims filed by or on behalf of the government under any laws, including but not limited to, the False Claims Act and/or the Dodd-Frank Act (and/or any state or local counterparts of these federal statutes or any other federal, state or local qui tam or “bounty” statute) against the Company. Employee also represents and promises that Employee will deliver any such proceeds, bounties or awards to the United States government (or other appropriate governmental unit).
– Employee will inform the Company within ten (10) days of receipt of a subpoena or inquiry requesting information relating to the Company and will cooperate with the Company in any investigation, regulatory matter, arbitration and/or any third-party lawsuit in which the Company is a subject or party.
The letter requests the SEC issue a regulation or an opinion clarifying the breadth of actions that the SEC views as likely to “impede” communication with the SEC under the whistleblower program. The law firm believes this would stem the growth of what they believe is an apparent effort to discourage whistleblowers from providing information to the SEC.
We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net 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:
– Harvard Hires Sustainable Investing VP
– Corp Fin: Lobbying Expenditure, Political Giving Not Duplicative
– Hewlett-Packard Directors Win Re-Election Despite Challenging Campaigns
– Proxy Season Preview: ESG Proposals – Part 2
– Divergent Corp Fin Decisions on Independent Chair Proposals
– Corp Fin Explains Analysis for Assessing Vague Shareholder Proposals Under (i)(3)
Last week, I ran this blog providing survey results on Rule 10b5-1 plans and received many emails in response. David Smyth of Brooks Pierce even blogged this analysis about them:
When I was on the SEC’s enforcement staff, I had a case once where we were pretty sure our prospective defendant had engaged in insider trading. Our conversation with his lawyer went something like this:¹
Us: Did your guy sell those shares on the basis of material, nonpublic information?
Him: No way. In fact, he had a 10b5-1 plan in place, and all of his sales were in accordance with that plan.
Us: Um, was that plan written down anywhere?
Him: No, it wasn’t written down, but it doesn’t have to be. If you look at the trading records, you’ll see the trades followed a regular pattern.
Us: Hmmm. We’ve actually reviewed those records. It looks like the plan was to sell all his shares as quickly as possible so he could get out before the share price cratered, as he knew was going to happen.
We recommended that the Commission bring an enforcement action against this person for insider trading, which it did. We settled the matter soon afterward. But let me tell you, if this defendant’s trading had followed a regular pattern, we wouldn’t have touched that case with a ten-foot pole. Even if we suspected that he was selling only to avoid suffering from the imminent death of the company whose shares he owned, an actual 10b5-1 plan would have protected him. We would not have wanted to attack sales that were obviously covered by such a plan, because the court would have rightly handed us our heads.
Rule 10b5-1 plans work like this: if, before becoming aware of material, nonpublic information, a corporate insider (1) enters into a binding contract to trade the securities; (2) instructs another person to trade the securities for the insider’s account; or (3) adopts a written plan for trading the securities, the trades are deemed not to be “on the basis of” that material, nonpublic information. The rule goes on in greater detail, but the gist is that the trader must not have discretion to adjust the trades once the information becomes known. If the plan is to sell 100 shares per month, the insider can’t change that number to 10,000 when the draft of a horrendous quarterly earnings report is circulated to senior management but not yet to investors. But Rule 10b5-1 plans that are strictly followed are extremely strong defenses against insider trading charges.
Which is why it surprised me on Tuesday to see the results from Broc Romanek’s survey on Rule 10b5-1 plan practices. None of the 35 companies responding to the survey require corporate insiders to sell shares pursuant to a 10b5-1 plan, and 68% of those companies do not explicitly encourage their use. I don’t get this. It seems like such low-hanging corporate governance fruit to me to ask that senior executives cabin their trading in a way to minimize potential liability for themselves and their companies. Bruce Carton wrote a good piece in Compliance Week two years ago discussing the benefits of having a strong insider trading compliance program. They included:
– Avoiding control person liability for companies whose executives are found liable for insider trading;
– Protecting employees who don’t understand the intricacies of insider trading law, which are complex; and
– Avoiding reputational damage and legal fees from disruptive investigations.
A Rule 10b5-1 plan, faithfully followed and not gamed for the insider’s benefit, is one relatively easy way to avoid those things. I’m surprised that more companies are apparently not taking advantage of them.
1. Our actual conversation did not go like this. As we always did, we gathered facts in the investigation, and this “discussion” played out in the Wells process that followed.
And myStockOptions.com also covered the survey results in this blog…
SEC’s Chief Accountant Discusses New COSO Framework
A few weeks ago, SEC Chief Accountant Paul Beswick gave this speech about the updated COSO framework in which he said that the SEC staff will monitor the transition for companies to evaluate whether any SEC become necessary. In the meantime, companies are free to refer to the new COSO framework.
Insights Into Forming Your Own Firm
In this podcast, Ben Lieber of Potomac Law Group provides some insight into what it’s like to form your own law firm, including:
– What led you to create your own firm?
– What is the firm’s business model?
– How much corporate governance/corporate work does the firm do?
– Any surprises in making this leap?
The SEC does some rebranding. As noted in this press release, the agency renamed Division of Risk, Strategy, and Financial Innovation (commonly known as “RiskFin”) to the Division of Economic and Risk Analysis. The Division was first created in ’09 – and its size and importance has dramatically increased since formation, primarily due to the intense scrutiny of the economic analysis given to rulemakings throughout the federal government. So what is the Division’s new nickname? DERA?
Economic Analysis of Rulemaking: SEC’s Inspector General Issues Two Final Reports
With economic analysis of rulemaking continuing to be a hot topic in the wake of the court case striking down the SEC’s proxy access rules – legislation in this area is still pending – the SEC’s IG office issued two reports last week. This report is the final one evaluating the SEC’s current use of guidance on economic analysis and contains six recommendations. This report is the final one evaluating the SEC’s implementation of this guidance and contains one recommendation. The evaluations were conducted per Congressional request.