We just sent out the July-August 2009 issue of The Corporate Executive, along with a Special Supplement. This issue is devoted to in-depth analysis and practical guidance on the SEC’s proposed changes to the executive compensation disclosure rules. The issue includes:
– The SEC’s Proposed Changes – And their Effects
– The Relationship of Compensation and Risk
– A Broader Scope to the CD&A (But Only When Material)
– Revisiting Equity Award Disclosure – Some Welcome Relief
– A Troublesome Result – And a Fix
– Compensation Consultant Disclosure: An Interim Step?
– Other Important Areas Where Comment is Solicited – And Our Comments
– Walk-Away Disclosure and Analysis – A Heads Up
– Are You Recognizing Too Much Expense for Your ESPP?
– Limits Reduce Employee Returns
– Accounting Considerations
– Proxy Disclosure Updates – Full Walkaway Model CD&A
– Treasury’s Mark Iwry to Speak at 6th Annual Executive Compensation Conference
Subscribing to The Corporate Executive is now more important than ever, particularly given all of the changes contemplated with executive compensation and SEC disclosure requirements. In recognition of the need we are serving this year (and in view of the tight economic times), we are extending a special offer for new subscribers which will enable anyone to receive The Corporate Executive at no risk. If you sign up now for 2010, you can get the July-August 2009 issue on a complimentary basis and the rest of 2009 for free.
FASB Deliberates on Loss Contingencies
Last week, the FASB took up its controversial 2008 proposed changes to the standards regarding disclosure of loss contingencies. As Edith Orenstein notes in FEI Financial Reporting Blog, the August 19 meeting focused on litigation contingencies, with other types of loss contingencies to be taken up at a later meeting. The Board didn’t rule out an effective date by the end of this year, however it appears that the possibility is pretty remote. Here are highlights of the deliberations from the FEI Financial Reporting Blog:
Disclosure objective: The board agreed on the following disclosure object for loss contingencies: An entity shall disclose qualitative and quantitative information about the loss contingency to enable a financial statement user to understand the nature of the contingency and its potential timing and magnitude.
Disclosure principles: The board agreed on three broad principles for loss contingencies:
1. Disclosures about litigation contingencies should focus on the contentions of the parties, rather than predictions about the future outcome.
2. Disclosures about a contingency should be more robust as the likelihood and magnitude of loss increase and as the contingency progresses toward resolution.
3. Disclosures should provide a summary of information that is publicly available about a case and indicate where users can obtain more information.
Quantitative disclosure requirements: The board directed the staff to develop an approach that would focus on disclosure of non-privileged quantitative information that would be relevant to making an estimate of the potential loss, for consideration by the Board at a future meeting.
Reasonably possible equals more than remote: The board decided to maintain the existing requirement to disclose asserted claims and assessments whose likelihood of loss is at least reasonably possible and to clarify that at least reasonably possible and more than remote have the same meaning.
Disclosure of certain remote contingencies: The board agreed that certain remote loss contingencies should be disclosed, and the board directed the staff to develop possible approaches for discussion at a future meeting.
Unasserted claims: The board agreed to maintain existing threshold requirements for unasserted claims and assessments and agreed to enhance the existing interpretive guidance about the threshold.
Recoveries, indemnifications, and settlement negotiations. The board agreed that:
entities should not consider the possibility of recoveries from insurance or indemnification arrangements when assessing whether a contingency should be disclosed.
to require disclosure about possible recoveries from insurance and other sources if and to the extent that the information has been provided to the plaintiff in discovery.
not to require entities to disclose information about settlement negotiations.
Secondary Liability Legislation: Does it Have Legs?
At the end of July, Senator Arlen Spector (D-PA) introduced a bill that would amend the Exchange Act to permit private civil actions against secondary actors for securities fraud, seeking to override the Supreme Court’s rulings in Central Bank and Stoneridge. The legislation would provide that anyone who knowingly or recklessly provides “substantial assistance” to a primary violator will be deemed to have violated the statute to the same extent. Given the current environment, there is at least some chance that this kind of legislation might get support, although at this point it may be too soon to tell.
The Administration recently released the last piece of draft legislation for its financial reform agenda. The legislation is focused on creating a comprehensive system of regulation for the credit default swap market and all other OTC derivative markets. The draft bill is generally consistent with the framework that the Administration outlined back in June, and the overall thrust of these proposals is to encourage the movement of OTC derivatives transactions from unregulated over the counter markets to regulated exchanges and centralized clearinghouses.
