The latest version of the House “bailout” legislation includes provisions for a “say on pay” vote, limits on severance, clawbacks and shareholder access to the proxy for those companies involved in the bailout. See Section 9 on pages 11-13. The Senate version of a bailout bill contains the executive compensation provisions (see Section 17 on pages 30-31), but not the shareholder access one.
Bear in mind that both of these are just drafts and that they likely are just the Democratic versions of a bill. Media reports indicate that the bailout plans changes from hour to hour. In fact, I can’t even be sure I have linked to the latest drafts…
The World is Changing: Why Can’t CEO Pay?
With the very real possibility of executive compensation constraints being part of the Congressional bailout legislation, it seems like a good time to examine why executive compensation practices haven’t changed – even though 99% of this country believes they should. With Wall Street and our financial markets undergoing a complete transformation and the regulatory framework certain to be reformed in ways we never imagined, why does CEO pay remain “untouchable” for many boards and their advisors?
Here are a few of my thoughts:
1. Lots of Lip Service – Personally, I am tired of having conversations with colleagues who tell me that compensation committee meetings really have changed. I believe that. The problem is it’s just the committee processes that have changed – to pass judicial muster after Disney – but the committee’s actions remain the same. When I have these conversations, it’s telling how perfunctory committee meetings used to be!
2. When There is Responsible Change, It’s Driven by the CEO – Most often when I talk to someone who regularly advises boards, I hear that the few companies that really make responsible changes are the ones where the CEO speaks up and voluntarily asks for the change. Sadly, boards and compensation committees are not the ones driving responsible change.
3. Debunking “Everyone Else is Doing It” – How often has this justification lead us down the garden path? Just because everyone is using peer group benchmarking instead of alternative benchmarking – like internal pay equity – doesn’t make it right. In fact, some plaintiff lawyers may argue that it’s now widely known that 15 years of broken peer group benchmarking has made that methodology unreliable – and that boards that continue to heavily rely on that broken database are not fulfilling their fiduciary duty to be reasonably informed. (And remember that today’s excessive CEO pay packages are a relatively new phenomenon, only about 15 years old as I’ve explained before).
4. You Won’t Lose Your CEO If You Trim $10 Million – Probably the most frequent justification to maintain the status quo is that the CEO will walk if the pay package is cut from $20 million to $10 million. I find this an empty argument in most cases (and for the many really hurting in today’s economy, even the $10 million produces anger). Sure, the grass is always greener – but the reality is the grass is brown all over right now.
I realize that having a pay-cutting conversation is hard – but there are baby steps that can be taken to bring executive compensation back in line. Start with implementing a clawback provision with teeth, eliminate severance arrangements that have no purpose and require executives to hold-til-retirement. Use better tools to ensure a fairer process, like internal pay equity and wealth accumulation analyses.
5. Congressional Solution Not Preferred, But Perhaps Inevitable – I don’t believe Congressional intervention into pay practices is a sound idea, but the failure of boards to fix pay practices on their own has brought us to where we are today. And it shouldn’t be a surprise that Congress is now focusing on this topic – the House has held hearings on CEO pay repeatedly this year and both Presidential candidates have stated their intention to pass “say on pay” legislation next year. I believe we are at a “last chance” stage for boards to truly get their act together or else we will wind up with laws that do it for them.
What Can You Do? You can be informed and learn as much about responsible practices as possible. Our upcoming “5th Annual Executive Compensation Conference” can help you get started by providing a roadmap of practical tools and processes that you – and your board – can use to make things right. If you can’t make it to New Orleans on October 21st-22nd, you can still catch this important conference by video webcast.
If times are tight and your company doesn’t have the budget to cover the full cost of registration, send me an email and we’ll accommodate you. We are far more interested in getting CEO practices back on the right track than making money from the Conference. Note that when you register for the “5th Annual Executive Compensation Conference,” you also get access to the “Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference” as these two practical Conferences are bundled together. The two Conferences are being held on successive dates.
Fixing the “No Short List”: The SEC Punts to Stock Exchanges
In my rush to blog before I left for a speaking engagement yesterday morning, I had missed the part of the SEC’s revised emergency order that now requires each stock exchange to post a list of the financial institutions that should be covered by the SEC’s temporary short-selling ban. Last night, the exchanges posted their lists with additional companies on them (here is the NYSE list and Nasdaq list), which are subject to further refinement.
This is probably a wise move given the snafus made by the SEC so far – but pretty embarrassing given that the SEC went through the exercise of creating a “No Short List” for financial institutions just a month ago (read some of the quotes at the end of this WSJ article). As a SEC Staff alumni, this Bloomberg article makes me cringe and I worry that the SEC will be made a scapegoat for the ongoing crisis and that Congress will fold it into another federal agency…
The US Treasury’s initial draft of Congressional legislation to provide Treasury with authority to purchase up to $700 billion in mortgage-related assets is unbelievably simple, providing broad authority for the Treasury to set their own guidelines about how to spend the money. So simple that I think it was drafted on the back of a napkin. However, there is much Congressional haggling to be done over the next few days and the final product likely will look much different.
Here is a Davis Polk memo that summarizes the legislation pretty nicely – and here are some articles on the proposed legislation:
Between the time I drafted this blog last night and this morning, things were already changing. Things are moving so fast. One of the key bones of contention regarding the legislation is whether there should be limits on CEO pay – including severance pay – at those companies that benefit from the legislation. Last night, Mark Borges covered this story in his “Proxy Disclosure” Blog.
Patching Up the SEC’s Temporary Emergency Actions
Wow, what a wild week last week was. And I imagine this week will be more of the same as Congress seeks to act. In the SEC’s haste to take action, its temporary emergency actions had holes in them, some of which were addressed by clean-up amendments adopted on Sunday – see this SEC press release. In addition to making technical amendments, the SEC’s revised order provides that the information disclosed by investment managers on new Form SH will be nonpublic initially, but will publicly available on Edgar two weeks after it is filed with the SEC (see footnote 8 of the revised order).
Here is a WSJ article describing some of the holes and below is an excerpt from a Davis Polk alert:
“Unlike a similar action taken by the U.K. Financial Services Authority on September 18th, the prohibition is not limited to the active creation or increase of net short positions. Without this exception, it would appear that financial institutions (including those the SEC is trying to protect) and other market participants who hold convertible securities, options and other equity derivatives, cannot adjust their delta hedge positions in the underlying common stock that hedge their risk of owning the equity derivatives. Therefore, contrary to its intent, the SEC action may significantly limit the ability of the indentified financial institutions to access the convertible and equity derivative markets.
The SEC has been addressing a number of specific questions and concerns that have been noted. For example, we understand that the SEC staff has informally advised market participants that, despite the reference to ‘publicly traded security’ in the order, the order is not intended to cover debt securities.”
A few members were not happy with my dig against McCain on Friday, about his jab against SEC Chairman Cox. I just want the record to show that I had written that piece before I had read this op-ed entitled “McCain’s Scapegoat” in Friday’s WSJ, which expressed a similar sentiment. Don’t worry, I’m not gonna start blogging about politics – but that one was too hard to resist.
The Importance of Your SIC Code
On Friday morning, the SEC took temporary emergency action to prohibit short selling in 799 financial companies. These actions were effective immediately and will expire at the end of the day on October 2nd (unless extended by the SEC). For its “No Short List” (see Appendix A for the list), the SEC selected the 799 companies based on their Standard Industrial Classification code (known as a “SIC” code; these codes are a US government system for classifying industries by assigning a four-digit code to each company). A total of 31 SIC codes were included in the list.
I received a number of emails from panicky members whose financial service companies were not part on the SEC’s list. Some of these companies have SIC codes covered by the SEC’s emergency order, but they were not listed by name in the SEC’s order. For example, this situation applies to AllianceBernstein Holding, Invesco and Legg Mason. They’ve all filed Form 8-Ks stating that they believe they should be on the list since they were covered by the SIC code used by the SEC (eg. Legg Mason’s 8-K).
Others believe their companies are financial services companies and should be on the list, but their companies don’t have SIC codes – at least, as they show up in the SEC’s database (however, EDGAR shows their SIC code) – that correspond to the range of SIC codes covered by the SEC’s “No Short List.” To illustrate, CNBC reported that several companies – like General Electric – may be added to the list because their financial services businesses are substantial. GE’s SIC code in the EDGAR database shows up as “SIC: 3600 – Electronic & Other Electrical Equipment (No Computer Equip).” CNBC mentioned several other financial service companies not on the SEC’s list, including CIT Group and American Express. Watch this CNBC video, which points out the problems and quirks with the list (egs. there aren’t 799 names on the list and at least four non-trading companies were inadvertently included).
Note in the SEC’s order, the SEC took pains to say that its list was prepared on a “best efforts basis.” I’ve heard that the SEC expects to post an amended list soon.
Lesson learned? Re-consider your company’s SIC code to ensure it properly fits your company. Remember that companies pick their own SIC code when they file their Form S-1 to go public – there is a spot on the facing page – and the SEC has no input (although in theory, the Staff could question your choice). The SIC code also is submitted as part of the header when the filing is Edgarized (note a SIC code isn’t solicited on the Form ID).
Note that the SEC is one of the few – if not the only – government agency that still uses SIC codes (probably because those codes are so hard-wired into much of the SEC’s disclosure framework). The more recent – and widely used – identification system is the North American Industry Classification System (NAICS), which has largely replaced SIC codes in other contexts.
