Many members have been asking if we have heard what their peers are doing in reaction to the SEC’s new whistleblower rules. These survey results should help answer those questions:
1. In the wake of the SEC’s new whistleblower rules, our company:
– Has changed existing policies to address the new rules – 9.1%
– Hasn’t yet, but intends to change existing policies to address the new rules – 27.3%
– Not sure yet if will change existing policies – 42.4%
– Has decided not to change existing policies because considerations under the new rules are adequately addressed by existing policies – 21.2%
2. The board committee charged with consideration of the SEC’s new whistleblower rules is:
– Audit Committee – 68.8%
– Corporate Governance Committee – 18.8%
– Risk Committee – 0%
– Compliance Committee – 9.4%
– Compensation Committee – 0%
– Board as a whole – 3.1%
3. In the wake of the SEC’s new whistleblower rules, our company:
– Has provided incentives for whistleblowers to report internally first – 0%
– Hasn’t yet, but intends to provide incentives for whistleblowers to report internally first – 3.0%
– Not sure yet if will provide incentives for whistleblowers to report internally first – 60.6%
– Has decided to not provide incentives for whistleblowers to report internally first – 36.4%
4. In the wake of the SEC’s new whistleblower rules, our company:
– Has created a system to alert employees of the benefits of reporting internally (eg. sign updated employee handbook, fill out compliance questionnaires) – 12.1%
– Hasn’t yet, but intends to create a system to alert employees of the benefits of reporting internally – 24.2%
– Not sure yet if will create a system to alert employees of the benefits of reporting internally – 60.6%
– Has decided not to create a system to alert employees of the benefits of reporting internally – 3.0%
5. Since Dodd-Frank was enacted in mid-2010, our company has had:
– More whistleblower claims reported internally – 3.1%
– Same number of whistleblower claims reported internally – 90.6%
– Fewer whistleblower claims reported internally – 6.3%
DOL Adopts New “Adverse Employment Action” Standard for SOX Whistleblower Cases
As noted in this memo, the DOL’s recent Menendez v. Halliburton decision substantially lowers the bar for SOX whistleblowers in terms of establishing that they suffered a legally actionable adverse employment action. In that case, the DOL’s Administrative Review Board adopted a new standard governing “adverse employment actions” under Section 806 of Sarbanes-Oxley. Now, according to the ARB, an employee need not experience a “tangible” consequence as a result of protected activity.
In addition, the US District Court for the Western District of Washington continued the trend of granting employers summary judgment on a Section 806 claim on causation grounds in Kim v. The Boeing Co. Importantly, the Kim court also noted that the “definitely and specifically” standard federal courts have applied in determining whether a complainant engaged in protected activity is alive and well (at least within the Ninth Circuit), despite the finding in Sylvester v. Parexel International LLC.
Transcript: “Preparing for the SEC’s New Whistleblower Rules: What Companies Are Doing Now”
We have posted the transcript for our popular webcast: “Preparing for the SEC’s New Whistleblower Rules: What Companies Are Doing Now.” The program was newsworthy, borne out by this Davis Polk blog regarding “Whistleblowers and Internal Certifications.”
Last week, Corp Fin updated its Financial Reporting Manual for issues related to reporting requirements in an acquisition or disposition made by a variable interest entity, subsidiary guarantee release provisions, transitional registration statement options for first-time IFRS adopters, as well as other changes. The good news is that Corp Fin continues to add a summary of changes that comprise the current update at the beginning of the Manual. Last revised in July (and April, December and October before that), Corp Fin has been updating the Manual much more frequently than in the past, deciding to do so a little bit at a time rather than major rewrites.
In addition, the SEC has posted the Charter for the new Advisory Committee on Small and Emerging Companies.
More on “STA’s Beneficial Ownership Processing Study”
Last week, I blogged about a study from the Securities Transfer Association that evaluates 20 Broadridge invoices and claims that transfer agents can process beneficial ownership services cheaper than Broadridge. In this Securities Technology Monitor article, Broadridge responds as reflected in this excerpt:
“The latest survey by the STA consists of twenty imaginary prices for services it doesn’t offer, has no idea how to perform, and would never have to deliver,” says Chuck Callan, senior vice president of regulatory affairs for Broadridge in a statement to Securities Technology Monitor on Friday morning. “The STA continues to dodge requests to disclose its rate cards. Its data does not reconcile to any published rates.”
