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."
A question you need to ask yourself every year. Here is some input from Richard Blake of Wilson Sonsini:
Once Dodd-Frank rules are finalized and effective, there will be a number of changes to the D&O questionnaires including – but not limited to – compensation committee independence requirements. But for now, the only thing that has been proposed that could affect proxies, and that likely will be effective for this proxy season, are the say-on-pay rules – and note that say-on-pay is mandatory for this proxy season even if the SEC doesn’t finalize its rules (although that’s not the case for say-on-golden parachute).
I think the only thing that could affect D&O questionnaires apart from say-on-pay is the inclusion of new Reg. S-K Item 402(t) – disclosure of “golden parachute compensation” – which would be different and broader than the disclosure in Item 402(j), which is likely already included in the questionnaires. The Item 402(t) disclosure need only be provided if the company wants to take advantage of the SEC rules that say that they don’t need to take a say-on-golden-parachutes-payments vote upon an acquisition event if they previously received a favorable say-on-pay vote that included Item 402(t) disclosure. So sort of a company’s choice as to what it wants to do, particularly since some companies don’t ask about compensation in the questionnaire since they already know what they are paying their executives.
Gearing Up for Say-on-Pay: What Clients Are Asking Now
Tune in tomorrow for this CompensationStandards.com webcast – “Gearing Up for Say-on-Pay: What Clients Are Asking Now” – featuring Towers Watson’s Eric Larre; Semler Brossy’s Blair Jones, Pay Governance’s Ira Kay, Deloitte Consulting’s Mike Kesner and Verizon’s Mary Lou Weber as they provide guidance about how you can put your best foot forward with shareholders to help gain their approval on the ballot. This is the first of a trio of say-on-pay webcasts on CompensationStandards.com – renew now for 2011 as all memberships expire at year end. Or if you are not yet a member of that site, try a 2011 no-risk trial and gain access to this webcast for free.
As I belatedly blogged on Tuesday, this blog was selected by LexisNexis as a “Top 25 Business Law Blog” last week – and then the 25 blogs were pitted against each other in a short voting contest. I’m proud to say that we easily emerged as #1 – as noted in this announcement – garnering 36% of the total vote! Thanks to those that bothered to vote – your karma will be rewarded. We are now 2-for-2 as this blog won the ABA Law Journal’s voting contest for the best legal blog earlier this year.
The son of a friend of mine has kicked off a new webisode series called “Naked Man” on YouTube and iTunes. Despite the title, the videos are “clean” and thus safe for work. The series’ tag line is “In a world full of danger, a hero arrives. But why is he naked?” Subscribe to receive new episodes as they are rolled out…
Political Spending Shareholder Proposals: Chamber Board Members Targeted
Yesterday, a group of investors issued this press release noting that shareholder proposals regarding political spending were being filed at four companies – Accenture, IBM, Pepsi and Pfizer – who have directors that also sit on the board of the Chamber of Commerce. This tactic of challenging companies more broadly to review their policies and oversight of political expenditures by targeting a specific trade association is interesting and perhaps a harbinger of things to come.
According to the press release, these companies were selected due to their strong governance records (as well as vendor policies in three of the cases). The release also notes that more proposals likely would be filed (did you know that the Chamber’s board has representatives from over 100 companies?). Finally, the release has a sample shareholder proposal at the bottom of it…
Yesterday, the SEC extended the compliance date for amendments to Regulation SHO by pushing it out a few months to February 28th. The original compliance date was next Wednesday, November 10th.
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:
– Apple’s Earnings Release: Did It Go Out on the Wire?
– Is Your CEO Being Arrested for DWI/DUI Material?
– Whistleblower Complaints: Likely to Rise with Heightened Emphasis on Corporate Bounty Hunters
– Delaware Court Permits Stockholders to Shorten Term of Airgas Staggered Board
– Disclosure of Adviser Conflicts: When Is It Enough?
It was way back in June that the constitutionality of the SEC’s oversight over the PCAOB was upheld by the US Supreme Court. As I noted in this blog, the Sarbanes-Oxley fix dictated by SCOTUS was that the SEC can remove PCAOB board members at will going forward.
While the SEC waited for the outcome of that decision, the openings on the PCAOB board piled up. That was understandable given the uncertainty over the outcome and it may have been difficult to find a qualified candidate. But time has passed since certainty has been restored. Today, there are three openings – although two of them are filled by board members whose terms have expired (Bill Gradison and Charley Niemeier’s terms ended one and two years ago, respectively). Dan Goelzer has been Acting Chair since July 31, 2009.
