It’s been quite some time since the SEC’s Enforcement Division brought a Regulation FD case (two years since the last one) – and I count only nine such cases since Reg FD was adopted earlier this decade (according to the list in our “Regulation FD” Practice Area). On Thursday, the SEC announced an administrative proceeding in which a former American Commercial Lines CFO (Christopher Black, who was the company’s de facto IRO) agreed to pay $25,000 for a Reg FD violation that occurred a few years ago. The CFO is alleged to have selectively disclosed material, nonpublic information regarding the 2nd quarter ’07 earnings forecast to a limited number of analysts. Here is the SEC’s complaint.
Here is a summary of what allegedly happened according to the complaint:
– In mid-2007, the company issued a press release projecting second quarter earnings in line with 1st quarter earnings.
– Later that week, the CFO sent an e-mail from his home to the eight sell-side analysts who covered the company that said that the company’s earnings per share for the second quarter “will likely be in the neighborhood of about a dime below that of the first quarter,” effectively cutting in half the second quarter earnings guidance.
– This selective disclosure and resulting analysts’ reports triggered a significant drop in the company’s stock price.
The SEC’s litigation release identified these factors to explain why an enforcement action wasn’t pursued against the company itself:
– Prior to the selective disclosure by Black, the company cultivated an environment of compliance by providing training regarding the requirements of Regulation FD and by adopting policies that implemented controls to prevent violations.
– The CFO alone was responsible for the violation and he acted outside the control systems established by the company to prevent improper disclosures.
– Once the illegal disclosure was discovered by the company, it promptly and publicly disclosed the information by filing a Form 8-K with the SEC the same day.
– The company self-reported the conduct to the SEC Staff the day after it was discovered and the company provided extraordinary cooperation with the Staff’s investigation.
– The company took remedial measures to address the improper conduct, including the adoption of additional controls to prevent such conduct in the future.
These factors noted by the SEC serve as a good reminder that companies should have Regulation FD policies and well-documented compliance training programs in place. In our “Regulation FD” Practice Area, we have a bunch of sample Reg FD policies.
PCAOB Issues 1st Year AS #5 Implementation Report
Last Thursday, the PCAOB issued a report on the first year of implementation of AS #5 regarding internal controls. In FEI’s “Financial Reporting Blog,” Edith Orenstein wonders whether the SEC’s “Study of the Costs and Benefits” regarding internal controls reporting under the SEC & PCAOB rules is not far behind…
Many companies have adopted stock ownership guidelines requiring executives and directors to own stock in their company based on a multiple of their salaries or board retainers. With the current market downturn and drop in net worth for many people, some companies are changing their stock ownership guidelines. Below are the results from a recent survey we conducted on this topic:
1. At our company, we are:
– Enforcing our stock ownership guidelines without change – 52.2%
– Revising our ownership requirements – 23.3%
– Terminating or suspending our stock ownership guidelines entirely – 5.6%
– Granting waivers selectively to executives or directors who aren’t meeting the guidelines – 3.3%
– We don’t have stock ownership guidelines – 15.6%
Please take a moment to respond anonymously to respond to our “Quick Survey on “Board Committees Interacting with Full Board
.”
Move SEC’s Enforcement to DOJ? Good Grief…
If I tried to give my opinion on each of the hundreds of reform recommendations made in the wake of the financial crisis, that’s all this blog would be about. Plus, it’s probably humanly impossible to keep up with them all. Everyone has a say in how we should fix what is broken.
But sometimes I see something that causes my brain to hurt and I can’t help but say something. This Bloomberg article posits the idea of “spinning off” the SEC’s Enforcement Division to the Department of Justice because Enforcement
needs “independence.” And now I quote from the article, “That way, after people in the division of market regulation “notify the pit bulls” in enforcement about suspicious activity, the SEC has no further role in the investigation and can’t be pressured by the target firm to go easy.”
Ah, where do I start…I guess with these thoughts:
1. The SEC is an independent agency – just like the DOJ. It’s only been politicized during the last decade by an intruding Congress who had pushed for deregulation (as I’ve blogged about before) – just like the DOJ became politicized this decade (remember Alberto Gonzales?).
2. Not to say the SEC hasn’t slipped up occasionally this decade, but I haven’t seen the DOJ do anything particularly stellar recently. At this time, the SEC only has the authority to bring civil actions for violations of the federal securities laws – the DOJ is the agency tasked with bringing criminal charges. Do you see the DOJ using that authority to bring criminal charges against the perpetrators of the financial meltdown? I don’t.
3. Do the folks behind this idea think that the DOJ (or any other law enforcement in the world) doesn’t engage in negotiations with targets to arrive at a compromise solution? The SEC doesn’t go “easy” with its targets.
4. There is a clear lack of understanding about how the SEC really works in this article. Investigations with Market Reg or Corp Fin implications aren’t simply “handed off” to Enforcement. For example, Enforcement Staffers rely on Corp Fin Staffers for their expertise to help parse financial fraud.
I agree with the idea in the article that Enforcement should build a better mechanism to allow investors to submit complaints. But people have to realize the very limited resources of the SEC – it only has so many horses. And the number of crazy complaints that the SEC receives would boogle your mind (and that’s before this market crash). Thousands of investors who gambled in the market and lost think they have a case against someone. That somehow investing in the market was a guarantee. Do you want to spend your money as a taxpayer chasing down every single one of these crazy “leads”?
This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Convertible Debt Exchange Offers: Considerations for Distressed Issuers
– Mitigating Value and Dilution Risks in Stock-for-Stock Mergers
– Caveat Everybody: Changes in Control as Assignments of Contract Rights
– Substituting Tort for Contract: Tortious Interference Claims Against M&A Affiliates
– How long did the process take to produce this Report?
– What are the Report’s major findings?
– Any surprises in the Report?
– What do you hope will happen in response to the Report?
More on “Poll Results: How Do You Look Up a SEC Rule?”
Below is some member feedback on my poll results regarding how folks look up SEC rules:
– I have gotten used to using the CFR, even though it’s only updated once a year. I figure I keep up with Corp Fin stuff enough that I know where recent changes are. I teach with someone from a big firm and she is confounded when I use the CFR.
– Back in my youth, even the lowliest green goods associate at Big Law got a huge 7-volume set of CCHs. It was full of annotations and references and regulatory history and no-action and interpretation cites that were helpful, especially when you didn’t know anything. Not sure if those are still around, but so much more information is readily available (like on this site) that I imagine it isn’t used much anymore due to a hefty price tag.
More on “The Mentor Blog”
We continue to post new items daily on our new blog – “The Mentor Blog” – for TheCorporateCounsel.net members. This blog might be misnamed – it’s not just about mentoring – it covers all types of developments and practice pointers that can prove useful in your daily practice.
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:
– How Do We Turn the Legal Profession Around?
– Annual Report Distribution Service: Scam?
– The One-Year Law School
– How Common are “Risk Committees”?
– California Simplifies Requirements for Electronic Communications to Shareholders and Corporate Members
– The Original “Original Thinker”: Bob Monks
As noted by Gibson Dunn: Recently, the Nasdaq Listing and Hearing Review Council sent a paper to Nasdaq companies seeking comment on whether it should adopt a “comply or disclose” approach for certain corporate governance practices as an alternative to additional, substantive requirements, noting that some non-U.S. markets follow a “comply or disclose” model and that it “offers flexibility to companies and transparency to investors and allows practices to evolve in a logical manner.”
Accordingly, the Nasdaq paper solicits comment about a range of practices, including board leadership, resignation policies for directors that fail to receive majority votes, annual director elections, and shareholder ratification of a company’s outside auditor. Any required disclosures would appear either in a company’s proxy, in the case of most U.S. companies, or in its annual report filed with the SEC for all other companies. Comments are due by October 30th.
How to Sell a Division: Nuts & Bolts
Join us tomorrow for the DealLawyers.com webcast – “How to Sell a Division: Nuts & Bolts” – to learn more about one of the most popular methods to change a company’s focus – and raise much-needed cash: selling a division. Join these experts:
Last week, the SEC announced that three subcommittees of its newly-formed Investor Advisory Committee have been formed to address specific categories of regulatory issues. Here is the Committee’s new web page. And the PCAOB has announced the 19 members of its inaugural Investor Advisory Group. Only three members are duplicated among the SEC’s group of 17 (with another member “ex officio”). That’s not too bad…
A few weeks ago, the Aspen Institute released a report (here is the press release) entitled “Overcoming Short-Termism: A Call for a More Responsible Approach to Investment and Business Management,” signed off by a number of well-known governance experts on all sides of the governance debate. It’s short (6 pages) and comes when high-frequency and flash trading have come under regulatory attack (as I blogged about recently – and last week, the SEC proposed rules to ban flash trading).