Callan went on to say that although the STA has been interested in providing proxy distribution services for Street-name shareholders that are better, faster, cheaper and more accurate than competitors “its interest is free from any commitment to write the check.”
He suggests that the “market-rates” for proxy mailings to Street name shareholders could come out to be far higher than the regulated rates. The reason: a study conducted by Compass Lexecon, an economics consulting firm on behalf of Broadridge which examined over 12,000 invoices for “actual work performed,” showed that the market-based rates issuers pay Broadridge for delivering proxies to registered shareholders are “substantially higher” than regulated rates for sending proxies to Street-name shareholders.
Webcast Transcript: “Current Developments in Capital Raising”
We have posted the transcript for our recent webcast: “Current Developments in Capital Raising.”
I continue to get member feedback on my series of blogs about novel ways that companies can market their IPOs. Here’s an excerpt from WilmerHale’s David Westenberg’s book on going public that provides more examples of companies using gimmicks to sell their IPO.
And here’s a note from Michael Schley of Larkin Hoffman in Minnesota:
You recently blogged about the James Page Brewing SCOR offering from 1999. I did that deal. I thought you might like a little more info. It was federally exempt under 504 (not Regulation A) and state registered in Minnesota under SCOR. I still think SCOR is underused (see the book I wrote for the state about SCOR and Angel Tax Credit; also see my crowdfunding memo from May, written before the SEC’s “Pabst” enforcement action). The brewery put a “stuffer” in their 6-packs in the liquor store coolers. We didn’t expect it but a lot of investors bought the Units as Christmas gifts so we closed the deal early so we could get the certificates out timely.
The president of the company was great at marketing. Once he had all these owners/members (close to 1,000 if my memory serves), he sent them all several business cards with information about the brewery, the brands, etc. on one side and a “why don’t you serve this great beer” statement on the other side for the investors to hand to restaurants and bars who didn’t serve their beer. This led to a lot of bars telling their distributors that they wanted to add it as a tap beer.
Finally, we have this SCOR offering from Surly Brewing Company (see this article). I haven’t seen one of those in some time – I have also never seen free beer for life offered in lieu of dividends…
SEC Enforcement Actions: Internal Control Violations
This settlement of Labarge with the SEC’s Division of Enforcement involves internal controls at a company, prompting a member to ask in our Q&A Forum (#6613): Does anyone know if there have been many of these?
I believe the answer is that there are probably quite a few. This type of result is a convenient mid-point for settlement of cases where the staff thinks there was accounting fraud (or FCPA bribery) but either isn’t sure it could prove it or agrees to drop the fraud (or bribery) charge as a reward for cooperation and willingness to settle.
XBRL Snafus: “My Public Float is Bigger Than Yours. A Quadrillion Dollars!”
This blog about XBRL errors by Anne Leslie-Bini is an eye-opener, particularly when its starts off by noting SEC Data Guy founder Ed Hodder has reported that 6 companies have submitted XBRL instance documents in their Q2 10-Q filing that disclosed public floats in the quadrillions of dollars. Sounds like something that Dr. Evil would disclose!
In all the “excitement” over the recent epidemic of lawsuits over say on pay, I want to be sure that companies and their advisers do not overlook another type of shareholder derivative lawsuit being filed based on executive compensation and company performance. Like the Shareholder Say on Pay suits, the merits of these suits are highly questionable. However, fighting them can cost firms significant time and money, to say nothing of the embarrassment and bad publicity stemming from a firm being sued over its compensation practices.
In a similar vein to the SOP lawsuits, we have seen a reappearance of shareholder derivative suits based on companies’ Code Section 162(m) disclosures in the proxy statement. The 162(m) lawsuits generally allege that the company’s proxy disclosures of the performance goals and/or its claims to follow a pay-for-performance philosophy are false and misleading. Paralleling the SOP suits, the 162(m) suits further allege that because the disclosures are inadequate, the compensation in question is non-deductible and, therefore, it constitutes corporate waste, unjust enrichment of the executives, and a breach of the directors’ duty of loyalty.
In April 2011, plaintiffs’ lawyers filed a shareholder derivative (“strike”) lawsuit (Abrams v. Wainscott) against AK Holdings alleging that its 2010 proxy statement contained false or misleading statements concerning compliance with Section 162(m)(here’s the complaint). AK Holdings’ 2010 proxy statement sought stockholders’ approval of its Long Term Performance Plan and its Stock Incentive Plan, both of which the proxy claimed provided compensation to executives that was tax-deductible under Section 162(m). The complaint alleges that, while the shareholders had approved these compensation plans, portions of the plans allowed too much discretion to increase compensation and thus did not in fact comply with the tax deductibility requirements of Section 162(m). The complaint also alleged that the company would have paid this compensation regardless of the result of the stockholder vote, an interesting allegation considering that the shareholder vote in fact approved the compensation package.
In July, the US District Court for the District of Delaware allowed a similar shareholder derivative suit, Hoch v. Alexander, to continue against the officers and directors of Qualcomm, alleging that they issued a false or misleading proxy statement regarding the 162(m) tax-deductible status of executives’ compensation (here’s the court order).
We’re only a few weeks away from our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices – both combined for one price) – so come join 2000 of your colleagues in San Francisco. Or join the thousands more watching live (or by archive) online – and receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.
Front-Page Article: Perils of Peer Group Benchmarking
On Tuesday, the Washington Post ran this lengthy article criticizing peer group benchmarking on the front page, in the upper left corner. The piece is well worth a read.
With an election year upon us and the unemployed becoming more willing to be vocal about perceived inequalities, I imagine we are going to see much more media attention to the processes by which CEO pay is set. Although much progress have been made over the past decade in corporate governance generally – and CEO pay specifically – I believe we are still in the infancy of the governance reforms that ultimately need to be made. There still are way too many stories of excesses – and not just by “outliers.” And as we’ve been saying all along, the overreliance on peer group surveys is one of the biggest adjustments that boards need to make…
Say-on-Pay and Smaller Reporting Companies
Here’s some good stuff from Mark Borges that he recently blogged in his “Proxy Disclosure Blog” on CompensationStandards.com:
A member inquiry came into the CompensationStandards.com “Q&A Forum” last week seeking data on how many smaller reporting companies had complied with the Dodd-Frank Act shareholder advisory votes on executive compensation (the “Say on Pay” vote and the Frequency vote) this year.
As you know, in late January, the SEC postponed compliance with these two votes for SRCs until 2013. Nonetheless, there were a number of SRCs that had filed their proxy materials prior to this announcement that contained proposals for the two votes. And, in spite of the Commission’s relief, most of those companies (although not all) proceeded to conduct the votes at their annual meetings.
In addition, a handful of SRCs that filed their proxy materials after the SEC announcement included the shareholder advisory votes on a “voluntary” basis (query whether they are obligated to hold a vote next year (if their shareholders expressed a preference for annual “Say on Pay” votes, or can “pass” until 2013).
While I haven’t been scrupulously looking for and identifying SRCs when I look for companies that are conducting the Dodd-Frank Act votes, I do note such companies when I see them. So here’s an admittedly incomplete picture of the smaller reporting companies that have conducted (or are conducting) a “Say on Pay” vote and a Frequency vote this year.
Smaller reporting companies that filed their proxy materials before the SEC issued its final “Say on Pay” rules
I identified 49 SRCs that filed proxy materials containing the two shareholder advisory votes before the SEC issued its final “Say on Pay” rules. All of these companies that followed through and conducted a “Say on Pay” vote had the proposal approved. Apparently, five of these companies scrapped the vote after the SEC rules were issued, as they reported their annual meeting voting results but no Say-on-Pay (or Frequency vote) results.
As for the Frequency vote,
– 11 companies filed proxy materials recommending annual Say-on-Pay votes. Ten of these companies saw their shareholders express a preference for future Say-on-Pay votes to be held annually. One company saw its shareholders express a preference for future Say-on-Pay votes to be held biennially.
– Two companies filed proxy materials recommending biennial Say-on-Pay votes. Both saw their shareholders express a preference for future Say-on-Pay votes to be held biennially.
– 34 companies filed proxy materials recommending triennial Say-on-Pay votes. Twenty-seven of these companies saw their shareholders express a preference for future Say-on-Pay votes to be held triennially. Two company saw their shareholders express a preference for future Say-on-Pay votes to be held annually. And, as noted above, five companies appear to have not conducted the vote at all.
– Two companies filed proxy materials with no recommendation on future Say-on-Pay votes. One saw its shareholders express a preference for future Say-on-Pay votes to be held biennially and other saw its shareholders express a preference for future Say-on-Pay votes to be held triennially.
Smaller reporting companies that filed their proxy materials after the SEC issued its final “Say on Pay” rules
So far, I have identified 23 SRCs that have filed proxy materials containing the two shareholder advisory votes since the SEC issued its final “Say on Pay” rules. Once again, I haven’t been tracking this particular item all that closely, so the actual number of SRCs that have conducted or are conducting the votes on a “voluntary” basis is, in all probability, slightly higher than this figure. As with the earlier group, all of these companies have had their “Say on Pay” proposal approved.
As for the Frequency vote,
– Six companies filed proxy materials recommending annual Say-on-Pay votes. Five of these companies have seen their shareholders express a preference for future Say-on-Pay votes to be held annually. One company has not yet reported its voting results.
– One company has filed proxy materials recommending biennial Say-on-Pay votes. This company has not yet reported its voting results.
– 13 companies filed proxy materials recommending triennial Say-on-Pay votes. Ten of these companies have seen their shareholders express a preference for future Say-on-Pay votes to be held annually. Three companies have not yet reported their voting results.
– Three companies filed proxy materials with no recommendation on future Say-on-Pay votes. Two of these companies have seen their shareholders express a preference for future Say-on-Pay votes to be held triennially and one has seen its shareholders express a preference for future Say-on-Pay votes to be held annually.
Final Thoughts
What does this data mean? Well, at least 67 SRCs have conducted “Say on Pay” votes this year, which is less than 3% of all the proxy statements that have been filed so far with the two Dodd-Frank Act shareholder advisory votes. As you might expect from smaller companies, all of the “Say on Pay” votes were approved; most with 85% – 90% shareholder support. I’ve seen only a couple of instances where the vote was close.
Second, as you also might expect, for the most part, companies that recommended that future “Say on Pay” votes be held every two or three years saw their shareholders agree with the recommendation (95%). This is in contrast with non-SRCs, where the company and shareholders agreed on this point only about half the time.
So even while almost three-quarters of the companies that held “Say on Pay” votes this year will be holding their next vote in 2012, about 60% of the SRCs that conducted votes this year will be sitting out this item next year.
Finally, here’s another query to chew on: of the 37 companies where shareholders expressed a preference for triennial “Say on Pay” votes (consistent with the company’s recommendation), will their next “Say on Pay” vote be in 2014, or, consistent with the SEC’s vision for transitioning SRCs into compliance, will they be required to hold a vote in 2013 (essentially, mimicking the requirement that applied this year to all non-SRCs)?
As this NY Times article notes, over 700 people were arrested on Saturday on the Brooklyn Bridge as part of the “Occupy Wall Street” protests that began a few weeks ago. 700 arrested – that’s a lot! On Monday, protestors dressed as “corporate zombies” eating Monopoly money – and the mass media is finally devoting attention to this movement after ignoring it initially.
In fact, Occupy Wall Street has now spread to most major US cities, as noted in this article. “Occupy K St” is planning to march on DC tomorrow, according to this Washington Post article. As I blogged when the protests started, it’s been fascinating to follow the protest on Twitter as many thousands from all over the world continuously weigh in as part of a virtual protest (use #occupywallstreet to see).
Some have been critical of Occupy Wall Street because they say the protestors must be lazy if they don’t have decent jobs. This Forbes article is the essence of that misguided view (watch this video and determine if you would characterize the protestors as lazy). As someone who recently stood for a semester before a group of bright young students at a Top 25 law school – a group who knew they had very little chance of getting a job in law anytime soon – I can tell you that view can’t be correct. They simply don’t have any meaningful opportunities because they don’t exist – not because they aren’t trying hard enough.
It’s true that this protest is not as clear cut as opposing a war. But it’s also clear that these protestors are angry about something – and it’s a movement that will continue to grow as the media reports on boards doling out multi-million dollar severance packages to fired CEOs (eg. NY Times article) while laying off and cutting the pensions of the general workforce. Bailed out banks taking actions just to enhance the paychecks of senior management (eg. “article). There certainly are plenty of reasons to protest these days.
