Yesterday, Corp Fin added six new ’33 Act CDIs to address the repeal of Rule 436(g) situation that I blogged about yesterday. The new CDIs essentially apply to the corporate debt market and are consistent with the white paper released by ten major firms yesterday, as they address the circumstances where rating agency consents are – and are not – required (ie. required for registration statements and prospectuses; not required for free writing and in certain MD&A liquidity discussions).
In addition, now-former CDI 255.13 was withdrawn, as it provided that an investor may include the estimated fair market value of their principal residence as an asset for purposes of Rule 501(a)(5). The withdrawal was necessary to be consistent with Section 413(a) of Dodd-Frank.
Dodd-Frank: Corp Fin’s No-Action Relief for the Asset-Backed Market
Early yesterday, Corp Fin Director Meredith Cross issued this statement regarding relief for the asset-backed market:
The SEC has been reviewing the interaction between the requirements for registered asset-backed securities offerings provided in “Regulation AB” and the requirement that issuers now obtain credit rating agency’s experts consent for use in filings, as is the case with other ‘experts.’
Within the next day, the Division of Corporation Finance expects to issue a ‘no action’ letter allowing issuers for a period of 6 months to omit credit ratings from registration statements filed under Regulation AB. Although there are currently few issuers in the registered asset-backed securities market, we understand from some issuers that they cannot currently obtain credit rating agency consent to include the credit ratings in these ‘Reg AB’ filings. This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changes to comply with the new statutory requirement while still conducting registered ABS offerings.
As is more fully explained in interpretations issued by the Division of Corporation Finance today, the current rules for corporate debt issuances differ in this respect – and we believe that the corporate debt market has not been, and should not under current rules be, meaningfully affected by the statutory change.
Corp Fin did better than the “next day” and issued the no-action relief yesterday to Ford Motor Credit Company. By the terms of this no-action letter, “the Division will not recommend enforcement action to the Commission if an asset-backed issuer as defined in Item 1101 of Regulation AB omits the ratings disclosure required by Item 1103(a)(9) and 1120 of Regulation AB from a prospectus that is part of a registration statement relating to an offering of asset-backed securities.” The Staff’s position expires for offerings commencing with an initial bona fide offer on or after January 24, 2011.
Photo: Devastation After the 3.6 Earthquake in DC
If you haven’t heard, I awoke last Thursday at 5 am, experiencing the first earthquake in my life – here in DC! Below is a scene of the damage caused in the area that has been making the rounds; warning, it is pretty graphic:
Yesterday, President Obama signed the Dodd-Frank Act into law (signed, sealed & delivered). And the first major unintended consequence took place as the coming repeal of Rule 436(g) wreaked havoc on the US debt market (the repeal takes effect today).
Rule 436(g) allows the use of credit ratings from NRSROs without a consent (technically, it provides an exemption from the consent requirement). This repeal could be a disaster for debt, preferred securities and asset-backed offerings. For example, this hurts asset-backed deals since Regulation AB requires disclosure of ratings if the offering is conditioned upon a rating – as all are – and the rating agencies have all said they will not furnish consents for the time being. So this could mean that all ABS deals will need to be done on a Rule 144A basis for now.
Fortunately, the news is less grim outside the ABS space. Late yesterday, ten major firms signed this “White Paper” (sent along by Davis Polk) which sets forth approaches – after consulting the Corp Fin Staff – that they believe are appropriate when using NRSRO ratings in offerings of debt and preferred securities. Under the approaches in the white paper, there should not be significant disruptions in the non-ABS debt and preferred stock markets. More to come on this…
Dodd-Frank: What Does the “Enactment Date” Mean?
Unlike the Sarbanes-Oxley Act, which snuck up on the corporate community in comparison (see my blog on that), numerous firms sent out emails yesterday to note the event. For example, Mayer Brown gives us this meaning of the “enactment date”:
The Act’s “date of enactment” – which is the key date for determining dozens of delayed effective dates and deadlines under the Act – is Wednesday, July 21, 2010. The Act generally takes effect on Thursday, July 22, except that many provisions will not take effect for a year or more and many will require implementing regulations to be issued.
And Weil Gotshal gives us this “big picture”:
Today, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, making this package of financial regulatory reforms the largest such initiative in scope and depth since the New Deal. The legislation includes 15 major parts with 14 stand-alone statutes and numerous amendments to the current array of banking, securities, derivatives, and consumer finance laws. The legislation will significantly restructure the regulatory framework for the US financial system, with broad and deep implications for the financial services industry where the crisis started; however, its impact will be felt well beyond the financial sector. Aspects of the legislation have the potential to affect all public companies by extending federal regulation of corporate governance. In addition, some of the provisions will affect the US operations of foreign companies as well as global transactions involving US-based businesses, assets, and financial instruments.
The fun is just beginning with this new legislation and I’m already going batty. For example, I’m walking around throwing new colloquialisms such as “What in the Dodd-Frank?” and “Where in the Dodd-Frank do you think you’re going?” Anyways, below are the results from my recent poll about what you thought the acronym for the Dodd-Frank Act should be:
We have posted the results from our recent survey regarding annual meeting conduct, repeated below:
1. To attend our annual meeting, our company:
– Requires pre-registration by shareholders – 5.9%
– Encourages pre-registration by shareholders but it’s not required – 13.2%
– Requires shareholders to bring an entry pass that was included in the proxy materials (along with ID) – 5.9%
– Encourages shareholders to bring an entry pass but it’s not required – 11.8%
– Will allow any shareholder to attend if they bring proof of ownership – 57.4%
– Will allow anyone to attend even if they don’t have proof of ownership – 33.8%
2. During our annual meeting, our company:
– We hand out rules of conduct that limit each shareholder’s time to no more than 2 minutes – 20.9%
– We hand out rules of conduct that limit each shareholder’s time to no more than 3 minutes – 26.9%
– We hand out rules of conduct that limit each shareholder’s time to no more than 5 minutes – 4.5%
– We announce a policy that limits each shareholder’s time to no more than 2 minutes (but rules are not handed out) – 7.5%
– We announce a policy that limit each shareholder’s time to no more than 3 minutes (but rules are not handed out) – 3.0%
– We announce a policy that limit each shareholder’s time to no more than 5 minutes (but rules are not handed out) – 0%
– There is no limit on how long a shareholder can talk (subject to the inherent authority of the Chair to cut off discussion at any time) – 37.3%
3. For our annual meeting, our company:
– Provides an audio webcast of the physical meeting, including posting an archive – 25.0%
– Provides an audio webcast of the physical meeting, but does not post an archive – 7.4%
– Has provided an audio webcast of the physical meeting in the past, but discontinued that practice – 1.5%
– Is considering providing an audio webcast of the physical meeting but haven’t decided yet – 4.4%
– Provides a video webcast of the physical meeting (or is considering doing so) – 1.5%
– Does not provide an audio nor a video webcast of the physical meeting – 60.3%
4. At our annual meeting, our company:
– Announces the preliminary results of the vote on each matter (unless special circumstances arise such as a very close vote) – 92.7%
– Doesn’t announce the preliminary results of the vote on each matter – 7.4%
Please take our new “Quick Survey on More on Compensation Committees and Compensation Consultants.”
Size Doesn’t Matter: SEC Targets Small, Newly Formed Public Companies in Their Crusade
The title of this McGuire Woodsmemo grabbed me, highlighting how the SEC’s new Foreign Corrupt Practices Act unit has made clear that newly public companies doing business overseas will be held to the same compliance standards as larger and more established public companies.
But this is just the tip of the iceberg as the SEC’s Enforcement Division has been implementing its new series of initiatives over the past six months, as illustrated in this Gibson Dunnmemo. Perhaps best reflecting the SEC’s newfound willingness to be tough on fraudsters is this recent speech from SEC Commissioner Luis Aguilar about his desire for more D&O bars.
