Yesterday, the U.S. Supreme Court denied the petition for certiorari filed by Textron, leaving the decision in favor of the IRS in the First Circuit in place. What this means, given the split of authority in the Circuits, is unclear – other than that it means continued uncertainty with regard to the protected status of tax workpapers.
Here is more of a drill down: the Supreme Court’s denial of the petition for certiorari filed by Textron leaves in place the en banc decision of the U.S. Court of Appeals for the First Circuit in United States v. Textron, Inc., 577 F.3d 21 (1st Cir. 2009). That decision held that Textron’s tax workpapers, which were shared with its auditor, were prepared in the ordinary course in connection with preparing its annual financial statements and were not case preparation materials prepared “because of” or “for use in” litigation, and thus were not subject to protection from IRS summons under the work product doctrine.
The Supreme Court’s denial of cert. leaves the strict First Circuit test in place, which is in conflict with tests applied in other circuits. For example, the test in the Second Circuit applied in United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998), is whether the materials were prepared “in anticipation of” or “because of possible” litigation. This was the test previously applied by the First Circuit in Maine v. United States Dept. of Interior, 298 F.3d 60 (1st Cir. 2002).
The Fifth Circuit applies a stricter test but still not as strict as the First Circuit’s test in Textron. In United States v. El Paso, 682 F.2d 530 (5th Cir. 1982), the Fifth Circuit required the prospect of litigation to be the “primary motivating factor for the preparation of the documents.” Thus, until clarified by the Supreme Court in another case, we have uncertainty in the status of tax workpapers and other materials shared with auditors, and companies in the First Circuit share such materials with auditors at their peril.
Third-Party Review of Executive Compensation Practices II
In this follow-up podcast on CompensationStandards.com, Greg Taxin of Soundboard Review Services discusses the latest developments for Soundboard Review Services (here is the first podcast), including:
– Soundboard has been quoted in its first proxy this year, for DuPont. Can you tell us what the DuPont board engaged you to do?
– How are investors using the information provided by DuPont in its proxy about your review services? Have investors contacted you?
– Having now done a number of these reviews, can you share any surprising practices you have seen or best practices that are perhaps uncommon?
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:
– 0.3% of Directorships Voted Down in 2009: Will 2010 Be Different?
– Proxy Access: Notes from a Stanford Law Panel
– New Type of Whistleblower: State Securities Regulator Resigns in Protest
– The Problem with IFRS: Little Independence for the IASB
– More on “Earnings Releases: Google’s Site as a ‘Recognized Channel'”
Even though the Senate has not yet made available the final Dodd bill – reflecting the various amendments adopted during the last few weeks of Senate floor debate – and the final bill is not expected to be released for several days, we have begun posting memos from firms in our “Regulatory Reform” Practice Area. These firms have written their memos based on an assessment of where the bill ended up…
Note that the final tally of proposed amendments exceeded 430 – an average of 4.3 per Senator!
Virginia’s New “Financial Fraud Task Force”
Last week, the USA Today carried this article about a new multi-agency federal task force focused on financial fraud cases – with a priority on securities cases – that will be based in Richmond, Virginia. The US Attorney’s Office in Richmond will coordinate the Task Force with the SEC, CFTC, FBI, US Postal Service and IRS, as well as state law enforcement agencies. The arrangement is described as a partnership born as a “boots-on-the-ground outgrowth” of the interagency Financial Fraud Enforcement Task Force established by President Obama last November.
According to the USA Today article, the government is excited because potential jurors in the Virginia area are perceived to be supportive of government action – and because the federal docket moves cases from indictment to trial in 90 to 150 days, a true “rocket docket.”
How does eastern Virginia have the legal right to handle almost any securities law fraud case? Because the filings from publicly traded companies go to the SEC’s EDGAR computer server in Alexandria, Virginia. The EDGAR servers moved there from DC more than a decade ago. Also, this BusinessWeek article notes that the Federal Reserve in Richmond is one of the primary hubs for wire transfers.
Update on “Carried Interest” Legislation
Here is news from Davis Polk: On May 20, Democratic House and Senate tax writers released a tax extenders package (H.R. 4213) that includes provisions relating to the taxation of carried interest received by investment fund managers.
In general, the proposal would tax carried interest (and gain on the disposition of carried interest partnership interests) as ordinary income and as income subject to self-employment taxes. The new bill is substantially similar to the version originally proposed by Rep. Levin and passed by the House in December, with the following changes.
– The most significant change is that, in the case of partners who are individuals, ordinary income treatment and self-employment tax would apply to only 75% of each item of income comprising the carried interest. For taxable years beginning before 2013, the percentage would be 50% instead of 75%.
– The new version would generally apply to taxable years ending after the date of enactment, which therefore would include calendar year 2010 if the bill were enacted this year. Pursuant to a special provision, however, the new rules would apply only to partnership income for the post-enactment portion of the year (or, if less, partnership income for the entire enactment year). In the case of disposition gains, the new proposal would apply only to transactions occurring after the date of enactment.
– The new version would clarify that gains attributable to a general partner’s own out-of-pocket cash contributions are eligible for capital gain treatment even though those contributions are not subject to management fees or carried interest (and thus are not pari passu with limited partner interests).
– The new version includes various other technical changes. Among other things, these changes would:
o Exclude the disposition of a publicly traded partnership interest by an individual who does not provide investment management services.
o Exclude the contribution of a carried interest partnership interest to an upper-tier partnership if the contributing partner elects to treat the upper-tier partnership as an investment services partnership interest.
Yesterday afternoon, the US Senate passed a motion for cloture by a vote of 60-40 after failing to get a majority for this motion on Wednesday. Then, the Senate didn’t take advantage of the limited 30 hours of debate that cloture provides – instead it cleared a handful of procedural hurdles and passed the Dodd bill itself (the final bill is not yet available; I will blog when its posted; here’s the rollcall on how each Senator voted).
After several weeks of debate, the U.S. Senate voted 59-39 this evening to approve Senator Christopher Dodd’s wide-ranging financial reform legislation. The vote was largely along party lines, but four Republicans voted for the bill.
The final text was not immediately available, but the version of the bill brought to the floor included provisions to require majority voting in board elections and annual shareholder votes on executive compensation. The bill also affirmed the authority of the SEC to issue a proxy access rule.
The legislation will have to be reconciled with a narrower reform bill that the House of Representatives approved in December. That bill includes an advisory vote mandate and a proxy access provision, but not majority voting. A joint House-Senate conference likely will be held in June, and Democratic leaders hope to have a compromise bill ready for President Obama to sign by the July 4 holiday.
And more information from this excerpt of a WSJ article (see bottom of this article for bullets about where the Senate and House bills differ):
Sen. Gregg was one of 37 Republicans to vote against the 1,500-page bill. But the legislation ultimately passed with a narrow bipartisan majority. Four Republicans joined with 53 Democrats and the Senate’s two independents in support of the package. Two Democrats voted against the bill, and two senators weren’t present for the vote.
Now Congress will need to reconcile the Senate bill with a companion House package adopted in December on a 223-202 vote, with 27 Democrats joining unanimous Republican opposition.
The outlines of the two bills are largely the same. But there are more than a dozen notable differences that will need to be reconciled during negotiations that are expected to start within days. Despite the differences, the Senate passage virtually ensures that some type of financial regulatory reform will be finalized by this summer.
Leading the negotiations will be House Financial Services Chairman Barney Frank (D., Mass.), who has said he would like to have a compromise package by the end of June.
Insights: Delaware’s Latest Changes to the DGCL
In this DealLawyers.com podcast, John Grossbauer of Potter Anderson & Corroon provides some insight into this year’s changes to the Delaware General Corporation Law.
From “The Motley Fool,” here’s some great commentary about the ways of the world from Berkshire Hathaway’s Charlie Munger.
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:
– Careers: Three Tips for Younger Lawyers
– Delaware Supreme Court Affirms In Part, Reverses In Part, And Remands Court of Chancery’s Ground-Breaking Decision On Bylaw Amendments, “Stockholders of Record” and “Vote Buying”
– SEC Proposes Large Trader Reporting System
– Special Litigation Committees: Chancellor Chandler Weighs In
– Do You Need to Use Director Nominee Questionnaires?
Yesterday, the motion for cloture in the US Senate failed 57-42 regarding the Dodd bill, as noted in this blow-by-blow account in the WSJ. This motion would have limited further debate over the 300-plus proposed amendments to just 30 hours before forcing a vote on the bill (Yes, I said over 300 amendments! That’s an average of more than three per Senator for those playing at home).
This means that the Dodd bill might not be passed this week as expected (see this Washington Post blog) – and so far there has been no Manager’s Amendment, as well as no real way of knowing whether the amendment to kill proxy access and majority voting will be voted upon before the Senate’s tussling ends. Thanks to the folks at Davis Polk and others for helping me sort through the chaos on the Senate floor…
Audit Inspections: Some Countries Refuse to Play Ball with US Regulators
Earlier this week, the PCAOB published this alert that contains a list of foreign issuers where the PCAOB has been denied access to the information necessary to conduct inspections of the audits of those companies (as noted in this Accountancy Age article, this lack of information sharing may hinder a Lehman investigation). In these jurisdictions, the related governments have failed to cooperate with the SEC and PCAOB in coming up with a meaningful inspection process for these audits.
At a recent Investor Advisory Group meeting, investors encouraged the PCAOB to make this list publicly available so investors could determine which audits are not subject to the type of auditing framework that exists for US issuers. Due to this tug of war, there is greater uncertainty over the quality of the independent audits for these companies, including the integrity of their financial statements and their compliance with IFRS.
Posted: The SEC’s Semiannual Regulatory Agenda
Recently, the SEC posted its seminannual regulatory agenda, in which it reports its progress on rulemaking to Congress. From this list, you can see that the SEC has been busy – and will continue to be so. But there are no real surprises to be gleaned from the agenda…
As I’ve been blogging, one of the battles in the Senate has been over the future of Regulation D (as strange as that is) – as I blogged yesterday, it looks like there is now closure on that issue for the Dodd bill. Here is the latest from Alan Parness of Cadwalader:
Regarding the proposed amendments to Sections 412 and 926 of S. 3217 introduced by Senators Bond et al last Thursday as SA 4037, such amendments have been supplanted by new amendments introduced on Monday by Senator Bond et al, as SA 4056, and those amendments were passed by voice vote of the Senate that evening. Here’s SA 4056 and its record from the Thomas (Library of Congress) website.
By my read of SA 4056, I noticed only a few minor changes to Sections 412 and 926 from the versions in SA 4037. Note that while the SEC’s initial review and adjustment of the definition of “accredited investor” in accordance with Section 412(b)(1) appears to be optional [“The Commission may undertake a review . . .”], Section 412(b)(2) mandates that the SEC undertake reviews of the definition every 4 years thereafter, but solely as regards the definition of the term in 17 CFR Sec. 230.215 (Rule 215 under the ’33 Act for purposes of the definition of “accredited investor” in Section 2(a)(15)(ii) and, in turn, the Section 4(6) exemption), but not as regards the definition in Rule 501(a) of Reg. D. The version of Section 412 in SA 4037 made no such distinction between the rules.
Of course, what remains to be seen is what the SEC does in accordance with the rulemaking directives of Sections 412 and 926, if those provisions are ultimately enacted in the versions set forth in SA 4056.
Coming Soon: The Next Phase-In for XBRL
Over the next several months, companies will face additional implementation milestones to provide XBRL-tagged financial statements with their SEC filings. For financial statements for periods ending on or after June 15th, the largest companies (ie. first phase-in group) must provide detailed tagging for financial statement notes and schedules as an exhibit to their filings.
Concurrently, all other domestic and foreign large-accelerated filers using US GAAP (second phase-in group) must submit their first XBRL-tagged financial statements. This memo from KPMG summarizes guidance from a recent SEC Staff webcast that covered detailed tagging phase-in requirements, rules about changes in filing status during the three-year phase-in period, and other implementation issues.
May-June Issue: Deal Lawyers Print Newsletter
This May-June issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Loyal to Whom? Recent Delaware Decisions Clarify Common Stockholders Are Primary Beneficiaries of Directors’ Fiduciary Duties
– Recent Trends in Earnout Use: A Cautionary Note
– The Shareholder Activism Report: Recommendations to Consider
– Delaware Chancery Opens Door for Next Gen Poison Pill
– More Takeaways from Selectica
If you’re not yet a subscriber, try a 2010 no-risk trial to get a non-blurred version of this issue on a complimentary basis.
A lot of activity in the US Senate late last night, winding up with a motion for cloture (a procedure that limits further debate to 30 hours) that sets up a likely vote tomorrow to limit further debate and pave the way for a final vote on the Dodd bill, potentially by the end of this week, as noted in this Washington Post article.
Many of the 300 proposed amendments won’t be considered before the vote – but the Senate is tackling a fair number of them. Last night, a handful of the amendments were passed by a voice vote. One of these was an amendment from Senators Dodd and Bond that subsumed the amendment that I blogged about yesterday that seeks to preserve Regulation D and Rule 506, as noted in this BusinessWeek article.
As I figure out more details about what was actually passed, I’ll tweet about them – as well as provide an update in this blog manana since I can’t find any specifics as of this morning…
– Why are secure emails important?
– How does encryption work for emails? How simple is the process?
– What does Zix’s service do to facilitate secure communications?
Smaller Company Proxy Disclosures: The Latest Developments
Join us tomorrow for the CompensationStandards.com webcast – “Smaller Company Proxy Disclosures: The Latest Developments” – to hear Mark Borges of Compensia and Dave Lynn of CompensationStandards.com and Morrison & Foerster discuss the expectations of what smaller reporting companies should be disclosing regarding executive compensation practices, which has radically changed over the past few years.
A while back, I blogged how Regulation D would get hammered under Section 926 (and Section 412) of the Dodd bill. Joe Wallin of Davis Wright Tremaine reports that Senators Bond, Warner, Brown and Cantwell have proposed an amendment (#4037) to the Dodd bill that would:
– Remove the ridiculous and industry killing 120-day wait period
– Remove the “go back in time” provision, which would have re-adjusted the accredited investor financial thresholds in a way that would have wiped out 2/3rds of existing angel investors qualifying as “accredited investors”
– Exclude the value of an investor’s primary residence in determining whether the investor would meet the net worth standard
– Add a “bad boy” provision to Rule 506 offerings
Even though some groups are excited – like the Angel Capital Association – some still see issues with the amendment. For example, Alan Parness of Cadwalader has these thoughts:
1. Regarding the proposed rewrite of Section 412, I don’t have any particular problem, noting that the current $1 million minimum net worth standard in the SEC’s Rule 501(a)(5) would be in place for 4 years from enactment of the bill.
Obviously, the main question is how many persons would be eliminated as accredited investors under Rule 501(a)(5) if the value of the investor’s primary residence were removed from the net worth calculation (those of you handling public offerings of direct participation programs subject to state filings should be familiar with NASAA’s Guidelines, whereby investor suitability standards include a minimum net worth requirement which excludes the value of the investor’s home, home furnishings and automobiles – see, e.g., Sec. II.B of NASAA’s Omnibus Guidelines at NASAA Reports par. 2322).
2. Regarding Section 926, I’m troubled by the following:
– The preamble to paragraph (2) provides for disqualification of “any offering or sale of securities by a person.” What person or persons will be covered by this provision? It’s not clear whether it would encompass the same people subject to disqualification by the SEC’s Rule 262.
– Paragraph (2)(A) includes only final orders of state securities and insurance regulators, and federal and state banking regulators, as opposed to court orders, and contains no limit as to when the “final order” may have been entered (compare Rule 262, which in most cases imposes a 5-year “look-back” limit). One possible issue would be whether an order is “final” if it’s been issued by the regulator, but is in the process of being challenged by the respondent through administrative or judicial proceedings.
– Paragraph (2)(A)(ii) covers violations of “any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct.” Obviously, the question is what particular conduct is deemed to be “fraudulent, manipulative, or deceptive” under a particular state’s law or regulations. For example, NY Gen. Bus. Law Secs. 352(1) and 352-i provide that any violation of a number of provisions in GBL Article 23-A (NY’s infamous “Martin Act”), constitutes a “fraudulent practice,” including the requirement in Section 359-e(8) that a dealer file a “further state notice” with the NY Department of State for certain offerings (for those of you not familiar with this form, it’s a pointless piece of paper which only serves as a revenue source, and it’s been preempted by ’34 Act Section 15(h)(1) as regards SEC-registered broker-dealers).
Query whether there are provisions under other states’ securities or insurance laws, or federal or state banking laws, or rules thereunder, which deem a violation of a filing, recordkeeping or some other innocuous requirement to be “fraudulent, manipulative, or deceptive.” Further, this provision is an open invitation for states to amend their securities, banking and/or insurance laws or regulations to designate a broad range of violations as “fraudulent, manipulative, or deceptive,” and thereby trigger a disqualification.
– Paragraph (2)(B) contains no time limit on when the particular conviction occurred. Compare the SEC’s Rule 262(a)(3), imposing a 5-year look-back, and Rule 262(b)(1), imposing a 10-year look-back, on the convictions specified in those provisions.
– Unlike the preamble to Rule 262, whereby the SEC may waive any disqualification “upon a showing of good cause,” there is no mechanism provided for waiver of any disqualification under par. (2), whether by the SEC or by the particular state regulator (for reasons of uniformity, I believe granting the SEC authority to grant waivers to be the better approach).
– If, like the SEC’s Rule 262(b), the proposed disqualification from use of Rule 506 may be triggered by reason of a beneficial owner of 10% or more of the issuer’s equity securities being a “bad boy,” that raises a number of practical problems as to how an issuer can be absolutely certain that none of its 10%+ beneficial owners is a “bad boy.”
First, how is “beneficial owner” to be defined for purposes of the disqualification? In similar fashion to SEC Exchange Act Rule 13d-3 or 16a-1(a), or in a different manner? There are many possible variables in that regard. Also, if “beneficial owner” is to include someone owning 10% or more of an issuer’s equity securities indirectly through another person, say, for example, that 20% of the interests in an issuer commencing a Rule 506 offering are owned by an offshore entity. Can the issuer in that case simply rely in good faith on a representation by that entity that no person holding 50% or more of its equity interests is a bad boy? What if that representation proves to be false? Does the issuer pay the price in that case with a loss of the Rule 506 exemption?
Also, one basic issue – does Congress really expect that adding a “bad boy” disqualification will deter the real securities crooks out there? In reality, I believe it will only make the process more cumbersome and expensive for honest issuers who seek to comply with the law by doing their homework and obtaining appropriate certifications (hopefully truthful!) those from the persons covered by the rule, while issuers with “bad boys” running the show will simply proceed along their merry way, either ignoring federal and state securities laws altogether, or claiming reliance on other exemptions without a bad boy disqualifier.
I wonder how many instances can be cited where a state uncovered a “bad boy” lurking behind an issuer for which a Form D was filed, and such person’s involvement or nefarious background was not disclosed to investors (or, worse, such person committed a fraud in the course of the offering), as opposed to cases where a state uncovered a “bad boy” behind an issuer effecting a fraudulent offering which failed to make any filing with the SEC or the state?
3. On the practical side, I also fear that the potential for disqualification under Section 926 could lead to strong-arm tactics by certain state regulators in the course of investigations, forcing respondents to settle for extraordinary remedies in lieu of an order which would disqualify them from future Rule 506 offerings.
Put into the context of issues that have arisen recently in connection with Rule 506 offerings, say a state securities administrator decides to pursue an entity serving as the general partner of various limited partnerships which effected Rule 506 offerings in the state, as well as the entity’s individual principals, on the basis that, despite the absence of any complaints from local investors or other evidence that the offerings might have been fraudulent: (i) notice filings were made later than required by law or rule, (ii) notice filings were not made as required by law or rule, and/or (iii) the issuers refused to submit copies of offering materials for such offerings upon the state’s request.
Facing the state’s threat to issue an order under a statute which deems a violation of any provision of the statute or a rule thereunder to be a “fraudulent practice,” which would disqualify the general partner and its principals from participating in future Rule 506 offerings pursuant to par. (2)(B) of Section 926, and, after concluding that the cost and time required to challenge such an order through the requisite administrative and judicial proceedings would be impractical (let alone the likelihood of success before the local administrative or judicial panels which would hear such a challenge), the respondents capitulate and agree to make a rescission offer to all investors in that state and pay a huge penalty to the state. Unrealistic? I don’t think so.
RiskMetrics’s ISS Reveals All: Full GRId Methodology Now Available
A few weeks ago, RiskMetrics released a fuller explanation – a 193-page technical paper – about how their new GRId governance rating framework will work, updating the outline they issued back in March (here’s ISS’s 8-page summary of GRId). We are posting memos analyzing this new information in our “Governance Ratings” Practice Area.
Last week, The Corporate Libraryweighed in on the long-standing debate about what governance ratings actually mean to investors, particularly those related to ESG issues (Environmental, Social and Governance).
Navigating Corp Fin’s Comment Process
Join us tomorrow for the webcast – “Navigating Corp Fin’s Comment Process” – to hear former SEC Senior Staffers Linda Griggs of Morgan Lewis & Bockius, John Huber of Latham & Watkins, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster and Bill Tolbert of Jenner & Block explain the process by which the SEC Staff issues comments as well as provide their practical guidance about how to respond.
We’ve posted some great course materials for this program, including:
As I blogged a few days ago, there are over 200 amendments proposed for the Dodd bill in the Senate. There is a lot happening on the Senate floor daily right now (and continuing into the night) and it’s hard to separate fact from rumor (I’m not even sure that those on the Senate floor can keep track). For starters, some people report that President Obama wants to sign a bill by the end of June; some say he wants it by Labor Day.
There are so many proposed amendments, it would be hard to discuss even a fraction of them in this blog, particularly since the ground moves daily beneath the bill. But here are two that you may want to be aware of – thanks to the “heads up” from Rick Hansen of Chevron: the Byrd (#3880) and Rockefeller (#3886) amendments. Both of these would significantly expand the disclosure obligations of ’34 Act companies – principally because they contain no meaningful disclosure thresholds (i.e. materiality), and in the case of the Byrd Amendment, would significantly expand the bases upon which directors and officers may be found personally liable for failures to disclose.
1. The Byrd Amendment
Amends Securities Exchange Act of 1934 by inserting new Section 21B. Health and Safety Disclosure Violations. Requires issuers subject to the Securities Exchange Act of 1934 to disclose, at least annually:
– “any pending litigation concerning a health or safety condition or violation under Federal or State law involving the issuer, other than ordinary, routine litigation that is incidental to the business of the issuer, as determined by the [SEC]”;
– “any significant health or safety condition, or significant health or safety violation, at any business unit of the issuer in which routine activities pose a risk of loss of life”;
– “any significant health or safety condition, or significant health or safety violation, at any business unit of the issuer in which routine activities pose a risk of accident or fatalities, injuries, or illnesses, the occurrence of which could cause reported financial information not to be necessarily indicative of future financial condition of the issuer, or which could cause a negative effect on operating results of the issuer or any subsidiary thereof”; and
– “any trend in health or safety conditions or violations under Federal law, at any business unit of the issuer, that may change the relationship between cost and revenue for the issuer or any subsidiary thereof.”
Permits the SEC and stockholders to file claims in federal court “whenever it shall appear that any issuer has violated” the disclosure requirements. The SEC or stockholders may seek equitable relief or civil penalties “to be paid by the senior executive officers or members of the board of directors” of the issuer “(i) who knew about such violations; or (ii) whose duties and decisions affected matters regarding production or safety and therefore had reason to know about such violation.”
Key defined terms include:
– “pending litigation” means “any civil action or administrative proceeding for a penalty for violating a federal or state health and safety law that (i) is being contested before an administrative law judge under the Occupational Safety and Health Review Commission or the Federal Mine Safety and Health Review Commission; or (ii) is being otherwise contested or appealed under a state review board or other body.”
– “significant health or safety condition” means “a condition that a certified worker or manager could identify as reasonably likely to be cited, were the condition to be observed by a Federal inspector, as (i) a significant and substantial health or safety violation under the Federal Mine Safety and Health Act of 1977; (ii) a serious or repeated violation under the Occupational Safety and Health Act of 1970; or (iii) another health or safety related violation carrying a high degree of gravity under Federal law.”
– “significant health or safety violation” means “(i) a significant and substantial health or safety violation under the Federal Mine Safety and Health Act of 1977; (ii) a serious or repeated violation under the Occupational Safety and Health Act of 1970; or (iii) another health or safety related violation carrying a high degree of gravity under State or Federal law.”
2. The Rockefeller Amendment
Requires issuers who are subject to the Securities Exchange Act of 1934 and that are an operator, or that have a subsidiary that is an operator, “of a coal or other mine” to disclose in the issuer’s quarterly and annual reports:
– For each coal or other mine, (a) “the total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard under section 104 of the Federal Mine Safety and Health Act of 1977,” (the “Act”) (b) “the total number of orders issued under Section 104(b) of the Act”; (c) “the total number of citations or orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under section 104(d) of the Act”; (d) “the total number of flagrant violations under section 110(b) of the Act”; (e) “the total number of imminent danger orders issued under section 107(a) of the Act”; and (f) “the total dollar value of proposed assessments from the Mine Safety and Health Administration under the Act”;
– A list of each coal or other mine that received written notice from the Mine Safety and Health Administration of(a) “a pattern of violations of mandatory health or safety standards” or (b) “the potential to have such a pattern”; and
– “Any pending legal action before the Federal Mine Safety and Health Review Commission involving such coal or other mine.”
Requires issuers who are subject to the Securities Exchange Act of 1934 and that are an operator, or that have a subsidiary that is an operator, “of a coal or other mine” to file a current report on Form 8-K with the SEC disclosing the following:
– “The receipt of an imminent danger order issued under section 107(a)” of the Federal Mine Safety and Health Act of 1977;” or
– “The receipt of a written notice from the Mine Safety and Health Administration that the coal or other mine has (a) “a pattern of violations of mandatory health or safety standards” or (b) “the potential to have such a pattern.”
Key defined terms include:
– “Coal or other mine” means a coal or other mine as defined in section 3 of the Federal Mine Safety and Health Act of 1977.
– “Operator” has the meaning given that term in section 3 of the Federal Mine Safety and Health Act of 1977.
A Fake SEC? The “U.S. Securities and Equities Administration”
Just when you get old enough to think that you’ve seen everything – something new comes along. Yesterday, the SEC issued this alert to note that “an entity calling itself the “U.S. Securities and Equities Administration” and other similar names, including the “U.S. Securities Administration” or the “U.S. Securities Bureau.” In conversations with members of the public, the entity may have represented that its address is 225 Franklin Street, Boston, Massachusetts. The entity also claims to operate a website at www.gov.ussea.us. It appears that this entity may be requesting up-front fees to remove purported restrictions on shares of stock that investors own, or to release funds purportedly being held by the U.S. government on investors’ behalf.”
I wonder how much this fake “SEA” pays a Staff attorney these days – I imagine a lot as they could just pay in Monopoly money…
Short Selling: A New SEC Enforcement Priority
In his “SEC Actions” Blog, Tom Gorman explains how the SEC’s Enforcement Division took action against individuals for short-selling, as compared to other recent cases that involved market professionals and hedge funds.
Last Chance for “Early Bird” Rates: For one more day, we are offering a $200 discount for all registrations received by the end of tomorrow. This is a great savings and we won’t be able to extend this deadline, so don’t wait to register.
Register Now: Don’t wait any longer–we will not be able to offer this reduced rate for registrations after tomorrow so register now or contact us at info@compensationstandards.com or 925.685.5111. Remember that last year, these Conferences sold out a month before the event.
Suppose you are a high ranking executive who is participating in an analyst call with a colleague and your colleague makes a misstatement. Can you go to jail if you don’t jump in and correct the misstatement? What if you fail to rectify the misstatement in SEC filings? Recently, the Third Circuit Court of Appeals – in US v. Schiff – said that “the plain language of § 10(b) and corresponding Rule 10b-5 do not contemplate the general failure to rectify misstatements of others.” The Court also rejected the government’s argument that the defendant’s position as a “high corporate executive” imposed a general fiduciary duty requiring disclosure. In doing so, the Court observed a number of problems with such a theory.
For example, would such a duty potentially rope in all corporate officers based on a single misstatement by another officer? Although the government was not successful under either a duty to disclose or fiduciary duty theory, it still has other prosecutorial arrows in its quiver – for example, criminal conspiracy and aiding and abetting. Also, the case does not exonerate an executive from state corporate law claims of breach of fiduciary duty.
Mailed: March-April Issue of The Corporate Counsel
The March-April issue of The Corporate Counsel includes pieces on:
– Staff Provides Relief on the Need for a No-Action Letter When Suspending Section 15(d)
– Reporting Obligation under Rule 12h-3
– Revised Non-GAAP CDIs–Staff Seeks Consistency in Issuer Communications
– PIPEs Revisited–The Staff Dials Back the 1/3 of Public Float Guideline
– Roth IRA Conversion–The Soup, Nuts And Bolts
– California Still Householdless
– Beware, Congress Delving into the Accredited Investor Thresholds
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We now have over 200 amendments to the Dodd bill in the Senate and we’re still bound to get some more. With so many amendments they cover a large swatch of issues, including exempting small companies from Sarbane-Oxley’s Section 404 regarding internal controls (egs. #35 – Vitter Amendment 3764 and #56 – Hutchinson Amendment 3785) and removing proxy access from the bill (#157 – Carper 3887, as noted in this blog).
As is typical on the Hill, some amendments are unrelated to financial reform (eg. #62 – Brownback Amendment 3791 re: the Congo conflict), including one that eliminates cost-of-living increases for members of Congress (#1 – Feingold Amendment 3730)! Perhaps not an appropriate item to bury in a financial reform bill (but I get the idea).
Here’s the Senate Banking Committee’s 251-page report on the Dodd bill from April 30th – and here’s where you can find the list of the 205 amendments (click on “Amendments” in 2nd column). This list is useful as it links to the text of each amendment – but unfortunately you have to drill down to the text of each amendment to determine its subject matter since each is merely described as “Purpose will be available when the amendment is proposed for consideration” in the index.
The Reasons for Last Week’s 1000-Point Plunge: Maybe We’re Better Off Not Knowing?
Yesterday, SEC Chair Schapiro delivered this testimony before the House Capital Markets Subcommittee on the causes of last Thursday’s severe market disruption. As noted in this Washington Post article, the regulators now believe they have a handle on the confluence of events that precipitated the “blip” (but they still don’t know what caused that day’s volatility). A member sent in this commentary about the situation as known so far:
The collective facts so far from the regulators: at 2:32 pm, a CME trader sells heavy S&P 500 futures contracts (an “e-mini”) as part of a “bona-fide hedge,” per the CME. By 2:40, the cash equity markets are off 4% and near 10% a few minutes later.
The SEC says the NYSE institutes market steadying protocol when the selling gets off-the-hook, which has humans take over for electronic orders being routed to NYSE. The automated exchanges read this as a flaw and stop sending orders to NYSE. Market makers (“liquidity providers”) that are tasked with standing in and keeping the cash markets liquid (i.e. order flow) instead withdraw as the high-frequency trading programs go haywire. This is the where the “no bid” period establishes itself.
In other words, when the sh#% hits the fan, we can count on the Wall Street Army to retreat and let the tent fold, while they head for the hills with the cash. Mad Max, or what?
Floyd Norris’ Response: A Rebuttal to “SEC’s Rating Agency Regulatory Scheme Heighten Risk of Insider Trading”
Floyd Norris of the NY Times provides us with this response to a rebuttal to one of his columns noted in yesterday’s blog:
I just saw yesterday’s blog which allows that I don’t know what I am talking about. I think I was misunderstood. Let me take it slowly:
1. The rating agencies are exempt from Regulation FD; they can get info the rest of us don’t have.
2. That has led some people to think the ratings are based on superior information, and that Moody’s (or S&P’s or Fitch’s) opinion is worth more than some other analyst’s – not because of relative skill in analysis, but because of an information gap.
3. Why not end the exemption? If a company feels it is necessary to tell the rating agancy something, let it tell everyone else too. At least that can be done as soon as the new rating is published. (That allows for mergers and other major corporate changes. Effectively, it says that if an agency has inside info – it cannot disclose it until it becomes public.)
4. The fact that Moody’s discloses its rating is irrelevant to this analysis, contrary to what the member quoted says, so long as it (or the company) does not disclose the inside info on which the rating is based.
Your member thinks we are better off to have Moody’s know more, because it can then give us the results of that knowledge. I think we would be better off to have a level playing field, in no small part because it would take away the agencies’ aura, and that if companies knew they would be seen in a better light – and pay lower interest rates – if they released information, it would be released.
Obviously, his (or her) forecast of the future may be better than mine. But how does that prove I do not know what I am talking about?
