In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:
– Engagement with shareholders conducting letter-writing campaigns
– The SEC’s transition guidance for Say-on-Pay
– Considerations with implementing share repurchase programs
Dodd-Frank: SEC Solicits Comment on Transnational Securities Fraud Study
Yesterday, the SEC posted this request for comment for its mandated study on the extent to which private rights of action under the antifraud provisions of the 1934 Act should be extended to cover transnational securities fraud (ie. revisiting the extraterritorial scope that was limited by the Supreme Court in Morrison v. National Australia Bank earlier this year). This “Foreign-Cubed” securities class action study is required under Section 929Y of Dodd-Frank – comments are due by February 18th.
Poll: Bob Seger, Yes or No?
This week, you can participate in Dave & Marty’s off-topic discussion through this anonymous poll:
Last week, FINRA issued Regulatory Notice 10-52 relating to free-writing prospectuses – which partially revises a prior ’06 NASD interpretation – to require that FWPs distributed by a broker-dealer in a manner reasonably designed to lead to a “broad unrestricted dissemination” be subject to FINRA’s rules regulating broker-dealer communications with investors (NASD Rules 2210 and 2211). The prior interpretation had excluded FWPs from those rules. It appears that this change in interpretation is immediate.
FINRA states that it is following guidance provided by the SEC as to the scope of the term “broad unrestricted dissemination” – and that the term would include posting FWPs on an unrestricted website or releasing them to the media; whereas it would not include posting FWPs on a restricted website or sending the FWP directly to the broker-dealer’s customers (regardless of the number of customers). The Notice sets forth an example in Endnote 6 that broker-dealers would be required to file a FWP for a public direct participation program within 10 business days of first use.
Note that – as set forth in Endnote 7 to the Notice – FINRA is not withdrawing prior interpretations from ’06 regarding:
– FWPs are exempt from the provisions of NASD Rules 2210 and 2211, as the case may be, if the FWP is not distributed in a manner reasonably designed to lead to broad unrestricted dissemination; and
– FWPs are not subject to the filing requirements of FINRA Rule 5110 or NASD Rule 2720 (to be renumbered FINRA Rule 5121).
There are some funny ones among these New Yorker cartoons, including the one about three financial experts and a jerk. And here are the WaPo’s top quotes from Rocky & Bullwinkle – the creator passed away last week.
Corp Fin Director Meredith Cross Speaks on the Division’s Rulemaking Schedule
On Friday, Corp Fin Director Meredith Cross delivered this speech, explaining the upcoming – and hectic – rulemaking schedule for the Division of Corporation Finance. The timeline is not any different than what was previously spelled out – but it does help to get some gloss on this important topic. It’s Meredith’s first posted speech since she took office.
Dissecting the Modern Poison Pill
We have posted the transcript from the recent DealLawyers.com webcast: “Dissecting the Modern Poison Pill.”
Last week, the SEC released its final 50-page strategic plan for the next five years – 2010 through 2015 – as required by the Government Performance and Results Act of 1993. A draft of the plan was issued last October, at which time I blogged about how I dislike five-year horizons for any plan since unforeseen events often change priorities and needs (and here is my blog about the SEC’s prior strategic plan).
A quick perusal of the strat plan doesn’t reveal anything earth-shattering. On pages 6-8, the limits of the SEC’s resources – and limited budget – are explored. The Corp Fin-related content mostly is on pages 21-24 and pages 32-35. It appears there will be a survey conducted by the SEC regarding the quality of disclosures and the SEC’s disclosure requirements (a topic that I recently tackled on “The Mentor Blog“). The influence of the new Investor Advisory Committee is felt on pages 36-38.
A New SEC Comment Letter Service: Comment-by-Comment
In this podcast, Ganesh Rajappan of LogixData provides some insight into how LogixData’s SEC comment letter service works (here is a demo), including:
– How does LogixData’s comment letter database differ from the existing databases out there?
– How many SEC comment letters are in your database?
– Can you give an example of how a customer might use the ability to search for comments issued by a specific Corp Fin examiner?
PCAOB “Bars from Association”: A Vague and Ambiguous Standard
It’s great to see more securities lawyers entering into the blogosphere. Michael MacPhail of Holme Roberts has been blogging in his “Securities Defense Blog” about PCAOB investigations, including this one about a potentially vague standard to be barred from practicing before the PCAOB.
Yesterday, the SEC settled Reg FD enforcement charges against Office Depot and two of its executives after they selectively conveyed to analysts and institutional investors that the company would not meet analysts’ earnings estimates. This is another case brought due to its unique circumstances indicating that “signaling” was going on, without overt statements being made. As noted in this Davis Polkmemo, the settlement “is distinctive because the challenged statements appear to have been crafted – unsuccessfully, as it turned out – to walk the FD compliance line by avoiding express references to changes in the company’s business.”
It’s the third Reg FD enforcement action from the SEC in a year, after a four year hiatus. And it makes it a dozen Reg FD enforcement actions that the SEC has brought since Reg FD was adopted a decade ago – see the list in our “Regulation FD” Practice Area.
Congrats to my good friend Brad Bennett for being named FINRA’s Enforcement Head yesterday – that’s one strong cowboy…
Winn-Dixie Fails to Exclude Annual “Say-on-Pay” Proposal
Here is news from Ted Allen of ISS:
The SEC staff has rejected a no-action request by Winn-Dixie Stores to omit a proposal from Schultze Asset Management that seeks an annual “say on pay” vote. The Florida-based grocery retailer argued that it had “substantially implemented” the proposal because its board adopted a governance policy in July that calls for a biennial vote on compensation. Winn-Dixie plans to hold its first advisory vote at its 2010 annual meeting on Nov. 10. The staff of the SEC’s Corporation Finance Division did not agree, noting: “We are therefore unable to conclude that Winn-Dixie’s policies, practices, and procedures compare favorably with the guidelines of the proposal such that Winn-Dixie has substantially implemented the proposal.”
The staff ruling is potentially significant because many U.S. companies likely will seek to hold less frequent advisory votes after the 2011 proxy season, and some activist investors may continue to use shareholder resolutions to press for annual votes. The Dodd-Frank Act requires U.S. issuers to hold a pay vote at their first annual meeting after Jan. 21, 2011, and directs companies to conduct a vote on the frequency of future pay votes at that meeting (and then once every six years). Given this mandated vote on frequency, companies may have better luck in their efforts to exclude similar shareholder proposals next season. However, the SEC may rule differently on 2012 proposals when a frequency vote will not be on corporate ballots.
Our “Q&A Forum”: The Big 6000!
In our “Q&A Forum,” we have blown by query #6000 (although the “real” number is much higher since many of these have follow-up queries). I know this is patting ourselves on the back, but it’s over 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 19,000 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.
Not surprisingly, I received quite a bit of member feedback on my recent blog about the Boston Globe article that found many companies incorrectly totaling the amounts in their Summary Compensation Tables. Others are blogging about this story too, such as this entry from Mark Borges in his “Proxy Disclosure Blog.”
Here is a useful response from Jim Brashear of Zix Corporation:
I copied the summary compensation table from one of the SEC filings cited in the recent Boston Globe article on math errors in proxy statements, and I pasted it into this Word document. I wondered if the addition errors could have been avoided by some simple changes to how the Word tables were formatted. Avoided at least while the issuer and its counsel are working on the document in Word, before it gets handed off to the printer and is reformatted.
A lot of lawyers don’t know that you can use Word tables very much like Excel spreadsheets. It’s particularly easy to sum columns and rows of adjacent cells that all contain numbers. If there are intervening cells that are empty or have non-number characters, it’s a bit more complicated to sum the cells, but it can still be done.
In my Word document, the top table is straight from the SEC filing (only names redacted). The bottom table shows how I cleaned up the table to remove the cell “padding”, replaced the dashes with zeros and, most importantly, inserted into the far right column a formula that calculates automatically the sum of the columns to the left. (I left one blank column between Year and Salary so that the formula would not add the year date to the compensation amount.
Inserting a formula is done in Word from the Table menu by selecting Formula. Word will even suggest the correct formula – in this case “=SUM(LEFT)”. Then, the author selects the Number Format to display $ and the commas (delete the cents if you don’t want them). Voila, no more simple addition errors! If there are changes to numbers in the table, you may have to refresh the formula cells by selecting them and pressing F9 – but that refresh happens automatically when the document is printed.
And here is a follow-up from a member: While this would work, since most company’s external reporting departments already prepare the tables in Excel, all you need to do is copy the Excel table in Excel and then paste it into the Word document at the proper location. You can even re-open the table in the Word document while in Word and edit the Excel spreadsheet.
By the way, here is a follow-up article from the Boston Globe that includes some quotes from a SEC spokesperson. I agree with the thoughts in the article from Lynn Turner that it would be impossible for Corp Fin Staff to be involved in checking the math when conducting their disclosure reviews. For me, not only is it impossible, it is impractical. Who would ever think that the team of folks that draft disclosure documents wouldn’t bother to check the math…and is Corp Fin expected to foot every row and column of numbers in the financials too when a filing is selected for review?
The Wall Street Jargon iPhone App
In this podcast, Kirk Davenport of Latham & Watkins describes his firm’s new iPhone application, including:
– What is the Wall Street jargon app?
– How long did it take to create?
– Have there been any surprises since it was launched?
More on our “Proxy Season Blog”
With the proxy season gearing up once more, we are posting new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Gadflies Get Press
– Proxy Plumbing: First Salvos
– Fortune Uses Proxy Democracy to Question Vanguard
– Corp Fin to Issue Rule 14a-8 Staff Legal Bulletin Before ’11 Season
– Proxy Season Review: Majority-Supported Proposals
Comments are due today on the SEC’s concept release regarding reform of the proxy processing system, although I’m sure the SEC will look at your comment letter if it’s only a few days late. Out of the 90 or so comment letters submitted so far, here already have been a number of interesting letters submitted, including these:
There often is a short lag between when comment letters are submitted and when they are posted on the SEC’s site – so I’m sure we will see many more posted in the days to come…
One topic that is being commented upon is whether the cost and burden of tagging proxy statement disclosures in XBRL outweigh the potential benefits. Personally, I don’t see tagging of that type of data being too useful – and I worry that it only feeds the reliance on peer group surveys when setting executive and director compensation (eg. use of datapoints from compensation tables without taking into account the nuances of the circumstances).
White Paper: Transfer Agents Target Broadridge
To provide input for the SEC’s proxy plumbing project, the Securities Transfer Association (known as the “STA”) released a White Paper last week on the differences in issuer costs between the current model and a proposed one in which proxy distribution services would be subject to more market competition. The White Paper compares actual invoices and the average pricing used by transfer agents in handling proxy processing services – and found that the average cost savings for different types of issuers ranged substantially (from 20-70%) under their proposed model.
Poll: Reason for Not Submitted a Proxy Plumbing Comment Letter
Given how busy folks are – and how many Dodd-Frank proposals we will need to comment upon – I can understand why only 90 comment letters have been submitted so far on the SEC’s proxy plumbing concept release. Here is an anonymous poll to survey why you haven’t submitted a letter:
Note that these proposals weren’t a product of an open Commission meeting. The SEC smartly issued this set of proposals without the fanfare of an open meeting, which is not required if all of the Commissioners sign an order (ie. seriatim). Probably since these proposals are required by Dodd-Frank – and time is of the essence – the SEC went with what used to be the traditional route of getting a proposal out of the SEC (more recently, nearly all proposals are the product of open Commission meetings; it wasn’t that way a decade ago).
Say-on-Pay: What Should September 30th Fiscal Year End Companies Do?
You may recall that Dodd-Frank requires that say-on-pay must be included in proxy statements relating to a company’s first annual or other meeting of shareholders occurring on or after January 21, 2011 – regardless of whether the SEC has adopted final rules by then (that’s just for say-on-pay; the golden parachute provision is not self-executing and the SEC states that provision won’t apply to companies until it finalizes those rules). The comment deadline for both rulemakings is November 18th – so it will be a tight squeeze for the SEC to adopt final rules by January 21st (but it is doable).
I have been hearing from a number of companies with 9/30 fiscal year ends that were freaking out because they didn’t have SEC guidance on a number of issues. Now, they have some guidance – even though it isn’t final. One big issue for these companies related to their proxy preparation schedule because they didn’t have any relief from the preliminary proxy filing requirements yet. Fortunately, in the SEC’s proposing release, the SEC does provide some relief on page 65. Here is that excerpt:
Rule 14a-6 currently requires the filing of a preliminary proxy statement at least ten days before the proxy is sent or mailed to shareholders unless the meeting relates only to the matters specified by Rule 14a-6(a). Until we take final action to implement Exchange Act Section 14A, we will not object if issuers do not file proxy material in preliminary form if the only matters that would require a filing in preliminary form are the say-on-pay vote and frequency of say-on-pay vote required by Section 14A(a).
In the proposing release, the SEC also states that these companies are permitted to conduct the frequency vote on the basis of the proposed four choices – every year, every two years, every three years, or abstain.
The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank
This is a “biggie.” Tune in tomorrow for the 75-minute webcast – “The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank” – to hear former Senior Staffers Brian Breheny of Skadden Arps; Marty Dunn of O’Melveny & Myers; John Huber of Latham & Watkins; Brian Lane of Gibson Dunn and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster weigh in on what do now that the proxy access rules are stalled, plus analysis of all the latest from the SEC’s Corp Fin on Dodd-Frank related-matters – including say-on-pay and more. If you’re not yet a member of TheCorporateCounsel.net, try a no-risk trial for 2011 and gain access to this webcast for free.
In the wake of the SEC’s adoption of a rule change to Regulation FD that carries out the repeal of the rating agency exemption – as dictated by Dodd-Frank – I conducted a poll about how companies would try to handle rating agency communications going forward. The poll results showed that 53% would try to negotiate stand-alone agreements with the agencies – with 23% being comfortable relying on the internal confidentiality policies of the agencies (15% were too busy with access to know about the rule changes; 13% said “what me worry?”).
Initially after the repeal, the major rating agencies had differing approaches as to whether they would enter into confidentiality agreements (most would upon request; but some wouldn’t) – but during the past few days, it seems that they have all come around to routinely including uniform confidentiality agreements into their agreements with issuers going forward. It doesn’t appear that the rating agencies are willing to negotiate the terms of their uniform agreements – but I have heard that they may be willing to responded to questions with “interpretations” that may be helpful. (So for those keeping track of this fluid situation, these statements from Moody’s and Fitch appear to be old news already).
Does it matter that companies enter into a confidentiality agreement with a rating agency? I think so. I recently polled my advisory board about whether they have ever heard of circumstances where a rating agency has leaked confidential information – and I did hear of a few aberrations where it did happen. So getting some extra protection beyond an agency’s own code of conduct seems like a smart thing to do…
As noted in some of the memos posted in our “Regulation FD” Practice Area, some rating agencies have issued statements that say that they believe that Reg FD doesn’t apply to them notwithstanding the exemption repeal dictated by Dodd-Frank.
SEC Seeks Comment Ahead of Internal Controls Study
Last Thursday, the SEC posted this request for comment ahead of a study mandated by Section 989G(b) of Dodd-Frank regarding how the SEC could reduce the burden of complying with Section 404(b) of Sarbanes-Oxley for companies with a public float between $75 million and $250 million. The study seeks to determine whether Dodd-Frank’s exemption for companies with a float under $75 million should be extended to more companies – and it must be completed within nine months of Dodd-Frank’s passage.
The SEC’s request identifies 23 specific items for comment. This new study was mandated notwithstanding the SEC’s Office of Economic Analysis publishing a 139-page study on the same topic last October…
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:
– RealNetworks’ Rule 10b5-1 Trading Plan Disclosure
– Diversity in the Boardroom is Important and, Unfortunately, Still Rare
– Insider Trading and Suspicious Trading, Not the Same
– Marty Lipton’s “The Spotlight on Boards”
– SEC Approves PCAOB Disciplinary Order
Mike Melbinger noted yesterday on his CompensationStandards.com blog that the disclosure of the relationship between compensation and risk will be an important element of consideration for ISS and investors in the upcoming proxy season, so now is the time to start thinking about how to “do it right.” One thing that I have found helpful in benchmarking risk assessments has been the plethora of data points that can be gleaned from the hundreds of comments letter responses that have been submitted on EDGAR in response to the Staff’s comment asking companies to explain what they did to reach their conclusions as to whether disclosure was required under Item 402(s) of Regulation S-K (which effectively resulted in disclosure that was not otherwise required). In most cases, these responses talk about a process whereby:
– compensation programs were reviewed, particularly focusing on incentive compensation programs;
– program features were identified which could potentially encourage excessive or imprudent risk taking;
– the specific business risks that related to such features were identified;
– mitigating factors (if any) were identified;
– an analysis was undertaken to determine the potential effects of the risks and the impact of the mitigating factors; and
– an analysis was undertaken of the particular situations described in Item 402(s) as they apply to the company.
The findings that companies often reached were similar, focusing on:
– the mix of compensation, which tended to be balanced with an emphasis toward rewarding long term performance;
– the use of multiple performance metrics that are closely aligned with strategic business goals;
– the use of discretion as a means to adjust compensation downward to reflect performance or other factors;
– caps on incentive compensation arrangements;
– the lack of highly leveraged payout curves;
– multi-year time vesting on equity awards which requires long term commitment on the part of employees;
– the governance, code of conduct, internal control and other measures implemented by the company;
– the role of the compensation committee in its oversight of pay programs;
– frequent business reviews;
– the existence of compensation recovery (clawback) policies;
– the implementation of stock ownership or stock holding requirements;
– the use of benchmarking to ensure the compensation programs are consistent with industry practice;
– the uniformity of compensation programs across business units and geographic regions, or alternatively, the differences employed to reflect specific business unit or geographic considerations; and
– the immaterial nature of some plans.
In terms of employee plans, there was a lot of discussion in the comment responses regarding sales incentive plans, often focusing on controls in place on those plans such as caps, negative discretion, prepayment review, and recovery in the event of error or fraud, etc. The responses often note that the analysis was conducted by management with the concurrence or consultation of the compensation committee, and they also frequently referenced the use of compensation consultants in performing the analysis, with that consultant in many cases being the same compensation consultant that the compensation committee used for other compensation matters.
Our Quick Survey on Clawback Policies
As noted above, one of the items cited often in response to the evaluation of compensation and risk is the existence of a clawback policy. Based on a number of requests from members, we have posted a “Quick Survey on Clawback Policies.” It’s anonymous and just takes a few seconds to complete. Once you participate, you will see a link to the running results.
Broc blogged a couple of weeks ago about the SEC’s short term borrowings rule proposal and related MD&A interpretive release. One thing to keep in mind about the interpretive release is that is was no doubt timed to provide some guidance in advance of third quarter 10-Qs, so that companies could evaluate their liquidity disclosure in their interim period MD&A and make adjustments accordingly. One good thing about this approach is that you can “ease” into these disclosures by trying them out in the 10-Q, rather than incorporating potential changes for the first time in the 10-K. A few of the key points to keep in mind from the interpretive release as you are drafting or reviewing the 10-Q are:
1. Revisit whether more disclosure is necessary in the MD&A about cash management and risk management policies that are relevant to an evaluation of financial condition. The short-term borrowings disclosure concerns that the SEC has, in particular (but not limited to) the use of repurchase agreements, share-lending transactions and off-balance sheet arrangements or contractual repurchase obligations that may be accounted for as sales, all get back to one simple notion: cash is king. There is a concern, expressed in this release and also in comments on MD&A that the Staff has been issuing over the last couple of years, that the liquidity discussion in MD&A too often gives short shrift to the availability of cash, what companies are doing with their cash, where short-term cash is coming from and how risks related to liquidity are managed. This notion has manifested itself outside of the context of short-term borrowings, for example, in frequent Staff comments seeking more disclosure about the availability of cash balances held overseas.
2. Revisiting leverage ratio disclosure. The interpretive release gives some very specific guidance about disclosure of leverage ratios and the conditions under which such ratios can be disclosed. Now is a good time to revisit any disclosure along these lines to see if it is consistent with the Staff’s views.
3. A focus on the Contractual Obligations Table. While not necessarily an item for the 10-Q, it is not too early to start thinking about potential changes to the Contractual Obligations Table required in MD&A, to determine if you need to add to or revise your disclosure – through footnotes, a revised presentation, or otherwise – to provide “a presentation method that is clear, understandable and appropriately reflects the categories of obligations that are meaningful in light of its capital structure and business.” It has been my experience that this table hasn’t received a whole lot of attention (other than updating the numbers, adding new obligations and taking out old obligations) since it was adopted in the wake of Sarbanes-Oxley, so now might be the best time to take a hard look at what is being captured in the table and how it is presented.
For more tips regarding the implementation of the latest MD&A interpretive release, check out our “MD&A” Practice Area.
The SEC announced this week that the Division of Corporation Finance has added two new Associate Directors in the Division’s Disclosure Operations group. Karen Garnett and Mark Kronforst were promoted from within Corp Fin to the Associate Director positions – Karen was Assistant Director of the Office of Real Estate and Business Services, and Mark was Corp Fin’s Deputy Chief Accountant. Karen and Mark join Paul Belvin, Jim Daly and Barry Summer in the senior management ranks of the Disclosure Operations group, which is led by Shelley Parratt. These new leadership slots are in recognition of the fact that Corp Fin’s responsibilities keep growing and are becoming ever more complex. Filling these slots will undoubtedly now open the way for hiring folks to run the three Corp Fin new offices that were announced back in the summer.
More Dodd-Frank Rulemaking Underway
Yesterday, the SEC proposed (and adopted) more rules under the Dodd-Frank Act. The SEC proposed yet another set of asset-backed securities disclosure rules, this time in accordance with Sections 932 and 945 of the Dodd-Frank Act. Under these proposals: (1) issuers of asset-backed securities that are registered with the SEC would need to perform a review of the assets underlying the asset-backed securities; (2) proposed amendments to Regulation AB would require an issuer of asset-backed securities to disclose the nature, findings and conclusions of this review; and (3) the issuer or underwriter for both registered and unregistered asset-backed securities offerings would be required to disclose the findings and conclusions of any review performed by a third party that was hired to conduct such a review. The Commission also adopted interim final rules to require that certain swaps dealers and other parties report any security-based swaps entered into prior to the July 21 passage of the Dodd-Frank Act, as well as proposed rules (a new Regulation MC) intended to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities, and national securities exchanges that post security-based swaps or make them available for trading.
Dave & Marty on Governance, Proxy Access and British Cars
We just posted another edition of the Dave & Marty Radio Show, where Marty and I talk about the latest developments with proxy access, some of the interesting observations from the Report of the NYSE Commission on Corporate Governance and, believe it or not, British sports cars that Marty and I admire.
