One of the significant changes to the financial regulatory system that Dodd-Frank will bring about is the regulation of advisers to private funds, through the elimination (effective July 11, 2011) of the 15-client exemption contained in Section 203(b)(3) of the Investment Advisers Act. The intent was to bring regulation to the advisers of hedge funds and private equity funds, but Congress recognized (with the help of some lobbying, no doubt) that the definition of “private fund” in Dodd-Frank potentially has a very broad reach. Thus was born the need for an exemption for family offices, which are commonly thought of as those entities that run the money for well-off families, and are presumably unlikely to be significant contributors to the systemic risk concerns that have now rained down regulation on the advisers to private equity and hedge funds.
Yesterday, the SEC proposed rules to implement the Dodd-Frank exemption for family offices, giving commenters just a little over 30 days to weigh in. Next up will probably be proposed rules to implement the exemption for advisers to venture capital funds, which are sure to bring about a lot of commentary given the difficulties in defining what exactly is a venture capital fund (as compared to other private funds).
R.I.P. TARP
With the expiration of the TARP program, it appears to be time to justify its existence and to explain how it really wasn’t as bad (or as costly) as everyone made it out to be. I don’t need much convincing on this one, just thinking back to how bad things were in the depths of the financial crisis and how I might have been selling apples on a street corner had it not been for some level of intervention. Nonetheless, we now have a full-scale retrospective on TARP, plus Treasury Secretary Timothy Geithner’s Washington Post opinion piece from last Sunday. In the op-ed piece, Secretary Geithner seeks to dispel the top five myths about TARP: that TARP cost taxpayers hundreds of billions of dollars; TARP was a gift for Wall Street that did not help Main Street; TARP was a quick fix for the market meltdown but left the financial system weak overall; TARP worsened concentration in the banking sector, leaving it more vulnerable to another crisis; and TARP was the centerpiece of a strategy by the administration to assert more government control over the economy. TARP also “lab tested” some of the “reforms” that have now been rolled out to public companies generally, such as the soon-to-be required Say-on-Pay resolution. Now that it is gone, let’s hope we never see it come to pass again.
Wall Street Pay
It is intriguing to juxtapose the TARP defense with the news earlier this week in the WSJ that Wall Street pay has hit a record level at $144 billion, up 4% from last year. This kind of news fans the flames of outrage of compensation levels, although it does appear that pay may be slowing down in the months ahead as some of the financial reforms and other regulatory actions kick in. It also seems that some of the compensation has been shifted to equity and deferred instruments, reflecting an effort toward mitigating risks of employees seeking only short term gains, which is hopefully some good news for these institutions in the long run.
Over the last few months, we have been so focused on Dodd-Frank Act and its regulatory aftermath, I think that now more than ever we should dedicate some continuing attention to what the Staff has been asking for in issuer disclosures through the review process, particularly given the Staff’s general view (notably expressed at last year’s Proxy Disclosure Conference) that we should all be cognizant of their positions as expressed through the comment process and act accordingly when drafting disclosures for any issuers. One area that was certainly ripe for Staff comments this year was the new corporate governance disclosures that were adopted at the end of 2009 as a part of the Proxy Disclosure Enhancements rulemaking.
Other than comments raising questions about disclosure items that were just missed entirely, the Staff’s comments on the governance disclosures tended to deal with a few common issues. On the disclosure requirement requiring a discussion of director qualifications, the Staff has raised comments asking for more details concerning how the qualifications were relevant to the determination that the person should be nominated as a director. The Staff seems to be very much looking for individualized disclosure with a fair amount of detail for each director. (And it wasn’t just the Staff commenting on the director qualifications disclosure – Chairman Schapiro incorporated a comparison of “good” disclosure and “bad” disclosure in a speech to the Stanford Directors’ College back in June 2010.)
With regard to the board leadership disclosure, it was usually the case that when a company has a combined Chairman and CEO, the company felt compelled to go in a lot of detail as to why that made sense for the company and this usually didn’t draw a Staff comment, unless the company failed to include an explanation of how the combined Chairman and CEO made particular sense for the company given its circumstances. By contrast, when companies had a split Chairman and CEO, there was a tendency toward providing less explanation, perhaps because that structure is perceived as the “good governance” structure. As a result, the Staff often raised a comment asking for more detail as to the rationale for the split Chairman/CEO leadership structure.
Another comment that the Staff has raised seeks disclosure of how the leadership structure affects the company’s risk oversight. Many companies seemed to have either overlooked this item or did not fully comprehend its meaning, and in fact it is perfectly fine to say that the leadership structure does not affect risk oversight — it is just that the Staff expects an affirmative obligation to say something about the relationship.
Lastly, if the staff saw the word “diversity” somewhere in a company’s disclosure regarding director qualifications, then it is likely that the Staff would ask for disclosure of the company’s diversity policy and how it is implemented and monitored.
The SEC Staff recently put out an Investor Alert warning of yet another Staff impersonator, using the name “Steven Cooper” and some purported correspondence to a fake SEC employee by the name of “Gordon Green.” His rap is kind of messed up, because he is telling people that he can provide assistance with settling federal tax obligations with the IRS. It is odd to me that this imposter picked the SEC as his fake employer, since when you say you are from the SEC in some parts of the country they think you mean the Southeast Conference.
More on our “Proxy Season Blog”
Even with the proxy season mostly done, we are still 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:
– It’s Time for Summary Proxy Statements
– Lawmakers Consider Shareholder Approval of Political Spending
– Some Thoughts on How to Overcome the Challenges of Disclosing Voting Percentages
– Retail Investors Filed Most of 2010’s Majority-Backed Proposals
– 6 Directors Receive Support from Less than One-Third of Shareholders
The PCAOB recently issued a report collecting findings from inspection reports concerning how audit firms may have failed to comply with PCAOB standards while conducting audits during the economic crisis. In looking back over the past three years of audits, the PCAOB noted a number of areas where audits were found lacking, including:
– fair value measurements
– impairment of goodwill
– indefinite-lived intangible assets and other long-lived assets
– allowance for loan losses
– off-balance sheet structures
– revenue recognition
– inventory
– income taxes
On a positive note, the PCAOB did find that firms had made an effort to respond to increased risks posed by the economic crisis. The PCAOB also noted that it will be evaluating whether efforts by firms to address deficiencies identified in PCAOB inspection reports have actually reduced or eliminated the subsequent occurrence of the same deficiencies.
The areas identified in the PCAOB report will no doubt be areas of increased diligence as we go into the audit cycle for the upcoming 10-K season.
The Dodd-Frank Rulemaking Train Keeps Rolling: Now, Asset-Backed Securities
In accordance with Section 943 of the Dodd-Frank Act, the SEC re-proposed a rule from the Regulation AB proposals issued earlier this year which would require that “securitizers” disclose fulfilled and unfulfilled repurchase requests across all transactions. Further, the SEC proposed a new rule which would require that credit rating agencies include, in any report accompanying an asset-backed securities credit rating (including a preliminary rating), disclosures about representations, warranties, and enforcement mechanisms available to investors (as well as how the representations, warranties and enforcement mechanisms differ from those in similar securities). The SEC must adopt these rules by January 14, 2011, so it has a very short comment period – comments are due on November 15, 2010.
The SEC is keeping this scorecard of the regulatory actions that it has taken to date under its Dodd-Frank Act mandates.
Last week the SEC approved new FINRA Rule 5131, which when effective will regulate the list of initial public offering abuses that were so prevalent during the dot-com bubble. (Has it really been almost a decade since that bubble burst?) Rule 5131, which started out life as a NASD rulemaking first submitted to the SEC in September 2003, prohibits a variety of practices in connection with a “new issue” of an equity security, including: (1) quid pro quo allocations, which involve making allocations of securities in return for services provided to the broker-dealer selling the new issue; (2) spinning, or the practice of allocating new issue securities to executive officers and directors of public or certain non-public companies to curry favor with those executives or directors (subject to certain exceptions); (3) imposing inequitable penalty bids; and (4) acceptance by broker-dealers of market orders for new issue shares before commencement of secondary market trading. The rule also imposes a number of additional restrictions on the offering process and the activities of broker-dealers participating in the offering of a new issue, including a requirement to establish walls between investment banking personnel and those making the new issue allocation decisions.
Many of these practices have already gone the way of the dinosaur thanks to all of the attention paid to them in the post-dot-com bubble fallout, including lots of litigation. Nonetheless, FINRA finally has some additional rules to keep them from happening again. FINRA will announce an effective date within 60 days of the SEC’s approval.
The FSOC Meets
As Dodd-Frank Act landmarks go, it seems like last week’s inaugural meeting of the Financial Stability Oversight Council was certainly a big one. The FSOC, comprised of all of the significant financial regulators, was created by Dodd-Frank to provide comprehensive monitoring of the overall financial system, hopefully so that emerging risks or issues won’t fall through the regulatory cracks. Much of the inaugural meeting was just housekeeping, including adopting bylaws and a transparency policy and setting in motion various tasks mandated under Dodd-Frank.
Mailed: September-October Issue of The Corporate Counsel
The September-October issue of The Corporate Counsel was just mailed and includes pieces on:
– The Requirement to File Revised Financials Ahead of a Shelf Filing–A Trap for the Unwary
– Identifying NEOs–Former CEO/CFO Can’t Also be One of Three Most Highly Compensated Executive Officers
– Form 8-K Requirement(s) upon Reassignment, Later Termination, of Principal Officer/NEO
– Risk Factor Updating in Form 10-Q–Repeat in Subsequent Qs?
– Former Affiliate’s Sale of Issuer Stock Within 90 Days After Termination–Chapter 2 (or 20?)
– Dodd-Frank–Whatever Happened to Principles-Based?
– Enforcement’s 1933 Act Batting Average Now .250
– Roth Conversion Follow-Up
On Monday, the Boston Globe ran this breathless story at the top of page one. I went into it expecting an analysis about the judgment calls we all make in drafting compensation disclosure and thought there might be journalistic oversimplification as typically happens in the mass media. Some might say that pay disclosure is not necessarily a science, but an art.
However, one has to concede that math is still a science – and the Globe’s research certainly raises eyebrows about how seriously some companies are taking their pay disclosures. The Globe looked at about 210 local company proxy statements, adding up the columns in the summary compensation tables. It turns out that 55 times – at 34 companies – the totals of the columns did not match the number the company reported in the “Total” column. Um, that’s over 15%.
At most of these companies, the Globe determined (or the company conceded) that it was some sort of math or clerical error – transposed numbers, extra digits, etc. In some cases, when the company updated the stock compensation numbers for the past years using the SEC’s new methodology, they just changed the column in the middle of the table but didn’t update the total. Truly, the devil is always in the details and I would urge companies to double-check their numbers this year as I imagine a lot of newspapers are going to be following the Globe’s lead and do the math themselves in their local areas. Thanks to Mike Andresino of Posternak for bringing the article to my attention!
Our Timely Ten Tips: Preparing Say-on-Pay Disclosure Now
We have just posted the Fall 2010 issue of the Compensation Standards newsletter, in which Mark Borges provides ten timely tips for preparing say-on-pay disclosure. Note that we are making a big change for CompensationStandards.com for 2011 – we are moving the online version of “Lynn, Borges & Romanek’s Executive Compensation Disclosure Treatise & Reporting Guide” onto that site. So that when you try a no-risk trial or renew for 2011 – remember that all memberships expire at the end of the year – you gain immediate access to it. The 2011 version of the Treatise will be posted within the next few weeks; the 2010 version is posted now.
Poll: How to Handle Rating Agency Communications After Reg FD Repeal?
On Monday, the SEC’s recent Regulation FD adopting release was published in the Federal Register – so October 4th is the effective date for the removal of the rating agency exemption that I blogged about last week.
In that blog, I noted that companies may want to pursue stand-alone confidentiality agreements with the agencies. Now I’m hearing from some companies that they have approached a few agencies and have heard pushback from them about entering into stand-alone agreements. Rather, I hear these agencies believe that companies can rely upon the internal confidentiality policies that the agencies already have. Here is a poll on what your company intends to do:
Yesterday, in this 2-page order, the SEC granted a stay of its proxy access rules pending resolution of the Business Roundtable and Chamber of Commerce petition for review with the DC Circuit Court of Appeals (I blogged about the lawsuit last week) so that the SEC could join the groups in seeking an expedited review by the court. As expected, the SEC’s order does not address the merits of the plaintiff’s claims.
In its order, the SEC also delayed the amendment to Rule 14a-8, which would have allowed shareholders to file bylaw proposals that seek more permissive access procedures. That rule change was not challenged by the plaintiffs – but he SEC said it decided to delay the implementation of this rule change, “because the amendment to Rule 14a-8 was designed to complement Rule 14a-11 and is intertwined, and there is a potential for confusion if the amendment to Rule 14a-8 were to become effective while Rule 14a-11 is stayed.”
Proxy Access: What is the Timing for the Court’s “Expedited Review”?
Prior to this stay, the new rules were scheduled to become effective November 15, 2010 – and apply to companies that mailed proxy materials mailed for its last annual meeting after March 13, 2010. As the SEC’s order was silent about how to determine the manner in which the stay will ultimately impact the effective date of the rules, I have been bombarded with questions about what the possible timing of the expedited review.
Here is what Cooley is saying – excerpted from this memo – about timing: “Even in highly expedited cases, in most of the courts of appeals, each party will have about three weeks for their principal briefs and a week or more for the reply. We think that, in a case like this, there is likely to be argument heard. As a result, we estimate that it may take a few months to resolve, which means that the potential application of proxy access for this proxy season will likely be in limbo for many issuers until more is known about the schedule. The court has not yet set a briefing schedule, nor is there anything on the Court’s docket showing that it has received a motion to expedite the briefing schedule.”
This seems right as this BusinessWeek article notes a SEC spokesperson as saying this will be resolved in “late Spring”…
Interestingly, dozens of law firms already have sent out emails regarding this development – but these firms had remained silent when the lawsuit was filed last week. Notably, very few of the emails dealt with this timing issue, which I imagine is the one item that folks want to know about most.
Proxy Access: Corp Fin’s Position on the Application of Advance Notice Bylaws
Below is a Corp Fin position as repeated from this memo from Cooley (a position which was also articulated by Corp Fin Director Meredith Cross at a New York Chapter meeting of the Society of Corporate Secretaries on Friday):
An SEC staff member has just responded to a question I had posed to the staff about a month ago with regard to the viability of advance notice bylaws in connection with Rule 14a-11 (proxy access) nominations. While it’s clear that advance notice bylaws apply with regard to nominations made outside of the proxy access rules, it was not clear whether the company could, in the SEC’s view at least, preclude a proxy access candidate’s nomination at the meeting if the nominating shareholder did not comply with the company’s advance notice bylaws. Most firms took the position that proxy access “trumped” the advance notice bylaws and that the company could not preclude the nomination and election of the candidate at the meeting, even if the nominating shareholder did not comply with the advance notice provisions. The staff member told me that, to the contrary, the staff’s position is that the advance notice bylaws cannot be ignored.
Moreover, a predicate to Rule 14a-11 is that there is a state law right to nominate, and failure to comply with the advance notice bylaw means, in effect, that there is no state law right to nominate. As a result, not only could the nomination of the candidate be precluded at the meeting, but, surprisingly, the company could use the fact of noncompliance to exclude the nominee from the proxy, subject to the company’s following the process outlined by the SEC for exclusion of nominees, including notice to the SEC.
The question of director qualifications is, from the staff’s perspective, a slightly different animal. It’s clear from the release that if the bylaws include reasonable director qualifications that relate to the nominee’s ability to serve as a director, then a Rule 14a-11 nominee must be included in the proxy statement even if the nominee does not satisfy the qualifications. The company could, however, refuse to seat the director, even if elected, in compliance with Delaware (or other state) law. But what if the bylaws were phrased to prevent not only service as a director, but the nomination of a director that did not meet the reasonable qualifications in the bylaws? Again, if the bylaws cut off the right to nominate the director, then the 14a-11 nominee could be excluded, not just from nomination, but also from the proxy statement.
However, in advising the SEC that the company intended to exclude the nominee, the company would need to show that the qualification was generally applicable across the board, not one that could be satisfied prior to nomination (such as a qualification that the nominee be a shareholder) and that the qualification would be a valid limitation on the right to nominate under Delaware (or other state) law. (I assume that the difference with regard to advance notice provisions is that it’s widely accepted that reasonable advance notice provisions are permitted under Delaware law to preclude nominations, whereas qualification requirements for the nomination of directors was less clear (at least to the staff if not to Delaware counsel), so the threshold to convince the staff regarding qualifications would be higher.)
The staff member said that the staff would, however, look askance at a bylaw provision that suggested that the company was really just trying to “opt out” of Rule 14a-11. His example of that type of circumvention was a director qualifications bylaw that provided that an individual could not be nominated if the nomination occurred during the open window period for proxy access nominations, thus creating an unavoidable conflict with Rule 14a-11.
This interpretation seems to open up the field for bylaw limitations on the right to nominate, provided that they would could be supported as valid under Delaware law. Of course, the summary above is just the staff’s take on the matter. A nominating shareholder that wants to contest a company’s attempt to exclude a nominee could well end up seeking a judicial determination, which could easily have a different result.
Proxy Access: The Debate Over What to Do If the Rules Stick
While we wait to see what happens with the SEC’s new proxy access rules, I thought it might be useful to point out the heated debate over what types of actions that companies might take if access “sticks.” Professor JW Verret has been publishing his ideas about what type of defenses companies might consider adopting in the wake of access – and here is some commentary in response.
On Friday, Corp Fin updated its Financial Reporting Manual for issues related to Regulation S-X Rule 3-09, Rule 3-10, and Rule 3-16, as well as other changes (eg. Topic 1500 of the Manual). The revisions are reflected as of June 30th and aren’t attributable to Dodd-Frank. Corp Fin has been updating the Manual much more frequently than in the past, deciding to do so a little bit at a time rather than major rewrites as in the past.
Dodd-Frank: The SEC Fleshes Out Its October Rulemaking Schedule
On Friday, the SEC listed the specific rulemakings that are planned for October in this schedule. As noted earlier, the schedule includes proposals for say-on-pay and say-on-golden parachutes, as well as disclosure of voting by institutional money managers on executive pay. Proposals regarding compensation committee/advisor independence; mine safety and disclosure relating to resource extraction issuers are not coming until November.
Among other planned rulemakings, October also includes a request for comment on a study regarding reducing the costs of smaller companies complying with Section 404 of Sarbanes-Oxley (ie. internal controls). The SEC will also establish five new Offices this month: Whistleblowers, Credit Ratings, Investor Advocate, Women and Minority Inclusion and Municipal Securities. Here is testimony before the Senate Banking Committee from SEC Chair Schapiro regarding how the rulemaking is proceeding.
On Friday, the SEC also issued its report on why the market suddenly crashed back in May – as noted in this NY Times article, a single $4 billion trade led to the “flash crash.” Scary…
Holding the Virtual Annual Meeting: Factors to Consider and Practice Pointers
We have posted the transcript for the recent webcast: “Holding the Virtual Annual Meeting: Factors to Consider and Practice Pointers.”
Showing just how hard this blogging stuff can be, I am blogging a slight correction to my recent blog in which I complained how folks were coming to the wrong conclusion about which companies will have to deal with proxy access during the upcoming proxy season – and then I mentioned March 15, 2010 as the D-Day, which is technically incorrect.
Thanks to Todd Bloomquist of Winston & Strawn, who bothered to do the math and notes that “if a company mailed its proxy materials on Saturday, March 13, 2010, then the 120-day count would fall on November 13, 2010. Because November 13, 2010 is a Saturday, the proxy access notification window would actually be open for one day on Monday, November 15, 2010 under Instruction 1 to Rule 14a-11(b)(10).” In practice, I’m not sure it matters much because a quick Edgar search reveals that no companies mailed on that Saturday (so March 15th essentially is the threshold date in practical terms).
In erroneously pegging March 15th as the D-Day, I did what I think a lot of other folks have done – simply took the example provided by the SEC Staff during its open Commission meeting and moved the dates without thinking about how the weekend stuff would impact the calculation (in other words, few folks bothered to do the math themselves – I still haven’t!). Of course, this analysis is moot if the Business Roundtable and Chamber of Commerce are victorious in their motion for a stay of the effectiveness of the SEC’s new access rules (as I blogged about yesterday).
Trust me, it’s hard to blog daily and not occasionally get something wrong or offend someone accidentally. Particularly since most breaking news items come at the end of the day – and therefore the window to conduct research to ensure your analysis is correct is somewhat limited (and sometimes feels like a moving target). The community adds much more value than I possibly could alone – please keep it coming.
Thankfully my blogs have never been so controversial that I had to quit in order to protect my family, as recently happened to Prof. Todd Henderson of the “Truth on the Market” blog (see this Forbes blog).
More on “Dodd-Frank: SEC Removes Rating Agency Exemption from Reg FD”
A prime example of the challenges of blogging is how I needed to update my Reg FD piece yesterday morning to add some thoughts from Nancy Wojtas that I hadn’t seen anyone else muse about. In that updated blog, I noted the possibility that a Regulation FD obligation may be triggered if a rating agency were deemed to be acting as an agent of the issuer (I did call it a “stretch”). A member emailed these thoughts on that issue:
Even if a rating agency would be deemed an agent of the issuer, there should not be a problem, because the communication to the rating agency (as an agent) should be covered by the “trust and confidence” exception, and then the rating agency’s disclosures (at least for Moody’s, S&P and Fitch) would be FD compliant, since they always announce their ratings in press releases.
Rating agencies are not in the fourth category of covered persons under FD (a person “Who is a holder of the issuer’s securities, under circumstances in which it is reasonably foreseeable that the person will purchase or sell the issuer’s securities on the basis of the information.”) because of the requirements of being an NRSRO. Specifically, Section 15E(g) and Rule 17g-4 under the Securities Exchange Act of 1934 requires that NRSROs implement and maintain policies prohibiting its employees from inappropriately communicating information they learn when providing ratings services or engaging in transactions in securities (including derivatives) when they possess material, non-public informa¬tion or confidential information concerning the issuer of such securities. Thus, there is a reasonable basis for concluding that NRSROs and their employees would not be expected to trade securities based on information that issuers furnish an NRSRO.
Ironically, it was a prior Congressional action, the Credit Rating Agency Reform Act of 2006, that took rating agencies out of FD. That was the Act that amended the definition of investment adviser so that Section 2(a)(11)(F) of the Investment Adviser’s Act specifically excludes NRSROs (unless such organization engages in issuing recommendations as to purchasing, selling, or holding securities or in managing assets, consisting in whole or in part of securities, on behalf of others, which the major ratings agencies don’t). That was the same Act that created 15E(g) imposing the confidentiality requirements on NRSROs.
I do note that the few law firm memos I have seen so far on this topic vary in their analysis of this rule change – so I don’t feel so bad about needing to update my blog early yesterday. Note that if you read this blog via RSS feed or through Knowledge Mosaic (which populates its list of blogs thru RSS feeds), you likely are not reading the “final” product. I often tweak the blog once or twice right after it’s posted. You may be better off inputting your email address on the left side of this blog – which alerts you to when our daily blog is posted and you can read the genuine article.
Our October Eminders is Posted!
We have posted the October issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Yesterday, the Business Roundtable and US Chamber of Commerce filed this petition for review in the US Court of Appeals for the DC Circuit against the SEC to invalidate the recently adopted proxy access rules. Among others, the plaintiffs allege that the rules are arbitrary and capricious; violate the Administrative Procedure Act; that they violate companies’ rights under the Constitution’s 1st and 5th Amendments; and that the SEC failed to properly assess the rule’s effects on “efficiency, competition and capital formation” as required by law. Note that I believe the plaintiffs are just challenging the SEC’s adoption of Rule 14a-11 – but not the changes to Rule 14a-8 (ie. the shareholder proposal rule) that the SEC recently adopted.
The Business Roundtable and Chamber of Commerce also filed a motion (see pg. 4 of the PDF) that the SEC stay implementation of the rules – including the November 15th effective date – until the DC Circuit has ruled on the challenge. The motion seeks a response from the SEC by next Tuesday, October 5th. If the SEC denies that request, then the plaintiffs plan to file a similar motion with the DC Circuit. Here’s the related press release.
In response, the SEC released this statement: “We believe that the Commission’s proxy access rules are both lawful and in the best interests of the public and shareholders. The Commission will, of course, carefully consider and timely respond to the motion for a stay.”
As an interesting sidenote, I have yet to see a single law firm push out any information about this lawsuit (other than this exception in the form of a blog). In contrast, every firm under the sun sent out an immediate notice when the SEC adopted the access rules. Not that it matters an iota, but I just thought this was an interesting factoid…
Dodd-Frank: SEC Removes Rating Agency Exemption from Reg FD
Here’s one of those “would be” mini-Dodd-Frank sleepers. Section 939B of Dodd-Frank directs the SEC to amend Regulation FD within 90 days of the law’s enactment to remove the exemption for rating agencies that is contained in FD (Rule 100(b)(2)(iii)). Yesterday, the SEC issued this adopting release taking that action. The SEC adopted a final rule change without proposing it first because the legislative mandate meant its action “does not involve the exercise of Commission discretion or policy judgments.” The amendment will become effective immediately upon its publication in the Federal Register.
Note the general exemption for confidentiality agreements remains in Reg FD (Rule 100(b)(2)(ii)), which would seem to negate the impact of the exemption removal because most agreements between rating agencies and rated companies contain confidentiality provisions (and if they don’t, a simple work-around is for a rating agency and a company to execute a stand-alone confidentiality agreement now).
But upon closer inspection, I’m not sure this change is that significant as Reg FD applies to communications to certain market participants, including investment advisers. Although at one point, most rating agencies were investment advisers registered with the SEC and subject to Reg FD, the major credit rating agencies more recently have terminated their registration as investment advisers and qualified instead as nationally recognized statistical rating organizations (NRSROs). As a result, they are no longer among the enumerated persons that trigger FD violations. That means that the exception for credit rating agencies no longer was necessary and that elimination of the exception has no real impact at this point. Hence, this likely is the purpose of this Dodd-Frank provision – we don’t know for sure as it has no discernible legislative history (note the purpose of the provision was not touched upon in the SEC’s adopting release).
Companies will still need to think about entering into confidentiality agreements with rating agencies since there could be a Rule 10b-5 issue when material nonpublic information is shared. Perhaps there is one argument that can be made regarding Reg FD – that a Regulation FD obligation may be triggered if a rating agency were deemed to be acting as an agent of the issuer. Perhaps that’s a stretch but under the right facts and circumstances, a possibility. Thanks to Nancy Wojtas of Cooley for her analysis of this subject!
SEC Dealt Setback by Second Circuit in Galleon Insider Trading Case
A federal appeals court on Wednesday ruled against the Securities and Exchange Commission in its effort to get wiretaps from the criminal prosecution of Raj Rajaratnam, the founder of the Galleon Group hedge fund. The United States Court of Appeals for the Second Circuit overturned an order from Judge Jed Rakoff, of Federal District Court in Manhattan, that would have compelled Mr. Rajaratnam and a co-defendant, Danielle Chiesi, to give the commission the wiretapped recordings of hundreds of their conversations. Prosecutors in the criminal case provided the recordings to Mr. Rajaratnam and Ms. Chiesi during discovery proceedings, and the SEC had wanted to use them as evidence in its civil insider-trading case.
Three judges on the appeals court sent the case back to Judge Rakoff, who is overseeing the civil case, saying he should have waited on a ruling in the criminal case on whether the government’s wiretaps were legal. The federal judge in the criminal case, Richard Holwell, has not yet ruled on whether the wiretaps were legally obtained. Judge Holwell plans to hold a hearing on Monday to consider whether prosecutors provided enough information about the need for the wiretaps.
I’ve seen too many people report that proxy access doesn’t apply to companies that mail their proxy materials before March 15th, 2011 – that is an incorrect statement of how the SEC’s transitional rules work. As noted earlier in this blog, since the SEC’s adopting release was published in the Federal Register on September 16th, the new access rules will become effective on November 15th – which would mean that companies who mailed their 2010 proxy statement prior to March 15, 2010 would have a window period that fully pre-dated the effective date of the rules for this proxy season – thus meaning that these companies would not be subject to proxy access for the 2011 proxy season.
Below is the excerpt from the adopting release that lays out the transition period:
Rule 14a-11 contains a window period for submission of shareholder nominees for inclusion in company proxy materials of no earlier than 150 calendar days, and no later than 120 calendar days, before the anniversary of the date that the company mailed its proxy materials for the prior year’s annual meeting.671 Shareholders seeking to use new Rule 14a-11 would be able to do so if the window period for submitting nominees for a particular company is open after the effective date of the rules. For some companies, the window period may open and close before the effective date of the new rules. In those cases, shareholders would not be permitted to submit nominees pursuant to Rule 14a-11 for inclusion in the company’s proxy materials for the 2011 proxy season. For other companies, the window period may open before the effective date of the rules, but close after the effective date. In those cases, shareholders would be able to submit a nominee between the effective date and the close of the window period.
I know this excerpt can be challenging to understand – but during the SEC’s open Commission meeting adopting the rules, Staffers did explain in plain language how it works in practice and what I have blogged from the beginning is correct.
If you’re trying to figure out what your “mailing date” was for this past season, I imagine the SEC will look for that date the way it does under Rule 14a-8 (as that issue is not clearly addressed in the access adopting release). So the date of the proxy statement likely controls (although if your affidavit of mailing has a different date, that might control – the date on the affidavit hopefully would not be earlier than the date on the proxy statement since definitive proxy materials need to be filed with the SEC before delivery commences.
Join us on October 20th for the webcast – “The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank” – to hear former Senior Staffers 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 the open issues related to the new proxy access rules plus all the latest from Corp Fin on other matters.
SEC Approves Nasdaq’s (and NYSE’s) Rule Change on Broker Nonvotes and Executive Pay
Yesterday, the SEC approved a Nasdaq rule change on an accelerated basis that amends its proxy voting rule – Rule 2251 – to prohibit broker-dealers from voting on the election of directors, executive compensation, or any other significant matter, as determined by the SEC, unless instructed by the beneficial owner of the shares.The amendment was required to comply with Section 957 of Dodd-Frank.
A few weeks ago, the SEC approved a change to the NYSE’s Rule 452 that prohibits broker-dealers from voting uninstructed shares if the matter to be voted on relates to executive compensation. The change expressly provides that “executive compensation matters” include the three Say-onPay votes created under new Section 14A of the Exchange Act (as added by Section 951 of Dodd-Frank).
Dissecting the Modern Poison Pill
Tune in tomorrow for the DealLawyers.com webcast – “Dissecting the Modern Poison Pill” – to hear Rick Alexander of Morris Nichols, David Katz of Wachtell Lipton and Cliff Neimeth of Greenberg Traurig examine the use of poison pills and how they are constructed in the wake of Selectica, Yucaipa and Barnes & Noble, including factors you should consider when devising a pill. If you are not yet a member, try a 2011 no-risk trial and get the rest of 2010 for free (including access to this program).
