Last week, the SEC adopted a number of changes to its credit rating rules that were originally proposed back in June. Here is the press release and Chairman Cox’s remarks.
This latest round of changes largely originated out of the SEC’s examination of the NRSRO rating practices for structured finance deals. At the open meeting last Wednesday, the SEC did not consider any of the proposed changes to its rules targeted at eliminating references to credit ratings, and it remains unclear whether those rule proposals will move forward. The SEC did not move forward on proposals to require a change in the symbols used by NRSROs for rating structured finance products.
The SEC adopted a number of new prohibited conflicts of interest for NRSROs and their personnel including: (1) making recommendations to an issuer about obtaining a credit rating; (2) having the same personnel discuss fees and ratings; (3) gifts from rated issuers in excess of $25. The rule changes also call for internet disclosure of ratings history when the NRSO follows an “issuer pays” model, and enhanced disclosure of performance measures, verification procedures and credit surveillance policies. Enhanced documentation will be required for model deviations, and credit rating agencies will need to retain complaints about credit analysts.
The SEC also reproposed rules concerning additional internet disclosure for “issuer pays” NRSROs and public disclosure of data underlying structured finance ratings.
From the AICPA Conference: Cox on the SEC’s Fair Value Study
The AICPA’s “National Conference on Current SEC and PCAOB Developments” kicked off in Washington yesterday, and Chairman Cox delivered a speech that covered a number of current accounting concerns at the SEC.
Among the things covered in Cox’s speech were some insights into the SEC’s EESA-mandated study on fair value accounting. His preliminary observations seemed to confirm what was reported in an article in yesterday’s WSJ, which noted that sources indicate that the SEC plans to keep fair value accounting in place, while seeking to refine its application.
Cox noted these preliminary findings from the study:
“First, for many financial institutions, investments marked-to-market through earnings on a quarterly basis represent a minority of their total investment portfolio. A larger portion of investment portfolios consists of available-for-sale securities or loans. As you know, investments in loans and available-for-sale securities are not marked-to-market through earnings each period. Rather, these securities are subject to (in some cases, difficult) judgments on other-than-temporary impairments.
Second, most investors, and many others, agree that fair value is a meaningful and transparent measure of an investment for financial reporting purposes. Financial reporting is intended to meet the needs of investors. While financial reporting may serve as a starting point for other users, such as prudential regulators, the information content provided to investors should not be compromised to meet other needs.
Third, accounting standards have served our capital markets well, but we must endeavor to continue to develop robust best practice guidance for auditors and preparers — particularly for fair value measurements of securities traded in inactive or illiquid markets. Education efforts and the development of application guidance must provide a path for auditors and preparers to reach a common ground on these difficult issues.”
I’ll have more from the AICPA conference later this week.
TARP Update: Is There Progress?
Yesterday, Interim Assistant Secretary for Financial Stability Neel Kashkari delivered remarks at the OTS Annual National Housing Forum. In assessing the progress to date of the TARP program, Kashkari stated:
“People often ask: how do we know our program is working? First, we did not allow the financial system to collapse. That is the most direct, important information. Second, the system is fundamentally more stable than it was when Congress passed the legislation. While it is difficult to isolate one program’s effects given policymakers’ numerous actions, one indicator that points to reduced risk of default among financial institutions is the average credit default swap spread for the eight largest U.S. banks, which has declined more than 200 basis points since before Congress passed the EESA. Another key indicator of perceived risk is the spread between LIBOR and OIS: one-month and three-month LIBOR-OIS spreads have each declined about 100 basis points since the law was signed and about 180 basis points from their peak levels before the CPP was announced.“
With so many important action items impacting your proxy disclosures right now, you will want to read the Fall 2008 Issue of the Compensation Standards print newsletter that covers some key issues regarding proxy disclosures to consider now.
As a bonus, the issue includes a feature entitled “The Box” that provides an important “heads-up” regarding insiders’ margin accounts and a related D&O questionnaire pointer – which alone are examples of the invaluable, timely preventive guidance that this newsletter provides.
