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."
Last week, the SEC released its final 50-page strategic plan for the next five years – 2010 through 2015 – as required by the Government Performance and Results Act of 1993. A draft of the plan was issued last October, at which time I blogged about how I dislike five-year horizons for any plan since unforeseen events often change priorities and needs (and here is my blog about the SEC’s prior strategic plan).
A quick perusal of the strat plan doesn’t reveal anything earth-shattering. On pages 6-8, the limits of the SEC’s resources – and limited budget – are explored. The Corp Fin-related content mostly is on pages 21-24 and pages 32-35. It appears there will be a survey conducted by the SEC regarding the quality of disclosures and the SEC’s disclosure requirements (a topic that I recently tackled on “The Mentor Blog“). The influence of the new Investor Advisory Committee is felt on pages 36-38.
A New SEC Comment Letter Service: Comment-by-Comment
In this podcast, Ganesh Rajappan of LogixData provides some insight into how LogixData’s SEC comment letter service works (here is a demo), including:
– How does LogixData’s comment letter database differ from the existing databases out there?
– How many SEC comment letters are in your database?
– Can you give an example of how a customer might use the ability to search for comments issued by a specific Corp Fin examiner?
PCAOB “Bars from Association”: A Vague and Ambiguous Standard
It’s great to see more securities lawyers entering into the blogosphere. Michael MacPhail of Holme Roberts has been blogging in his “Securities Defense Blog” about PCAOB investigations, including this one about a potentially vague standard to be barred from practicing before the PCAOB.
Yesterday, the SEC settled Reg FD enforcement charges against Office Depot and two of its executives after they selectively conveyed to analysts and institutional investors that the company would not meet analysts’ earnings estimates. This is another case brought due to its unique circumstances indicating that “signaling” was going on, without overt statements being made. As noted in this Davis Polkmemo, the settlement “is distinctive because the challenged statements appear to have been crafted – unsuccessfully, as it turned out – to walk the FD compliance line by avoiding express references to changes in the company’s business.”
It’s the third Reg FD enforcement action from the SEC in a year, after a four year hiatus. And it makes it a dozen Reg FD enforcement actions that the SEC has brought since Reg FD was adopted a decade ago – see the list in our “Regulation FD” Practice Area.
Congrats to my good friend Brad Bennett for being named FINRA’s Enforcement Head yesterday – that’s one strong cowboy…
Winn-Dixie Fails to Exclude Annual “Say-on-Pay” Proposal
Here is news from Ted Allen of ISS:
The SEC staff has rejected a no-action request by Winn-Dixie Stores to omit a proposal from Schultze Asset Management that seeks an annual “say on pay” vote. The Florida-based grocery retailer argued that it had “substantially implemented” the proposal because its board adopted a governance policy in July that calls for a biennial vote on compensation. Winn-Dixie plans to hold its first advisory vote at its 2010 annual meeting on Nov. 10. The staff of the SEC’s Corporation Finance Division did not agree, noting: “We are therefore unable to conclude that Winn-Dixie’s policies, practices, and procedures compare favorably with the guidelines of the proposal such that Winn-Dixie has substantially implemented the proposal.”
The staff ruling is potentially significant because many U.S. companies likely will seek to hold less frequent advisory votes after the 2011 proxy season, and some activist investors may continue to use shareholder resolutions to press for annual votes. The Dodd-Frank Act requires U.S. issuers to hold a pay vote at their first annual meeting after Jan. 21, 2011, and directs companies to conduct a vote on the frequency of future pay votes at that meeting (and then once every six years). Given this mandated vote on frequency, companies may have better luck in their efforts to exclude similar shareholder proposals next season. However, the SEC may rule differently on 2012 proposals when a frequency vote will not be on corporate ballots.
Our “Q&A Forum”: The Big 6000!
In our “Q&A Forum,” we have blown by query #6000 (although the “real” number is much higher since many of these have follow-up queries). I know this is patting ourselves on the back, but it’s over eight years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been over 19,000 questions answered.
