A few months ago, I blogged about how Google may have taken the first step towards creating a “recognized channel” under the SEC’s 2008 Regulation FD guidance. In this podcast, David Calusdian of Sharon Merrill Associates analyzes this, including:
– What did Google recently do?
– For those that might consider doing something similar, what issues should they analyze?
– Do you foresee other companies following Google’s lead?
The Rise of Web Disclosure: Thomson Reuters and Nasdaq OMX Set to Launch
Recently, I blogged about concerns regarding how the traditional business wires might unevenly distribute the news. Over the past week or so, Dominic Jones has been conducting experiments to illustrate a different point – the potential ineffectiveness of traditional PR wire distribution.
Earlier this morning, Dominic blogged about a development that has “the potential to substantially streamline and reshape disclosure practices at thousands of US companies.” Thomson Reuters and Nasdaq OMX are set to launch platforms to help companies use web disclosure more extensively – which may dramatically reduce the use of PR newswires. Thomson Reuters and Nasdaq OMX provide IR webpage hosting services for about 2700 and 1078 companies, respectively – and intend to charge a flat annual fee (in comparison to the standard PR newswire practice of charging by the word).
Thomson Reuters has posted a fact sheet and white paper about its upcoming product offering – and here’s Nasdaq’s press release on its new DIY service.
PCAOB: New FAQs for Non-US Auditors Due to EU’s Directive on Statutory Auditors
Yesterday, the PCAOB issued staff guidance – in the form of FAQs – related to the registration process for applicants from non-U.S. jurisdictions where the PCAOB is prevented from inspecting PCAOB-registered firms. The affected jurisdictions currently are the 30 European countries that are required to follow the European Union’s Directive on Statutory Auditors, China, Hong Kong, and Switzerland.
Maybe these are more common than I realize – but the SEC announced a while back this settled C&D order against ECO2 Plastics, a Pink Sheet company for not disclosing effective disclosure controls as well as the lack of effective internal controls. The order states that the company failed to comply with Item 307 of Regulation S-K in its ’08 and ’07 annual reports and Item 308T of Regulation S-B in ’07.
I can’t recall seeing a case where lack of disclosure controls disclosure was the primary charge alleged; usually it is a tack-on to some other charges. The order doesn’t provide much in the way of details, so I can’t quite figure out how egregious were the circumstances that led to these charges. In September ’09, the company filed an amended Form 10-K for 2008 (after it had already filed a prior amended Form 10-K in August) to include the Item 9A disclosure control disclosures that it omitted from the company’s 2008 Form 10-K (and it omitted the Item 8A disclosures in its 2007 Form 10-KSB). This new 9A disclosure includes a paragraph describing how the company couldn’t perform an adequate assessment of internal controls in ’07.
Based on all this, I think the case is predicated on failing to provide the required disclosure control disclosures for two years and failing to have effective internal controls in one. So lesson learned…
Lawyers as Actors
In this podcast, Howard Kline discusses his new acting activities, including:
– What new hobby have you picked up over the last few years?
– What led you to try something new?
– Do you think being a lawyer helped you in your acting career?
– And vice versa, does acting help your lawyering?
Our June Eminders is Posted!
We have posted the June issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
On the heels of the passing of “The Financial Services Act 2010,” the United Kingdom’s new coalition government announced that it will not disband the Financial Services Authority – sparing the country’s financial regulator from abolishment. Learn more in this memo in our “European Law” Practice Area.
Sometime today, the UK’s Financial Reporting Council is likely to announce changes to the UK’s “Combined Code on Corporate Governance.”
First DOJ Opinion in ’10 Permits Payment to Foreign Official
Last month, the DOJ issued its first opinion of the year – Opinion Procedure Release No. 10-01 – in which it announced that it would not take enforcement action under the Foreign Corrupt Practices Act against a U.S. company that proposed to pay a foreign official for services the foreign official would provide on behalf of the US company. Learn more in this memo posted in our “Foreign Corrupt Practices Act” Practice Area.
Yesterday, the final version of the Senate’s Dodd bill – the “Restoring American Financial Stability Act of 2010” – was made publicly available. At 1,615 pages, it will take quite some time to print (and read!).
