Yesterday, the SEC unanimously voted to adopt rule changes that remove references to credit ratings from some of its rules and forms to implement Section 939A of Dodd-Frank. These changes help preserve the availability of shelf and short-form registration – Forms S-3 and F-3 – for companies widely followed in the market. To replace the credit ratings criteria, the SEC created four new tests, one of which must be satisfied to use short-form/shelf registration – and subsidiaries of WKSIs do qualify. The rules include a transition 3-year grandfather period. Here’s the SEC’s press release (the adopting release is not out yet).
According to SEC Chairman Mary Schapiro, the SEC expects just about all issuers that currently rely on the existing test also to continue to qualify under the new criteria. While this may be the case, there are issuers of investment grade debt securities that do not meet the Form S-3 or Form F-3 public equity requirements and will not meet the new criteria adopted today. Once the grandfathering period is over, these issuers will lose access to Form S-3 or Form F-3 until they issue substantial amounts of registered debt. We expect, however, that most of these issuers will issue debt pursuant to Securities Act Rule 144A if they are not able to use Form S-3 or Form F-3, given the potential time delay in making registered offerings using a long form registration statement, and thus will likely never satisfy the new criteria adopted today.
SEC Re-Proposes Shelf Eligibility Requirements for Asset-Backed Securities
Yesterday, the SEC also issued this re-proposing release related to shelf-eligibility requirements for asset-backed securities. There is a 60-day comment period. Here’s the SEC’s press release.
The GAO’s Study on Securities Fraud Liability for Secondary Actors
Last week, as required by Section 929Z of Dodd-Frank, the GAO published this study on the impact of creating a private right of action against secondary actors who aid and abet violations of the federal securities laws.
We have posted the survey results regarding the latest Regulation FD trends, repeated below. This new survey supplements several prior surveys that we have conducted on this topic:
1. Our company has a written policy addressing Reg FD practices:
– Yes, and it is publicly available on our website – 11.8%
– Yes, but it is not publicly available on our website – 62.7%
– No, but we are in the process of drafting such a policy – 13.6%
– No, and we do not intend to adopt such a policy in the near future – 11.8%
2. Regarding reaffirmation of earning announcements, our company uses one of the following rules of thumb regarding private reaffirmations:
– We do not allow private reaffirmation – 63.6%
– Rule of thumb allowing for private reaffirmations of one week or less – 10.9%
– Rule of thumb allowing for private reaffirmations of one to two weeks – 10.9%
– Rule of thumb allowing for private reaffirmations of two to three weeks – 5.5%
– We permit private reaffirmations – but never use a rule of thumb, instead we require confirmation of no material change with CEO, GC, etc. – 9.0%
3. At our company, our CEO and other senior managers: (multiple answers apply, may total more than 100%):
– Are not permitted to meet privately with analysts – 6.9%
– Are only permitted to meet privately with analysts so long as someone else accompanies them (such as general counsel or IR officer) – 63.8%
– Are permitted to meet privately with analysts after briefing by IR officer, general counsel, etc. – 32.8%
– Are only permitted to meet privately with analysts during certain designated times – 25.9%
Please take a moment to participate in this “Quick Survey on Whistleblower Policies & Procedures.”
– What is the research population for the latest study?
– What do audit fee trends look like?
– What about non-audit fee trends?
– What were the biggest surprises from the latest study?
The SEC has amended its agenda for today’s open Commission meeting and will not be voting on adopting rules requiring institutional investment managers to disclose their voting records yet (the proposal came out last October). No word on why the sudden cancellation of this agenda item – but I imagine adoption of these rules is merely postponed as they don’t appear controversial looking at the comments submitted. The remaining three agenda items will still be dealt with at the meeting.
On Friday, the US Court of Appeals for the DC Circuit issued its much-anticipated opinion in the Business Roundtable’s and Chamber of Commerce’s challenge to the SEC’s proxy access rule (we are posting memos in our “Proxy Access” Practice Area). The court found that the SEC “was arbitrary and capricious” under the Administrative Procedure Act in promulgating Rule 14a-11 and vacated it.
The news was greeted with much glee by the corporate community, much like Steve Martin when he received a new phonebook in “The Jerk” – even though the decision to vacate was not much of a surprise to those who followed the harsh line of questioning from the three judges during oral argument back in April (see this blog). The only surprise may have been that this decision was reached in July – more folks in my poll on when the decision would be rendered selected August.
Obviously, the SEC is not happy as reflected in this statement (nor are investor groups like CII – see their statement). As I blogged before, the SEC has various alternatives available to it going forward. This excerpt from a Skadden alert drives this point home:
It remains to be seen how the SEC responds to the decision. It is possible that the SEC will refine its economic analysis and re-propose a proxy access rule. In light of the SEC’s continuing work load relating to the implementation of the Dodd-Frank Act and other time constraints, it seems likely that any new proxy access rule would not be effective in time for the 2012 proxy season.
It is worth noting that when the SEC adopted the proxy access rule, it also amended Rule 14a-8 in a way that would permit stockholders to propose additional proxy access (by narrowing the so-called “election exclusion” under Rule 14a-8(i)(8)). This amendment was not challenged by the Business Roundtable and Chamber of Commerce. When the SEC granted the stay of the proxy access rule in October 2010, it also stayed the effectiveness of the Rule 14a-8 amendment because the amendment was “designed to complement” the proxy access rule and the SEC viewed the two as “intertwined.”
It is not known whether the SEC will keep this part of the stay in place while it considers its next steps on a proxy access rule or, alternatively, if it will allow the Rule 14a-8 amendment to take effect and open the door to proxy access stockholder proposals for the 2012 proxy season. A statement released by the Director of the SEC’s Division of Corporation Finance, expressing disappointment in the Court’s decision, specifically noted that the Rule 14a-8 amendment was not affected by the Court’s decision.
It’s been a while since we heard of a development in the insider trading case, SEC v. Cuban (here’s the last one I blogged about). Here’s news from Knowledge Mosaic:
On July 18th, the Court overseeing the SEC’s insider trading case against Mark Cuban, the owner of the Dallas Mavericks, held that Cuban cannot assert unclean hands as an affirmative defense to the SEC’s action. The defense is strictly limited to cases where the SEC’s misconduct is egregious, the misconduct occurs before the SEC files the enforcement action, and the misconduct results in prejudice to the defense rising to a constitutional level and established through a direct nexus between the misconduct and the constitutional injury.
The SEC’s Report on Credit Ratings Reliance
On Thursday, the SEC issued this 24-page report on the reliance on credit ratings, as required by Section 939A(c) of Dodd-Frank.
Happy anniversary Dodd-Frank! For those of us that received job security when Dodd-Frank became law a year ago, today should be a day of celebration (the anniversary was yesterday, but it seems more appropriate to celebrate on a Friday). I’m celebrating by not being too serious in today’s blog. [Here’s a Morrison & Foerster memo; Davis Polk memo; O’Melveny & Myers memo; and a Sullivan & Cromwell memo on “what’s happened” in different areas – how far we’ve come and how much we have to go kind of thing. Certain provisions of Dodd-Frank become effective today and are identified in the memos. SEC Chair Schapiro delivered this anniversary testimony yesterday before the Senate Banking Committee.]
I imagine some of the celebrations would remind us of the Seinfeld episode where Elaine took offense with the large number of office parties. “Get well, get well soon, we wish you to get well!”
Poll: How I Plan to Spend Dodd-Frank’s Anniversary
According to this Washington Post article yesterday, the SEC’s Commissioners have disagreed with its Enforcement Staff to settle the CSK Auto clawback case because the penalty amount was too low. It’s relatively rare that the Commission disagrees with its Enforcement Staff – but certainly not unheard of – but it is rare that a closed Commission meeting outcome like this is made public.
The SEC’s Enforcement Process: How Does a Commissioner Dissent?
There are various steps in the SEC’s Enforcement process that requires blessing by the SEC’s Commissioners. That approval either takes place behind closed doors at a closed Commission meeting or ad seriatim. Last week, the Washington Post ran this article about Commissioner Aguilar dissenting in a settlement – the article notes that only two dissents in an enforcement action have been posted since ’04.
A public dissent by a Commissioner certainly is unusual, but it’s not unprecedented as noted in the article. Because this settlement was in the form of an administrative proceeding, there was an opportunity for Commissioner Aguilar to have a public airing. Otherwise (i.e., with a federal court action), there’s no public outlet to note a Commissioner’s dissent – it is merely recorded by the SEC’s Secretary in the minutes of the closed Commission meeting. But sometimes the press does get leaked information somehow – you may recall the news reports last year that the 2 Republican Commissioners dissented from the SEC-Goldman Sachs settlement involving the ABACUS CDO…
Next Tuesday: SEC to Adopt Institutional Investment Manager Vote Reporting Rules and More
As noted in ISS’s Blog, the SEC will hold an open Commission meeting on Tuesday to adopt rules requiring institutional investment managers to disclose their voting records; rules replacing credit rating references with alternative criteria and rules establishing a large trader reporting system. The SEC will also consider re-proposing rules relating to shelf-eligibility for asset-backed securities.
In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:
– Dealing with securities analysts
– The latest SEC trends in SEC comments on Exchange Act filings
– Favorite beach activities
The GAO’s Report on the SEC’s Revolving Door
Last week, the GAO issued this report about the SEC’s revolving door entitled “Existing Post-Employment Controls Could Be Further Strengthened.” This report was mandated by Congress in Section 968 of Dodd-Frank. As I’ve blogged recently, revolving doors at federal agencies have been in the news, particularly since it’s a pet peeve of Senator Grassley.
A couple of interesting facts from the report: 2127 staffers left the SEC between 2006-2010 – and there are 3729 staffers right now – so that’s a startling percentage of departures (but maybe that is normal for most organizations – I have no idea since it’s not my area of expertise). Of the 2127 departing staffers though, only 37% were attorneys or accountants (or other types of examiners); the rest were non-examination employees (egs. IT personnel, secretaries) – that was surprising to me too because I assumed most of the turnover was due to staffers leaving for more lucrative jobs in law and accounting firms. During this period, the average tenure of a staffer before departure increased to 13.5 from 8.3 years, mainly due to the recession.
Executive Compensation Disclosure During the ’11 Proxy Season: A Large Step Forward
On CompensationStandards.com, we have posted the Summer 2011 issue of our Compensation Standards newsletter that contains practical guidance (and numerous specific examples) in the aftermath of a hectic proxy season. The Summer issue covers:
– The Evolving Role of the Executive Summary
– Coordinating the Executive Summary and the Say-on-Pay Supporting Statement
– The Newest Disclosure Tool – The Proxy Statement Summary
– The Second Round of Compensation-Related Risk Disclosure
– A Preview of the Coming Consultant Disclosure
– What to Expect in 2012
Act Now: This issue is available to all those with a CompensationStandards.com membership – which is “half-price for the rest of the year” with this no-risk trial. Members should print it out now so they can read Mark Borges’ guidance today…
As noted in Jim Hamilton’s blog, President Obama issued an Executive Order two weeks ago asking the SEC, CFTC and other independent agencies to follow the cost-saving, burden-reducing principles when proposing and adopting regulations as outlined in an earlier Executive Order issued in January that was addressed to other federal agencies (at that time, other agencies were encouraged to follow this order – but none of the independent agencies have submitted an action plan, so hence this new non-binding Order to push them). This new Executive Order also asks the independent agencies to analyze existing regulations to identify any that are outdated or too burdensome. The agencies have 120 days to report their findings to the Office of Management and Budget.
The SEC & the “Plain Writing Act of 2010”
A few days ago, I had just sat down to draft a blog about the Plain Writing Act of 2010 when Dominic Jones thankfully beat me to the punch with this “Coming soon: SEC advice you can (maybe) understand.” I say “thankfully” because I had never heard of the Act nor have I seen anyone else write about it (other than this piece by Lois Yurow) even though implementation is due in a few months, i.e. October 13th. Here’s the SEC’s report on implementing the Act – and here’s the SEC’s Plain Writing Initiative.
Dominic writes that investors are unlikely to benefit from simpler prose in disclosure documents under the Act and I agree that is important. But I would even take that a step further and simplify how documents on Edgar are presented, long a pet peeve of mine. How can ordinary investors understand what a “DEFA14A” means? Or even a “Form 10-K” for that matter? The SEC’s forms and schedules should have labels that more clearly identify what they are…
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:
– Is Going Public Going Out of Style?
– Corporate Political Spending Post-Citizens United
– A 12-Step Program to Truly Good Corporate Governance
– Study: “Bridging Board Gaps”
– Fifth Call Objectives, and Incremental Alternatives
As noted in this NY Times’ article on Saturday, the House Appropriations Committee cut the SEC’s fiscal 2012 budget request by $222.5 million, to $1.19 billion (the same as this year’s), even though the SEC’s responsibilities were vastly expanded by Dodd-Frank. As I’ve blogged about numerous times before, the SEC needs to be self-funded because Congress is all too willing to play politics with this independent agency.
As noted in the article, cutting the SEC’s budget doesn’t help Congress in its battle to cut the federal deficit. In fact, this move hurts that effort because the SEC is funded out of fees it collects – and Section 991 of Dodd-Frank limits the fees that the SEC can collect by now tying the amount it is able to collect to its budget. Congress really shot itself in the foot when it included that provision in Dodd-Frank, but Wall Street and the corporate world have good lobbyists. Here’s an excerpt from the NYT article:
By way of comparison, in 2009 Citigroup and JPMorgan Chase, two institutions the S.E.C. regulates, spent $4.6 billion each — four times the SEC’s entire annual budget – on information technology alone. Under the House’s proposed budget, the S.E.C.’s resources for technology would be cut by $10 million and a $50 million reserve fund earmarked for technology would be eliminated.
The Re-Introduction of the Shareholder Protection Act
Last week, several prominent members of the U.S. Senate and House of Representatives re-introduced the Shareholder Protection Act for debate. As noted in the Harvard Corporate Governance Blog, the bill – which originally passed the House last year – would establish corporate governance rules for deciding when corporate resources may be spent on politics. Although it appears that the bill is unlikely to be adopted during this Congress, its reintroduction might mean that it will continue to surface until a time comes when it has substantial support.
Meanwhile, as part of the efforts to reduce the federal deficit, Sen. Levin and Sen. Brown have introduced legislation – the “Ending Excessive Corporate Deductions for Stock Options Act” (S. 1375) – to end a corporate tax break allowing corporations to deduct stock option expenses on their tax returns in amounts greater than the expenses shown on their books
Proxy Season Results of Mobile Phone Voting
In this podcast, Joe Vicari describes how Broadridge facilitated voting by mobile devices during the proxy season (following up on this podcast), including:
– How many shareholders voted by mobile phone?
– Was this more than expected?
– Are you aware of any companies that made special efforts to notify their shareholders that they could vote by mobile phone?
– What do you recommend that companies do next year to boost their mobile phone voting rates?
Last month, Premiere Global Services became the 40th company to file a Form 8-K reflecting a failure to get majority support for it’s say-on-pay agenda item (47%). A list of the Form 8-Ks of these companies is in CompensationStandards.com’s “Say-on-Pay” Practice Area (bearing in mind that totals for three of these companies are somewhat in dispute). 40 failures is less than 2% of all companies that had say-on-pay on their ballot this season.
So what does this all mean? On the one hand, the relatively low percentage of companies failing has led commentators to label say-on-pay as insignificant as a force for needed change, such as this blog by Bob Monks and this one from Paul Hodgson. On the other hand, many corporate advisors are holding up this season’s results as evidence that more change in pay practices is not necessary.
My take is that it’s too early to tell what it means (including what level of “against” votes is a red flag that some pay practices are problematic – clearly, there are levels below a majority that should give boards pause). I believe this year was a test year as many institutional investors weren’t prepared for the massive undertaking that a true look at pay packages for their portfolio companies entails. In addition, we didn’t see much in the way of grass roots movements – surprising in this social media age. The potential for potent and inexpensive campaigning online against a company’s say-on-pay vote will continue to loom. Five years from now – particularly when say-on-pay then applies to the numerous small companies that have a temporary bye right now – we’ll have a better sense of what say-on-pay really means.
To be honest, 40 failures is many more than I expected. That should be clear from the poll I posted on this blog back in January asking y’all to guess how many failures there would be. In hindsight, the choices I offered in the poll revealed how low I thought the numbers would be. I offered choices of 0 failures (which garnered 1% of votes); 1-2 failures (1%); 3-4 failures (3%); 5-10 failures (18%); and More than 10 failures (75%). I should have broadened the choices – and I will next year.
I’m still mystified that most directors appeared to be unsupportive of say-of-pay before Dodd-Frank mandated it. So many of them are now resting easy, having shareholders bless their pay packages with flying colors. As I blogged a few years back, these boards now have a likely shield from liability and from reputational attack. I could always understand why board advisors didn’t like say-on-pay – it’s a lot more work with no additional resources during an already busy proxy season – but I never understood why directors would be against it. But maybe they saw those say-on-pay lawsuits coming…
CEOs: When Too Many Luxury Homes Becomes a Hassle
If you follow me on Twitter, you know I fell off my chair reading this recent article in “Chief Executive” magazine that essentially provides guidance for CEOs buying that 3rd or 4th luxury home. The CEO featured in the article is the head of a private family-owned company but it’s still quite a brazen piece of journalism.
For those that argue that all the corporate jet trips to these far-flung homes are somehow for business purposes, there is no hint of that in the piece. In fact, the CEO in the article complains that his second biggest problem is that he works too much to get to these extra residences (although the article notes he gets to Martha’s Vineyard every weekend in the summer). His biggest problem? “He owns too many homes, likening his passion for collecting top-tier getaways to the way other people collect paintings.”
The Latest Compensation Disclosures: A Proxy Season Post-Mortem
We have posted the transcript for our recent CompensationStandards.com webcast: “The Latest Compensation Disclosures: A Proxy Season Post-Mortem.”
A few months ago, I blogged a “Farewell to Bowne” and posted a poll about “your favorite financial printer moment.” In response to the poll, 69% responded that free food was their favorite (no surprise!); 41% said tedious arguments over commas and periods; 19% said brushing up on proofing; 5% said good facetime with partners and 10% said sleeping in the bathroom.
In addition, I received many emails with specific memories, some of which are repeated below – please keep them coming and I will only blog them if you give me permission:
– My favorite memory is an experience done a hundred times melded into one memory: the clearing of the blue line, just before printing the final prospectus (you know, when nobody is left at the printer other than a couple of lawyers and accountants with sometimes a guest appearance by the junior analyst from the investment bank to make sure their name is spelled correctly on the cover of the 424). Ah, peace.
– My favorite story involves the hubris of a first-year associate from a large, very prestigious firm that shall go unnamed, in the early-ish days of constant cell phone use. This was about a decade ago, in mid-2000 or so, and it was dinnertime after the deal ended and I was having a brief meal before heading home, and he was having a few beers with a colleague before heading out, and we overheard him calling the front desk on his cellphone from the lunchroom and attempting to order a car, and totally confounding the front desk since he wasn’t walking a few doors down to ask for the car or calling on the printer’s phone, but using his cell phone. And he was a little tipsy. In the end, it devolved down to a “do you know who I am” moment on his part, after which he stated very loudly “I am a ____ associate”, as if it was time for whoever was on the other line at the front desk to bow down to him and call that car – fast. That was an iconic moment, a classic “I don’t want to be that entitled person” story.
– I spent many long hours at Bowne of Dallas, which had nice cushy chairs, a huge projection TV and free Pac Man and Ms Pac Man game tables (now that gives you the timeframe). Good BBQ for meals, too.
– I sure have a lot of good memories of lawyers, accountants and bankers working nights shoulder-to-shoulder at the printers in the ’70’s and 80’s. In Cleveland, our printer was originally known as The Judson Brooks Company, which was later acquired by Bowne. We all knew some of the owners and most of the staff like family. They had a couple of cots separated by curtains in the back where you could catch a few hours’ shut-eye before leaving for the dawn flight to DC with the SEC filing package. We did the red-lining on the plane. Many the nights I called my wife to let her know I would be working late and spending the night at “The Judson Hilton.”
– Going to the printer was one on the best things about being a securities lawyer. Unlike everyone else in the world, financial printers loved lawyers and would do most anything to make them happy. I love you.
More on “An Emerging Hot Topic? Whether to Disclose Voting Result Percentages”
Last year, I blogged about grumblings that the SEC’s adoption of the requirement of a Form 8-K to be filed to disclose voting results didn’t go far enough because it only requires the disclosure of somewhat meaningless raw voting data and not the percentages themselves. In that blog, I weighed in that perhaps the SEC’s omission was wise because there was so much confusion about how to count percentages.
Since then I have blogged about the troubles some companies (and their advisors) have had with figuring out how to determine whether an agenda item has passed. This obviously is not good and it’s only a matter of time before some of these close votes wind up in court. Care must be taken to complying with the complexity of laws involved. Now that the votes are more important than ever, it’s probably time for the SEC to tweak the Item 5.07 requirements and require a percentage, as this should help force companies into being more careful with their count. It is doable – see how IBM has done just that again this year in their Form 8-K…
Deals: The Latest Delaware Developments
We have posted the transcript for the recent DealLawyers.com webcast: “Deals: The Latest Delaware Developments.”