Of all of the draft legislation that the Administration has advanced thus far, I think that this bill is the most far-reaching, in that it essentially creates a new regulatory system where pretty much nothing in the way of government regulation (other than, e.g., capital standards) had existed before. The components of the contemplated regulatory system include:
Centralized clearing of standardized OTC derivatives through CFTC- or SEC-regulated clearing organizations;
A requirement that standardized OTC derivatives would be required to be traded on a CFTC- or SEC-regulated exchange or alternative swap execution facility;
An “encouragement” to use standardized OTC derivatives, with higher capital requirements and higher margin requirements applicable to non-standardized derivatives;
Transparency through confidential reporting of positions to federal regulators and public data regarding aggregated open positions and trading volumes;
Federal regulation of any firm dealing in OTC derivatives and firms taking large positions in OTC derivatives;
Strict capital and margin requirements for all OTC derivative dealers and major market participants through the SEC or CFTC;
Tools for the SEC and CFTC to prevent manipulation, fraud and abuse; and
A tightened definition of those eligible investors who may engage in OTC derivatives transactions.
While it is certainly hard to believe that the end of the August recess is almost upon us, it still seems highly likely that Congress will take up derivatives legislation when they get back in town. The Administration’s proposals closely track the agreed-upon guidelines for derivatives legislation reached by Representative Barney Frank (D-MA) and Representative Collin Peterson (D-MN). Further, a number of bills seeking to enhance OTC derivatives regulation have already been introduced in Congress. For example, on the House side, Agriculture Committee Chairman Peterson introduced H.R. 977, which is pending before the House Financial Services Committee. Moreover, H.R. 2454 was introduced by Energy and Commerce Committee Chairman Henry Waxman (D-CA) and includes several provisions concerning OTC derivatives regulation. This legislation was approved by the House on June 26. In the Senate, Agriculture Committee Chairman Tom Harkin (D-IA) introduced S. 272, while other bills with provisions targeting derivatives have been introduced jointly by Senators Carl Levin (D-MI) and Susan Collins (R-ME) (S. 961) and by Senator Ben Nelson (D-NE) (S. 807).
The CFTC Response: Not Quite Far Enough
CFTC Chairman Gary Gensler was apparently not a recipient of Treasury Secretary Geithner’s obscenity-laced tirade a few weeks back, so he felt free to comment to Congressional leaders (as noted in this Bloomberg article) on the Administration’s derivatives legislation, asking lawmakers to, among other things, not adopt exemptions for foreign currency swaps and end users that are not swap dealers or major market participants.
Among other recommendations, Gensler also suggests that Congress not move forward with the mixed swap provisions of the Administration’s draft legislation, which provide for the dual SEC-CFTC regulation of swaps deriving value from both a security and a commodity. Rather, Gensler suggests a system where the applicable regulation follows what the value of the derivative is primarily based on. He also suggests Bankruptcy Code amendments to provide protections similar to those afforded in the futures markets.
SEC/CFTC Harmonization
The SEC and the CFTC announced last week that they will hold joint meetings to seek public input on the harmonization of market regulation by the two agencies. The first meeting, to occur on September 2, will be held at the CFTC, and the second meeting will be held at the SEC the next day. The two agencies have until the end of September to come up with a report to Congress which identifies conflicts in their regulation of financial instruments and that makes recommendations for harmonizing the regulations.
Yesterday, the SEC announced that it had experienced problems receiving electronically submitted comment letters on a number of proposing releases, most notably the shareholder access proposals and the proposed amendments to Regulation SHO. The problems occurred during a “brief time” on August 17, although it is not clear from the notice when that brief time occurred. Some folks who attempted to submit comments got e-mails from the Secretary’s office following up, while others did not.
The notice indicates that the Staff believes all comments have been identified, but that commenters might want to contact the Office of the Secretary (202-551-5400) or check www.sec.gov under the comment file for the particular release to confirm receipt of their comments. It is always a good idea to check the online comment file in any event to make sure that your comment letter got through.
