We recently mailed the July-August issue of The Corporate Counsel. This issue includes pieces on:
– NSMIA’s Rule 506 Pre-Emption Follow-Up–Risdall Reversal
– The Requirement to Include Late 8-K Information in Form 10-Q/K
– 8-K Item 5.02–When Does the Reference Year Change for Determining the High-Paid NEOs?
– S-K Item 401– Identifying Executive Officers in the 10-K/Proxy Statement
– Exhibit Filing Items
– The Staff’s Longstanding Prohibition on Selling Shareholder Registration of Shares Prior to Issuance– Universal vs. Automatic Shelf Registration
– Federal Legislative Response to Boards Declining Tendered Resignations of Losing Nominees–Pre-Empt State-Law Holding Over?
– SEC’s “IDEA”– Not a Great Idea
– Ramifications of the New SEC and Treasury Proposals
Act Now: Get this issue on a complimentary basis when you try a “Rest of ’09” for free when you try a 2010 no-risk trial today.
Nasdaq Speaks ’09: Latest Developments and Interpretations
We have posted the transcript for our recent webcast: “Nasdaq Speaks ’09: Latest Developments and Interpretations.”
Sponsor An Executive: Hijinks
If you need a laugh, check out this Canadian commercial – a spoof on executives losing money in the market…
We just dropped the Summer 2009 issue of the Compensation Standards print newsletter in the mail to members of CompensationStandards.com (members of that site get the print newsletter as a bonus).
Complimentary Copy: Since the issue provides timely analysis of all the regulatory reforms that have recently taken place, we have posted a complimentary copy of the Summer 2009 Issue so that you can get up-to-speed on the radical changes taking place in the executive pay area.
Free for Rest of ’09: Since we know that times are still tough for many, we offer you the ability to be a member of CompensationStandards.com for free for the rest of this year when you try a 2010 no-risk trial. With all the change going on in the executive compensation area, you can’t afford to be without the critical resources on that site (and the Compensation Standards print newsletter, which you get as a bonus for being a member of CompensationStandards.com).
More on “Will Facebook Sidestep Google’s Pre-IPO Problems?”
Recently, I blogged about my concern that Facebook might confront the same Section 12(g) issues that plagued Google – forgetting to register at the 500 shareholder/$10 million assets threshold.
I didn’t do enough homework as it turns out that the Facebook did indeed seek relief by filing a Section 12(h) application with the SEC back in 2008. And the SEC granted the relief, providing a limited exemption for certain employee equity grants (this Red Herring article provides a summary explanation).
These 12(h) applications are pretty rare – but I should know better as I was the guy who processed them for a spell back when I was in Corp Fin’s Office of Chief Counsel many moons ago…
A Word of Caution: Take with a Grain of Salt
A member recently sent us this issue of “SEC Today,” which had to issue a correction to a prior issue because someone mistook a technical correcting release from the SEC for something substantive. I am not poking fun at them as mistakes do happen – just look at my mea culpa above.
The reason for me to note this is to remind you to correct us if you see mistakes in this blog (or elsewhere on our sites). It does happen and we will go back and make the fix as soon as we are notified. It ain’t easy being a “journalist”; it can be nervewracking posting these blogs everyday without the layers of review that the mainstream media enjoys. Any and all feedback is appreciated and always kept to ourselves unless we receive permission to use it otherwise.
As I head out for a two-week email-free vacation (got some blogs tee’d up for next week and Dave will be manning the ship), I have to admit surprise by Judge Jed Rakoff’s decision to not approve this week’s settlement between the SEC and Bank of America over allegations of misleading proxy materials because the bonus obligations due to Merrill Lynch employees were not fully disclosed.
BofA had agreed to pay a $33 million fine, which I suggested recently was on the high side for a non-scienter violation. Personally, I thought the SEC was trying a new approach and acting fast – as bringing charges against individuals will take considerably longer. Take my poll below to express what you think.
According to this Reuters article, the Judge’s order states: “Despite the public importance of this case, the proposed consent judgment would leave uncertain the truth of the very serious allegations made in the complaint.” The order is linked from this “WSJ Law Blog.” Judge Rakoff will hold a hearing on the case on Monday in his US District Court, Southern District of New York.
FINRA Proposes New Fixed Priced Offering Rule
On Tuesday, FINRA proposed new Rule 5141 “Sale of Securities in a Fixed Price Offering,” which would eliminate NASD Rules 2730, 2740 and 2750. Under the proposal, the definition of “fixed price offering” would build on the existing definition with minor changes and would continue to make clear that an offering can have more than one stated fixed price (e.g., volume discounts and sales net of commissions to the issuer’s employees).The comment period expires on September 18th.
Proposed Rule 5141 would:
1. Incorporate the standards of Rule 2740 by prohibiting a broker-dealer that participates in a fixed price offering selling syndicate from offering securities to any person that is not a member of such selling syndicate at a price below the stated public offering price (known as the “reduced price”), with an exception to permit sales to a person to which the broker has or will provide research (provided that the purchaser pays the stated public offering price and the research falls within Section 28(e)3)(A) of the ’34 Act;
2. Incorporate the standards of Rule 2730 by defining a “reduced price” to include any purchase of – or arrangement to – purchase securities from a person at more than the fair market price in exchange for securities in the offering; and
3. Modify the prohibition in Rule 2750 on sales to “related persons,” by permitting a member of the selling syndicate to sell securities to an affiliate, subject to compliance with FINRA Rule 5130 (ie. IPOs) and that any other transactions between the broker and the affiliate unrelated to the sale or purchase of securities in a fixed price offering are part of the normal and ordinary course of business (i.e., thereby avoiding the recapture of the selling concession through the affiliate as intended to be prevented by the existing rule).
On Wednesday, FINRA withdrew its ’04 proposal that would have clarified the application of then-Rule 2710 to shelf offerings. Note that the ‘04 proposal remains useful as a resource regarding the standards for the current Form S-3/F-3 shelf offering exemptions and the views of the FINRA Staff on the calculation of underwriting compensation for such offerings.
FINRA Officially Creates the “Limited Representative – Investment Banking”
Back in April, I blogged about the SEC approving FINRA’s rule change that creates a new limited representative category – Limited Representative-Investment Banking – for persons whose activities are limited to investment banking, including those who work on the equity and debt capital markets and syndicate desks. On Wednesday, FINRA issued this regulatory notice creating the mandatory registration regime – effective November 2nd – and the SEC issued this order.
Poll: The SEC and Bank of America Settlement
Take a moment to participate in this anonymous poll:
– Treasury’s Mark Iwry, Senior Advisor to Secretary Geithner
– RiskMetrics’ Pat McGurn and Martha Carter
– NY Times’ columnist Joe Nocera
– Noted counsel John Olson and Marc Trevino
– Renowned consultants Fred Cook, Ira Kay, Mike Kesner, Doug Friske, James Kim and Don Delves
– Panel of respected Directors
– Investor advocates Ed Durkin, Meredith Miller and Paul Hodgson
Now that Congress is moving on say-on-pay (and other compensation-changing initiatives), you need to register now to attend our popular conferences and get prepared for a wild proxy season. Remember that the “6th Annual Executive Compensation Conference” is paired with the “4th Annual Proxy Disclosure Conference” (held on 11/9) – so you automatically get to attend both Conferences for the price of one. Here is the agenda for both Conferences.
Act Now: Register now to attend live in San Francisco or by video webcast. If you can’t make these dates, note that both Conferences will be available through a video archive.
SEC Enforcement Staff Gains Authority to Issue Subpoenas Without Commission Blessing
As noted by this Reuters article, SEC Enforcement Director Rob Khuzami delivered a speech yesterday about his first 100 days in the job (the text of the speech is not yet available). Rob said that the SEC plans to issue more subpoenas and give people more incentives to cooperate with investigations. Based on the article, here are the speech’s highlights (most of which SEC Chair Schapiro had already announced):
– Yesterday, the SEC adopted final rules that provide the Enforcement Staff with the power to issue subpoenas by getting approval only from supervisors, not the full Commission – this will make it much faster and easier to get formal orders. Rob said that the increased subpoena power may induce companies to be more aggressive in addressing wrongdoing to avoid “the necessity” of a subpoena. Some companies do not disclose SEC probes before subpoenas are actually issued.
– The SEC has plans to seek authority to submit more immunity requests to the Justice Department to encourage people to testify without fear of criminal prosecution.
– The SEC plans to create new groups to investigate cases involving asset management, foreign corrupt practices, market abuses, municipal securities and public pensions and structured products. One group already exists to investigate subprime mortgage abuses. Management will be streamlined.
– The SEC plans to create a new office to monitor incoming tips and complaints and hire its first chief operating officer to boost efficiency and speed the reimbursement of funds to harmed investors.
– The Enforcement Staff will need Rob’s permission for “tolling agreements” that give them more time to conduct investigations. He said these have become too common, causing delays that reduce the SEC’s accountability.
Another Sign of the Times: Birth of the “Investors Working Group”
Recently, it was announced that over 50 investor groups had joined to form the “Investors Working Group,” a group co-sponsored by the Council of Institutional Investors and the CFA Institute Centre for Financial Market Integrity. The group aims to lobby Washington over how to deal with the financial crisis and the co-chairs are two former SEC Chairs, Arthur Levitt and William Donaldson. Here is the related press release – and here is their initial report recommending a host of regulatory reforms.
With the SEC bringing this accounting fraud case against General Electric yesterday – costing the company a fine of $50 million – it’s clear that the SEC’s new aggressive approach to Enforcement is in full-gear with a trio of high-profile cases during the past two weeks (note that it’s likely that some – if not all – of these cases were commenced under the prior SEC Chair’s watch).
This case follows the Bank of America settlement, which cost that company a fine of $33 million. Some have complained that $33 million was too small an amount. I had the opposite reaction, that’s a large amount for a mere one-time disclosure violation allegation. Bear in mind that yes, Rule 14a-9 is an anti-fraud rule – but it’s a “non-scienter” fraud provision, so there is no requirement for intent or knowledge of wrongdoing. As a result, penalties often are pretty small – in fact, I recall that many cases are often settled with a C&D order and no fine at all (eg. GE’s “disclosure of perks” settlement with the SEC in ’04). Note the third in the trio is the CSK Auto clawback action.
These cases follow SEC Chair Schapiro’s comments back in April about overhauling the approach that the SEC’s Enforcement Division will take when considering which cases to pursue. We have posted memos regarding the SEC’s new settlement policy, etc. in our “SEC Enforcement” Practice Area.
As is true often in life, sometimes quantity is confused for quality – and the consequences can be disastrous. In Enforcement’s case, the Division’s former goal seems to have been a high number of cases brought (undoubtably to impress Congress, whose focus likely would be on numbers come funding time) – so low-hanging fruit often was pursued at the cost of not tackling some important cases (eg. Madoff). It sounds like that will now change.
I personally haven’t done the math for Enforcement’s reported caseload over the years – but a member recently sent me these thoughts:
I am very skeptical of the Enforcement numbers. Specifically, the SEC’s delinquent filing list recently constitutes a couple hundred each year. The delinquent filing list had 220 for fiscal ’08.
Enforcement claimed 671 completed actions in fiscal 2008. How many delinquent filing cases are included in this total? The entire group of 220? In comparison, the SEC listed only 11 delinquent filer cases in fiscal ’03. If the improvement in Enforcement’s number of cases over the past five year is due solely to delinquent filers, I think this fact pattern in problematic given that delinquent filings really isn’t fraud and simply requires the Staff to send out letters asking the company when they intend to become current.
This thought is not far from what Judith Burns of Dow Jones wrote in an article last Fall. Here is an excerpt from that article:
The Securities and Exchange Commission’s enforcement division brought a near record level of cases in the just-ended 2008 fiscal year, results that critics say are padded with relatively easy actions against companies that are late in filing quarterly or annual reports.
SEC Chairman Christopher Cox heralded the results Wednesday, calling fiscal 2008 the enforcement division’s second-best on record. That would put the total between the 656 enforcement cases brought in fiscal 2007 and the record 679 actions in fiscal 2003, the agency’s high-water mark. The SEC is expected to issue official figures within weeks.