On Monday, the SEC issued these written procedures for appointment of a member or chair of the PCAOB. These procedures are actually a little abbreviated from the procedures announced during Chair Cox’s term – so I doubt their development was a roadblock to filling board slots. Maybe now with the mid-term elections behind us, there will be some movement on this important task…
Dodd-Frank: SEC Proposes New Whistleblower Bounty Program
Yesterday, at an open Commission meeting, to propose a new whistleblower program as required by Dodd-Frank. The proposing release is already available – comments are due by December 17th. Here is the press release – and here’s SEC Chair Schapiro’s opening remarks.
The SEC found the development of these rules especially challenging because of the potential for unintended consequences (e.g., the possibility that the rules would undermine internal corporate compliance programs – how about those developed under SOX– or that the SEC would be inundated with spurious or other leads that are not “high quality,” requiring the limited enforcement staff to triage tips.) As a result, the rules attempt to provide balance. For example, the rules propose that, among the criteria for determining the amount of an award, the SEC would take into account whether the matter was first reported internally; however, internal reporting would not be a predicate to making a whistleblower claim. Does this mean that companies will now offer their own financial incentives? Will there be a new wave of lawyers making their livings from these procedures, as with Section 16 and Prop 65?
New York Court of Appeals: Declines to Expand Outside Advisor Liability
A few weeks ago, the New York Court of Appeals ruled on certified questions in two cases: Kirschner v. KPMG (certified by the United States Court of Appeals for the Second Circuit) and Teachers’ Retirement System of Louisiana v. PricewaterhouseCoopers (certified by the Delaware Supreme Court). In the decision, the Court strengthened the in pari delicto defense, which is available to third-party professionals – including accountants or attorneys – who are accused by companies of colluding with, or negligently failing to detect the wrongdoing of, the company’s own management. We are posting memos on the decision in our “Auditor Liability” Practice Area.
Last week, the SEC released this first annual report to Congress regarding the state of its whistleblower program – the report shows that the SEC has put $451.9 million into a new fund to pay whistleblowers (Dodd-Frank requires a minimum of $300 million).Today, the SEC will hold an open Commission meeting to consider proposals to implement Dodd-Frank’s whistleblowing provision, Section 922.
In our “Whistleblower” Practice Area, we’ve posted numerous memos about the SEC’s new bounty program under Dodd-Frank. Perhaps this provision is the “sleeper” of the Act because so many folks have complained about it. For example, read this entry in “The Mentor Blog,” this piece from the “D&O Diary” or this one in Mike Melbinger’s blog on CompensationStandards.com (or this WSJ article or this NY Post piece). All of these express concerns over the provision – and note how companies may want to change their internal whistleblower procedures in response.
Some entrepreneurial lawyers have caught on to the potential pot of gold offered by the new bounty program. For example, as noted in this New York Post article, there is a whistleblowing ad appearing in the theaters of Manhattan. The lawyer’s “SEC Snitch” site includes the commercial. I imagine we are just starting to scratch the surface of how this area will evolve…
Check out this interesting blog from Harvard Business Review about how crowdsourcing could potentially help the SEC’s whistleblowing efforts.
Dodd-Frank: SEC Moves Up “Accredited Investor” Rulemaking Schedule
On Monday, the SEC updated its “Implementation of Dodd-Frank page, mainly to provide more detail about which rulemakings will take place this month (whistleblowing; investment advisers; derivatives; Office of Investor Advocate) – many of which will be considered at today’s open Commission meeting.
The January-March schedule was also updated to move up proposals now set for that time period regarding Sections 413 and 926 that will revise the “accredited investor” standard and who is disqualified to offer securities in an exempt offering. Previously, these were set to come out in the April-July timeframe.