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:
– An Open Issue in Europe: Confidentiality of Communications with In-House Lawyers
– Survey: What Keeps Your Board Up at Night?
– Vendors Lacking In Experience: The White Paper
– Security Risks with Digital Copiers, Etc.
– SEC Enforcement Action Demonstrates Potential Risks of “Flash” Reporting
With a year under her belt, Corp Fin Director Meredith Cross announced a flurry of changes on Friday. For starters, these three new offices within Corp Fin are being created, as noted in this press release:
– Office of Capital Market Trends – A brand new office that will review new securities products and capital markets trends and develop recommendations for changes to the securities offerings rules.
– Office of Structured Finance – The reviews of asset-backed filing are being pulled out of Max Webb’s AD group and placed into this new unit; this office will also handle policy issues related to ABS.
– Office of Financial Services – Another brand new office that will review filings from investment banks, investment advisors and the largest banks through more continuous and direct interaction with them and by working with other Divisions within the SEC – this new office likely will be more accounting-focused than a typical operations group. Todd Schiffman’s AD group will continue to review filings made by smaller financial institutions.
In addition, Paula Dubberly was promoted to Deputy Director (Policy and Capital Markets). Paula will oversee the top two new offices noted above, as well as continue to oversee the Office of Rulemaking. With many rulemakings coming up in a short period of time under the Dodd-Frank Act, it’s gonna be busy down there…
Recently, SEC Chair Schapiro delivered a speech that included remarks about “revising risk disclosure requirements” and then “possibly changing filing formats so that basic information can be more easily digested by investors and updated by companies.” So it’s possible that the new Office of Capital Markets will be working towards a dramatic restructuring of the SEC’s disclosure and filing requirements, a challenging project that has been discussed for quite some time in Corp Fin – but hasn’t gotten much headway due to all the other regulatory demands that the past decade has laid at the SEC’s feet.
Now Available: The “Final” Dodd-Frank Act
As I blogged last week, the Dodd-Frank Act was somewhat of a moving target even after conference reconciliation was completed. It appears that this may be the final version of the Act, although note that the Table of Contents doesn’t always conform to the text of the Act. Also now available is the printed version of the Act’s Conference Report, with a “Joint Explanatory Statement of the Committee of Conference” that begins on page 865.
Webcast: Exploring the New World of Web Disclosure
Tune in tomorrow for our webcast – “Exploring the New World of Web Disclosure” – to hear Bill Haney of Thomson Reuters, Dominic Jones of IR Web Report, Mike Marron of Expedia and Demo Skalkotos of Nasdaq OMX discuss how companies are evolving their use of the Web and social media, including the recent announcements from Thomson Reuters and Nasdaq OMX to offer “web disclosure” platforms for their IR web page clients. Please print these course materials before the program.
Yesterday, as noted in this NY Times article, the US Senate voted 60-39 passing the conference report version of the Dodd-Frank Act. Three Republicans voted for the legislation, which was supported by all but one of the Senate Democrats. In our “Dodd-Frank Act” Practice Area, we continue to post numerous memos on the various provisions of the Act – including this condensed 605-page version of the Act itself (no easy feat given that it’s a 75% reduction – can’t help but think of George’s “shrinkage” episode from Seinfeld).
Last week, Corp Fin posted an updated “Financial Reporting Manual,” with changes made for issues related to Regulation S-X Rule 3-01, Rule 3-05, and Article 11, as well as general partner financial statements, and other changes.
Humor in the Goldman Sachs Settlement
A humorous moment before yesterday’s Goldman settlement news conference down at the SEC, which was available via webcast: During the sound check – which could be heard online (but the video feed wasn’t on yet) – the dude doing the soundcheck said “won’t everyone be surprised when they hear the press conference is for another set of new proxy rules.” I laughed my tail off. A joke that only us Corp Fin types could understand.