Yesterday, Senator John McCain stated that he would fire SEC Chairman Cox if he were President. In response, Cox issued this press release in his defense.
Both of these actions are breathtaking. McCain obviously is looking for a scapegoat in his efforts to win the Presidency. And Cox looks wildly paranoid – and stooping low to engage in politics when he is supposed to be managing an independent federal agency in the midst of the biggest financial crisis of our lifetime.
I’ve blogged over six years and haven’t blogged a single item that could be considered partisan politics. But with McCain’s unbelievable flip-flopping of late, I can’t help it. I guess that means next week McCain will say that Cox will be named Treasurer if he gets elected. On Wednesday, McCain was saying that the government should let AIG fail – but by Thursday, he was touting the opposite (see this video).
Meanwhile, Paulson continues to socialize our economy. The US Treasury just set aside $50 billion to guarantee money market funds (see this press release). I could sit here and blog all day about the unbelievable string of events this week – by the end of next week, it looks likely that our entire financial system will be completely revamped before our very eyes. I’m sure glad people are taking their time to debate the course of action and closely consider all the long-term ramifications of these actions…
I do believe Cox could have done a whole lot more during this financial crisis – for starters, he should have been on the bully pulpit trying to maintain calm. I’m not the only one who thinks more could have been done: check out this blog that criticizes Cox for demoralizing the Enforcement staff – and listen to this story from Chicago public radio’s This American Life called “Now You SEC Me, Now You Don’t,” which talks about how noticeably absent SEC Chair Cox has been in the midst of the meltdown. This podcast is just free for this week – and the story starts at 36 minutes into the program. Minute 54 is particularly amusing.
Parsing the SEC’s Authority to Adopt Its Short-Selling Emergency Order
Yesterday, I noted in passing that Professor Jay Brown had analyzed in his “Race to the Bottom” blog, whether the SEC’s emergency order violates the Administrative Procedures Act.
Jack Katz, the SEC’s long-time former Secretary, saw that and noted there was something weird at first glance. Under Section 12(k)(2)(C), when the SEC takes emergency action, it’s exempt from the APA, including the Section 553 notice and comment period as well as the 30-day waiting period for effectiveness. However, the SEC’s press release explicitly says that the action is taken under the APA. In comparison, the SEC’s emergency order is silent on the APA.
For example, under the APA, a federal agency can skip both the notice and comment period and 30-day waiting period for effectiveness if it makes a finding that the action is unnecessary, impracticable or contrary to the public interest (for notice and comment) and a finding of good cause (30-day period for effectiveness). You may recall that the December 2006 executive compensation amendments were adopted under that standard as interim final rules.
I think the discrepancy can be explained – there likely was a shift in the SEC’s thinking between the time of issuance of the press release and the later issuance of the emergency order, when the SEC decided to issue its new rules in the form of an emergency order from interim final rules, probably due to the fact that they just didn’t have the time to crank out a full-blown release. The whole thing happened very quickly.
By the way, the SEC just banned all short selling in financial companies, similar to what the United Kingdom did yesterday.
The SEC’s Investor Education Efforts During the Crisis: Ummmm
On Tuesday – the day that AIG was being bought by the government and the world felt like it was ending – the SEC retooled its home page to provide much more information directed towards the retail investor. I got excited because I had already fielded four calls from my mom and several of her friends about the annuities they had bought from AIG. Naturally, they were freaking out. A quick search online showed that the same question was being asked by millions around the country. No surprise there.
So what does the SEC do? It devotes the top half of its home page to market its “3rd Annual Senior Summit,” an event to help seniors spot fraud (note that on Wednesday, nearly half of the SEC’s home page was devoted to this summit; now, it’s much less but it still is the top item). Normally that wouldn’t even give me pause. I wondered to myself – this is what the SEC focuses on in the face of the gravest financial crisis of our lifetime?
But wait, maybe I’m saved as I spot this link on the right side of the home page: “What to Know About Equity-Indexed Annuities.” You can read it for yourself to see if it would truly answer the types of questions being asked by those in distress right now. I guess this is what they mean by deregulation.
Yesterday, facing a cry to adopt a market-wide rule on naked short sales and rumor-mongering (see this Wachtell Lipton memo entitled “Today the SEC Must Step Up” from Tuesday), the SEC took several coordinated actions against “naked” short selling. This came in the form of an emergency order, thereby avoiding the typical notice and comment period of government rulemakings. The SEC’s new actions became effective at midnight. Here is a statement from Chairman Cox and Enforcement Director Thomsen.
These actions apply to the securities of all public companies; compared to the SEC’s temporary Emergency Order (that lapsed a month ago) which only applied to companies in the financial sector. Wachtell’s new memo? “Too Little, Too Late.”
