A few months ago, the SEC hired Rick Bookstaber as Chief Policy Advisor to the Director of its new RiskFin Division. Interestingly, Rick has continued to maintain his own blog – albeit his entries are fairly infrequent. I imagine each of Rick’s posts has to be run through the SEC’s Ethics Office just like any other article written by a Staffer has to vetted there (when I served there, that vetting process took quite a while to complete – the process could be quite different nowadays).
Personally, I can’t believe the SEC is permitting a RiskFin guy to issue opinions on some of the topics that Rick covers, such as this opinion that that there is a gold bubble. When I was there, the only articles that a Staffer was permitted to write had to be factual with no color commentary. Maybe I’m “old school” here because I am indeed old…
Mailed: May-June Issue of The Corporate Executive
The May-June Issue of The Corporate Executive includes pieces on:
1. Reporting Performance Awards in the Proxy Statement
– Taxes When Performance Awards Vest During a Blackout Period
– Where We Have Been–Negative Numbers and Other Reporting Problems
– Where We are Now–A Clearer Picture
2. The Box: Planning for Taxes Due Upon Vesting of Performance Awards
– Methods Available for Covering Taxes
– Alternative #1: Short-Term Deferral
– Alternative #2: Longer Deferrals
– Alternative #3: Rule 10b5-1 Plans
– Alternative #4: Deduct FICA from Employee Paychecks
– What Doesn’t Work
– Planning Ahead is Key
In this CompensationStandards.com podcast, Greg Ruel of The Corporate Library discusses his recent report regarding the largest severance payments given to short-tenured CEOs, including:
– Why did you decide to conduct the severance payment study?
– What were the study’s major findings?
– Did the findings surprise you? Did most of the companies with high severance payments to short-tenured CEOs have low ratings overall?
Yesterday, negotiations over the regulatory reform bill resumed with a goal to wrap them up by this Thursday, to allow sufficient time for the President to sign the legislation by July 4th. The loose schedule for this week’s House-Senate conferee consideration is noted at the end of this WSJ article (here’s the latest on the Volcker Rule from the Washington Post).
During negotiations on financial reform legislation on Tuesday, U.S. Senate conferees agreed to drop their opposition to a House provision to require public companies to hold separate shareholder votes on “golden parachute” payments, according to Dow Jones Newswires.
The conference committee’s negotiations will continue on Wednesday. House and Senate lawmakers still have not reached an agreement on a Senate proposal to require investors to hold a 5 percent stake to nominate board candidates under the SEC’s proposed proxy access rule, according to Dow Jones. House lawmakers and investor advocates argue that a 5 percent threshold would be too high.
Meanwhile, Steve Nieman – an employee-shareholder of Alaska Air Group – who has nominated director candidates in the past at his employer (remember VotePal.com) has filed a “Notice of Assertion of Right to Proxy Access” at Alaska Air ahead of next year’s annual meeting. I believe the timing is intended to set up a potential lawsuit in the event that Congress does include a 5% ownership threshold in a proxy access provision.
We have posted the 2nd Quarter 2010 issue of the “Proxy Disclosure Updates” (which is part of the Lynn, Borges & Romanek’s “Executive Compensation Annual Service”) that includes a proxy season post-mortem from Mark Borges, complete with analysis of the latest proxy disclosures filed during the just-completed season.
Act Now: To gain access to the complete version of this issue immediately, try a No-Risk Trial to the Annual Service today.
Report: The SEC’s Forum on Small Business Capital Formation
Recently, the SEC posted this 35-page report on its “2009 Government-Business Forum on Small Business Capital Formation.” On page 14, there is a list of recommendations from the Forum participants.
Last Friday, the PCAOB issued “Staff Questions and Answers” concerning a registered firm’s obligation to file its annual report on Form 2. This guidance comes out pretty late given that all registered firms (those registered as of March 31st) are required to file their first annual reports by June 30th. These annual reports will include information about audit reports issued, disciplinary histories of new personnel, and certain information about fees billed to issuer audit clients for various categories of services.
How to Search the New Annual Reports Filed by Audit Firms: What Are Firms Saying About Their Clients?
The PCAOB will make each firm’s annual report on Form 2 available to the public on this firm filing page promptly upon filing (this also applies to registration forms filed on Form 1 and special reports filed on Form 3).
The search tool that the PCAOB has built is interesting. There are a number of different ways to search the filing database – but each search field has a specific purpose. For example, there is a search field that allows you to search “Annual Reports indicating that the firm played a substantial role in the audit of a specific issuer.” Companies should be curious about what their independent auditors are disclosing about them and regularly check their auditor’s filings each year.
Note that there is no way to conduct an open-ended search as far as I can tell (so the functionality is quite different than the SEC’s EDGAR). Maybe this functionality will be built into future generations of the search tool. Anyways, I will be curious to see how well the PCAOB’s search functionality works once the Form 2s come rolling in – and I’ll let you know what I find…
SIFMA Issues Recommendations on Reforming the Shareholder Communications System
Last week, as noted in this press release, SIFMA became the latest group to issue a report on the shareholder communications process in an effort to influence the SEC’s proxy plumbing efforts. Given that we may well see a proxy plumbing concept release any day now from the SEC, it does come a bit late – but I imagine the report contains recommendations that it has shared with the SEC long ago…
Tune in tomorrow for the webcast – “Nasdaq Speaks ’10: Latest Developments and Interpretations” – to hear the latest practical guidance from five senior Nasdaq Staffers and Suzanne Rothwell of Skadden Arps, who will be discussing everything from the latest rules changes to whom do you call to resolve an issue, and much more. Please print out these Course Materials before you tune in.
Nasdaq’s New Requirement: Prompt Notification of Any Noncompliance with Governance Listing Standards
Recently, Nasdaq amended its corporate governance listing standards – specifically Nasdaq Stock Market Rule 5625 – to provide that, effective a week ago (ie. June 13th) companies listed on the Nasdaq Stock Market will be required to provide Nasdaq with prompt notification after an executive officer becomes aware of any noncompliance with Nasdaq’s corporate governance requirements, not just “material” noncompliance. This change conforms to an identical change recently made to the NYSE rules. I’m sure the Nasdaq Staff will explain this change during tomorrow’s webcast…
Senate Introduces Revised Carried Interest Taxation Bill
Here is news drawn from this Kirkland & Ellismemo:
Last Wednesday, the Chairman of the Senate Finance Committee introduced a revised carried interest bill that would raise the effective tax rate on net carried interest income in some cases and lower it in others. Under the revised Senate bill, 75% of an investment professional’s carried interest net income would be treated as compensation ordinary income (“OI”) beginning January 1, 2011. Previous House and Senate bills would have treated only 50% of carried interest net income as OI for 2011 and 2012, and a prior Senate bill would have treated only 65% as OI for 2013 and later years.
In a taxpayer-favorable change, the revised Senate bill would treat only 50% of an individual’s net carried interest income as OI to the extent the income relates to an asset (e.g., stock in a portfolio company) held for at least 5 years. This reduced 50% OI recharacterization rate would also apply (subject to extremely opaque legislative language) to an individual’s gain from sale of an interest in an investment services partnership/LLC (the so-called “enterprise tax”) held by the selling partner for at least 5 years to the extent the gain is attributable (1) to an underlying partnership/LLC asset held for at least 5 years (or to all of the gain on such a sale if “substantially all” of the partnership/LLC assets have been held for at least 5 years) and (2) generally to goodwill of the partnership/LLC.
For carried interest income that otherwise would have been taxable as long term capital gain, this bill would produce an effective individual federal income tax rate (before taking into account any Medicare tax) of 34.7% for gain not qualifying for the 50%-5-year recharacterization rate (and hence subject to 75% recharacterization) and 29.8% for gain qualifying for the taxpayer-favorable 50%-5-year recharacterization rate.
As the House-Senate negotiations continue to heat up, they have gone off their proposed schedule and yesterday mainly was devoted to regulation of financial institutions (as noted in this NY Times article) as the Fed’s role in bank audits grew. So there was not much new news in the governance space yesterday.
However, there was growing anger among advocates of a strong proxy access provision as it became clearer that the White House is playing a much larger role in the conferee negotiations than was imagined. As noted in this Huffington Post blog, Valerie Jarrett, a senior White House adviser – who is the administration liaison to the Business Roundtable – has been pulling a lot of strings behind the scenes and appears to be primarily responsible for the new proxy access restrictions requested by the Senate conferees (as I blogged about yesterday – with yesterday’s developments provided in this ISS blog). So the CII and others have ramped up their lobbying to include Ms. Jarrett, as Jim McRitchie notes in his CorpGov.net blog.
I just find it curious that Congress has made this big deal about televising all of its negotiations – and promising not to cut deals in the bathroom – and then we find out that the White House is a major player and is off camera. You mean I’ve been watching C-SPAN and trying to ascertain the meaning of that furtive glance for no reason?
The Big Breakup: UK to Split FSA Into Three Agencies
On Wednesday, as noted in this article, the United Kingdom’s new government unveiled a shake-up of the country’s bank-regulatory system that will consolidate power within the Bank of England.
The Financial Services Authority – which currently is the primary supervisor of the U.K.’s banking and finance industry – will be splintered into three new agencies over the next two years.
Under the plan, the Bank of England will establish a new subsidiary dedicated to regulation, as well as a financial policy committee and an agency for consumer protection and the markets. The FSA’s chief executive will assume new roles on the planned agencies, becoming a deputy governor of the central bank. The plan won’t change how the UK banks are regulated as the European Union assumes a larger role,
Europe Commission’s “Green Paper”: More Governance Proposals for Financial Firms
A few weeks ago, the European Commission issued this “green paper” (scroll to 2nd page to see it) to propose new governance reforms that would include possible new duties for directors (including a look at the duties between boards and shareholders), executive compensation, enhanced risk reporting, the composition of boards generally, more authority for independent auditors, corporate social responsibility and other matters. In addition, the financial firms are having their corporate governance policies individually reviewed by the EC.
Ted Allen of ISS does a great job of recapping the results of yesterday’s marathon negotiations over the regulatory reform bill’s governance provisions in this blog that he wrote at 12:30 am. Bravo to him on his stamina! The negotiations will continue today in this area and are still being televised on C-SPAN.
Here is a recap based on what Ted wrote and what others have written to me (note that it’s hard to know for certain what is going on and it could all change):
– Mandatory majority voting has been dropped from the bill as Senate conferees have agreed to eliminate it; this was not in House bill
– Proxy access provision could become more detailed as Senate conferees agreed to impose a 5% ownership standard and a two-year holding period on shareholders who wish to nominate directors (under Base Text, details would have been left up to the SEC); uncertain if House conferees will accept this change
– Say-on-pay could be altered to allow companies to hold them on a biannual or triennial basis rather than be forced to do so annually; not certain whether this will be accepted by either Senate or House conferees
– Senate conferees accepted a House provision to permanently exempt small issuers from SOX’s auditor attestation requirements – even though the Dodd bill didn’t have this provision in it
– Senate conferees didn’t accept House conferees’ proposal to mandate votes on “golden parachute” packages
– Senate conferees accepted House conferees’ proposal to require large institutional investment managers to disclose their say-on-pay votes
– Senate conferees accepted House conferees’ proposal to ensure that the SEC’s independence standards for compensation consultants are competitively neutral
– House conferees voted to add a new provision to permit private rights of action for aiding and abetting (overturning Stoneridge and Central Bank) even though there was no similar provision in Base Text (but this provision did exist in an older version of a House bill from last December); not likely that Senate conferees will accept this
– House conferees accepted SEC self-funding, as well as creation of new SEC offices for whistleblowers and ombudsman; Senate had already approved this in Dodd bill – but now some Senators are trying to strip the SEC’s self-funding. Proving my note at the beginning about how this all could change…
It’s interesting how some blogs have sprung to assist folks in contacting members of Congress to pressure them on these negotiations even as they happen – see this blog as an example. And it’s also interesting to note that even regulators are willing to express their view on the future of the reform bill, check out this “thumbs up and down” chart from NASAA…
SEC’s ‘Revolving Door’ Under Review
Yesterday, the WSJ ran this article – entitled “SEC ‘Revolving Door’ Under Review” – that describes how Senator Grassley sent a letter to the SEC’s Inspector General on Monday seeking a review of the recent departure of a top Market Reg Staffer who took a job with a prominent high-frequency trading firm. This comes on the heels of a similar WSJ article in April (see my somewhat related blog).
Meanwhile, the “Project on Government Oversight” Blog has the latest on the SEC’s Inspector General’s findings of whistleblower retaliation in the SEC’s Fort Worth office.
How NOT to Engage in Illegal Insider Trading
Thanks to Usha Rodrigues over on the Conglomerate Blog for the comical blog entry that I repeat below:
OK, I’m throwing in the towel-the Disney insider trading is just too good. Here’s the letter sent to various hedge fund managers:
Hi, I have access to Disney’s (DIS) quarterly earnings report before its release on 05/03/10 [sic]. I am willing to share this information for a fee that we can determine later. I am sorry but I can’t disclose my identity for confidentiality reasons but we can correspond by email if you would like to discuss it. My email is eilatcap@gmail.com. I count on your discretion as you can count on mine. Thank you and I look forward to talking to you.
Yesterday, I blogged about the progress of the House-Senate conference committee deliberations and the release of the “Conference Base Text.” Later on, Rep. Barney Frank issued this press release stating that debate over the investor protection and executive compensation provisions will begin at 11 am today.
The press release contains a long list of changes to the base text that the House Democrats seek. As noted in the ISS Blog, among other changes sought by these House Democrats are these:
– Require separate shareholder votes on “golden parachute” retirement payouts when companies seek approval for mergers, consolidations, or other transactions. This provision was in the House bill, but not the Senate measure.
– Add a House provision on enhanced compensation oversight for the financial industry. The House members seek to require “all federal financial regulators to issue and enforce joint compensation rules specifically applicable to all financial institutions with a federal regulator.”
– Add a House provision that SEC apply independence standards to compensation committee consultants that are competitively neutral and treat large and small consultants equally.
– Add a House provision to direct the SEC to require large institutional investment managers (i.e., those subject to Section 13(f) requirements) to disclose their proxy voting on advisory votes and golden parachute matters.
This Washington Post article describes how the rare “made-for-TV” reconciliation process feels like…
As noted in this WSJ article, yesterday’s House-Senate conference committee negotiations resulted in the removal of new conflict-of-interest rules for credit rating agencies from the reform bill. The conferees agreed that something needs to be done to reform the rating agency process – but thought it was too complicated to tackle in this bill. So in essence, the reform was tabled for now – with a promise that something would be done later as noted in this NY Times article.
The Latest Compensation Disclosures: A Proxy Season Post-Mortem
Always a popular program, tune in tomorrow for the CompensationStandards.com webcast – “The Latest Compensation Disclosures: A Proxy Season Post-Mortem” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was disclosed (and what was not disclosed) during the proxy season.
As part of the Senate-House reconciliation process, the House-Senate conference committee has released nearly 2000 pages of the “Conference Base Text” – these are the provisions that the conference committee is working off of – all of the governance provisions from the final Senate bill made it into the base text.
In the alternative, there is this 3-page press release from Rep. Barney Frank. Note that the House now has named all of its conferees (and here’s what is being negotiated today – this article notes some activity in the rating agency area).
Survey Results: Investor Perception of Independent Auditor’s Work
Below are the key findings of a recent survey by the CFA Institute regarding audit reports (see related info in our “Audit Process” Practice Area). This survey is notable because it provides a “customer” viewpoint on what the independent auditors provide. For starters, 72% of respondents said the audit report is “important” in their analysis and use of financial reports in the investment decisionmaking process, while 46% indicated it is “very important.” Here are more survey stats:
Report Language Describing the Nature of an Audit & Respective Roles of Auditor and Management (Pages 7 and 9)
– 73% agree that the auditor report’s language on the nature of an audit and respective roles of auditor and management could help reduce or manage the expectations gap that exists regarding the financial statement audit.
– Furthermore, 69% think it is important to provide these communications within the auditor’s report, with 33% indicating it is very important.
Disclosure on Roles of Auditors and Method of Determining Materiality
– An overwhelming 91% agree that in cases where there is more than one auditor, the identities and specific roles of other auditors should be disclosed.
– 82% agree that the method by which the auditor determines/assesses materiality should be disclosed.
Information about the Audit Process & Matters Related to the Audited Financial Statements
– 60% of respondents believe the auditor’s report should contain more information about the audit process itself and matters related to the audited financial statements. The findings show also that 37% of respondents believe the auditor’s report contains the right amount of information about the audit process itself and matters related to the audited financial statements.
Information on the Audited Entity (Page 18)
– 57% think the auditor’s report should contain more information on the audited entity. 40% think the auditor’s report contains the appropriate amount of information.
Additional Information in the Auditor’s Report (Page 20)
– 94% of respondents would like to see additional information in the auditor’s report
– 77% would like to see information about “audit materiality”.
– 72% would like to see information on circumstances or relationships that might bear on the auditor’s independence.
– 66% would like to see the level of assurance actually achieved in the audit.
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:
– Was That a Yes or a No? Depositions in the YouTube Era
– Second Circuit Provides Guidance as to When a Cautionary Statement Is Not Meaningful
– Trading of Private Company Stock: Issues to Consider
– Why is the Choice of Forum Important?
– Internal Controls Study: Fraud in Non-Accelerated Filer Companies
Recently, I blogged about how Staffer pay levels at the SEC have increased substantially since I left a dozen years ago. In her recent testimony before a subcommittee of the Senate’s Appropriations Committee, SEC Chair Schapiro indicated that she is looking to hire many more Staffers as part of her request for a big jump in the SEC’s budget. Here’s an excerpt from that testimony:
Managing Agency Growth: While the budget request anticipates significant growth in the size of the SEC, the agency is properly positioned to implement this spending plan. To accomplish the hiring of hundreds of new staff during the course of FY 2011, the SEC is enhancing its human resources staff and, consistent with its current authorities, streamlining its hiring process. Improvements include simplifying the application process and maintaining a searchable database of applicants, so that it is possible to interview for a vacancy as soon as it appears rather than having to go through the lengthy posting process each time. Being able to better tailor, target and speed recruiting will enhance the quality of applicants and help the agency acquire the necessary talent to perform effectively in an increasingly complex financial environment.
Perhaps to gear up for all this hiring, I understand that the SEC has retained a recruiter – Futurestep, a Korn/Ferry Company – to help “provide strategic talent acquisition solutions to help the agency address its continuing talent needs.” I don’t recall the SEC using a third party to help find candidates before – although I admit it’s something that I haven’t paid much attention to and it easily could be fairly routine…
Recently, SEC Commissioner Luis Aguilar delivered this speech entitled, “Recruiting the Best and the Brightest Means Striving for a Diverse Applicant Pool.” When I last worked at the SEC, then SEC Chair Arthur Levitt pushed hard for Wall Street to diversify. It’s a topic that certainly deserves greater attention as not much has changed.
Wanted: CLO for the SEC’s “SEC University”
One of the more interesting jobs that has recently opened up down at the SEC is the one for a “CLO” (no, not a “chief legal officer”). Below is the job description (note the opening just closed so the job isn’t listed online anymore):
The Chief Learning/Knowledge Officer (CLO) of the Securities & Exchange Commission is responsible for the management of SEC University and coordination of all SEC education investments providing executive leadership, policy direction, functional management, and successful coordination of Agency-wide training and development program and activities.
The CLO is responsible for ensuring that SEC’s learning and development programs and investments are linked directly to the Agency’s strategic goals by managing and implementing synergies among learning and development programs, SEC University and mission Division technical training units to meet the critical training goals of the Agency. These strategic plans/goals include assessing Agency-wide knowledge gaps technical and management competencies, developing strategies to close knowledge gaps, creating external partnerships designed to ensure leading edge training and development programs, and managing technology to deliver learning and knowledge programs across the Agency to ensure investment in employee knowledge development are optimally managed.
Getting Hired by the SEC
Last Fall – in response to a request from a Professor who had several students applying for an entry-level job at the SEC – I posted this 5-minute video on YouTube giving my ten cents on what it’s like to work for the SEC and what the hiring process is like.
It’s not a recruitment video (nor a parody). The SEC has been flooded with resumes over the past year – but I often get asked the question about how one gets hired there so I thought this might help those that may be curious. I slapped this together real quick so beware of low production values. I pointed the Flip at myself and shot…
On May 25th, the DOJ’s Acting Deputy Attorney General, Gary Grindler, sent around this memo requesting that federal prosecutors to be more clear on what help they can offer companies having issues with corporate monitors assigned to them under federal prosecution agreements. The memo states that if a company considers a monitor recommendation “unduly burdensome, impractical, unduly expensive, or otherwise inadvisable,” it need not adopt the recommendation immediately. In addition, if the company and monitor disagree on the recommendation, “the views of both shall promptly be brought to the attention of the department.”
The SEC as a Republican Target: Potshots Galore
Last month, House Oversight and Government Reform Committee Ranking Member Darrell Issa (R-Ca) released a 33-page report which recommends a number of SEC reforms not included in the financial reform legislation being considered by Congress (see pages 29-31). Given the tight timeline that Congress has for bill reconciliation, I doubt this report will have much influence. But the bulk of the report is not pretty for the SEC as it consists of a series of potshots taken at the SEC – in fact, the report’s title is “The SEC: Designed for Failure.”
In a way, the rebuttal would be that the SEC hasn’t had adequate resources for it’s massive tasks – and that Congress has been the one holding it back. See Lynn Turner’s excellent entry on our “The Mentor Blog” entitled “A Self-Funded SEC: Making the Case” from earlier this week…
The US Citizenship Ceremony: An Emotional Experience
I thought I’d share my recent experience of attending the US citizenship ceremony for my good friend Deng Juac. Deng is a 22-year whom the United Nations brought over here about six years ago from a Kenyan refugee camp (after his dad carried him on his back across a desert from Sudan to save his life when he was 11). My family has been involved in sheltering Deng and helping him through school for the past few years. He truly is a gentle soul.
Recently, Deng received his naturalization certificate and became a US citizen. As you can imagine, this is a big deal for immigrants. At the risk of being verbose, here is a play-by-play of Deng’s citizenship ceremony – some of it was quite emotional despite its bureaucratic nature:
1. Security at the federal immigration building is much tighter than any other federal building I have been in. There is a long line out the door at all times – and security is tight within as well. No wandering the halls.
2. After Deng turned in his green card (which had an incorrect name that they gave him when he arrived 6 years ago, “Juac Juac”), we waited as 10 folks at a time were brought upstairs. After some explanatory remarks, there was a rollcall of countries represented by the folks to be sworn in. It was quite a diverse group including Afghanistan, Pakistan and Somalia. Here is a video of that.
3. We listened to a recording of the Star-Spangled Banner and then we sang the Pledge of Allegiance.
4. Then came the swearing-in ceremony which officially gets you into the “club” – here is the first-half video and here is the second half.
5. We then watched a “welcome” video from President Obama that was great (my dad says he has attended citizen ceremonies in the past and the sitting President didn’t bother to do this). This was followed by a short presentation that showed past ceremonies.
6. Then came the presentation of the naturalization certificates – the photo-op that took a while as each new citizen got their photo taken with the Section Head of the immigration office we were in. Here is a video of a Iranian who need a translator – we’re talking “old country” here. And here is a video of Deng with one of his priceless smiles.