The Small Business Voice on Shareholder Access
Some of the comment letters that did manage to get through earlier this week on the shareholder access proposals seem to represent an interesting new trend. Over the last few years, there has developed quite the cottage industry in letter writing campaigns on SEC proposals. In many cases, these coordinated comment responses have come as “form” letters. The Staff has wisely adopted a practice of categorizing the form letters by type, and thereby taking them out of the list of commenters, while still providing the text of the letters. The prevalence of these letter writing campaigns has skyrocketed the comment letter count to numbers in the tens of thousands, which certainly makes the job of putting together a comment summary seem like a daunting task!
With this latest round of shareholder access proposals, we are seeing a wave of individualized letters from small business owners. And here we are talking very small businesses, not, e.g., smaller reporting companies. So, for example, in this letter, Noreka Taylor from Mama’s Kitchen in Kinston, NC writes:
Being a good cook alone is not going to help me make it through the recession. My country and my government should be helping me and my business succeed, not intentionally doing it more harm! Now that I have finally seen an increase in customers and income, my country has decided to try to hurt the economy again. These changes just do not make sense. Putting unqualified appointees into corporate chairs to peddle their own agenda and special interest could not possibly help anyone or anything except lining their own pockets. My restaurant cannot afford these changes and most other small businesses cannot either.
Meanwhile, at Don’s Tractor Repair in Wakefield, KS, Tim Zumbrunn worries that the access rule will put him out of business if his suppliers get caught up in expensive proxy contests. Tim states “[o]ur federal government should not intrude on publicly traded corporations, and corporate state laws should remain intact.” Proxy access is even on the mind of Teresa Liddell at Dust 2 Dust ATV Track and Trails in Thackerville, OK, stating that “[t]he recent proposal by the SEC to change shareholder proxy access and give the government greater access to businesses and their decisions would only hurt us and many other businesses.”
Each of these letters is personalized and describes different ways in which the proxy access proposals might cause harm, so they can’t be easily categorized into “form” letter categories. It is hard to say how much sway these letters will have with the Staff and the SEC as compared to, say, the Seven Firms letter or the letter from the Council of Institutional Investors, but they certainly indicate the lengths to which those opposed to access will go in seeking to undercut the SEC’s proposals.
Robert Khuzami: Breaking the Ice
In a speech before the New York City Bar on his first 100 days as the Director of Enforcement, Robert Khuzami got things started off with this joke:
All that being said, I’m pretty proud of my own 100-day accomplishments. So how have things changed? Before I joined the Division in March, the Dow was struggling around 6500 points. Now the Dow is over 9200. So am I really responsible for a 41% increase in the Dow? I am, and I’d explain it, but it’s very complicated. It involves algorithms, and calculus, and a black box and other … stuff. Now, when I ran this speech by my wife, she looked (kind of like some of you out there) a little incredulous. She said, “you’re not claiming credit for the stock market, are you? While you’re at it, are you also taking credit for the mild hurricane season or the sharp decrease in lethal shark attacks world-wide.” Well I am, and I’d explain it, but it’s very complicated. It involves algorithms, and calculus, and a black box and other … stuff.
The speech went on to note the significant changes being implemented in Enforcement, including the organization of specialized units, the streamlining of management and internal processes, the creation of an Office of Market Intelligence, an effort to foster cooperation by individuals and the expansion of resources throughout the Division, including adding staff to the Trial Unit and hiring a Chief Operating Officer.
I attended the ABA Annual Meeting earlier this month, and at the Federal Regulation of Securities Committee’s “Dialogue with the Director” session, new Corp Fin Director Meredith Cross, along with Deputy Director Brian Breheny, outlined Corp Fin’s agenda. In addition to reviewing comment letters and coming up with recommendations on already proposed rules, the Staff is working on rulemaking initiatives that include:
Expanding Schedule 13D/G reporting to cover short positions. The Staff is also considering changes to the beneficial ownership rules for purposes of 13D/G reporting;
Liberalizing shareholder communications to permit distribution of educational materials to shareholders regarding the proxy voting process, without the materials being deemed a proxy solicitation. The Staff is proposing to conduct a study regarding shareholder communications and will announce the results;
Amending credit rating agency rules to address conflicts of interest;
Improving asset-backed securities registration and disclosure; and
Amending Rule 163 (communications by WKSIs).
The Staff is also:
Keeping track of legislation in Congress to enable them to gear up to quickly to propose any rulemaking mandated by legislation;
Continuing its review of the proposed Regulation D amendments;
Discussing Section 5/short selling issues with General Counsel David Becker to determine how to move forward; and
Conducting a “Core Disclosure” review project for the purpose of reviewing all disclosure rules to ensure that the disclosure is “right” rather than just “more.”
The Staff is in the process of reviewing how the work of Corp Fin is being done and whether any improvements can be made, including in the area of maintaining and expanding transparency. The Staff has been improving the efficiency of such things as responding to no-action and waiver requests. Further, it was announced that a new products team has been established, headed up by Tom Kim and Paul Belvin. This team will coordinate the review of new financial products in the Division, including reviewing new products on a pre-filing basis.
We have posted notes from the “Dialogue with the Director” session (courtesy of Suzanne Rothwell at Skadden) in our “Conference Notes” Practice Area.
FINRA Announces Amendments to Conflicts of Interest Rules
A few months ago, I noted in the blog that the SEC had approved changes to NASD Rule 2720, which deals with underwriter conflicts of interest. Last week, FINRA issued Regulatory Notice 09-49, so the rules will now go into effect on September 14, 2009. The FINRA Regulatory Notice includes some clarifications of the rule. It should be noted for upcoming offerings that, in addition to the procedural safeguards contemplated in the amended rule, more prominent disclosure of conflicts of interest will be required in offering documents. In the Regulatory Notice, FINRA notes that, with respect to a takedown from a shelf registration statement that became effective prior to September 14, the disclosure requirements of the amended rule will apply to any post-effective amendment or prospectus supplement filed on or after September 14.
SEC and FINRA Issue Alert Regarding Leveraged and Inverse ETFs
It is certainly not surprising, given the increased focus on the risks arising from financial products, that the SEC and FINRA are now singling out particular products and highlighting their risks for investors. With the prospect of something along the lines of a financial product safety commission hanging out there to potentially infringe on its authority, I suspect that the SEC in particular wants to be proactive in addressing what could be the next big blow-up.
Earlier this week, the SEC and FINRA issued an Alert highlighting the perils of investing in leveraged and inverse exchange traded funds. In the Alert, the agencies note “[i]nvestors should be aware that performance of these ETFs over a period longer than one day can differ significantly from their stated daily performance objectives.” According to the Alert, inverse ETFs (also called “short” funds) are designed to provide the opposite of the performance of the index or benchmark that they track, which may be a broad market or sector specific index. Leveraged inverse ETFs (also known as “ultra short” funds) seek to achieve a return that is a multiple of the inverse performance of the underlying index.
These are clearly instruments which have a very specific purpose that is probably inconsistent with the type of investing strategy pursued by anyone who needs an SEC/FINRA reminder on the potential dangers of the product. Whether warnings like this one do any good in discouraging people from getting in over their heads – under what is essentially a “caveat emptor” system – is a big question that will be considered as the debate over the regulatory reform landscape continues.
As Broc previously noted in the blog, the FASB Codification project was launched back in July and will be effective for financial statements issued for interim and annual periods ending after September 15, 2009. Under the FASB Codification, existing references to U.S. GAAP materials are replaced by new references, thereby rendering all existing references obsolete.
Yesterday, the SEC issued an interpretive release in order to address the issues for SEC materials that are raised by the Codification. In the release, the SEC indicates that all references to the “legacy” FASB standards (and other private-sector US GAAP literature) in rules, regulations, releases and staff bulletins should be construed as the corresponding reference in the FASB Codification. The SEC notes that it will be embarking on a longer term project to revise U.S. GAAP references in its rules and guidance.
The SEC also asserts its GAAP supremacy in the release, noting that while the FASB Codification supersedes existing U.S. GAAP references from private standards-setters, it does not supersede any SEC rules or regulations. In this regard, the SEC notes that the FASB Codification is not the authoritative source for SEC rules and regulations, which are referenced in the Codification for the convenience of users.
Corp Fin Provides MD&A Guidance on Loan Losses
A new “Dear CFO” letter provides some guidance to financial institutions on what the Staff expects in terms of MD&A disclosure around an institution’s provision and allowance for loan losses. While the disclosure requirements have not changed, the Staff indicates that the current economic environment may require that a company “reassess whether the information upon which you base your accounting decisions remains accurate, reconfirm or reevaluate your accounting for these items, and reevaluate your Management’s Discussion & Analysis disclosure.”
