Does Reg FD Prohibit Directors from Speaking Privately with Shareholders?
One area that continues to generate a slew of misinformation from some practitioners is Reg FD. So I was happy to see Corp Fin issue this new CDI:
Question 101.11
Question: Does Regulation FD prohibit directors from speaking privately with a shareholder or groups of shareholders?
Answer: No. Regulation FD prohibits a company or a person acting on its behalf — such as directors, executive officers and investor relations personnel — from selectively disclosing material, non-public information to a shareholder under circumstances in which it is reasonably foreseeable that the shareholder will purchase or sell the company’s securities on the basis of that information. If a company’s directors are authorized to speak on behalf of the company and plan on speaking privately with a shareholder or group of shareholders, then the company should consider implementing policies and procedures intended to help avoid Regulation FD violations, such as pre-clearing discussion topics with the shareholder or having company counsel participate in the meeting.
In addition, because Regulation FD does not apply to disclosures made to a person who expressly agrees to maintain the disclosed information in confidence, a private communication between an independent director and a shareholder would not present Regulation FD issues if the shareholder provided such an express agreement.
FINRA Proposals: Conflicts of Interest and Fixed Price Offering Rules
As part of its initiative to incorporate the NASD’s rules into the FINRA Rulebook, FINRA recently issued two proposals. In this proposal, FINRA proposes to incorporate its conflict of interest rule – NASD Rule 2720 – into the Rulebook as Rule 5121 without change except for references to other rules.
And in this rule filing with the SEC, FINRA proposes to codify what are known as the “Papilsky” or “fixed priced offering” rules (NASD Rules 2730, 2740 and 2750) into the Rulebook as new Rule 5141. This proposal includes numbers of changes to the prior rules.
In this follow-up podcast, Prudential’s Peggy Foran and Ed Ballo explain how their company’s novel initiative that tied its environmental/sustainability program to bringing in the vote for its annual shareholders meeting fared (here is their earlier podcast from before the meeting), including:
– What were the results of Pru’s experiment to engage registered holders?
– Where there any surprises?
– For other companies considering doing this type of program, what issues would you tell them to consider?
Closed Deal: RiskMetrics Acquired by MSCI – Will ISS Be Sold Again?
As noted in this press release, MSCI closed its purchase of RiskMetrics last week. I blogged about the deal when it was first announced. The word on the street is that MSCI will be selling off the ISS unit and keeping the remainder of the RiskMetrics assets. We’ll see if that comes to pass. Meanwhile, we can all go back to calling it “ISS” and drop the RiskMetrics label…
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:
– Whether Earnings Calls Transcripts Are Worth Producing?
– No Surprise: Wires Bashing Google’s Recognized Channel Approach
– More on “The Problem with IFRS: Little Independence for the IASB”
– What Boards Need to Know About SEC Comment Letters
– Canada Proposes Its Own E-Proxy Rules
Thanks to Michele Kulerman of Hogans Lovell for this rundown on how the timeline and processes of passing Congress’ financial reform bill – the “Restoring American Financial Stability Act of 2010” – goes from here:
The Congress returns to Washington this week, anticipating an intense month of negotiations to complete consideration of sweeping financial services regulatory reform. Because each chamber must pass identical bills before the President can sign reform into law, an ad hoc “conference committee” will be named to work through the differences between the House and Senate bills.
Members of the conference committee are selected independently by House and Senate leaders from both parties, and drawn from senior members of the House Financial Services Committee and the Senate Banking Committee. They are expected to be named Tuesday, June 8th. Party ratios in the conference reflect the parties’ ratio in each chamber. The conference on this bill will be chaired by the House, so Barney Frank (D-MA), who chairs the House Financial Services Committee will preside.
The first public meeting of the conference will take place Thursday, June 10 and this session and all subsequent meetings will likely be broadcast live via C-SPAN. The opening session will be devoted to member statements and may provide insight into possible avenues of compromise on open issues.
Staffers have been working for the past two weeks on the text which the conferees will use. The Senate amendment to the House bill, HR 4173, will serve as the base text, with added House-approved language related to mortgage reform and the hiring of minorities and women by the regulatory agencies. In addition, a side-by-side comparison of provisions in both bills is usually prepared. Both documents should be publicly available sometime next week.
The conferees will meet again June 15-17 and June 22-23 in open session to rewrite the text. Obviously, a lot of the work will take place behind the scenes, and the public meetings are as likely to highlight political differences in an election year as they are to debate differences in a spirit of compromise.
The conferees hope to conclude their work by the 24th by filing the conference report that day. The report – the text of the compromise bill – is usually accompanied by a Statement of Managers which reviews the need for the legislation, details the differences between the two versions, and explains the agreed-upon compromise.
The plan is for the House to act first, starting June 28th, and for the Senate to act in time to send the bill to the President by the end of the week.
Trends in Audit Fees and Non-Audit Fees
Recently, Audit Analytics released its annual “Audit Fees and Non-Audit Fees” report, a seven-year analysis focusing on fiscal years 2002 through 2008. The report examines the fees paid by 2,924 accelerated filers that disclosed fees in each year covered by the study, with the findings including:
– After 4 years of steady decline from 2002 to 2006, non-audit fees as a percentage of total fees have leveled off in 2007 and 2008.
– For the third year in a row, non-audit fees represented only about 21% of the total fees paid by accelerated filers, down from 51% in 2002.
– While the total audit fees increased steadily over the period examined, audit fees as a percentage of revenue decreased since 2005 and now stand at $556 per million dollars of revenue.
Navigating Corp Fin’s Comment Process
We have posted the transcript of our recent webcast: “Navigating Corp Fin’s Comment Process.”
On Wednesday, the SEC announced it had charged Diebold and three former finance officers for engaging in a fraudulent accounting scheme to inflate the company’s earnings. The SEC separately settled an enforcement action (here’s the litigation release – and here’s the complaint) against Diebold’s former CEO Walden O’Dell, obtaining reimbursement of certain financial benefits that he received while Diebold was committing the accounting fraud. The SEC used the clawback provision under Section 304 of Sarbanes-Oxley to get the former CEO to agree to reimburse the company $470,016 in cash bonuses, 30,000 shares of Diebold stock and stock options for 85,000 shares of Diebold stock.
Notably, the SEC didn’t allege that the former CEO engaged in the fraud (or any other violation of the securities laws) – something the SEC did last year in an action against the former CEO of CSK Auto Corp. (ie. Maynard Jenkins), who pushed back in a motion to dismiss last September as I noted in this blog. Jenkins’ motion has not yet been ruled upon (oral arguments were heard on April 30th; here’s the transcript from that hearing posted in CompensationStandards.com’s “Clawback Policies” Practice Area) – but a ruling is expected soon…
Smaller Company Proxy Disclosures: The Latest Developments
We have posted the transcript from the recent CompensationStandards.com webcast: “Smaller Company Proxy Disclosures: The Latest Developments.”
More on “Picking Kentucky Derby Winners Based on the Economy”
A few weeks ago, I noted how Mark Coller successfully picks his Derby winners based on current events. Another member took the ball and ran with it as we head into the Belmont leg of the Triple Crown. This member has made up some horse names to fit the times:
– Banker Bailout – this horse is so last year
– Public Malaise – this one has a shot, the horse is so well-aligned with the American psyche, I don’t see how he can be overlooked
– Shop and Spend – with a name like this filly, it looks unbeatable
– Rational Investment- not a chance in a million
– Retire Rich – see Rational Investment
– Trusted Advisor – are you serious?
– Conservative Banker – might have had a chance during Glass-Steagall
– Greedy Banker – ding, ding, ding this one has to be a lock, the surest shot in the history of the sport, cash in your 401k because this horse is the only way to retire rich and don’t forget to include Churn and Burn for the exacta
I don’t know why, but this video that features a lip-syncing of Carol Channing and Liza Minnelli spliced together on a Larry King episode cracks me up (here is the original video).
In this 11-minute podcast, Ning Chiu of Davis Polk does a great job of boiling down the corporate governance and executive compensation provisions that apply to all US public listed companies in the recently passed Senate reform bill, the “Restoring American Financial Stability Act of 2010.”
Not only does Ning compare the differences between the Senate and House bills, but she identifies which provisions aren’t all that clear – and she notes which provisions are more likely to sail through and which may be altered before Congress reconciles the two bills. Finally, Ning notes the practical consequences for companies of these provisions.
Timing News about IFRS and GAAP Convergence Project
Yesterday, the IASB and FASB issued a joint statement about the status of their project to converge US GAAP and IFRS. As noted in the statement, in November 2009, the two standard setters set June 2011 as the target date to complete all major convergence projects. Stakeholders expressed concerns about their ability to provide input on the large number of exposure drafts of standards that are planned for publication in the second quarter of this year. The standard setters therefore are developing a modified strategy to prioritize projects and stagger the publication of exposure drafts. The result is that completion of some projects will be extended past June 2011.
Shortly afterward, SEC Chair Schapiro issued a statement. She indicated that she did not believe these modifications to the timetable for the convergence project will impact the SEC Staff’s ability to execute its work plan issued in February 2010. She also stated that these developments would not affect the SEC’s ability to make a determination in 2011 about whether to incorporate IFRS into the financial reporting system for US issuers.
More on our “Proxy Season Blog”
With the proxy season wrapping up, we are winding down 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:
– Notes From Google’s Annual Meeting: Good Food!
– Will Google Sidewiki Change IROs’ E-Communication Patterns?
– SEC Not Swayed by Companies’ Post-Apache Arguments
– Study: Electing Directors
– More on “Surfing Champion Surfaces in a Proxy Filing”
– A New Site for Shareholders: Lemonjuice.biz
A few months ago, I blogged about how Google may have taken the first step towards creating a “recognized channel” under the SEC’s 2008 Regulation FD guidance. In this podcast, David Calusdian of Sharon Merrill Associates analyzes this, including:
– What did Google recently do?
– For those that might consider doing something similar, what issues should they analyze?
– Do you foresee other companies following Google’s lead?
The Rise of Web Disclosure: Thomson Reuters and Nasdaq OMX Set to Launch
Recently, I blogged about concerns regarding how the traditional business wires might unevenly distribute the news. Over the past week or so, Dominic Jones has been conducting experiments to illustrate a different point – the potential ineffectiveness of traditional PR wire distribution.
Earlier this morning, Dominic blogged about a development that has “the potential to substantially streamline and reshape disclosure practices at thousands of US companies.” Thomson Reuters and Nasdaq OMX are set to launch platforms to help companies use web disclosure more extensively – which may dramatically reduce the use of PR newswires. Thomson Reuters and Nasdaq OMX provide IR webpage hosting services for about 2700 and 1078 companies, respectively – and intend to charge a flat annual fee (in comparison to the standard PR newswire practice of charging by the word).
Thomson Reuters has posted a fact sheet and white paper about its upcoming product offering – and here’s Nasdaq’s press release on its new DIY service.
PCAOB: New FAQs for Non-US Auditors Due to EU’s Directive on Statutory Auditors
Yesterday, the PCAOB issued staff guidance – in the form of FAQs – related to the registration process for applicants from non-U.S. jurisdictions where the PCAOB is prevented from inspecting PCAOB-registered firms. The affected jurisdictions currently are the 30 European countries that are required to follow the European Union’s Directive on Statutory Auditors, China, Hong Kong, and Switzerland.
Maybe these are more common than I realize – but the SEC announced a while back this settled C&D order against ECO2 Plastics, a Pink Sheet company for not disclosing effective disclosure controls as well as the lack of effective internal controls. The order states that the company failed to comply with Item 307 of Regulation S-K in its ’08 and ’07 annual reports and Item 308T of Regulation S-B in ’07.
I can’t recall seeing a case where lack of disclosure controls disclosure was the primary charge alleged; usually it is a tack-on to some other charges. The order doesn’t provide much in the way of details, so I can’t quite figure out how egregious were the circumstances that led to these charges. In September ’09, the company filed an amended Form 10-K for 2008 (after it had already filed a prior amended Form 10-K in August) to include the Item 9A disclosure control disclosures that it omitted from the company’s 2008 Form 10-K (and it omitted the Item 8A disclosures in its 2007 Form 10-KSB). This new 9A disclosure includes a paragraph describing how the company couldn’t perform an adequate assessment of internal controls in ’07.
Based on all this, I think the case is predicated on failing to provide the required disclosure control disclosures for two years and failing to have effective internal controls in one. So lesson learned…
Lawyers as Actors
In this podcast, Howard Kline discusses his new acting activities, including:
– What new hobby have you picked up over the last few years?
– What led you to try something new?
– Do you think being a lawyer helped you in your acting career?
– And vice versa, does acting help your lawyering?
Our June Eminders is Posted!
We have posted the June issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
On the heels of the passing of “The Financial Services Act 2010,” the United Kingdom’s new coalition government announced that it will not disband the Financial Services Authority – sparing the country’s financial regulator from abolishment. Learn more in this memo in our “European Law” Practice Area.
Sometime today, the UK’s Financial Reporting Council is likely to announce changes to the UK’s “Combined Code on Corporate Governance.”
First DOJ Opinion in ’10 Permits Payment to Foreign Official
Last month, the DOJ issued its first opinion of the year – Opinion Procedure Release No. 10-01 – in which it announced that it would not take enforcement action under the Foreign Corrupt Practices Act against a U.S. company that proposed to pay a foreign official for services the foreign official would provide on behalf of the US company. Learn more in this memo posted in our “Foreign Corrupt Practices Act” Practice Area.
Yesterday, the final version of the Senate’s Dodd bill – the “Restoring American Financial Stability Act of 2010” – was made publicly available. At 1,615 pages, it will take quite some time to print (and read!).
If you’re interested in just the corporate governance and executive compensation portions of the RAFSA, check out this 23-page excerpt courtesy of Davis Polk. Of course, we continue to post memos analyzing the bill in our “Regulatory Reform” Practice Area (here is a 8-pager with a nice side-by-side comparison of the House and Senate bills). And stay tuned for an upcoming podcast on the Senate bill next week if you are more audio-inclined…
The Skinny on “Virtual” Law Firms
In this podcast, David Goldenberg of Virtual Law Partners explains how the “virtual” law firm model works, including:
– What is Virtual Law Partners?
– How is the firm run differently than a typical firm?
– From a client’s perspective, how are services provided any different?
– What led you to the virtual model?
– How do you overcome the challenges of not being physically together?
Smaller Company M&A: The Latest Developments
We have posted the transcript of our recent DealLawyers.com webcast: “Smaller Company M&A: The Latest Developments.”
As noted in the ISS Blog, KeyCorp became the third company to fail to obtain majority support for its executive pay package at its annual meeting last Friday. The pay package received only 45% support – it received 87% support last year. Here’s the company’s Form 8-K with the voting results.
So KeyCorp joins Motorola and Occidental Petroleum as the first three US companies whose management say-on-pay ballot items didn’t pass. Wow.
Consider the magnitude of this development:
– These three companies are not Wall Street banks where the general public is angry over banker bonuses.
– There were no organized campaigns against the pay packages at these three companies. This was a pure grass roots movement. With organized campaigns, imagine the level of votes.
– Only a few hundred companies have say-on-pay on their ballot this year; a small fraction of the 10,000 that will have it on their ballot next year when Congress makes it mandatory.
– If the Senate provision remains in the final bill changing NYSE Rule 452, say-on-pay will become a “nonroutine” agenda item – and broker nonvotes won’t be available to be cast in favor of pay packages. This means it will become harder to obtain majority support for executive pay packages.
Among the 40-plus panels, we have tailored a special track to help you prepare for mandatory say-on-pay including these panels:
– “Say-on-Pay: The Proxy Solicitors Speak”
– “Say-on-Pay: Successfully Communicating Externally and Internally”
– “The Proxy Advisors & Investors Speak: Their Hot Button Issues and Say-on-Pay”
– “The New Compensation Legislation: What to Do About Say-on-Pay and More”
– “Five Hot Button Compensation Fixes: In Light of Say-on-Pay and More”
– “This Coming Year’s Grants: How to Deal with Last Year’s Inadvertent Gains”
– “The Big Roundtable: Consultants, Directors and Top HR Heads”
– “Directors Speak Their Minds on Executive Compensation”
With Conference registrations going strong – on track to reach nearly 2000 attendees – you don’t want to be caught unprepared as we head into next year. Last year’s Conference sold out a month in advance – and that was without the reality of mandatory say-on-pay hanging over our heads.
Act Now: You have two choices – either attend the “18th Annual NASPP Conference” in Chicago (which includes the ability to attend the “7th Annual Executive Compensation Conference” – or attend the “7th Annual Executive Compensation Conference” by video webcast (which includes the “5th Annual Proxy Disclosure Conference”).
Handicapping the House-Senate Conference Committee Reconciliation
Although we will not officially know the entire composition of the House-Senate Conference Committee that will reconcile the Senate and House versions of a financial reform bill for a few more weeks, we do know that Rep. Barney Frank will head the Committee (as noted in the NY Times’ DealBook) and we do know the twelve Senators that will be included in that Committee (as noted in this Reuters article; this Reuters article identifies likely House members of the Committee even though they won’t be officially named til week of June 7th). Congress – and President Obama – have a goal to wrap up a final bill by the 4th of July recess.
Even though the House’s bill was weaker in the governance area, it is likely that Rep. Frank will push to keep the stronger Senate provisions in the final bill – with some tweaks as noted below – given that very few of the 400-plus proposed amendments to the Dodd bill dealt with governance issues. The real reconciliation debate will center on how financial institutions are regulated (ie. derivatives, “too big to fail”, etc. – see Frank’s comments in these areas yesterday).
Note that Barney Frank wants the Conference Committee negotiations televised.
Barney Frank Speaks: His View of Which Governance Provisions Will Survive Reconciliation
According to this article, Rep. Frank yesterday said that the specific language regarding the proxy access provision was up in the air. He also said that the Senate provision for a self-funded SEC may be tweaked to keep Congress involved somewhat – and he indicated that the House provision to exempt smaller companies from SOX’s internal controls requirement may survive. According to the ISS Blog, Frank said that the Senate’s majority vote requirement could well be stripped out in the final bill.
Below is a piece written by CongressDaily’s Bill Swindell entitled “Frank Sees SEC Self-Funding Language As Ripe for Revision” that covers a number of topics:
A drive to allow the SEC to self-fund its budget by retaining fees it collects will likely have to be modified to allow for greater oversight by appropriators, House Financial Services Chairman Barney Frank said Tuesday. Frank said conference negotiators on legislation to revamp the nation’s financial regulatory system will have to take into account the resistance of appropriators to SEC self-funding because they would lose their power to dictate its budget.
“The Appropriations Committee gets very upset about this. What I am hoping that gets worked out, and it will be with their participation, is a way to do some self-funding, which leaves the Appropriations Committee with a role,” Frank said during a talk at the Compliance Week annual conference. The Senate bill contains the provision, allowing the agency’s chairman to submit a budget to the SEC, but it would automatically get the amount requested. The language was sponsored by Sen. Charles Schumer, D-N.Y., who has argued the agency needs more resources to monitor wrongdoing in the aftermath of the Bernard Madoff and Allen Stanford fraud cases. The House bill set an increase in authorization levels.
The FY10 funding for the SEC was $1.1 billion, a $151 million increase over FY09. It has requested $1.26 billion for FY11. The agency collected $1.5 billion in fees in 2008. “The appropriators are going to push hard to maintain some role, and I think they will be successful,” Frank said. Both bills give the SEC authority to issue rules that would allow shareholders to nominate board of director candidates through increased proxy access. “I think we are at least going to empower the SEC to do it. Beyond that, I’m not sure,” Frank said.
The SEC last year proposed a rule to require companies in some cases to include in their proxy materials the nominations for directors by shareholders, but held off on finalizing the proposal. The U.S. Chamber of Commerce and other business groups question whether the agency has the right to issue rules over corporate governance standards that are enacted at the state level.
The Senate bill, however, includes additional Schumer provisions, such as requiring that directors in uncontested elections receive a majority of the votes cast, or they must tender their resignation. It also would require the SEC to issue rules to require public companies in their proxy statements to disclose why the same or different people serve as chairman and CEO. Frank said he did not know if the additional Schumer provisions could withstand negotiations, though they are a priority for the New Yorker.
Frank expressed some skepticism for a drive to separate the CEO and chairman duties. “In my experience, it hasn’t made a lot of difference if you have looked at the performance, of separating the CEO from the chairman of the board. People say it’s very important. But my guess is that if you threw up the list of major companies, and didn’t tell people which was which, there wouldn’t be [a] way to differentiate by any kind of results and analysis,” he said.
The Senate appointed its conferees Tuesday, with a 7-5 ratio of Democrats to Republicans. Frank said the House will appoint its conferees the week of June 7, and he recommended a party-line ratio of eight to five. “We have an administration that feels strongly about this, and I expect House leadership will be engaged more than they were last year when health care took up much of their time and when they paid us the compliment of trusting us,” Frank wrote to Democratic members of his panel.
“Their greater involvement will not imply a lack of trust, but simply the fact we are down to a very few important issues where the administration will be strongly expressing its view,” he continued. “There is also the fact that the need to keep 60 votes in the Senate will be something of a constraint.”
