For TheCorporateCounsel members, we finally got our hands on a nice sample D&O questionnaire for Nasdaq companies – fully updated for the new governance listing standards and in a Word file.
Still working on one for NYSE companies – let me know if you see something. [personal anecdote – Saw Simon & Garfunkel last night. Truly amazing; Paul should run for President. Coincidently, I worked for Senator Paul Simon in the ’70s as an intern (back when he was a Rep) – he was the most noble politician I have come across. Condolences to his family.]
SEC Goes After Independent Directors
Last Thursday, the SEC filed additional civil fraud charges in its long-running investigation of the Heartland Group high yield bond funds. Although this case is perhaps most noteworthy because of its analysis and response to mutual fund mispricings and bad acts by an independent pricing service, the SEC’s action does include meaningful relief under the ’33 Act as well.
The SEC obtained settled cease-and-desist orders against four independent directors of this registered investment company for violations of the antifraud provisions of the ’33 Act (in addition to violations of the fund pricing provisions of the ’40 Act). The funds’ prospectus expressly stated that the directors would monitor and assure the liquidity of the funds’ bonds. The directors failed to do this adequately and accepted the characterization of that failure as a violation of the antifraud provisions of the 1933 Act. More interestingly, they also agreed that their failure to participate meaningfully in the valuation of the Funds was a violation of the antifraud provisions of the ’33 Act – and not just of the ’40 Act.
The SEC’s actions against the directors came despite the fact that the independent directors had been lied to by the Funds’ advisor, had hired experts to assist them in performing their duties and had engaged in subsequent remedial actions once the Funds’ problems came to their attention.
To my knowledge, the first “opt-in” proposal has been submitted to a company, Marsh & McLennan (who is the parent of Putnam Mutual Funds). Three public pension funds – AFSCME, New York State Common Fund, Calpers and Calstrs – stated in a press release that they submitted the proposal because the company failed to properly control its money management business and does not have a sufficiently independent board.
Under the proposed shareholder access rules, if an “opt-in” shareholder proposal receives the support of a majority of shares voted at the company’s May annual meeting, shareholders would be permitted to submit board candidates for inclusion on the company’s proxy ballot the following year. Note that the SEC has not yet aopted this rule (comment period is open til 12/22) and the final parameters of what is an acceptable “opt-in” proposal is not known for certain. The company also can decide to challenge this proposal under a variety of exclusionary bases under Rule 14a-8.
Roy Disney – Taking It to the Web
Roy Disney and Stanley Gold recently left the Disney board in a huff to protest the leadership of CEO Michael Eisner. Now, they have launched a website – SaveDisney.com – in an effort to commence a grass-roots movement to oust Eisner, including the e-mail addresses of what they call “three key Disney directors.”
Rule 10b5-1 Plans
For TheCorporateCounsel.net subscribers, we have posted an interview with Darryl Rains of Morrison & Foerster on 10b5-1 Plan Advantages.
And don’t forget our “10b5-1″ Practice Area, which contains a load of resources including model plans/arrangements; analysis of SEC guidance in this area and sample 8-K announcements of plans.
Yesterday, the SEC issued its proposing release regarding amendments to the mutual fund pricing rules to prevent late trading in fund shares. The proposed rules would require that all purchase and redemption orders be received by the fund (or a single transfer agent designated by the fund or registered clearing agency) no later than the time at which the fund prices its securities, typically 4 pm.
This change would have an impact on the operation of 401(k) plans. The proposal states that administrators of defined contribution employee pension plans – such as 401(K) plans – have informed the SEC that they likely will be unable to process any purchase or redemption requests the same day they are made.
Another issue that operating companies have to consider is market timing through trading in 401(k) investment options by plan participants. For example, it has recently been reported that some employees have been engaging in market timing in the Federal Reserve’s employee thirft plan, and that the Fed has issued two letters to participants and imposed a restriction on rapid trading. Possible measures to restrict market timing in plans (e.g., redemption fees or trading restrictions) have to be reviewed for possible ERISA issues. Thanks to our roving reporter, Mike Holliday, for the information above!
Scrushy Looking to Overturn SOX
According to a brief story on AccountingWeb.com, Richard Scrushy’s lawyers said yesterday that part of Scrushy’s defense in his criminal fraud case is “overturning SOX” (there is no further elaboration in the story). Scrushy, former CEO of Healthsouth, is alleged to have signed false 906 certifications. What kind of name is “Scrushy” anyways…
This one is a moving target. I hear from a reader that the Nasdaq staff is now going back to its original position that proxy statement disclosure in proxy statements sent to stockholders for annual meetings held on – or after – January 15th should include the newly adopted disclosure from the new governance standards.