Anyways, here is Kevin LaCroix’s analysis of the Goldman settlement, including noting that the “record” nature of what Goldman paid is about semantics and context (ie. largest-ever penalty paid by a Wall Street firm).
For a little more Friday humor, check out this video on the European financial crisis.
Yesterday, after an open Commission meeting, the SEC issued this 150-page concept release (double-spaced) regarding proxy mechanics, etc. Here’s the related press release – and Chair Schapiro’s opening statement. There is a 90-day comment period – and we should expect a large number of comments on a wide variety of topics given the complexity of some of the issues. The existing voting framework is a labyrinth that is difficult to untangle – so there is much work to be done. For a refresher about what a concept release really is, see my blog from last week…
Director Resignations as a Risk Factor
As happens more often than you would think in the blogosphere, Nell Minow beat me to the punch in blogging about an interesting new article. Below is what Nell blogged in The Corporate Library Blog:
Kevin LaCroix has an important piece in his D&O Diary Blog on unexpected director resignations as a leading indicator of risk. It “increases the probability of a securities class action lawsuit filing by 31 percent to 35 percent, with the likelihood increasing as firm size increases; if a company’s stock and accounting performance were poor in the prior year’ and if the firm raised relatively more external financing in the prior year.” According to a copyrighted March 2010 paper titled “The Dark Side of Outside Directors: Do They Quit When They Are Needed Most?” by Rüdiger Fahlenbrach of the Ecole Polytechnique Fédérale de Lausanne, Angie Low of the Nanyang Technological University and René Stultz of Ohio State University:
Among other things, a company with a surprise outside director departure has a “significantly higher likelihood of being named in a federal class action securities fraud lawsuit.” The study’s authors call this risk of future adverse events following a director’s departure the “dark side of outside directors.”…[O]utside directors have “incentives to leave when they anticipate that the firm on whose board they sit will perform poorly and/or disclose adverse information.”
“At a minimum,” LaCroix concludes, “the authors’ analysis suggests a potentially important new underwriting criterion.”
Social and Environmental Shareholder Proposals
In this podcast, Michael Passoff of As You Sow discusses the organization’s “2010 Proxy Preview” as well as the current trends in social and environmental shareholder proposals, including:
– Why was the proxy preview written?
– What were the major social and environmental shareholder proposals this year?
– Any surprises in the votes so far this year?
– Do you have any recommendations for companies that receive a social or environmental shareholder proposal?
Here is something I blogged yesterday on CompensationStandards.com’s “The Advisors’ Blog“:
Published in the Federal Register last week, the FAA recently issued a proposal to revise its broad prohibition on pro rata reimbursement for the cost of owning, operating and maintaining a company plane when used for routine personal travel by executive officers under certain conditions. I’m far from being a FAA expert – but I believe this change, if approved, would permit greater flexibility for companies to seek and accept reimbursement from executives for their personal use of the corporate jet.
Given the affinity for private plane use – and officer distaste for disclosure about this practice – my bet is that executives would jump at the opportunity to do this, particularly if the money that executives paid was “replaced” in some way. The upshot is we may well see fewer perk disclosures for personal plane use in the not-so-distant future…
Here are other entries from “The Advisors’ Blog” over the last week – sign up to get these pushed out to you daily on the left side of the blog:
– Executive Compensation: Someone’s Doing It Right
– Study Update: Long-Term Incentive Trends from ’08-’10
– Principles for Tying Equity Compensation to Long-Term Performance
– A “Wall Street Pay” Microblog
– CEO Pay For All Company Sizes
Privacy Gaffes: Massachusetts Securities Division Joins the Party
There are so many privacy breaches these days that they are too innumerable to count. Now, the Massachusetts Securities Division joins the list as noted in this news from Alan Parness of Cadwalader:
While the exact nature of what occurred is somewhat obfuscated by a heading titled “Important Information in connection with the recent notice to Massachusetts Registered Broker-Dealer Agents and Investment Adviser Representatives” on the MA Securities Division’s website, apparently the Division, in response to a FOIA-type request from an Internet-based investment adviser compliance service company, sent the company a CD-ROM with the residential addresses and social security numbers of all broker-dealer agents and investment adviser representatives registered with the Division. Here’s the full notice concerning this gaffe from the Division’s website.
