On Monday, the Boston Globe ran this breathless story at the top of page one. I went into it expecting an analysis about the judgment calls we all make in drafting compensation disclosure and thought there might be journalistic oversimplification as typically happens in the mass media. Some might say that pay disclosure is not necessarily a science, but an art.
However, one has to concede that math is still a science – and the Globe’s research certainly raises eyebrows about how seriously some companies are taking their pay disclosures. The Globe looked at about 210 local company proxy statements, adding up the columns in the summary compensation tables. It turns out that 55 times – at 34 companies – the totals of the columns did not match the number the company reported in the “Total” column. Um, that’s over 15%.
At most of these companies, the Globe determined (or the company conceded) that it was some sort of math or clerical error – transposed numbers, extra digits, etc. In some cases, when the company updated the stock compensation numbers for the past years using the SEC’s new methodology, they just changed the column in the middle of the table but didn’t update the total. Truly, the devil is always in the details and I would urge companies to double-check their numbers this year as I imagine a lot of newspapers are going to be following the Globe’s lead and do the math themselves in their local areas. Thanks to Mike Andresino of Posternak for bringing the article to my attention!
Our Timely Ten Tips: Preparing Say-on-Pay Disclosure Now
We have just posted the Fall 2010 issue of the Compensation Standards newsletter, in which Mark Borges provides ten timely tips for preparing say-on-pay disclosure. Note that we are making a big change for CompensationStandards.com for 2011 – we are moving the online version of “Lynn, Borges & Romanek’s Executive Compensation Disclosure Treatise & Reporting Guide” onto that site. So that when you try a no-risk trial or renew for 2011 – remember that all memberships expire at the end of the year – you gain immediate access to it. The 2011 version of the Treatise will be posted within the next few weeks; the 2010 version is posted now.
Poll: How to Handle Rating Agency Communications After Reg FD Repeal?
On Monday, the SEC’s recent Regulation FD adopting release was published in the Federal Register – so October 4th is the effective date for the removal of the rating agency exemption that I blogged about last week.
In that blog, I noted that companies may want to pursue stand-alone confidentiality agreements with the agencies. Now I’m hearing from some companies that they have approached a few agencies and have heard pushback from them about entering into stand-alone agreements. Rather, I hear these agencies believe that companies can rely upon the internal confidentiality policies that the agencies already have. Here is a poll on what your company intends to do:
Yesterday, in this 2-page order, the SEC granted a stay of its proxy access rules pending resolution of the Business Roundtable and Chamber of Commerce petition for review with the DC Circuit Court of Appeals (I blogged about the lawsuit last week) so that the SEC could join the groups in seeking an expedited review by the court. As expected, the SEC’s order does not address the merits of the plaintiff’s claims.
In its order, the SEC also delayed the amendment to Rule 14a-8, which would have allowed shareholders to file bylaw proposals that seek more permissive access procedures. That rule change was not challenged by the plaintiffs – but he SEC said it decided to delay the implementation of this rule change, “because the amendment to Rule 14a-8 was designed to complement Rule 14a-11 and is intertwined, and there is a potential for confusion if the amendment to Rule 14a-8 were to become effective while Rule 14a-11 is stayed.”
Proxy Access: What is the Timing for the Court’s “Expedited Review”?
Prior to this stay, the new rules were scheduled to become effective November 15, 2010 – and apply to companies that mailed proxy materials mailed for its last annual meeting after March 13, 2010. As the SEC’s order was silent about how to determine the manner in which the stay will ultimately impact the effective date of the rules, I have been bombarded with questions about what the possible timing of the expedited review.
Here is what Cooley is saying – excerpted from this memo – about timing: “Even in highly expedited cases, in most of the courts of appeals, each party will have about three weeks for their principal briefs and a week or more for the reply. We think that, in a case like this, there is likely to be argument heard. As a result, we estimate that it may take a few months to resolve, which means that the potential application of proxy access for this proxy season will likely be in limbo for many issuers until more is known about the schedule. The court has not yet set a briefing schedule, nor is there anything on the Court’s docket showing that it has received a motion to expedite the briefing schedule.”
This seems right as this BusinessWeek article notes a SEC spokesperson as saying this will be resolved in “late Spring”…
Interestingly, dozens of law firms already have sent out emails regarding this development – but these firms had remained silent when the lawsuit was filed last week. Notably, very few of the emails dealt with this timing issue, which I imagine is the one item that folks want to know about most.
Proxy Access: Corp Fin’s Position on the Application of Advance Notice Bylaws
Below is a Corp Fin position as repeated from this memo from Cooley (a position which was also articulated by Corp Fin Director Meredith Cross at a New York Chapter meeting of the Society of Corporate Secretaries on Friday):
An SEC staff member has just responded to a question I had posed to the staff about a month ago with regard to the viability of advance notice bylaws in connection with Rule 14a-11 (proxy access) nominations. While it’s clear that advance notice bylaws apply with regard to nominations made outside of the proxy access rules, it was not clear whether the company could, in the SEC’s view at least, preclude a proxy access candidate’s nomination at the meeting if the nominating shareholder did not comply with the company’s advance notice bylaws. Most firms took the position that proxy access “trumped” the advance notice bylaws and that the company could not preclude the nomination and election of the candidate at the meeting, even if the nominating shareholder did not comply with the advance notice provisions. The staff member told me that, to the contrary, the staff’s position is that the advance notice bylaws cannot be ignored.
Moreover, a predicate to Rule 14a-11 is that there is a state law right to nominate, and failure to comply with the advance notice bylaw means, in effect, that there is no state law right to nominate. As a result, not only could the nomination of the candidate be precluded at the meeting, but, surprisingly, the company could use the fact of noncompliance to exclude the nominee from the proxy, subject to the company’s following the process outlined by the SEC for exclusion of nominees, including notice to the SEC.
The question of director qualifications is, from the staff’s perspective, a slightly different animal. It’s clear from the release that if the bylaws include reasonable director qualifications that relate to the nominee’s ability to serve as a director, then a Rule 14a-11 nominee must be included in the proxy statement even if the nominee does not satisfy the qualifications. The company could, however, refuse to seat the director, even if elected, in compliance with Delaware (or other state) law. But what if the bylaws were phrased to prevent not only service as a director, but the nomination of a director that did not meet the reasonable qualifications in the bylaws? Again, if the bylaws cut off the right to nominate the director, then the 14a-11 nominee could be excluded, not just from nomination, but also from the proxy statement.
However, in advising the SEC that the company intended to exclude the nominee, the company would need to show that the qualification was generally applicable across the board, not one that could be satisfied prior to nomination (such as a qualification that the nominee be a shareholder) and that the qualification would be a valid limitation on the right to nominate under Delaware (or other state) law. (I assume that the difference with regard to advance notice provisions is that it’s widely accepted that reasonable advance notice provisions are permitted under Delaware law to preclude nominations, whereas qualification requirements for the nomination of directors was less clear (at least to the staff if not to Delaware counsel), so the threshold to convince the staff regarding qualifications would be higher.)
The staff member said that the staff would, however, look askance at a bylaw provision that suggested that the company was really just trying to “opt out” of Rule 14a-11. His example of that type of circumvention was a director qualifications bylaw that provided that an individual could not be nominated if the nomination occurred during the open window period for proxy access nominations, thus creating an unavoidable conflict with Rule 14a-11.
This interpretation seems to open up the field for bylaw limitations on the right to nominate, provided that they would could be supported as valid under Delaware law. Of course, the summary above is just the staff’s take on the matter. A nominating shareholder that wants to contest a company’s attempt to exclude a nominee could well end up seeking a judicial determination, which could easily have a different result.
Proxy Access: The Debate Over What to Do If the Rules Stick
While we wait to see what happens with the SEC’s new proxy access rules, I thought it might be useful to point out the heated debate over what types of actions that companies might take if access “sticks.” Professor JW Verret has been publishing his ideas about what type of defenses companies might consider adopting in the wake of access – and here is some commentary in response.
On Friday, Corp Fin updated its Financial Reporting Manual for issues related to Regulation S-X Rule 3-09, Rule 3-10, and Rule 3-16, as well as other changes (eg. Topic 1500 of the Manual). The revisions are reflected as of June 30th and aren’t attributable to Dodd-Frank. Corp Fin has been updating the Manual much more frequently than in the past, deciding to do so a little bit at a time rather than major rewrites as in the past.
Dodd-Frank: The SEC Fleshes Out Its October Rulemaking Schedule
On Friday, the SEC listed the specific rulemakings that are planned for October in this schedule. As noted earlier, the schedule includes proposals for say-on-pay and say-on-golden parachutes, as well as disclosure of voting by institutional money managers on executive pay. Proposals regarding compensation committee/advisor independence; mine safety and disclosure relating to resource extraction issuers are not coming until November.
Among other planned rulemakings, October also includes a request for comment on a study regarding reducing the costs of smaller companies complying with Section 404 of Sarbanes-Oxley (ie. internal controls). The SEC will also establish five new Offices this month: Whistleblowers, Credit Ratings, Investor Advocate, Women and Minority Inclusion and Municipal Securities. Here is testimony before the Senate Banking Committee from SEC Chair Schapiro regarding how the rulemaking is proceeding.
On Friday, the SEC also issued its report on why the market suddenly crashed back in May – as noted in this NY Times article, a single $4 billion trade led to the “flash crash.” Scary…
Holding the Virtual Annual Meeting: Factors to Consider and Practice Pointers
We have posted the transcript for the recent webcast: “Holding the Virtual Annual Meeting: Factors to Consider and Practice Pointers.”
Showing just how hard this blogging stuff can be, I am blogging a slight correction to my recent blog in which I complained how folks were coming to the wrong conclusion about which companies will have to deal with proxy access during the upcoming proxy season – and then I mentioned March 15, 2010 as the D-Day, which is technically incorrect.
Thanks to Todd Bloomquist of Winston & Strawn, who bothered to do the math and notes that “if a company mailed its proxy materials on Saturday, March 13, 2010, then the 120-day count would fall on November 13, 2010. Because November 13, 2010 is a Saturday, the proxy access notification window would actually be open for one day on Monday, November 15, 2010 under Instruction 1 to Rule 14a-11(b)(10).” In practice, I’m not sure it matters much because a quick Edgar search reveals that no companies mailed on that Saturday (so March 15th essentially is the threshold date in practical terms).
In erroneously pegging March 15th as the D-Day, I did what I think a lot of other folks have done – simply took the example provided by the SEC Staff during its open Commission meeting and moved the dates without thinking about how the weekend stuff would impact the calculation (in other words, few folks bothered to do the math themselves – I still haven’t!). Of course, this analysis is moot if the Business Roundtable and Chamber of Commerce are victorious in their motion for a stay of the effectiveness of the SEC’s new access rules (as I blogged about yesterday).
Trust me, it’s hard to blog daily and not occasionally get something wrong or offend someone accidentally. Particularly since most breaking news items come at the end of the day – and therefore the window to conduct research to ensure your analysis is correct is somewhat limited (and sometimes feels like a moving target). The community adds much more value than I possibly could alone – please keep it coming.
Thankfully my blogs have never been so controversial that I had to quit in order to protect my family, as recently happened to Prof. Todd Henderson of the “Truth on the Market” blog (see this Forbes blog).
More on “Dodd-Frank: SEC Removes Rating Agency Exemption from Reg FD”
A prime example of the challenges of blogging is how I needed to update my Reg FD piece yesterday morning to add some thoughts from Nancy Wojtas that I hadn’t seen anyone else muse about. In that updated blog, I noted the possibility that a Regulation FD obligation may be triggered if a rating agency were deemed to be acting as an agent of the issuer (I did call it a “stretch”). A member emailed these thoughts on that issue:
Even if a rating agency would be deemed an agent of the issuer, there should not be a problem, because the communication to the rating agency (as an agent) should be covered by the “trust and confidence” exception, and then the rating agency’s disclosures (at least for Moody’s, S&P and Fitch) would be FD compliant, since they always announce their ratings in press releases.
Rating agencies are not in the fourth category of covered persons under FD (a person “Who is a holder of the issuer’s securities, under circumstances in which it is reasonably foreseeable that the person will purchase or sell the issuer’s securities on the basis of the information.”) because of the requirements of being an NRSRO. Specifically, Section 15E(g) and Rule 17g-4 under the Securities Exchange Act of 1934 requires that NRSROs implement and maintain policies prohibiting its employees from inappropriately communicating information they learn when providing ratings services or engaging in transactions in securities (including derivatives) when they possess material, non-public informa¬tion or confidential information concerning the issuer of such securities. Thus, there is a reasonable basis for concluding that NRSROs and their employees would not be expected to trade securities based on information that issuers furnish an NRSRO.
Ironically, it was a prior Congressional action, the Credit Rating Agency Reform Act of 2006, that took rating agencies out of FD. That was the Act that amended the definition of investment adviser so that Section 2(a)(11)(F) of the Investment Adviser’s Act specifically excludes NRSROs (unless such organization engages in issuing recommendations as to purchasing, selling, or holding securities or in managing assets, consisting in whole or in part of securities, on behalf of others, which the major ratings agencies don’t). That was the same Act that created 15E(g) imposing the confidentiality requirements on NRSROs.
I do note that the few law firm memos I have seen so far on this topic vary in their analysis of this rule change – so I don’t feel so bad about needing to update my blog early yesterday. Note that if you read this blog via RSS feed or through Knowledge Mosaic (which populates its list of blogs thru RSS feeds), you likely are not reading the “final” product. I often tweak the blog once or twice right after it’s posted. You may be better off inputting your email address on the left side of this blog – which alerts you to when our daily blog is posted and you can read the genuine article.
Our October Eminders is Posted!
We have posted the October issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Yesterday, the Business Roundtable and US Chamber of Commerce filed this petition for review in the US Court of Appeals for the DC Circuit against the SEC to invalidate the recently adopted proxy access rules. Among others, the plaintiffs allege that the rules are arbitrary and capricious; violate the Administrative Procedure Act; that they violate companies’ rights under the Constitution’s 1st and 5th Amendments; and that the SEC failed to properly assess the rule’s effects on “efficiency, competition and capital formation” as required by law. Note that I believe the plaintiffs are just challenging the SEC’s adoption of Rule 14a-11 – but not the changes to Rule 14a-8 (ie. the shareholder proposal rule) that the SEC recently adopted.
The Business Roundtable and Chamber of Commerce also filed a motion (see pg. 4 of the PDF) that the SEC stay implementation of the rules – including the November 15th effective date – until the DC Circuit has ruled on the challenge. The motion seeks a response from the SEC by next Tuesday, October 5th. If the SEC denies that request, then the plaintiffs plan to file a similar motion with the DC Circuit. Here’s the related press release.
In response, the SEC released this statement: “We believe that the Commission’s proxy access rules are both lawful and in the best interests of the public and shareholders. The Commission will, of course, carefully consider and timely respond to the motion for a stay.”
As an interesting sidenote, I have yet to see a single law firm push out any information about this lawsuit (other than this exception in the form of a blog). In contrast, every firm under the sun sent out an immediate notice when the SEC adopted the access rules. Not that it matters an iota, but I just thought this was an interesting factoid…
Dodd-Frank: SEC Removes Rating Agency Exemption from Reg FD
Here’s one of those “would be” mini-Dodd-Frank sleepers. Section 939B of Dodd-Frank directs the SEC to amend Regulation FD within 90 days of the law’s enactment to remove the exemption for rating agencies that is contained in FD (Rule 100(b)(2)(iii)). Yesterday, the SEC issued this adopting release taking that action. The SEC adopted a final rule change without proposing it first because the legislative mandate meant its action “does not involve the exercise of Commission discretion or policy judgments.” The amendment will become effective immediately upon its publication in the Federal Register.
Note the general exemption for confidentiality agreements remains in Reg FD (Rule 100(b)(2)(ii)), which would seem to negate the impact of the exemption removal because most agreements between rating agencies and rated companies contain confidentiality provisions (and if they don’t, a simple work-around is for a rating agency and a company to execute a stand-alone confidentiality agreement now).
But upon closer inspection, I’m not sure this change is that significant as Reg FD applies to communications to certain market participants, including investment advisers. Although at one point, most rating agencies were investment advisers registered with the SEC and subject to Reg FD, the major credit rating agencies more recently have terminated their registration as investment advisers and qualified instead as nationally recognized statistical rating organizations (NRSROs). As a result, they are no longer among the enumerated persons that trigger FD violations. That means that the exception for credit rating agencies no longer was necessary and that elimination of the exception has no real impact at this point. Hence, this likely is the purpose of this Dodd-Frank provision – we don’t know for sure as it has no discernible legislative history (note the purpose of the provision was not touched upon in the SEC’s adopting release).
Companies will still need to think about entering into confidentiality agreements with rating agencies since there could be a Rule 10b-5 issue when material nonpublic information is shared. Perhaps there is one argument that can be made regarding Reg FD – that a Regulation FD obligation may be triggered if a rating agency were deemed to be acting as an agent of the issuer. Perhaps that’s a stretch but under the right facts and circumstances, a possibility. Thanks to Nancy Wojtas of Cooley for her analysis of this subject!
SEC Dealt Setback by Second Circuit in Galleon Insider Trading Case
A federal appeals court on Wednesday ruled against the Securities and Exchange Commission in its effort to get wiretaps from the criminal prosecution of Raj Rajaratnam, the founder of the Galleon Group hedge fund. The United States Court of Appeals for the Second Circuit overturned an order from Judge Jed Rakoff, of Federal District Court in Manhattan, that would have compelled Mr. Rajaratnam and a co-defendant, Danielle Chiesi, to give the commission the wiretapped recordings of hundreds of their conversations. Prosecutors in the criminal case provided the recordings to Mr. Rajaratnam and Ms. Chiesi during discovery proceedings, and the SEC had wanted to use them as evidence in its civil insider-trading case.
Three judges on the appeals court sent the case back to Judge Rakoff, who is overseeing the civil case, saying he should have waited on a ruling in the criminal case on whether the government’s wiretaps were legal. The federal judge in the criminal case, Richard Holwell, has not yet ruled on whether the wiretaps were legally obtained. Judge Holwell plans to hold a hearing on Monday to consider whether prosecutors provided enough information about the need for the wiretaps.
I’ve seen too many people report that proxy access doesn’t apply to companies that mail their proxy materials before March 15th, 2011 – that is an incorrect statement of how the SEC’s transitional rules work. As noted earlier in this blog, since the SEC’s adopting release was published in the Federal Register on September 16th, the new access rules will become effective on November 15th – which would mean that companies who mailed their 2010 proxy statement prior to March 15, 2010 would have a window period that fully pre-dated the effective date of the rules for this proxy season – thus meaning that these companies would not be subject to proxy access for the 2011 proxy season.
Below is the excerpt from the adopting release that lays out the transition period:
Rule 14a-11 contains a window period for submission of shareholder nominees for inclusion in company proxy materials of no earlier than 150 calendar days, and no later than 120 calendar days, before the anniversary of the date that the company mailed its proxy materials for the prior year’s annual meeting.671 Shareholders seeking to use new Rule 14a-11 would be able to do so if the window period for submitting nominees for a particular company is open after the effective date of the rules. For some companies, the window period may open and close before the effective date of the new rules. In those cases, shareholders would not be permitted to submit nominees pursuant to Rule 14a-11 for inclusion in the company’s proxy materials for the 2011 proxy season. For other companies, the window period may open before the effective date of the rules, but close after the effective date. In those cases, shareholders would be able to submit a nominee between the effective date and the close of the window period.
I know this excerpt can be challenging to understand – but during the SEC’s open Commission meeting adopting the rules, Staffers did explain in plain language how it works in practice and what I have blogged from the beginning is correct.
If you’re trying to figure out what your “mailing date” was for this past season, I imagine the SEC will look for that date the way it does under Rule 14a-8 (as that issue is not clearly addressed in the access adopting release). So the date of the proxy statement likely controls (although if your affidavit of mailing has a different date, that might control – the date on the affidavit hopefully would not be earlier than the date on the proxy statement since definitive proxy materials need to be filed with the SEC before delivery commences.
Join us on October 20th for the webcast – “The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank” – to hear former Senior Staffers Marty Dunn of O’Melveny & Myers; John Huber of Latham & Watkins; Brian Lane of Gibson Dunn and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster weigh in on the open issues related to the new proxy access rules plus all the latest from Corp Fin on other matters.
SEC Approves Nasdaq’s (and NYSE’s) Rule Change on Broker Nonvotes and Executive Pay
Yesterday, the SEC approved a Nasdaq rule change on an accelerated basis that amends its proxy voting rule – Rule 2251 – to prohibit broker-dealers from voting on the election of directors, executive compensation, or any other significant matter, as determined by the SEC, unless instructed by the beneficial owner of the shares.The amendment was required to comply with Section 957 of Dodd-Frank.