So we are back to a split in opinion between the NYSE and Nasdaq – as we noted in our December issue of E-Minders. The maddening part is that nothing in writing has come from the Nasdaq staff on this very important topic – and its not the type of topic for which one should submit an interpretive request and pay the Nasdaq staff $2k (as now required under Rule 4550). As an aside, did you notice that Nasdaq has advertising at the bottom of its “Legal & Compliance” page? Sorta diminishes the feeling that you are dealing with a regulator…
Today, the National Association of Corporate Directors is coming out with a Blue Ribbon Commission Report on Executive Compensation and the Role of the Compensation Committee. As evident from how often I cite the NACD “BRCs” in the FAQs on GreatGovernance.com, I hold them in high regard as they are among the finest corporate governance publications out there.
Based on an article in today’s WSJ, this BRC proposes ways to constrain exec pay, including recommending that comp committees hire their own comp consultants and that committees should hire consultants not used by management for other assignments (as well as that companies should provide disclosure if the committees do hire someone that does work for management). Other ideas are crackdowns on severance pay; “pay-for-performance” packages that are triggered after-the-fact; and incentive pay for weak performance.
Perhaps the most interesting is the advice to consider alternatives to CEO contracts. I will blog more after I get a chance to obtain and read this new BRC.
In addition to today’s webcast on “The New MD&A” (to which we just added Richard Harrison, President of GSI – which runs LiveEdgar – to the panel), don’t forget tomorrow’s webcast on “The New Governance Listing Standards” – which will be full of practical guidance from in-house counsel that have already grappled with implementing many of the new standards. The panel includes: Peggy Foran of Pfizer; Jim Gunderson of Schlumberger; Cary Klafter of Intel; and Tina Van Dam of Dow Chemical.
Mulling the Security of the SEC’s Website
Today, the Washington Post ran an article about how most federal agencies flunked (again – 4th year in row) a test regarding the relative security of their computer networks and other online threats.
Seven agencies received an “F” including the Justice Department, which is charged with prosecuting many cases involving hacking and other forms of cyber-crime. The test is administered by the House Government Reform subcommittee on technology.
The SEC was not mentioned in the article and I couldn’t find any more information from this subcommittee’s webpage about the most recent scorecard. However, I have no reason to believe that the SEC’s systems are not secure. In the hacker community, it has been a challenge to attempt to access the Edgar database for some time – just to prove it can be accomplished – and there have been no successes that I am aware of. Still, the thought of it can drive you mad – if someone accessed your recently filed 10-K and subtracted a few zeroes from net income…
Last week, GSI Online—sponsor of the LIVEDGAR database—rolled out a new product that consists of public access to SEC staff comment letters. The database appears to be comprised of hundreds – if not thousands of – letters that GSI has obtained through a massive FOIA request and includes requests for correspondence between the SEC staff and a wide range of companies (including companies that were part of the SEC’s Fortune 500 review project). This includes public access to both SEC comment letters and the responses.
For TheCorporateCounsel.net members, we have posted an interview with Thad Malik and Bill Tolbert of Jenner & Block on SEC Comment Letters in the Public Domain – including information about what Alan Beller said at this weekend’s ABA meeting on this topic regarding confidentiality requests and more. We also have started posting law firm memos on this topic in E.18 of our “Sarbanes-Oxley Law Firm Memos.”
While SEC comment letters have always been subject to FOIA requests, this facilitated ability to access – and word-search – them may well chill communications between the SEC staff and the corporate community. And Milberg Weiss certainly won’t be opposed to such a development…
Sample MD&As
Although it was against my nature – due to my training on the SEC staff to never endorse specific disclosure – we have posted samples of specific MD&As that we thought were pretty good in certain areas (we included brief notes about what we thought were good about them). This was part of another update of the checklist in our “Proxy Season Resource Center” during which we have added several dozen more factors to consider in drafting a MD&A.
This is all in preparation for tomorrow’s webcast on “The New MD&A”. Tune in to hear Stacey Geer of BellSouth; Karl Groskaufmanis of Fried Frank and Ron Mueller of Gibson, Dunn.
AMEX Governance Listing Standards Approved
Better late than never, the SEC has approved the final AMEX governance listing standards (note that this SEC release is on our site, but not the SEC’s site yet).
Over the weekend, the ABA Federal Regulation of Securities Subcommittee held a meeting – and someone reportedly told the audience that it will now interpret the effective date of its new governance listing standards so that applicable disclosures will not be required in documents before the date on which the company must comply with the amended listing standards – for calendar year companies, their first annual meeting after January 15, 2004 (i.e. disclosures not required in proxy statements because they are filed and delivered before the annual meeting – website disclosures required to be up as of the annual meeting date). This is the position that the NYSE staff took several weeks ago.
This was counter to what we heard Nasdaq was saying before – that proxy statement disclosure in proxy statements sent to stockholders for annual meetings held on – or after – January 15th should include the newly adopted disclosure. We reported this former split in opinion between the NYSE and Nasdaq in our December issue of E-Minders.
Now, on December 10, the Nasdaq has stated that its sticking by its original position as stated in E-Minders above – so the split between Nasdaq and NYSE remains and Nasdaq companies will have to provide these disclosures in the upcoming proxy statements.
Director Education and Orientation
For TheCorporateCounsel.net members, we have launched a “Director Education/Orientation Portal” which includes a sample checklist for director orientation and a list of links to all of the third-party director colleges. More to come in this area.
Don’t forget to vote in our current survey on director education and orientation. So far, the twenty responses have been interesting…
SEC Commissioner Harvey Goldschmid gave a speech before the Investment Company Institute yesterday in which he warned that lawyers could be targeted if they were aware of credible evidence of a material violation of the securities laws and didn’t report it up. There have been no specific allegations against lawyers yet in the mutual fund scandals.
As reported in a NY Times article today, John Villa of Williams & Connolly is reported to state “because the questionable practices uncovered by the mutual fund investigations are not clearly illegal, they present exactly what lawyers feared would result from the SEC’s new rules.”
How many comment letters do you think have been submitted to the SEC on its shareholder access proposal? You gotta take a guess…
Can you believe its easily over 5000 with several weeks left in the comment period. However, 2,898 individuals/entities submitted comments using “Letter Type I” and 1,916 individuals/entities used “Letter Type C.” The Council of Institutional Investors has been very effective in getting out the vote. The SEC has been smart to combine these “cookie cutter” form letters into one submission on its website.
Former SEC Commissioner and Stanford Professor Joe Grundfest offers an interesting alternative to the SEC’s shareholder access proposal. He suggests an “advice and consent” set of procedures, that are modeled after Article II Section 2 of the United States Constitution.
These procedures would effectively force a nominating committee to take action against a director – or the director would be otherwise penalized – if there was a triggering event (and the triggering event would not facilitate the ability of shareholders to place nominees on the ballot in the following year).
So if a regulatory threshold of withheld votes were cast for a particular director, negative consequences would follow (what Joe calls “cure” provisions) – either the nominating committee getting that director to resign/not stand for re-election or if the director was re-elected, the director might not be deemed independent for purposes of listing standards, might be prohibited from voting on any matter required by SEC or SRO rules; or could trigger a rule that prevents a company from insuring or indemnifying the director for violations of federal securities laws.
Joe argues that this advice and consent mechanism has several clear advantages over the SEC’s proposed shareholder access initiative. It greatly reduces the danger that shareholders will resort to the proxy mechanism as a device for promoting special interest agendas. It also greatly diminishes the dangers of factionalization that can arise from the election of dissident directors to a board. The proposal also eliminates the need for the SEC to adopt complex and potentially arbitrary rules defining “trigger conditions” and “qualified shareholders,” and there is far less risk that the mechanism would be subject to a successful legal challenge.
More companies have been naming “Chief Governance Officers” and yet there still is some confusion about what these officers do. In fact, there is a disparity among what these officers actually do, as practice depends on the company’s circumstances.
In my mind, the Chief Governance Officer’s key role is to develop relationships with key constituents of the company, with the most obvious being institutional investors. However, the CGO is not the investor relations’ officer – the CGO’s contacts at these investors are those that vote proxies, which is a different group of folks from those that invest or analyze the company. Another key constituent is the company’s regulators – which means that the CGO should be active in associations that interact with the government regularly.
None of this works if the CGO does not have the ear of the board – that’s why just sticking a new label on a corporate secretary or inhouse securities counsel doesn’t work unless it also means elevating that person’s true status within the company.
On November 18th, the European Union’s Competitiveness Council of Ministers agreed to a weaker version of a proposed pan-European takeover code that would have removed many of the obstacles to cross-border mergers. Instead, the obstacles will largely remain in effect. Fourteen EU member countries voted in favor of the amended code (Spain abstained). If only one country had voted against the amended code, the EU could have rejected it.
Originally, the EU had wanted to enact a bold plan to remove nearly all of the existing barriers to cross-border buyouts. However, strong opposition from Germany and Scandinavia left the barriers in place.
Now, the EU’s Council of Ministers and Parliment must approve the amended code – if so, it is expected to take effect in mid-2005.