Since members of CompensationStandards.com get a free subscription to the Compensation Standards print newsletter, we have posted the Fall issue online. If you’re not a member, try a ’09 no-risk trial and get this issue rushed to you today.
And since all memberships are on a calendar-year basis, members should renew for ’09 today to continue getting this guidance.
Smaller Company Governance
Man, I’ve never seen so many good people get laid off in our field. One of them is Steve Shapiro, who has been in-house counsel for four companies. I recently caught up with Steve in this podcast to learn the corporate governance challenges that smaller companies face, including:
– What are the particular challenges of being a GC/CS at a smaller company?
– What could be easier?
– What resources are helpful?
– Are there differences in dealing with other executives? Boards? Outside advisors like accountants and counselors?
FINRA Issues Guidance on Broker/Dealer Obligations regarding SPACs
Recently, FINRA issued Regulatory Notice 08-54, which provides guidance on the structure, trends and broker/dealer conflicts of interest associated with SPACs. The Notice discusses broker/dealer suitability and disclosure obligations in connection with a SPACs’ IPO, after-market trading and any subsequent acquisitions. The Notice also refers to compliance with NASD Rule 2720, the NASD conflict-of-interest rule, in connection with an acquisition by a SPAC.
As noted in this recent Washington Post article, the SEC will be spending the next six months reshuffling the offices in its new building (price tag = $4.1 million). When the SEC moved into its new building a few years ago, someone in charge of such things had a not-so-brilliant idea – mix up Staffers from the various Divisions on each floor rather than maintain the Divisions on their own floors. End result of that: folks from the same Division communicated far less with each other because they rarely saw each other (and communication already had been reduced due to the popularity of working from home).
Some of the Corp Fin Operation groups are already moving – and this project likely will change the Mail Stops for some of them in the near future. This “restacking” is a great idea, but the timing of it puzzles me given that there is some likelihood of the SEC merging with the CFTC (or other agencies), but I’m sure they have their reasons.
– Why was this survey undertaken?
– What were the major findings of the Survey?
– Were any findings surprising?
– What advice do you have for companies in the wake of the Survey?
Nasdaq’s New Process for SEC Filing Deficiencies
Recently, Nasdaq filed a proposed rule change which would provide more lenient treatment for companies that are delinquent in making periodic filings to the SEC. Under current Nasdaq rules, companies receive a delisting letter immediately upon missing a filing due date. Late filers are not given a compliance period in which to make a late filing – nor is the Nasdaq staff permitted to grant the delinquent companies additional time to comply with the filing requirements. Although the rule change has been filed as a proposed rule, Nasdaq has asked the SEC to waive the normal 30-day waiting period and approve the rule change to go effective immediately.
Under the modified rules, late filers would have 60 calendar days after receiving a Nasdaq notice of delinquency to submit a plan to regain compliance. The plan would have to address the reasons for the late filing, the likelihood of making the filing within the exception period, the company’s past compliance history, corporate events that might occur within the exception period, and disclosures to the market. After reviewing this (and other relevant information), the Nasdaq Staff may grant the company up to 180 calendar days from the date of the first missed filing to fulfill the filing requirement and regain compliance.
Nasdaq’s rationale for the proposed change is a recognition of the fact that, when a company delays a filing, the formal procedures required to investigate the underlying issues causing the delay and, if necessary, to restate its financial statements, can be a laborious time-consuming process. In these situations, companies often publish whatever financial information they can and inform investors of the reasons for the delay. Nasdaq believes that delisting a company that is taking all appropriate steps to regain compliance and file financial statements – while keeping the public informed – is not in the best interest of the company or its investors.
About ten days ago, the FDIC issued its Final Rule regarding its Temporary Liquidity Guarantee Program (known as “TLGP”), which includes the debt guarantee program under which the FDIC is guaranteeing the unsecured senior debt of eligible entities. The TLGP is an opt-out program with an opt-out deadline of December 5th.
In connection with the FDIC’s final rule, Corp Fin has issued an interpretive letter clarifying that offerings of TLGP-guaranteed debt don’t need to be registered under the ’33 Act (since the guaranteed debt will be exempt under Section 3(a)(2)). We have posted memos regarding TLGP in our “Debt Financings” Practice Area.
