Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
I’ve written repeatedly how absurd it is for a so-called independent federal agency – like the SEC – to be subject to the very real political pressures and whims of Congress. And the political pressures faced by the SEC have only grown since the passage of Dodd-Frank a mere two years ago. You may recall that the Senate’s version of Dodd-Frank envisioned a self-funded SEC – a concept to be lost during the House-Senate conferencing leading up to the bill’s enactment (if I recall, House conferees had accepted self-funding but some Senators stripped it from the final bill). Dodd-Frank also was supposed to dramatically bolster the SEC’s resources, a notion that was quickly buried after it became law.
So what to do with the front-page article in the Washington Post today that Rep. Spencer Bachus (R-Ala.), Chair of the House Financial Services committee – the one that oversees the SEC – is being investigated for insider trading by the Office of Congressional Ethics? The case is the first of its kind involving a member of Congress. Although I wouldn’t hold your breath given that the OCE’s powers are limited (egs. can’t compel cooperation with an investigation nor does it have subpoena powers).
But the bigger picture is how can there still be justification to allow Congress to continue playing games with the SEC’s budget when it’s supposed to be operating as an independent agency? A lot of fingers continue to be pointed at the SEC for regulatory failures. But one of the causes for the SEC’s failures rests with those at the top – Congress. More than just a few on the Hill want the SEC to fail, doing their utmost to be a thorn in the agency’s side. Doing the work urged by well-heeled lobbyists. Until this problem is fixed, the SEC will always be faced with strong headwinds in their work to keep the markets safe for investors. Riddle me that, Batman!
House Passes Watered-Down STOCK Act
Yesterday, the House of Representatives passed its version of the STOCK Act in a nearly unanimous vote. However, as noted in this Washington Post article, the House version of this Act omits a few key provisions that the Senate passed last week (S 2038). The differences will be resolved in conference over the next few weeks.
Although the House version of the STOCK Act bars members of Congress from trading on material non-public information like the Senate version, it doesn’t include the provision – pushed by Sen. Chuck Grassley – which would require those in the “political intelligence” world to register as lobbyists under the Lobbyist Disclosure Act. In DC, there are a growing number of specialized political intelligence agencies that collect and sell information about upcoming legislation and regulatory developments to hedge funds, private equity, etc.
The House version would merely require a study into this practice rather than require lobbyist registration. Not surprisingly, those pushing for the study alternative – including Rep. Eric Cantor and House Speaker John Boehner – are among the largest recipients of contributions from hedge and private equity funds, etc. as noted in this spreadsheet from Maplight.org. Check out this NY Times article from a few days ago about how these GOP House members claim their revisions to the Senate bill would “strengthen” it…
Corp Fin’s Common Financial Reporting Issues for Smaller Companies
Yesterday, Corp Fin posted these slides that detail the latest common financial reporting issues for smaller companies. The slides were part of a presentation for a small business forum hosted by the PCAOB in December.
Here’s news from Steven Haas of Hunton & Williams (also see this blog from Francis Pileggi): In recent days, shareholders have filed several class action complaints in Delaware (here’s a sample complaint posted in our “Exclusive Forum Bylaws” Practice Area; there are 9 filed so far). The litigation will require Delaware courts to review a bylaw that would increase Delaware’s market share of corporate litigation. A ruling upholding these bylaws would likely cause numerous other corporations to adopt them.
An exclusive forum provision typically provides as follows:
Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article __.
These provisions gained traction, particularly for IPO companies, ever since Vice Chancellor Laster suggested in a 2010 opinion that they would be enforceable (see In re Revlon S’holders Litig., 990 A.2d 940 (Del. Ch. 2010)). Claudia Allen of Neal Gerber recently updated her study detailing that, as of December 31st, 195 Delaware corporations have adopted or proposed exclusive forum charter or bylaw provisions. Although a California court refused to enforce Oracle’s exclusive forum bylaw last year, this is the first time the issue has been squarely presented to the Delaware courts. Steven Davidoff (aka The Deal Professor) previously offered his thoughts on the issue.
Large Trader Reporting Rules Update: No Annual Form 13H Required This Year
Here’s news from Skadden Arps: Exchange Act Rule 13h-1(b), which went into effect on October 3, 2011, requires persons defined as “large traders” to file a Form 13H with the SEC on the following timetable:
– promptly after first effecting aggregate transactions, or after effecting aggregate transactions subsequent to becoming an inactive large trader, equal to or greater than the identifying activity levels in Rule 13h-1;
– within 45 days after the end of each full calendar year; and
– promptly following the end of a calendar quarter in the event that any of the information contained in a Form 13H filing become inaccurate for any reason.