In his “Race to the Bottom” blog, Professor Jay Brown provides some nice analysis of whether the SEC’s emergency order violates the Administrative Procedures Act…
AIG to Be Renamed “NOSLAUP II, LLC”? Hint: “Paulson” Spelled Backwards
Some members wonder why the Federal Reserve only purchased 79.9% of AIG – was there any magic to it not going over 80%? As noted in this DealBook blog by Prof. Davidoff, the government can’t purchase more than 80% of a company “because if it goes over the magical number of 80 percent, the company’s debts are then required to be consolidated onto the federal government’s balance sheet. Keeping it at 79.9 percent allows the government to maintain the fiction that it is still not responsible for the company’s solvency.” Thanks to Tom Conaghan of McDermott Will for tracking this down.
A nice off-balance sheet play by the Feds. I guess they are trying to be like Enron. Maybe they should rename Fannie Mae “Raptor 6” and AIG “NOSLAUP II, LLC” (ie. “Paulson” spelled backwards).
Anyways, I can’t wait to see the Fed file their Schedule 13D and all of their Section 16 reports.
Broc and I are more than excited to be finally done with our comprehensive treatise of executive compensation disclosures: Lynn, Romanek and Borges’ “The Executive Compensation Disclosure Treatise & Reporting Guide”. This thing is massive, over 1000 pages long and it wouldn’t have been possible without the help of our new co-author Mark Borges and our two co-editors, Julie Hoffman and Dan Greenspan.
It’s great to have Mr. Borges as part of our Treatise team since he was able to lend his well-known experience and wisdom to the project. And of course, we thank the many of you that have sent us encouraging words (and ordered a copy).
We hope to have the online version of the Treatise up over the next week or so and it will take about a month to typeset and print the hard copy of the book. Remember that when you order the Treatise, you not only get the hard copy of the book – but you also get access to an online version of the Treatise. We’ll let you know when the Treatise is online – as well as when we mail. Here are FAQs about the Treatise.
Order your Treatise now so we can rush it to you right after it’s printed; remember there is a reduced rate if you are attending any of our Conferences.
Order online – or here is an order form if you want to order by fax/mail. If at any time you are not completely satisfied with the Treatise, simply return it and we will refund the entire cost.
Is it Friday Already? The AIG Bailout
Apparently AIG couldn’t wait around for the typical flurry of weekend meetings at the New York Federal Reserve and had to be bailed out on, of all days, a Tuesday. It just doesn’t seem to have quite the same dramatic flair as when the announcements are made on Sunday. But the bailout of AIG is quite dramatic, involving an $85 billion bridge loan and the nationalization of one of the largest insurance companies in the world. Under the terms announced last night, AIG has access to up to $85 billion through a Fed liquidity facility with a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. The government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders. Not the best of terms for AIG or its shareholders, but I guess beggars can’t be choosers. I note that $85 billion is more than twice the amount that AIG was seeking over weekend.
Why backstop AIG but not Lehman? It is certainly hard to say, other than apparently it was thought that Lehman could be unwound in an orderly fashion under Chapter 11, while AIG was at risk for a “disorderly failure.” At this point, there doesn’t seem to be a whole lot of consistency in the government’s approach, which could only spell more uncertainty for those institutions still standing.
Kevin LaCroix has provided a great summary of what we know so far in The D&O Diary blog. Kevin notes: “The problem for AIG is that sale of its non-core subsidiaries alone may not be sufficient to pay back even half of $85 billion. The Deal Journal blog estimates (here) that sales of AIG’s non-core subsidiaries and minority interests might raise ‘as much as $42 billion’ – and that, I might add, is before taxes. (I think Uncle Sam will insist on the payment of all applicable taxes.) Which raises the question whether the sale of ‘businesses’ specifically contemplates the sale of some or all of AIG’s core insurance operations?
Left unanswered in the Fed press release is the question of what this development means for AIG’s continuing business operations. The primary goal of the Fed facility is the orderly sale (as opposed to the ‘disorderly failure,’ as the Fed statement put it) of AIG’s businesses. What does this imply about the future of AIG’s operating companies? And what will be left of AIG after the ‘orderly sale’?”
Kevin raises a number of excellent questions that we will only know the answers to as the situation unfolds. Chief among the questions for me is why is the government now the majority owner of a major insurance company and what does it intend to do with its ownership interest?
Shell Companies and Rule 144
New paragraph (i) of Rule 144 has provided a framework for Rule 144 sales of shell company securities, but it has raised a number of questions and concerns for practitioners.
In this podcast, David Feldman of Feldman Weinstein & Smith discusses the latest developments with Rule 144(i), including:
– What are the principal concerns that have come up so far in implementing Rule 144(i)?
– What guidance did you seek from the SEC Staff and what did they say?
– What are some practical considerations for issuers now?
– What further adjustments to Rule 144(i) might be possible at this point?
Late last month, New York Attorney General Andrew Cuomo announced that Xcel Energy has reached an agreement with the State of New York to provide more disclosure about risks that the company faces as a result of climate change. In the press release announcing the agreement, Cuomo is quoted as saying “[t]his landmark agreement sets a new industry-wide precedent that will force companies to disclose the true financial risks that climate change poses to their investors.” The agreement with Xcel comes out of an effort launched by Attorney General Cuomo last September, when his office issued subpoenas to Xcel and four other energy firms – AES Corp., Dominion Resources, Dynegy and Peabody Energy.
As I noted in the blog a year ago, a group of state officials, state pension fund managers and environmental organizations had submitted a petition to the SEC (which was supplemented in June 2008), asking for interpretive guidance clarifying that, under existing law, companies are required to disclose material information related to climate change. To date, it does not appear that the SEC has acted on this petition. Now, the New York Attorney General has sought to compel climate change disclosure in a company’s SEC filings without the help of the SEC. There is no doubt that the precedent of the New York agreement with Xcel may push other utilities – as well as companies in other industries who face similar climate change issues – toward more disclosure regarding climate changes risks.
Under the terms of the “Assurance of Discontinuance” with New York, Xcel has agreed to provide specific disclosures in its Form 10-K, including an analysis of financial risks from climate change related to:
– present and probable future climate change regulation and legislation;
– climate-change related litigation; and
– physical impacts of climate change.
Xcel also agreed to beef up its climate change disclosures in a number of other areas, including:
– current carbon emissions;
– projected increases in carbon emissions from planned coal-fired power plants;
– company strategies for reducing, offsetting, limiting, or otherwise managing its global warming pollution emissions and expected global warming emissions reductions from these actions; and
– corporate governance actions related to climate change, including whether environmental performance is incorporated into officer compensation.
It remains to be seen whether the New York action will prompt the SEC to move forward with any sort of rulemaking or interpretive guidance as suggested in the petition filed last year. It always strikes me as interesting when some entity other than the SEC is prescribing specific disclosures to be included in periodic or current reports. What happens if the SEC or the SEC Staff disagrees with the New York Attorney General on the materiality of this information and whether it is necessary for investors? It could put Xcel and other companies that follow Xcel’s lead in a bind with Corp Fin when comments may be raised in the course of a Form 10-K review seeking to cut back or modify this sort of “mandatory” disclosure.
Weil Gotshal & Manges just published an inaugural survey of private investment in public equity (PIPE) transactions in which private equity sponsors, sovereign wealth funds and other financial investors invested $100 million or more, covering a total of 63 transactions (including 24 in the United States, 9 in Europe and 30 in Asia). The survey notes that 25% of the surveyed US transactions involved aggregate investments of greater than a whopping $5 billion, while almost half of the surveyed transactions involved aggregate investments of greater than $500 million! Many of the largest PIPEs were for investments in financial institutions seeking to bolster their capital. Interestingly enough, I notice that these very large transactions are rarely characterized as “PIPEs” when they are announced.
Of the United States deals surveyed, it is clear that PIPEs have served in some cases as vehicles for private equity sponsors to acquire significant (and sometimes controlling stakes) in companies. In this regard, some features of going private transactions have “migrated” to PIPE transactions. The survey notes that four recent PIPEs featured the retention of a “fiduciary out” by the board of the public company to accept a superior bid, and two included a “go-shop provision,” which permitted the board to solicit other bidders. While one of the transactions with a go-shop involved private equity sponsors acquiring a majority equity interest in the target company, another transaction only involved the acquisition of a significant minority interest.
At the other end of the PIPEs spectrum, US District Court Judge Graham Mullen in the Western District of North Carolina recently granted summary judgment to the defendant in SEC v. John F. Mangan, Jr., making things worse for the SEC in its cases against funds who sold short in anticipation of PIPE offerings. After the Securities Act Section 5 claims were dismissed last year, the case proceeded on insider trading claims that have now been shot down in this court. No word yet on the other two litigated PIPEs cases that remain out there.
Foreign Corrupt Practices Act: Latest Compliance and Investigation Developments
– Paul McNulty, Partner, Baker & McKenzie, LLP, former Deputy Attorney General, U.S. Department of Justice
– John Soriano, Vice President-Compliance and Deputy General Counsel, Ingersoll Rand Company
– Jeffrey Kaplan, Partner, Kaplan & Walker LLP
Late last night, Lehman Brothers announced that it intends to file for Chapter 11 bankruptcy protection of the parent company, Lehman Brothers Holdings, capping off a tumultuous weekend of negotiations to sell the bank, which ultimately failed when the government decided that it would not back-stop any deal. Apparently, the concept of “too big to fail” has its limits. It seemed only a matter of time for the government bailouts to reach an end, and unfortunately for one of the most storied investment banks on Wall Street, that time is now. If Lehman is liquidated as many seem to expect, it is truly a tragic end for an institution known for being capable of surviving many ups and downs over its 158-year history.
As noted in this WSJ article, the two leading contenders to save Lehman, Barclays and Bank of America, walked away when the government refused to provide financial support to any potential buyers. Bank of America didn’t walk away empty-handed though, picking up Merrill Lynch along the way for $50 billion – apparently Merrill Lynch saw the handwriting on the wall that it could be next. Meanwhile, AIG is struggling to raise capital as it faces a possible downgrade of its credit rating, taking the unprecedented step of trying to convince the Federal Reserve to lend it some of the $40 billion that it needs to survive.
Lehman’s imminent bankruptcy filing looked relatively certain by Sunday afternoon as no willing buyers emerged. The firm’s huge exposure in the credit derivatives market and in other derivatives led the ISDA to announce a “netting trading session” between 2 p.m. and 6 p.m. on Sunday. Under the protocol for the session, firms could seek other counterparties to take Lehman’s place on outstanding contracts as a means of beginning to unwind Lehman’s positions. But it appears that few contracts were offset through this process, and trades were conditioned on Lehman filing for bankruptcy before 11:59 pm New York time on Sunday. The SEC put out a statement last night, just a few hours before Lehman’s announcement, noting that it was taking steps to protect customers of Lehman’s broker-dealer subsidiaries. And the Federal Reserve announced some initiatives designed to increase liquidity, including allowing lower-rated collateral to be pledged to the Fed for borrowings.
While Lehman’s failure will certainly have an effect on the already jittery equity markets, I think that the big concern will be the extent to which the Lehman bankruptcy will damage the credit and derivatives markets, where Lehman’s exposures were huge. Presumably those same reasons that drove the government to push Bear Stearns into its shotgun wedding with JP Morgan are present with Lehman, including the potential for a shock to the credit default swap market of unprecedented proportions, as traders seek to unwind trades with Lehman in an environment where pricing may be difficult and where few counterparties may be willing (or able) to participate. Further, a back-to-back failure of AIG or another massive financial institution may have become more likely, now that it has been made abundantly clear that the government is not going to stand behind every deal. With many other Wall Street firms, commercial banks and presumably hedge funds facing capital crunches of their own, the large-scale orderly unwinding of Lehman’s positions that the Federal Reserve and Treasury appear to expect may prove difficult to pull off, raising the level of systemic risk in the financial system to what I think are unprecedented heights.
Now Effective: Changes to Form D
The amendments to Form D that the SEC adopted earlier this year are now effective, although electronic filing will remain optional until March 16, 2009. On Friday, the Corp Fin Staff put out a Small Business Compliance Guide on filing and amending a Form D, highlighting in particular the specific circumstances for when an amendment to Form D is – and is not – necessary. Under revised Rule 503 and the Form D instructions effective today, amendments to the Form D notice are required in the following three instances only:
(1) to correct a material mistake of fact or error in the previously filed notice (as soon as practicable after discovery of the mistake or error);
(2) to reflect a change in the information provided in a previously filed notice (as soon as practicable after the change), except that no amendment is required to reflect a change that occurs after the offering terminates or a change that occurs solely in the following information:
– the address or relationship to the issuer of a related person identified in response to Item 3 of Form D;
– an issuer’s revenues or aggregate net asset value;
– the minimum investment amount, if the change is an increase, or if the change, together with all other changes in that amount since the previously filed notice, does not result in a decrease of more than 10%;
– any address or state(s) of solicitation for a person receiving sales compensation;
– the total offering amount, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice, does not result in an increase of more than 10%;
– the amount of securities sold in the offering or the amount remaining to be sold;
– the number of non-accredited investors who have invested in the offering, as long as the change does not increase the number to more than 35;
– the total number of investors who have invested in the offering;
– the amount of sales commissions, finders’ fees or use of proceeds for payments to executive officers, directors or promoters, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice, does not result in an increase of more than 10%; and
(3) beginning March 16, 2009, annually, on or before the first anniversary of the filing of the Form D or the filing of the most recent amendment, if the offering is continuing at that time.
If you wish to try your hand at electronic filing over the next six months, it is necessary to first obtain a CIK and CCC number (otherwise known as a log in and password) in order to access the EDGAR system. If you choose to file in paper until electronic filing is mandatory, you can either use the old Form D, which has been revised slightly and is called “Temporary Form D,” or you can use the new Form D that contains all of changes to the information requirements adopted earlier this year.
The Staff has also provided this additional guidance on the Form D filing process.
In the September-October issue of The Corporate Executive – which was just mailed – the primary focus of the issue was on the need for companies to implement hold-til-retirement provisions for equity awards and how to pick what’s right for your company. With much help from Marc Trevino and Joseph Hearn of Sullivan & Cromwell, this issue contains a roadmap of the considerations you need to analyze when adopting these provisions.
In connection with this issue, we have updated our list of companies that we have identified as having hold-til-retirement requirements and the total is now over 40 companies (thanks to Equilar for helping spot some new companies). In comparison, at least two-thirds of S&P companies have some form of traditional stock ownership guideline, whereby executives are required to acquire and retain a certain value of company stock (usually a multiple of salary).
Thanks to Marc and Joseph, we have posted a slew of new sample documents in our “Hold-Til-Retirement” Practice Area on CompensationStandards.com, including:
The September-October issue of The Corporate Executive specifically includes articles on:
– “Hold ‘Til Retirement” Requirements for Equity Awards: How to Pick and Implement What’s Right for Your Company
– Forms of HTR Requirements
– Reasons to Adopt
– Addressing Potential Criticisms
– Ten Steps to Designing the Program That Is Right for You
– An Additional Comment on ExxonMobil’s Approach
– Proposed Regulations for Section 6039 Returns
– Proposed Regulations for ESPPs
– A Roadmap to Comply with the SEC’s New Regulation FD Guidance
Seventy-five years after passage of the “original” Securities Act, the House passed a bill yesterday titled the “Securities Act of 2008.” In a statement, SEC Chairman Cox applauded the House for passing legislation that seeks to enhance investor protections and provide more tools for the SEC’s enforcement program, noting that the bill incorporates recommendations that the SEC made to Congress. The bill was introduced earlier this summer by Representative Paul Kanjorski (D-PA).
It appears that the principal aim of the bill is to add provisions to the federal securities laws that would permit the SEC to assess and impose civil penalties in cease and desist proceedings, ranging in amount under a three-tier system from $65,000 to $650,000.
The remainder of the bill includes tweaks to a wide variety of provisions. For instance, the bill would authorize the SEC to censure, place limitations on the activities or functions of, or investigate any person who at the time of specified alleged misconduct was: (1) a member or employee of the Municipal Securities Rulemaking Board; (2) a person associated or seeking to become associated with a government securities broker or dealer; (3) a person associated with a member of a national securities exchange or registered securities association; (4) a participant of a registered clearing agency; (5) an officer or director of a self-regulatory organization; and (6) an officer or director of an investment company. In addition, the bill would amend the Exchange Act and the Investment Advisers Act to permit the SEC to bar certain persons from being associated with a broker, dealer, investment adviser, municipal securities dealer, or transfer agent who has engaged in alleged misconduct.
On the Corp Fin side of things, the bill would amend the Securities Act of 1933 to exempt from blue sky regulation any warrants or rights to subscribe to or purchase covered securities.
In addition to making amendments to the Securities Investor Protection Act, fingerprinting requirements and provisions relating to the nationwide service of subpoenas, the bill seeks to make a large number of technical corrections, some of which arising from the repeal of the Public Utility Holding Company Act. The bill would enhance protections for the confidentiality of material submitted to the SEC. Finally, a provision in the bill would require the SEC, the FASB, and the PCAOB to give oral testimony annually to the House Financial Services Committee on efforts to reduce the complexity in financial reporting.
Be sure to check out these notes from the May 2008 meeting between the ABA’s Joint Committee on Employee Benefits and the SEC Staff. Mark Borges previously noted a number of the notable executive compensation disclosure interpretations coming out of this meeting in his CompensationStandards.com blog, and several interpretations discussed at the May meeting were included in the Regulation S-K Compliance and Disclosure Interpretations posted in July.
The topics covered by the JCEB and the Staff go beyond Item 402 of Regulation S-K, and not all of the interpretations from the meeting make it into the Compliance and Disclosure Interpretations. The topics covered at this year’s meeting included Form S-8, Regulation S, Rule 701, Rule 144, Section 16 and the new Rule 12h-1(g) exemption.
On the Form 8-K front, the Staff noted that an Item 5.02(b) Form 8-K is not required when an executive officer is moved to a different executive officer position, unless the executive officer is moving into or out of one of the specified “principal officer” positions or is being demoted to a non-executive officer position. Further, the Staff confirmed that an Item 5.02(c) Form 8-K announcing the appointment of one of the specified officers must include disclosure about “any grant or award” made in connection with the event, even if it is a non-material, routine equity grant made to the officer at the time of appointment to the position.
The Freddie Mac and Fannie Mae Exit Packages
From Broc: As could be expected, the phone started ringing off the hook when it was announced that the government would be taking over Fannie Mae and Freddie Mac. These journalists posed the big question: what would the departing CEOs be taking home with them?
And they are not the only one posing the question – as this WSJ article notes, the Presidential candidates and some US Senators have weighed in by writing letters urging the Federal Housing Finance Agency to stop payment (the GSEs have their own regulator, the FHFA). Under a new law enacted in July, the FHFA has the authority to approve pay packages and prohibit or limit severance pay.
It’s too early to tell what will happen – although some outsiders have made calculations regarding what they are entitled to. According to the WSJ article, in an interview with the PBS “Nightly Business Report” on Monday, the FHFA Director James Lockhart said, “We’re not going to try to get part of the money back.” According to media reports, it seems like one CEO seems willing to rein in his own package (and has hired his own lawyer with his own money) whereas the other doesn’t appear as willing (and has hired his own lawyer with his former employer’s money).
It is noteworthy that the new Freddie and Fannie CEOs “will have salary and benefits significantly lower than the old CEOs,” which is great news since it’s the type of leadership that Corporate America has been sorely lacking. Someone stepping up and not demanding the excessive pay of peers.
And what am I telling the journalists who call me? I explain how to implement a clawback provision with “teeth” – as laid out in our Winter 2008 issue of Compensation Standards. The WSJ article cites statistics of the growing numbers of companies with clawback provisions – but I wonder how many of those really have teeth to avoid the sort of media crisis that happens when a company falls in the toilet and the CEO heads off to the links.
By the way, check out the investor relations’ home pages for Fannie Mae and Freddie Mac. Not a word – or link to something that mentions – the government takeover. And the IR profession wonders why it’s importance is diminishing…
Establishing GAPP: Principles for Sovereign Wealth Funds
The recently-formed International Working Group of Sovereign Wealth Funds announced last week that it has reached a preliminary agreement on a draft set of Generally Accepted Principles and Practices (GAPP), otherwise known by the catchier name of the “Santiago Principles.” The IWG was set up back in May to establish a set of voluntary standards for governance, accountability and investment practices of sovereign wealth funds. Now, the group has come up with principles and practices that the group says will “promote a clearer understanding of the institutional framework, governance, and investment operations of SWFs, thereby fostering trust and confidence in the international financial system.”
As noted in this transcript of the press conference announcing the Santiago Principles, the governance and accountability arrangements are geared toward providing comfort that sovereign wealth funds are separate from their owners, and that “the investment policies and risk management together with other things are intended to make it clear that sovereign wealth funds act from a commercial motive and not other motives.”
The GAPP will be presented to the Internal Monetary Fund’s International Monetary and Financial Committee on October 11th, once the respective governments with funds making up the IWG have had a chance to consider the preliminary recommendations. After that, the group expects to make the principles publicly available.
Tune into the DealLawyers.com webcast – “The Rise of Sovereign Fund Investing” – on October 2nd to find out about the latest strategies and investment techniques used by sovereign funds, as well as the latest issues raised in doing these types of deals.
As part of the Fall issue of InvestorRelationships.com, I got to spend some quality time with my good friend, the independent inspector Carl Hagberg to conduct an interview entitled, “An Insider’s Perspective: How to Avoid a Yahoo-Like Tabulation Nightmare.” In the interview, we get access to Carl’s many years of experience to better understand how the tabulation and inspection processes work. As borne out by the media attention to the voting result snafu at last month’s Yahoo annual meeting, this could be wisdom that saves you from a needless crisis at your own shareholder meeting. In Yahoo’s case, Carl explains how that snafu could have been easily avoided.
If you try a no-risk trial for InvestorRelationships.com for 2009, you get access to this Fall issue for free. Note that membership rates are very reasonable, starting at $295 for a single user through the end of ’09. And membership gets you free admission to the upcoming InvestorRelationships.com webconference: “The SEC’s New Corporate Website Guidance: Everything You Need to Know – And Do NOW.”
If you already have received an ID/password for InvestorRelationships.com this year, you can renew your membership for 2009 now (and get free access to this webconference, etc. for another year).
Survey Results: Disclosure Committees
Back in mid-2004, we conducted a survey on disclosure committees (here are those older results) – we recently canvassed folks again on this topic and here are the results:
1. Our company:
– has a disclosure committee – 97.8%
– doesn’t have a disclosure committee – 2.2%
2. Our disclosure committee has:
– more than 10 members – 37.2%
– between 8-9 members – 27.9%
– between 6-7 members – 27.9%
– between 4-5 members – 6.9%
– has less than 4 members – 0.0%
3. Our disclosure committee has the following types of members:
– CEO – 18.2%
– CFO – 70.5%
– Controller – 93.2%
– General Counsel – 75.0%
– Securities Counsel – 79.6%
– Compliance or Risk Management – 36.4%
– Investor Relations Officer – 77.3%
– Internal Auditor – 68.2%
– Officer from a Business Unit – 50.0%
– Other – 63.6%
Comparing the two surveys, it looks like the size of the disclosure committee has grown slightly (not surprising given the SEC’s 2006 exec comp rule changes that likely brought in some new members) – and more internal auditors joining the committee and some CEOs dropping off…
Please take a moment to take this “Quick Survey on CEO Succession Planning.”