The letter lays out the Staff’s disclosure expectations around high risk loans (e.g., option ARM products, junior lien mortgages, subprime loans), changes in practices for determining the allowance for loan losses, declines in collateral value and other potentially material considerations, such as risk mitigation strategies, the reasons behind changes in key ratios (such as the non-performing loan ratio), and how accounting for an acquisition under FAS 141R or accounting for loans under SOP 03-3 affects trends in the allowance for loan losses.
Benchmarking in the Spotlight
An article in yesterday’s WSJ discussed two new academic studies that have focused on benchmarking practices at public companies. While the article tends to sensationalize the issue a bit, it does note how the studies highlight one of the principal failings of benchmarking, which is the way in which peer groups are selected. In particular, the studies appear to demonstrate a bias toward selection of peer companies with better paid CEOs, compounded by a trend noted in one of the studies that approximately 40% of the companies reviewed indicated that they paid their CEOs more than the median level of comparable pay. In the article, the typical competitiveness arguments are noted in support of benchmarking. The article observes that these studies were made possible by the 2006 amendments to the executive compensation disclosure rules, which require disclosure of the list of peer companies when benchmarking is used.
Obviously this is not any breaking news; rather, what is noteworthy is that there is now some empirical support (which, of course, should always be taken for what it is worth and in consideration of its limitations) for some of the claims about benchmarking. It certainly helps to confirm what then-Corp Fin Director Alan Beller so eloquently said at our conference back in 2004:
“Too many boards have apparently operated on the principle that compensation must be in the top half or even the top quartile of some benchmark group (the basis of selection of which is often not disclosed) for the company to be competitive in attracting executive talent. (This principle apparently operates without regard to whether performance is commensurate to compensation). This approach produces what I have called the Lake Wobegon effect, where everyone is above average. Boards of directors ought to be able to do better than this.”
What can be done now, in light of this new evidence of the obvious? I think that one place to start is the useful guidance provided in the Obama Administration’s broad compensation principles announced in June, which call for developing an improved pay for performance paradigm that is less focused on external competitive positioning and more focused on relative performance of the company, achieved through a diversified set of performance criteria having an emphasis on long-term value creation.
For more analysis of the Administration’s compensation principles, be sure to check out this complimentary copy of the Summer 2009 issue of Compensation Standards. Also note that you can sign up to be a member of CompensationStandards.com for free for the rest of this year when you try a 2010 no-risk trial.
Back in April, the SEC proposed several alternative ways of addressing short sales, including either: (1) a market-wide approach; or (2) a security-specific circuit breaker approach. As I noted in the blog back then, it promised to be a monumental task for the Staff to reconcile the competing approaches and the many comments on the proposals in coming up with a final recommendation.
Yesterday, the SEC took the relatively unusual step of reopening the comment period for the proposals, which had closed June 19th. The SEC noted that it has received approximately 4,000 comment letters, as well as over 250 copies of 4 different standard letters, and a petition with 5,605 signatures. In reopening the comment period, the SEC has focused in particular on an alternative uptick rule, which would permit short selling at a price above the current national best bid. Comment was solicited on this alternative uptick rule in the initial proposing release, but it was not one of the proposals that was specifically advanced. In the new release, the SEC discusses the alternative uptick rule in greater detail and solicits specific comments regarding its potential application.
The reopened comment period runs for 30 days from the date of publication in the Federal Register.
Yesterday was the last day of the comment period for the shareholder access proposals. Some had asked the SEC to extend the comment period, but no such extension was forthcoming. Of course, the Staff and the Commissioners will still consider comment letters that are submitted “late,” although it depends on how quickly the rulemaking is moving as to whether a late letter has any influence. So far, only slightly over 170 comment letters have been submitted by my count, which is a far cry from the thousands of letters received on the prior proposals in 2003 and 2007. Here is Evelyn Y. Davis’s comment letter – surprisingly, she is not in favor of shareholder access!
The UK’s FSA Implements Pay Reforms for Financial Institutions
Last week, the FSA rolled out its compensation reforms applicable to large financial institutions in Policy Statement 09/15. The reforms were originally proposed through a Consultation Paper released back in March 2009. While the principles are limited in applicability to the largest UK banks, building societies and broker dealers (26 firms, as compared to 47 firms under the proposed rules), the FSA indicates in its announcement of the final rules that the Policy Statement “indicate[s] [FSA’s] thinking on what is viewed as good practice (where relevant) to all firms in these groups.” The Remuneration Code set forth in the Policy Statement is set to go into effect on January 1, 2010.
The rules are, of course, focused on the relationship between compensation and risk. The general requirement of the Code is that remuneration policies must be consistent with effective risk management. The Code sets forth a number of remuneration principles, which include:
1. the role of bodies responsible for remuneration policies and their members;
2. procedures and risk and compliance function input;
3. remuneration of employees in risk and compliance functions;
4. profit-based measurement and risk adjustment;
5. long-term performance measurement;
6. non-financial performance metrics;
7. measurement of performance for long-term incentive plans; and
8. remuneration structures (e.g., mix of salary and bonus, bonus deferral, performance criteria, guaranteed bonuses).
With the January 1, 2010 effective date rapidly approaching, the FSA plans to send letters out at the end of August to covered firms, asking for their remuneration policy statements. The firms will be expected to provide their remuneration policy statements to the FSA by mid-October, and then the regulator will hold meetings with the compensation committees and risk committees of the firms between November 2009 and February 2010. Some limited transition relief is provided for firms that have to amend or terminate employment agreements.
The Code puts the UK out in front in terms implemented of pay reforms, although the FSA notes that international discussions on alignment and implementation principles are underway with the Basel Committee on Banking Supervision and the European Council. As noted in this Bloomberg article, however, the FSA’s rule changes have not necessarily been welcomed in the UK, thanks to a belief that the FSA watered down the requirements and ended up leaving banks and brokers with substantial discretion with respect to pay decisions.
TALF Extended into Next Year
Yesterday, the Federal Reserve Board and the Treasury Department announced an extension to the Term Asset-Backed Securities Loan Facility. While acknowledging improvements in financial market conditions over the last few months, the Fed and Treasury noted a bleak outlook in the markets for securities backed by consumer and business loans and for CMBS. They will now be extending TALF loans against newly issued ABS and legacy CMBS through March 31, 2010. Given the time lags involved in new CMBS deals, TALF lending against newly issued CMBS will occur through June 30, 2010.
The Fed and Treasury also announced that they wouldn’t be expanding the types of collateral eligible for the TALF program. They indicate that they will continue to monitor the situation to see if any further extension is warranted, or if any additional collateral should be permitted.
On Friday, Corp Fin posted a number of new or revised C&DIs across a number of topic areas, including Securities Act Sections, Rules and Forms, Regulation S-K, Exchange Act Sections and Section 16. A summary of interpretations that are new or revised is provided on the “What’s New” page posted last Friday, and now each interpretation indicates “NEW” or “REVISED” along with the date in the bracketed notation at the end. For the purposes of determining the changes made in the revised C&DIs (as well as the C&DIs that have been withdrawn), you can review the “Outdated or Superceded Compliance and Disclosure Interpretations” page included in the “Archives” section.
A few of the notable Securities Act interpretations are as follows:
Securities Act Forms Question 118.02/Securities Act Rules Question 212.05: These interpretations were revised to clarify that an unqualified Exhibit 5 legality opinion must be filed no later than the closing date of an offering that is conducted as a takedown off of a shelf. The interpretations had previously indicated that time for filing the opinion was prior to any sales or contracts of sale, causing concern that the opinions would be required to be filed too early in the offering process. The change to the interpretation came about as a result of some dialogue between the Staff and the Securities Law Opinions Subcommittee of the Federal Regulation of Securities Committee at the ABA meeting in Chicago earlier this month.
Securities Act Sections Question 139.27: This new interpretation indicates that securities from a second private placement may be added by pre-effective amendment to a pending resale registration, so long as that private placement was commenced and completed consistent with the guidance in Release No. 33-8828 (Aug. 10, 2007).
Securities Act Sections Question 139.28: This new interpretation provides the Staff’s views on offers and sales of securities while a post-effective amendment to a registration statement is pending.
Securities Act Forms Question 116.20: This new interpretation gives some timely guidance for rights offerings, including the fact that General Instruction I.B.4. is not available (for either a new registration statement or for a takedown off of an existing S-3) for the securities underlying rights in a rights offering, given that the rights are not outstanding at the time of the filing of the registration statement (or conducting a takedown).
On the executive compensation disclosure front, the Staff provides guidance in Regulation S-K Question 117.03 on the reporting of compensation that as been recovered under a clawback policy, as well as reporting in the Non-Qualified Deferred Compensation Table of vested equity awards that provide for deferral of the receipt of such awards (see Regulation S-K Question 125.05).
Look for more discussion and analysis of the latest Compliance and Disclosure Interpretations in the upcoming issue of The Corporate Counsel.
The New Regulation FD C&DIs
The Staff has also made some more progress migrating the old Telephone Interpretations over to the Compliance and Disclosure Intepretation format, posting Regulation FD C&DIs for the first time on Friday. For the most part, these interpretations are the same as the Regulation FD interpretations from the Fourth Supplement to the Manual of Publicly Available Telephone Interpretations. Here is how the new C&DIs relate to the old telephone interpretations:
C&DI Question 101.01 – same as Interpretation 1 (note that this interpretation provides an explanation of what it means to confirm a prior forecast and how to avoid confirming a prior forecast)
C&DI Question 101.02 – same as Interpretation 2
C&DI Question 101.03 – same as Interpretation 7
C&DI Question 101.04 – same as Interpretation 9
C&DI Question 101.05 – same as Interpretation 10
C&DI Question 101.06 – same as Interpretation 11
C&DI Question 101.07 – same as Interpretation 12
C&DI Question 101.08 – same as Interpretation 15
C&DI Question 101.09 – same as Interpretation 13
C&DI Question 101.10 – same as Interpretation 14
C&DI Question 102.01 – same as Interpretation 3
C&DI Question 102.02 – same as Interpretation 5
C&DI Question 102.03 – same as Interpretation 6
C&DI Question 102.04 – revised Interpretation 8 (changes were not substantive)
C&DI Question 102.05 – revised Interpretation 4 (providing additional justification and adding concepts of webcast or broadcast)
C&DI Question 102.06 – revised Interpretation 16 (changed the answer to a categorical “no” without providing any additional explanation)
C&DI Question 102.07 – new, referring to the SEC’s guidance in Release No. 34-58288
In updating the Regulation FD guidance, the Staff did not reissue Interpretation 17, which had reiterated the SEC’s position that it did not intend, with the adoption of Regulation FD, to change the practice of using a press release to disseminate earnings information in advance of a conference call or webcast. It would seem that the interpretation is no longer necessary, given that the earnings release model has continued largely unchanged for almost a decade following adoption of Regulation FD.
On Friday, the PCAOB announced that the SEC had approved the Board’s rules governing the reporting regime that will be applicable to registered accounting firms. These rules implement Section 102(d) of the Sarbanes-Oxley Act, which required each registered public accounting firm to submit an annual report to the PCAOB, along with more current information as may be deemed necessary. The changes also included rules governing succession to the registration status of a firm. The rules will take effect on October 12, 2009.
Recently, the Investor Responsibility Research Center Institute and PROXY Governance teamed up to conduct this study about the voting policies and voting records of seven of the largest exchange-traded fund sponsors, which account for around 94% of the $500 billion ETF market. Given this large amount, ETFs can have a significant influence over corporate matters.
The study essentially found that practices were all over the map, for both the level of detail of each ETF’s voting guidelines as well as their voting philosophies and patterns. Some funds were much more likely to vote with management compared to other funds (90% of the time vs. 23%); and those funds that were less likely to vote with management relied more heavily on a proxy advisory firm for voting advice. I guess the diversity in voting practice is not too surprising, given that this is a relatively young investment product in a rapidly expanding market.
If you buy an ETF, does the ETF has the right to vote at all of the underlying companies owned by that ETF? The answer can be a little complicated in that the “ETF” term has become bastardized such that it encompasses several categories of investment structures, some of which technically aren’t ETFs. But according to the SEC’s “Q&As,” ETFs are investment companies – and therefore, the voting rights are held by the fund managers, not the fund shareholders. ETFs are not mutual funds (and cannot call themselves mutual funds).
In June, a US District Court Judge dismissed an 8-year old shareholder lawsuit accusing Oracle CEO Larry Ellison of insider trading and misleading investors. The case – Nursing Home Pension Fund v. Oracle – stems from back in early ’01, when Oracle’s shares dropped 21% after the company announced that it would miss its quarterly earnings forecasts. The suit alleged that Ellison sold $900 million of Oracle stock before the announcement, knowing that there were problems with one of Oracle’s products. The company claimed Ellison sold stock to exercise options that were going to expire and had to be sold during open trading windows.
This is the same case that was dismissed in ’03 by the District Court, a decision that was reversed on appeal in ’04. Ellison donated $100 million to charities and paid $22 million to resolve a separate insider trading suit in ’05. That settlement followed the dismissal of a similar suit in Delaware against Ellison. For more on the case and its long history, see this Bloomberg article.
IFRS Study: More Trouble Than Its Worth?
The debate over IFRS continues to rage. A recent study finds that the US doesn’t have much to gain from adopting International Financial Reporting Standards. The study examines the economic consequences of mandatory IFRS reporting around the world and finds that, on average, there are several benefits to adopting IFRS, including increased market liquidity, decreased cost of capital and increased equity valuations. However, in countries like the US, where there is already a high-quality accounting infrastructure in place, there may be minimal room for improvement.
Additionally, while some argue that adopting IFRS in the US would make it easier for investors to compare compaies with those in other countries and decrease the cost of reconciliations, the study discovered “weak” evidence of any comparability benefits. You can follow the debate over IFRS in our “IFRS” Practice Area, including this Watson Wyatt article that examines a number of comment letters.
Following on the heels of another insider trading case asking important questions – SEC v. Cuban – the SEC recently prevailed in another insider-trading case: SEC v. Dorozhko. In its decision, the Second Circuit held that hacking into a secure server and trading on the basis of information obtained constitutes a “deceptive device” under Section 10(b) – even though the guy didn’t owe a fiduciary duty to the company. Read some analysis in Tom Gorman’s “SEC Actions” Blog – and note we’ve been posting memos relating to this case in our “Insider Trading” Practice Area.
In this podcast, Bill Kelly and Billy Fenrich of Davis Polk discuss the Dorozhko ruling, including:
– How does the decision differ from SEC v. Cuban?
– What are the implications of these two opinions?
Court Upholds SEC’s Bar of an Accountant for “Unreasonable Conduct”
A few weeks ago , the DC Circuit Court of Appeals upheld a Rule 102(e) decision of the SEC – in Dearlove v. SEC – to bar an accountant from practicing before the SEC for conduct that was merely “unreasonable.” The Court affirmed the SEC’s ’06 order that had barred the Deloitte engagement partner on the audit of Adelphia Communications.
The Court held that Rule 102(e) did not require the SEC to employ a common law negligence standard since generally accepted accounting standards was the standard without requiring the SEC to elicit expert testimony on the reasonableness of petitioner’s conduct.
The Challenge to PCAOB’s Constitutionality
In this podcast, Merritt Cole of White and Williams discusses the case that the Supreme Court recently agreed to hear challenging the constitutionality of the creation of the PCAOB, including:
– What’s the history of this case?
– What are the issues before the Supreme Court?
– If the Supreme Court deems the PCAOB’s creation unconstitutional, what happens to it?
– Are there any other consequences if the Supreme Court holds the PCAOB unconstitutional?
Recently, the mass media has been noticing the rising use of automated advocacy calls that companies sometimes use to help bring in the vote (recall the rising use of these calls for political elections over the past decade). For example, see this Forbes’ article. This negative attention illustrates the tightrope that companies – and their proxy solicitors – will walk next year when broker votes disappear and the need for these calls increases by a factor of five.
To learn more about automated advocacy calls, I caught up with Tom Ball of Morrow & Co. in this DealLawyers.com podcast so he could tell us about the latest trends using these voicemails, including asking him:
– What are these automated advocacy calls? How common are they?
– How are the calls best used?
– How much do they cost?
– Who gets hired to do the “voiceovers” for the calls?
I also posted some samples of these voicemails in case you have never heard one: here is one sample voicemail – and here’s another sample).
Survey Results: Audit Committee Oversight and Subsidiaries
Probably due to the narrowness of the topic, our recent survey on “Audit Committee Oversight and Subsidiaries” didn’t have too many respondents. However, there were some interesting results.
Many companies have adopted stock ownership guidelines requiring executives and directors to own stock in their company based on a multiple of their salaries or board retainers. With the current market downturn and drop in net worth for many people, some companies are changing their stock ownership guidelines. Here is our latest “Quick Survey on Stock Ownership Guidelines” to gauge what folks are doing. Please take a moment to respond to this anonymous survey.
Alternative Fee Arrangements for Deals: Little Less Talk and Lot More Action?
We have posted the transcript from our recent DealLawyers.com webcast: “Alternative Fee Arrangements for Deals: Little Less Talk and Lot More Action?”