Andrew Ross Sorkin penned this piece yesterday, positing this about the protest’s message:
At times it can be hard to discern, but, at least to me, the message was clear: the demonstrators are seeking accountability for Wall Street and corporate America for the financial crisis and the growing economic inequality gap. And that message is a warning shot about the kind of civil unrest that may emerge – as we’ve seen in some European countries – if our economy continues to struggle.
“Ultimately this is about power and greed, unchecked,” said Jodie Evans, the co-founder of Code Pink. She, too, said she wanted to see Wall Street executives go to jail. Consider the protests a delayed reaction to the financial crisis that has now reached a fever pitch as the public’s lust for scalp has gone unfulfilled. In Chicago on Monday, one sign read: “If corporations are people, why can’t we put them in jail?”
Are Institutional Investors Part of the Problem or Part of the Solution?
A few days ago, the Committee for Economic Development (CED) and the Millstein Center at Yale’s School of Management published this paper – “Are Institutional Investors Part of the Problem or Part of the Solution?” – authored by former GE General Counsel Ben Heineman and Stephen Davis. The paper argues that institutional investors have a significant impact on the market but not enough is known about how they are governed – and calls for construction of a database on the governance and practices of institutional investors.
SEC’s OCIE’s Report on Rating Agency Exams: “Apparent Failures”
Last Friday, as noted in this press release, the SEC’s OCIE released this report based on exams of the 10 credit rating agencies – as required by Dodd-Frank – which created a stir because all 10 had “apparent failures” as noted in this Reuters’ article. The SEC has requested remediation plans from each of the agencies within 30 days and is continuing its investigation. The good news is that OCIE reported that the Big 3 rating agencies have devoted sufficient resources to deficiencies identified in a ’08 SEC report.
This Bloomberg article analyzes the current Board composition of the PCAOB – and notes how long-time Board Member Dan Goelzer’s replacement may well tip the balance regarding new PCAOB Board Chair’s Jim Doty’s ambitious reform efforts (also see Francine McKenna’s article on the topic). Here’s input that I received from a member:
As this article indicates, the SEC Chairman is now faced with a clear decision – does she appoint a person who is dedicated to investor protection or does she select the candidate the accounting profession is supporting? The profession has put forward a candidate, a partner from one of the firms, a firm that recently hired the top advisor to Schapiro and who Schapiro has hired other senior staff from. Investors, including the CII, have also weighed in with their candidate as well.
And while it is a vote of all Commissioners, given the current composition of the SEC with just four – this is clearly the decision of the SEC Chairman. During the past year, Chairman Schapiro and the SEC have picked three members of the PCAOB. One was a partner from one of the firms who has expressed pro audit firm views, a law partner who defended the Big 4 firms and has expressed similar views, and Chairman Doty whose views to date have been pro-investor protection.
By the way, the PCAOB published Staff Audit Practice Alert #8 yesterday to increase auditors’ awareness of risks when performing audits of companies with operations in emerging markets.
STA’s Beneficial Ownership Processing Study
Yesterday, the Securities Transfer Association (STA) released this study that evaluates the costs of beneficial owner proxy processing services, as compared to providing those same services to registered shareholders. After evaluating 20 Broadridge invoices, the study concludes that transfer agents can probably do it cheaper if the model was one of competitive pricing rather than a regulatory fixed rate. Having visited Broadridge’s processing facilities myself a few years ago, I imagine it would be hard for anyone to realistically compete with Broadridge’s actual processing of accounts – but it seems that there could be pricing issues that the NYSE needs to address.
Webcast: “Materiality: The Hardest Determination”
Tune in tomorrow for the webcast – “Materiality: The Hardest Determination” – to hear Linda Griggs of Morgan Lewis, John Huber of FTI Consulting, Eric Olson of Morrison & Foerster, and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster provide practical guidance about how to make “materiality” determinations for disclosure purposes, as well as how to make those determinations after-the-fact (i.e., the litigator’s perspective).
On Friday, this WSJ article created a stir regarding a possible change in strategy by the SEC’s Enforcement Division and how it brings cases. Here’s an excerpt from the article:
Securities and Exchange Commission officials are trying to make it easier on themselves to hold more individuals responsible for wrongdoing during the financial crisis. In a major shift from the agency’s traditional enforcement strategy, the SEC could file more civil cases in which defendants are accused of negligence only, rather than harder-to-prove charges of intentional wrongdoing or recklessness, according to SEC officials.
In the past, the SEC sometimes persuaded individuals to agree to narrow negligence charges in order to settle the case, rather than fight the agency in court over more-serious allegations, according to defense lawyers. The SEC generally wasn’t willing to risk a courtroom defeat if the only allegation was negligence. The penalties for negligence typically are much less harsh than for intentional fraud, with smaller fines and less risk of a ban from working in the financial industry. A charge of negligence also can result in less reputational damage for a defendant than outright fraud.
So far, the strategic change has been evident in just one major enforcement action. But a flurry of negligence charges is possible as the agency pushes ahead with its investigations of Wall Street’s behavior before and during the financial crisis, according to SEC officials.
SEC’s Inspector General: The Mark Cuban Report
On Friday, the SEC’s Inspector General issued this report absolving the Staff of any misconduct during the insider trading investigation of Mark Cuban. As I blogged a few years ago: “a complicated aspect of the Cuban case is the strange involvement of a SEC Enforcement Staffer who hadn’t been working on the investigation into Cuban’s alleged insider trading – but yet felt compelled to send emails to Cuban about various aspects of his life while the case was being put together. This eventually led to Cuban responding to this rogue Staffer via email, copying then-SEC Chair Chris Cox.”
On Friday, the SEC’s IG also released his report relating to the payment of living expenses of Henry Hu – and reimbursing the University of Texas for what Henry would be making there – for his one-year stint as head of RiskFin…
Our October Eminders is Posted!
We have posted the October issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Yesterday, the SEC issued Fee Rate Advisory #3 to remind people about the new filing fee rates become effective tomorrow, as I blogged about a few weeks ago (the rate slightly declines to $114.60 per million, a 1.2% price drop). As explained in this SEC order, these new rates become effective regardless of when Congress passes the government’s budget. This is unlike past years, when the new rates didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year, which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battled over the government’s budget.
Court Order Available: Beazer Home’s Say-on-Pay Lawsuit Dismissal
Earlier this week, I blogged about the dismissal of Beazer Home’s say-on-pay lawsuit being dismissed and I noted that the judge rule from the bench. The judge has now issued a 24-page court order explaining the dismissal, which we have posted in the “Say-on-Pay” Practice Area on CompensationStandards.com.
SEC Sets Conflict Minerals Roundtable for October 18th
Yesterday, the SEC announced that it will hold a roundtable on conflict minerals on October 18th. A final agenda including a list of participants will be announced closer to the date of the roundtable. Before Section 1502 was dumped into the “Miscellaneous” section of Dodd-Frank, who would have thunk that the SEC would be grappling with this topic…
Congrats to Me! The NACD Directorship 100
Recently, I was honored to make the list of 100 most influential people in corporate governance according to Directorship, a publication recently bought by the NACD. There are many luminaries much brighter than me on the list but I’m happy to take what I can get…
Under at least two scenarios these days, a director may be required to submit a resignation letter – either when the company’s corporate governance guidelines require it when a director has a change in his/her job responsibility or as part of a majority vote provision. Below are our recent survey results about director resignations:
1. If a director resignation scenario arises, the process our company uses to obtain the letter involves:
– Corporate secretary or general counsel reminds the director of the need to submit the resignation letter – 47.1%
– Board chair or governance committee chair reminds the director of the need to submit the resignation letter – 41.2%
– Full Board reminds the director of the need to submit the resignation letter at a board meeting – 0.0%
– Nobody reminds the director of the need to submit the resignation letter – 8.8%
– Other – 2.9%
2. After a director resigns, the process our company uses as part of an “exit” interview – and to ensure that a Form 8-K under Item 5.02(a) is not required – involves:
– Board meets in executive session without the “resigning” director – 2.9%
– Board chair meets with the resigning director – 14.7%
– Nominating/governance chair meets with the resigning director – 23.5%
– CEO meets with the resigning director – 11.8%
– General counsel meets with the resigning director – 26.5%
– Corporate secretary meets with the resigning director – 8.8%
– Other – 11.8%
Please take a moment to participate in this “Quick Survey on D&O Questionnaires and Director Independence.”
Shame on Regulators: European Bank Blowups Hidden With Shell Games
From Lynn Turner: This Bloomberg article highlights what fools the European regulators and accounting standard setters now look like. The article rehashes how the banks and politicians ganged up together on both the FASB and IASB to immensely water down their rules three years ago, so that banks could prepare misleading financial statements that omitted losses on their investments. At the time, the SEC also failed to defend the FASB and in fact, when questioned, told a congressman they would see to it the FASB got the rule changes done in just 30 days.
Now, as the article highlights, this change has allowed (1) banks to avoid reporting the losses they have suffered on Greek Debt, (2) banks are slowing “dripping” their losses into their financials over a number of years including years to come, much like Chinese water torture, (3) resulting in banks failing to actively manage their problems, and (4) extending the problem and probably the magnitude of losses incurred. Back at the beginning of the 1990s, a report from the GAO noted the US government had engaged in similar financial shenanigans until Richard Breeden became chair of the SEC and forced the S&Ls and banks to report their true losses. Unfortunately, the politicians undid his work and the result is a negative outcome for investors.
This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– The Down Economy: Special Negotiating and Diligence Items to Consider
– Changing Due Diligence Practices for Uncertain Times: An In-House Perspective
– Due Diligence: Implications of Dodd-Frank’s Whistleblower Provisions for Acquirors
– $17.50 from Column A and $17.50 from Column B: “50/50 Split” Implicates Revlon
With the fate of mandatory proxy access behind us, the latest common question I have been hearing from members is: “what is the timing of Corp Fin’s proxy plumbing project?” On a recent Glass Lewis webcast, Skadden Arps’ Brian Breheny noted that rulemakings emanating from the proxy plumbing project will likely come in waves, with greater regulation of proxy advisory firms being one of the first. But Brian noted that even this was not likely to be proposed this year given so many Dodd-Frank rulemakings still to come. Brian thought it was likely to happen in ’12 – but even then the timing is uncertain. So nothing will likely be in place until the proxy season in ’13 at the earliest here.
As for what the SEC might propose, Brian believes companies may be disappointed if they are waiting for the SEC to change the relationship between proxy advisors and their investor clients. Rather, the SEC could modernize Rule14a-2(b)(3) by:
– Requiring more disclosure regarding potential conflicts of interest
– Requiring proxy advisor recommendations to be filed with the SEC, but on a delayed basis so as not to harm any competitive advantage for the proxy advisors
– Requiring proxy advisory firms to describe their review processes in filed reports
The SEC also could amend the investment advisor rules to remove a barrier to registration so that proxy advisory firms can – or are required to – register regardless if they have the requisite amount of assets under management that the rules currently require. So far, a number of commenters asked the SEC to consider requiring proxy advisors to provide a draft of their recommendations to issuers before publication. Brian thinks it’s unlikely that the SEC would propose such a rule, if only because it would be difficult to craft and police.
Finally, Brian surmised that because Rule 14a-9 already applies to proxy advisors, the SEC could possibly bring actions for fraud under 14a-9 if solicitation material was deemed to be false or misleading – however, such actions are difficult to bring because the question as to whether proxy materials are false or misleading is dictated by the facts and circumstances of the matter. Here’s the comment letters submitted to the SEC on proxy plumbing so far. Thanks to Darla Stuckey of the Society of Corporate Secretaries for taking notes on Brian’s thoughts!
DOL to Repropose Changes to Its Fiduciary Definition Rule
Last week, the DOL announced that it will re-propose its rule on the definition of a fiduciary to collect more feedback from the public – and Congress. Given some of the language in the press release about giving folks time to comment on the agency’s “updated economic analysis,” it appears this extension was related to the recent proxy access court decision – particularly since the DOL already has received ample feedback. The press release notes: “This extended input will supplement more than 260 written public comments already received, as well as two days of open hearings and more than three dozen individual meetings with interested parties held by the agency.” Anyways, this rulemaking has bearing on whether proxy advisors are considered fiduciaries. The new timing is that a new proposal is expected in early ’12.
Changing Due Diligence Practices
In this DealLawyers.com podcast, Andrew Sherman of Jones Day – and co-author of a new book, “The AMA Handbook of Due Diligence” – provides some insight into how due diligence practices are changing, including:
– How do the deal markets look these days?
– How have due diligence practices changed over the past few years?
– What practices do practitioners often overlook?
– What is the best way to determine if someone doing diligence knows what they are doing?