You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis and that any answers don’t contain legal advice.
Not surprisingly, I received quite a bit of member feedback on my recent blog about the Boston Globe article that found many companies incorrectly totaling the amounts in their Summary Compensation Tables. Others are blogging about this story too, such as this entry from Mark Borges in his “Proxy Disclosure Blog.”
Here is a useful response from Jim Brashear of Zix Corporation:
I copied the summary compensation table from one of the SEC filings cited in the recent Boston Globe article on math errors in proxy statements, and I pasted it into this Word document. I wondered if the addition errors could have been avoided by some simple changes to how the Word tables were formatted. Avoided at least while the issuer and its counsel are working on the document in Word, before it gets handed off to the printer and is reformatted.
A lot of lawyers don’t know that you can use Word tables very much like Excel spreadsheets. It’s particularly easy to sum columns and rows of adjacent cells that all contain numbers. If there are intervening cells that are empty or have non-number characters, it’s a bit more complicated to sum the cells, but it can still be done.
In my Word document, the top table is straight from the SEC filing (only names redacted). The bottom table shows how I cleaned up the table to remove the cell “padding”, replaced the dashes with zeros and, most importantly, inserted into the far right column a formula that calculates automatically the sum of the columns to the left. (I left one blank column between Year and Salary so that the formula would not add the year date to the compensation amount.
Inserting a formula is done in Word from the Table menu by selecting Formula. Word will even suggest the correct formula – in this case “=SUM(LEFT)”. Then, the author selects the Number Format to display $ and the commas (delete the cents if you don’t want them). Voila, no more simple addition errors! If there are changes to numbers in the table, you may have to refresh the formula cells by selecting them and pressing F9 – but that refresh happens automatically when the document is printed.
And here is a follow-up from a member: While this would work, since most company’s external reporting departments already prepare the tables in Excel, all you need to do is copy the Excel table in Excel and then paste it into the Word document at the proper location. You can even re-open the table in the Word document while in Word and edit the Excel spreadsheet.
By the way, here is a follow-up article from the Boston Globe that includes some quotes from a SEC spokesperson. I agree with the thoughts in the article from Lynn Turner that it would be impossible for Corp Fin Staff to be involved in checking the math when conducting their disclosure reviews. For me, not only is it impossible, it is impractical. Who would ever think that the team of folks that draft disclosure documents wouldn’t bother to check the math…and is Corp Fin expected to foot every row and column of numbers in the financials too when a filing is selected for review?
The Wall Street Jargon iPhone App
In this podcast, Kirk Davenport of Latham & Watkins describes his firm’s new iPhone application, including:
– What is the Wall Street jargon app?
– How long did it take to create?
– Have there been any surprises since it was launched?
More on our “Proxy Season Blog”
With the proxy season gearing up once more, we are posting 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:
– Gadflies Get Press
– Proxy Plumbing: First Salvos
– Fortune Uses Proxy Democracy to Question Vanguard
– Corp Fin to Issue Rule 14a-8 Staff Legal Bulletin Before ’11 Season
– Proxy Season Review: Majority-Supported Proposals
Comments are due today on the SEC’s concept release regarding reform of the proxy processing system, although I’m sure the SEC will look at your comment letter if it’s only a few days late. Out of the 90 or so comment letters submitted so far, here already have been a number of interesting letters submitted, including these:
There often is a short lag between when comment letters are submitted and when they are posted on the SEC’s site – so I’m sure we will see many more posted in the days to come…
One topic that is being commented upon is whether the cost and burden of tagging proxy statement disclosures in XBRL outweigh the potential benefits. Personally, I don’t see tagging of that type of data being too useful – and I worry that it only feeds the reliance on peer group surveys when setting executive and director compensation (eg. use of datapoints from compensation tables without taking into account the nuances of the circumstances).
White Paper: Transfer Agents Target Broadridge
To provide input for the SEC’s proxy plumbing project, the Securities Transfer Association (known as the “STA”) released a White Paper last week on the differences in issuer costs between the current model and a proposed one in which proxy distribution services would be subject to more market competition. The White Paper compares actual invoices and the average pricing used by transfer agents in handling proxy processing services – and found that the average cost savings for different types of issuers ranged substantially (from 20-70%) under their proposed model.
Poll: Reason for Not Submitted a Proxy Plumbing Comment Letter
Given how busy folks are – and how many Dodd-Frank proposals we will need to comment upon – I can understand why only 90 comment letters have been submitted so far on the SEC’s proxy plumbing concept release. Here is an anonymous poll to survey why you haven’t submitted a letter:
Note that these proposals weren’t a product of an open Commission meeting. The SEC smartly issued this set of proposals without the fanfare of an open meeting, which is not required if all of the Commissioners sign an order (ie. seriatim). Probably since these proposals are required by Dodd-Frank – and time is of the essence – the SEC went with what used to be the traditional route of getting a proposal out of the SEC (more recently, nearly all proposals are the product of open Commission meetings; it wasn’t that way a decade ago).
Say-on-Pay: What Should September 30th Fiscal Year End Companies Do?
You may recall that Dodd-Frank requires that say-on-pay must be included in proxy statements relating to a company’s first annual or other meeting of shareholders occurring on or after January 21, 2011 – regardless of whether the SEC has adopted final rules by then (that’s just for say-on-pay; the golden parachute provision is not self-executing and the SEC states that provision won’t apply to companies until it finalizes those rules). The comment deadline for both rulemakings is November 18th – so it will be a tight squeeze for the SEC to adopt final rules by January 21st (but it is doable).
I have been hearing from a number of companies with 9/30 fiscal year ends that were freaking out because they didn’t have SEC guidance on a number of issues. Now, they have some guidance – even though it isn’t final. One big issue for these companies related to their proxy preparation schedule because they didn’t have any relief from the preliminary proxy filing requirements yet. Fortunately, in the SEC’s proposing release, the SEC does provide some relief on page 65. Here is that excerpt:
Rule 14a-6 currently requires the filing of a preliminary proxy statement at least ten days before the proxy is sent or mailed to shareholders unless the meeting relates only to the matters specified by Rule 14a-6(a). Until we take final action to implement Exchange Act Section 14A, we will not object if issuers do not file proxy material in preliminary form if the only matters that would require a filing in preliminary form are the say-on-pay vote and frequency of say-on-pay vote required by Section 14A(a).
In the proposing release, the SEC also states that these companies are permitted to conduct the frequency vote on the basis of the proposed four choices – every year, every two years, every three years, or abstain.
The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank
This is a “biggie.” Tune in tomorrow for the 75-minute webcast – “The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank” – to hear former Senior Staffers Brian Breheny of Skadden Arps; Marty Dunn of O’Melveny & Myers; John Huber of Latham & Watkins; Brian Lane of Gibson Dunn and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster weigh in on what do now that the proxy access rules are stalled, plus analysis of all the latest from the SEC’s Corp Fin on Dodd-Frank related-matters – including say-on-pay and more. If you’re not yet a member of TheCorporateCounsel.net, try a no-risk trial for 2011 and gain access to this webcast for free.
In the wake of the SEC’s adoption of a rule change to Regulation FD that carries out the repeal of the rating agency exemption – as dictated by Dodd-Frank – I conducted a poll about how companies would try to handle rating agency communications going forward. The poll results showed that 53% would try to negotiate stand-alone agreements with the agencies – with 23% being comfortable relying on the internal confidentiality policies of the agencies (15% were too busy with access to know about the rule changes; 13% said “what me worry?”).
Initially after the repeal, the major rating agencies had differing approaches as to whether they would enter into confidentiality agreements (most would upon request; but some wouldn’t) – but during the past few days, it seems that they have all come around to routinely including uniform confidentiality agreements into their agreements with issuers going forward. It doesn’t appear that the rating agencies are willing to negotiate the terms of their uniform agreements – but I have heard that they may be willing to responded to questions with “interpretations” that may be helpful. (So for those keeping track of this fluid situation, these statements from Moody’s and Fitch appear to be old news already).
Does it matter that companies enter into a confidentiality agreement with a rating agency? I think so. I recently polled my advisory board about whether they have ever heard of circumstances where a rating agency has leaked confidential information – and I did hear of a few aberrations where it did happen. So getting some extra protection beyond an agency’s own code of conduct seems like a smart thing to do…
As noted in some of the memos posted in our “Regulation FD” Practice Area, some rating agencies have issued statements that say that they believe that Reg FD doesn’t apply to them notwithstanding the exemption repeal dictated by Dodd-Frank.
SEC Seeks Comment Ahead of Internal Controls Study
Last Thursday, the SEC posted this request for comment ahead of a study mandated by Section 989G(b) of Dodd-Frank regarding how the SEC could reduce the burden of complying with Section 404(b) of Sarbanes-Oxley for companies with a public float between $75 million and $250 million. The study seeks to determine whether Dodd-Frank’s exemption for companies with a float under $75 million should be extended to more companies – and it must be completed within nine months of Dodd-Frank’s passage.
The SEC’s request identifies 23 specific items for comment. This new study was mandated notwithstanding the SEC’s Office of Economic Analysis publishing a 139-page study on the same topic last October…
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:
– RealNetworks’ Rule 10b5-1 Trading Plan Disclosure
– Diversity in the Boardroom is Important and, Unfortunately, Still Rare
– Insider Trading and Suspicious Trading, Not the Same
– Marty Lipton’s “The Spotlight on Boards”
– SEC Approves PCAOB Disciplinary Order
On Monday, the Boston Globe ran this breathless story at the top of page one. I went into it expecting an analysis about the judgment calls we all make in drafting compensation disclosure and thought there might be journalistic oversimplification as typically happens in the mass media. Some might say that pay disclosure is not necessarily a science, but an art.
However, one has to concede that math is still a science – and the Globe’s research certainly raises eyebrows about how seriously some companies are taking their pay disclosures. The Globe looked at about 210 local company proxy statements, adding up the columns in the summary compensation tables. It turns out that 55 times – at 34 companies – the totals of the columns did not match the number the company reported in the “Total” column. Um, that’s over 15%.
At most of these companies, the Globe determined (or the company conceded) that it was some sort of math or clerical error – transposed numbers, extra digits, etc. In some cases, when the company updated the stock compensation numbers for the past years using the SEC’s new methodology, they just changed the column in the middle of the table but didn’t update the total. Truly, the devil is always in the details and I would urge companies to double-check their numbers this year as I imagine a lot of newspapers are going to be following the Globe’s lead and do the math themselves in their local areas. Thanks to Mike Andresino of Posternak for bringing the article to my attention!
Our Timely Ten Tips: Preparing Say-on-Pay Disclosure Now
We have just posted the Fall 2010 issue of the Compensation Standards newsletter, in which Mark Borges provides ten timely tips for preparing say-on-pay disclosure. Note that we are making a big change for CompensationStandards.com for 2011 – we are moving the online version of “Lynn, Borges & Romanek’s Executive Compensation Disclosure Treatise & Reporting Guide” onto that site. So that when you try a no-risk trial or renew for 2011 – remember that all memberships expire at the end of the year – you gain immediate access to it. The 2011 version of the Treatise will be posted within the next few weeks; the 2010 version is posted now.
Poll: How to Handle Rating Agency Communications After Reg FD Repeal?
On Monday, the SEC’s recent Regulation FD adopting release was published in the Federal Register – so October 4th is the effective date for the removal of the rating agency exemption that I blogged about last week.
In that blog, I noted that companies may want to pursue stand-alone confidentiality agreements with the agencies. Now I’m hearing from some companies that they have approached a few agencies and have heard pushback from them about entering into stand-alone agreements. Rather, I hear these agencies believe that companies can rely upon the internal confidentiality policies that the agencies already have. Here is a poll on what your company intends to do:
Yesterday, in this 2-page order, the SEC granted a stay of its proxy access rules pending resolution of the Business Roundtable and Chamber of Commerce petition for review with the DC Circuit Court of Appeals (I blogged about the lawsuit last week) so that the SEC could join the groups in seeking an expedited review by the court. As expected, the SEC’s order does not address the merits of the plaintiff’s claims.
In its order, the SEC also delayed the amendment to Rule 14a-8, which would have allowed shareholders to file bylaw proposals that seek more permissive access procedures. That rule change was not challenged by the plaintiffs – but he SEC said it decided to delay the implementation of this rule change, “because the amendment to Rule 14a-8 was designed to complement Rule 14a-11 and is intertwined, and there is a potential for confusion if the amendment to Rule 14a-8 were to become effective while Rule 14a-11 is stayed.”
Proxy Access: What is the Timing for the Court’s “Expedited Review”?
Prior to this stay, the new rules were scheduled to become effective November 15, 2010 – and apply to companies that mailed proxy materials mailed for its last annual meeting after March 13, 2010. As the SEC’s order was silent about how to determine the manner in which the stay will ultimately impact the effective date of the rules, I have been bombarded with questions about what the possible timing of the expedited review.
Here is what Cooley is saying – excerpted from this memo – about timing: “Even in highly expedited cases, in most of the courts of appeals, each party will have about three weeks for their principal briefs and a week or more for the reply. We think that, in a case like this, there is likely to be argument heard. As a result, we estimate that it may take a few months to resolve, which means that the potential application of proxy access for this proxy season will likely be in limbo for many issuers until more is known about the schedule. The court has not yet set a briefing schedule, nor is there anything on the Court’s docket showing that it has received a motion to expedite the briefing schedule.”
This seems right as this BusinessWeek article notes a SEC spokesperson as saying this will be resolved in “late Spring”…
Interestingly, dozens of law firms already have sent out emails regarding this development – but these firms had remained silent when the lawsuit was filed last week. Notably, very few of the emails dealt with this timing issue, which I imagine is the one item that folks want to know about most.
Proxy Access: Corp Fin’s Position on the Application of Advance Notice Bylaws
Below is a Corp Fin position as repeated from this memo from Cooley (a position which was also articulated by Corp Fin Director Meredith Cross at a New York Chapter meeting of the Society of Corporate Secretaries on Friday):
An SEC staff member has just responded to a question I had posed to the staff about a month ago with regard to the viability of advance notice bylaws in connection with Rule 14a-11 (proxy access) nominations. While it’s clear that advance notice bylaws apply with regard to nominations made outside of the proxy access rules, it was not clear whether the company could, in the SEC’s view at least, preclude a proxy access candidate’s nomination at the meeting if the nominating shareholder did not comply with the company’s advance notice bylaws. Most firms took the position that proxy access “trumped” the advance notice bylaws and that the company could not preclude the nomination and election of the candidate at the meeting, even if the nominating shareholder did not comply with the advance notice provisions. The staff member told me that, to the contrary, the staff’s position is that the advance notice bylaws cannot be ignored.
Moreover, a predicate to Rule 14a-11 is that there is a state law right to nominate, and failure to comply with the advance notice bylaw means, in effect, that there is no state law right to nominate. As a result, not only could the nomination of the candidate be precluded at the meeting, but, surprisingly, the company could use the fact of noncompliance to exclude the nominee from the proxy, subject to the company’s following the process outlined by the SEC for exclusion of nominees, including notice to the SEC.
The question of director qualifications is, from the staff’s perspective, a slightly different animal. It’s clear from the release that if the bylaws include reasonable director qualifications that relate to the nominee’s ability to serve as a director, then a Rule 14a-11 nominee must be included in the proxy statement even if the nominee does not satisfy the qualifications. The company could, however, refuse to seat the director, even if elected, in compliance with Delaware (or other state) law. But what if the bylaws were phrased to prevent not only service as a director, but the nomination of a director that did not meet the reasonable qualifications in the bylaws? Again, if the bylaws cut off the right to nominate the director, then the 14a-11 nominee could be excluded, not just from nomination, but also from the proxy statement.
However, in advising the SEC that the company intended to exclude the nominee, the company would need to show that the qualification was generally applicable across the board, not one that could be satisfied prior to nomination (such as a qualification that the nominee be a shareholder) and that the qualification would be a valid limitation on the right to nominate under Delaware (or other state) law. (I assume that the difference with regard to advance notice provisions is that it’s widely accepted that reasonable advance notice provisions are permitted under Delaware law to preclude nominations, whereas qualification requirements for the nomination of directors was less clear (at least to the staff if not to Delaware counsel), so the threshold to convince the staff regarding qualifications would be higher.)
The staff member said that the staff would, however, look askance at a bylaw provision that suggested that the company was really just trying to “opt out” of Rule 14a-11. His example of that type of circumvention was a director qualifications bylaw that provided that an individual could not be nominated if the nomination occurred during the open window period for proxy access nominations, thus creating an unavoidable conflict with Rule 14a-11.
This interpretation seems to open up the field for bylaw limitations on the right to nominate, provided that they would could be supported as valid under Delaware law. Of course, the summary above is just the staff’s take on the matter. A nominating shareholder that wants to contest a company’s attempt to exclude a nominee could well end up seeking a judicial determination, which could easily have a different result.
Proxy Access: The Debate Over What to Do If the Rules Stick
While we wait to see what happens with the SEC’s new proxy access rules, I thought it might be useful to point out the heated debate over what types of actions that companies might take if access “sticks.” Professor JW Verret has been publishing his ideas about what type of defenses companies might consider adopting in the wake of access – and here is some commentary in response.
On Friday, Corp Fin updated its Financial Reporting Manual for issues related to Regulation S-X Rule 3-09, Rule 3-10, and Rule 3-16, as well as other changes (eg. Topic 1500 of the Manual). The revisions are reflected as of June 30th and aren’t attributable to Dodd-Frank. Corp Fin has been updating the Manual much more frequently than in the past, deciding to do so a little bit at a time rather than major rewrites as in the past.
Dodd-Frank: The SEC Fleshes Out Its October Rulemaking Schedule
On Friday, the SEC listed the specific rulemakings that are planned for October in this schedule. As noted earlier, the schedule includes proposals for say-on-pay and say-on-golden parachutes, as well as disclosure of voting by institutional money managers on executive pay. Proposals regarding compensation committee/advisor independence; mine safety and disclosure relating to resource extraction issuers are not coming until November.
Among other planned rulemakings, October also includes a request for comment on a study regarding reducing the costs of smaller companies complying with Section 404 of Sarbanes-Oxley (ie. internal controls). The SEC will also establish five new Offices this month: Whistleblowers, Credit Ratings, Investor Advocate, Women and Minority Inclusion and Municipal Securities. Here is testimony before the Senate Banking Committee from SEC Chair Schapiro regarding how the rulemaking is proceeding.
On Friday, the SEC also issued its report on why the market suddenly crashed back in May – as noted in this NY Times article, a single $4 billion trade led to the “flash crash.” Scary…
Holding the Virtual Annual Meeting: Factors to Consider and Practice Pointers
We have posted the transcript for the recent webcast: “Holding the Virtual Annual Meeting: Factors to Consider and Practice Pointers.”
Showing just how hard this blogging stuff can be, I am blogging a slight correction to my recent blog in which I complained how folks were coming to the wrong conclusion about which companies will have to deal with proxy access during the upcoming proxy season – and then I mentioned March 15, 2010 as the D-Day, which is technically incorrect.
Thanks to Todd Bloomquist of Winston & Strawn, who bothered to do the math and notes that “if a company mailed its proxy materials on Saturday, March 13, 2010, then the 120-day count would fall on November 13, 2010. Because November 13, 2010 is a Saturday, the proxy access notification window would actually be open for one day on Monday, November 15, 2010 under Instruction 1 to Rule 14a-11(b)(10).” In practice, I’m not sure it matters much because a quick Edgar search reveals that no companies mailed on that Saturday (so March 15th essentially is the threshold date in practical terms).
In erroneously pegging March 15th as the D-Day, I did what I think a lot of other folks have done – simply took the example provided by the SEC Staff during its open Commission meeting and moved the dates without thinking about how the weekend stuff would impact the calculation (in other words, few folks bothered to do the math themselves – I still haven’t!). Of course, this analysis is moot if the Business Roundtable and Chamber of Commerce are victorious in their motion for a stay of the effectiveness of the SEC’s new access rules (as I blogged about yesterday).
Trust me, it’s hard to blog daily and not occasionally get something wrong or offend someone accidentally. Particularly since most breaking news items come at the end of the day – and therefore the window to conduct research to ensure your analysis is correct is somewhat limited (and sometimes feels like a moving target). The community adds much more value than I possibly could alone – please keep it coming.
Thankfully my blogs have never been so controversial that I had to quit in order to protect my family, as recently happened to Prof. Todd Henderson of the “Truth on the Market” blog (see this Forbes blog).
More on “Dodd-Frank: SEC Removes Rating Agency Exemption from Reg FD”
A prime example of the challenges of blogging is how I needed to update my Reg FD piece yesterday morning to add some thoughts from Nancy Wojtas that I hadn’t seen anyone else muse about. In that updated blog, I noted the possibility that a Regulation FD obligation may be triggered if a rating agency were deemed to be acting as an agent of the issuer (I did call it a “stretch”). A member emailed these thoughts on that issue:
Even if a rating agency would be deemed an agent of the issuer, there should not be a problem, because the communication to the rating agency (as an agent) should be covered by the “trust and confidence” exception, and then the rating agency’s disclosures (at least for Moody’s, S&P and Fitch) would be FD compliant, since they always announce their ratings in press releases.
Rating agencies are not in the fourth category of covered persons under FD (a person “Who is a holder of the issuer’s securities, under circumstances in which it is reasonably foreseeable that the person will purchase or sell the issuer’s securities on the basis of the information.”) because of the requirements of being an NRSRO. Specifically, Section 15E(g) and Rule 17g-4 under the Securities Exchange Act of 1934 requires that NRSROs implement and maintain policies prohibiting its employees from inappropriately communicating information they learn when providing ratings services or engaging in transactions in securities (including derivatives) when they possess material, non-public informa¬tion or confidential information concerning the issuer of such securities. Thus, there is a reasonable basis for concluding that NRSROs and their employees would not be expected to trade securities based on information that issuers furnish an NRSRO.
Ironically, it was a prior Congressional action, the Credit Rating Agency Reform Act of 2006, that took rating agencies out of FD. That was the Act that amended the definition of investment adviser so that Section 2(a)(11)(F) of the Investment Adviser’s Act specifically excludes NRSROs (unless such organization engages in issuing recommendations as to purchasing, selling, or holding securities or in managing assets, consisting in whole or in part of securities, on behalf of others, which the major ratings agencies don’t). That was the same Act that created 15E(g) imposing the confidentiality requirements on NRSROs.
I do note that the few law firm memos I have seen so far on this topic vary in their analysis of this rule change – so I don’t feel so bad about needing to update my blog early yesterday. Note that if you read this blog via RSS feed or through Knowledge Mosaic (which populates its list of blogs thru RSS feeds), you likely are not reading the “final” product. I often tweak the blog once or twice right after it’s posted. You may be better off inputting your email address on the left side of this blog – which alerts you to when our daily blog is posted and you can read the genuine article.
Our October Eminders is Posted!
We have posted the October issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
