Yesterday felt like science fiction, with the humans finally realizing that machines have long taken over the financial world. Of course, there are humans behind those machines (traders call them “the box”) – but it will be interesting to see if the regulators (see SEC/CFTC’s press release) and journalists will be able to figure out what truly went wrong. I doubt that even the quants behind those machines can figure it out.
I don’t have a lot of confidence in the stock market being “fair” these days. And the fact that millions of trades will be busted due to yesterday’s “trader error” doesn’t help. I’ll be curious to see who gets bailed out by busting these trades. I imagine some quants will be saved, while others will be angry that their big bargain buys will be cancelled. Good news for some lawyers I imagine.
Don’t forget this morning is Goldman Sach’s annual meeting – that is sure to bring some fireworks. And if you’re wondering where I got the “millions” for the title of this blog, it was drawn from the end of this WaPo article..
The Status of the Senate’s Financial Reform Efforts
With over 100 amendments offered on the Dodd bill over the past two weeks, it’s impossible to know the shape of the bill that the Senate ultimately will pass (although two of those changes were officially tacked onto the Dodd bill on Wednesday). And those 100-plus proposed amendments were made before yesterday’s chaos – that craziness is sure to bring out a few new amendments.
Debate on the bill is expected to continue for at least another week. Note that some of the amendments do seek to strip proxy access and mandatory majority votes from the bill, as noted in Ted Allen’s blog.
Are Tattoos Appropriate for Professional Women?
Thanks to the many for their kind words on my 8th blogging anniversary this week. It got me thinking about how many lawyers now blog (I’m still convinced we’ve barely scratched the surface on how many lawyers will be blogging soon enough; read my piece to figure out what it takes to be a blogger). All sorts of legal blogs have emerged. For example, in this blog, Corporette answers the question: “Are tattoos appropriate for professional women?”
Here is something I blogged earlier this morning on CompensationStandards.com’s “The Advisors’ Blog“:
As we await mandatory say-on-pay’s fate on Capitol Hill, here are a few recent developments worth noting:
– RiskMetrics’ Ted Allenreports that Motorola received just 46% support during the company’s May 3rd annual meeting, marking the first time that a US company has failed to earn majority support from shareholders during a non-binding vote on compensation (here is Motorola’s Form 8-K). Mark Borges just blogged about this as well.
– Remember that brokers still get to cast discretionary votes on management say-on-pay proposals (although one of the sections of the Dodd bill would eliminate this, as I noted in this blog). Thus, Motorola’s level of support would have been even lower if these broker votes were not included. As an example, see Ted’s notes about American Express’ recent meeting (and see AmEx’s Form 8-K) – he quotes someone from the AFL-CIO who estimates that the company’s 63% level of support would have been reduced to 58% (and Wells Fargo’s level of support would have dropped from 73% to 67% without the broker votes).
– Ted reports that say-on-pay shareholder proposals received 51% support at EMC, a 47.9% vote at Johnson & Johnson, and 45.3% support at IBM. The number of votes exceeded the support levels for the same resolutions at the three companies last year. Note these are proposals from shareholders to put say-on-pay on the ballot going forward; they are not management say-on-pay agenda items like the situations noted above.
– Ted also reports that SuperValu received no-action relief – under the (i)(9) “conflicts with management’s proposal” basis – from Corp Fin to exclude a say-on-pay shareholder proposal because the company had already adopted a “triennial” approach to say-on-pay. The proponent wanted an annual vote instead of every three years.
The SEC’s Porn Story: My Reluctant Ten Cents
In all my years, I’ve never been asked so much about a story related to the SEC than the countless media reports that made the rounds a few weeks back regarding the SEC’s Inspector General’s report over misuse of the SEC’s computers to view porn. Here’s a summary of the report; note that I can’t find the actual report on the IG’s webpage (nor even the summary for that matter, I found that on a Washington Post web page).
Note that the story first broke out back in early February and it was written up by the mass media back then (eg. this article). Thus, it’s odd that the same story recycled a few months later – perhaps the public’s fascination with the Goldman investigation convinced the media that it was “newsworthy” again? Or maybe because more information was made available to the media? I don’t know, nor do I care.
In my opinion, this is a non-story since this type of stuff happens in every government agency as well as every company in the private sector. It’s the “few bad apples” syndrome. The problem for the SEC is the story comes at a delicate time for the agency. And the specific details – which I’m not convinced really needed to be divulged – are quite repugnant.
For me, the big surprise in this story was reading that some SEC Staffers make as much as $222,000 these days (as noted in the summary)! A far cry from the pay levels when I left a dozen years ago. I think my salary was in the low 70s when I left – and I worked for a Commissioner at the time. Next week, I’ll be blogging about working at the SEC.