If you’re interested in just the corporate governance and executive compensation portions of the RAFSA, check out this 23-page excerpt courtesy of Davis Polk. Of course, we continue to post memos analyzing the bill in our “Regulatory Reform” Practice Area (here is a 8-pager with a nice side-by-side comparison of the House and Senate bills). And stay tuned for an upcoming podcast on the Senate bill next week if you are more audio-inclined…
The Skinny on “Virtual” Law Firms
In this podcast, David Goldenberg of Virtual Law Partners explains how the “virtual” law firm model works, including:
– What is Virtual Law Partners?
– How is the firm run differently than a typical firm?
– From a client’s perspective, how are services provided any different?
– What led you to the virtual model?
– How do you overcome the challenges of not being physically together?
Smaller Company M&A: The Latest Developments
We have posted the transcript of our recent DealLawyers.com webcast: “Smaller Company M&A: The Latest Developments.”
As noted in the ISS Blog, KeyCorp became the third company to fail to obtain majority support for its executive pay package at its annual meeting last Friday. The pay package received only 45% support – it received 87% support last year. Here’s the company’s Form 8-K with the voting results.
So KeyCorp joins Motorola and Occidental Petroleum as the first three US companies whose management say-on-pay ballot items didn’t pass. Wow.
Consider the magnitude of this development:
– These three companies are not Wall Street banks where the general public is angry over banker bonuses.
– There were no organized campaigns against the pay packages at these three companies. This was a pure grass roots movement. With organized campaigns, imagine the level of votes.
– Only a few hundred companies have say-on-pay on their ballot this year; a small fraction of the 10,000 that will have it on their ballot next year when Congress makes it mandatory.
– If the Senate provision remains in the final bill changing NYSE Rule 452, say-on-pay will become a “nonroutine” agenda item – and broker nonvotes won’t be available to be cast in favor of pay packages. This means it will become harder to obtain majority support for executive pay packages.
Among the 40-plus panels, we have tailored a special track to help you prepare for mandatory say-on-pay including these panels:
– “Say-on-Pay: The Proxy Solicitors Speak”
– “Say-on-Pay: Successfully Communicating Externally and Internally”
– “The Proxy Advisors & Investors Speak: Their Hot Button Issues and Say-on-Pay”
– “The New Compensation Legislation: What to Do About Say-on-Pay and More”
– “Five Hot Button Compensation Fixes: In Light of Say-on-Pay and More”
– “This Coming Year’s Grants: How to Deal with Last Year’s Inadvertent Gains”
– “The Big Roundtable: Consultants, Directors and Top HR Heads”
– “Directors Speak Their Minds on Executive Compensation”
With Conference registrations going strong – on track to reach nearly 2000 attendees – you don’t want to be caught unprepared as we head into next year. Last year’s Conference sold out a month in advance – and that was without the reality of mandatory say-on-pay hanging over our heads.
Act Now: You have two choices – either attend the “18th Annual NASPP Conference” in Chicago (which includes the ability to attend the “7th Annual Executive Compensation Conference” – or attend the “7th Annual Executive Compensation Conference” by video webcast (which includes the “5th Annual Proxy Disclosure Conference”).
Handicapping the House-Senate Conference Committee Reconciliation
Although we will not officially know the entire composition of the House-Senate Conference Committee that will reconcile the Senate and House versions of a financial reform bill for a few more weeks, we do know that Rep. Barney Frank will head the Committee (as noted in the NY Times’ DealBook) and we do know the twelve Senators that will be included in that Committee (as noted in this Reuters article; this Reuters article identifies likely House members of the Committee even though they won’t be officially named til week of June 7th). Congress – and President Obama – have a goal to wrap up a final bill by the 4th of July recess.
Even though the House’s bill was weaker in the governance area, it is likely that Rep. Frank will push to keep the stronger Senate provisions in the final bill – with some tweaks as noted below – given that very few of the 400-plus proposed amendments to the Dodd bill dealt with governance issues. The real reconciliation debate will center on how financial institutions are regulated (ie. derivatives, “too big to fail”, etc. – see Frank’s comments in these areas yesterday).