The first offerings of debt guaranteed under the program have already been launched – and it has been estimated that as much as $300 billion of debt may ultimately be issued under the TLGP. To help you prepare for this wave, we have just announced a new webcast – “How to Issue FDIC-Guaranteed Debt under the TLGP” – to be held on December 17th. With all the big issues being hashed out right now, our panel of Wall Street lawyers will be able to give you the latest developments. This is a “biggie.”
If you’re not a member of TheCorporateCounsel.net, try a ’09 no-risk trial to access this webcast for free. If you are a member, please renew your membership today since all memberships are on a calendar-year basis.
Yesterday, Mark Borges blogged about the GAO’s preliminary assessment of the compliance with TARP so far, particularly as it relates to executive compensation. It’s a great blog entry.
The NYSE Speaks ’08: Latest Developments and Interpretations
We have posted the transcript from our recent webcast: “The NYSE Speaks ’08: Latest Developments and Interpretations.”
Financial Viability Exception: Nasdaq Issues New Staff Interpretive Letters
Recently, Nasdaq posted three new letters (2008-18, -19 and -20) written to companies seeking to utilize the financial viability exception in Rule 4350(i)(2), the rule that provides an exception to the shareholder approval rules for companies in financial distress. A company may not use this exception without obtaining specific approval from Nasdaq; the company must also comply with certain other requirements. But these new letters – and this series of FAQs on the financial viability exception – may help companies thinking about requesting the exception to understand the factors Nasdaq will consider in deciding whether to approve it.
I know that a lot of companies are rethinking their executive compensation arrangements right now. We just sent the Nov-Dec ‘08 issue of The Corporate Executive to the printer. This issue contains the definitive guidance on repricings (and related compensation restructuring issues) and how to implement hold-through-retirement provisions that will help comply with Treasury’s “excessive risk” limitations.
Act Now: To receive a non-blurred version of this issue right away (and on a complimentary basis), enter a No-Risk Trial for ‘09 today.
Note that last week, the Council of Institutional Investors issued a statement warning companies not to reset the bar for CEO pay because of the market meltdown. We have posted this statement – and other memos regarding underwater options – in CompensationStandards.com’s “Stock Options” Practice Area. In addition, we have posted other memos about executive compensation restructuring in our “Rolling Back Compensation” Practice Area.
Believe It or Not: Sarbanes-Oxley Lawsuit Marches On
With the markets collapsing and a new appetite for regulatory reform, it was surprising to see this article that reports that the Free Enterprise Fund was dealt another setback in its attempt to find the Sarbanes-Oxley Act unconstitutional. By a 5-4 decision, the US Court of Appeals for Washington DC voted not to review the case recently. Apparently, the plaintiffs now plan to appeal to the US Supreme Court.
Even more surprising is the occasional mention in the process of Paulson’s ’07 “blueprint” to modernize the financial markets as a possible stepping stone for regulatory change. As you may recall, that was a blueprint to deregulate, not re-regulate. We’ll be posting reform proposals in our “Regulatory Reform” Practice Area.
SEC’s “IDEA” Not a Great Idea? Accusations of Trademark Infringement
As noted by Dominic Jones in his “IR Web Report” a while back, the SEC’s plan to launch a new online database (dubbed “IDEA”) may have hit a wall when a Canadian tech company – CaseWare International – claimed it already had been using the name for 20 years. The SEC filed a trademark application back in May with the US Patent and Trademark Office, while CaseWare claims it registered its trademark with the US PTO back in 2001. It will be interesting to see how this plays out…
Last week, Corp Fin updated its “’33 Act Sections” CD&Is. I’m sure that this is welcome news to Corp Fin Director John White, who had Chief Counsel Tom Kim and Deputy Director Brian Breheny stand up and affirm their intent to update the portions of the old Telephone Manual into CD&Is by the end of the year during the recent ABA Fall meeting of the Federal Regulation of Securities Committee.
During his last remarks as Corp Fin Director, John reviewed the numerous changes during his two-plus year tenure – including noting that now over 20,000 of the Staff’s comment letters have been posted – and he identified big rulemakings that have been tee’d up for the near future, including:
– IFRS roadmap now proposed, along with proposed timetable
– Further implementation of certain CIFiR recommendations
– Proxy matters, including a reconsideration of shareholder access
– Technology, including XBRL and the “21st Century Disclosure Initiative”
– Beneficial ownership reporting regime, in the wake of the CSX decision and the SEC’s short-selling efforts
Recently, I wondered in this blog whether SEC Chairman Cox would get across the finish line with mandatory XBRL before he left. Listening to John’s remarks, I got the sense that the SEC would adopt mandatory XBRL before Cox departed (although John didn’t mention what type of transitionary timetable would be adopted). Bolstering this effort, XBRL US announced last week that they have completed a new draft of the XBRL US GAAP Taxonomies – as well as the initiation of a public review.
Recently, I blogged that Broadridge was leading the way on proxy statement XBRL taxonomies. This changed last month when Broadridge donated its draft proxy taxonomies to XBRL US. However, XBRL US’s new draft taxonomy doesn’t include tags for proxy statements – thus making it highly unlikely the SEC would include executive compensation data in its initial adoption of mandatory XBRL.
Our December Eminders is Posted!
We have posted the December issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Speaking of RiskMetrics, I have heard that they are contemplating an overhaul of their corporate rating service, the “Corporate Governance Quotient” (known as “CGQ”). Although their plans could change, I understand that there will not be a single numerical score as there is today. [You may recall that today, each company’s CGQ score is available from their Yahoo! Finance page, among other places.]
Instead, there would be multiple scores for each company, each score dependent on a major area of governance (egs. board independence, board structure, compensation, auditing and financial integrity). The idea is to make the results less “black-and-white” and allow users to reach their own conclusions more readily.
I’m not sure if a change in methodology will make the CGQ more popular with investors – studies have shown they are not considered particularly relevant for investment decisions today – but I imagine some companies will welcome this development (particularly corporate secretaries who have directors that closely follow the scores – although I believe the number of those have dwindled over the years).
Bebchuk v. Electronic Arts: Transcript Posted
Recently, I blogged how Judge Hellerstein of US District Court (SDNY) dismissed Bebchuk v. Electronic Arts, Inc. (which involves Professor Lucian Bebchuk’s attempt to use Rule 14a-8 to establish new “shareholder access” procedures). I mentioned that once we find a copy of the decision, we’d post it in our “Shareholder Proposals” Practice Area.
Apparently, the Judge didn’t feel like writing a decision because he figured that the 2nd Circuit would handle that upon appeal – so we’ve posted his 1-page order as well as the transcript from the hearing.
Yesterday, SEC Chief Accountant Conrad Hewitt announced that he will leave the SEC in January. This is a day after Alexander Cohen announced he would leave as Deputy Chief of Staff. And a week after General Counsel Brian Cartwright announced his departure plans – and two weeks from Corp Fin John White’s announcement.
While it’s not unusual for these positions to be filled by a new Chairman (other than the Corp Fin Director, who typically doesn’t “rotate” with a new Administration), it’s a little unusual for these departure announcements to come so close to each other. Looks like President-elect Obama will need to pick a new SEC Chair soon, so that these positions can be filled in short-order during these trying times.
Why is SEC Chairman Cox a Short-Timer?
It’s been widely reported that SEC Chairman Chris Cox will leave office soon himself, even though his five-year term doesn’t expire until June 2010. Some members have asked: “What if Cox didn’t want to leave office? Does the President have the authority to fire an SEC chair?”
The answer is “no.” The law with respect to independent – so-called “alphabet” – agencies is that the SEC Commissioners including the Chair are appointed for a specific term and can only be removed “for cause.” However, the President can tap someone else as Chair – and have an existing Chair serve as a “mere” Commissioner instead. This setup is supposed to insulate those agencies from political pressure. Historically though, the SEC Chair has tendered a resignation when a new party comes into power.
CFIUS Issues Final Regulations
Last week, the Department of the Treasury’s Committee on Foreign Investment in the United States (known as “CFIUS”) issued final regulations governing national security reviews of foreign investments in US companies. The new regulations – issued to implement amendments adopted by the “Foreign Investment and National Security Act of 2007” – largely track the proposed regulations issued in April – and are the most significant changes to the CFIUS rules since their adoption in ‘91.
The new rules encourage parties to consult with CFIUS in advance of filing formal notification (an existing CFIUS “best practice”). Significantly, the new rules do not define “national security,” or what constitutes “control” by a foreign investor; nor do they provide special rules for sovereign wealth funds. CFIUS retains the flexibility to review each transaction on a case-by-case basis.
As predicted by 59% of members taking our recent poll, it appears that over 100 companies have applied to participate in Treasury’s Capital Purchase Program. While participation in the CPP doesn’t require shareholder approval, most of these companies don’t have the authority to issue preferred shares under their charter and they are now scrambling to file preliminary proxy materials for a special meeting to obtain shareholder approval. Here are a few issues to consider:
1. Corp Fin Review – Yesterday, the Corp Fin Staff posted this guidance – complete with typical comments and pro forma analysis – for companies filing special meeting proxy statements (at this weekend’s ABA Fall meeting, John White mentioned that several of these bulletins on a variety of topics would be forthcoming soon – more on the ABA meeting next week).
I believe the Corp Fin Staff is selecting most (if not all) of these preliminary proxy statements for review. And I have heard that although expedited treatment isn’t being promised by the Staff, the Staff is aware of the time pressures caused by the Treasury’s timeline – and that comments are often issued faster than the typical 30-day period.
2. ISS Review – Many of the CPP companies likely will request “blank check” preferred stock, which gives a company’s board the power to issue preferred stock at its discretion, with voting, conversion, distribution and other rights to be determined by the board at the time of issue. However, issuances of “blank check” shares typically raise a concern for ISS that they could be used as a takeover defense if they are placed with parties friendly to management. To address this concern, companies can create “declawed” preferred stock, which can’t be used as a takeover device. Here is more information as to how RiskMetrics Group will assess such requests.
3. Samples – At least 58 companies already have filed preliminary proxy statements with the SEC. In our “Credit Crunch” Practice Area, we have posted a few of these proxy statements (although we can’t vouch for whether they have cleared Corp Fin’s review process) – as well as sample risk factor disclosures regarding the credit crunch.
More on “Breaking the Buck” for Listed Companies
Last week, Dave blogged about “breaking the buck” for listed companies. A few members e-mailed some thoughts and confirmed most of what the NYSE Staff said during our webcast. In other words, the NYSE Staff has told them that they are – at least for now – maintaining the $1 requirement and the NYSE is giving companies the longer of six months or the next annual meeting to fix the problem through a reverse stock split, etc. (with the alternative of moving the listing; apparently the pink sheets are becoming more popular).
New York Revises its Plan to Regulate Credit Default Swaps
From Davis Polk: “The New York State Department of Insurance will delay indefinitely its previously outlined plan to regulate credit default swaps, while remaining on active surveillance of the various federal plans and options, according to the testimony of NYS Department of Insurance Superintendent Eric Dinallo before the United States House of Representatives Committee on Agriculture last week.
The decision, as officially announced in the ‘First Supplement to Circular Letter 19‘ published last week, results from “the progress made toward comprehensive federal regulation.” In his testimony, Mr. Dinallo specifically referred to SEC Chairman Christopher Cox’s request for power to regulate the credit default swap market, subsequent actions by the President’s Working Group (in particular, its initiative to develop central counterparties for credit default swaps) and his discussions with members of the United States Congress. Mr. Dinallo asserted that while the NYS Department of Insurance continues to have the jurisdiction to regulate credit default swaps where the buyer holds, or is expected to hold, a material interest in the referenced obligation, the NYS Department of Insurance believes that “the best option is a holistic solution for the entire credit default swap market” and that “it would not be effective or efficient for New York to regulate some transactions” while others are regulated under another scheme or not at all.
Mr. Dinallo stated that the NYS Department of Insurance will be actively following and assisting with regulatory efforts made by federal agencies and Congress. He suggested that, in his view, federal regulation should contain the following elements:
– requirements that all sellers maintain adequate capital and post sufficient trading margins to minimize counterparty risk;
– a guaranty fund that ensures that a failure of one seller will not create a cascade of failures in the market;
– clear and inclusive dispute resolution mechanisms;
– mechanisms for collecting comprehensive market data and making it available to regulatory authorities; and
– comprehensive regulatory oversight, such that regulation is not voluntary.
Once appropriate regulations have been put in place, Mr. Dinallo concluded, New York will consider changes in state law to prevent problems that could arise from some swaps being categorized as insurance. On the other hand, if New York finds the federal government is not acting decisively enough, the implication is that the NYS Insurance Department may again decide to act as a regulator of credit default swaps.”
On Friday, the Corp Fin Staff put out some much needed guidance on dealing with the upcoming expiration of registration statements under the 3-year shelf sunset provision in Securities Act Rule 415(a)(5). The guidance confirms that for all of those “grandfathered” shelf registration statements out there – i.e., those registration statements that were effective prior to the December 1, 2005 effective date of the Securities Offering Reform amendments – the deadline for filing a new registration statement to replace an expiring shelf is this Friday, November 28th. This deadline is critical for any companies (particularly non-WKSIs) that want to maintain the flexibility to stay in the market with their expiring shelf for up to six months while the replacement registration statement is pending.
The guidance provides some important tips on dealing with the process for carrying over unsold securities from the expiring shelf to the replacement shelf, including that only the same class of securities can be carried over from the expiring shelf to the replacement shelf. If any amounts are sold off of the expiring shelf while the replacement shelf is pending, the company must file a pre-effective amendment to the replacement shelf reflecting the reduced amount of securities carried forward.
As noted in the guidance, filing fees can be tricky when filing a replacement shelf, because the EDGAR system won’t accept a Securities Act registration statement (other than an automatic shelf registration statement relying on “pay-as-you go”) unless some amount is included in the “Proposed Maximum Aggregate Offering Price” header tag. The Staff says that an issuer relying on Rule 415(a)(6) to carry over unused securities should specify “$1.00” in the “Proposed Maximum Aggregate Offering Price” header tag and “$0” as the fee paid. This problem goes away if the company is registering new securities transactions on the replacement shelf, in which case only the amount of the new securities need be included in the “Proposed Maximum Aggregate Offering Price” header tag and the fee due on those additional securities must be paid.
The Staff’s guidance points out the perils of seeking to rely on Rule 457(p) instead of Rule 415(a)(6) when carrying over fees. The Staff notes that if Rule 457(p) is used instead of Rule 415(a)(6) to pull forward fees from an expiring registration statement, the securities from the expiring registration statement will be deemed deregistered upon the filing of the replacement shelf, and thus can’t be sold while the replacement shelf is pending.
As we noted in the September-October issue of The Corporate Counsel, some issuers are finding themselves coming up to the 3-year shelf sunset deadline without their WKSI status. The Staff notes that a company can continue to use an expiring ASR and available WKSI exemptions even if the company is forced to file a non-automatic replacement shelf because it no longer qualifies as a WKSI, at least until the company’s Section 10(a)(3) update comes around. Thanks to Dave for writing this analysis!
Changing from Lawyer to Proxy Solicitor
In this podcast, Rhonda Brauer of Georgeson discusses her new gig at Georgeson, which she joined several months ago after a lengthy stint as an in-house lawyer at the NY Times, including:
– How do you like your new job so far?
– How did Georgeson find you?
– What tasks are you performing so far?
– How will that evolve?
More Conference Performance Art
I spoke a number of times last week – and took the opportunity to tape a few more works of art. Thanks to Dick Johnson for blogging about my Kansas City presentation.
Falling Down in Chicago (A True Dork)
Live from Kansas City! (“Saturday Night Live” Parody)