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:
– Time (Off) Well Spent
– Pink Sheets Changes Into the “OTCQBTM Marketplace”
– More Women on Boards? Conflicting Survey Results
– Mark Cuban Says SEC Tampered With Witness
– Rule 10b-5(b): Securities Professionals Must Actually ‘Make’ a Statement
Lately, I’ve heard grumblings that the SEC – when it adopted new rules requiring the reporting of voting results in a Form 8-K within four business days after the end of the meeting at which the vote was held – only required companies to just provide raw voting data, information that most shareholders would not know how to interpret. In other words, Item 5.07 of Form 8-K doesn’t require companies to include voting percentages.
At first, I thought this was an oversight during the rulemaking process since reporting percentages – instead of totals – was not one of the questions asked by the SEC in its proposing release – nor does it appear that the issue was raised during the comment process either (we checked a number of comment letters from shareholder groups and didn’t see anyone suggest adding this type of requirement).
But after mulling the issue – and conferring with those who know better than me – perhaps the SEC may have been wise to not require such disclosure since quite a few practitioners (including inspectors of election and tabulators!) have had trouble calculating percentages themselves. This is tricky business, figuring out whether – and how – abstentions count towards the vote calculations for shareholder proposals. Those rules differ depending on a company’s state of incorporation. For example, New York and Delaware have different rules on this (and to dig deeper for Delaware companies, there are the state law percentages – and then there is the Rule 14a-8 approach, which is the approach that shareholder proponents use, that looks only at votes cast).
Another factor is how the company’s bylaws are drawn up – oftentimes with language agreed to many years ago and whose intent is long forgotten. Carl Hagberg, our “go-to” independent inspector of elections, tells me that he has seen many mistakes by practitioners when they report on percentages because they have not read or interpreted the bylaws correctly. As I’ve noted before, Carl’s article from his “Shareholder Service Optimizer” on the basics on inspectors of elections is a “must” read (it’s posted in our “Annual Stockholders’ Meetings” Practice Area).
Notably, there are some companies that have figured out how to make the calculations for themselves and provided valuable voluntary disclosure. Recently, IBM filed its Form 8-K with voting results and they voluntarily included percentages for the shareholder proposals on its ballot, in addition to the required raw data. It will be interesting to see if other companies will follow IBM’s approach going forward…
Ban on Blackberries in the Boardroom?
Take a listen to the audio archive from a recent BBC program. The relevant segment starts at minute #11, in which a professor calls for banning blackberries in board meetings – and that companies should publicly disclose that they have a “no wireless device” policy in the boardroom. He discusses that plaintiff attorneys could use a record of a director’s emailing and phone calls during a board meeting as evidence of breach of duty of care (ie. inattention to meeting).
PS – I’m no litigator, but I doubt a plaintiff could get the phone company/ISP records of phone and email calls that easily?
Latest Developments in Director Diligence
In this podcast, Jim Rowe of the James Mintz Group discusses the latest developments for diligence practices during the director recruitment process, including:
– What does the Mintz Group typically do to vet a board candidate?
– How has diligence for board candidates changed over the past few years?
– Any surprises these days about the board vetting process?
Today marks eight years of my blither and bother on this blog (note the DealLawyers.com Blog is nearly seven years old – not shabby!). It’s one time of the year that I feel entitled to toot my own horn – as it takes stamina and boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. I’m sure I won’t get more refined with age.
Someone recently asked me how I came to be one of the first lawyers to blog (if I remember correctly, the few other lawyers with a blog at that time blogged solely about marketing for lawyers; not the law itself). Back in early ’02, I was reading one of the dying tech magazines – the ones that disappeared with the Internet bust – and the term “blog” was mentioned in passing. I looked it up and downloaded the blogging software to give it a try. I never imagined it would amount to much as I wondered who would want to read my “diary.” For the first few years that I blogged, I had to constantly explain to folks what a “blog was…
To celebrate, I thought I’d share a groovy video of a classic song circa 1970 (I love the dancing near the end):
SEC Rule 163 Proposal Stalled – But Request for Fixed Income Offering “Speed Bump” Gets Traction
At a meeting of the ABA Subcommittee on Securities Regulation recently, Tom Kim, Chief Counsel, SEC Division of Corporation Finance, indicated that the SEC’s proposed amendment to Rule 163 under the Securities Act has lost momentum as a result of negative feedback received from investors. The proposed amendment, which was generally supported by corporate issuers, underwriters and their counsel, would have allowed underwriters or dealers acting on behalf of well-known seasoned issuers (WKSIs) to offer securities before the filing of a registration statement, enabling WKSIs to better gauge investor interest in their securities before publicly launching an offering.
Mr. Kim also noted that the SEC staff is paying attention to fixed income investors’ concerns that they are being asked to make corporate bond investment decisions too quickly. The Credit Roundtable, a group of fixed income investors, has asked the SEC staff to consider imposing a “speed bump” or delay of at least one hour in the corporate bond offering process in order to improve investors’ ability to conduct diligence before books are closed. The Credit Roundtable’s other recommendations for the corporate bond offering process include increased access to management conference calls and easier access to disclosure documents through the use of hyperlinks.
Mr. Kim indicated that because these timing and disclosure concerns go to the “core” of the SEC’s investor protection mission, they are being taken very seriously by the staff. The staff plans to hold a roundtable in the fall of 2010 to discuss these issues and is unlikely to act on the recommendations before then. Interested parties are encouraged to contact the Division with their views.
Posted: The Revised US Sentencing Guidelines
Last Friday, the US Sentencing Commission posted its final amendments to the US Sentencing Guidelines. Check out this podcast for analysis of these amendments (and we are posting memos in our “Sentencing Guidelines” Practice Area).
On Friday, the SEC issued its first fee advisory for the year (along with this methodology). Right now, the filing fee rate for Securities Act registration statements is $71.30 million (the same rate applies under Sections 13(e) and 14(g)). Under the fee advisory, this rate will rise to $116.10 per million, a hefty 63% price hike – and the largest one-year rate hike in my experience. The new fees will not go into effect until five days after the date of enactment of the SEC’s 2011 appropriation – which often is delayed well beyond the October 1st start of the government’s fiscal year, as Congress and the President battle over the government’s budget.
You might be asking, “How are the SEC’s fees set?” Or more importantly, “Will the rate hike help the SEC’s push for more resources?”
The SEC sets its filing fees annually under the “Investor and Capital Markets Fee Relief Act of 2002.” The SEC’s budget is not dependent on its fees as it’s not a self-funded agency. All of the fees go to the US Treasury. But perhaps the higher fees could convince Congress to allow the SEC to receive the requested 12% increase in its budget. On Friday, SEC Chair Schapiro testified before a subcommittee of the Senate’s Appropriations Committee and she noted:
It is important to note that the proposed increase in spending would be fully offset by the fees we collect on transactions and registrations. In FY 2011, we estimate that we will collect $1.7 billion — an increase of $220 million over FY 2010.
It will be interesting to see if – and how – the higher level of fees impacts the SEC’s push for self-funding. Learn more how the filing rate-setting process works in this blog.
FINRA Issues FAQs for its New Same-Day Clearance Process for Shelf Filings
Last week, FINRA’s Corporate Financing Department supplemented its new “COBRADesk Same Day Clearance Guide” by issuing FAQs regarding the “Same-Day Clearance Option” with FAQs related to the process (the FAQs are at the end of the guide).
As you may recall, the new same-day option is for shelf takedowns that have an accelerated effective, pricing or launch date. At the recent ABA Business Law Section Spring Meeting, Paul Mathews, Director of FINRA’s Corporate Financing Department, stated that 60% of the Department’s shelf filings already were being submitted using the same day option and indicated that the process was working well for the companies seeking quickly access to the capital markets.
Our May Eminders is Posted!
We have posted the May issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
As noted in the D&O Diary Blog, earlier this week, the US Supreme Court issued its opinion in Merck v. Reynolds. The decision resolves a split in the circuit courts over the two-year statute of limitations for claims brought under Section 10(b) of the ’34 Act, the antifraud provision most frequently invoked by private plaintiffs.
The applicable statute – 28 U.S.C. § 1658(b) – provides that a private securities fraud complaint must be filed within two years after “the discovery of facts constituting the violation” or five years after the alleged violation itself, whichever comes first. The Supreme Court held that the two-year period begins to run when the plaintiff discovers – or a reasonably diligent investor would have discovered – facts showing that a materially misleading statement was made with the intent to deceive investors. We are posting memos analyzing the decision in our “Securities Litigation” Practice Area.
IRS Releases a Draft Schedule for Reporting of Uncertain Tax Positions
Here is news culled from this Sullivan & Cromwellmemo: Recently, the IRS issued IRS Announcement 2010-30 accompanied by the release of a highly-anticipated draft schedule and instructions to be used by certain corporate taxpayers to report uncertain tax positions on their annual income tax returns. Although the draft schedule provides space for reporting current and prior year tax positions, a transition rule provides that tax positions taken in a taxable year beginning before December 15, 2009, or in a short tax year beginning on or after December 15, 2009, and ending before January 1, 2010, would not need to be reported.
The draft schedule would require a concise description of each reported tax position as well as information about its magnitude, but would not require disclosure of the taxpayer’s risk assessments or tax reserve amounts.
More on our “Proxy Season Blog”
With the proxy season winding down, 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:
– Proxy Season Early Trends: More Proposals, and More Exclusions
– CII Backs Strict Majority Vote for Corporate Directors
– Director Attitudes Shifting: Laggards Should be Voted Off
– More on “Fixing the Problems with Client Directed Voting”
– The Need to Better Draft VIFs
Last year, as noted by Dominic Jones in his “IR Web Report,” there was a small spurt of companies holding annual meeting solely online, with Broadridge, Warner Music Group and Conexant Systems joining companies that have done it for a few years (eg. Herman Miller, see this blog).
