Yesterday, the SEC issued nine new Compliance and Disclosure Interpretations to deal with issues posed by the new executive compensation and proxy disclosure enhancement rules adopted last month. These CDIs are in addition to the transitional CDIs already issued.
Below are links to the new CDIs, the last two of which are transitional in nature (in the alternative, we have placed all of the new CDIs in one document for your reading pleasure):
Yesterday, the SEC announced that it will hold an open Commission meeting next Wednesday to consider issuing interpretive release on climate change. Here is the meeting agenda.
I wonder if this guidance will apply to this proxy season? Either way, we held an excellent webcast last week – “ESG Disclosures: Environmental, Climate Change, Social Responsibilities” – whose audio archive (transcript to come) will help get you to up-to-speed on the issues you should be analyzing now.
Webcast: “Pat McGurn’s Forecast for 2010 Proxy Season: Wild and Woolly”
Tune in today for our webcast – ““Pat McGurn’s Forecast for 2010 Proxy Season: Wild and Woolly”” – to hear Pat McGurn of RiskMetrics’ ISS Division give a recap of what transpired in the 2009 proxy season and predict what to expect for the upcoming proxy season. Here are course materials you should print out in advance of the program.
Act Now: Since all memberships are on a calendar-year basis and expired at the end of December, if you don’t renew now, you will be unable to access this webcast. If you’re not yet a member, try a 2010 no-risk trial.
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:
– “Collectively Stupid”: A Way of Life?
– US and California Supreme Courts Tackle Attorney-Client Privilege
– The SEC Cares
– The Time I was Written Up for Blogging
– SCOTUS to Hear “Foreign-Cubed” Cases
– An Unforeseen Impact of an SEC Complaint: No D&O Coverage
– Why I Don’t Allow Comments on My Blogs
In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion regarding compliance, risk and heavy metal – not necessarily in that order.
Redlined: Changes to S-K Items 401, 402, and 407
Thanks to Luke Frutkin of Frost Brown Todd, we have posted redlined versions of Items 401, 402 and 407 of Regulation S-K – which account for the recent SEC rule changes. We have also posted a Word version of the new Item 5.07 of Form 8-K (note that the SEC’s PDF of Form 8-K doesn’t include this new item yet).
Whistleblower Can Go “De Novo” If DOL Doesn’t Act
A few weeks ago, the Fourth Circuit – in Stone v. Instrumentation Laboratory Company – held that the Sarbanes-Oxley Act’s whistleblower provisions establish a complainant’s right to de novo review in federal district court if the Labor Department does not issue a “final decision” within the statutory 180-day period. This is the first time a court has addressed this issue.
In an interesting move, Corp Fin has hired Professor Lawrence Hamermesh of Widener University Law School as an attorney fellow, who will serve thru mid-2011. Professor Hamermesh is a well-known Delaware law expert and is regularly rumored to be a candidate for the bench there. Not surprisingly, the Professor will be advising on areas where both federal and state law intersect. I imagine this has a lot to do with proxy access. A good hire by the SEC…
Here We Go Again: SEC Files Second Complaint against BofA
Last week, the SEC filed a second complaint in the US District Court – SDNY against Bank of America concerning an alleged lack of disclosure over extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies (here’s the SEC’s litigation release). Last year, the SEC filed a “lack of disclosure” complaint against BofA over a bonus plan related to its merger with Merrill Lynch that became headline news after Judge Rakoff had earlier refused to approve a settlement between BofA and the SEC.
A second complaint was filed by the SEC rather than amending the existing complaint because the court had denied the SEC’s motion to amend. Note that in the SEC’s litigation release announcing its intention to seek leave to amend, the SEC specifically noted that it does not allege that any individual bank executive or counsel acted with scienter and does not name as defendants, any individual. Trial is set for March 1st…
Dominic Jones notes that Judge Rakoff recently ruled that BofA cannot present expert testimony asserting that media reports should have alerted shareholders to the bonuses it planned to pay Merrill Lynch executives after the 2008 merger.