Large traders were required to file their first Form 13H on or before December 1, 2011.
We have confirmed with the SEC staff that it is interpreting the annual reporting requirements in Rule 13h-1(b) not to apply to 2011 since the new rules were not in effect for a “full calendar year.” As a result, large traders will not be required to file an annual Form 13H on or before February 14, 2012.
The large trader rules also include provisions applicable to registered broker-dealers, including requirements to maintain records in connection with transactions by large traders, monitor customer accounts for activity that may trigger the large trader reporting requirements and report large trader transaction information to the SEC upon request through the Electronic Blue Sheets (EBS) system. Although these broker-dealer requirements were expected to go into effect on April 30, 2012, it is our understanding that the SEC staff is considering requests to extend the compliance date for these requirements.
Here’s A Metric on the Facebook IPO You Won’t See Anywhere Else
Last week, Facebook’s filing of a Form S-1 for its IPO was all the rage – and as I blogged, the level of traffic to the SEC’s site seemed to bring Edgar to its knees. Chris Hitt hints on Blog Mosaic just how much traffic there actually was…
I never thought I’d host a program involving election law but boards increasingly are being called on to oversee the corporate political contribution process – and thus many in our community are now required to learn some new “tricks.” Tune in tomorrow for the webcast – “The Exploding World of Political Contributions” – to hear Ken Gross of Skadden Arps and Doug Chia of Johnson & Johnson discuss how companies should rethink their political contribution policies and procedures so they don’t violate pay-to-play or other laws or run afoul of what their major shareholders demand from them (the webcast won’t parse efforts to rein in Citizens United, such as this California initiative). Please print these course materials in advance.
By the way, you might want to check out this article by the Center for Political Accountability entitled – “Dangerous Terrain: How to Manage Corporate Political Spending in a Risky New Environment” – which looks at the dramatic change in campaign spending through the lens of corporate governance and Watergate and the heightened risks that companies face.
Three States to Require Insurers to Disclose Climate Change Response Plans; Covers 90% of Insurers
As noted in this NY Times article, insurance commissioners in California, New York and Washington State now will require that companies disclose how they intend to respond to the risks their businesses and customers face from increasingly severe storms and wildfires, rising sea levels and other consequences of climate change. The disclosure will be made in the form of a National Association of Insurance Commissioners survey ( I think this is what the survey will look like). I believe these are the first three states to mandate this type of disclosure (state NAICs started collecting voluntary disclosure surveys in 2009 (here’s Ceres’ latest summary of what insurers have voluntarily disclosed), but this is the first time it has been mandated).
Between these three states, about 90% of the insurance industry in the US market will be covered, as these states made it mandatory for any insurance company doing business in those states (if they do $300 million worth of business nationwide); not just those domiciled in those states. This effort builds upon the SEC’s climate change guidance from early 2010.
New US Exchange: “It’s Better Than A Magic Lantern Show”
A while back, Keith Bishop posted this blog explaining who’s the third largest securities exchange operator in the United States and where is it located. The exchange operator is called BATS and it is based outside of Kansas City. BATS is derived from an initialization of Better Alternative Trading System.
Just ahead of becoming the first major company with a proxy access shareholder proposal in its proxy materials, Hewlett-Packard filed its proxy statement on Friday without the proposal as it negotiated the withdraw of the shareholder proposal instead. Here is a WSJ article explaining that the company agreed to put up a proxy access bylaw for a vote at the 2013 annual meeting at the access threshold previously adopted by the SEC (3% ownership for 3 years), though nominations would be limited to 20% of the board:
In a major victory for activists, Hewlett-Packard Co. agreed to a step that could give investors more power to oust its board members. The Palo Alto, Calif., technology giant will give its stockholders the chance to approve so-called proxy access through a bylaw vote at its 2013 annual meeting. If the measure passes, investors who own at least 3% of H-P shares for at least three years would be allowed to nominate up to 20% of the company’s directors, the company said. The vote would be binding, meaning H-P would be bound by the results. Currently, proxies only list directors that the company nominated.
Activist shareholders have been trying to get proxy access for some time. In the case of H-P, Amalgamated Bank’s LongView Fund, which owns around 400,000 shares of H-P, was expected to succeed at bringing such a nonbinding proposal to a vote at H-P’s 2012 annual meeting, which takes place in March. But a proposal wasn’t included in H-P’s proxy materials, which were filed Friday.
Instead, an H-P spokesman said in a statement that the company had already reached a deal with Amalgamated Bank. Under the agreement, H-P has “agreed to put a board-recommended proxy access proposal to a vote at our 2013 annual meeting of stockholders,” he said, noting that the company “is committed to good corporate governance and open and frequent communication with its stockholders.”
A spokesman for Amalgamated Bank said it withdrew its proposal after H-P agreed to present a proxy-access proposal in 2013. H-P’s move represents “a recognition by a significant company that proxy access has potential merit and number two, that the shareholder resolution probably would have passed without management support,” said Charles Elson, head of the Weinberg Center for Corporate Governance at University of Delaware’s business school. Proponents say proxy access should improve returns by forcing boards to be more responsive to shareholders. Without proxy access, investors keen to shake up boards must wage costly campaigns and foot the bill for distributing their own ballots.
Last year, the Securities and Exchange Commission decided not to appeal a federal court ruling throwing out an agency rule that broadly required proxy access at U.S. companies. The agency put the rule on hold in August after business groups sued to overturn it. H-P’s board has come under scrutiny several times in recent years for issues including a spying scandal and its ousting of a popular chief executive. Last year, a shareholder watchdog criticized the involvement of its then-CEO Leo Apotheker in the selection of five new board members. The 3% ownership bar is a high one, however, as only four H-P shareholders own that much of the technology company, according to filings.
Back in December, I blogged about how SIFMA and the International Swaps and Derivatives Association filed a complaint in US District Court for DC to challenge the CFTC’s new rule that seeks to curb excessive speculation (like proxy access, this rule was approved 3-2 by the CFTC Commissioners). The groups had petitioned the higher US Court of Appeals for the DC Circuit to hear the case – which is the court that ruled against the SEC in the proxy access lawsuit filed by the Business Roundtable and US Chamber of Commerce. And like that lawsuit, this one claims the CFTC didn’t conduct a proper cost-benefit analysis. In his “Dodd-Frank.com Blog,” Steve Quinlivan notes that the US Court of Appeals for the District of Columbia Circuit recently dismissed the petition for review.
In this report issued a few weeks ago, the SEC’s Inspector General provided its latest review of Dodd-Frank rulemaking’s cost-benefit analysis.
More on “Is Corp Fin Too Lenient with Waiver Letters?”
Last week, I blogged a note from an anonymous member – which I had received before the NY Times made front-page news of its own thoughts – about Corp Fin’s practice of considering waiver requests for being an “ineligible issuer” under Rule 405.
I received a number of emails from members who stated that their experience with the Staff has been contrary to what the anonymous member wrote. They noted they had submitted a request to Corp Fin and struck out – as a result, they thought the Staff was pretty miserly in granting these requests. So I the NY Times’ article perhaps was driven by the often erroneous perception that regulators are in the back pocket of Wall Street. I don’t think this perception is necessarily fair, but “it is what it is” in this post-financial crisis era…
On Friday, the SEC announced that it had replaced outgoing PCAOB board member Dan Goelzer (the last remaining “founding” board member) with Jeanette Franzel, who currently “leads all aspects of GAO’s financial audit oversight of the U.S. federal government.” The SEC’s press release included welcomes from Chair Schapiro and Chief Accountant Kroeker. But in the first of its kind, as noted in this Reuters article, SEC Commissioner Luis Aguilar issued the following separate dissent:
Today, the Commission has failed to fulfill its legal obligation. It has appointed a member to the Public Company Accounting Oversight Board (“PCAOB”) who has no demonstrable record of investor advocacy. Thus, the Commission has failed to satisfy its basic statutory mandate to appoint an individual who, among other factors, has “a demonstrated commitment to the interests of investors. Accordingly, I do not support and must respectfully dissent for the reasons outlined below.
Congress established the PCAOB in response to scandalous audit failures, like Enron and WorldCom, that cost investors billions. In doing so, Congress entrusted this Commission with the significant responsibility of appointing the members of the PCAOB. In exercising this responsibility, the Commission is required to abide by the statutory criteria to appoint individuals “who have a demonstrated commitment to the interests of investors.”
My objection to this appointment is based on the fact that the Commission must appoint individuals who have “demonstrated commitment to the interests of investors.” This is not the case here. Although the appointee is an experienced government auditor, and I appreciate her years of service, there is nothing in the evidentiary record that reflects a commitment to the interests of investors, or a history of advocacy for investor rights. I believe the Commission is bound to appoint an individual whose actions, public statements, and reputation demonstrate a clear and steadfast advocacy of the rights and interests of investors.
In reaching this decision, I considered many factors in the evidentiary record, including the professional biographies of each of the finalists for this position, my own interviews with the candidates, and the candidates’ published writings and remarks. I also considered the many letters received by the Commission from investors, respected members of the accounting profession and academic community, members of Congress, and others who supported the appointment of an investor advocate.
I also reviewed comment letters previously submitted to the PCAOB by the finalists for this position. In that connection, I was struck that not once in any of the four letters signed by today’s appointee, discussing topics such as the engagement quality review and risk assessment, was there any mention of the interests of investors. In fact, the word “investor” was not mentioned.
This appointment is being made at a critical time for the PCAOB. There is much at stake. The recent financial crisis exposed an auditing process that continues to be seriously flawed. In response, the Board has embarked on various projects to enhance the relevance, credibility and transparency of audits, including important initiatives on auditor independence, audit transparency, and the auditor reporting model. The success of these projects will require a Board fully committed to investors as the owners of public companies, the providers of capital, and the primary beneficiaries of financial statements.
I believe that the Commission has failed to meet its obligation to appoint an individual with “a demonstrated commitment to the interests of investors. Unfortunately, as a result, I am forced to dissent.
Carlyle Drops Forced-Arbitration Clause In IPO
After heavy criticism – as noted in this WSJ article – the Carlyle Group abandoned a plan to ban shareholders from filing class-action lawsuits, a plan that could have delayed the private-equity firm’s IPO. Here is my blog from two weeks ago noting the criticism.
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:
– A Closer Look at Proxy Access Proposals
– Should Annual Meetings Be Held Less Often?
– A Tipping Point for Social and Environmental Issues?
– Survey on Shareholder Proposals
– 2011 Proxy Season Review: United Kingdom
A few months ago, I received this from an anonymous member:
You may have seen the recent article in the NY Times regarding how firms continue to make promises in settlements to the SEC and when those promises are broken, nothing happens. For me, this story triggered another topic that I think goes largely unnoticed, waiver letters for being an “ineligible issuer” under Rule 405. Under the Staff’s WKSI waiver standard, it seems like it’s not difficult to convince Corp Fin to take a position that grants leniency to a company that settles with the SEC for violating anti-fraud provisions of the securities laws (especially for failing to disclosure material information) such as this JPMorgan waiver letter. I think this stuff flies under the radar – even though publicly posted on the SEC’s website – because the benefits of waivers are not apparent to many that are not securities lawyers.
I appreciate the adverse implications of not granting waiver letters in these situations because eligibility to be in the market is necessary for many of their offered products. But this just begs the question, what’s the point of having an ineligible issuer rule if issuers know that it is not enforced anyway?
Well, this no longer is an obscure topic just for securities lawyers as the NY Times today ran this front-page article entitled “SEC Is Avoiding Tough Sanctions for Large Banks.” The article cites a bunch of waiver stats over the past decade. Here is an excerpt with a quote from Corp Fin Director Meredith Cross:
“The purpose of taking away this simplified path to capital is to protect investors, not to punish a company,” said Meredith B. Cross, the S.E.C.’s corporation finance director, referring to the fast-track offering privilege. “You’re not seeing the times that waivers aren’t being granted, because the companies don’t ask when they know the answer will be no.”
Wisconsin Judge Approves SEC Settlement Without Changes
As noted in this NY Times article, a Wisconsin judge who raised some of the same questions posed by Judge Jed Rakoff in the proposed SEC-Citigroup settlement six weeks ago has decided to bless the SEC’s settlement with Koss Corporation after all – a nice victory for the SEC (this Wisconsin case was first noted in this blog of mine). The SEC was able to keep its proposed terms but agreed to redraft its settlement to more explicitly spell out all of the remedial actions required of Koss. It will be interesting to see how the SEC fares with Judge Rakoff…
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor 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:
– Dodd-Frank: Revised Whistleblower Policies
– Top 10 Whistleblower Decisions of 2011
– Should/Must Corporate Minutes Be Signed?
– Conflicts of Interest: Serving on Another Company’s Board
– More on “Ringing the NYSE’s Bell”
Oh, the Twitterverse was a-humming yesterday about 4:45 pm eastern as news of Facebook’s filing of a Form S-1 – with a 150-page prospectus – went viral. Countless folks began “live tweeting” their read of all the lurid details (use “$FB” as a search term in your Tweetdeck to view the stream of comments), including this letter from Mark Zuckerberg (“building a better world, blah, blah” – see this NY Time’s article about FB’s social mission). Meanwhile, the SEC’s Edgar felt the opposite of this exhibit from the S-1 as the level of traffic to the SEC’s database went through the roof. Many members emailed me to say they couldn’t access Edgar for more than an hour…
Updated Study: Benchmarking the Number of “Executive Officers”
Last year at this time, I worked with LogixData to produce a comprehensive benchmarking study (posted in our “Executive Officer Determination” Practice Area) to help companies benchmark against their peers regarding the number of employees designated as “executive officers.” LogixData has now produced updated numbers to include 2011data (and more such as top index analysis as well as a SIC distribution). Last year’s study is still useful for my narrative analysis of the law of the land in this area, etc…
Check out this video featuring Don Cornelius of Soul Train, who passed away yesterday. Once you get past the intro, you will see moves that you won’t believe…
Transcript: “Activist Profiles and Playbooks”
We have posted the transcript for the DealLawyers.com webcast: “Activist Profiles and Playbooks.”
We have posted the survey results regarding the latest disclosure committees trends, repeated below:
1. Back in mid-2008, we conducted a survey on disclosure committees (here are the results) – we are now canvassing to see if practices have changed. Our company:
– Has a disclosure committee – 96.7%
– Doesn’t have a disclosure committee (if you check this box, you are done) – 3.3%
2. Our disclosure committee has:
– More than 10 members – 32.1%
– Between 8-9 members – 39.3%
– Between 6-7 members – 21.4%
– Between 4-5 members – 7.14%
– Has less than 4 members – 0%
3. Our disclosure committee has the following types of members:
– CEO – 27.6%
– CFO – 75.9%
– Controller – 86.2%
– General Counsel – 86.2%
– Securities Counsel – 82.8%
– Compliance or Risk Management – 41.4%
– Investor Relations Officer – 72.4%
– Internal Auditor – 55.2%
– Officer from a Business Unit – 55.2%
– Other – 55.2%
4. For our disclosure committee:
– Someone takes minutes of meetings – 72.4%
– We don’t keep minutes of our meetings – 27.6%
Please take a moment to participate in this “Quick Survey on Blackout Periods” – and this “Quick Survey on Pay Ratios.”
Webcast: “Ethics, Conflicts and Privilege Issues in Executive Compensation”
Tune in tomorrow for the CompensationStandards.com webcast – “Ethics, Conflicts and Privilege Issues in Executive Compensation” – to hear Christie Daly of Bryan Cave HRO, Mike Melbinger of Winston & Strawn and Mark Poerio of Paul Hastings analyze the tricky ethical, conflicts and privilege issues involved in setting executive pay. Please print out their presentation in advance.
Our February Eminders is Posted!
We have posted the February issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
As noted in Gibson Dunn’s new “Securities Regulation & Corporate Governance Monitor,” the changes to Forms 10-K and 10-Q caused by the new mine safety rules took effect on Friday. The headings for Part I, Item 4 of Form 10-K and Part II, Item 4 of Form 10-Q now read “Mine Safety Disclosures” (previously those headings were the more distinguished “Removed and Reserved”).
As noted in Gibson Dunn’s blog, the SEC estimated that only approximately 100 companies would be subject to the new rules – but all other companies still should make this caption change and then can state that the item is “not applicable.” Note that the blank Form 10-K and Form 10-Q posted on the SEC’s site have not yet been updated…
ISS Issues 20 FAQs on Its ’12 Compensation Policies
Last week, ISS issued this set of FAQs about its newly-minted compensation policies; 15 about pay-for-performance, 3 about management say-on-pay responsiveness and 2 about equity plans.
Transcript: “Pat McGurn’s Forecast for 2012 Proxy Season: Wild and Woolly”
We have posted the transcript for our recent webcast: “Pat McGurn’s Forecast for 2012 Proxy Season: Wild and Woolly.”
As noted in its Form 8-K, Actuant is the first company holding its annual meeting in 2012 to fail to gain majority support for its say-on-pay with only 46% voting in favor. A list of the Form 8-Ks filed by the “failed” companies is posted in CompensationStandards.com’s “Say-on-Pay” Practice Area.
More on “Federal Court Dismisses Umpqua Say-on-Pay Lawsuit”
Quite a few members emailed me in response to my recent blog in which I reported news from Wachtell Lipton that a federal court had dismissed one of the say-on-pay lawsuits. As noted in this Reuters article, it’s simply a procedural skirmish at this point as the case was dismissed without prejudice. As noted in the article, the plaintiff’s lawyers intend to continue the case.
Transcript: “The ‘Former’ Corp Fin Staff Speaks”
We have posted the transcript for our recent webcast: “The ‘Former’ Corp Fin Staff Speaks.”
