It was good to see SEC Chair Schapiro’s statement about President Obama’s request for the SEC’s budget, with a 12% increase for 2011 so that the agency’s total would be nearly $1.3 billion. As one former Staffer emailed me: “I remember when they struggled to pass $500 million!” They will need the resources to implement the coming reforms, as well as continue they tasks they have already been performing.
Here’s the SEC’s justification report for the budget request. On page 47 (page 49 of the PDF), there is a page devoted to Corp Fin, where the Division seeks 30 additional positions (translating into nine full-time equivalents). In comparison, Enforcement seeks 90 more positions; IM seeks 20 and Market Reg seeks 40. RiskFin seeks 30 positions – it already has 72. I’m surprised it has grown so fast already…
This action by the Administration is interesting because Obama’s State of the Union last week announced a freeze on government spending for the next three years. But the “freeze” is not absolute – rather, some agencies will see their budgets go up and others will go down, producing an overall freeze effect. So it appears that the SEC may be a “winner” here, as it should be in my opinion.
This excerpt from the SEC’s justification report is noteworthy: “Between fiscal years (FY) 2005 and 2007, the SEC experienced three years of flat or declining budgets, losing 10 percent of its employees and severely hampering key areas such as the agency’s enforcement and examination programs. Even with the funding increases provided by Congress in the last two years, under the SEC’s current funding level, the agency’s workforce still falls about one percent–or 35 full-time-equivalents (FTE)–short of the FY 2005 level. And yet while the workforce at the SEC has shrunk, the job that the SEC has been asked to do has grown even larger. Since 2005, the number of investment advisers registered with and overseen by the SEC has grown by 32 percent, and the number of broker-dealer branch offices has grown by 67 percent.
The SEC oversees a total of more than 35,000 registrants, including over 10,000 public companies, 7,800 mutual funds, about 11,500 investment advisers, 5,400 broker-dealers, 600 transfer agents, 12 securities exchanges, 10 nationally recognized statistical rating organizations (NRSROs), and self-regulatory organizations (SROs) such as the Financial Industry Regulatory Authority, Municipal Securities Rulemaking Board, and Public Company Accounting Oversight Board. While other financial regulators have close to parity between the number of staff and the number of entities they regulate, in recent years SEC staffing and funding simply have not kept pace with industry growth.”
The SEC Approves FASB’s “Support Fee”: What Is It?
Speaking of budgets, a few days ago, the SEC approved FASB’s “accounting support fee” for 2010. The support fee is sort of the FASB’s budget – and the SEC’s approval process is an annual exercise that the SEC now conducts in accordance with Section 109 of Sarbanes-Oxley. The FASB is limited to collecting fees from issuers not to exceed its “recoverable expenses.” In reality, the PCAOB collects the FASB’s support fees when it collects its own fees and then hands over that money to FASB.
The PCAOB’s redesigned website is not bad. My fixes to the home page would include losing the fake Scotus graphic at the top; minimize the huge and long title and move the intro sentence that takes up a lot of valuable real estate to the “About Us” page. It was odd that the PCAOB announced the redesigned site a few days before it went live – less confusing to announce it when it actually happens…
Last week, the SEC approved a rule change to Nasdaq’s delisting procedures that modify the length of certain of the automatic and Staff-authorized “compliance periods” as well as the length of time available for a company to submit a plan to regain compliance. To help you understand these changes, in our “Delisting” Practice Area, we have posted a chart – courtesy of Suzanne Rothwell of Skadden Arps, explaining delisting procedure changes.
Yesterday, the SEC finally posted its climate change interpretive guidance in this 29-page interpretive release. The guidance is effective on the date it is published in the Federal Register, which should happen fairly shortly. We’ll continue to post memos analyzing this guidance in our “Climate Change” Practice Area.