A few weeks ago, the SEC approved a change to the NYSE’s Rule 452 that prohibits broker-dealers from voting uninstructed shares if the matter to be voted on relates to executive compensation. The change expressly provides that “executive compensation matters” include the three Say-onPay votes created under new Section 14A of the Exchange Act (as added by Section 951 of Dodd-Frank).
Dissecting the Modern Poison Pill
Tune in tomorrow for the DealLawyers.com webcast – “Dissecting the Modern Poison Pill” – to hear Rick Alexander of Morris Nichols, David Katz of Wachtell Lipton and Cliff Neimeth of Greenberg Traurig examine the use of poison pills and how they are constructed in the wake of Selectica, Yucaipa and Barnes & Noble, including factors you should consider when devising a pill. If you are not yet a member, try a 2011 no-risk trial and get the rest of 2010 for free (including access to this program).
Since there didn’t seem to be much of a backlash to last year’s slate of companies that conducted virtual-only annual meetings, I was beginning to think that the objections expressed a decade ago had dissipated. But as laid out by Jim McRitchie in his blog, many of the biggest active holders did object to Symantec’s recent virtual meeting – including CII, CalSTRS and CalPERS. Symantec is the first Fortune 500 company to conduct an all-electronic meeting.
Among other concerns, some of Symantec’s shareholders who attended electronically were not happy that they didn’t have their submitted question answered by management during the meeting (nor did 3 of the company’s 11 directors attend online), as laid out in this NY Times column. Suddenly, there has been a lot of negative press surrounding virtual-only meetings as here is yet another piece from Reuters that was published a few days before the NY Times piece…
Congrats to Keir Gumbs – a former Corp Fin Staffer, who has to rate among the most beloved in the history of the Division – for making Partner at his firm…
Pension Games Threaten Market
Since it doesn’t neatly fit into what most of our members deal with in their practice, I’ve been trying to resist blogging about the ongoing madness with state and local municipalities and how they may be the next domino that topple our markets. But this Bloomberg article with commentary from former SEC Chair Arthur Levitt and former SEC Chief Accountant Lynn Turner provides a great description of what is taking place there…
The video archive of last weeks’ pair of Conferences – the “5th Annual Proxy Disclosure Conference” & “7th Annual Executive Compensation Conference” – are posted. Hopefully, you’ve talked to some of the many that attended this event and heard how much practical guidance was imparted. Our panels really delivered this year – and it’s not too late to watch them as you can still register and watch the panels now or when you are gearing up to draft your proxy materials.
The memo below from Wayne Carlin and David Anders of Wachtell Lipton describes the latest in the Mark Cuban insider trading saga:
On September 21, 2010, the Fifth Circuit Court of Appeals reversed the holding of the lower court and reinstated the SEC’s insider trading charges against entrepreneur Mark Cuban. This decision serves as an important reminder of the fact-intensive nature of insider trading inquiries and the perils of treading too close to the line when trading while in possession of non-public information.
Here, the SEC’s essential allegation is that Cuban violated the misappropriation theory of insider trading when, after receiving confidential information from the CEO of Mamma.com that the company was going to make a private investment of public equity (PIPE) offering, he sold his stake in the company in an effort to avoid losses from the expected fall in Mamma.com’s share price when the PIPE was announced. The district court found that the SEC’s complaint sufficiently alleged that Cuban had agreed to keep confidential information he received from the CEO, but that it had not alleged that Cuban agreed not to trade. Without that further agreement, the district court held, Cuban had not breached a duty, as required for insider trading liability. The district court therefore dismissed the case. On appeal, the Fifth Circuit disagreed, holding that it was at least plausible to conclude from the allegations in the complaint that, under the circumstances, Cuban was obligated not to trade. The appellate court therefore vacated the decision of the lower court and remanded the case to allow the SEC the opportunity to fully develop the factual record through discovery.
Although the appellate court opinion did not set forth any new legal principles, several important conclusions can be drawn from the decision. First, commentators who warned against reading the lower court decision as a change in the law of insider trading were correct: the Fifth Circuit decision makes clear that the bar for proving insider trading has not been raised. Second, the court made clear that insider trading cases are heavily fact-specific. Therefore, once the specter of insider trading is raised, it is difficult to avoid a detailed investigation into the facts. Third, even where the trial court was willing to decide the case at the motion-to-dismiss stage as a matter of law, the appellate court found that was erroneous in the presence of debatable issues of the interpretation and legal significance of certain facts.
This case is thus a reminder to proceed with caution and to seek guidance before trading while in possession of information that may be confidential. Careful analysis is essential before concluding that trading is permissible. If the circumstances surrounding a trade are likely to draw government scrutiny, there is every reason to expect the result to be a lengthy investigation (or litigation) with an uncertain eventual outcome.
SEC Issues Transitional Guidance for Broker Audits
On Friday, the SEC issued this 4-page interpretive release to provide transitional guidance on which auditing standards should be used by broker-dealers now that the PCAOB has authority to set auditing standards under Dodd-Frank. Since the SEC’s rules and the PCAOB’s standards have not yet been updated for this new legislation, the SEC’s guidance is that references in the SEC rules to auditing literature (ie. GAAS) should continue to be understood to mean auditing standards generally accepted in the US, plus any applicable SEC rules. This transitional guidance will be revisited when a rulemaking project is undertaken.
Financial Stability Oversight Council to Hold First Meeting
Last week, Treasury Secretary Tim Geithner, in his capacity as Chair of the Financial Stability Oversight Council, announced that the Council will hold its first meeting on October 1st. This press release lists all of the Council’s members.
Yesterday, the NYSE Commission on Corporate Governance issued its final report that identifies 10 core governance principles covering such topics as the fundamental objectives of the board, management’s responsibility for governance, and the relationship between shareholders’ trading activities, voting decisions and governance. The report is timely given the SEC’s proxy plumbing concept release was recently put out for comment.
While the the report formally concludes the work of the NYSE Commission on Corporate Governance, the NYSE announced that the group would, from time to time, continue to provide constructive input on corporate governance and the proxy reform process.
The SEC Inspector General’s Take on Goldman Sachs Enforcement Action: Not Favorable
Yesterday, I woke up at our Conference to a front-page WSJ article entitled “SEC Blasted on Goldman,” describing a Senate Banking Hearing where the SEC’s inspector general testified that the SEC’s fraud lawsuit against Goldman was “suspicious,” suggesting agency officials tried to distract attention from a report criticizing the SEC for failing to detect an alleged Ponzi scheme. The article included interesting Enforcement stats drawn from testimony provided by the SEC at the hearing – here is an excerpt of that:
According to a tally by the SEC, the agency has filed 634 civil cases since its fiscal year began last October, extracted $968 million in penalties and distributed nearly $2 billion to investors. Those figures “don’t capture the breadth and complexity of cases we’ve filed,” said Mr. Khuzami, who is shaking up the unit. The Justice Department said nearly 3,000 defendants were sent to prison between October and June for financial fraud. The number of criminal mortgage-fraud cases filed by the agency has more than doubled so far this year compared with 2007, while new corporate-fraud cases also have surged. Still, few criminal charges have been filed against high-ranking executives often blamed for the crisis.
And here is a telling excerpt as to why future cases might not be so forthcoming:
One reason for the small number of criminal cases so far, according to current and former regulators: Many of the highest-profile disasters of the crisis look increasingly like they were caused by too much risk-taking and bad decisions–not criminal behavior. “One of the challenges in this environment is there were such broad systemic failures that identifying the one or two people or the six enterprises that are quote responsible, which is what we see a broader appetite for, I don’t think that’s doable,” William McLucas, a former SEC enforcement chief, said in an interview. “There may be cases where the rules were broken. Are they all cases where you can or should put people in jail? Probably not, but that doesn’t satisfy the lust for accountability.”
Our Week of Conferences: Sights & Sounds
Here are three short videos from our week of Conferences this week – this first one shows the sheer size of our plenary session on Tuesday (1900 attendees in person and many more online):
Our exhibitors like to make the Conferences fun – check out this pig race from Radford in our Exhibit Hall (attendees placed their business card on which pig they thought would win – and if your pig won, you earned a prize):
On Tuesday night, I sat in the right field bleachers of the Cubs game – behind me were a row of rooftops rented out by different exhibitors for various attendees of the Conferences (if you haven’t seen this phenomenon in person, this rooftop directory gives you an indication of its popularity):
Yesterday, Reuters ran the article below (entitled “US senator wants to reopen Wall St bill”) indicating that there is sentiment from some Republicans to revisit some of Dodd-Frank if they make gains in Congress during the mid-term elections:
Republicans will reopen the broad Wall Street reform law and overhaul the newly created consumer protection bureau if they regain control of Congress after the November elections, a leading lawmaker said on Monday. Richard Shelby, the top Republican on the powerful Senate Banking Committee, said lawmakers must revisit the legislation enacted this summer, which is the broadest overhaul of financial rules since the Great Depression. “The bill is so sweeping and such a game changer in many ways that it’s incumbent upon us to revisit it,” Shelby told the Reuters Washington Summit. The bill, one of the Obama administration’s legislative victories, will impose new restrictions on every aspect of Wall Street.
But lawmakers are already trying to change the bill, even though it was only signed into law in July. And that’s before the November midterm elections, which could see Republicans gaining further influence, if not control, over Congress. The House Financial Services Committee, which oversees financial regulators, is now considering tweaks to one of the bill’s provisions related to the Securities and Exchange Commission.
If Democrats lose control of Congress, Republicans may try to tear apart the contentious legislation they mostly all opposed. “The consumer agency bothers me the most,” said Shelby, who failed to reach a compromise with Democrats and voted against the bill. “I thought the creation of it and the way it was created was a mistake,” he said.
Under the Dodd-Frank bill, banking regulators are stripped of their consumer supervisory duties and the new Consumer Financial Protection Bureau gains the power to write and enforce rules for mortgages, credit cards and other financial products. “I don’t believe it’s good for business, it’s not good for the financial sector and ultimately I don’t believe it’s going to be good for credit for a lot of people who need it. It’s gonna cost,” Shelby said. But Sheila Bair, chairman of the Federal Deposit Insurance Corp, warned against Congress reopening the law, saying banks already face enough regulatory uncertainty.
“I think to go back and completely reopen it now with a whole other set of question marks and uncertainties about what people are supposed to be doing … I hope people would think hard about that,” Bair told the Reuters Washington Summit. Christopher Dodd, the chairman of the Senate Banking Committee and one of the bill’s main authors, said it may be hard for Republicans to rollback the bill or water down the consumer bureau as the Treasury Department has already begun to put it together.
“I think if they (Treasury) do it and it gets going then I think the job that Richard Shelby and others have in mind of undermining and gutting (the bureau) will be difficult,” Dodd told the Reuters summit. Dodd added that Republicans would likely target the bureau’s budget and “gut it financially.” Republicans despise the consumer bureau and have long argued that consumer protections should not trump the safety and soundness of banks. They fear that the bureau would hurt the availability of credit by burdening banks with piles of new regulations.
They were also upset with the appointment of Wall Street critic Elizabeth Warren, a Harvard professor, to help set up the consumer watchdog. “I believe she’s got a big ax to grind and she’s sharpening that ax,” said Shelby. “I don’t think that you need somebody in a position like that with all these preconceived ideas and I believe she has a lot of them.”
Nugget #1: Conduct Board Committee Evaluations Before Board Evaluations
I tend to get nostalgic as we get into our week of Conferences as I think back on our jam-packed year. It got me thinking about the series of “50 Nuggets in 50 Minutes” webcasts that Alan Dye and I used to hold when I first started with this organization nearly nine years ago. There was some good stuff in those programs and most of those nuggets still hold value today – so I thought I would begin blogging a number of them. Here is the first one:
Committee Evaluations – Conduct committee evaluations before board evaluations – Although many companies conduct both their board and committee evaluations at the same time for convenience, we like the idea of separating them by a few months – with committee evaluations being conducted first. This should help to provide time for directors to focus on each distinct group dynamic and more importantly, the results of committee evaluations can be considered as part of the subsequent board evaluation.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Study: Corporate Governance of the 100 Largest US Companies
– Director Searches: What Can You Tell a Recruiter
– The SEC Departs from an Important Safeguard
– SAS 70 and Internal Control Issues
– Dress Code for Delaware Courts