The Aspen report makes recommendations for three basic problems:
1. Fees – High rate of portfolio turnover harms investor returns.
2. Short-Term Focus Harmful in Long Term – Short-term traders have little reason to care about long-term corporate performance – so are unlikely to exercise a positive role in promoting corporate policies and can lead to market failures, social and environmental degradation.
3. To Whom Do Executives/Boards Owe Duties? – If managers and boards pursue strategies to satisfy short-term investors, they can put the interests of shareowners seeking long-term growth and sustainable earnings and Corporate America’s future at risk.
This is a noble effort and should be helpful to assist the SEC and other regulators push investors towards longer-term thinking, if that is possible given how “buy and hold” investors got crushed in the recent downturn…
SEC Adopts (and Proposes) Rules to Further Strengthen Oversight of Credit Rating Agencies
Last week, at an open Commission meeting, the SEC adopted (and proposed) a bunch of rules changes designed to strengthen their oversight of the credit rating agencies (specifically, these rules). Here are Chair Schapiro’s opening remarks. Some of the proposals could impact the disclosure obligations that companies have – so this is not just news for rating agencies (I’ll leave it to Dave to blog about this point in the near future).
Some aren’t convinced that the SEC’s approach to reform of the rating industry is sound – they worry that the inherent conflicts of interest will continue to entice the agencies to give more favorable ratings than deserved since the SEC’s rule changes don’t alter that dynamic at all. For example, see Steve Pearlstein’s column from Friday’s Washington Post.
Full Steam Ahead: SEC Decides to Pursue BofA Bonus Disclosure Trial
Last week, I blogged about US District Court Judge Jed Rakoff’s refusal – with a stinging rebuke to both the SEC and Bank of America – to approve a $33 million settlement between the SEC and BofA over allegations of misleading proxy materials because the bonus obligations due to Merrill Lynch employees were not fully disclosed. I noted how the SEC had limited options because it argued before Rakoff that that there was insufficient evidence to charge individuals – and that the SEC’s best bet may be to dismiss the case and file an administrative claim that wouldn’t be heard in federal court.
Well, what do I know. Yesterday, the SEC filed a case management plan in Rakoff’s court and issued a statement that it would proceed “vigorously” to pursue its case against Bank of America, including:
“As we alleged in our complaint last month, Bank of America did not provide investors with complete and accurate information about the bonuses to be paid by Merrill Lynch to employees. We believe that this disclosure failure violated the federal securities laws.
We firmly believe that the settlement we submitted to the court was reasonable, appropriate and in the public interest. As we consider our legal options with respect to the court’s ruling, we will vigorously pursue our charges against Bank of America and take steps to prove our case in court. We will use the additional discovery available in the litigation to further pursue the facts and determine whether to seek the court’s permission to bring additional charges in this case.
In deciding how to proceed, we will, as always, be guided by what the facts warrant and the law permits.”
As part of it’s announcement, as noted in this Washington Post article, the SEC intends to broaden its investigation into alleged wrongdoing at the company and may seek additional charges as it prepares for the trial…
With the expiration of the comment period and rumblings of next proxy season heard in the not-so-far off distance (not to mention the huge attendance for our webcast on the topic last week; audio archive now available), a lot of members are wondering if the SEC indeed will adopt proxy access – and if so, when. Based on statements from the SEC, the short answers seem to be “yes” and “in time for next proxy season.” I’ve heard from quite a number of sources – bear in mind, all of them from outside the SEC – that the SEC will hold an open Commission meeting to adopt something in the mid-November range.
As noted by Prof. Lisa Fairfax in the “Conglomerate Blog,” SEC Chair Schapiro spoke last week and indicated that something would likely be adopted soon. Lisa then went on to provide some notes about what Schapiro said in reaction to some questions at the end of her speech – so it’s worth reading her blog in tandem with Schapiro’s speech…
Survey: Shareholders “Just Voting No” Rises
Over the weekend, as noted in this NY Times article, proxy advisor PROXY Governance released a survey showing a significant increase in the percentage of director nominees who received high percentages of shareholder votes cast in opposition in director elections during the first eight months of 2009. Here are the major findings:
– Although the vast majority of director nominees continue to be elected with little opposition, through August 2009, 9.8% of unopposed director nominees had at least 20% of shares voted against them or withheld, up from 5.5% in 2008.
– This trend was apparent at other threshold levels as well, with the percentage of directors having at least 40% of shares voted in opposition doubling from 1% in 2008 to 2.1% in 2009, and the percentage of directors failing to attain support from a majority of shares cast tripling to 0.6% in 2009 from 0.2% in 2008.
– Of all director nominees who had more than 20% of shares withheld or voted against them in board elections, nearly 60% served on compensation committees.
– Despite fewer organized “Vote No” campaigns against directors in 2009, at least 84 directors at 48 companies failed to attain majority support from shareholders through August 2009 at more than 2,400 companies where voting results were available.
– Beginning in 2010, discretionary voting by brokers will no longer be allowed in director elections. Because brokers control up to 20% of the vote at many companies and almost always vote with management’s recommendations in director elections, the new rules could result in many more directors failing to achieve majority support. For example, out of PROXY Governance’s universe of director votes through August 2009, there were 284 director nominees who were elected with less than 60% of shares cast in support and 473 nominees elected with less than 65% support of the shares cast. Many of these directors would likely not have received majority support if broker discretionary votes had not been counted.
Microsoft Becomes First Company to Adopt Triennial Alternative for Say-on-Pay
Late Friday, Microsoft announced that its board authorized moving forward with a triennial say on pay approach starting with this year’s meeting, being held on November 19th. On the “Microsoft on the Issues” Blog, the company’s General Counsel and Deputy General Counsel provide more background on the issue and details of the plan adopted.
You may recall that the Carpenters Union had been pushing this triennial alternative (as noted in this blog) – but that it had more recently withdrawn the proposals it had submitted to 20 companies on the topic in the wake of the House considering but rejecting the idea when it passed a say-on-pay bill in early August. Maybe Microsoft’s action will provide some momentum towards the idea, although it could be too late as the Senate plans to consider a bill in the coming months…
Effective September 1st, New York has a new law that imposes new requirements for the creation of valid power of attorneys, both statutory and non-statutory. While this likely will impact you on some level, a question was raised in our “Q&A Forum” as to how it impacts registration statements, Section 16 reports and Form 10-Ks – since they often have signatures affixed via POAs. Here is a response from Alan Dye:
My view is that the signature requirements for registration statements and other SEC filings (including Forms 4) are a matter of federal law, and aren’t affected by state laws governing power of attorneys (some of which require a notary). I cover this in his Section 16 Treatise, in the section dealing with signature requirements. I’ve never heard the SEC Staff address it – but also have never seen them request confirmation that a power of attorney conforms to state law or requires a notary.
Now that we have seen the SEC’s proposals and Congress’ say-on-pay legislation – that will force you to radically change your executive compensation disclosures and practices before next proxy season – we are wrapping up the ’10 version of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise and Reporting Guide,” which we will deliver to subscribers in early October.
Act Now for $100 (Or More) Discount: To obtain this hard-copy ’10 Treatise when its printed in October (as well as get online access to the ’09 version right now on CompensationDisclosure.com, as well as the valuable quarterly “Proxy Disclosure Updates”), you need to try a no-risk trial to the Lynn, Borges & Romanek’s “Executive Compensation Service” now.
If you order by October 1st, you can take advantage of a $100 or more discount. The many of you that currently subscribe can renew by October 1st to also receive this discount. Get the new Treatise hot off the press when it comes out in a few weeks!
Pay Czar Ken Feinberg Poised to Issue TARP Pay Rules
Yesterday, pay czar Ken Feinberg spoke at a FDIC conference on executive compensation here in DC (this Reuters’ article reports he has 8 speaking gigs before his end of October deadline) and, according to this BNET article, he said he would issue his blueprint for the top 25 employees at financial institutions receiving TARP funds within the next 30 days.
Here is a notable excerpt from the article:
Feinberg suggested the rules he lays out for these companies should serve as a precedent for the entire financial industry, said Jaret Seiberg, a policy analyst with Concept Capital’s Washington Research Group who attended the event. But how broadly the rules are applied is up to officials with the Federal Reserve and SEC, Feinberg noted.
Yesterday, the SEC announced the creation of a new Division – the Division of Risk, Strategy and Financial Innovation. The new division combines the Office of Economic Analysis, Office of Risk Assessment and “other functions to provide the Commission with sophisticated analysis that integrates economic, financial, and legal disciplines.” At least for starters, this Division will have quite a small staff.
As rumored, the SEC lured Professor Henry Hu from Texas to head the new Division. Henry has become famous for his writings on derivatives, including problems with proxy voting. The addition of his expertise comes at a critical time given that broker nonvotes are eliminated next year for director elections. I continue to expect numerous problems as votes become more hotly contested and wind up in court.
I wonder what catchy nickname this new Division will earn – nothing comes to mind like Corp Fin and Market Reg. Maybe just initials like IM?
When Was the Last Time the SEC Created a Division? 1972
Surprisingly, this question stumped me when I pondered this one. So I went to the first logical source I could think of – the SEC Historical Society’s site – and I got zip. Then I turned to a place that has been gathering dust on my bookshelf – the Louis Loss Treatise – and found these nuggets buried in a footnote:
– Current Divisional organization dates back to August 1972.
– Before then the SEC had three divisions: (i) Trading and Markets, (ii) Corporate Regulation (which administered PUHCA and John Huber informs me was the biggest and most important division during the Depression) and (iii) Corporation Finance (actually, Loss uses the term “Corporate Finance,” a common misspelling!).
– ’72 reorg divided Trading and Markets into a Division of Enforcement and a Division of Market Regulation.
– The ’72 reorg also created a new Division of Investment Company Regulation, spun off from the Division of Corporate Regulation.
– In January 1973, the Division of Investment Company Regulation was renamed the Division of Investment Management
– In December 1983, the SEC delegated authority to its General Counsel that ended the Division of Corporate Regulation (and became an Office within the Division of Investment Management).
– In November 2007, the SEC renamed the Division of Market Regulation back to its ’72 name: Division of Trading and Markets.
Note that the sizable Office of General Counsel has never been a Division.
Bonus Question: When was Corp Fin created? The SEC’s 1943 annual report says the agency was reorganized in 1942, creating the Corporation Finance Division. This new Corporation Finance Division was referred to that way in subsequent annual reports until the ’48 annual report, when the SEC (without explanation) referred to the division as the Division of Corporation Finance. Thanks to Alan Dye for digging this nugget out! It should be required learning as part of a new Staffer’s initiation…
More on “The Mentor Blog”
We continue to post new items daily on our new blog – “The Mentor Blog” – for TheCorporateCounsel.net members. This blog might be misnamed – it’s not just about mentoring – it covers all types of developments and practice pointers that can prove useful in your daily practice.
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:
– Delaware Chancery Court Mulls Lawsuit Over Director Resignations
– Tweaking Stock Ownership Guidelines
– Pricing Committees: Pros and Cons
– Law Firms Going Public: Crazy Talk?
– Rule 10b5-1 Plans: Still a Good Idea
– Nearly Complete: The Transition to a Paperless Stock Certificate World
Tune into our webcast tomorrow – “How to Prepare for a Proxy Access World” – to learn the list of tasks you need to perform now including scrubbing bylaws, understanding the demand for stockholder lists process, etc. This program is not a debate about the virtues of the SEC’s access proposal – rather, it will provide practical guidance about what you need to do now ahead of the SEC acting on its access proposal (because by the time the SEC acts, the window to scrub things may be a bit short before the proxy season).
Join these experts:
– Steve Bigler, President and Director, Richards Layton & Finger
– David Drake, President, Georgeson Shareholder
– David Katz, Partner, Wachtell Lipton Rosen & Katz
– Carol McGee, Partner, Alston & Bird
Redlined Version: Corp Fin’s Latest CDIs
With Corp Fin updating a bunch of CDIs over the past few months (egs. on Monday and in August), a number of members have sought redlined versions of the changes. You may want to check out the redlines on the ABA’s Disclosure and Continuous Reporting Subcommittee page, where WilmerHale’s Jonathan Wolfman and Carter Ledyard’s Guy Lander are now manning the fort.
The massive redline of the August CDIs comes courtesy of Jonathan, with the legwork done by WilmerHale’s Michelle Vervais and Alex Greene.
Input for Corp Fin’s Shareholder Proposal Process Meeting
Next Tuesday, Corp Fin is holding a meeting with representatives of some key stakeholders to discuss the process by which the Staff decides on no-action letters regarding shareholder resolutions, as noted by Jim McRitchie. Jim notes that Sanford Lewis and others have prepared a brief survey for shareholders who have had experience in that process to help provide input to the Staff. I think it’s a great idea that the Staff is conducting this meeting – it probably should be an annual pre-proxy season event…
Here’s my pitiful plea before today’s “meat.” Please drop a note and nominate “TheCorporateCounsel.net Blog” to be included in ABA Journal’s Top 100 Blogs. We were named last year and would like to be included in the list again. Yes, it’s vain – but this is a lot of work and peer recognition is appreciated!
Okay, on to the news. Yesterday, Corp Fin updated a slew of new Compliance & Disclosure Interpretations in a variety of topic areas (and issued new interps in one area). It looks like the Division will take advantage of the Web to quickly distribute updated guidance rather than relying on major overhauls every few years like the old days. That’s good news!
Going to Trial? Judge Rakoff Takes SEC to Task in Rejecting BofA Settlement
Yesterday, in a sternly-worded 12-page order, US District Court Judge Jed Rakoff’s refused to approve a $33 million settlement between the SEC and Bank of America over allegations of misleading proxy materials because the bonus obligations due to Merrill Lynch employees were not fully disclosed. As this Bloomberg article notes, even though a February 1st trial is scheduled, the SEC has limited options now because it argued before Rakoff that that there was insufficient evidence to charge individuals. The SEC’s best bet may be to dismiss the case and file an administrative claim that wouldn’t be heard in federal court.
The following excerpt from this NY Times article gives you a sense of how Judge Rakoff felt about the settlement:
He accused the S.E.C. of failing in its role as Wall Street’s top cop by going too easy on one of the biggest banks it regulates. And he accused executives of the Bank of America of failing to take responsibility for actions that blindsided its shareholders and the taxpayers who bailed out the bank at the height of the crisis.
The sharply worded ruling, which invoked justice and morality, seemed to speak not only to the controversial deal, but also to the anger across the nation over the excesses that led to the financial crisis, and the lax regulation in Washington that permitted those excesses to flourish.
Implicit in the judge’s remarks were broader questions on the anniversary of one of the most tumultuous weeks in Wall Street’s history: What do the giants of finance owe their shareholders and the investing public? And who will adequately oversee these behemoths?
As the drama of this case continues to unfold, Bank of America awaits the findings of NY Attorney General Andrew Cuomo as some expect him to file a complaint charging individuals at Bank of America in connection with the disclosure of Merrill Lynch bonuses in the near future.
Obama Speaks on Lehman’s Collapse Anniversary: Latest Timetable for Congressional Reform
Yesterday, President Obama was also stern as he delivered a speech near Wall Street in which he talked about the need for financial reform. As noted in this NY Times article, the window for true reform is quickly closing as the stock market climbs every day. Below is an excerpt from that article about the possible timeline for Congress taking legislative action:
Senior Congressional Democrats had originally planned to have the House complete its work on the financial overhaul before turning to the more recalcitrant Senate. But the tighter time schedule has forced lawmakers to rethink that approach.
Later this week, Barney Frank, Democrat of Massachusetts and the chairman of the House Financial Services Committee, is expected to announce a series of hearings for the coming days before his committee marks up legislation in October. Aides say he is hoping to get legislation to the floor by the end of next month or beginning of November.
There is less certainty in the Senate, where Christopher J. Dodd, Democrat of Connecticut and the chairman of the Senate Banking Committee, has been working to put together a package that could withstand the threat of a filibuster.