Dominic notes that a number of new companies have announced plans to go “virtual-only” this proxy season, including Illumina, Artio Global Investors, Winland Electronics and PICO Holdings.
Intel originally intended to join this group – but decided to stay with the hybrid “both physical and online” meeting structure it pioneered last year (see this first-hand report of last year’s meeting), with the help of Broadridge’s online voting platform. Dominic notes that several new companies will try this hybrid model this year – Best Buy, American Water Works and Charles Schwab – with Charles Schwab relying on its transfer agent Wells Fargo to provide the online voting platform rather than Broadridge.
So the total number of companies dipping their toes into the online meeting world is still less than a dozen. Is this a trend that is here to stay? My guess is “yes.” Tune in for this webcast that I just announced – “Holding the Virtual Annual Meeting: Factors to Consider and Practice Pointers” – featuring panelists whose companies have tested these new waters recently…
Survey: The Different Types of Pre-Registration for Annual Shareholder Meetings
In our “Annual Stockholders’ Meetings” Practice Area, I just posted a number of examples of the different ways that companies require – or request – shareholders to indicate whether they will attend the annual meeting in person.
In addition, I have posted a “Quick Survey on Annual Meeting Conduct,” which includes a question about pre-registration practice. Please take a moment to fill out this short anonymous survey.
While you’re at it, please take a moment to complete this “Quick Survey on Codes of Ethics and the Board.”
Broadridge’s E-Proxy Stats for ’10 Proxy Season So Far
As they have been doing for the past two years, Broadridge feeds us the latest statistics about e-proxy use during the proxy season through March 31st (which we have posted in our “E-Proxy” Practice Area).
As of March 31st, these stats included:
– 821 companies (technically, it’s not companies – it’s “distributions” which is a greater number than the number of companies) used voluntary e-proxy between June 30, 2009 and March 31st (compared to 526 for the same period in the year prior). 571 of these companies were using e-proxy for a second year – 8 companies distributed a second notice. Remember the cut-off is early in the meeting season and Broadridge reports having 655 commitments to use e-proxy for this year not yet processed.
– 96 jobs were bifurcated, nearly all of them stratified by the number of shares held (96%) although some were stratified by notice vs. full package (11%).
– 0.39% of shareholders requested paper after receiving a notice; this average is down 50% from last year’s 0.80% (and the prior year had been 1.05%). Note that this percentage doesn’t include Broadridge’s “standing order for paper” instructions (ie. shareholders who have said they wish to continue receiving paper copies indefinitely).
– 14% of companies using e-proxy had routine matters on their meeting agenda (way down from 54% last year); another 73% had non-routine matters proposed by management; and 13% had non-routine matters proposed by shareholders. None were contested elections.
After the annual meeting season ends, Broadridge will be reporting out the full season’s numbers, including the latest retail voting trends. But this early report clearly shows that companies continue to use e-proxy, undaunted by the broker non-vote changes in the NYSE’s Rule 452.
With representatives from Goldman Sachs testifying – for 11 hours! – before the Senate Banking Committee yesterday (see this morning’s WaPo article, with over 500 comments already), the 24-hour coverage of Goldman’s perceived role in the financial crisis continues. Personally, I’m still puzzled by the all the coverage – the underlying theme of the stories is not really new news. Ever since the crisis came to light, it has been well known that Goldman was far less impacted by the housing market collapse compared to its brethren – and for the most part, they were called geniuses until now.
Here’s a hodge-podge of Goldman-related stories that I found interesting:
– Tom Brakke’s “The Sideshow” from “The Research Puzzle”
– This NY Times’ Dealbook column entitled “A Crowd With Pity for Goldman”
– In this article, Harvey Pitt provide his thoughts on the risks of the SEC losing the Goldman case
– In his “Ideoblog,” Prof. Larry Ribstein describes how the SEC’s Goldman case continues its war on “shorts” – and here is Larry’s analysis on how the case is mutating
– In his “SEC Actions” blog, Tom Gorman writes about “The SEC, the Goldman Case and Critics”
– A former Goldman Sachs director is alleged to have tipped Galleon Group, touching Warren Buffett’s investment in Goldman, as noted in this Reuters article
Although things are moving so fast, that it’s relevance may be limited – Ted Allen provides these notes from last Wednesday’s House hearing on the regulatory reform bill.
Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now
We have posted the transcript for the recent webcast: “Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now.”
One topic discussed at length during the program is “when disclosure of an SEC investigation is required – or is recommended – to be disclosed?” (a topic also recently tackled by Marty Rosenbaum in his OnSecurities Blog.
SEC Agrees to Reduce Penalties in Exchange for Cooperation
The SEC’s new cooperation policy was one of the hot topics during our recent webcast with former senior SEC Enforcement Staffers. Here is news from Ted Levine, Wayne Carlin and Kevin Schwartz of Wachtell Lipton (also available in this memo):
In two recent insider trading actions, the SEC agreed to settlements with substantially reduced civil penalties based on the defendant’s agreement to cooperate with an ongoing investigation and related enforcement action: SEC v. Cutillo et al., No. 09 Civ. 9208 (S.D.N.Y. Mar. 30, 2010) and SEC v. Galleon Management, LP et al., No. 09 Civ. 8811 (S.D.N.Y. Apr. 19, 2010). These cases merit attention as the SEC reportedly considers revising its framework for assessing penalties against entities.
The Commission brought these two actions against Schottenfeld Group LLC — a registered broker-dealer — based on alleged insider trading by individuals who, at the time of the trading, were registered representatives and proprietary traders at Schottenfeld. The SEC is statutorily authorized to obtain civil penalties of up to three times the profit gained or loss avoided as a result of insider trading. Historically, the Commission’s practice in insider trading settlements has been to secure a “one-time” penalty equal to the amount of disgorgement.
In the Cutillo and Galleon actions, however, the Commission submitted and the courts approved settlements that included civil penalties equal to only 50% of the disgorgement amounts. In a joint submission to the court in Galleon, the parties explained that the penalty in that case represented a 50% “discount from a one-time penalty, in exchange for [Schottenfeld’s] agreement to cooperate with the Commission.” The final judgments in both cases stated that penalties in excess of the amounts agreed were not being ordered “based on Defendant’s agreement to cooperate in a Commission investigation and related enforcement action.” While this is not stated explicitly in the filings, the settlements suggest that Schottenfeld may have entered into a formal cooperation agreement, as contemplated by the initiatives announced by the SEC in January. It is also unclear whether the settlements are based on the defendant’s forward-looking promise to cooperate or, rather, are based in whole or in part on cooperation that has already occurred.
The Schottenfeld settlements suggest a willingness on the part of the SEC to extend quantifiable benefits in return for cooperation, at least in some cases. In insider trading cases, a “discount” has verifiable meaning, in view of the historical baseline of one-time penalties. Yet even here, the Schottenfeld settlements do not articulate what the cooperation entailed (or promised for the future), or by what criteria the SEC determined that the appropriate discount level was 50%. In other types of cases, whether a penalty amount is discounted for past or future cooperation is a much more subjective question. As the Commission revisits its framework for seeking penalties against entities, some meaningful transparency from the SEC as to its methodology for determining penalty amounts and discounts is important.
Below are three items that I recently blogged on CompensationStandards.com’s “The Advisors’ Blog“:
As noted in the excerpt below of this article from Manifest (a European proxy advisor service), Australia may take the concept of say-on-pay further than proposed here in the US (here is the Australian’s full response on this topic):
Australian Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen has delighted Australian shareholders with plans to introduce extensive executive remuneration reforms designed to force boards to be more accountable and give shareholders more power.
In a ringing endorsement of the Productivity Commission’s review of executive pay which was published in January this year, the Rudd administration has announced that it will introduce legislation to implement many of the PC’s 17 recommendations, including the “two strikes” proposal, which will strengthen the non-binding vote on remuneration and set out consequences where companies do not adequately respond to shareholder concerns on remuneration issues.
As currently proposed, the two strikes and re-election resolution would work as follows:
– 25 per cent ‘no’ vote on remuneration report triggers reporting obligation on how concerns addressed; and
– Subsequent ‘no’ vote of 25 per cent activates a resolution for elected directors to submit for re-election within 90 days.
It is not clear whether it would be the entire board to be submitted for re-election, just the remuneration committee or the chairman, however there will be a further opportunity for input as there during the consultation process ahead of the final drafting of amendments to the Corporations Act 2001.
An unexpected but welcome addition to the proposals is a “claw-back” provision which would require a director or executive to repay to the company any bonuses calculated on the basis of financial information that subsequently turned out to be materially misstated. Bowen asserted that the introduction of a claw-back provision “warrants further analysis, as it would help strengthen the ability of shareholders to recover overpaid bonuses that have occurred as a result of materially misstated financial statements.”
Issuers have expressed their concerns in the Australian media calling the proposals “heavy handed”. Speaking to ABC News, John Colvin from the Institute of Company Directors said: “We’re a bit perplexed and quite frankly bemused at why we would have such a heavy-handed, red-taped, legislative approach to this area,”
“Whilst there are examples of, and we acknowledge those, of pay outcomes which haven’t been in line with either company expectations… on the whole Australian remuneration of corporate governance has been very good.” The Australian Shareholders Association (ASA) said that the response was “much stronger than they had anticipated.”
“We think that it’s a very well-measured, very well-considered report,” said an ASA representative “from the ASA’s point of view it certainly went a little bit further than we had asked, but we’re very positive about the recommendations and we’re very hopeful that they’ll have the effect of making boards much more accountable on this issue which is very important to shareholders.”
AFL-CIO Actively Attacking Bank Pay
Recently, the AFL-CIO launched “PayWatch 2010” and announced it is focusing on the six largest banks this year – Bank of America, Citigroup, Wells Fargo, Morgan Stanley, JPMorgan Chase and Goldman Sachs – when the companies hold advisory votes on executive compensation later this month and in May. They also are focusing on the bank’s lobbying on financial reform.
As part of this focus, the AFL-CIO plans to stage protests at the banks’ annual meetings and may oppose compensation committee members. The AFL-CIO also is planning a rally this Thursday on Wall Street, with hope for more than 10,000 demonstrators.
Here’s a silly AARP video on big banks and financial reform that might tickle you entitled “A Financial Protection Sing-A-Long.”
Survey of Recent Disclosures: Board’s Role in Risk Oversight
Below is an excerpt from this Akin Gumpmemo, based on their survey on recent risk oversight disclosures:
To assess the types of disclosures that companies are providing about the board’s role in overseeing risk management, we reviewed preliminary or final proxy statements filed by 50 randomly selected S&P 500 companies since the February 28, 2010 effective date of the new disclosure rules. The results of our survey, categorized by the various types of disclosures, are set forth below.
Separate Section Devoted to Risk Oversight
Ninety-two percent of surveyed companies had a designated section in their proxy statements for risk oversight. This section typically stood alone, but sometimes was combined with the section addressing board leadership structure. Typically, the section was located in the portion of the proxy statement discussing corporate governance matters and was often titled “The Board’s Role in Risk Oversight” (or words of similar effect).
Statements about Management’s Primary Risk Management Responsibility
Twenty-four percent of surveyed companies included a statement to the effect that management is primarily responsible for risk management, while the board’s role is one of oversight.
Sample disclosures are set forth below:
Sunoco, Inc.: “Management of risk is the direct responsibility of the Company’s CEO and the senior leadership team. The Board has oversight responsibility, focusing on the adequacy of the Company’s enterprise risk management and risk mitigation processes.”
Peabody Energy Corporation: “Management is responsible for the day-to-day management of the risks we face, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management.”
AT&T Inc.: “Assessing and managing risk is the responsibility of the management of AT&T. The Board of Directors oversees and reviews certain aspects of the Company’s risk management efforts.”
Strategic Direction
Forty-two percent of surveyed companies explained that oversight of risk management was an important or integral part of the board’s role in the strategic planning process.
Several illustrative examples are set forth below:
Valero Energy Corporation: “The Board also believes that risk management is an integral part of Valero’s annual strategic planning process, which addresses, among other things, the risks and opportunities facing Valero.”
Stryker Corporation: “A fundamental part of setting the Company’s business strategy is the assessment of the risks the Company faces and how they are managed.”
Bristol-Myers Squibb Company: “Our Board meets regularly to discuss the strategic direction and the issues and opportunities facing our company in light of trends and developments in the biopharmaceutical industry and general business environment. Our Board has been instrumental in determining our strategy to combine the best of biotechnology with pharmaceuticals to become a best-in-class next generation biopharmaceutical company. Throughout the year, our Board provides guidance to management regarding our strategy and helps to refine our operating plans to implement our strategy. Each year, typically during the second quarter, the Board holds an extensive meeting with senior management dedicated to discussing and reviewing our long-term operating plans and overall corporate strategy. A discussion of key risks to the plans and strategy as well as risk mitigation plans and activities is led by the Chairman and Chief Executive Officer as part of the meeting. The involvement of the Board in setting our business strategy is critical to the determination of the types and appropriate levels of risk undertaken by the company.”
Enterprise Risk Management
Fifty-four percent of surveyed companies expressly used the term “enterprise risk management.”
Sample disclosures are set forth below:
American Express Company: “The Company relies on its comprehensive enterprise risk management process (ERM) to aggregate, monitor, measure and manage risks. The ERM approach is designed to enable the Board of Directors to establish a mutual understanding with management of the effectiveness of the Company’s risk management practices and capabilities, to review the Company’s risk exposure and to elevate certain key risks for discussion at the Board level. The Company’s ERM program is overseen by its Chief Risk Officer who is an executive officer of the Company and a member of the Company’s most senior management.”
Express Scripts, Inc.: “In order to assist the board of directors in overseeing our risk management, we use enterprise risk management (“ERM”), a company-wide initiative that involves the board of directors, management and other personnel in an integrated effort to identify, assess and manage risks that may affect our ability to execute on our corporate strategy and fulfill our business objectives. These activities entail the identification, prioritization and assessment of a broad range of risks (e.g., financial, operational, business, reputational, governance and managerial), and the formulation of plans to manage these risks or mitigate their effects.”
Primary Responsibility at Board vs. Committee Level
Eight percent of surveyed companies stated that the primary responsibility for risk management oversight rests with the entire board, 34 percent of surveyed companies stated that primary responsibility is vested in one or more committees and 52 percent reflected that both the board and various committees have responsibility for risk management oversight.
Of those companies where primary responsibility is vested in one or more committees, 65 percent (22 percent of all surveyed companies) identified their audit committees as having primary responsibility, 18 percent had a separate committee expressly dedicated to risk management (all of these companies were in the financial services or insurance industries) and 18 percent stated that various board committees were responsible for overseeing the management of risks relating to the committee’s primary areas of responsibility.
Regardless of where primary responsibility rested, over half of the surveyed companies included descriptions of the specific types of risks that various committees of the board oversee.
Compensation Committee Responsibility for Determining Compensation Risk Disclosure
As discussed above, the new SEC disclosure rules require companies to discuss their compensation policies and practices for employees as they relate to risk management practices and risk-taking incentives if the risks arising from those policies and practices are reasonably likely to have a material adverse effect on the company. The new rules do not require a company to include any disclosure if the company has determined that the risks arising from its compensation policies and practices are not reasonably likely to have a material adverse effect.
RiskMetrics has announced that it does not take a position regarding whether companies should disclose their risk determinations where the company has determined that a material adverse effect is not reasonably likely. RiskMetrics does, however, advise companies “at a minimum” to discuss their process in reaching a determination and any mitigating features (such as clawbacks or bonus banks) that they have already adopted. RiskMetrics views this disclosure “as an opportunity for communication, not simply compliance” and expects that shareholders will be looking for a reasonably substantive discussion of the board’s process for determining whether the company’s incentive pay programs motivate inappropriate risk-taking and what they are doing to mitigate that risk.
Our survey shows that many companies elected to provide disclosure about their compensation risk determinations and the process the company undertook to make the determination.
– Compensation Committee Responsibility to Assess Risks. Sixty-eight percent of surveyed companies stated that their compensation committee was charged with either determining that the compensation policies and practices do not encourage excessive risk-taking or determining whether the risks arising from such policies and practices are reasonably likely to have a material adverse effect on the company.
– Disclosure of Determination. Seventy-four percent of surveyed companies expressed a determination that their compensation policies and practices either did not encourage excessive or unnecessary risk-taking (or used words of similar effect) or were not reasonably likely to result in a material adverse effect on the company. Of the 37 companies that disclosed a determination, 17 of them (46 percent) phrased their conclusion in terms of the absence of a material adverse effect, 15 companies (41 percent) expressed their conclusion in terms of not encouraging excessive or unnecessary risk-taking and the remaining companies phrased their conclusions in terms of a determination of an “appropriate level of risk-taking” or an “effective balance of risk and reward” or words of similar effect.
– Who Made the Determination. Companies varied widely as to who made the risk determination regarding compensation programs and policies. Twenty-three companies (62 percent of those disclosing the determination) stated that the determination was made by the compensation committee, 10 companies (27% of those disclosing the determination) phrased the determination as being made by the company or “we” and, in the remaining instances, “management” made the determinations.
– Process for Determination. Sixty-five percent of those companies disclosing a risk determination provided disclosure of the process that the company or compensation committee undertook to make the determination.
– Location of Determination. Companies varied widely on the location of the disclosure in their proxy statements. Almost half of the companies included the disclosure in Compensation Discussion and Analysis. Other popular disclosure locations included under a separate heading in the corporate governance section, in the discussion of board oversight of risk or under a separate heading near discussions of compensation committee interlocks and compensation consultants.
– Risk-Mitigating Features. Regardless of whether a company disclosed a risk determination with respect to its compensation policies and practices, almost three-quarters of the surveyed companies discussed various features of their compensation programs and policies that are designed to mitigate excessive risk-taking.
The following excerpt from Kraft Foods’ proxy statement discusses the compensation committee’s process in evaluating compensation risks, risk-mitigating features contained in the company’s compensation policies and practices and the conclusion of the compensation committee with respect to such risks:
“Analysis of Risk in the Compensation Architecture
In 2009, the Human Resources and Compensation Committee evaluated the current risk profile of our executive and broad-based compensation programs. In its evaluation, the Human Resources and Compensation Committee reviewed the executive compensation structure and noted numerous ways in which risk is effectively managed or mitigated. This evaluation covered a wide range of practices and policies including: the balance of corporate and business unit weighting in incentive plans, the balanced mix between short-term and long-term incentives, caps on incentives, use of multiple performance measures, discretion on individual awards, a portfolio of long-term incentives, use of stock ownership guidelines, and the existence of anti-hedging and clawback policies. In addition, the Human Resources and Compensation Committee analyzed the overall enterprise risks and how compensation programs impacted individual behavior that could exacerbate these enterprise risks. The Human Resources and Compensation Committee collaborated with the Audit Committee in this analysis.
Additionally, we engaged an outside independent consultant to review our incentive plans (executive and broad-based) to determine if any practices might encourage excessive risk taking on the part of senior executives. The outside consultant noted several of the practices of our incentive plans (executive and broad-based) that mitigate risk, including the use of multiple measures in our annual and long-term incentive plans, Human Resources and Compensation Committee discretion in payment of incentives in the executive plans, use of multiple types of long-term incentives, payment caps, significant stock ownership guidelines, and our recoupment and anti-hedging policies. In light of these analyses, the Human Resources and Compensation Committee believes that the architecture of Kraft Foods’ compensation programs (executive and broad-based) provide multiple, effective safeguards to protect against undue risk.”
Reporting Processes
As previously discussed, the SEC suggested in the adopting release that, where relevant, companies disclose in their proxy statements whether the officers responsible for risk management report directly to the board or to a board committee or how information is otherwise received from such persons. Thirty-eight percent of surveyed companies identified their principal risk officer or officers by title and disclosed that the officer or officers reported directly to the board or a board committee.
Frequency of Entire Board Review
One-third of surveyed companies reported that the full board reviews risk management at least annually, 22 percent stated that the full board reviews risk management issues “periodically” or “regularly” and a few companies reported quarterly or semiannual reviews by the entire board.
Length of Disclosure
Most companies devoted at least two or three paragraphs to their discussion of the board’s role in risk oversight. The average length of the disclosures was 10 sentences, with the length of the discussion ranging from a high of 27 sentences to a low of three sentences. These numbers do not reflect any specific discussions of risks relating to compensation policies and practices or factors mitigating those risks.
Effect of Board’s Role in Risk Oversight on Leadership Structure
Only 20 percent of the surveyed companies specifically addressed the effect of the board’s role in risk oversight on the board’s leadership structure. Instead, most companies simply stressed in the discussion of their leadership structure the role that a lead director or the independent directors play in providing strong, effective oversight of management.
Set forth below are disclosures by several companies that expressly addressed the matter:
IBM: “The Board’s role in risk oversight of the Company is consistent with the Company’s leadership structure, with the CEO and other members of senior management having responsibility for assessing and managing the Company’s risk exposure, and the Board and its committees providing oversight in connection with those efforts.”
Teco Energy: “We believe that our Board leadership structure promotes effective oversight of the company’s risk management for the same reasons that we believe the structure is most effective for our company in general, that is, by providing unified leadership through a single person, while allowing for input from our independent Board members, all of whom are fully engaged in Board deliberations and decisions.”
The Coca-Cola Company: “The Company believes that its leadership structure, discussed in detail [above], supports the risk oversight function of the Board. While the Company has a combined Chairman of the Board and Chief Executive Officer, strong Directors chair the various committees involved in risk oversight, there is open communication between management and Directors, and all Directors are actively involved in the risk oversight function.”
Last week, FINRA issued Regulatory Notice 10-22 to provide guidance to broker-dealers regarding the conduct of due diligence in Regulation D private placements. As noted in this press release, the Notice reminds broker-dealers of their obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings – and the Notice highlights three recent enforcement actions involving private placements. In fact, this guidance may very well have been issued as a result of those actions, particularly SEC v. Tambone (1st Cir.; 3/10/10).
In 12 pages, the Notice describes specific issues that relate to a broker-dealer’s due diligence investigation responsibilities (e.g., b-d’s affiliation with the issuer) and describes practices that have been adopted by some broker-dealers to discharge their due diligence obligations. The Notice includes a recommendation that a broker-dealer should retain records documenting the diligence process – and provides a detailed list of recommended diligence practices while pointing out that “reliance upon a single checklist may result in an inadequate investigation.”
Banks Getting Grilled: California and Credit Default Swaps
A few weeks ago – before the SEC’s action against Goldman Sachs – the California Treasurer sent letters to six major underwriters of California’s state bonds asking a series of questions about credit default swap trading related to California bonds. The key question was: “Describe, in your view, how State of California CDS trading, in recent years, has affected the State, its bond sales and the borrowing costs paid by taxpayers.” Last week, the Treasurer posted the responses of all six banks.
I think that Goldman Sach’s response concerning the impact of CDS trading is typical: “We believe that CDS trading has had little or no effect on California’s borrowing costs. The State’s credit, budget and debt management (and not CDS prices) are the primary drivers of the State’s borrowing costs.”
Smaller Company M&A: The Latest Developments
Tune in tomorrow for the DealLawyers.com webcast – “Smaller Company M&A: The Latest Developments” – to hear Diane Holt Frankle of DLA Piper, Mark Filippell of Western Reserve Partners, John Jenkins of Calfee, Halter & Griswold and Bob Kuhns of Dorsey & Whitney discuss all you need to know about doing private and public deals when smaller companies are either the acquirer or the acquiree.