Some might ask why the release is only 29 pages. Two related reasons. First is that since this is not a rulemaking, all of the requisite jargon that typically is in the back half of a rulemaking release was not required. Second is that since this is not a rulemaking, the SEC was forced to limit its guidance within its existing disclosure framework. Otherwise, it could be accused of violating the Administrative Procedures Act – something that someone might challenge given the political hot potato nature of this topic, as I blogged yesterday.
Don’t forget the transcript and audio archive for our recent – and timely – webcast: “ESG Disclosures: Environmental, Climate Change, Social Responsibilities.” Even though this webcast was held before the SEC adopted its new interpretive guidance, the panelists covered many topics that can help you meet your new disclosure obligations.
RiskMetrics: Farewell CGQ! Long Live “Governance Risk Indicators” aka “GRId”
After nearly a year in development, RiskMetrics finally has announced its successor product to its governance rating product known as Corporate Governance Quotients or “CGQ.” The new governance rating service is called “Governance Risk Indicators” (to be known as “GRId”) and is expected to be launched in early March. GRId will assess companies along four independent dimensions: board, compensation/remuneration, shareholder rights and audit.
CGQ scores will be frozen as of early March and retired completely at the end of June. RiskMetrics also will soon discontinue its accreditation for director education programs. For those of you in-house, you will want to inform your directors of this change. It will be interesting to see if this spells the end of all the director colleges, etc. that have sprung up this decade.
I’m not sure why, but the convoluted spelling of the “GRId” nickname really bothers me…
How to Implement E-Proxy in Year Three
Tune in tomorrow for the webcast – “How to Implement E-Proxy in Year Three” – to hear Lyell Dampeer of Broadridge, Tom Ball of Morrow & Co., Keir Gumbs of Covington & Burling, Carl Hagberg of The Shareholder Service Optimizer and Paul Schulman of The Altman Group discuss new e-proxy developments, including the elimination of broker nonvotes in director elections and “lessons learned” from the first two seasons. They will also explain the voting patterns you should expect — and provide solicitation strategies to help you be better prepared for this proxy season.
Before the program, print off these three sets of course materials:
I’m getting numerous requests asking when the SEC’s climate change guidance – adopted last Wednesday by the SEC, but still not available – will be posted. As others have, I thought the SEC would act fast to release the interpretive guidance – just as it did last month with the new proxy enhancement rules (ie. adopting release out the same day as the SEC’s open Commission meeting) – given that we are knee-deep in proxy season.
I imagine the interpretive guidance has to put out real soon given that Form10-Ks are required to be filed in merely four weeks by large accelerated filers. My guess for the hold-up is the politically-charged nature of the guidance, so that some of its language may still be a subject of debate internally within the SEC. As soon as it’s made available, I will tweet on it.
When I blogged last week about the SEC’s open Commission meeting to adopt interpretive guidance on climate change, I mentioned that there was a heated debate about whether the SEC was getting itself into politics. I’ve blogged before how the SEC has been dragged more and more into the political arena over the past decade – so much so that many think the independent nature of the agency is seriously at risk.
As could be expected, some members of Congress have jumped on the SEC’s climate change guidance as a hook to add fuel to the fire. Here is a letter to the SEC from Reps. Barton-Walden that serves as Exhibit A – and here is a rebuttal published Sunday in the NY Times.
I believe we shall be seeing numerous shareholder proposals on this topic going forward – and recently, this petition was submitted to the SEC, urging that Regulation S-K be amended to require that companies disclose all electioneering expenditures under a “Political Influence” heading.
Here are the remarks from each Commissioner delivered at last week’s open Commission meeting:
Tune in tomorrow for the DealLawyers.com webcast – “The Latest on Fairness Opinions” – to hear Kevin Miller of Alston & Bird, Steve Kotran of Sullivan & Cromwell, Stuart Rogers of Credit Suisse Securities and Chris Croft of Houlihan Lokey explore the latest trends and developments in fairness opinion practices. You may want to print these course materials in advance – one set regarding recent case developments and another set regarding the role of investment bankers.