SEC Staff Report: A Review of XBRL Filings
On Monday, the SEC’s Division of Risk, Strategy and Financial Innovation issued this report that reviews interactive data filings submitted by companies during this past summer and lists a number of common issues in the form of “observations” (which I guess will be RiskFin’s terminology rather than any of the vehicles that Corp Fin uses; ie. Staff Legal Bulletins, “Dear CFO” letters, etc.). It doesn’t appear that individual comment letters were sent out to companies whose XBRL filings were reviewed by RiskFin, at least not at this stage of the XBRL roll-out…
I’ve been remiss by not highlighting that this blog was selected by LexisNexis as a “Top 25 Business Law Blog” last week – and that there a voting contest among the 25 that ends today! Here is their announcement – and more importantly, here is where you can vote today. Simply click on the circle to the left of “TheCorporateCounsel.net” (it’s the 9th bullet down) – then click “Vote Now” at the bottom of the page. It takes only a second to do…
How Does Corp Fin Process Confidential Treatment Requests? The SEC’s Inspector General Weighs In
Recently, the SEC’s Inspector General posted this 51-page report that assesses how Corp Fin processes confidential treatment requests. The report contains eight recommendations – Corp Fin agrees with half of them, partially agrees with three others and disagrees with one (Corp Fin’s response starts on page 44 of the PDF).
The IG claims that Corp Fin “is not performing a robust review and examination of many confidential treatment requests.” The report notes that 68% of the CT requests during a discrete period were not reviewed at all after an initial screening – and only 8.5% were selected for a “full” review. Of the 3381 CT requests filed during this 26-month period, only one request was denied.
Based on statements made in the report, it appears that the IG reviewed the requests from companies and evaluated whether the requests were overly broad – but yet relief was granted. Another example of the IG’s inspection is that it criticized instances where the explanation from companies about why the subject matter of the CT request was not necessary for investor protection didn’t address both qualitative and quantitative factors. I’m not sure how the IG’s office has the expertise to fully evaluate how Corp Fin performs in this area – but I guess that is the case for all of their investigations (just like internal auditors). I wonder whether this report will cause Corp Fin Staffers to be less lenient in their grants of relief…
Don’t forget that yesterday, the US Sentencing Commission’s amendments to the Organizational Sentencing Guidelines – including the definition of what constitutes an effective corporate compliance program – went into effect.
The SEC Staff on M&A
Tune in tomorrow for the DealLawyers.com webcast – “The SEC Staff on M&A” – to hear Michele Anderson, Chief of the SEC’s Office of Mergers and Acquisitions, and former senior SEC Staffers Dennis Garris of Alston & Bird and Jim Moloney of Gibson Dunn discuss the latest rulemakings and interpretations from the SEC.
On Friday, Corp Fin posted this “Dear CFO” letter sent recently to companies regarding accounting and disclosure issues related to potential risks and costs associated with mortgage and foreclosure-related activities or exposures. The “Dear CFO” letter is a reminder of the related disclosure obligations to consider in upcoming Form 10-Qs, etc. given the foreclosure mess that has dominated headlines of late.
IFRS: SEC Staff Issues First Progress Report
On Friday, as noted in this press release, Corp Fin and the SEC’s Chief Accounting Office jointly released its first progress report on its Work Plan for consideration of incorporation of IFRS into the US financial reporting system. The Staff will continue to issue these progress reports over time.
Our November Eminders is Posted!
We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
The Rally to Restore Sanity: Sights & Sounds
Here are a few videos from Saturday’s Rally here in DC. The first illustrates the ingenious signs that people created – many were simply inane (this one features a guy in an Abe Lincoln costume with a sign protesting for “No Guns in Theaters”):
This one illustrates how crowded it was. The shot is taken from atop the National Gallery of Art steps – this museum was off to the side and 4 streets down from the stage:
When it comes to ISS and the other proxy advisory firms, there certainly are many strong opinions and views. And the SEC’s proxy plumbing project has brought those to the fore. But even before a back-and-forth debate arose over this CNBC article, I recognized the article for what it is – a mass media piece written by someone without a background in the topic – and I tweeted as such.
For starters, I question the veracity of nearly every other premise in the article. There are an increasing number of proxy contests? I don’t think so. Mutual funds began using proxy advisory services in earnest only after the SEC’s 2003 rule that required disclosure of their voting records? Nope. The author mistakenly thinks the demand for proxy advisory services relates to regulations adopted this decade – but the reality is that institutions have been heavily relying on them ever since the first advisory firm was founded after the DOL’s 1988 Avon letter. I would even go as far as to challenge this tenet of the article – that investors are relying more on proxy advisory firms than ever before. I have no hard facts to support this – but anecdotal evidence indicates that the opposite is true: institutions increasingly are choosing to vote their shares relying more on their own analysis.