Note that Barney Frank wants the Conference Committee negotiations televised.
Barney Frank Speaks: His View of Which Governance Provisions Will Survive Reconciliation
According to this article, Rep. Frank yesterday said that the specific language regarding the proxy access provision was up in the air. He also said that the Senate provision for a self-funded SEC may be tweaked to keep Congress involved somewhat – and he indicated that the House provision to exempt smaller companies from SOX’s internal controls requirement may survive. According to the ISS Blog, Frank said that the Senate’s majority vote requirement could well be stripped out in the final bill.
Below is a piece written by CongressDaily’s Bill Swindell entitled “Frank Sees SEC Self-Funding Language As Ripe for Revision” that covers a number of topics:
A drive to allow the SEC to self-fund its budget by retaining fees it collects will likely have to be modified to allow for greater oversight by appropriators, House Financial Services Chairman Barney Frank said Tuesday. Frank said conference negotiators on legislation to revamp the nation’s financial regulatory system will have to take into account the resistance of appropriators to SEC self-funding because they would lose their power to dictate its budget.
“The Appropriations Committee gets very upset about this. What I am hoping that gets worked out, and it will be with their participation, is a way to do some self-funding, which leaves the Appropriations Committee with a role,” Frank said during a talk at the Compliance Week annual conference. The Senate bill contains the provision, allowing the agency’s chairman to submit a budget to the SEC, but it would automatically get the amount requested. The language was sponsored by Sen. Charles Schumer, D-N.Y., who has argued the agency needs more resources to monitor wrongdoing in the aftermath of the Bernard Madoff and Allen Stanford fraud cases. The House bill set an increase in authorization levels.
The FY10 funding for the SEC was $1.1 billion, a $151 million increase over FY09. It has requested $1.26 billion for FY11. The agency collected $1.5 billion in fees in 2008. “The appropriators are going to push hard to maintain some role, and I think they will be successful,” Frank said. Both bills give the SEC authority to issue rules that would allow shareholders to nominate board of director candidates through increased proxy access. “I think we are at least going to empower the SEC to do it. Beyond that, I’m not sure,” Frank said.
The SEC last year proposed a rule to require companies in some cases to include in their proxy materials the nominations for directors by shareholders, but held off on finalizing the proposal. The U.S. Chamber of Commerce and other business groups question whether the agency has the right to issue rules over corporate governance standards that are enacted at the state level.
The Senate bill, however, includes additional Schumer provisions, such as requiring that directors in uncontested elections receive a majority of the votes cast, or they must tender their resignation. It also would require the SEC to issue rules to require public companies in their proxy statements to disclose why the same or different people serve as chairman and CEO. Frank said he did not know if the additional Schumer provisions could withstand negotiations, though they are a priority for the New Yorker.
Frank expressed some skepticism for a drive to separate the CEO and chairman duties. “In my experience, it hasn’t made a lot of difference if you have looked at the performance, of separating the CEO from the chairman of the board. People say it’s very important. But my guess is that if you threw up the list of major companies, and didn’t tell people which was which, there wouldn’t be [a] way to differentiate by any kind of results and analysis,” he said.
The Senate appointed its conferees Tuesday, with a 7-5 ratio of Democrats to Republicans. Frank said the House will appoint its conferees the week of June 7, and he recommended a party-line ratio of eight to five. “We have an administration that feels strongly about this, and I expect House leadership will be engaged more than they were last year when health care took up much of their time and when they paid us the compliment of trusting us,” Frank wrote to Democratic members of his panel.
“Their greater involvement will not imply a lack of trust, but simply the fact we are down to a very few important issues where the administration will be strongly expressing its view,” he continued. “There is also the fact that the need to keep 60 votes in the Senate will be something of a constraint.”
Yesterday, the U.S. Supreme Court denied the petition for certiorari filed by Textron, leaving the decision in favor of the IRS in the First Circuit in place. What this means, given the split of authority in the Circuits, is unclear – other than that it means continued uncertainty with regard to the protected status of tax workpapers.
Here is more of a drill down: the Supreme Court’s denial of the petition for certiorari filed by Textron leaves in place the en banc decision of the U.S. Court of Appeals for the First Circuit in United States v. Textron, Inc., 577 F.3d 21 (1st Cir. 2009). That decision held that Textron’s tax workpapers, which were shared with its auditor, were prepared in the ordinary course in connection with preparing its annual financial statements and were not case preparation materials prepared “because of” or “for use in” litigation, and thus were not subject to protection from IRS summons under the work product doctrine.
The Supreme Court’s denial of cert. leaves the strict First Circuit test in place, which is in conflict with tests applied in other circuits. For example, the test in the Second Circuit applied in United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998), is whether the materials were prepared “in anticipation of” or “because of possible” litigation. This was the test previously applied by the First Circuit in Maine v. United States Dept. of Interior, 298 F.3d 60 (1st Cir. 2002).
The Fifth Circuit applies a stricter test but still not as strict as the First Circuit’s test in Textron. In United States v. El Paso, 682 F.2d 530 (5th Cir. 1982), the Fifth Circuit required the prospect of litigation to be the “primary motivating factor for the preparation of the documents.” Thus, until clarified by the Supreme Court in another case, we have uncertainty in the status of tax workpapers and other materials shared with auditors, and companies in the First Circuit share such materials with auditors at their peril.
Third-Party Review of Executive Compensation Practices II
In this follow-up podcast on CompensationStandards.com, Greg Taxin of Soundboard Review Services discusses the latest developments for Soundboard Review Services (here is the first podcast), including:
– Soundboard has been quoted in its first proxy this year, for DuPont. Can you tell us what the DuPont board engaged you to do?
– How are investors using the information provided by DuPont in its proxy about your review services? Have investors contacted you?
– Having now done a number of these reviews, can you share any surprising practices you have seen or best practices that are perhaps uncommon?
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– 0.3% of Directorships Voted Down in 2009: Will 2010 Be Different?
– Proxy Access: Notes from a Stanford Law Panel
– New Type of Whistleblower: State Securities Regulator Resigns in Protest
– The Problem with IFRS: Little Independence for the IASB
– More on “Earnings Releases: Google’s Site as a ‘Recognized Channel'”
Even though the Senate has not yet made available the final Dodd bill – reflecting the various amendments adopted during the last few weeks of Senate floor debate – and the final bill is not expected to be released for several days, we have begun posting memos from firms in our “Regulatory Reform” Practice Area. These firms have written their memos based on an assessment of where the bill ended up…
Note that the final tally of proposed amendments exceeded 430 – an average of 4.3 per Senator!
Virginia’s New “Financial Fraud Task Force”
Last week, the USA Today carried this article about a new multi-agency federal task force focused on financial fraud cases – with a priority on securities cases – that will be based in Richmond, Virginia. The US Attorney’s Office in Richmond will coordinate the Task Force with the SEC, CFTC, FBI, US Postal Service and IRS, as well as state law enforcement agencies. The arrangement is described as a partnership born as a “boots-on-the-ground outgrowth” of the interagency Financial Fraud Enforcement Task Force established by President Obama last November.
According to the USA Today article, the government is excited because potential jurors in the Virginia area are perceived to be supportive of government action – and because the federal docket moves cases from indictment to trial in 90 to 150 days, a true “rocket docket.”
How does eastern Virginia have the legal right to handle almost any securities law fraud case? Because the filings from publicly traded companies go to the SEC’s EDGAR computer server in Alexandria, Virginia. The EDGAR servers moved there from DC more than a decade ago. Also, this BusinessWeek article notes that the Federal Reserve in Richmond is one of the primary hubs for wire transfers.
Update on “Carried Interest” Legislation
Here is news from Davis Polk: On May 20, Democratic House and Senate tax writers released a tax extenders package (H.R. 4213) that includes provisions relating to the taxation of carried interest received by investment fund managers.
In general, the proposal would tax carried interest (and gain on the disposition of carried interest partnership interests) as ordinary income and as income subject to self-employment taxes. The new bill is substantially similar to the version originally proposed by Rep. Levin and passed by the House in December, with the following changes.
– The most significant change is that, in the case of partners who are individuals, ordinary income treatment and self-employment tax would apply to only 75% of each item of income comprising the carried interest. For taxable years beginning before 2013, the percentage would be 50% instead of 75%.
– The new version would generally apply to taxable years ending after the date of enactment, which therefore would include calendar year 2010 if the bill were enacted this year. Pursuant to a special provision, however, the new rules would apply only to partnership income for the post-enactment portion of the year (or, if less, partnership income for the entire enactment year). In the case of disposition gains, the new proposal would apply only to transactions occurring after the date of enactment.
– The new version would clarify that gains attributable to a general partner’s own out-of-pocket cash contributions are eligible for capital gain treatment even though those contributions are not subject to management fees or carried interest (and thus are not pari passu with limited partner interests).
– The new version includes various other technical changes. Among other things, these changes would:
o Exclude the disposition of a publicly traded partnership interest by an individual who does not provide investment management services.
o Exclude the contribution of a carried interest partnership interest to an upper-tier partnership if the contributing partner elects to treat the upper-tier partnership as an investment services partnership interest.
Yesterday afternoon, the US Senate passed a motion for cloture by a vote of 60-40 after failing to get a majority for this motion on Wednesday. Then, the Senate didn’t take advantage of the limited 30 hours of debate that cloture provides – instead it cleared a handful of procedural hurdles and passed the Dodd bill itself (the final bill is not yet available; I will blog when its posted; here’s the rollcall on how each Senator voted).
After several weeks of debate, the U.S. Senate voted 59-39 this evening to approve Senator Christopher Dodd’s wide-ranging financial reform legislation. The vote was largely along party lines, but four Republicans voted for the bill.
The final text was not immediately available, but the version of the bill brought to the floor included provisions to require majority voting in board elections and annual shareholder votes on executive compensation. The bill also affirmed the authority of the SEC to issue a proxy access rule.
The legislation will have to be reconciled with a narrower reform bill that the House of Representatives approved in December. That bill includes an advisory vote mandate and a proxy access provision, but not majority voting. A joint House-Senate conference likely will be held in June, and Democratic leaders hope to have a compromise bill ready for President Obama to sign by the July 4 holiday.
And more information from this excerpt of a WSJ article (see bottom of this article for bullets about where the Senate and House bills differ):
Sen. Gregg was one of 37 Republicans to vote against the 1,500-page bill. But the legislation ultimately passed with a narrow bipartisan majority. Four Republicans joined with 53 Democrats and the Senate’s two independents in support of the package. Two Democrats voted against the bill, and two senators weren’t present for the vote.
Now Congress will need to reconcile the Senate bill with a companion House package adopted in December on a 223-202 vote, with 27 Democrats joining unanimous Republican opposition.
The outlines of the two bills are largely the same. But there are more than a dozen notable differences that will need to be reconciled during negotiations that are expected to start within days. Despite the differences, the Senate passage virtually ensures that some type of financial regulatory reform will be finalized by this summer.
Leading the negotiations will be House Financial Services Chairman Barney Frank (D., Mass.), who has said he would like to have a compromise package by the end of June.
Insights: Delaware’s Latest Changes to the DGCL
In this DealLawyers.com podcast, John Grossbauer of Potter Anderson & Corroon provides some insight into this year’s changes to the Delaware General Corporation Law.
From “The Motley Fool,” here’s some great commentary about the ways of the world from Berkshire Hathaway’s Charlie Munger.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Careers: Three Tips for Younger Lawyers
– Delaware Supreme Court Affirms In Part, Reverses In Part, And Remands Court of Chancery’s Ground-Breaking Decision On Bylaw Amendments, “Stockholders of Record” and “Vote Buying”
– SEC Proposes Large Trader Reporting System
– Special Litigation Committees: Chancellor Chandler Weighs In
– Do You Need to Use Director Nominee Questionnaires?
Yesterday, the motion for cloture in the US Senate failed 57-42 regarding the Dodd bill, as noted in this blow-by-blow account in the WSJ. This motion would have limited further debate over the 300-plus proposed amendments to just 30 hours before forcing a vote on the bill (Yes, I said over 300 amendments! That’s an average of more than three per Senator for those playing at home).
This means that the Dodd bill might not be passed this week as expected (see this Washington Post blog) – and so far there has been no Manager’s Amendment, as well as no real way of knowing whether the amendment to kill proxy access and majority voting will be voted upon before the Senate’s tussling ends. Thanks to the folks at Davis Polk and others for helping me sort through the chaos on the Senate floor…
Audit Inspections: Some Countries Refuse to Play Ball with US Regulators
Earlier this week, the PCAOB published this alert that contains a list of foreign issuers where the PCAOB has been denied access to the information necessary to conduct inspections of the audits of those companies (as noted in this Accountancy Age article, this lack of information sharing may hinder a Lehman investigation). In these jurisdictions, the related governments have failed to cooperate with the SEC and PCAOB in coming up with a meaningful inspection process for these audits.
At a recent Investor Advisory Group meeting, investors encouraged the PCAOB to make this list publicly available so investors could determine which audits are not subject to the type of auditing framework that exists for US issuers. Due to this tug of war, there is greater uncertainty over the quality of the independent audits for these companies, including the integrity of their financial statements and their compliance with IFRS.
Posted: The SEC’s Semiannual Regulatory Agenda
Recently, the SEC posted its seminannual regulatory agenda, in which it reports its progress on rulemaking to Congress. From this list, you can see that the SEC has been busy – and will continue to be so. But there are no real surprises to be gleaned from the agenda…
As I’ve been blogging, one of the battles in the Senate has been over the future of Regulation D (as strange as that is) – as I blogged yesterday, it looks like there is now closure on that issue for the Dodd bill. Here is the latest from Alan Parness of Cadwalader:
Regarding the proposed amendments to Sections 412 and 926 of S. 3217 introduced by Senators Bond et al last Thursday as SA 4037, such amendments have been supplanted by new amendments introduced on Monday by Senator Bond et al, as SA 4056, and those amendments were passed by voice vote of the Senate that evening. Here’s SA 4056 and its record from the Thomas (Library of Congress) website.
By my read of SA 4056, I noticed only a few minor changes to Sections 412 and 926 from the versions in SA 4037. Note that while the SEC’s initial review and adjustment of the definition of “accredited investor” in accordance with Section 412(b)(1) appears to be optional [“The Commission may undertake a review . . .”], Section 412(b)(2) mandates that the SEC undertake reviews of the definition every 4 years thereafter, but solely as regards the definition of the term in 17 CFR Sec. 230.215 (Rule 215 under the ’33 Act for purposes of the definition of “accredited investor” in Section 2(a)(15)(ii) and, in turn, the Section 4(6) exemption), but not as regards the definition in Rule 501(a) of Reg. D. The version of Section 412 in SA 4037 made no such distinction between the rules.
Of course, what remains to be seen is what the SEC does in accordance with the rulemaking directives of Sections 412 and 926, if those provisions are ultimately enacted in the versions set forth in SA 4056.
Coming Soon: The Next Phase-In for XBRL
Over the next several months, companies will face additional implementation milestones to provide XBRL-tagged financial statements with their SEC filings. For financial statements for periods ending on or after June 15th, the largest companies (ie. first phase-in group) must provide detailed tagging for financial statement notes and schedules as an exhibit to their filings.
Concurrently, all other domestic and foreign large-accelerated filers using US GAAP (second phase-in group) must submit their first XBRL-tagged financial statements. This memo from KPMG summarizes guidance from a recent SEC Staff webcast that covered detailed tagging phase-in requirements, rules about changes in filing status during the three-year phase-in period, and other implementation issues.
May-June Issue: Deal Lawyers Print Newsletter
This May-June issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Loyal to Whom? Recent Delaware Decisions Clarify Common Stockholders Are Primary Beneficiaries of Directors’ Fiduciary Duties
– Recent Trends in Earnout Use: A Cautionary Note
– The Shareholder Activism Report: Recommendations to Consider
– Delaware Chancery Opens Door for Next Gen Poison Pill
– More Takeaways from Selectica
If you’re not yet a subscriber, try a 2010 no-risk trial to get a non-blurred version of this issue on a complimentary basis.