SEC Approves PCAOB’s “Engagement Quality” Standard
On Friday, the SEC approved the PCAOB’s Auditing Standard No. 7 regarding engagement quality review, after receiving nine comment letters when the standard was proposed last August. The standard is effective for engagement quality reviews of audits and interim reviews for fiscal years that began on or after December 15, 2009. Here is the PCAOB’s press release.
On Friday, the SEC reversed course and reinstated old non-GAAP FAQ 23, as CDI 105.07 of the new non-GAAP CDIs that had been released last Tuesday (which had updated the SEC’s FAQs on this topic from 2003). At the same time, the SEC also deleted new CDI 105.4.
It appears that in initially issuing CDI 105.4 last week, the intent was not to change the meaning of old FAQ 23 – but to make it clearer. In doing so, the new CDI omitted the key fact that the earnings release was not furnished on a Form 8-K before the conference call. To correct this, the SEC deleted new 105.4 and reissued old FAQ 23 as new C&DI 105.07, omitting the Reg FD sentence since nothing in that fact pattern raises an FD concern.
Courtesy of Davis Polk, here’s a redlined version of how the ’03 FAQs compare to the new CDIs, including this latest change.
SEC Agrees to 2-Year Stay of Rule 151A
Even though I don’t typically cover the indexed annuity products area, I thought this development was interesting because I don’t recall a situation where a court postponed the implementation of a SEC rule for two years (although I imagine it has happened before). Here is a summary of this development drawn from this Morrison & Foerster memo:
On December 8, 2009, the Securities and Exchange Commission (the “SEC”) stated in a filing with the U.S. Court of Appeals for the District of Columbia Circuit (the “Court”) that it agreed to stay of the effective date of Rule 151A for “two years after completion of all proceedings on remand, to run from publication of a retained or reissued Rule 151A in the Federal Register.” Compliance with Rule 151A is therefore postponed. Companies would have two years from that new publication date to comply with Rule 151A, or any reissued version of the rule.
The filing was made in response to petitions filed by various insurance industry participants requesting the Court to reconsider its remand order that it issued on July 21, 2009 and void Rule 151A. The Court had previously ruled that the SEC failed to properly consider the effects of Rule 151A on efficiency, competition and capital formation in the insurance industry and remanded the issue to the SEC for reconsideration.
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:
– 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?”
It looks like Corp Fin is making good on its promise to provide more detail in its responses to exclusion requests under Rule 14a-8, the shareholder proposal rule. See this Bank of America letter and this Verizon letter issued recently under (i)(7) – and this General Electric letter issued under (i)(2).
There is not much detail, just an extra sentence or two for the rationale of the Staff’s decision. This is understandable as the SEC doesn’t have the resources to write full blown opinions like judges do…
In California: Fiduciary Duty of Shareholders under Bylaws
Last week, a California court of appeal held – in Tien Le v. Lieu Pham – that when the bylaws provide that one stockholder must give another a right of first refusal with respect to a sale of shares, it is a breach of fiduciary duty for the selling shareholder to attempt to sell in violation of the right of first refusal. Notably, the stockholder who sold his share was not a majority owner (holding only 50% of the outstanding shares).
The case involved a pharmacy corporation and the court based its holding in part on this fact and the public policy of requiring a “reasonably snug fit” between ownership and licensed pharmacists. However, the court also applied corporate common law “involving protection of vulnerable stockholders from other stockholders who have the power, by the choice of to whom shares will be sold, to affect the actual conduct of the corporation”. In this case the licensing of the corporation as a pharmacy was impacted by the sale. The principle enunciated by the court could be extended to other situations, such as transfer restrictions to preserve NOLs, gaming licenses, or contractual rights.
Readers may wish to compare the California court’s holding with the following observation by Delaware Vice Chancellor Lamb in Latesco v. Wayport, Del. Ch., No. 4167-VCL (July 24, 2009): “The performance of a Stockholder Agreement giving corporations or corporate insiders rights of first refusal over the shares of other stockholders is not governed by any generalized fiduciary duty of disclosure nor is it governed by any generalized application of the duty of loyalty. Instead, the contours of such an insider’s duty to the selling stockholder is defined by the terms of the agreement itself and the normal prohibitions against fraud.”
Board Priorities for 2010
In this podcast, Jeff Stein of King & Spalding discusses the latest developments in boardroom thinking, including:
– How would you describe the mood in the boardroom these days?
– Why are boards suddenly focusing on strategy? Hasn’t this always been a priority?
– What are boards doing in the area of risk management as we start 2010?
– Tell us what boards are thinking about when they talk about “board management” or when we hear about the renewed interest in board performance?
– How significant are the SEC’s new rule changes for 2010 proxy statements from the board perspective?
– Is there any fundamental change in the way in which directors view their roles with public companies?
With a media blitz to drive home the point, the SEC showed its determination to overcome a year of bad publicity by announcing a series of changes in its Enforcement Division. In fact, there are so many changes that there were two press releases and a special “Cooperation” web page. Here is this release announcing internal structural changes (ie. new heads of specialized units and a new “Office of Market Intelligence”) And here is this release announcing an initiative to encourage cooperation during investigations (which is driven by this new policy statement, as reflected in a new Section 6.2 in the SEC’s Enforcement Manual).
The SEC’s Division of Trading & Markets also had a big day as the SEC moved forward with a broad review of the equity market structure yesterday by approving the issuance of a concept release seeking comment on such issues as high frequency trading, co-locating trading terminals and markets that do not publicly display price quotations.
Corp Fin Permits Section 3(a)(9) Reliance for Securities Exchanges with Upstream Guarantees
Here’s a new development as explained by Davis Polk: Yesterday, the Staff of the SEC’s Division of Corporation Finance issued a no-action letter to Davis Polk, Cleary Gottlieb and O’Melveny & Myers permitting reliance upon Section 3(a)(9) of the Securities Act of 1933 for the issuance of a new parent security in exchange for an outstanding parent security that has one or more “upstream” guarantees from the parent’s 100%-owned subsidiaries.
All of the prior Staff no-action positions involving the availability of Section 3(a)(9) for exchanges of guaranteed securities had involved “downstream” guarantees (i.e., situations where the parent guaranteed a security issued by one or more of its subsidiaries) as opposed to “upstream” guarantees. Here is the incoming request.
As a result of the 3(a)(9) Upstream Guarantee Letter:
– issuers of securities with upstream guarantees will not be required to keep a shelf registration statement effective for the life of the outstanding convertible security to cover exercises and
– issuers of securities with upstream guarantees will have an attractive third option for effecting exchange offers in addition to registration (which has timing implications) and relying on a private placement exemption (which limits the potential offerees).
Transcript Posted: “The Latest Developments: Your Upcoming Compensation Disclosure”
We have posted the transcript to the popular CompensationStandards.com webcast: “The Latest Developments: Your Upcoming Compensation Disclosures – What You Need to Do Now!” As we do every year, we have updated CompensationStandards.com’s “SEC Rules” Practice Area – including posting these memos & checklists that raise considerations for this proxy season.
One of the longer-standing complaints in the corporate community has been the relatively unchecked ability of John Chevedden to submit dozens of shareholder proposals to companies each year – at companies where he doesn’t have an ownership interest. On its face, this violates the shareholder proposal rule’s eligibility requirements under Rule 14a-8(b), but Chevedden typically has been able to successfully argue to the SEC Staff that he is acting as an agent for another shareholder – rather than as a conduit because he can’t satisfy the eligibility requirements.
Many corporate secretaries will be cheering to hear that Chevedden was recently sued over his efforts to submit a proposal (although this situation doesn’t involve alter egos). Rather than solely rely on the Corp Fin Staff to allow exclusion of his proposal, Apache Corporation has also sued Chevedden in a federal district court. Here is the complaint filed in court – and here is Apache’s exclusion notice sent to the SEC on the same date (both are posted in our “Shareholder Proposals” Practice Area).
Note that unlike a typical situation, Apache doesn’t appear to be “requesting” exclusion – this is a notice filing that the company intends to exclude the proposal. Per Rule 14a-8(j): “If the company intends to exclude a proposal from its proxy materials, it must file its reasons with the Commission no later than 80 calendar days before it files its definitive proxy statement and form of proxy with the Commission.” Note that the rule doesn’t say that you need to request exclusion – here it appears that Apache complied with the notice requirement, gave its reasons for exclusion and essentially said it is going to court to get a ruling that it can exclude the proposal.
Apache is no stranger to being in court over a shareholder proposal, having been sued by NYCERS two years ago over the exclusion of a employment-related proposal – after the exclusion was allowed by the Corp Fin Staff – under the “ordinary business” basis (ie. 14a-8(i)(7)).
Here are some thoughts from an anonymous member: “I am glad they are taking Chevedden to court. More companies should make sure his shenanigans have some real consequences. If he started getting his butt hauled into court all across the country, then his proposals would cost more than the price of a stamp.”
SEC Adopts Rules Governing Say-on-Pay Votes for TARP Companies
Yesterday, the SEC adopted rules implementing the requirement under Section 111(e) of EESA that requires companies that have received TARP money to conduct a separate shareholder advisory vote to approve the compensation of executives during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding. Since most companies have repaid their TARP money, not many will be subject to these new rules.
The SEC amended Rule 14a-6(a) to clarify that a TARP recipient is not required to file a preliminary proxy statement (see pages 8-11 of the adopting release) – but the adopting release is silent as to whether non-TARP companies must file preliminary proxy materials as a consequence of voluntarily including a management-sponsored shareholder advisory vote on executive compensation on the ballot. As a result, I believe non-TARP companies continue to need to file preliminary materials because it is not carved out under the existing rules (and I believe that every company that has put up a MSOP proposal – with one exception – has filed preliminary materials).
Webcast: “ESG Disclosures: Environmental, Climate Change, Social Responsibilities”
Tune in tomorrow for our webcast – ““ESG Disclosures: Environmental, Climate Change, Social Responsibilities”” – to hear Gail Flesher and Betty Moy Huber of Davis Polk, Brink Dickerson of Troutman Sanders, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster and Jane Whitt Sellers of McGuireWoods discuss environmental, climate change and social responsibility disclosures and how companies are rethinking their approach to such disclosures.
Renew Today: Since all memberships are on a calendar-year basis and expired at the end of December, if you don’t renew today, you will be unable to access this webcast. Renew now for ’10! [Here is our “Renewal Center” to better enable you to renew all your expired memberships and subscriptions.]
And then next Thursday, catch another TheCorporateCounsel.net webcast – ““Pat McGurn’s Forecast for 2010 Proxy Season: Wild and Woolly”” – to hear Pat McGurn of RiskMetrics’ ISS Division give a recap of what transpired during the 2009 proxy season and predict what to expect for the upcoming proxy season.
Yesterday, Corp Fin posted this new batch of 32 Compliance & Disclosure Interpretations that deal with Non-GAAP Financial Measures, including interps that deal with business combinations; Item 10(e) of Regulation S-K; EBIT and EBITDA; segments; Item 2.02 of Form 8-K; FPIs and voluntary filers.
These CDIs replace a set of old FAQs that the Staff issued in 2003. Here’s a redline to note the differences between the two, courtesy of Davis Polk.
Status of Regulatory Reform: What Does Dodd’s Retirement Mean?
RiskMetrics’ Ted Allen recently weighed in with enlightening analysis of where we stand on regulatory reform and the possible impact of Senator Dodd’s retirement announcement (here is the Washington Post’s take on the same topic):
Capitol Hill and governance observers have varying views on what U.S. Senator Christopher Dodd’s planned retirement may mean for his sweeping financial reform and corporate governance legislation. Most observers believe that Dodd’s decision to step down will make him more determined to pass a reform bill this year to cement his legislative legacy. His spokeswoman said this week that Dodd is “committed to continue working in a bipartisan fashion to pass strong financial reform this year.”
The U.S. Chamber of Commerce, the Financial Services Roundtable, and other business advocates express hope that Dodd will be more likely to compromise with Senate Republicans because he no longer has to appease left-leaning and populist voters in Connecticut. At the same time, consumer advocates point out that Dodd won’t have to raise campaign funds and thus should have more freedom to stand up to Wall Street interests. Other observers say that Dodd’s retirement won’t make a significant difference, because it still will be difficult for Dodd and his fellow Democrats to attract Republican support for the legislation.
Dodd, who chairs the Senate Banking Committee, announced Jan. 6 that he would not seek another six-year term in office. Dodd, 65, would have a faced a difficult re-election fight this year; he was trailing in opinion polls behind his potential Republican challengers.
In early November, Dodd unveiled a draft 1,136-page bill to overhaul the financial regulatory system. The bill included various governance provisions, such as an annual “say on pay” requirement, authorization for the SEC to adopt a proxy access rule, and provisions to mandate majority voting in director elections and to require companies to obtain shareholder consent for classified boards.
However, Senator Richard Shelby, the ranking Republican on the banking panel, and his GOP colleagues criticized the far-reaching bill, while some Democrats expressed concerns. In early December, Dodd assigned Democratic and Republican committee members to work in pairs to try to reach consensus on different provisions. Senator Charles Schumer of New York, who introduced the “Shareholder Bill of Rights Act” last year, was assigned to work with Senator Michael Crapo, a business-friendly Republican from Idaho, on executive compensation and governance provisions. Other senators were delegated to work on systemic risk principles, regulation of derivatives, and oversight of the Federal Reserve.
On December 23, Schumer and Shelby said in a joint statement that they were making “meaningful progress” on the bill. While staff members for Schumer and Crapo have met, it doesn’t appear that they have reached common ground. According to committee observers, Schumer wants to keep the governance provisions in the bill, while Crapo isn’t convinced they are necessary and wants to hold hearings. Some Democratic staffers resist the idea of holding hearings, because they fear that Republicans are trying to delay the process and have no intention of supporting a revised bill.
A committee mark-up hearing has been scheduled for Jan. 26, but some staff members are skeptical that the lawmakers will complete their work by then, according to the Financial Times. Before a mark-up is held, committee members will be given a chance to offer amendments. “I think that we still have a chance [to pass a bill with governance provisions],” Jeff Mahoney, general counsel of the Council of Institutional Investors, told R&GW. “I don’t think [Dodd’s] not seeking re-election changes much.”
Mahoney said he hopes that Schumer will keep pushing to keep the governance provisions in the bill. He also expressed optimism that Shelby and other Republicans, who generally favor market-based mechanisms over additional government regulation, will be receptive to reforms that empower shareholders. Mahoney said the council will continue lobbying for its three governance priorities–“say on pay,” authorization for a proxy access rule, and a mandate for majority voting in board elections.
Based on conversations with staffers on both sides, Mahoney said he believes that most committee members and staff members still are trying to reach consensus where possible. “No one wants to run this through on a partisan basis,” Mahoney said, recalling the recent rancor over health care reform legislation.
On December 11, the House of Representatives approved a narrower financial reform bill, which includes proxy access and “say on pay” but not other governance provisions. No Republicans voted for the final bill. Dodd has a greater need than the House Democrats to enlist Republican support because Senate rules require 60 votes to cut off debate on most bills. While the Democrats now hold 60 seats in the Senate, Dodd knows from the health care debate that he can’t count on every Democrat to support legislation that has no Republican support.
Dodd also has a limited amount of time to pass a bill before his term expires next January. During election years, lawmakers seldom pass any substantive legislation after their August recess. Senator Tim Johnson, Dodd’s likely successor as Banking Committee chairman, is unlikely to support significant new restrictions on banks. Johnson represents South Dakota, where Citigroup and other banks have significant operations.
Ask the Experts: Schedule 13D and Schedule 13G Issues
We have posted the transcript from our recent DealLawyers.com webcast: “Ask the Experts: Schedule 13D and Schedule 13G Issues.”
RiskMetrics’ New Summary: “Consolidated 2010 Voting Guidelines”
Last week, RiskMetrics posted this set of “Consolidated 2010 Voting Guidelines,” a 72-page document that highlights the key aspects of the entirety of its voting policies. In comparison, the document RiskMetrics released in November highlights only the policy guidelines that were added or modified for 2010.
Webcast: “Disclosure Controls & Procedures: An In-House Perspective”
Tune in tomorrow for our webcast – “Disclosure Controls & Procedures: An In-House Perspective” – to hear Barbara Blackford of Superior Essex, Doug Chia of Johnson & Johnson, Carrie Darling of CareFusion, Josh DeRienzis of PSS World Medical, Cindy Grimm of Texas Instruments and Isobel Jones of Del Monte Foods discuss the evolution of disclosure controls and procedures at their companies, as well as the techniques by which they help train others in their organization in an effort to ensure inadvertent disclosures aren’t made – and that disclosures are full and accurate when made.
Renew Today: Since all memberships are on a calendar-year basis and expired at the end of December, if you don’t renew today, you will be unable to access this webcast. Renew now for ’10! [Here is our “Renewal Center” to better enable you to renew all your expired memberships and subscriptions.]
And then on Thursday, catch another TheCorporateCounsel.net webcast – “ESG Disclosures: Environmental, Climate Change, Social Responsibilities” – to hear Gail Flesher and Betty Moy Huber of Davis Polk, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster, Brink Dickerson of Troutman Sanders and Jane Whitt Sellers of McGuireWoods discuss environmental, climate change and social responsibility disclosures and how companies are rethinking their approach to such disclosures.
The passing into a new decade last week – combined with the announcement of the pending retirement of Senator Dodd – reminded me that it is a good time to address the Year 2000 scare in the securities law context, particularly for those youngsters who may not remember much of it. Back in ’97 and ’98, I was heavily involved with the SEC’s Y2K efforts – both internally within the agency as well as pressuring companies to provide better disclosure.
In a nutshell, Senators Dodd and Bennett (as well as many others) pressured the SEC into being very proactive in pressuring companies to step up their Y2K efforts. As time was running short, their idea was to use disclosure requirements to gauge where companies stood with respect to being prepared. As a result, Corp Fin issued a controversial interpretive release in mid-1998, using Item 303 of Regulation S-K – ie. MD&A – as a tool to elicit disclosure about Y2K preparedness (note that yours truly is one of the contacts on the release).
This release was controversial because it used the “known uncertainties” component of Item 303 to make this strong statement: “We expect that for the vast majority of companies, Year 2000 issues are likely to be material.” The SEC expected companies to disclose their state of readiness, preparedness costs, risk and contingency plans – even if some of those companies didn’t believe any of this was material to them.
Many commentators thought this was a stretch for MD&A, and it probably was. But you have to understand that many companies were in the dark about the extent of their own Y2K issues. During 1998, I averaged 2-3 speaking gigs per month on the topic and it helped me learn how to handle a hostile audience. There were two types of hostile audiences: senior managers who didn’t want to make this type of disclosure and IT folks who thought the SEC didn’t go far enough (although many thanked the SEC for forcing their senior managers to finally pay attention to this important issue and give them the resources to combat it).
I still firmly believe that if the SEC had not taken this extraordinary step to force companies to more closely consider their Y2K risks, it would have been pure bedlam at the turn of the century. Of course, since not much transpired at when the clock struck midnight, the success of all those Y2K efforts is overshadowed by all the “hype” that now makes Y2K a laughing matter. But trust me, it was real – just like it is right now for 30 million Germans whose debit cards stopped working because they can’t handle the digits “2010”…
And yes, I still owe Joe Babits a lunch because the world did not end ten years ago…
Speaking of Comment Letter Fatigue…
As we all have been engaged in writing oodles of comment letters this decade, it’s natural that some would experience comment letter fatigue (a topic I touched upon recently in the e-proxy context). Apparently, this commentator has more fatigue than most…
– What are the Fed Reserve’s new guidelines?
– What is your own experience in implementing guidance from the Fed?
– What do you recommend that financial institutions do in response to the Fed’s guidelines?
We recently posted the latest annual update of Alan Kailer’s chapter regarding preparation of the executive compensation tables on CompensationStandards.com.