I do agree with the article’s last words: “We should at least worry that their advice might fail just like the advice of the credit ratings agencies failed.” But my concerns are probably different than those harbored by the article’s author. So far, ISS has wielded its influence remarkably responsibly – unlike the failings of the credit rating agencies, whose blind-eye actions were a major factor in facilitating the recent financial crisis. Regardless of whether you agree with ISS’s views, it is hard to dispute that ISS has done more to effectuate change in corporate governance practices over the past decade than all other movers and shakers combined. Year after year, ISS raises the bar on what it believes are governance best practices. Again, this is something hard to dispute even if you don’t agree with their view on what are best practices.
My big concern these days is that ISS was sold – yet again – earlier this year, and is rumored to be on the block once more. I worry about ISS being capable of being fully supported by a parent and it’s ability to retain good people (Chris Young already has departed as head of ISS’s M&A advisory unit). I worry that ISS won’t have the resources to do a good job and that their reports will be filled with many errors – and that they will be too short-staffed to take corrections on a timely basis. I worry that a new acquiror might change ISS policies in ways that we can’t imagine. That is what CNBC should be writing about.
But the bigger issue perhaps is what type of world would we have without ISS? Does the corporate community really want to navigate a proxy season in which it must keep track of a set of diverse voting policies from all of their numerous holders? Will companies provide the additional resources to the corporate secretary’s office necessary to conduct this important task? Remember that so few companies have failed to earn majority support for say-on-pay in the United Kingdom because the proxy advisors there drive the process in a way that companies know what likely will pass – and what won’t. Without ISS, we may be looking at the Wild West here and companies could well be operating in the dark heading into their annual meeting as to what the outcome will be.
On the other side of the coin, do beneficial holders want to bear the costs of institutions beefing up their woefully understaffed proxy committees? This is the real reason why many institutions rely on ISS – cost savings. They don’t want to spend the money it takes to analyze proxy materials and make the decision about how to vote. Unlike what CNBC wrote, this is why institutions look to proxy advisory firms – and this is why the DOL wrote the Avon letter in the first place (before that letter, very few institutions bothered to vote).
Note that challenges to the CNBC article have been mounted by Andrew Clearfield in the comments to this blog – also see these thoughts from Nell Minow, one of the original leaders of ISS (you might also want to read Nell’s proxy plumbing comment letter).
CNBC’s John Carney then tries to rebut this criticism in this follow-up piece. He bizarrely claims – by citing an academic paper – that ISS’s influence is overstated. Not sure how this supports his original thesis? Anyways, I disagree with that paper’s conclusion that ISS controls 6-10% of the average vote. In practice, I believe most proxy solicitors – and companies – would opine that percentage should be doubled or even tripled.
For what it’s worth, I provided a clear description of how the ISS process works in our July-August 2010 issue of The Corporate Counsel. I wrote that piece because I had never seen anyone explain in detail what is involved – and knowing that is more important than ever now that we have mandatory say-on-pay.
Time to Comment on ISS’s Policies: Time to Speak Up
On Wednesday, as noted in this press release, ISS opened the comment period for it’s 2011 policies, as it has for the past several years. Here is their policy gateway where you can input your views.
The comment period is short – ending on November 11th. Given the importance of this proxy season, this would be a good time to get involved if you haven’t before. ISS expects to release its 2011 policy updates in late November. Pat McGurn will discuss those during his annual webcast with us on January 27th.
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:
– Analysis: Whether to Regularly Distribute Board Materials to Independent Auditors?
– Why Blogs Ought Not Drive Traffic to Your Law Firm’s Website
– Florida Pension System Calls for Majority Voting
– Film Review: “Wall Street – Money Never Sleeps”
– Delaware Chancery on Privilege Logs and How to Avoid Waiver by Insufficient Detail in a Privilege Log
Here is news from Davis Polk: At its open meeting yesterday, the FASB advised that calendar year-end companies will not be required to comply with the FASB’s proposed new loss contingency disclosure standards in their 2010 Form 10-Ks. The FASB indicated that it does plan to conduct redeliberations on the proposed standard at a future meeting.
The FASB first proposed amendments to its loss contingency disclosure standards in July 2008. Its first proposal met significant opposition due to concerns that it would require disclosure of information that could be prejudicial in litigation. In July 2010, the FASB proposed a revised new loss contingency standard which it had planned to finalize by year-end but commenters voiced the same concerns about this new proposal–mainly that the new standard would require the disclosure of prejudicial information.
Proxy Plumbing: An Interesting Phenomenon
Last week, I posted a “cute” poll on this blog asking about the reasons why you may not have submitted a comment letter to the SEC. 40% said they were too busy with Dodd-Frank; 21% said they were too busy with their Halloween costume; 13% said they don’t comment on concept releases, just proposals and 27% said they had been assimilated.
For this project of the SEC, an interesting phenomenon has arisen. A number of sites and blogs have been created just on this topic – see ProxyPlumbing.com(catch the customized search engine for the plumbing comment letters in the latest entry) and ReformtheProxySystem.com. Somewhat unprecedented and I believe a true harbinger of things to come. Falls in line with my prediction that many more of us will one day be bloggers – and that solicitations for annual meetings will someday be waged much more online…
Dodd-Frank: Repeal of Provision Protecting SEC Exam Confidentiality from FOIA
Before Congress broke for the upcoming election, it took action to repeal Section 929I of Dodd-Frank. Section 929I had amended the 1934 Act to provide the SEC with authority to protect information gathered under its examination authority from both public disclosure under the Freedom of Information Act and disclosure in response to subpoenas in litigation. Just days after the SEC issued guidance concerning how it would apply that provision, Congress repealed Section 929I – despite testimony from SEC Chair Schapiro that the provision would enhance the SEC’s ability to conduct timely and comprehensive examinations. We have posted memos regarding the repeal in our “FOIA” Practice Area.
The SEC’s interpretation of FOIA has not been popular recently. For example, see this NY Times article entitled “Stonewalled by the SEC.” Also see Keith Bishop’s blog about CalPERS and the California Public Records Act.
In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:
– Engagement with shareholders conducting letter-writing campaigns
– The SEC’s transition guidance for Say-on-Pay
– Considerations with implementing share repurchase programs
Dodd-Frank: SEC Solicits Comment on Transnational Securities Fraud Study
Yesterday, the SEC posted this request for comment for its mandated study on the extent to which private rights of action under the antifraud provisions of the 1934 Act should be extended to cover transnational securities fraud (ie. revisiting the extraterritorial scope that was limited by the Supreme Court in Morrison v. National Australia Bank earlier this year). This “Foreign-Cubed” securities class action study is required under Section 929Y of Dodd-Frank – comments are due by February 18th.
Poll: Bob Seger, Yes or No?
This week, you can participate in Dave & Marty’s off-topic discussion through this anonymous poll:
Last week, FINRA issued Regulatory Notice 10-52 relating to free-writing prospectuses – which partially revises a prior ’06 NASD interpretation – to require that FWPs distributed by a broker-dealer in a manner reasonably designed to lead to a “broad unrestricted dissemination” be subject to FINRA’s rules regulating broker-dealer communications with investors (NASD Rules 2210 and 2211). The prior interpretation had excluded FWPs from those rules. It appears that this change in interpretation is immediate.
FINRA states that it is following guidance provided by the SEC as to the scope of the term “broad unrestricted dissemination” – and that the term would include posting FWPs on an unrestricted website or releasing them to the media; whereas it would not include posting FWPs on a restricted website or sending the FWP directly to the broker-dealer’s customers (regardless of the number of customers). The Notice sets forth an example in Endnote 6 that broker-dealers would be required to file a FWP for a public direct participation program within 10 business days of first use.
Note that – as set forth in Endnote 7 to the Notice – FINRA is not withdrawing prior interpretations from ’06 regarding:
– FWPs are exempt from the provisions of NASD Rules 2210 and 2211, as the case may be, if the FWP is not distributed in a manner reasonably designed to lead to broad unrestricted dissemination; and
– FWPs are not subject to the filing requirements of FINRA Rule 5110 or NASD Rule 2720 (to be renumbered FINRA Rule 5121).
There are some funny ones among these New Yorker cartoons, including the one about three financial experts and a jerk. And here are the WaPo’s top quotes from Rocky & Bullwinkle – the creator passed away last week.
Corp Fin Director Meredith Cross Speaks on the Division’s Rulemaking Schedule
On Friday, Corp Fin Director Meredith Cross delivered this speech, explaining the upcoming – and hectic – rulemaking schedule for the Division of Corporation Finance. The timeline is not any different than what was previously spelled out – but it does help to get some gloss on this important topic. It’s Meredith’s first posted speech since she took office.
Dissecting the Modern Poison Pill
We have posted the transcript from the recent DealLawyers.com webcast: “Dissecting the Modern Poison Pill.”