Act Now: As all memberships are on a calendar-year basis, renew now if you haven’t yet – or try a ’10 no-risk trial if you’re not a member.
As you may recall from Corp Fin Deputy Director Shelley Parratt’s speech at our Conference in November, the SEC Staff appears to be drawing a “line in the sand” this year regarding when proxy statement amendments may be necessary. The Staff expects companies to carefully consider the Staff’s positions -including those expressed in comments to other companies – when drafting executive compensation disclosure, and that material noncompliance with the rules and the Staff’s positions will potentially trigger a request for an amendment of the disclosure (rather than fixing the disclosure in future filings).
We just mailed the January-February issue of The Corporate Executive, which includes a comprehensive analysis of typical Staff comments and how you may avoid related pitfalls, including:
– Representative Staff Comments–and Our Practical Guidance
– Guidance for Your 2010 Proxy Disclosures: The Staff’s Executive Compensation Comments
– How We Got To This Point on Executive Compensation Disclosure
– Getting the Analysis Right
– Revisiting Performance Target Disclosure
– Individual Performance
– Benchmarking
Act Now: Please try a 2010 no-risk trial to have this issue rushed to you.
Our February Eminders is Posted!
We have posted the February issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Survey: Bifurcation of Record Dates for Annual Shareholder Meetings
To address the issue of empty voting, the Delaware legislature amended Section 213(a) of the DGCL – effective last August – to allow boards to set a two different record dates for their annual shareholder meeting: one for those shareholders entitled to notice and one for those entitled to vote. This dual-dating system is already used in Europe, where the concept of street-name holders doesn’t exist.
Below is an anonymous survey about whether your company has taken action to adopt this bifurcated record date format:
Ahead of next Thursday’s webcast on e-proxy developments and other voting issues, below are the results from a recent survey we conducted on the topic of the impact of loss of broker nonvotes for ’10 proxy season:
1. Our company:
– Has used e-proxy in a past proxy season and definitely intends to do so in 2010 – 33.3%
– Has used e-proxy in a past proxy season and may decide to not do so in 2010 – 6.1%
– Has used e-proxy in a past proxy season and doesn’t intend to do so in 2010 – 0.0%
– Has not used e-proxy yet but definitely plans to do so in 2010 – 1.5%
– Has not used e-proxy yet but might decide to do so in 2010 – 13.6%
– Has not used e-proxy yet and will not use it in 2010 – 45.5%
2. When it comes to the impact of elimination of broker nonvotes, our company:
– Isn’t worried about its impact at all – 16.7%
– Is a little worried, but not much, about its impact – 50.0%
– Is somewhat worried about its impact – 27.3%
– Is very worried about its impact – 6.1%
3. Our company:
– Is not concerned about obtaining a quorum with the loss of discretionary votes – 13.6%
– Already seeks the ratification of auditors – 83.3%
– Already has another routine proposal planned the would address quorum concerns – 1.5%
– Will add the ratification of auditors this year out of quorum concerns – 1.5%
– Will add a different routine proposal this year out of quorum concerns – 0.0%
4. Our company:
– Has not used a proxy solicitor in the past for regular annual meetings but definitely intends to use one for the upcoming proxy season – 3.0%
– Has not used a proxy solicitor in the past for regular annual meetings but is considering it for the upcoming proxy season – 9.1%
– Has not used a proxy solicitor in the past for regular annual meetings and will not use one for the upcoming proxy season – 18.2%
– Has used a proxy solicitor in the past for regular annual meetings and definitely intends to use one for the upcoming proxy season – 59.1%
– Has used a proxy solicitor in the past for regular annual meetings and may use one for the upcoming proxy season – 9.1%
– Has used a proxy solicitor in the past for regular annual meetings but doesn’t intend to use one for the upcoming proxy season – 1.5%
5. Our company:
– Has a majority vote standard and intends to keep it – 54.6%
– Has a majority vote standard but may change it to a plurality standard – 1.5%
– Has a plurality vote standard and intends to keep it – 36.4%
– Has a plurality vote standard but may change it to a majority standard – 7.6%
Please take a moment to respond anonymously to our “Quick Survey on ‘More on Blackout Periods’.”
Learning about a New Voting Service: Moxy Vote
In this podcast, Mark Schlegel, Co-Founder and VP-Business Developments of Moxy Vote, discusses the latest developments in proxy voting capabilities, including:
– What is Moxy Vote?
– What has happened since your launch?
– What can in-house counsel/corporate secretaries do to start participating?
– What types of advocates are on the site and what are the issues they cover?
– What do we want to accomplish?
– Are there any upcoming votes of interest?
Pat McGurn’s Forecast for 2010 Proxy Season: Wild and Woolly
We have posted the transcript for our webcast: “”Pat McGurn’s Forecast for 2010 Proxy Season: Wild and Woolly.”
Yesterday, the SEC adopted by a 3-2 vote (Commissioners Casey and Paredes voted against adoption) an interpretive release to provide guidance to companies about how they should make climate change disclosures (the release is not out yet; here is the press release). There was heated discussion during the meeting – particularly from Commissioner Casey – as to whether the SEC was getting into the tricky intersection of climate change and politics.
Although not discussed during the meeting or in the press release, since the guidance is in the form of an interpretive release, many are presuming it is immediately effective – meaning that it applies to the Form 10-Ks that will be filed fairly shortly by calendar-end companies.
Below is an excerpt from a memo from Troutman Sanders:
The SEC stated that its release does not create a new legal requirement or modify existing disclosure rules, regulations or interpretations, which the SEC remarked included the framework and flexibility necessary for meaningful disclosure. Instead, the release provides “guidance that can help public companies in determining what does and does not need to be disclosed” according to Chairman Mary Schapiro. The release was adopted by a vote of 3 to 2.
In presenting the release, the SEC reiterated the existing provisions requiring disclosure of climate change risks and implications when material to a public company:
– Item 101 of Regulation S-K: Item 101 provides for a general description of a company’s business and requires disclosure as to “the material effects that compliance with federal, state and local provisions… regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the company.” This item also may require disclosure as to the anticipated impact of future environmental regulation.
– Item 103 of Regulation S-K: Item 103 requires disclosure as to “any material pending legal proceedings, other than ordinary routine litigation incidental to the business.” The instructions to Item 103 state that disclosure is required regarding “an administrative or judicial proceeding … arising under any federal, state or local provisions… regulating the discharge of materials into the environment… for the purpose of protecting the environment.”
– Item 303 of Regulation S-K: Item 303 provides for management’s discussion and analysis of the company’s financial condition and requires disclosure of “known trends or uncertainties” that a company believes will result, or are reasonably likely to result, in material changes in the company’s liquidity, net sales, revenues or income from continuing operations.
– Item 503(c) of Regulation S-K: Item 503(c) provides for the disclosure of risk factors that make investments in the company speculative or risky to the extent that they are not generally applicable to any issuer.
The SEC stated that meaningful disclosure might address these four topics:
1. The impact of state and federal legislation and regulation, including potential legislation
2. The effects of international accords and treaties
3. The actual and potential indirect impacts and consequences, including reputational harm and lost opportunities
4. The actual and potential impact of physical effects of climate change
While the current rules and regulation require companies to disclose things that are material to investors, and the Staff noted that the SEC is not changing the traditional standard for materiality, which is a substantial likelihood that disclosure would be viewed by the reasonable investor as having significantly altered the total mix of information made available. But the Staff also emphasized that if there is any doubt to whether something is material or not, it should be resolved in favor of the investor and, thus, disclosed.
We are particularly concerned that the interpretive guidance, as described by Chairman Schapiro, might require a company to speculate on what legislation will pass and what its consequences will be. This is an unprecedented disclosure requirement and one that is frought with the risk of evaluation in hindsight. Those opposing the adoption of the release noted the great flux of the state of science, law and policy addressing climate change and suggested that the release was being adopted because of political pressures. They noted that disclosure on the four topics noted above would include much speculation and lead to greater investor confusion.
While the SEC did not issue new rules today, the discussion at the SEC’s meeting indicates that the Staff believes that public companies need to revisit their disclosure practices. We believe that if the SEC does not see improvements in the amount and detail of discussion, we will see a responsive flow of comment letters that could by their nature impose standards on all reporting companies.
We also believe that there is the potential that the SEC may resort to a formal rulemaking requiring specific disclosure, including discussion of carbon footprints and quantitative measurements. Companies wishing to avoid a “one size fits all” approach in the future should carefully draft their 2010 disclosure under the current framework to provide investors with useful information about the potential risks and implications of climate change.
ESG Disclosures: Environmental, Climate Change, Social Responsibilities
We have posted the transcript for our recent – and timely – webcast: “ESG Disclosures: Environmental, Climate Change, Social Responsibilities.” Even though this webcast was held before the SEC adopted its new interpretive guidance, the panelists covered many topics that can help you meet your new disclosure obligations.
More on “The Mentor Blog”
We continue to post new items daily on our new 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:
– Obama’s 10th Justice Gives Supreme Court a Business Tilt
– Russ Ryan on the State of SEC’s Enforcement Division
– Becoming an “Outlier”: Leveraging Social Media
– What Level of Due Diligence Should a Placement Agent Conduct?
– Where the Action Is: CEO Searches
– Legal Implications of Cloud Computing
– More on “Collectively Stupid: A Way of Life?”
Last week, Dave Lynn and Marty Dunn got together during Northwestern’s annual Securities Regulation Institute in San Diego to tape this podcast, including a discussion of:
– The Staff’s new position on Section 3(a)(9) exchanges
– Drafting director diversity disclosure
– The new C&DI on director qualifications disclosure
– The back story on the new non-GAAP measure C&DIs
– Marty’s travel stories
SEC Proposes to Modernize Stock Buyback Safe Harbor
Yesterday, the SEC posted this proposing release to update Rule 10b-18’s safe harbor when companies repurchase their own stock. The safe harbor hasn’t been updated much since the rule’s adoption in 1982 – and trading strategies and technologies have dramatically changed since then.
Alan Dye on the Latest Section 16 Developments
Tune in tomorrow for the Section16.net webcast: “Alan Dye on the Latest Section 16 Developments.” This is always one of our most popular webcasts, as Alan answers many of the more common queries he has been receiving lately.
Act Now: As all memberships are on a calendar-year basis, renew now – or if you’re not yet a member, try a ’10 no-risk trial today.
Taken public just two years ago, this WSJ article claims that RiskMetrics is considering selling itself. The article notes a few prospective buyers and that the premium may be as high as 30%. Although the company does more than provide proxy advice, it’s interesting timing for a potential sale given the uncertainty over whether say-on-pay and proxy access will be mandated, either of which should give somewhat of a boost to its ISS Division.
Board Diversity Policies: Do You Need One? Samples Available
In reaction to the SEC’s new board diversity disclosure requirement, several members have asked for sample board diversity policies, so we have posted a few in our “Diversity” Practice Area. But in deciding whether you need one, you should consider the input provided yesterday in our “Proxy Season” Blog as well as the commentary made during our recent webcast: “How to Implement the SEC’s New Rules for This Proxy Season.”
Disclosure Controls & Procedures: An In-House Perspective
We have posted the transcript for our recent webcast: “Disclosure Controls & Procedures: An In-House Perspective.”
As I’ve blogged, there are appear to be deficiencies with the amendments to New York’s power of attorney statute that were adopted last summer, which have changed the requirements for creating certain types of valid powers of attorney in New York and – when read in isolation – may have had the unintended consequence of invalidating a wide variety of common corporate, commercial and financial documents.
Now, 51 law firms have weighed in with this White Paper with the aim of providing a blueprint for a consensus among practitioners on some of these troublesome issues because of the concern that an overly conservative interpretation may become the accepted version of the law. The White Paper focuses specifically on proxies to vote shares of corporations, indorsements to effect the registration of transfer of certificated securities and powers of attorney granted in connection with the formation and governance of non-New York limited liability companies and non-New York limited partnerships. The firms conclude that – consistent with New York’s customary and long-standing principles of statutory interpretation as well as the internal affairs doctrine – at least substantial portions of the statute do not apply to the issues covered in the White Paper.
Virtual Annual Meetings: Intel Decides to Hold Physical Meeting in 2010
According to Jim McRitchie’s “CorpGov.net Blog,” Intel has decided to at least postpone foregoing holding a physical component to its annual shareholders’ meeting for 2010. Initially, Intel planned to hold a completely virtual annual meeting as Broadridge did a few months ago. Intel planned to take its quasi-virtual annual meeting from last year one step further and hold it completely online – now Intel will hold its ’10 as a quasi-virtual one just like it did in ’09. Here’s an investor’s statement on Intel’s decision.
More on our “Proxy Season Blog”
With the proxy season in full gear, we are posting new items regularly on our “Proxy Season 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:
– Effective Board Engagement with Shareholders
– A Real Reason: Attaching Plans to the Proxy Statement
– Newground Initiates “Fair Vote” Campaign
– Analysis: Voluntary Implementation of Proxy Access
– Annual Meeting Transcripts: Should You Post One?
Yesterday, in a 5-4 decision, the US Supreme Court delivered a surprising – and groundbreaking – opinion in Citizens United v. Federal Election Commission that held, among other things, that a prohibition on corporations, unions, etc. from using their general treasury funds to pay for campaign advertisements regarding an issue or political candidate was unconstitutional. Note that corporations are still prohibited from making direct political contributions to candidates or political parties. This decision is expected to radically alter the role that companies will play in political elections, as it turns back the clock a century on laws in this area. It represents quite an aggressive intervention into politics by SCOTUS.
Looking at Google News, there are already more than 2500 articles on this case – and I see that some law firms have already set up webcasts to explain this decision to be held as early as Monday! We will be posting memos on this decision in our “Political Contributions” Practice Area.
Here are a few blogs that lay out the issues and possible consequences of the decision pretty nicely:
What Does Citizens United Mean for Director Elections? Turns Them Into Political Ones?
One topic not addressed so far in the media pieces I have read is how Citizens United may impact the boardroom. Given that a company’s board will likely be the greatest influencer on how a company spends money in political campaigns, I imagine the politics of each director could well be scrutinized now and perhaps it’s more likely that third-parties will attempt to place alternative candidates – ones with a different political bent – on a company’s ballot. Plus, Senator Schumer is talking about Congress adopting a law that would require shareholder approval of political expenditures as one of several alternatives to limit the decision’s impact. A true mix of politics and investing.
The importance of proxy access just jumped three-fold in my opinion. And the importance of the roles played by chief governance officers, corporate secretaries and investor relations departments also jumped as they will be called upon to help directors conduct real campaigns, a topic I have written about often (here is one example and another). The change never stops…
Mailed: January-February Issue of The Corporate Counsel
The January-February issue of The Corporate Counsel was recently mailed and analyzes these topics:
– Will Delaware Issuers Be Utilizing the New Bifurcated Record Dates for Their Upcoming Annual Meeting?
– Incorporation By Reference/Totality of Information As Good Deal-Disclosure–The Dialogue Continues
– Do Spring-Loaded Option Grants To Executives Trigger 8-K Item 5.02(e)?
– Rule 10b5-1 Plan Practices–Staff CDIs and Other Updates
– More Section 13(d)/(g) CDIs
– Getting Familiar with the GAAP Codification
Act Now: As all subscriptions are on a calendar-year basis, renew now if you haven’t yet to receive this issue. If not yet a subscriber, try a 2010 no-risk trial.