As you will note, the Division is not volunteering to pay for credit monitoring, presumably based on the written assurances received from the service company that the CD-ROM was returned to the Division and that no files were retained. While I have no reason to disbelieve the service company, and I don’t pretend to be an expert on the MA security breach law, query whether the state would be so forgiving or understanding if a registered broker-dealer or investment adviser committed a similar blunder with its records concerning clients in MA, and received similar assurances from the recipient of those records? In this regard, note that the MA security breach law – Mass. Gen. Laws ch. 93H – is not administered by the Division, but by the state’s Office of Consumer Affairs and Business Regulation and the state Attorney General; here’s the OCABR’s rules under ch. 93H (which conveniently exclude as a “person” subject to filing security breach reports under the law any agency, etc., of the state).
You may also want to peruse this Boston Globe article, including the reader comments which follow the article as some are amusing.
PCAOB Proposes New Auditing Standard Regarding Confirmation
Yesterday, the PCAOB proposed an audit standard regarding Confirmation that is drafted to strengthen the requirements under the existing standard, AU sec. 330, including more explicitly incorporate consideration of the risk of material misstatement due to error or fraud into the selection, design, and performance of confirmation procedures. Here is the proposing release.
Congress is back from vacation. As noted this article, the Senate is close to getting the 60 votes needed to get past a potential Republican filibuster and get the Dodd-Frank Act to President Obama for enactment. For every day there is a delay, it will be that much harder for the SEC to adopt rules timely ahead of the 2011 proxy season.
How much rulemaking can we expect? According to the nifty chart on page ii of this Davis Polksummary of the Dodd-Frank Act (a memo that preceded this WSJ article), a total of 11 regulators are committed to make 243 rulemakings, 67 studies and 22 new periodic reports under the Act. The SEC itself will be required to conduct 95 of those rulemakings, 17 studies and 5 new periodic reports. Ouch…
One member astutely observed how changes were being made to the Dodd-Frank Act when Congress was last in session two weeks ago – in the midst of which, the House passed the Act. The member posed the question – which version of the Act did the House actually vote upon? And if there were subsequent changes to the Act, will the House need to vote again? I don’t know the answers to these – anyone out there know?
Webcast: Evolving Insider Trading Policy and 10b5-1 Plan Practices
Tune in tomorrow for the webcast – “Evolving Insider Trading Policy and 10b5-1 Plan Practices” – to hear Alan Dye of Hogan Lovells LLP and Section16.net, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster, Sue Morgan of Perkins Coie and Ron Mueller of Gibson Dunn discuss the nuts and bolts of the latest developments related to insider trading policies and Rule 10b5-1 plans practices and procedures.
PCAOB Staff Alert: Work of Other Auditors or Engaging Outside Assistants
Yesterday, the PCAOB issued Staff Audit Practice Alert #6 prompted by observations from PCAOB inspections that some US-based firms issuing audit reports based on work performed by others outside the US are not properly applying PCAOB standards.
