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."
Below are the results from a recent survey we conducted on the topic of code of ethics and the board:
1. Which board committee typically reviews (and approves) your company’s Code of Ethics policy:
– Corporate Governance committee – 57.9%
– Audit committee – 31.6%
– Compensation committee – 0.0%
– Compliance committee – 0.0%
– Other board committee – 2.6%
– No board committee – 7.9%
2. Which board committee “enforces” (or handles complaints related to) the business conduct provisions of your company’s Code of Ethics such as confidentiality, use of corporate assets, etc.:
– Corporate Governance committee – 31.6%
– Audit committee – 68.4%
– Compensation committee – 0.0%
– Compliance committee – 0.0%
– Other board committee – 2.6%
– No board committee – 0.0%
3. Our company has a separate Code of Ethics – one for our senior financial officers and a separate one for all our employees:
– Yes, they are separate – 16.2%
– No, there is only one Code that applies to both senior financial officers and all employees – 83.8%
4. Our company has a separate Code of Ethics – one for our Board of Directors and a separate one for our employees:
– Yes, they are separate – 13.2%
– No, there is only one Code that applies to both directors and employees – 86.8%
5. When it comes to the Code of Ethics that applies to our directors, our Board:
– Is required to sit through actual ethics training – 18.4%
– Is offered an ethics training class if they wish to sit through it – 15.8%
– Just gets copies of the Board’s Code of Ethics – 65.8%
Please take our new “Quick Survey on Director Education & Orientation.”
Is the PCAOB a Good Cop or Big Flop?
Yesterday, I was surprised to see this lengthy article in the Washington Post analyzing the PCAOB’s tenure so far. My surprise had more to do with a mainstream newspaper choosing this topic than what was in the piece. The article itself is pretty comprehensive and hits most of the marks (one item it doesn’t cover enough is how much the PCAOB is beholden to the SEC and how that may hamstring how it operates).
Speaking of marks, in the article, Lynn Turner is quoted as giving the PCAOB a “B” for inspections, a “D-plus” for standard setting and an “F” for enforcement. When the PCAOB was born, I was concerned that the PCAOB would overly extend the SEC’s enforcement capabilities and efforts. Here is an excerpt from the WaPo article on what has actually transpired:
In the realm of enforcement, the PCAOB shares powers with the SEC and was intended to bolster the SEC’s policing efforts. But Turner, the former SEC official, said the board may have the opposite effect. Because PCAOB investigations unfold in secret, audit firms “are much better off if the action is brought by the PCAOB where it can be kept under wraps, slowed down and dragged out without anyone knowing anything whatsoever about it,” Turner said by e-mail. The board’s acting chairman made a similar point in recent testimony, saying the law gives auditors “an incentive to litigate, rather than settle, in order to delay any adverse publicity.”
So far, the board has issued 31 disciplinary orders, some of which send mixed messages. After the chairman of a computer services company in India confessed to inflating profits for several years and overstating a cash balance by $1 billion, two auditors affiliated with PricewaterhouseCoopers allegedly failed to cooperate with a PCAOB investigation. The board disbarred the auditors in March, about a year after it first sought their testimony.
In 2009, the board disciplined a former Deloitte & Touche auditor for misconduct that allegedly took place more than five years earlier. In another case, a BDO Seidman auditor was disbarred for allegedly backdating records to make it appear that an audit was done properly and for directing a subordinate to do the same. The auditor has since left the firm. Two years after disciplining him, the board reinstated his right to audit public companies. Carcello, the Tennessee professor, said the outcome of some cases left him wondering: “What does it take to be disbarred for life?”
Poll: Do Folks Still Refer to the PCAOB as “Peekaboo”?
As I blogged about back in 2003, the PCAOB strongly dislikes being referred to as “Peekaboo.” When I heard that way back then, I assumed the nickname died a quick death and I have only heard the PCAOB referred to as such on rare occasion. Thus, I was surprised that the WaPo’s article used the term in its subtitle. Participate in this anonymous poll and let us know what you call the PCAOB:
Recently, the European Union Parliament passed a resolution adopting a EU Commission proposal to amend the Prospectus Directive (2003/71/EC) with certain modifications. The EU Commission had started a public comment period (called a “consultation”) over a year ago and issued its proposal in September. The new Prospectus Directive attempts to simplify the disclosure requirements, provide clearer exemptions and ensure that adequate information is provided to retail investors. We have posted memos regarding this development in our “European Law” Practice Area.
True Story: Former SEC Lawyer Claims He’s LeBron’s Dad, Sues
I had to work LeBron somehow into this blog after last night’s ridiculous TV special to announce where he would play next year (long-suffering Wizards fans like me have come to dislike LeBron for his unprofessional theatrics during playoff games; I didn’t watch the “made-for-TV” event). As noted in this AmLaw article, a former SEC attorney has sued LeBron and his mother because he claims he’s LeBron James’ father. The plaintiff accuses James’s mother of engaging in a scheme with her son and their attorneys to cover up the identity of James’s real father – as a 2007 paternity test came back negative with a “0 percent probability of paternity,” as noted in this BusinessWeek article.
This is not the typical paternity suit, where a deadbeat dad is sued for child support; this is the opposite when an alleged deadbeat dad sues for recognition as the father of a celebrity. Two things to note about the plaintiff: he was 29 and LeBron’s mom was 15 when they allegedly had the tryst; and he agreed to resign from the SEC in ’02 when he was paid $230,000 to drop a second EEO complaint against the agency after working there for 19 years.
And in answer to the question I have been emailed a dozen times: no, I don’t know the plaintiff. He worked in the Division of Investment Management and although I knew folks in IM, I never heard of this guy before.
SEC Adopts “Pay-to-Play” Rules
Last week, the SEC adopted new pay-to-play rules in an effort to curtail the corrupting influence of this type of practice by investment advisers; here’s the adopting release. In his new blog covering California law developments, Keith Bishop covers some California specific issues related to the new rules.
Well, it’s really not that shocking given the huge cost (and time) savings and the fact that most of the companies holding virtual-only meetings are pretty small. But it’s shocking to me as I thought I was keeping pretty good tabs on what is happening in this space since it’s a topic I have written about for over a decade.
I just dug out a good half-dozen companies that have conducted all-virtual annual meetings this year that I didn’t know about (thus, in addition to these that I blogged about a few months ago) from inspecting this list from Broadridge. Recall that Broadridge itself held a virtual annual meeting last year, as noted in my blog here.
Note that Broadridge’s list doesn’t break out “all virtual” from “hybrid” meetings. There is a huge difference between these types of meetings as some shareholders have been fighting against companies holding “all virtual” meetings since there is no opportunity to confront management and the board in person. In comparison, hybrid meetings combine the in person experience while providing opportunity for meeting input online – the best of all worlds for shareholders who may not be able to travel. I have broken out which companies have done all virtual amidst these “FAQs on Electronic Stockholders’ Meetings” (it’s the 5th FAQ in Section A).
SEC to Consider “Proxy Plumbing” Concept Release Next Week
Next Wednesday, the SEC is holding an open Commission meeting to vote on issuing its long-awaited “proxy plumbing” concept release. It sounds like the concept release will have hundreds of questions in it for folks to ponder and comment on.
For the newbies out there: a concept release sometimes is used as the first step towards proposing rules. It is relatively rarely used (eg. just two of them in ’09 and only one so far in ’10 – see the SEC’s “Concept Release” page) as a vehicle to draw in input before rules are even drafted since it takes a long time between soliciting comment on a concept, then soliciting comment on a proposal and then finally adopting final rules. So concept releases are primarily used just for broad areas of important change – that will eventually lead to one or more major rulemakings – that can afford to have a timeline of a few years…
Lawyers Transitioning to New Non-Firm Opportunities
In this podcast, Kate Neville of Neville Career Consulting – a former corporate & securities lawyer – provides some insight into how lawyers can change their lot in life, including:
– How can attorneys who are out of work or unhappy in life transfer their skill-sets to positions outside of law firms? To other professions?