Critics say the results are inflated by a record number of so-called 12(j) actions to deregister shares in companies that lack current financial reports. The SEC brought about 50 such cases in fiscal 2006, a level that appears to have doubled in fiscal 2008, which ended Sept. 30, accounting for roughly 15% of all cases.
Individuals familiar with the matter, who agreed to speak anonymously, said that in early 2008 the SEC’s enforcement division was on track to bring an abysmally low number of cases for the year. One reason for the declining output was a rush to issue cases at the end of fiscal 2007, leaving little in the pipeline for fiscal 2008, according to these individuals.
Delays in getting cases before by the five-member commission also are a factor, these individuals say. Critics say new internal controls and paperwork requirements are throwing sand in the enforcement division’s gears, reducing the amount of time that SEC cops have to spend on legwork.
Deregistration actions provided easy filler, allowing the SEC to paint a picture of an aggressive enforcement staff, according to critics. Some decry the practice, saying the cases need to be brought, but should not be counted toward overall output. Others worry that the SEC is using accounting tricks, sending the wrong message to corporate America: do as I say, not as I do.
More on “Early Problems for XBRL? A Mismatch with FASB’s GAAP Codification”
Recently, I blogged about the SEC’s mandatory XBRL deadline and the mismatch caused by the FASB’s new codification of accounting standards that was launched on July 1st (which becomes effective on September 15th) since all of the mandated XBRL standards are tied to the FASB’s now-superseded standards.
Yesterday, an extension taxonomy was jointly released by the FASB and XBRL US that is intended to bridge the GAAP between the old references and the codification. It’s a start, but Neal Hannon notes that the new codification references will not be accepted by the SEC’s EDGAR. So the mismatch problem still remains.
Neal points out another disconnect:The new extension taxonomy provides pointers only to the public sections in the Codification. In other words, if you are in an XBRL tool – which nearly all folks will be when working with XBRL – and want to see the authoritative literature, the hyperlink takes you out of your XBRL software and asks you to log into the FASB Codification to see the results. This is a major pain – but should eventually be rectified in the SEC’s next release of the taxonomy, slated for sometime early next year. In the meantime, those looking to discover a direct link from XBRL elements to the underlying authoritative literature will have to do a bit of discovery work on their own…
More on “The Mentor Blog”
We continue to post new items daily on our new blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Some Thoughts on Board Leadership Disclosure
– Rights Offerings: How Does the “European” Model Stack Up?
– Very Candid Disclosure: From the Company that Brought You “Dead Frogs”
– Carbon Emission and Cap Disclosures: Likely to Come Soon
– Managing Your Law Department: Top Ten Thoughts
– List of Online Job Databases
– The Kiss of Death: “Best of…”
– Regulation FD: When Does Information Become “Public?”
We’re very excited to announce that Corp Fin Deputy Director Shelley Parratt has joined our All-Star cast and will serve as the keynote for our “4th Annual Proxy Disclosure Conference.”
Now that Congress is moving on say-on-pay (and other compensation-changing initiatives), you need to register now to attend our popular conferences and get prepared for a wild proxy season. Remember that the “4th Annual Proxy Disclosure Conference” is paired with the “6th Annual Executive Compensation Conference” – so you automatically get to attend both Conferences for the price of one. They will be held November 9-10th in San Francisco and via Live Nationwide Video Webcast. Here is the agenda for the Conferences. Register now.
SEC Settles Charges that BofA Failed to Disclose Merrill Lynch Bonus Payments
As noted in this press release, yesterday, the SEC settled charges that Bank of America misled investors about the bonuses paid to Merrill Lynch executives at the time of its acquisition of the firm. Bank of America agreed to settle the SEC’s charges and pay a penalty of $33 million. Here is the SEC’s complaint – and here is the litigation release.
The SEC alleges that in the joint merger proxy statement, Bank of America stated that Merrill had agreed that it would not pay year-end performance bonuses or other discretionary compensation to its executives prior to the closing of the merger without Bank of America’s consent. In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008.
Note that New York Attorney General Cuomo announced that his investigation was continuing – so this saga may not be over…
Broadridge Speaks on Latest E-Proxy & Proxy Season Stats
Recently, I blogged about Broadridge’s release of data regarding the latest proxy season. Now, I’ve caught up with Lyell Dampeer, President of Broadridge Financial Solutions, to ask him a few questions in this podcast including:
– What were the e-proxy statistics for this past proxy season?
– What should companies be thinking about for next proxy season?
– How did the other proxy season statistics look?
On Friday, the House passed H.R. 3269 “Corporate and Financial Institution Compensation Fairness Act of 2009,” which is Rep. Barney Frank’s latest version of a say-on-pay bill, mostly along partisan politics lines by a vote of 237-185. This follows the marked-up version of the bill that the House Financial Services Committee passed on Tuesday. There are notable differences between what the House passed and the language that the Obama Administration (through the Treasury Department) recommended in June.
Two years ago, the House passed a different say-on-pay bill by a vote of 269 to 134 (afterwards, then-Sen. Obama floated the same bill in the Senate but it never went anywhere). The Senate is not expected to consider similar legislation until sometime after the August recess – and it’s expected that there will be a tougher battle in the Senate over the bill’s terms.
Here is a final version of the bill. And here is the House Financial Service Committee’s marked-up version of the bill (with the only reported major change being the clawback reversal noted below) – and here is that Committee’s report.
Below are key provisions of the bill’s three major components, with commentary gleaned from a variety of sources:
1. Say-on-Pay: Section 2
– Likely Not Applicable to ’10 Proxy Season – Effective date for this Section is six months after SEC adopts rules implementing this Section; and the SEC is directed to adopt rules within six months of enactment of the bill into law. The upshot is that say-on-pay is not likely to be applied to the ’10 proxy season, but perhaps could be effective later in 2010. Treasury’s recommendation was to adopt something before the ’10 proxy season.
– FPIs Excepted – No Triennial Alternative – Requires annual non-binding vote on disclosure of executive compensation arrangements and “golden parachutes”; mark-up clarified that neither applies to foreign private issuers. Note that the idea of a triennial vote (ie. Carpenters Union’s alternative) was considered during the mark-up but defeated.
– SEC Might Exempt Small Businesses – Gives authority to the SEC to exempt certain types of companies from say-on-pay; SEC might use this to exempt smaller businesses. Treasury recommendation didn’t address this topic.
– Investment Managers Report How They Vote – Requires certain types of investment managers to report annually how they voted on say-on-pay at the companies for which they own at least $100 million of their equity at some point during the preceding 12 months. Treasury recommendation didn’t include this likely-to-be controversial item.
– No Tabular Format for Golden Parachute Disclosures – For say-on-pay on golden parachutes, tabular format eliminated during mark-up; and mark-up clarified that golden parachutes previously approved by shareholders must be disclosed, but need not be voted upon again. I can’t figure out why tabular disclosures were dropped – in my opinion, dropping it was not a good idea.
– Clawbacks Still Possible Even If Shareholders Approve Compensation – The mark-up had produced an amendment that would have prohibited clawbacks of compensation arrangements that had approved by shareholders – the only amendment made to the marked-up bill on Friday was striking this new provision. So under the bill approved by the House, clawbacks are still possible even if the compensation disclosure has been approved by shareholders.
2. Compensation Committee Independence: Section 3
– Even Longer Effective Date – The exchanges (as directed by the SEC) wouldn’t be required to adopt listing standards to implement this Section until 9 months after the bill was enacted.
– Compensation Committees Must Be Independent – The thrust of this section is to have independent compensation committees (although mark-up eliminated requirement that comp committee members not be “affiliated persons”). Some of the more controversial aspects of the Treasury’s recommendations were reined in by the House bill, as noted below.
– SEC Might Exempt Small Businesses – Gives authority to the SEC to exempt certain types of companies from this Section; SEC might use this to exempt smaller businesses. Treasury recommendation didn’t address this topic.
– No Need to Disclose Why Didn’t Hire Compensation Consultant – During the mark-up, the requirement to provide potentially embarrassing disclosure regarding why a compensation committee didn’t hire a consultant was struck. However, companies would be required to provide funding for compensation consultants (as well as lawyers) if the compensation committee wanted to hire one.
– Compensation Consultants Must Be Independent – The SEC must adopt independence standards for compensation consultants. The mark-up clarifies that these standards must be competitively neutral.
– Lawyers Need Not Be Independent – During the mark-up, the requirement for the compensation committee’s counsel to meet independence standards was eliminated.
– SEC’s Study – Within two years, the SEC must provide a study regarding the impact of its new independence standards to Congress.
3. Regulation of Compensation at Large Financial Institutions: Section 4
This Section would regulate pay at large financial institutions – those with more than $1 billion in assets – particularly their incentive-based pay packages. It would require federal regulators to prohibit “certain compensation” structures at large financial institutions if they could have a “serious adverse effect on financial stability.” It would also require federal regulators to adopt rules requiring these institutions to disclose their incentive-based pay plans for executives and employees – and then the regulators would determine if the pay packages are “aligned with sound risk management.”
This is quite a controversial Section (eg. the issue of whether the government can abrogate a private contract) – and it was not part of the Treasury’s recommendations. I would be surprised to see this Section survive the Senate, even with all the public anger over Wall Street bonuses. This recent Bloomberg article notes skepticism over this Section expressed by the Obama Administration and some Senators.
There is a hodge-podge of other provisions in the bill. One example is a GAO study of the correlation between compensation structure and excessive risk-taking. Note that the foregoing recap is subject to the caveat that we haven’t yet seen the final bill as adopted.
A First: Shareholders Approve American Railcar’s Reincorporation to North Dakota
The stockholders have spoken at American Railcar. As I blogged a while back, Carl Icahn owns a majority stake in this company and management proposed the reincorporation to North Dakota. According to this Form 8-K recently filed by the company, it’s now a North Dakota corporation governed by the North Dakota Publicly Traded Corporations Act.
In comparison, a similar reincorporation proposal at Biogen didn’t fare too well with that company’s shareholders (as I blogged last month, about a dozen companies received shareholder proposals seeking reincorporation to North Dakota – so these proposals were not management-driven like American Railcar’s). According to this Form 8-K, Biogen shareholders cast 23 million votes “for” and 213 million “against” the reincorporation proposal. So Biogen remains a Delaware corporation. Thanks to Keith Bishop for giving me a “heads up” on these…
Our August Eminders is Posted!
We have posted the August issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
In our “Q&A Forum,” we have reached query #5000 (although the “real” number is really much higher since many of these have follow-ups). I know this is patting ourselves on the back, but it’s nearly eight years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been over 17,000 questions answered.
You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis and that any answers don’t contain legal advice.
You’ve never seen me so happy! They’re bringing Jimmy back! New “Rockford Files” coming soon…
Changes in the SEC’s Misappropriations Theory? SEC v. Cuban
Many have been following the battle between Mark Cuban and the SEC over Cuban’s alleged insider trading, partly due to Cuban’s prolific personality as I blogged about a few months ago.
A few weeks ago, a federal court – US District Court for the Northern District of Texas – dismissed the SEC’s insider-trading complaint against Cuban in SEC v. Cuban. The decision has stirred quite a bit of debate over the future of the misappropriations theory. We are posting memos analyzing the case in our “Insider Trading” Practice Area.
In this podcast, Ken Winer of Foley & Lardner discusses the court’s decision in Cuban, including:
– Case’s implications for executives who are about to provide material, nonpublic information to a third party
– Whether the dismissal means that it will be safe for someone in Cuban’s position to trade based on information obtained from an executive
Consideration Delayed: Formation of a New “Consumer Protection Agency”
While the House gears up today to vote on a say-on-pay bill (here is the latest version of the bill; here is Mark Borges’ analysis of what amendments will be offered on the floor today), Rep. Barney Frank and his House Financial Services Committee have delayed a vote on the bill that would create a new “Consumer Protection Agency” amid concerns from the business community. A number of Senators (including Democrats) have already expressed concern over this agency. Over 20 business groups have also urged a delay including the Chamber of Commerce and the AICPA, as noted in this article.
As an aside, check out this recent blog from the FEI’s Edith Orenstein about the yin-yang of regulation.
Recently, I cautioned how “dark pools” may be one of the next big problems facing our markets. A member – who probably knows more about this area than I do – disagreed and says:
I have a number of friends working for dark pools – and I remember reading some of the initial SEC market reports on stock order preferencing and internalization back in the day that were precursors to this type of trading – and I don’t share your dire opinion. Because in the end, dark pools provide more liquidity and help narrow stock spreads and because, quite frankly, it’s inevitable that automated algorithmic software agents will disintermediate human market makers and specialists.
The biggest problem is that they need to get rid of that name “dark pools” as it sounds like something out of a Harry Potter book – and will one day result in Henry Waxman and Maxine Waters calling for a special House investigation. In the end though, dark pools will get more regulated – not so much because they are bad – but because institutional wholesale traders who made a living “working” large orders by calling up their Ivy League buddies on other trading desks can not, in the long run, compete with the automated algorithms associated with the dark pools so in order to preserve their “buggy whip”-like jobs stricter regulations will be demanded to protect them from the algorithm software engineer menace.
It’s Here: New Edition of Romeo & Dye’s “Section 16 Forms & Filings Handbook”
We just started mailing the new ’09 edition of the popular Romeo & Dye “Section 16 Forms & Filings Handbook,” with numerous new – and critical – samples to those that ordered it. If you don’t try a no-risk trial to the “Romeo & Dye Section 16 Annual Service,” we will not be able to mail this invaluable resource to you. You can use this order form or order online.
The Annual Service not only includes the “Forms & Filings Handbook,” it also includes the popular “Section 16 Deskbook” and the quarterly newsletter, “Section 16 Updates.” Get all three of these publications when you try a no-risk trial to the Romeo & Dye Section 16 Annual Service now.
SEC Offers Its News Via Email
For those of you that don’t feel pounded already with email alerts about breaking news, the SEC recently added a free service where you can subscribe to receive their latest developments via email. You can select from a menu as to what type of news you wish to receive (unfortunately, it doesn’t offer choices by type of law – rather, it’s by the type of document the SEC has released). This builds on pre-existing services that the SEC offers: RSS feeds and Twitter.
So if you had this service, you would have seen Corp Fin Director Meredith Cross’ first written statement since she rejoined the SEC in this testimony – entitled “Protecting Shareholders and Enhancing Public Confidence by Improving Corporate Governance” – that she delivered yesterday to the Senate Banking Committee as soon as it was made available …
By the way, I can’t find a spot to “follow” (ie. sign-up) for the SEC’s Twitter feed on their site. However, you do get the option to do so when you subscribe to their email alerts or you can just do so by going to their Twitter page (they already have over 2700 followers). But most folks provide a link to their Twitter feed on their site or blog, like I do on the top left side of this blog for my Twitter feed. Am I missing something?
br /> For those that regularly read this blog, you know I was happy to see the SEC propose a requirement that would force companies to disclose the voting totals from their shareholder meetings more timely. It has always amazed me that some companies stonewall on the vote results – it’s a poor PR move as it riles shareholders (see this example) and they have to disclose it eventually. But I imagine they do this in the hope that shareholders – and the financial press – will lose
interest in the story.
The SEC proposes that disclosure be made within four business days after the end of a shareholder meeting (on a Form 8-K or a periodic report). For a contested director election, the 8-K would be due within 4 business days
after the preliminary voting results are determined. The proposal begs the question as to when “preliminary voting
results are ‘determined'” (i.e. trigger date). Maybe I’m missing it, but there doesn’t seem
to be any exception for other types of contested matters? Anyways, if it’s a contested director election, there could be two Form 8-Ks – one within four business days after the meeting’s end based on a preliminary vote and another one within four business days of the final vote being certified.
Importance of Tabulation Process
On page 44 of the SEC’s proposing release, the SEC provides its discussion of this proposal – and a cost analysis is on page 96. Understandably, there is not a detailed discussion of the tabulation process and what’s involved. But as I wrote about in the Fall ’08 issue of InvestorRelationships.com – in my interview with Carl Hagberg (whose upcoming issue of the Shareholder Service Optimizer will provide pointers on the inspection process) – the time is now for companies to rethink how they process their votes as well as who they hire to do it.
For starters, you probably want to hire only those inspectors that have a well-defined process about how they inspect – and you probably should hire only those inspectors whom you feel comfortable would pass muster under the pressures of litigation (eg. an entity that is independent – perhaps one is not your transfer agent). With the loss of broker nonvotes, we can expect closer elections and more litigation over voting results. You need to protect yourself and not rely on procedures that historically have been pretty loose.
Is Four Days Enough?
I expect that we will see quite a few comment letters from companies that express concerns that a 4-day filing requirement is unrealistic for some meetings – particularly getting a preliminary vote for a contested election in that time period. In my opinion, companies should be able to meet a fairly short deadline (5 business days?) if there isn’t a close call since most votes typically come from “street-name holders” – where
virtually all the tabulation has been finished by Broadridge before the polls
close. And remember that the voting instruction forms
received from street-name holders aren’t even subject to
examination by the Inspector of Election – or by anyone else – unless the
Inspectors’ Report has been released and the results have been officially
challenged in court.
But I do agree that a reasonable exception needs to be carved out – not just for director election contests,
but for any meeting where the preliminary results on one or more
proposals are “too close to be completely comfortable with” – to allow for more time (and of course, a true proxy contest – where both sides have the
right to examine the proxies and challenge their validity – is another matter
altogether). In fact, maybe there shouldn’t be a trigger for preliminary results – so these type of results are never required to be filed – because of their “preliminary” nature. Maybe the SEC’s rule should just focus on final results.
The trick here is to figure out how to properly define “too close” so that companies don’t regularly lean on this exception whenever they don’t like the voting results. Perhaps a specified voting percentage is the way to go (eg. 48/52% or closer)?
If companies invoke this type of exception, I imagine investors may not be excited about a lack of a cap regarding how long a company can go without sharing a final result. Maybe a compromise is a filing standard that would require with
certification of final results – maybe within 10 business days from the date of the meeting?
What Next for Regulators?
Finally,
since the SEC is looking to adopt requirements related to the process by which votes
are inspected and reported, it seems like a prime opportunity to tackle
overvoting. My sense is different tabulators use different methodologies
to resolve overvotes. A closer look at this process has been long overdue to
ensure that practices are fairly uniform.
By the way, one beef that investors have had is that some companies have presented the percentage of votes in favor of shareholder proposals as
a proportion of all votes cast, rather than as the standard RiskMetrics’ pro
forma calculation that excludes abstentions from the
total. The SEC should clarify what they want companies to disclose.
Announcing Voting Results: California Style
From Keith Bishop: Apropos to the SEC’s recent proposal concerning timely announcement of voting results – California law already requires that for a period of 60 days following a shareholders’ meeting, the corporation must upon the written request of a shareholder “forthwith” inform the shareholder of the result of any particular vote. Cal. Corp. Code Sec. 1509. This applies to annual and special meetings. The corporation must disclose the number of shares voting for, the number of shares voting against, and the number of shares abstaining or withheld from voting.
In the case of election of directors, the corporation is required to report the number of shares (or votes in the case of cumulative voting) cast for each nominee. Now you may be saying, well that is good for California corporations, but what about foreign corporations? Foreign corporations that are qualified to transact intrastate business in California are required to provide this information at the request of a shareholder resident in California. Cal. Corp. Code Sec. 1510(a).
In addition to natural persons residing in California, a shareholder will be considered resident in California if it is a state bank, national bank headquartered in California or any retirement fund for public employees established or authorized by California law (think, CalPERS and CalSTRS). Cal. Corp. Code Sec. 1510(b). Even if the foreign corporation is not qualified to transact business in California, it can be subject to the disclosure requirement if it has one or more subsidiaries that are domestic corporations or foreign corporations qualified to transact intrastate business in California. Finally, California has expansive provisions for determining who is a shareholder for purposes of this requirement. Cal. Corp. Code Sec. 1512.
Broc’s note: I wonder whether there is any “internal
affairs doctrine” applicability and case law on the subject? Anyone?
Poll: Can Four Business Days for Disclosing Preliminary Voting Results Be Done?
Here is an anonymous poll to see how you feel about the SEC’s proposal for reporting preliminary voting results of contested director elections:
