We just posted the “Summer ’09 Issue” of InvestorRelationships.com (we are maintaining this publication as complimentary thru ’09 as a “Thank You” to our loyal members in a down economy). The “Summer ’09” issue includes articles on:
– How to Monitor Shareholder Activism in a Changing World
– The Art of Handling Director Resignations: Practice Pointers
– Parsing the SEC’s Proxy Access Proposal
– My Last ExxonMobil Annual Meeting
– Online Document Sharing Services: Legal and Reputation Concerns for IROs
If you’re not yet a member of InvestorRelationships.com, simply provide your contact information in this sign-up form and gain free and immediate access to the issue. If you signed up last year, your ID/password will continue to work – if you forgot what those are, you can get a reminder.
Survey Results: Schumer’s “Shareholder Bill of Rights” Unpopular with Executives
Recently, the NYSE conducted a poll of its listed companies regarding Senator Schumer’s “Shareholder Bill of Rights Act of 2009.” Here is a summary of the results:
– 87% oppose and 6% favor legislation that requires advisory votes on executive compensation
– 82% oppose and 7% favor legislation to require proxy access, while 76% oppose and 10% favor the proposed 1% ownership level threshold for proxy access (among those opposed, 49% oppose and 31% favor a 5% level for proxy access, 55% oppose and 27% favor a 10% level for proxy access)
– 76% oppose and 16% favor legislation that mandates separation of the CEO and Chair roles
– 90% oppose and 4% favor legislation that precludes the CEO or a former CEO from ever serving as Chairman, even after retirement as a company executive
– 63% oppose and 25% favor legislation to mandate that all directors stand for re-election each year
– 45% oppose and 43% favor legislation requiring that in uncontested elections, directors must receive a majority of votes cast
– 66% oppose and 19% favor legislation that requires companies to establish a risk committee
– 73% currently have independent directors as part of the audit committee responsible for the company’s risk management practices, while 10% have a separate committee
– 81% oppose and 4% favor the Shareholder Bill of Rights Act (51% indicated that the Act would “greatly” or “somewhat” impair the company’s position with respect to their international competitors, while 24% and 2% say it would have “no impact” or “enhance” their competitive position; 90% say the Shareholder Bill of Rights Act would “significantly” or “somewhat” increase their costs as a public company, with 3% citing no effect)
Your Vote: What are the Odds of Schumer’s Bill Being Passed?
Senator Charles Schumer’s “Shareholder Bill of Rights” is not the only legislation floating around the Hills these days seeking to reform corporate governance. Here are three others:
1. “Shareholder Empowerment Act” – As Dave recently blogged about, Rep. Gary Peters introduced the “Shareholder Empowerment Act.” Similar to Schumer’s bill – but going further – Peters’ bill would implement eight governance reforms that were highlighted in a Council of Institutional Investors letter to Congress late last year, including:
– Require majority voting for directors
– Allow long-term investors to have proxy access by nominating their own director candidates
– Eliminate uninstructed broker votes in uncontested director elections
– Require separation of board chairs and CEO positions
– Implement nonbinding annual shareholder approval of executive compensation
– Require independent compensation consultants
– Strengthen clawbacks of unearned incentive compensation
– Bar severance agreements for executives terminated for poor performance
2. “Excessive Pay Shareholder Approval Act” and “Excessive Pay Capped Deduction Act of 2009” – In May, Senator Richard Durbin introduced two bills in May aimed at curbing “excessive” compensation: the “Excessive Pay Shareholder Approval Act” (Bill S. 1006) and the “Excessive Pay Capped Deduction Act of 2009” (Bill S. 1007).
The “Excessive Pay Shareholder Approval Act” would require a supermajority vote (60%) to approve a compensation structure in which any employee is paid more than 100x more than the average employee of that company. In addition, in connection this vote, proxy disclosure would need to include:
– Compensation paid to its lowest paid employee
– Compensation paid to its highest paid employee
– Average compensation paid to all of its employees
– Number of employees who are paid more than 100x the average employee compensation
– Total compensation paid to employees who are paid more than 100x the average employee compensation
The “Excessive Pay Capped Deduction Act” would limit the federal income tax deduction for compensation paid to executives to 100x average employee compensation. Any amounts paid in excess of this cap would be considered “excessive compensation” and would be non-deductible.
In addition, any company that paid “excessive compensation” would be required to file a report with Treasury for such taxable year that included:
– Amount paid to the employee receiving the lowest amount of compensation during such year
– Amount paid to the employee receiving the highest amount of compensation during such year
– Average compensation of all of its employees during such year
– Number of employees receiving compensation that is more than 100x the average employee compensation during such year
– Amounts paid to the employees receiving compensation that is more than 100x the average employee compensation during such year
An Inspector General Report: The SEC’s “Restacking Project”
At the end of last year, I blogged about how the SEC was spending $4.1 million to shuffle its personnel around physically due to bad planning when the Staff first moved into its new building a few years ago. The SEC called this it’s “restacking project.”
Back in March, the SEC’s Inspector General, David Kotz, issued this report on how the restacking project fared. The IG initiated the review because of Staff complaints that the project was “not properly approved and initiated, did not serve a useful purpose, and was a waste of Commission resources.” The report claims that 81% of the Staffers surveyed by the IG felt that the reorganization was completely unnecessary. Then SEC Chair Cox ordered a cost-benefit analysis that was never completed for the project. Not a good story.
“Cool Deal Cube Contest”: We Have a Winner!
Recently, I announced a “cool deal cube contest” as part of our ongoing “Deal Cube Chronicles.” John Newell of Goodwin Procter takes the prize with this cube. John notes:
Here is an old JPMorgan advertisement from the late ’80s that explains this cube. In a nutshell, it is that the cube/tombstone from the “tombstone of the unknown deal.” I made a joke to a senior guy at Bowne of Boston after a public deal cratered and he made a couple of these babies.
Recently, I also received this story from a member:
During a drafting session for a follow-on offering in which we were underwriters’ counsel, we commented that the CFO was referred to in his bio as a certified pubic accountant. Company counsel expressed surprise because they had copied the language verbatim from the original IPO prospectus. There followed 1-1/2 seconds of uncomfortable silence, after which we flipped through a copy of the IPO prospectus and confirmed the worst.
There is some consolation in the fact that a search of the term “certified pubic” on EDGAR yields 142 hits (and counting).
Whew, the proxy season is over. And it’s now fair to ask: just how wild and crazy was this proxy season? Given all the coming reforms, probably not as crazy as next year’s proxy season will be – but it certainly was’t dull. You can read details about how the various proposals were supported in RiskMetrics’ new “Preliminary Postseason Report.”
Regarding one of the hottest topics, as of June 1, “say-on-pay” shareholder proposals averaged 46.7% support, representing an increase of over 5% from 2008. The 2009 figure is based on preliminary or final voting results for 50 of the 85 proposals voted so far this year. Meanwhile, RiskMetrics is tracking 18 majority votes in favor of the resolution as of June 1st, compared with 11 in all of 2008. Proposals at another five companies received between 49 and 49.9% support.
It’s Time to Weigh In: RiskMetrics Launches Annual Policy Formulation Process
Last week, RiskMetrics kicked off its annual global policy formulation process by inviting comments in its 2010 proxy voting policy survey. This year’s policy formulation process will include more outreach to investment industry groups as well as expanded outreach to the global corporate community.
Given that these comments could influence RiskMetrics’ views – and given that RiskMetrics’ views will be more important than ever given regulatory reform, say-on-pay, proxy access, etc. – you should take advantage of this opportunity. The survey period ends July 31st – and will be followed by an open comment period in October after RiskMetrics publishes its draft policies. Don’t wait for this 2nd comment period to weigh in – it’s better to influence the policies now before the train gets rolling…
CEO Pay: Big Changes Coming
With the SEC’s goal to have new executive compensation disclosure rules in place before next proxy season – combined with the real likelihood of say-on-pay legislation and the loss of broker nonvotes for director elections – our the “4th Annual Proxy Disclosure Conference” (whose pricing is combined with the “6th Annual Executive Compensation Conference”) will be more important than ever. Here is the agenda.
Early Bird Expires This Friday: These Conferences will be held at the San Francisco Hilton and via Live Nationwide Video Webcast on November 9-10th. Take advantage of reduced rates that will expire this Friday, June 26th by registering now. These rates will not be extended – there will be no early bird discounts after Friday!
Good news. Peter and Alan just completed the 2009 edition of their popular “Section 16 Forms & Filings Handbook,” with numerous new – and critical – samples included among the thousands of pages of samples (remember that a new version of the Handbook comes along every 3 years or so – so those with the last edition have one that is dated). If you don’t try a ’09 no-risk trial to the “Romeo & Dye Section 16 Annual Service,” we will not be able to mail this invaluable resource to you in early July when it’s done being printed.
You can use this order form or order online. The Annual Service not only includes the “Forms & Filings Handbook,” it also includes the popular “Section 16 Deskbook” and the quarterly newsletter, “Section 16 Updates.” Get all three of these publications when you try a ‘09 no-risk trial to the “Romeo & Dye Section 16 Annual Service” now.
A Father’s Day Item: Becoming a “DAD”
From Keith Bishop: Are you, or would you like to become, a DAD? Pink OTC Markets provides an over-the-counter quotation system that is comprised of the OTCQX and Pink Sheets. These are not exchanges and the Pink OTC Markets is not a securities regulator or self regulatory organization.
A company that applies for admission to the OTCQX must have a “Designated Advisor for Disclosure” or otherwise known as “DAD.” A DAD may be either an attorney or an investment banking firm. According to the OTCQX rules: “The role of a DAD is to serve as a cautious and conscientious gatekeeper to prevent companies with inadequate questionable disclosure from joining OTCQX.” The OTCQX website currently lists a dozen attorney DADs.
By the way, I’ve heard that one investment banking firm was quoting a price of $90,000 to be a DAD. I must be living my life in reverse because all I do is write checks for my kids – no one is paying me to be a dad.
What Does a Spoofed Email Look Like?
Last week, Dave blogged about the email sent from a SEC attorney’s email account – even though she didn’t send the email (otherwise known as “spoofing”). As this episode illustrates, this fraudulent act isn’t like someone stealing your credit card. Spoofing is more than a mere hassle, it can injure your reputation even if uncovered. Here is a copy of the spoofed email so you can see how crazy it was.
I rehash this incident because spoofing isn’t limited to email, it now happens on Twitter and other new mediums. Companies need to be monitoring these new forms of media and not just stick their heads in the sand because they are new…
I play a lot of “old man” hoops (and I’m not that shabby), so I was excited to see this ESPN article about how President Obama has shaken up the love for basketball in the DC area.
For a short glossary of the 75+ acronyms in the White Paper, check out Mike O’Sullivan’s “Provided However” Blog.
Microsoft’s Legal Department Enters the Blogosphere
Several months ago, Microsoft launched a new blog – entitled “Microsoft On The Issues” – that includes the company’s “Law and Corporate Affairs” department among the contributors. The company uses the blog as a forum to communicate about issues important to it. For example, here’s a blog about how the company’s board recently recommended amendments to the company’s articles of incorporation that would give shareholders representing 25% or more of outstanding shares the right to call special shareholder meetings.
Hopefully this development will help nudge companies to be more outspoken, including submitting comments during the SEC’s rulemaking process – as well as draw outside counsel into the blogosphere. If in-house lawyers aren’t afraid to blog, I don’t see how law firms can continue to be so reluctant…
Survey Results: Compliance Committees
We recently wrapped up our Quick Survey on Compliance Committees practices. Below are our results:
1. Does your company have a Chief Compliance Officer:
– Yes, and with that title – 57.8%
– Yes, but not with that title – 26.7%
– No – 15.6%
2. Does your board have a Compliance Committee, with that or a similar title:
– Yes – 31.1%
– No – 68.9%
3. If the answer to #2 is “yes,” how old is the compliance committee:
– Less than one year – 14.3%
– 1-2 years – 28.6%
– 3-4 years – 35.7%
– More than 4 years – 21.4%
4. If the answer to #2 is “yes,” how often does the compliance committee meet:
– Once a year – 14.3%
– 2-3x per year – 50.0%
– More than 3x per year – 35.7%
– As needed – 0.0%
Please take a moment to participate in our new “Quick Survey on Audit Committee Oversight and Subsidiaries.”
While the official announcement of the Administration’s proposals for financial reform is slated for later today, copies of a near-final draft of the white paper outlining the proposals have already been circulating to members of Congress and to the major news organizations. Many thanks to Marty Dunn of O’Melveny & Myers for pointing this document out to me last night.
The SEC would seem to fare well under the Administration’s proposals. The white paper indicates that the SEC and the CFTC would maintain their current authorities and responsibilities as market regulators, while the statutory and regulatory frameworks for futures and securities would be harmonized. As previously discussed, the SEC would oversee the registration of advisers of all hedge funds and other private capital pools. Regulation of securitizations and over-the-counter derivatives will be accomplished through a “coherent and coordinated” regulatory framework.
Further, the white paper calls for expanded authority for the SEC to promote transparency in investor disclosures, and states that the SEC should be provided with new tools to increase fairness for investors, through the establishment of a fiduciary duty for broker-dealers offering investment advice and harmonizing the regulation of investment advisers and broker-dealers.
Among the new regulators proposed are:
– a Financial Services Oversight Council (FSOC), chaired by the Treasury and composed of prudential regulators tasked with identifying emerging systemic risks (replacing the President’s Working Group on Financial Markets);
– a National Bank Supervisor with the authority to supervise all federally chartered banks;
– an Office of National Insurance within the Treasury Department; and
– a Consumer Financial Protection Agency, tasked with protecting consumers from “unfair, deceptive and abusive practices.”
The FSOC would also establish the Financial Consumer Coordinating Council, with membership including federal and state consumer protection agencies, and a permanent role for the SEC’s newly created Investor Advisory Committee.
Seemingly back “on the front burner” with the white paper proposals is the issue of IFRS, with the report recommending that accounting standard setters “make substantial progress by the end of 2009 toward development of a single set of high quality global accounting standards.”
As widely expected, the Federal Reserve would gain more authority under these proposals, including authority over “Tier 1 Financial Holding Companies” and oversight over the payment, clearing and settlement systems.
Whether any or all of these proposals move forward is tough to say at this point, but at least today we now have a much clearer picture of the complete package of reforms under consideration.
New FINRA Conflict of Interest Rules
Just in time for hopefully an uptick in offering activity, the SEC has approved changes to NASD Rule 2720, which governs underwriter conflicts of interest in public offerings. These changes are meant to modernize and simplify the conflict of interest requirements, and provide some additional flexibility in connection with public offerings. The amendments to Rule 2720 will be implemented within 30 days after FINRA issues a Regulatory Notice (which will be issued some time within 60 days of the SEC’s approval).
Monitoring Activist Activity
During this DealLawyers.com podcast, Mary Beth Kissane of Walek Associates analyzes how companies should be monitoring shareholder activist activity, including:
– How do hedge funds have such a solid activism record?
– What should companies do to prepare for an activist attack?
– Who within the company owns the “monitoring activists” task?
– Who within the company should be dealing with the financial press?
– Who is the “financial press” these days? Bloggers included? Social media?
Just when you thought that the Shareholder Bill of Rights Act was the only thing to worry about on the federalized corporate governance front, along comes the “Shareholder Empowerment Act of 2009.” Last Friday, Congressman Gary Peters (D-MI) announced that he had introduced the legislation, which is intended to “expand shareholder rights and give investors a greater voice in overseeing the companies they own.”
This bill is even more wide-ranging than the Shareholder Bill of Rights legislation. The bill would amend the Securities Exchange Act of 1934 to provide:
1. Mandatory majority voting for directors – The SEC would direct the exchanges to adopt listing standards providing that a director nominee in an uncontested election must receive votes in favor from a majority of shareholders, and any nominee running unopposed for re-election would be forced to resign if he or she failed to receive a majority vote.
2. Proxy access – The SEC would be required to adopt rules, applicable beginning with shareholder meetings occurring after January 1, 2010, that would require issuers to “identify and provide security holders with an opportunity to vote on candidates for the board of directors who have been nominated by holders (sic) in the aggregate at least 1 percent of the issuer’s voting securities for at least 2 years prior to a record date established by the issuer for a meeting of security holders.” The SEC’s rules adopted under this provision would specify the information to be provided and would only be applicable when less than a majority is nominated.
3. Uninstructed Broker Votes in Uncontested Elections – This provision would direct the SEC to adopt rules providing that a broker will not be allowed to vote securities in an uncontested election if the beneficial owner has not provided specific instructions. The rule would apply for meetings held on or after January 1, 2010.
4. Independent Chairman – This provision of the bill would require the SEC to direct the exchanges to adopt listing standards mandating that issuers split the Chairman and CEO roles. Further, issuers would be required to provide that, to the extent possible and consistent with the issuer’s status as a public company, the Chairman is independent (under specified standards) and has not previously served as an executive officer.
5. Shareholder Approval of Executive Compensation – This provision would give shareholders an annual, non-binding advisory vote on the compensation packages of senior executives.
6. Independent Compensation Advisers – Under this provision, the SEC would be directed to adopt rules requiring that if a board or compensation committee retains an individual advisor or advisory firm in conjunction with negotiating employment contracts or compensation agreements with the issuer’s executives, the individual adviser and his or her firm must be independent, as prescribed in the bill.
7. Clawbacks of Unearned Pay – The SEC would direct the exchanges to adopt listing standards requiring issuers to have a policy for reviewing unearned bonus payments, incentive payments or equity payments awarded due to “fraud, financial results that require restatement, or some other cause.” The policy would need to require recovery or cancellation of any unearned payments “to the extent it is feasible and practical to do so.”
8. No Severance Agreements for Poor Performance – The SEC would direct the exchanges to adopt listing standards prohibiting the board or compensation committee from entering into agreements providing for severance payments for executives terminated for poor performance.
9. Disclosure of Performance Targets – The SEC would need to adopt rules requiring disclosure of specific performance targets used in compensation plans. In the course of this rulemaking, the SEC would need to “consider methods to improve disclosure in situations when it is claimed that disclosure would result in competitive harm to the issuer.” These methods might include required disclosure of past experience with similar targets, disclosure of inconsistencies between compensation targets and targets set in other contexts, and mandated confidential treatment requests.
There will no doubt be more legislative proposals of this kind. While the bills may not ultimately be adopted as proposed, they will continue to add issues to the debate over what sorts of governance reforms should go forward, and put pressure on the SEC to act with respect to its numerous outstanding rule proposals and contemplated rule proposals. Hat tip to Ted Allen’s RiskMetrics Group Risk & Governance Blog for highlighting this legislation.
How to Plan for CEO (and Other Senior Manager) Succession
Tune into tomorrow’s webcast – How to Plan for CEO (and Other Senior Manager) Succession – to hear Amy Goodman of Gibson Dunn; Holly Gregory of Weil Gotshal; Mark Van Clieaf of MVC Associates; and Mark Nadler of Oliver Wyman Delta talk about one of the most important – but yet the least understood – of governance areas out there.
The launch of the FASB Accounting Standards Codification is fast approaching on July 1, 2009. The Codification, which will serve as the single source of authoritative, non-government US GAAP, will be effective for interim and annual periods ending after September 15, 2009. Once the Codification is launched, all existing accounting standard documents are superseded, and all other accounting literature not included in the Codification will be considered “nonauthoritative.” For more information, you can check out FASB’s upcoming webcast about the Codification on June 22nd.
Yesterday, the FASB announced that it had issued Statement No. 166, Accounting for Transfers of Financial Assets (which serves and an amendment to FASB Statement No. 140) and Statement No. 167, Amendments to FASB Interpretation No. 46(R). In its announcement, the FASB notes that these standards will change the way issuers account for securitizations and special-purpose entities, and will impact financial institution balance sheets beginning in 2010. It was further noted that the impact of the standards was factored in by banking regulators in the course of conducting their recent “stress tests.”
For some time now, we have been waiting to see if the SEC would bring any insider trading actions involving the use of Rule 10b5-1 plans. Ever since the SEC Enforcement Staff first mentioned concerns with potential abuses of Rule 10b5-1 plans back in 2007, much has been made of how to avoid invalidating a Rule 10b5-1 defense (for comprehensive coverage of these issues, see our “Rule 10b5-1” Practice Area). Now, we have the SEC’s complaint against Countrywide’s former CEO Angelo Mozilo and others as a first of its kind SEC case questioning trades made under Rule 10b5-1 trading plans.
The SEC’s complaint in the Countrywide case alleges that Mozilo and two co-defendants misled investors about the problems that the mortgage lender faced, with contemporaneous e-mails painting a picture of significant internal concern over the company’s lending practices, while at the same time the company was portraying a rosy picture to the investment world. In this regard, SEC Enforcement Director Robert Khuzami, waxing poetic, called the situation “a tale of two companies” in the SEC’s press release announcing the action.
In the complaint, the SEC notes that Mozilo entered into four Rule 10b5-1 sales plans in late 2006, in each case while he was in possession of material non-public information about the mounting credit risk that Countrywide faced and the expected problems with the Countrywide-originated loans. With respect to his October 2006 sales plan, for instance, the SEC alleges that Mozilo established the plan one day before sending an e-mail to his co-defendants stating “we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales.” Over the course of the next 12 months, Mozilo exercised over 5 million options and sold the underlying shares pursuant to the Rule 10b5-1 plans, resulting in proceeds of over $139 million.
The Mozilo complaint for the most part focuses on one of the most fundamental elements for a successful Rule 10b5-1 defense – that the person entering into the plan must not be in possession of material non-public information at the time of entering into, or amending, the plan. I still get the question from time to time of whether a person can enter into a plan while in possession of material non-public information so long as trading does not commence until after the information is made public, which obviously can never work.
It will probably be some time before this case makes it to trial. It remains to be seen whether the Mozilo case is just one isolated incident of allegations involving Rule 10b5-1 plans, or whether more of its type are on the way. In any event, I think that the threat of the SEC cracking down on Rule 10b5-1 plans has in all likelihood cleaned up most abuses in this area (if there were any to start with).
In this entry from the D&O Diary blog, Kevin LaCroix provides a great explanation of why it is appropriate for Bank of America to be advancing Mozilo’s defense expenses.
Academic Research on Hedging Transactions and Abnormal Returns
As Mike Melbinger recently noted in his CompensationStandards.com blog, a recent academic study has highlighted a potential relationship between executives entering into prepaid variable forward contracts and a drop in their company’s stock price. (The study is discussed in this WSJ article). This research could potentially raise the SEC’s attention concerning these types of transactions, similar to the way that research on well-timed Rule 10b5-1 plans originally garnered the SEC’s attention on those plans. While it doesn’t seem that prepaid variable forwards have been as popular as they once were, they still offer an alternative for executives to diversify and monetize a portion of their stock holdings.
The Administration’s Regulatory Reform Proposals Expected This Week
In this Washington Post piece appearing today, Timothy Geithner and Lawrence Summers lay out the Administration’s plans for financial reform. The piece discusses how the Administration’s proposals will address five key problems. Among the solutions, Geithner and Summers indicate that the plan will call for “harmonizing the regulation of futures and securities, and for more robust safeguards of payment and settlement systems and strong oversight of ‘over the counter’ derivatives. All derivatives contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse.”
The WSJ also reports today that announcement of “the most sweeping reorganization of financial-market supervision since the 1930s” is expected this Wednesday. [It seems that in this phase of the financial crisis and its aftermath, Wednesday is the new Sunday. It used to be last Fall that we would wait until Sunday evening before Asian markets opened to find out what major calamity had been averted or precipitated. Now, major announcements seem to be happening on Wednesdays, which takes away some of the drama but is perhaps a good sign.]
From the WSJ report, the only agency on the chopping block is the Office of Thrift Supervision – otherwise, financial regulatory authority is expected to be reallocated so as to avoid gaps in regulation. As many have expected, the Federal Reserve will garner more power under the Administration’s proposal, overseeing the largest of financial institutions with enhanced authority.
It remains to be seen how quickly Congress will act on these proposals – healthcare seems to be taking center stage away from the financial crisis as signs of normalcy on the economic front have begun to emerge.
Deal Protection: The Latest Developments in an Economic Tsunami
We have posted the transcript from our recent DealLawyers.com webcast: “Deal Protection: The Latest Developments in an Economic Tsunami.”
There is no doubt that the SEC has a laser-like focus on its investor protection mission these days. Recently, the SEC announced that it will be getting some help from a newly-established investor advisory committee. Commissioner Aguilar will serve as the Commission’s “sponsor” of the Committee, and it will be made up mostly of institutional investors and representatives of individual investor organizations.
The SEC said that the Advisory Committee’s main goals will be providing:
– advice to the Commission on areas of concern to investors;
– investors’ views on “current, non-enforcement, regulatory issues;” and
– information and recommendations to the Commission regarding regulatory programs.
The SEC is free to set up these sorts of advisory committees under the Federal Advisory Committee Act (5 U.S.C. App. 2 §§ 1-16), if it can be determined that the establishment of the advisory committee is in the public interest. An advisory committee can be established (15 days after the publication of a notice in the Federal Register) by filing a charter for the committee with the Senate Committee on Banking, Housing, and Urban Affairs and with the House Committee on Financial Services. A copy of the charter is also filed with the SEC Chairman, furnished to the Library of Congress, placed in the Public Reference Room at the SEC, and posted on the SEC’s site.
The charter for the committee must provide that the duties of the committee are to be solely advisory, and specify the time frame during which the committee will operate. The charter also provides that the SEC alone will make any determinations of action to be taken and policy to be expressed with respect to matters within the SEC’s authority that are recommended by the committee.
The advisory committee approach can be a useful way for the SEC to obtain a more detailed understanding of matters without expending scarce Staff resources. In my view, they seem to work best when they operate relatively independently and their specific agenda is not more or less directed by the SEC.
More on the “Shareholder Bill of Rights Act”
Broc has blogged about Senator Schumer’s bill and we have posted memos analyzing it in our “Regulatory Reform” Practice Area. Now, in this podcast, Colin Diamond of White & Case provides some insight into the Shareholder Bill of Rights Act, including:
– What are the provisions of the Shareholder Bill of Rights Act?
– Are any provisions of the bill not seen before in other similar bills?
– What are the odds of passage of the bill?
– What are the implications of the bill, if passed?
The Spoofed E-mail Caper
It seems like the last thing the SEC needs right now is some bizarre story of a mysterious, highly critical e-mail sent to its leadership and the press, but that is just what happened earlier this week in the strange case of the “spoofed” e-mail account. As noted in this WSJ article (see also this Bloomberg and Washington Post coverage), the four page e-mail appeared to be sent from an enforcement attorney’s e-mail account, and it was addressed to Chairman Schapiro, a number of other SEC officials and several reporters covering the SEC. The e-mail attacked the performance of Chairman Schapiro and SEC Inspector General David Kotz, and railed against a number of things at the agency, including the performance review process. The original story from the apparent sender was that her Blackberry was stolen, but it later turned out that the e-mail was sent from outside of the SEC’s network where someone had “spoofed” her e-mail address. (I know all about “spoofing,” having received about fifty Canadian pharmacy e-mails a day from myself over the past couple of years.)
From the description of the e-mail and the excerpts that have been reported, it sounds like the e-mail came from a very angry Staffer (or ex-Staffer). I can think of several crazy e-mail stories from my days at the SEC, but by and large those involved self-inflicted e-mail gaffes. Of course back in the good old days, I recall that these sorts of loose-cannon Staffer activities were carried out on pilfered letterhead, rather than by e-mail. No matter how it is done, it is really unbelievable that someone would go to such lengths to vent their frustration – they should really get another hobby.
Yesterday marked a significant day in the ongoing involvement of the US government in executive compensation, as Treasury Secretary Geithner outlined a series of broad-based principles that companies – particularly financial institutions – should consider in connection with the design and implementation of their executive compensation programs. Secretary Geithner’s statements followed a meeting involving SEC Chairman Schapiro, Federal Reserve Governor Dan Tarullo and several compensation experts.
The principles that Secretary Geithner outlined yesterday should come as no surprise to those who have been reading our publications over the last several years. The principles draw on best practices that we have seen developing in the marketplace over time, and for the most part can be universally applied. (Nothing in Geithner’s comments seemed to indicate that the guidance was limited strictly to financial institutions, but banks will see these standards in more concrete terms as they are worked into the supervisory process of bank regulators.)
Here are the principles:
1. Compensation plans should properly measure and reward performance – Incentive compensation plans should be tied to performance in the sense of long-term value creation, which could be accomplished by using a wide range of internal and external metrics (and not just the company’s stock price), including metrics that distinguish the company’s performance from its peers.
2. Compensation should be structured to account for the time horizon of risk – Continuing the theme of aligning pay with long-term value creation, the principles encourage conditioning compensation on longer-term performance and thereby obviating the need for specific clawbacks, while encouraging the holding of equity awards for longer periods.
3. Compensation practices should be aligned with sound risk management – As we have heard repeatedly since the financial crisis, compensation committees are encouraged to conduct and publish risk assessments of compensation plans in order to “ensure that they do not encourage imprudent risk taking.”
4. Golden parachutes and supplemental retirement packages should be reevaluated – Companies should reexamine the extent to which golden parachutes and supplemental retirement packages are aligned with shareholder interests, whether they incentive performance and whether they result in value to executives even when shareholders lose value.
5. Promotion of transparency and accountability in the compensation-setting process – Citing the lack of independence of compensation committees and the lack of clarity in disclosures (including the lack of a true “walkaway” number for top executives), two legislative initiatives are proposed.
The first legislative initiative outlined yesterday is a push for an advisory vote on executive compensation, which goes beyond the previously introduced legislation and the pending Shareholder Bill of Rights, in that it would require a vote on executive compensation as disclosed in the proxy statement (including the CD&A and the compensation tables) and a vote targeting the compensation reported for each of the named executive officers. Similar to the prior proposals, a non-binding vote on golden parachutes would also be required in merger proxies.
The second legislative initiative coming out of the announcement is a new framework for compensation committees that would be analogous to the audit committee provisions of the Sarbanes-Oxley Act. Under SEC-mandated listing standards, the compensation committee members would be subject to the higher independence standards applicable to audit committee members, the compensation committee would get resources to hire and oversee its own advisors and independence standards would be prescribed for outside compensations consultants and outside counsel. This initiative comes as somewhat of a surprise to me, because while compensation consultant conflicts have been a concern, I have not heard much in the post-Sarbanes-Oxley era about concerns that compensation committees lack sufficient independence.
Chairman Schapiro also released a statement yesterday, reiterating the rulemaking efforts under consideration on executive pay and corporate governance. Proposals are expected on these in the next several weeks. Not to be outdone, Congressman Barney Frank issued a statement, generally supporting Secretary Geithner’s principles (except for the compensation committee proposal), but also indicating that Congress should go further and “adopt legislation that mandates that the SEC adopt appropriate rules that embody these principles.”
Treasury Issues Much-Anticipated Rules Implementing TARP Exec Comp Restrictions
We also saw the Treasury announce that it had finally published interim final rules implementing the executive compensation provisions from the Recovery Act. The lack of guidance had created difficulties for financial institutions participating in the TARP program, since they were not sure what to do with their compensation programs in the absence of greater clarity in how the legislation was to be applied.
The rules implement and expand on the Recovery Act provisions. Some new provisions that go beyond the statutory requirements include:
– Prohibiting tax gross-ups to senior executive officers and the 20 next most highly compensated employees;
– Requiring additional disclosure (to the Treasury and the principal regulator) of perquisites in excess of $25,000 for employees subject to the bonus restrictions, including a narrative description of, and justification for, the perquisites.
– Requiring a disclosure (to the Treasury and the principal regulator) of the use of compensation consultants, including a discussion of any non-compensation services performed and the use of “benchmarking” procedures.
It is Here: The SEC Publishes the Shareholder Access Release
Last night, the SEC posted the shareholder access release. The release comes in at 250 pages with 181 specific comment requests (with many of those including multiple questions), so there will be lots to comment on. The release includes an extensive discussion of the background and rationale for shareholder access, as well as a cool chart outlining the proposed Rule 14a-11 deadlines. I’ll cover more on some of the specifics in the proposals over the next couple of days.