– What type of resources are available to attorneys thinking about making a career move to work outside of a firm?
– What can lawyers thinking about this do to help decide if such a change is for them and determine which options to pursue?
Recently, the DC Court of Appeals issued a decision upholding the District Court’s decision denying the IRS access to three documents relating to the tax treatment of two partnerships owned by Dow Chemical that were in the possession of Dow’s auditor, Deloitte. Two of the documents were a memorandum prepared by a Dow in-house accountant and attorney and a tax opinion prepared by Dow’s outside counsel, both of which were furnished to Deloitte in connection with the audit to verify the adequacy of the tax contingency reserve for the transactions. The Court found that these documents were attorney work product entitled to protection, as conceded by the government, and that the protection was not waived by the documents being furnished to Deloitte.
This is the first Court of Appeals decision holding that disclosure to independent auditors did not waive work product protection. The Court found that the auditor is not a potential adversary or conduit to an adversary and Dow had a reasonable expectation that Deloitte would maintain the confidentiality of the documents, relying on professional standards requiring auditors not to disclose confidential client information.
The third document was a memorandum prepared by Deloitte that summarized a meeting with Dow officials and outside counsel to discuss potential litigation over the transactions. The Court held that this memorandum could be work product protected, notwithstanding that it was prepared by the auditor, because it reflected the thoughts and opinions of counsel with respect to anticipated litigation.
The Court rejected the government’s argument that the memorandum could not be work product because it was prepared in conncection with the annual audit, adopting the generally prevailing “because of” anticipated litigation test and rejecting the “primary motivating purpose” test of the Fifth Circuit and both distinguishing the First Circuit Textron decision as based on the particular documents at issue (ordinary tax workpapers) and rejecting Textron to the extent it adopted a more stringent “prepared for use in possible litigation” test as suggested by the dissent in Textron. Because the evidentiary record was insufficient to establish that all the information in the Deloitte memorandum was work product protected, the Court remanded to the District Court to review the memorandum in camera.
The decision is also notable because the Court clearly distinguishes the Supreme Court’s decision in Arthur Young as relating solely to whether there is accountant’s work product protection and not to whether attorney work product protected information continues to be protected in the hands of the accountant. The court notes the importance of preserving this protection because “independent auditors have significant leverage over companies” since “[a]n auditor can essentially compel disclosure by refusing to provide an unqualified opinion otherwise” and waiver under these circumstances “might discourage companies from seeking legal advice and candidly disclosing that information to independent auditors.”
Nasdaq Speaks ’10: Latest Developments and Interpretations
We have posted the transcript for our popular webcast: “Nasdaq Speaks ’10: Latest Developments and Interpretations.”
Poll: What Dodd-Frank Means to Me Personally?
Although the Dodd-Frank Act certainly will mean a sea change in behavior for certain folks, it may not mean much for everyone in our community at the end of the day. Take a moment to indicate what you predict the Act means for you in this anonymous poll:
Recently, the FASB and IASB issued a joint proposed standard for a new approach to revenue recognition that would align the financial reporting of revenue from contracts with customers and related costs and create a single standard for IFRSs and GAAP that would be applied across various industries and capital markets. As noted in this joint press release, the comment period ends October 22nd, with a goal of adopting a new standard by June 2011.
As noted in FEI’s “Financial Reporting Blog” last week, the FASB and IASB announced the release of a “Staff Draft” of their upcoming Exposure Draft of significant proposed changes to financial statements, as part of the Financial Statement Project.
Accounting Convergence: FASB & IASB Update Their Progress
At the same time, the FASB and IASB issued a progress report on their convergence project, which provides details of their modified strategy to converge US GAAP and IFRS by prioritizing certain joint projects and extending the targeted completion dates for some projects beyond June 2011 into the second half of the year. We continue to post memos on this project in our “IFRS” Practice Area.
I’m loving the “Back to the Future” snafu where tweetheads went wild yesterday with thoughts of hoverboards. As noted in this blog, yesterday’s calendar date – July 5, 2010 – was alleged to be the target entered by Dr Emmett “Doc” Brown into the DeLorean time machine. But alas, it is not true. Slackers…
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:
– Study: Twitter Reduces Bid-Ask Spreads
– CalPERS Won’t Issue a Focus List After Successful Engagement
– Drafting Standing Delegations of Authority from the Board: Factors to Consider
– PIPEs: Canadian Survey
– A Self-Funded SEC: Making the Case
On June 24th, the Senate failed for a third time to pass a procedural vote which would have sent the proposed carried interest legislation (H.R. 4213) to the Senate for a full vote on the bill. Senate Majority Leader Harry Reid (D-Nev.) has announced that the Senate is moving on to other matters. Although no further action is currently pending in the Senate on the proposed carried interest legislation, it is possible (and perhaps likely) that the legislation will be re-introduced into the Senate in the not too distant future.
NYSE Regulation Transfers Its Regulatory Authority to FINRA
Effective June 14th, NYSE Regulation transferred its market surveillance and enforcement functions to FINRA. In NYSE Regulation Information Memo 10-26, the NYSE provides guidance on the effect of the transfer on existing subjects of NYSE Regulation investigations and parties to disciplinary proceedings before the NYSE Hearing Board.
“Standing Committee” Approves Major Changes to Bankruptcy Disclosure Rule
Here is news, as excerpted from this Davis Polkmemo:
On June 15th, significant amendments to Bankruptcy Rule 2019, which governs the disclosure of claims and interests held by members of certain representative entities and the parties they represent in Chapter 11 cases, cleared an important hurdle when the amendments were approved by the Committee on Rules of Practice and Procedure of the Judicial Conference, commonly known as the Standing Committee. The proposed changes to Rule 2019 (“Proposed Rule 2019”) considerably expand the scope of disclosure required, broaden the types of economic interests that must be disclosed (to include, among other things, derivatives) and clarify which groups, committees and other entities must publicly disclose those economic interests in order to actively participate in a bankruptcy case.
The Standing Committee will present Proposed Rule 2019 to the full Judicial Conference for consideration at its September 2010 meeting. If the Judicial Conference approves the changes, it will then present Proposed Rule 2019 to the Supreme Court, which will meet in April 2011 to consider the amendments, and finally, absent a Congressional veto, the proposed changes will become effective on December 1, 2011.
As I blogged as an aside yesterday, the House-Senate conferees have already made some changes to the “final” bill and are now on “final” version #3 – with the changes perhaps not yet done as it’s clear that the President’s July 4th deadline for reform legislation is not going to be met even though the House passed the bill yesterday by a count of 237-192 (see this NY Times article). The Senate doesn’t have the 60 votes to overcome a filibuster, so the bill may not pass until mid-July according to this Bloomberg article.
It’s chaos out there. For example, newly-minted Senator Scott Brown seems to be see-sawing on whether to vote for the bill (as noted in this Huffington Post blog and this Business Insider piece). The story about who will – and won’t – vote for the reform bill changes by the hour and likely will continue to do so…
Federal Regulatory Agencies Jointly Issue Final Guidance on Sound Incentive Compensation Policies
A few members have emailed me asking why I haven’t blogged about the issuance of final guidance on sound incentive compensation policies, jointly put out by the OCC, OTS and FDIC last week. Actually, I did blog about it right the guidance came out on CompensationStandards.com’s “The Advisors’ Blog” – on which there are items blogged related to executive pay daily. Here are some other recent blog titles:
– CEO Pay For All Company Sizes
– New SEC Interpretation Raises Accounting and Disclosure Issues for Performance Share Awards Subject to Discretion
– You Can’t Buy a Ferrari with Grant Date Fair Value
– SEC Secures Victory in Clawback Case
– Executive Pay and Risk
Our July Eminders is Posted!
We have posted the July issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Now that we are all wading through the 2,000 pages of the Dodd-Frank Act (here is a Subtitle E excerpt if you just want to read the 23 pages related to governance and executive compensation – with exceptions that Sections 971 (proxy access) and 972 (Chair-CEO split) are in Subtitle G), members are finding some items they didn’t expect. For example, Rick Hansen of Chevron notes:
Evidently, late in the conference proceedings, Senator Lugar was successful in having language inserted into the bill regarding disclosure of payments by resource extraction issuers to the Federal Government and foreign governments.
Tucked in the back of the bill in “miscellaneous provisions,” Section 1504 amends Section 13 of the ’34 Exchange Act and requires that the SEC issue final rules that “require each resource extraction issuer to include in an annual report of the resource extraction issuer information relating to any payment made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the [U.S.] Federal Government for the purpose of the commercial development of oil, natural gas, or minerals, including: (i) the type and total amount of such payments made for each project of the resource extraction issuer relating to the commercial development of oil, natural gas, or minerals; and (ii) the type and total amount of such payments made to each government.”
The Act defines “commercial development of oil, natural gas, or minerals” to include “exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity, as determined by the ]SEC].”
The Act defines “payment” as any payment that is “made to further the commercial development of oil, natural gas, or minerals; and is not de minimis” and includes “taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits, that the Commission, consistent with the guidelines of the Extractive Industries Transparency Initiative (to the extent practicable) determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals.”
If you find any other gems, send them along. And if you get a moment, take our new “Quick Survey on Director Education & Orientation.”
Meanwhile, the House-Senate conferee gang got together yesterday to eliminate a special bank “tax” assessment from the bill it passed last Friday in an effort to win support from some key Senators in the wake of Senator Byrd’s death.
Mailed: May-June Issue of The Corporate Counsel
The May-June issue of The Corporate Counsel was just sent to the printers and includes pieces on:
– Why the Media Often Doesn’t Seem to Know Compensation Numbers Until the Annual Proxy Statement is Filed– Are Form 8-K Item 5.02(e) Practices the Culprit?
– Reg FD for Directors: A Good Time to Revisit Your FD Policy
– Addressing an FD Violation–Does “Call the Staff” Go On the Checklist?
– The Asset-Backed Securities Offerings Proposing Release– Implications Generally for 1933 Act Metaphysics (and Plumbing)?
– Other Private Placement Developments
– Client-Directed Voting–An Available Strategy to Increase Retail Voting in Director Elections?
– A Few 2010 Shareholder Proposal Season Post-Mortems
– The Staff’s Response to the New Compensation Risk (Non-)Disclosure
– Pilot Staff Review of Rule 424 Filings
– Going Concern Qualifications–Nasdaq Acknowledges that SEC Filing is Sufficient Announcement
– Credit Agreements–Exhibit Filing of Schedules and Attachments
– How to Gear Up for Mandatory Say-on-Pay
Second Circuit Finally Delivers an Opinion on PSLRA’s Forward-Looking Information Safe Harbor
Recently, the Second Circuit issued its first opinion analyzing the PSLRA’s safe harbor for forward-looking statements in Slayton v. American Express, 15 years after the safe harbor was created. We are posting memos analyzing the opinion in our “Forward-Looking Information” Practice Area.
My travel yesterday took a page from “Planes, Trains & Automobiles” – so it was humorous to first see a CNBC text that the stock market was up because the US Supreme Court had stricken the Sarbanes-Oxley Act, only to find out that the 5-4 decision in Free Enterprise Fund v. PCAOB was not so dramatic. [Recall that this is the case for whose oral arguments’ “sights & sounds” I covered in this blog.]
Not surprisingly, the Supreme Court found that the provision of the Sarbanes-Oxley Act that only permitted the SEC to remove board members for cause violated the Constitution’s separation of powers doctrine. But thankfully cooler heads prevailed and the majority limited the remedy by excising that limitation from the law with a fix that the SEC can remove PCAOB board members at will going forward.
So in finding this provision severable from the rest of Sarbanes-Oxley – including the other parts of Title I that provide the PCAOB with the authority to function – business will go on as usual at the PCAOB and Congress doesn’t even need to legislate to provide a fix (as noted in this PCAOB press release; here is the SEC’s statement).
The most immediate consequence of this decision could be the appointment of three PCAOB board members by the SEC, which has refraining from taking action until SCOTUS ruled (as noted in this Washington Post article). There could be other ramifications from the SCOTUS decision; this Gibson Dunnmemo notes: “Although this comparatively narrow holding may raise other issues, such as whether the Board’s prior actions are constitutionally valid and whether the Board will now be subject to federal budgetary control, it permits the Board to continue to function without further action by Congress or the SEC.”
Yesterday was a big day for SCOTUS as it was Justice Stevens last day and many in the audience sported a bow-tie in his honor. In addition, Elana Kagan’s confirmation hearing started in the Senate. Unfortunately, Justice Ginsburg’s long-time husband passed away the day before. And the USA Today contained poll results that two-thirds of Americans can’t name a single Supreme Court Justice…
In Love? SCOTUS Falls for Plenty of Securities Law Cases
There was a time when it was relatively rare for the Supreme Court to take up securities cases. Until recently, the Court basically went several years between cases filed under the securities laws. Those days are clearly over, as the Court has granted cert petitions in several securities cases in recent years, including the Merck and National Australia Bank cases this term.
The Court has now granted cert in a securities suit for next term as well. On June 14, 2010, the Supreme Court granted the petition for a writ of certiorari in the Matrixx Initiative case.
And yesterday, Kevin reports that SCOTUS granted yet another petition for writ of certiorari in a case – Janus Capital Group, Inc. v. First Derivative Traders – arising under the securities laws. Although the case arises out of the specific context of a mutual fund market timing case, it raises fundamental issues about who may be a “primary violator” under the securities laws. The Court seems poised to delve yet again into critical issues under the federal securities laws.
Critical FCPA Diligence in Deals Today
Tune in tomorrow for the DealLawyers.com webcast – “Critical FCPA Diligence in Deals Today” – to hear Brian Saulnier of K&L Gates, Soren Lindstrom of K&L Gates, Keith Hennessee of National Oilwell Varco and Susan Munro of Steptoe & Johnson discuss the latest in how diligence is being conducted and how reps & warranties related to FCPA violations are being negotiated.
With the Senate and House expected to vote upon the Dodd-Frank Act – formally known as the “Dodd-Frank Wall Street Reform and Consumer Protection Act” – within the next few days – with President Obama then signing it before the 4th of July – the 2000-pages of the Act have been posted. Note that the passing of Senator Byrd last night might delay adoption of the legislation, according to this WSJ article.
We have also posted an excerpt consisting of just Title IX (the investor protections of the Act), which consists of 362 pages (Subtitle E, which includes the governance and compensation provisions, begins on page 207). Finally, here is a 10-page summary – and the Conference Report. We have posted these, as well as memos and scorecards in our new “Dodd-Frank Act” Practice Area, which I’m sure will grow like wildfire over the next few weeks.
SCOTUS Rules on “Honest Services” Doctrine: Prosecutors Take a Hit
Last Thursday, the US Supreme Court issued two opinions in the cases of Enron’s Jeffrey Skilling and Hollinger’s Conrad Black that limit the scope of so-called “honest services” fraud charges. The honest services statute provides that for purposes of specified mail and wire fraud offenses, “the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.” Many practitioners thought that the statute was too broad and the Supreme Court agreed.
As noted by the multiple entries in “The Conglomerate Blog,” these decisions may have serious implications for prosecutors who have used the “honest services” fraud statute as a powerful tool in the investigation and prosecution of alleged corporate malfeasance. We have started posting memos about these decisions in our “White Collar Crime” Practice Area.
Poll: The Acronym for the Dodd-Frank Act?
Back when the Sarbanes-Oxley Act was passed in ’02, it took a while for “SOX” and “Sarbanes-Oxley” to become the common way that folks referred to the historic legislation. An early movement towards “SarBox” never took off – thankfully – although a few still use that term for some reason. So now we have a new piece of legislation to “name.” I personally like the “DFA” – but doubt that will catch on. Please participate in this anonymous poll about how we should refer to the Dodd-Frank Act on a shorthand basis:
