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 month, the PCAOB adopted an amendment to Rule 4003 (as well as proposed a separate amendment to that rule) relating to the timing of certain inspections of registered non-US companies. Given the breath-taking revelation by Satyam’s CEO of prevalent fraud perpetuated by the CEO, it’s unfortunate that the PCAOB has not been inspecting the foreign affiliates of the US audit firms, such as the Indian firm auditing Satyam, because the budget that the PCAOB submits to the SEC has not provided sufficient funds for such inspections.
As we saw in the past month with Madoff’s auditor who was not undergoing inspections, a lack of independent inspection of auditors has led to undesirable results, and is a major shortcoming on the part of the regulator and regulatory system. This is also especially interesting as the major auditing firms are now outsourcing portions of their audit work to India. With the developments below, this should give investors great concern. Especially at a time when some on the PCAOB have espoused a view that the agency should just rely on their foreign counterparties thru a system referred to as mutual recognition.
Lynn Turner teaches us about how audits of non-US companies are conducted:
There are two types of foreign audits. The first one is one in which a foreign company that lists in the US, is audited by a foreign audit firm, who renders the auditors report on the financial statements. That could be one of the large international audit firms or a local firm in that foreign country.
The second type of foreign audit work, often called “referral work” is when a US audit firm, such as one of the Big 4, audits a large international conglomerate such as IBM or Coca Cola. The US audit firm audits the revenues, assets, internal control and accounting systems in the US. The US audit firm then refers the audit work on the foreign operations to one of the audit firms affiliated with them in the respective foreign countries where the foreign operations exist and are accounted for. These are two separate and distinct firms, with separate management but affiliated for marketing and branding purposes.
Referral work is becoming more significant and having additional risks evolve for investors as the US audit firms are now also farming out to foreign affiliates, such as in India where the cost of labor lower, some of the audit work that in the past, would have been performed on the audit of the US operations of these companies. They are in essence, now outsourcing a portion of the US audit work and writing into their audit engagement letters that this can be done.
I have also been told by various sources that some of the Big 4 have been trying to set up structures internationally to avoid inspections of their foreign audits. Also some foreign entities such as the EU have been pushing the PCAOB to just go along with whatever independent oversight or inspections ( in many cases which is none) are done internationally. However, it is unlikely they will be bailing out the investors who have suffered losses in Satyam.
A New Angle: Investor Liability for Ponzi Schemes?
From Keith Bishop: In light of Bernie Madoff’s alleged Ponzi scheme, this recent opinion in Donell v. Kowell from the 9th Circuit Court of Appeals should be of some interest. The case addresses the liability of a good faith investor in a Ponzi scheme. The appellate court upheld liability under the Uniform Fraudulent Transfer Act as adopted by California.
Liability was based on a positive netting of the amounts paid by the Ponzi scheme to the investor against the initial investment. Then the court applied the applicable statute of limitations to determine the actual liability. The investor advanced several legal theories for why he shouldn’t be liable, but all were rejected on appeal. Here is a memo on the case.
Some Thoughts on the Madoff Scandal: Blame Thyself
A member recently sent me this: “I feel a rant coming on to the effect that any charitable foundation or endowment that lost 100% – or even 50% – of its entire net worth with Madoff has itself to blame. Prudent allocation theory would say that an institutional investor should have no more than 10-20% of its assets in alternative investments like private equity, and then that commitment should be diversified among at least several managers. The Madoff fund, I believe, was not sold as a diversified fund – so how could a prudent fiduciary invest all or even half of his or her assets with that one manager? At most, any institution should have lost maybe 5-10% of its assets to Madoff.”
As timely covered by Dominic Jones in his “IR Web Report,” SEC Commissioner Luis Aguilar recently delivered a speech in which he expressed concern over the huge drop in the number of retail investors who voted last year. This drop is mainly attributable to the SEC’s new e-proxy rules – and Commissioner Aguilar strongly suggested that “we move quickly to reconsider e-proxy, improving it if possible, repealing it if necessary, but with the goal of restoring investor participation.”
The drop in the retail vote should be a concern and it’s important that the SEC address it. But another concern is the level of shareholders even bothering to click on the proxy statements and annual reports posted online as part of the voting process. As Dominic wrote in the Winter issue of InvestorRelationships.com (sign up for a free copy):
In a recent survey among 1,000 retail investors commissioned by the SEC , fully 57% of investors said they rarely (28%), very rarely (13%) or never (16%) read annual reports when they receive them. For proxy statements, the results were somewhat better, with 44% saying they rarely (21%), very rarely (10%) or never (13%) read proxy statements.
When it comes to web-based proxy materials, statistics collected by Broadridge during the first year of notice-and-access meetings also present a dismal picture. First, only 1.1% of notice recipients bothered to ask companies to mail them paper documents. Meanwhile, just 0.5% of all recipients viewed the materials when they visited the URL provided in the notices. According to Broadridge, notice-and-access has resulted in a 96% reduction in information access by investors, which arguably has led to greater levels of voting without viewing proxy information.
We have posted the transcript from our recent webcast: “How to Implement E-Proxy in Year Two.”
Put It on the “Wish List”: Communicating IDEA/Edgar Problems
A member recently told me about a few anxious minutes between the filing of a company’s earnings release on a Form 8-K and the start of its conference call. Actually, it was more than a few minutes – it was a half-hour gap between the time that the SEC’s IDEA/Edgar indicated that it had accepted the filing and public availability of the filing on the SEC’s site.
In theory, under Regulation FD, if you have an Edgar acceptance message that says 10:30 and the call starts at 11, I would argue that the company can go ahead and start – even if investors can’t yet see the filing. However, there is some risk with this approach given the rule’s purpose of investors having this information before the earnings call starts.
As I understand it, this is not a new problem. In fact, EDGAR/IDEA was down yesterday starting ~12:17 eastern for over an hour. This occurs regularly enough that it should be on the list of issues that the SEC’s new brain trust should tackle right away.
The SEC doesn’t seem to monitor its outages – and when these outages occur, the Staff that should be aware of them typically aren’t until they get calls en masse from filers. There’s an easy fix (besides fixing the database) – the contractor used by the SEC should alert the appropriate SEC Staffers, particularly those who take calls from filers (ie. Filer Support and Technical Filer Support). And, the SEC should promptly post a message on their web site that an outage is taking place. That’s an easy first step towards fixing this problem.
Late Friday, Congress finished its conferencing and passed the “American Recovery and Reinvestment Act” – and law firms went to work drafting their memos analyzing this stimulus package (we’ll be posting all these memos in our “American Recovery Act” Practice Area). The final text of the legislation is posted on the White House’s site in five parts, along with the ability for anybody to post comments!
The most relevant part of the legislation for our members is the tax provisions in Division B, which includes the controversial executive compensation restrictions among others (eg. see this Hodak Value commentary) – even President Obama is not happy with what Senator Dodd inserted as the final exec comp language. Oddly, the stimulus legislation went from no new executive compensation restrictions on Friday morning to more restrictive than previously contemplated by the end of the day. More coverage to come…
Developments in Debt Restructurings & Debt Tender/Exchange Offers
One impact of the Recovery Act is a reduced tax burden for those companies that restructure or cancel debt, which may complicate tax planning. To learn about this and more, tune in tomorrow for this DealLawyers.com webcast – “Developments in Debt Restructurings & Debt Tender/Exchange Offers” – featuring:
– Alex Gendzier, Partner, Jones Day
– Jay Goffman, Partner, Skadden Arps
– Richard Truesdell, Partner, Davis Polk
– Casey Fleck, Partner, Skadden, Arps
Heightened Enforcement Activity for Financial Fraud
In this podcast, Sharie Brown of DLA Piper discusses:
– What important legislation has been introduced lately to curb white collar crime?
– Why is financial fraud likely to be an area of increased government enforcement focus?
– What can companies do pro-actively to improve their own fraud detection efforts?
There was plenty of new regulatory changes to talk about – mainly the Treasury’s executive compensation restrictions – during yesterday’s CompensationStandards.com webcast, even as it was being reported that the pay restrictions in the still-not-really-completed stimulus bill had been cut during the Senate-House conference. Yet, others were reporting that the pay restrictions had survived the final cut – or at least, some of them (eg. today’s NY Times article that seems to think they are still in). We should know later today what really has happened.
Even if the executive compensation restrictions in the stimulus bill truly did die in conference, Jesse’s piece about key fixes still applies to the new Treasury guidelines and his points were recently picked up by Joe Nocera in the NY Times’ “Executive Suite Blog.” We encourage you to forward Nocera’s blog to key members of Congress and Treasury and other decisionmakers. We each have a responsibility to help the government “get it right.”
Survey Results: Recent Climate Change Disclosures
From Janie Sellers and Karl Strait, McGuireWoods: Our “Climate Change” Practice Group just released the results of its review of climate change disclosures made by public companies. They reviewed the 2008 10-Ks for approximately 350 S&P 1500 companies, across all industry segments and market cap sizes. Some of the highlights include:
– Only 42 out of 350 companies reviewed provided any climate change or greenhouse gas (GHG) emissions-related disclosures, and few of those were outside the energy and utility industries;
– The most common disclosures were impacts/risks of regulation of GHG emissions (34) and efforts to reduce GHG emissions (20), followed by the amount of GHG emissions (8), physical impacts/risks of climate change (6) and legal proceedings related to GHG emissions or climate change (2);
– Most disclosures were found in Item 101 – Business and Risk Factors (30 each), followed by MD&A (13), Forward-Looking Statement Safe Harbor (8) and Item 103 – Legal Proceedings (2). Eleven companies made disclosures in other parts of the 10-K, typically in the notes to the financial statements; and
– Out of the 42 companies that provided 10-K disclosure, the majority do not provide company-specific climate change information on their websites; on the other hand, out of the 50 companies (of the 350 reviewed) that provide information on their websites, most (62%) provided no disclosure in their 10-Ks.
The Big 4500!
In our “Q&A Forum,” we have reached query #4500 (although the “real” number is really much higher since many of these have follow-ups). Combined with the Q&A Forums on our other sites, there have been over 15,000 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.
We recently wrapped up our Quick Survey on analyst “quiet period” practices. Below are our results:
1. Our company:
– Has a separate policy addressing quiet periods for analysts – 12.1%
– Has a policy addressing quiet periods for analysts, but it is part of our Regulation FD policy – 39.4%
– Has a policy addressing quiet periods for analysts, but it is part of our insider trading policy – 12.1%
– No, our company doesn’t have a policy addressing quiet periods for analysts – 36.4%
2. Our quiet period policy for analysts provides that the quiet period commences:
– More than three weeks before an earnings announcement – 10.4%
– Between two-three weeks before an earnings announcement – 25.0%
– Less than two weeks before an earnings announcement – 8.3%
– More than two weeks before a quarter ends – 8.3%
– Between one-two weeks before a quarter ends – 22.9%
– One week or less before a quarter ends – 6.3%
– Exactly when a quarter ends – 14.6%
– Sometime after a quarter ends – 4.2%
3. Our quiet period policy for analysts is:
– Has the exact same parameters as our trading blackout period (ie. when insiders are prohibited from making trades in the company’s stock) – 53.6%
– Has different parameters than our trading blackout period, as the quiet period for analysts commences at least two weeks earlier – 8.9%
– Has different parameters than our trading blackout period, as the quiet period for analysts commences between one-two weeks earlier – 5.4%
– Has different parameters than our trading blackout period, as the quiet period for analysts commences later than the blackout period – 14.3%
– We don’t have a quiet period policy for analysts – 17.8%
Please take a moment to participate in our new “Quick Survey on Insider Trading Policies: Hedging/Other Prohibitions.”
Don’t forget that the deadlines for Forms 5, 13G, and 13F this year falls on Tuesday, February 17th since Monday is a holiday.
Board Portal Developments
In this podcast, Joe Ruck of BoardVantage explains how the board portal processes have changed to make them more effective, including:
– What has changed since we spoke last year?
– How is the market for board portals evolving?
– Any surprises in terms of how boards use them lately?
– What are the latest developments for BoardVantage?
– How is BoardVantage affected by the financial crisis?
What Will the Future Bring for the SEC?
With the US Chamber of Commerce the latest in recommending changes to the SEC (see the other ideas in our “Regulatory Reform” Practice Area), it’s interesting to see what members thought during last week’s poll on what they think should happen with the SEC. Here are the results:
Now that the Senate has passed a bill with executive compensation restrictions that are dramatically different than the new set of Treasury guidelines that were just adopted last week, confusion reigns (within the 780-page “American Recovery and Reinvestment Act” is the Senate’s own set of executive compensation standards in Title VI of Division B; I could only find the bill on “Thomas“).
Try reading the Senate’s executive compensation provisions (here’s a memo outlining them; Mark Borges has provided an outline in his blog) – and you’ll get the feeling that various Senators got to insert their own random provisions because they don’t seem to work together. Hopefully this will get fixed during the House-Senate conferencing before this hodge-podge becomes law.
Meanwhile, in an effort to distance itself from the perceived failures of the recent past, the Obama Administration renamed TARP as the “Financial Stability Plan.” TARP, we hardly knew ye! But the markets reacted like it was more of the same.
Below is a brief summary of the Financial Stability Plan from Cleary Gottlieb:
The four-prong plan incorporates most major elements rumored in the press, but provides few details and leaves key questions unanswered.
– More Capital Assistance for Banks: Banks with over $100 billion in assets will undergo a regulatory “stress test” and then will be eligible to receive a preferred security investment from Treasury through the Capital Assistance Program (“CAP”). Smaller institutions will be eligible for CAP after a supervisory review. Securities will be convertible to common by the issuer at a modest discount to the February 9, 2009, market price. Stock purchased under CAP will be held in a newly created Financial Stability Trust.
– Public-Private Investment Fund to Buy Troubled Assets: Treasury (together with the FDIC and the Federal Reserve) will initiate a Public-Private Investment Fund to acquire “legacy” assets weighing down banks’ balance sheets, although Treasury is still exploring how to structure the fund. The fund is initially pegged at $500 billion, but could be expanded to $1 trillion. In later Senate Banking Committee testimony, Secretary Geithner emphasized that the fund is intended to kick-start a private market, not provide a Resolution Trust Corporation-type solution. Notably, the announcement did not address pricing concerns, the issue that has bogged down previous asset purchase proposals, saying only that the program would allow private sector buyers to set their own prices. In later remarks, the Secretary noted that he is unwilling to let the government subsidize the financial sector by overpaying for assets.
– Consumer and Business Lending Initiative—Expanding the Federal Reserve’s Term Asset-Backed Securities Lending Facility (“TALF”): The TALF program, announced last November but not yet implemented, will be expanded in both size and scope. Under TALF, the Federal Reserve Bank of New York will make non-recourse loans to eligible participants fully secured by eligible newly packaged AAA asset-backed securities. TALF could grow substantially, using $100 billion of Treasury funding to provide up to $1 trillion in new lending. In addition, eligibility will be expanded beyond securities backed by student loans, credit card debt, small business and auto loans to include commercial mortgage-backed securities and possibly other assets.
– Housing and Small Business Initiatives: Details of a comprehensive housing program will be announced in the new few weeks. The program likely will include use of TARP funds for foreclosure prevention efforts, national loan modification guidelines, and continued support for purchases of GSE mortgage-backed securities and debt by the Federal Reserve. CAP recipients will be required to participate in foreclosure mitigation programs consistent with Treasury guidelines. Treasury and the Small Business Administration plan to take steps to encourage small business lending, including financing purchases of AAA-rated SBA loans and supporting legislation that would increase SBA loan guarantees.
There will also be new requirements and conditions, including public reporting of detailed lending data and executive compensation limits, imposed on banks that receive CAP funds or exceptional assistance going forward. The Treasury announcement states that these standards will not be retroactive.
The Treasury Department also decided to launch a new site, FinancialStability.gov. The site sure ain’t no beauty and seems as rushed as the FSP. It opens with “This site is coming soon,” even though a few items have already been posted, including this fact sheet and Treasurer Geithner’s remarks announcing the new plan. I imagine this new site will be redundant with Treasury’s site, where all the TARP documents have been posted to date.
The Corporate Executive: January-February Issue Mailed
We have now mailed the full January-Febuary issue of The Corporate Executive (along with the Special Supplement with our Model CD&A). The issue includes pieces on:
– ESPPs—Opportunities in Today’s Environment
– Making Sure Your Stock Options Are Eligible for the 409A Corrections Program
– More Model Disclosures: Compensation Risk Disclosures
As all subscriptions are on a calendar-year basis, if you haven’t renewed yet, renew now to receive it immediately. If you aren’t yet a subscriber, try a no-risk trial for ’09 now.
Yesterday, SEC Enforcement Director Linda Chatman Thomsen resigned – with the lead candidate for replacement being former prosecutor Robert Khuzami, now a top Deutsche Bank lawyer.
This is not unexpected given the crisis that the SEC faces and the resulting stain on its reputation. Even if Linda is thought of as a solid performer – and I personally think she is – it’s smart of Chair Schapiro to “clean house” at the top to help regain the confidence of the markets (and Congress).
How far has the SEC fallen? A former Staffer that I know just landed a new job and was told to remove the SEC from his bio from the announcement that was being sent to clients. Having the SEC in your bio used to be a feather in your cap!
Nasdaq’s Response to Market Decline
In this podcast, Suzanne Rothwell of Skadden Arps explains how Nasdaq has responded to the current market downturn, including:
– What is Nasdaq’s general position for companies not meeting the continued listing standards?
– What accommodations has Nasdaq adopted to the listing standards or policies?
– What are struggling companies doing? Are some deciding it’s not worth trying to maintain their Nasdaq listing?
– Do you have any practical pointers for struggling companies?
Part II: Your Upcoming Proxy Disclosures—What You Need to Do Now!
We have posted the transcript from the second part of our popular two-part CompensationStandards.com webconference: “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!”
On Friday, the SEC announced that David Becker would be returning as General Counsel in a few weeks. He also will have the title of “Senior Policy Director,” a new position. David served as GC earlier in the decade during Arthur Levitt’s tenure. David is a great lawyer and the SEC gets a big boost for his willingness to take the pay cut and return to the public sector.
It’s also rumored that Kayla Gillan will be joining the SEC Staff (although I’m not certain in what capacity, the rumors don’t say). For the past year, Kayla has been the Chief Administrative Officer for RiskMetrics (she was told to pick her own title) and before that, was one of the PCAOB’s founding board members. Given the heat the SEC is taking, it’s smart for Chair Schapiro to find investor-protection minded experts willing to get paid relative peanuts to join the embattled agency.
On Friday, Chair Schapiro delivered this speech in which she describes some of her first steps in changing the Enforcement Division’s policies & procedures, etc. Here is a good summary of the speech from Gibson Dunn.
I expect this will be the first of many speeches announcing changes. Here’s an example of how Mary gets the urgency of the need to make changes – the title of this article is “SEC chief says agency to act like ‘hair is on fire.'”
Economic Downturn Disclosure
In this podcast, Jason Day of Faegre & Benson discusses periodic disclosures relating to the current economic downturn, including:
– Which areas of periodic disclosure might require additional attention due to economic conditions?
– What types of specific economic-related disclosure should companies be focused on in preparing their MD&A?
– What new risk factors might companies consider?
– How else are you seeing the economic conditions influence disclosures?
Audit Committee Charters: May Need to Review Due to New PCAOB Rule
If you haven’t been checking out our new “Proxy Season Blog,” here is one of the first entries from last month: A recent change to the PCAOB rules on auditor independence may require some companies to revise their Audit Committee charters. Last August, the PCAOB adopted Ethics and Independence Rule 3526, which requires auditors to make independence disclosures before they enter into an initial engagement. Rule 3526 supersedes the PCAOB’s Independence Standards Board Standard No. 1.
Effective September 30th, the SEC made a conforming technical change to Item 407 of Regulation S-K, concerning disclosures that companies must make in their audit committee reports included in their annual meeting proxy statements.
As a result, folks should review their audit committee charters to remove any references to superseded ISB Standard No. 1 – and consider instead stating that the committee receive written independence disclosures required by the PCAOB’s applicable requirements. I doubt that this affects many companies, probably only those who wrote their charters to specifically refer to PCAOB rules.
It’s been a long week, so I decided to alter a popular song for my own amusement (apologies to leopard shoe owners in advance):
You put your right hand in,
You take a bunch of cash out,
You put your right hand in,
And you scoop the rest out.
You do the hokey pokey,
And you tell yourself it’s okay because everyone else is doing it,
That’s what it’s all about.
2. Left hand, with a shovel
3. Right foot, wearing some leopard shoes
4. Left foot, with more of those leopard shoes
5. Head, with ear plugs to drown out the pleas from the poor
6. Butt, wearing some sort of cover
7. Whole self, leaping into a pile of gold coins and jewels
TARP Under Attack: A $78 Billion Shortfall for Taxpayers
Late yesterday, the Congressional Oversight Panel said it would issue it’s third report today on how TARP is being implemented – and it won’t be pretty. The report will show that Treasury put about $254 billion into financial institutions in 2008, but got only $176 billion in value. As noted in this NY Times article, the head of the Panel, Elizabeth Warren, told the Senate Banking Committee that after three months on the job, her panel was still not getting enough answers from Treasury. She described the bailout as “an opaque process at best.” When the report is out, we’ll post it in our “TARP” Practice Area.
How Avvo Works
In this podcast, Mark Britton, CEO and Founder, explains how Avvo works, including:
– How did a corporate lawyer end up launching something like Avvo?
– What are Avvo’s latest developments?
– How do you like blogging? Any lessons learned?
Sights & Sounds of Northwestern’s San Diego Conference
Here are a few videos from my visit last week to San Diego:
Yesterday, on our “Advisors’ Blog” on CompensationStandards.com, I blogged a story about a conversation with a cabdriver about the Wall Street bonuses and how the environment has been altered so much that boards absolutely must change their thinking about executive compensation practices or else face potential societal implications (see this NY Times article).
Recognizing the need for this change, President Obama yesterday announced a new set of Treasury guidelines for those companies seeking government funds. The fact that the President made the announcement and held a press conference on the topic highlights the importance of this matter. Rather than repeat these new restrictions, read the bullets in this press release.
To explain these new restrictions – and how they impact both companies seeking government funds and all companies generally – we are holding a webcast – “TARP II: The Executive Compensation Restrictions” – next Thursday on CompensationStandards.com. Tune in to learn these new developments!
Jesse Brill lays out below how the latest Treasury guidance still needs to be tweaked to accomplish its goals of reining in excessive executive compensation:
The biggest change under the new Treasury guidelines is a $500,000 salary cap. One key aspect of the new $500,000 cap that has not gotten sufficient attention is the unlimited amount of restricted stock and stock options that still can be granted under the latest “restrictions.” Equity compensation is the pay component that has gotten most out-of-line over the past 20 years. It (as well as severance/retirement/ golden parachutes) has caused the greatest disparity between CEO compensation and that of the next tier of executives (and employees generally).
The new $500,000 cap provision does prevent executives from realizing the gains in their equity compensation until after the government is paid back. But there are two major problems with how this applies:
1. It does not apply to past equity compensation. Warren Buffet imposed a similar cap on Goldman Sachs’ executives, but his restriction applies to all the equity held by the top executives. It is not limited just to future grants, as is the case with the new government restriction. So Buffett’s provision wisely requires that the key decision-makers keep all their “skin in the game” until he gets paid off.
2. Although it may help protect the government’s investment, it is short-sighted and fails to protect the shareholders’ best long term interests. The holding period should be the longer of age 65 or two years following retirement. That will ensure that the key executives make decisions that truly are in the long-term best interests of the company (as opposed to decisions aimed at a shorter period – after which an executive could depart, taking all his marbles with him).Note that holding-through-retirement also addresses the major concern about top executives’ unnecessary risk taking.
Holding equity compensation through retirement is perhaps the single most important—and fundamental – fix to getting executive compensation back on track because it also addresses all the past outstanding excessive option and restricted stock grants. And, by requiring CEOs to keep their skin in the game for the long term, it will go a long way to restoring public trust in our companies and our market, which is so important to restoring stability to the markets.
Needless to say, the fundamental hold-through-retirement fix should apply to all companies – not just TARP financial institutions—and can be adopted at the same time that Congress adopts say-on-pay legislation (if such legislation is adopted). (It will have much greater impact and do more good than say-on-pay.) Learn how to implement hold-through-retirement in our “Hold-Through-Retirement” Practice Area on CompensationStandards.com.
Here are three additional points about the $500,000 cap:
1. Just as the $1 million cap was a major cause for the runaway increase in equity compensation over the past decade, the new unlimited opening for restricted stock will further exacerbate the problem. As an example, the typical time vested restricted stock grant does not qualify for the $1 million cap “performance-based” compensation exemption, thus more companies and shareholders will suffer the cost of the lost tax deductions as these very large amounts vest. (So, once again the top executives will benefit at the expense of shareholders.)
2. One reasonable fix to the tax deductibility problem would be to require real performance conditions (in addition to time vesting) upon the vesting of the equity.
3. To address the “unlimited “ new grants problem, do not permit additional grants in situations where the CEO’s total accumulated equity grants exceed the company’s own historic internal pay equity ratios compared to the next tiers of executives within the company.
SEC Chair Schapiro Lays Out Big Changes
As noted in this Washington Post article from Wednesday, new SEC Chair Schapiro intends to make big changes to the Enforcement Division – and quickly. Among other changes, the article notes:
– Rollback of highly-criticized requirement that the Enforcement Staff receive Commission approval before negotiating to impose penalties. This created a huge bottleneck and fines levied have dropped 85% since it was instituted three years ago.
– Beefing up the number of Enforcement Staffers. The number of Staffers has steadily decreased in recent years.
– Reforming an office to focus on identifying and preventing risk in the market. Earlier this decade, then-Chair Donaldson formed such a group – but it was scarcely staffed (umm, with one person) and shut down not too long after it was created.
Good Grief: Here Come the Crazy Ideas
It’s a good thing that Chair Schapiro is acting fast. Congress is out for blood, as became quite clear during yesterday’s House Financial Services Committee hearing on the Madoff scandal. Harry Markopolos is a bit too much for me (here is his written testimony, his oral testimony was beyond self-serving – and here is the SEC Staff’s testimony). With his announcement that he’s about to hand off his investigation of a new mini-Madoff fraud to the SEC’s inspector general, I’ve decided to call him the new “Joe McCarthy.” My favorite quote from him: “3,498 people at the SEC were against me.” Paranoid.
More bothersome than Markopolos was the tone and suggestions of some members in Congress about how to fix the SEC. It looks like plenty of bad ideas might get some traction. For example, the suggestions expressed in this NY Times column entitled “What if Watchdogs Got Bonuses?” from Andrew Ross Sorkin were raised. In the column, Sorkin reports from Davos about a recommendation that regulators get paid bonuses so that they are paid more like their private industry counterparts. Here are few reasons why this is not a good idea:
1. The column posits that paying more will attract smarter people to the government. Although I’m sure existing government staffers would like to get paid more, I can assure you that there are many right now in the government that are plenty smart.
In fact, just as smart as the folks in the private sector – why do you think so many securities lawyers start their career at the SEC? To get trained by the best and brightest. But even in the past five years, Corp Fin has essentially stopped hiring folks right out of law school because so many experienced practitioners were willing to take a pay cut and exit out of the madness that is the law firm lifestyle.
2. The government is not having problems finding qualified people. Right now, a record number of resumes are sitting down at the SEC. The level of unemployed professionals is very high and government service appeals to many who feel that their career has been lacking purpose.
3. The bonus recommendation ignores how most criminals are caught. Referrals lead to the bulk of the SEC’s investigations. This is not unusual in the law enforcement area. Cops don’t show up until they are called (unless they accidentally witness a crime). That’s just the way of the world (unless we develop “pre-cogs” ala “Minority Report“).
How would a bonus program be adminstrated when federal agencies would be working mainly from outside referrals? The payment of bonuses may well disturb the comradery and cooperation that is required between SEC Divisions – and among Staffers within a Division – to make the often years-long effort to bring a solid case. If you’ve ever worked on uncovering a financial fraud, you know how complex and difficult it is to tie the ends, etc. Needle in a haystack stuff.
4. Replicating the poor compensation practices of Wall Street in the public sector doesn’t fix the problem. It’s simply incredible that at the same time policymakers and pundits are decrying bonuses as having motivated executives to engage in improper management practices, they are suggesting that the same apply to the government. How is that supposed to promote objectivity in decision-making? What would you do if you were faced with: “I get a bonus if I bring this enforcement action regardless of how ill-founded it is – and don’t get a bonus if I don’t.”
Most people in government service are not there for the money – so paying them more will not necessarily generate better performance. To the extent those in enforcement are after money, it comes from them earning a reputation as a tough cop who brings good cases and then going into private practice.
The reform focus should be on Wall Street and its ethics. Sure, the government staff could stand to earn some more in base salary so there wouldn’t be pressure to leave when the kids hit school age – but paying the Staff a bonus won’t turn on some magical spigot that will enable the SEC to catch the many criminals out there.
And it certainly won’t stop Wall Street from engaging in practices of the sort that led to the current meltdown. We can’t rely on the government to ensure that people act responsibly and ethically. They can help point us in the right direction and remove outliers from the playing field – but if nearly all the players decide to continue to push the grey areas and not think of the bigger picture, chaos results and even cops can’t help us…
Your Ten Cents: The SEC’s Future
Here is a quick poll to anonymously get your views. You’re allowed to select more than one answer if you wish:
