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."
Yesterday, the SEC announced that Brian Breheny has been promoted to be Corp Fin’s Deputy Director for Legal and Regulatory Policy (which was Marty Dunn’s former job). Brian has been Chief of Corp Fin’s Office of Mergers & Acquisitions since 2003. A new Chief of OM&A will be forthcoming, but not likely for at least several months.
Corp Fin also announced that Wayne Carnall will rejoin the SEC to serve as the Division’s Chief Accountant (a job that has been vacant for six months since Carol Stacey left). Wayne has been working in the National Office of PricewaterhouseCoopers since he left the SEC in 1997.
It’s On! SEC’s Open Commission Meeting Calendared for November 28th
Despite many objections (as I blogged yesterday), the SEC intends to forge ahead on shareholder access next Wednesday. And #2 on the meeting’s agenda (repeated below) is a shocker that nearly knocked me out of my chair:
1. The Commission will consider whether to adopt amendments to Rule 14a-8(i)(8) under the Securities Exchange Act of 1934, to clarify its longstanding interpretation of that rule.
2. The Commission will consider whether to adopt amendments to the proxy rules under the Securities Exchange Act of 1934 to facilitate the use of electronic shareholder forums.
A Little British Banker Humor
With a hat tip to Kevin LaCroix, here’s some British humor dealing with investment bankers, subprime, etc. Gobble, gobble!
Yesterday, RiskMetrics’ ISS Governance Services unit issued updates for its US, Canadian, International and UK proxy voting policies. These new policies will be applied to all companies with shareholder meeting dates starting February 1st. RiskMetrics intends to release summary policy guidelines in mid-December and its full proxy manual after the new year. We have posted the policy updates in our “Proxy Advisors” Practice Area.
Among other topics, the policy updates deal with the following (note these brief descriptions were written by ISS):
1. Say on Pay – With several U.S. companies having committed to shareholder advisory votes on executive compensation, and several successful shareholder resolutions and the possibility of legislative action on the subject, the Say on Pay issue has arrived in the US. ISS has developed a framework for evaluating remuneration reports according to five global principles that emphasize linking pay and performance, board independence in the pay-setting process – and sufficient disclosure to allow shareholders to evaluate both the package and the process. From these global principles, we have developed market-specific guidelines that reflect local best practices in the U.S. and internationally.
2. Poor Pay Practices – Our U.S. Poor Pay Practices policy has been updated to reflect the better information available in new compensation disclosures – identifying specific poor compensation practices that may trigger withhold recommendations, including egregious employment contracts, severance and make-whole provisions, perks and retirement benefits, and poor disclosure practices.
3. Equity Plan Costs – A majority of our Policy Survey respondents indicated support for plans where employees have been holding vested in-the-money options for a significant amount of time. As such, ISS Governance Services will consider carving out a portion of cost attributable to overhang for companies with sustained positive stock performance and high overhang cost attributable to in-the-money options outstanding in excess of six years. ISS will adopt a case-by-case approach considering the following criteria: company performance, overhang disclosure, dilution, and compensation practices.
4. Independent Chairs – Since over 45% of companies in our Board Practices study now separate the chair and CEO positions, and investors show strong support for separation of CEO/chair positions, ISS will continue to support shareholder resolutions calling for an independent chair at U.S. companies. However, if a company meets certain performance tests and good governance practices, including the appointment of an independent lead director, we will recommend on a case-by-case basis. We are also adding two additional factors for consideration in this analysis: first, the disclosed comparison of the specific duties of the lead director and chair, and second, the company’s disclosed rationale for combining the two positions. These additional disclosures will aid in evaluating board independence in the case there is a combined CEO/chair.
5. Product Safety – Heightened attention to product safety, plus strong investor interest for companies to disclose their social and environmental practices led us to enhance our policy to support shareholder proposals requesting that companies report on policies and oversight mechanisms related to toxic materials across their supply chains. In fact, 66-75 percent of Policy Survey respondents believe it is very important or somewhat important to report performance on social and environmental criteria to shareholders as part of routine disclosure.
Latest Rumors: Democratic Commissioner Nominees?
We try to stay away from rumors on this blog – as they often don’t pan out – but it’s noteworthy that the Washington Post ran this article last week noting that Luis Aguilar and Elisse Walter may be tapped to fill the SEC Commissioner vacancies since the shareholder access proposals are so controversial and there won’t be any Democratic Commissioners once Annette Nazareth leaves her post (which is expected next month). Some members of Congress (and a score of investors) have asked SEC Chairman Cox to hold off on acting on shareholder access – since it appears that the current Cox plan is to hold a meeting on November 28th to deal with the AFSCME decision and then revisit shareholder access next year.
Citing unnamed sources, the Post reports that Senate Majority Leader Harry Reid has submitted both names to the White House for approval. Under federal law, two of the SEC’s five Commissioner spots must be filled by members of the political party that doesn’t control the White House.
Luis Aguilar is a securities lawyer at McKenna Long & Aldridge in Atlanta and a former SEC Staffer. Elisse Walters rose through the Corp Fin ranks to serve as Deputy Director and also served in the SEC’s Office of the General Counsel and has been the General Counsel of the CFTC; for quite some time, she has worked at the NASD (now FINRA), where she now serves as Senior Executive Vice President, Regulatory Policy & Programs.
FINRA Looking for Marketing Bang?
I couldn’t resist repeating the following entry from Mark Astarita’s “SECLaw Blog“:
“In what some believe is a marketing ploy and an attempt to increase its Google search ranking, FINRA is requiring all member firms to provide a hyperlink to www.finra.org. The deadline for compliance is November 17, so get your web designers moving. While I am certain that this is not a Google-driven event, but rather an attempt to brand their corporate identity, it is a bit strange. The NTM simply requires a link, not any special language, or the logo, and it is not an attempt to educate customers of the existence of a regulator.
It appears that FINRA is spending way too much time worrying about its name. At a SIFMA conference yesterday, a senior FINRA executive repeatedly referred to “legacy-NASD” every time he referred to the NASD. It was so cumbersome and silly, that he had to explain that if he didn’t do that, he would “have to put a dollar in the jar” indicating that the organization thinks “NASD” is a bad word. Seems to me that the time could be better spent addressing a new rule book, or investigating firms that caused this massive $400 billion subprime scandal. How long before that filters down to investors?”
This “Auditing Profession Discussion Outline” from the Treasury Department’s Advisory Committee on the Auditing Profession (co-chaired by Arthur Levitt and Donald Nicolaisen) is an eye-opening list of topics that the Committee expects to take up, obtain comment and issue a report on next summer. Among other broad topics, the Committee will consider: how to improve the quality of audits; whether auditors should be provided caps on their legal liability; whether auditors should be able to organize in structures that would seek private or public capital; governance and transparency of the firms; independence rules; how to attract more students into accounting as opposed to seeing them go into other professions; the dwindling supply of college professors; and how to improve the competitiveness among the small and large firms. The Committee seeks input for its outline, with comments due by November 30th.
Meanwhile, the SEC’s Advisory Committee on Improvements to Financial Reporting continues to plug along, holding its latest meeting a few weeks ago. The SEC has posted a host of reports from various subcommittees (scroll down to November 2nd meeting). There are some pretty interesting ideas being kicked around – particularly those in this report on restatements.
Restatements: Timing and Disclosure Issues
Speaking of restatements, a recent study from the Huron Consulting Group found:
– average filing time between initial filing of a Form 8-K and restated financial statements was 7 weeks (and the median was 3 weeks)
– One out of every 6 restatements analyzed was filed within one day of a Form 8-K being filed (while one-third of the restatements were filed within two weeks of the initial Form 8-K filing)
– 20% of the companies reviewed took more than 4 months to complete the process (typically missing at least one timely filing of a Form 10-K or Form 10-Q)
– 4 out of 5 restatements are filed within 4 months of the initial filing of the Form 8-K announcing the existence of a material error
– Most prevalent accounting issues were: Equity and Debt; Capitalization and Expense of Assets; Reserves/Accruals/Contingencies; Revenue Recognition; and Taxes
– Neither company size nor industry appeared to be significant factors in the length of the restatement process
– 19% of Form 8-K filings announcing the existence of a material error reported fewer accounting issues than were ultimately included in the restated financial statements.
In our “Restatements” Practice Area, we have posted a copy of the Huron Consulting Group study – as well as a recent PCAOB working paper regarding changes in market responses to restatements.
SEC’s Concept Release: Disclosure of Business Activities in Terrorist Countries
On Friday, the SEC issued a concept release regarding how the public should access disclosures about material business activities in the five countries on the State Department’s list of State Sponsors of Terrorism. This is a follow-up to the SEC’s discontinued practice of listing companies that disclosed certain matters relating to the countries (the concept release explains the filters that the Staff had used before – long story).
Given the topic, we might see more comments than one would think – even though this potential rulemaking only impacts how the SEC would list information filed through Edgar and not require companies to do anything differently than they already do. Personally, I think the reputational stakes are too high if a mistake is made by the SEC and a company is inadvertantly placed on this type of a list. Let the media and others do Edgar searches to create their own list…
We’ve been getting quite a few questions about whether D&O questionnaires should be tweaked for this proxy season. Alan Dye notes that, other than the possible NYSE independence issues if they get adopted in time, he’s not aware of any new rule or regulation that would cause the questionnaire to change (assuming it was up-to-date last year).
The Corp Fin Report on executive compensation (and John White’s “Where’s the Analysis?” speech) is more for drafters of the proxy statement, and doesn’t necessarily impact the questionnaire. However, Alan notes that some companies continue to uncover perks they hadn’t known about – so some companies may need to beef up their questions regarding perks to cover more examples, including spousal travel and matching charitable gifts. And reviewing the February and August Corp Fin interpretations of S-K 402 (and our compilation of Staff comments) vis a vis your questionnaire is a good idea.
Anyone else have items to consider for this year’s questionnaire? Please email me if you do…
E-Proxy and California Law
In our “Q&A Forum,” we continue to receive follow-on questions related to the issues raised by California law as it intersects with the SEC’s new e-proxy rules – so I decided to go to the source who first raised the issue in this blog.
In this podcast, Keith Bishop of Buchalter Nemer, and a former California Commissioner of Corporations, describes how the SEC’s new e-proxy rules might conflict with California law, including:
– I understand that the SEC’s new e-proxy rules may conflict with California law. What might the conflict be? And which companies might it impact?
– Can the problem be solved by mailing annual reports only to actual shareholders of record?
– Should companies ignore the California conflict if the risk of enforcement is low?
– Any other potential conflicts that companies should be aware of when they implement e-proxy?
My Midlife Facebook Crisis? Nah…
I make my living primarily on the Web these days, but I still feel too old for the social networking craze (although I would argue that all of our sites are “closed” social networks since they are all community-themed). Last Saturday, the WSJ ran this great article – “My Midlife Facebook Crisis” – on what it’s like for us old-timers to join the social networking bandwagon.
In the middle of last year, Facebook began allowing anyone to join its network and start accumulating “friends.” So I spent a few minutes – very few – creating a profile for my alter ego, “Billy Broc Oxley.” A friend of mine took one look at Billy Broc’s profile and promptly said “it probably violates the laws of all states but Utah and Nevada (for different reasons).” Not sure how he got that, but I don’t think this experiment is gonna go anywhere…
[Boo-yah! For the past several months, whenever I have appeared on the speaking circuit, I have said “if you don’t get anything else out of this seminar, buy Broadridge stock.” Based on what Broadridge has done over the past two days, I can say “I told you so!” And thus ends my stock-picking career.]
Five brave souls have volunteered for our latest contest (and one anonymous contributor), setting forth some practice pointers regarding “Preparing Your Form 10-K.” Each contributor took a moment out of their busy life to write up something that might help you during the proxy season; they had no restrictions on what they could submit, so the format and nature of their pointers vary. Thanks to Carrie Darling, Linda DeMelis, John Newell, Jeff Taylor and Mike Woodard for entering our inaugural contest; each deserves much praise for giving this a try!
How to Vote: Now, you need to do your part and cast a vote. You are free to vote more than once – and when you vote, you can vote for as many of the contributors as you wish (even all six contributors if you want). Voting is completely anonymous.
[Dave “The Animal” was bounced before the competition even started when he submitted these pointers:
1. First, get yourself a six-pack. In fact, you might need a case if you are one of them there large accelerated filers.
2. Don’t be making yourself a fool by filing your 10-K under an 8-K header submission type – it hurts.
3. Speaking from experience, its not a good idea to file the CEO’s credit card numbers and social security numbers as as an exhibit.
4. I don’t like too many commas.
5. Don’t listen to all those pesky little voices coming out of your refrigerator when you are trying to draft some disclosure. My tin foil hat tends to drown them out.]
The SEC’s “Small Business-ish” Open Commission Meeting: Next Thursday
Late yesterday, the SEC published a Sunshine Act notice to announce an open Commission meeting for next Thursday to consider adoption of these proposals:
– Streamlined Smaller Public Company Reporting
– Amended Rules 144 and 145
– Stock Option Registration Exemption
– Financials prepared in accordance with IFRS without Reconciliation
Note that these three proposals are not on the agenda: shareholder access; Form-Reg D; simplified Form S-3 – so there may be another open Commission meeting around the corner (or maybe there won’t be – we don’t know yet).
At next Thursday’s meeting, the Commission will also consider proposing new rules to improve mutual fund disclosure by requiring more plain English – and enhancing the availability of more detailed fund information on the Web.
Some CD&A Guidance
As I alluded to yesterday, we have just wrapped up our just-completed “Special Fall/Winter 2007 Supplement” of the Compensation Standards newsletter, which should help you (and your board) address the CD&A disclosures that the SEC will be looking for this proxy season. Don’t forget to renew – or try a no-risk trial.
The community has spoken! On CompensationStandards.com, we have posted the 51 executive compensation disclosure tips that we received in response to our contest seeking ideas from our members. We will be announcing awards for these tips soon – take a look at them and let me know which ones you like best. Here’s the strange thing – I billed the contest as “51 tips” and I received exactly that number!
What is a “Severance Package”?
In the wake of Merrill Lynch CEO Stanley O’Neal’s resignation, there were some articles noting that he didn’t have a severance agreement with the company. Here are some thoughts from The Corporate Library on the topic:
“In a study released last week, The Corporate Library reports that the “non-severance” package awarded to O’Neal is not what it seems. Long rated a high concern board by The Corporate Library, Merrill Lynch’s actions are deemed too little, too late, by Paul Hodgson. ‘Stanley O’Neal’s departure from Merrill Lynch with ‘no severance’ and no 2007 bonus would seem to present a picture of a decisive board in control. Yet, when ‘no severance’ equals $161.5 million and an office and executive assistant for three years, what else did they think they needed to give him?’” Notably, Mr. O’Neal’s separation package comes in at #5 on a list of 10 of the most excessive severance packages this decade.
In addition to the severance panel discussion during the recent “4th Annual Executive Compensation” Conference, we have written quite a bit on severance and steps you should be taking to fix outstanding arrangements (and not make the same mistakes going forward) – look for more in a Special Supplement to the Compensation Standards print newsletter coming out very soon. Sign up for complimentary copies!
CII on CD&A
Back in September, the Council of Institutional Investors sent this letter to the SEC explaining what it seeks from companies when it comes to the “Compensation Analysis & Disclosure” section of the proxy statement. It’s interesting to compare CII’s letter to John White’s speech and the Corp Fin Staff Report that came out subsequently. For the Jan-Feb issue of The Corporate Executive, we are busily writing analysis (and model language) about what CD&As should look like next year – we hope to have that available within a month.
With the elimination of the S-B Forms (and Regulation S-B) probable in the near future, Corp Fin has reorganized the operations group headed by Assistant Director John Reynolds so that it’s now the “Office of Beverages, Apparel and Health Care Services.” John’s group used to handle all the small business filings and was called the “Office of Emerging Growth Companies.” Going forward, small business filings (including SPACs) will be processed in the operations group based on the industry they are in – just like any other company.
Note that Gerry LaPorte’s Office of Small Business Policy continues to exist and serves as the advocate and policy-maker for smaller companies. Our organization chart – as well as Corp Fin’s chart – has been updated.
Corp Fin: Who to Contact with EDGAR, CTRs, FOIA, Etc. Queries
A few months ago, I blogged that Patti Dennis took over Herb Scholl’s old job as Chief of Corp Fin’s Office of Disclosure Support and that Herb’s old office was formerly known as the “Office of EDGAR and Information Analysis.” What I neglected to clarify is that Herb’s old office has been split into two as follows:
– Office of Disclosure Support, which is responsible for EDGAR posting/dissemination of comment letters, confidential treatment and FOIA requests
– Office of Information Technology, whose Chief is Cecile Peters and which answers general EDGAR questions about ’33 Act and ’34 Act filings the Division processes (so this is the office that handles many of the functions that Herb’s OFIS used to do)
SEC Staff Issues SAB 109 on Fair Value Accounting for Written Loan Commitments
Yesterday, Corp Fin and the Chief Accountant jointly issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.” SAB 109 provides the Staff’s views on the accounting for written loan commitments recorded at fair value under GAAP – and the SAB revises and rescinds portions of SAB 105.
As noted in this press release, the SAB revised the Staff’s views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the Staff’s views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment.
Feeling the heat of a majority vote on a “say-on-pay” proposal, Verizon Communications became the second company to adopt a policy to put its compensation plans to an annual vote by shareholders in 2009. AFLAC became the first company to adopt such a policy earlier this year. Notably Verizon’s “say-on-pay” proposal barely received majority support with 50.18% votes cast supporting it. RiskMetrics reports that a majority vote has been achieved at 7 companies so far this year for “say-on-pay” proposals (e.g. 69% at Activision).
So why is Verizon the first of these 7 companies to adopt a “say-on-pay” policy? I have no inside scoop, but one reason might be that they want to abide by the will of the majority, even if it’s barely a majority. Another reason might be that the company’s executive pay practices have been widely criticized – and publicly so, ranging from being on The Corporate Library’s short “pay-for-failure” list to this Union press release (also see this letter from a group of institutional investors).
And of course, you shouldn’t forget the novel Electronic Shareholder Forum that I blogged about a few months ago. The Forum’s Verizon program was organized with the support of the Association of BellTel Retirees, the source of the Verizon shareholder proposal – and clearly, this Forum had some role in obtaining the majority vote given how close the vote was. Gary Lutin, who is responsible for conducting the Forum (with rigorous standards of independence), speculates that the higher vote may have been attributable to the broader range of investors involved in an open program – that had previously established principles based on shared management and shareholder interests – rather than the confrontational approach of the “say on pay” campaigns currently being waged by others.
So the lesson learned is that companies are really gonna need to learn to leverage – and monitor – the Web better, which ties into the subject of our upcoming November 15th webcast, “Annual Reports: How to Create Them for an Online World.”
[By the way, Verizon also approved a revised policy that more specifically defines the types of payments that will be included in the calculation of a severance payment – and adopted a policy that addresses the independence of its compensation consultant.]
The “Pink Sheets” Speak
Over the past few years, there have been a lot of changes in the pink sheets. In this lengthy podcast, Cromwell Coulson, CEO of the Pink Sheets, describes the latest upgrades to his market, including:
– How have the Pink Sheets gone electronic?
– What are your OTCQX market tiers?
– What are the new Pink Sheets disclosure categories?
– What is the role of securities counsel in the OTCQX market tiers and Pink Sheets disclosure categories?
– What are your thoughts on the SEC’s Rule 144 proposals?
Cromwell is always colorful – and we have more information about what is happening with the Pink Sheets in our “Pink Sheets” Practice Area.
BRIBEline
You may want to check out BRIBEline, which is a secure, multi-lingual site through which companies and individuals can anonymously report bribe demands by answering 9 multiple-choice questions. The site is operated by TRACE, a non-profit membership association of multinationals.
Here is some info from the BRIBEline website: No names are requested or collected, and reports made to BRIBEline are not used for investigations or prosecutions. Instead, the information is aggregated and publicly reported by country and by sector (the customs service, the judiciary, etc.), shining a spotlight on the worst offenders, providing companies with an additional risk mitigation tool, encouraging governments to reduce corruption in their ranks and helping those working to increase transparency and reduce bribery more effectively target their efforts.
From Kevin Miller of Alston & Bird: In a recent decision – Louisiana Muncipal Police Employee’s Retirement System v. Countrywide Financial Corp. – Vice Chancellor Noble of the Delaware Chancery Court addressed “what would appear to be the outer limits of the minimal quantum of evidence a shareholder must adduce in order to demonstrate a credible basis to suspect corporate wrongdoing that would constitute a proper purpose to inspect corporate books and records under 8 Del. C. § 220.”
The only evidence presented to support LAMPERS allegation of corporate misconduct was a statistical correlation suggesting the possibility of backdating or springloading of certain stock options granted to executive officers of Countrywide Financial. The question before the Court was not whether the backdating or springloading of stock options had occurred, but whether LAMPERS had established a credible basis, by “presenting “some evidence,” from which the court could infer possible issues of corporate misconduct warranting further inquiry through a limited inspection of corporate books and records.”
The court expressed concern that by finding in favor of the plaintiff solely on the basis of a mere statistical correlation that it risked “opening a floodgate of demands from shareholders seeking to inspect the books and records of Delaware corporations on the basis of spurious or contrived statistical correlations purporting to suggest the possibility of corporate wrongdoing.” The court emphasized that indiscriminate “fishing expeditions” cannot be tolerated in Section 220 actions, that each case is fact specific and must be individually analyzed to avoid abuse of the Section 220 process.
Ultimately the court concluded that “although statistics alone must not be enough to establish the ultimate issues underlying these cases, i.e., that corporate wrongdoing in fact occurred, the Court discerns no compelling reason why a statistical correlation, if adequately supported by a sound, logical methodology and competent expert testimony, cannot constitute “some evidence” of possible corporate wrongdoing sufficient to permit a shareholder limited access to a narrowly circumscribed set of corporate books and records.”
Nevertheless, the court found that the statistical evidence presented by LAMPERS was just barely sufficient to carry the minimal burden imposed by Delaware law and only permitted a limited inspection of Countrywide Financial’s books and records. We have posted a copy of the opinion in our “Books & Records” Practice Area.
Europe’s “Big Bang”
As described in this article from the Economist, the “Markets in Financial Instruments Directive” took effect yesterday and effectively creates a common market for share, commodities and derivatives trading across 30 countries in Europe. The new rules should have a big impact as it reduces the hold of national stock exchanges over share trading and throws open the field to newer electronic exchanges and even big investment banks.
Required Reading? Nah…
A member found this old memo among his papers and sent it along – it’s scary to see a sampling of your writing from your youth, particularly when its dated before there was widespread use of personal computers. I wonder if the SEC Historical Society has this among it’s gems…
Thanks to Kris Veaco of the Veaco Group, we have posted a second “Pro or Troll?” quiz that will test your knowledge about board agendas. Give it a try (and let me know if you want to compile your own quiz for our amusement)!
Survey: CFOs and Controllers on Governance Issues
Grant Thornton recently conducted a national survey of CFOs and senior comptrollers on some governance issues. Here are the results:
1. Do you believe the roles of CEO and chairman of the board should be independent of each other? Yes – 79%; No – 21 %
2. Should the SEC revise 8-K rules to require reasons for all company dismissals of auditors, for all auditor resignations and for all instances in which the auditor chooses not to stand for reappointment? Yes – 76%; No – 21%
3. Do you believe shareholders in public companies should have greater access to the proxy? Yes – 66%; No – 30%
4. Do you believe that small cap companies who test internal controls (according to Sarbanes-Oxley) will be looked upon more favorably by investors than those who do not test internal controls? Yes – 69%; No – 30%
5. Do you consider the newly issued guidance (AS 5) from the SEC on internal controls and the new audit standard for auditing internal controls to be a significant improvement over previous rules? Yes – 44%; No – 48%
Our November Eminders is Posted!
We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