Two examples in the PCAOB’s Alert relate to Chinese issuers, which is notable given that I hear that Chinese companies registered in the Caribbean are the single largest group of foreign companies piling into the US capital markets lately. The Alert raises a question as to how regulators (SEC, PCAOB or state boards of accountancy) can discipline auditors in situations such as those described the Alert given the difficulty of asserting jurisdictions in these cross-border scenarios…
Below are the results from a recent survey we conducted on the topic of code of ethics and the board:
1. Which board committee typically reviews (and approves) your company’s Code of Ethics policy:
– Corporate Governance committee – 57.9%
– Audit committee – 31.6%
– Compensation committee – 0.0%
– Compliance committee – 0.0%
– Other board committee – 2.6%
– No board committee – 7.9%
2. Which board committee “enforces” (or handles complaints related to) the business conduct provisions of your company’s Code of Ethics such as confidentiality, use of corporate assets, etc.:
– Corporate Governance committee – 31.6%
– Audit committee – 68.4%
– Compensation committee – 0.0%
– Compliance committee – 0.0%
– Other board committee – 2.6%
– No board committee – 0.0%
3. Our company has a separate Code of Ethics – one for our senior financial officers and a separate one for all our employees:
– Yes, they are separate – 16.2%
– No, there is only one Code that applies to both senior financial officers and all employees – 83.8%
4. Our company has a separate Code of Ethics – one for our Board of Directors and a separate one for our employees:
– Yes, they are separate – 13.2%
– No, there is only one Code that applies to both directors and employees – 86.8%
5. When it comes to the Code of Ethics that applies to our directors, our Board:
– Is required to sit through actual ethics training – 18.4%
– Is offered an ethics training class if they wish to sit through it – 15.8%
– Just gets copies of the Board’s Code of Ethics – 65.8%
Please take our new “Quick Survey on Director Education & Orientation.”
Is the PCAOB a Good Cop or Big Flop?
Yesterday, I was surprised to see this lengthy article in the Washington Post analyzing the PCAOB’s tenure so far. My surprise had more to do with a mainstream newspaper choosing this topic than what was in the piece. The article itself is pretty comprehensive and hits most of the marks (one item it doesn’t cover enough is how much the PCAOB is beholden to the SEC and how that may hamstring how it operates).
Speaking of marks, in the article, Lynn Turner is quoted as giving the PCAOB a “B” for inspections, a “D-plus” for standard setting and an “F” for enforcement. When the PCAOB was born, I was concerned that the PCAOB would overly extend the SEC’s enforcement capabilities and efforts. Here is an excerpt from the WaPo article on what has actually transpired:
In the realm of enforcement, the PCAOB shares powers with the SEC and was intended to bolster the SEC’s policing efforts. But Turner, the former SEC official, said the board may have the opposite effect. Because PCAOB investigations unfold in secret, audit firms “are much better off if the action is brought by the PCAOB where it can be kept under wraps, slowed down and dragged out without anyone knowing anything whatsoever about it,” Turner said by e-mail. The board’s acting chairman made a similar point in recent testimony, saying the law gives auditors “an incentive to litigate, rather than settle, in order to delay any adverse publicity.”
So far, the board has issued 31 disciplinary orders, some of which send mixed messages. After the chairman of a computer services company in India confessed to inflating profits for several years and overstating a cash balance by $1 billion, two auditors affiliated with PricewaterhouseCoopers allegedly failed to cooperate with a PCAOB investigation. The board disbarred the auditors in March, about a year after it first sought their testimony.
In 2009, the board disciplined a former Deloitte & Touche auditor for misconduct that allegedly took place more than five years earlier. In another case, a BDO Seidman auditor was disbarred for allegedly backdating records to make it appear that an audit was done properly and for directing a subordinate to do the same. The auditor has since left the firm. Two years after disciplining him, the board reinstated his right to audit public companies. Carcello, the Tennessee professor, said the outcome of some cases left him wondering: “What does it take to be disbarred for life?”
Poll: Do Folks Still Refer to the PCAOB as “Peekaboo”?
As I blogged about back in 2003, the PCAOB strongly dislikes being referred to as “Peekaboo.” When I heard that way back then, I assumed the nickname died a quick death and I have only heard the PCAOB referred to as such on rare occasion. Thus, I was surprised that the WaPo’s article used the term in its subtitle. Participate in this anonymous poll and let us know what you call the PCAOB:
