In Case You Missed It - Interesting Items for Corporate Counsel (Cumulative)

Corporate

4/9/2014

This update is a publication of Stoel Rives LLP for the benefit and information of our clients and friends. This update is not legal advice or a legal opinion on specific facts or circumstances. The contents are intended for informational purposes only. Copyright 2014.

April 9, 2014

You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. The Director of the SEC’s Division of Corporation Finance, Keith Higgins, recently gave the keynote address, here, at the 2014 Angel Capital Association Summit. He focused on the following three items on the SEC rulemaking agenda important to angel investors. (He didn’t mention Regulation Crowdfunding, which might suggest that he thinks, as we do, that crowdfunding won’t be useful).

    • Rule 506(c). Higgins noted only $10 billion has been raised in 900 offerings relying on the 506(c) exemption in contrast to $233 billion in 9,200 506(b) offerings in the same period. He shared thoughts on the most cited reasons for the slow 506(c) start.

      • Fear about disclosure of sensitive financial information under the enhanced accredited investor verification standards. Higgins waved this off, and we agree this doesn’t make much sense. The SEC provided non-exclusive safe harbors, like confirmation of your status by your accountant, and a principles-based rule that allows you to protect financial information with modest effort.

      • Fear about the meaning of “general solicitation.” Higgins noted the furor over what “general solicitation” means may be curbing reliance on 506(c), which is ironic since general solicitation is allowed under 506(c), so it doesn’t matter if you know what it means. He reminded everyone the SEC’s view has not changed: demo days and venture fairs are as permissible as they always have been (which has always depended on the facts and circumstances). He did suggest SEC no-action letter guidance on the issue might be due for an update, given that general solicitation is allowed in one type of Rule 506 exemption but not in another.

      • Fear about pending process rules. Higgins acknowledged the proposed process rules are controversial. While he didn’t suggest what might happen here, or when, he did say that no one should fear retroactive application and that he expects reasonable transition rules will be adopted.

      Not cited by Higgins is perhaps a more fundamental reason for 506(c)’s slow start: just because you can tell the world you’re raising money doesn’t mean you’ll get any money, and some may not want to publicly fail to get financing. There likely always will be a place for brokers and finders paid to connect with specific investors able and willing to invest money in risky startups, and if you’re going to use them anyway, why not rely on the tried-and-true 506(b) exemption?

    • Accredited investor definition. Higgins didn’t say much new here, reiterating that Dodd-Frank requires a review of the definition, which, aside from excluding the value of a primary home from the net asset test, hasn’t changed since 1982. He did say that the SEC would consider whether it should apply criteria beyond the income and net worth tests, including professional licenses (e.g., CFA or CPA), existing ownership of a specific amount of investment securities, and reliance on intermediaries that enhance a person’s ability to make good investment decisions.

    • Regulation A+. Here Higgins simply summarized the SEC’s proposed rules.

  2. A useful primer on Rule 506 and commentary on new ways to raise money after the JOBS Act, in a format we haven’t seen others use, are available here. They are, in a word, killer.

  3. To balance the lengthy discussion about private offerings, reviews of IPO activity in the two years since the JOBS Act are here and here and statistics about 2013 “venture-backed” IPOs are here.

  4. And speaking of IPOs, or at least public offerings, a highlight of trends in securities litigation settlements last year (“up”) is here and highlights and commentary identifying a trend in securities litigation filings after securities offerings and regulatory investigations of public companies (also “up”) are here.

  5. That’s not to say M&A as an exit strategy is any great shakes either, at least from a “subjecting yourself to litigation” perspective. A report noting that most (public) M&A activity results in litigation is available here.

  6. Information about the SEC’s cybersecurity roundtable, where you may also find a transcript when completed, is available here. The meeting and focus, on the heels of the release of NIST’s Framework for Improving Critical Infrastructure (here), highlight the continued importance of the issue.

  7. The SEC posted

    • Nine more FAQs on conflicts mineral reporting here; and

    • A revised statement on how well known seasoned issuers may obtain a waiver of “ineligible issuer” status here.

  8. Finally, two reports that caught our eye:

    • A(nother) study about whether the Sarbanes-Oxley Act was worth it (no, but what are you going to do?) is here and commentary about the study is here.

    • ISS’s 2014 preseason report on Environmental and Social Issues is here.

March 12, 2014

  1. The U.S. Supreme Court recently ruled in Lawson v. FMR LLC that the whistleblower provisions of the Sarbanes-Oxley Act protect employees who work for contractors and subcontractors of public companies and not just employees of the public company itself. At issue was the meaning of the phrase: “No [public] company . . . or any . . . contractor [or] subcontractor . . . of such company, may [retaliate] . . against an employee . . . because of [whistleblowing activity].” In its holding, the Court rejected the argument that the language was simply to prevent a public company from hiring a hatchet man, like George Clooney’s character in “Up in the Air,” to implement the retaliation. See here. Your cynical view that we, perhaps like the Court, have superfluously included a reference to George Clooney to increase our internet readership is noted.

  2. The U.S. Supreme Court also recently decided Chadbourne & Parke LLP v. Troice, in which it held that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) does not bar a state-law claim that the defendants misrepresented that uncovered securities were backed by covered securities. See here. (SLUSA generally precludes state class actions alleging misrepresentations in connection with the purchase or sale of a covered security.) 

  3. To complete the hat trick, because we so rarely get to write about U.S. Supreme Court cases involving securities law, we note the Supreme Court also heard oral arguments in Halliburton Co. v. Erica P. John Fund and will soon decide the fate of the fraud on the market presumption of reliance in federal securities class actions. That presumption allows plaintiffs to seek to certify a class without showing that each shareholder relied on alleged misrepresentations. An exhaustive review of the issues, in three parts, is available here. Additional commentary and a summary of the theory is here.

  4. And, for the four bagger, we note that the U.S. Supreme Court has also granted certiorari to hear Indiana State District Council of Laborers v. Omnicare, a case that should reconcile appellate court splits on whether lawsuits under Section 11 of the 1933 Act require allegations that an issuer knew its statements were false in addition to allegations that the statements were actually false. (In other words, is lying required?) Commentary is here.

  5. Because this month’s alert is almost entirely about judicial action, we feel compelled to provide a link to a description of 2013 Delaware corporate law decisions and how they might guide corporate action in 2014, here.

  6. Only three non-judicial items caught our eye this month:

    • A somewhat depressing article, at least for those who work on IPOs, about the death of small IPOs is here. The study attributes the decline to diminished investor demand, a reasonable reaction to the imbalance of risks and rewards associated with microcap investing. The study reveals that only 55% of microcap companies (initial market cap of less than $75 million) remain listed five years after an initial IPO compared to 61.3% for mid-cap and 67.1% for large-cap companies. Microcap companies most frequently exit public markets through voluntary or involuntary delisting, compared to more exits through acquisition for larger companies, and the microcaps that remain public fail to grow significantly. From this perspective, making an IPO easier, or even alternatives like the pending Regulation A+ process, might not be helpful because the primary culprit is simply microcap company lack of success.

    • Deloitte’s Audit Committee Brief on the 2013 COSO Framework is here and on the new era in audit committee reporting is here.

    • Warren Buffet’s letter to shareholders, which some describe as “folksy,” or at least as folksy as one can be when discussing how the intrinsic value of a share is much higher than its $134,973 book value, is available here. For sure, the letter is at least plain spoken. On the other hand, Buffet does give valuable folksy tips, including suggesting flying to Kansas City and driving to Omaha for the annual shareholder meeting to save money, an itinerary that includes competing against him in a newspaper-throwing contest, an exhortation to buy ketchup bottles with his picture rather than the (obviously heavily discounted) bottles with Charlie Munger’s picture, an invitation to take advantage of “Crazy Warren” discounts while he clerks at Borsheims, and an in-your-face challenge to get the giant root beer float at Piccolo’s because only sissies get the small one. And it works for him.

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February 12, 2014

  1. As proxy season begins, a few items of note:
    • ISS published guidance, here, explains how it will calculate a company’s “Governance Quickscore,” which is supposed to help investors identify governance risk. Commentary is here.
    • A decent reminder of “key” proxy items is here.
    • Some SEC issued guidance, here, covers “unbundling” under Rule 14A-4(a)(3), which generally requires that shareholders be allowed to cast separate votes on each material matter and that matters not be conditioned on each other, except when the SEC says it’s cool. Commentary is here.
  2. The SEC also added two new Compliance and Disclosure Interpretations (CDIs), here, to the Rule 506(c) CDIs it published in the last few months. The new CDIs address transitions between traditional 506(b) offerings and general solicitation 506(c) offers for offerings that began before 506(c) was adopted. Still no word on the status of proposed 506(c) process rules (here) or, for that matter, proposed crowdfunding rules (here).
  3. There has been no news about conflict minerals and the chance that SEC rules would be overturned on appeal (see last month’s ICYMI here). So don’t count on it. Note that the SEC posted Form SD, the form to make your conflict minerals report, here.
  4. It’s occasionally useful to remind ourselves that the SEC’s Division of Corporation Finance posts its financial reporting manual – its internal guidance for those reviewing your reports. The manual, which includes an update about accounting estimates for share-based compensation in IPOs (so pay attention, IPO filers), is here.
  5. The NYSE updated its annual listing standard affirmation to include compensation committee independence requirements, here.
  6. Last month, we noted proposed “Regulation A+” rules, which, along with the adoption of Rule 506(c), are the most potentially useful of the JOBS Act changes. (Sure, sure, everyone loves “confidential” IPO pre-filing, but did it really change much? Probably not – see here.) Comments on the proposal are due March 24, 2014. To tide you over, a few secondary sources on this proposed mini-IPO rule are here, here, and here.
  7. FINRA approved the registration of Nasdaq Private Market as a broker dealer, the first step in its registration with the SEC as an alternative trading system to match buyers and sellers in primary and secondary offerings of private company securities. See here and here. The introduction of the private trading market was announced last year, see here. Yet more evidence that IPOs will be increasingly rare?
  8. The PCAOB has apparently given up on requiring auditor rotation among U.S. public companies. See here. This is in contrast to the European Union, which has taken steps to require audit firm rotation every 10 years “subject to technical finalisation and formal approval by the co-legislators” (see here).
  9. The National Institute of Standards and Technology released its Framework for Improving Critical Infrastructure Cybersecurity, here, which is intended to help manage cybersecurity-related risks. Particularly after what happened at Target a couple months ago (see here and here), and given the SEC’s continued focus on cybersecurity (see here and here), you can expect NIST’s publication to be widely read.
  10. Finally, Valentine’s Day approaches and, as always, young security lawyers’ thoughts turn to the timely filing of annual Schedule 13Gs, due February 14. Remember: nothing says “I own more than 5% of a public company’s stock” like a Schedule 13G.

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January 15, 2014

  1. The SEC last month proposed Regulation A+ rules, here, which provide for capital raises of up to $50 million without a full-blown registration statement. Summaries of the proposed rules abound (e.g., here), but a few high points of the two "tier" exemptions follow.

    Tier 1 offering:

    • "Bad actors" not eligible.
    • Up to $5 million, including up to $1.5 million from selling shareholders.
    • Abbreviated registration statement subject to SEC staff review, with a few additions to existing requirements. Confidential submission process available.
    • Form 1-Z filed upon completion or termination of the offering.

    Tier 2 offering:

    • "Bad actors" not eligible.
    • Up to $50 million, including up to $15 million from selling shareholders.
    • Same abbreviated registration statement subject to SEC staff review as Tier 1, but audited financial statements are required. Confidential submission process available.
    • Ongoing public reporting requirements, including annual report on Form 1-K, semi-annual reports on Form 1-SA, current reports on Form 1-U.
    • May file a Form 1-Z to exit reporting obligations after reporting for one full fiscal year, if fewer than 300 shareholders of record.
    • Investment limited to the greater of 10% of investor's annual income or net worth.
    • Exemption preempts state blue sky law.

    Probably, not many will make a Tier 1 offering, which, like the existing Regulation A exemption, requires compliance with state securities laws. It also doesn't let you raise much. Proposed Tier 2 offerings, which are really mini-IPOs, have more potential and might prove a useful fundraising alternative to Rule 506 under Regulation D. The two primary advantages of Regulation A+ over Regulation D are that the securities sold are not "restricted securities" subject to resale limitations under Rule 144 and that sales may be made to an unlimited number of non-accredited investors. Comments on the rules are due 60 days after publication in the Federal Register, which one assumes will happen soon.

  2. And speaking of Regulation D, it is noteworthy that no movement is evident on proposed "process" rules for 506(c) offerings, although comments continue to be posted even though no official action extended the November 4, 2013 deadline for comments. It's probably just me, but has anyone else picked up a shift in tone in comment letters by legitimate commentators? It seems to have moved from "here's some suggestions to make this slightly less awful" to "why not make this not awful at all," including the ABA Business Law Section's plea for the SEC to take a wait-and-see approach instead of moving to curb speculative abuses with onerous rules (see here). Counterbalancing the ABA are letters from U.S. Senators Levin and Heinrich (here and here) urging the SEC to make the rules at least as awful as proposed, if not more. (Incidentally, the Levin staffer who wrote "the soon-to-be 'Wild West' that now exists" should be smacked. For syntax reasons, if nothing else.)

  3. That's not, however, to say the SEC has been idle on Regulation D. It published nine Compliance and Disclosure Interpretations (CDIs) on Rule 506(c) offerings (Questions 260.05-13) and 19 CDIs on "Bad Actor" disqualifications under Rule 506(d) (Questions 260.14-32) here. It also issued its first waiver of the bad actor rules, to RBS Securities, here.

  4. As the May 31 filing date for conflict mineral disclosures on Form SD approaches, a last gasp for voiding the disclosure rules seems to have legs, at least according to two accounts of the appellate hearing on the U.S. District Court's ruling that the disclosure requirements were valid. See here and here. Business groups' free speech arguments resonated with the panel, according to press coverage, and at least some time was spent suggesting that the rules are not within the SEC's core mandate of protecting investors (which is undisputed but probably irrelevant). Appellate judges are paid to be skeptical and ask probing questions of counsel, so don't count on a successful appeal based on coverage of the hearing. No timeline was set for a decision by the court.

  5. In what skeptics might see as continued struggles to stay relevant and cynics as an effort to have issuers continue to pay to receive its analysis, ISS revised the method it uses to calculate an issuer's governance QuickScore. See here. Also, it released its 2014 proxy voting updates. See here and here.

  6. A few other items of note:

    • Commentary on the Twitter IPO, including Twitter's responses to SEC questions, is here. The final prospectus, including a description of Twitter's "virtuous cycle of value creation" (. . .um. . . what?), is here.
    • The JOBS Act-required report on Regulation S-K, including a glimpse, at the end of the report, into where changes on this integrated disclosure rule might go, is here.
    • The SEC's Office of the Whistleblower's Second Annual Report, showing no significant change in tips between 2012 and 2013, is here.
    • The SEC's rulemaking agenda for the next 12 months is here, notable to 79 U.S. House and Senate Democrats, at least, for its omission of rules to require disclosure of political spending (see here and here). ("Because it protects investors" . . . right.)
    • Nasdaq's amended compensation committee independence rules, which align with the NYSE rules, were adopted last month (see here); the revised Compensation Committee Certification, here, can be completed online here.
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November 13, 2013

  1. The SEC proposed "Regulation Crowdfunding," here, on October 23. "Crowdfunding" generically refers to raising money in small amounts from many people over the Internet. Crowdfunding has taken the form of product pre-orders, where production occurs only after enough money has been gathered to make production economical, or simply donations of money in exchange for tokens like a film credit or a coffee mug. Neither involves an offer or sale of "a security" because no one paying expects to get a profit. Regulation Crowdfunding applies crowdfunding principles, and the notion that "the crowd" will gravitate toward the best ideas and the most promising projects, to sales of securities. But it also tries to protect investors, which occasionally is an issue (see, e.g., here, here, here and, of course, here). The SEC's struggle to include adequate investor protections without making the regulation completely unworkable is reflected in the regulation's 585-page length. Yes, 585. The public comment period on the rule ends February 3, 2014, which also is the last day you may comment on FINRA's proposed Funding Portal Rules and Related Forms (see here).

    It's tempting to think of Regulation Crowdfunding as a poor man's IPO, rather than an exemption from public registration, since it allows publicity, allows anyone to purchase, and requires that information be provided to the crowd during and after the offering. Key aspects of the regulation:

    • Information. It focuses on keeping the crowd informed, including allowing information only to flow through a single funding portal, and imposes a sliding scale of disclosure depending on how much money is sought. It requires a post-offering annual report and that funding portals provide specified information to potential investors.

    • Keep risk and fraud small. Only $1 million may be raised through crowdfunding in a single 12-month period, individual investments are capped based on net worth or salary, and resales are prohibited for one year. (The SEC clarified that the $1 million cap doesn't preclude additional money raises through other exemptions, and reconciled some sloppy statutory language regarding caps on investment amounts. It also proposed to permanently exempt shares originally sold to the crowd from the record holder count under Section 12(g) of the Securities Exchange Act of 1934.)

    • New regulated industry. It creates a new regulated industry of "funding portals" charged, in meaningful ways, with watch-dogging the new system.

    No matter what its final form, Regulation Crowdfunding isn't going to be very useful for most. It's expensive, time-consuming money and buys you a large, unsophisticated shareholder base that probably should scare away deeper pockets. And assuming the SEC adopts reasonable final Rule 506(c) "process" rules, who needs it? (That was rhetorical; the answer is "very few.") Here's a scorecard:

    Regulation Crowdfunding Rule 506(c)
    Offering size limit Yes, $1 million in 12-month period No
    Investment amount limit Yes, the rich capped at $100,000 and the poor at as little as $2,000 No
    Mandatory disclosure Yes, by both issuer and intermediary No
    Continuing federal reporting obligation Yes, annual report posted on website and filed with SEC, but holders of shares bought may not count for §12(g) No
    Investor type Anyone with Internet access Offers to anyone; sales only to accredited investors
    Investor verification; due diligence Intermediary obligations Reasonable verification by issuer of accredited investor status; FINRA Rule 2310 requires some diligence by any broker
    Resale limitations No resales for 12 months, with some exceptions No resales for 12 months (Rule 144), but "4 1/2" exemption
    Marketing/communication Only through intermediary Unlimited by issuer; specified intermediaries not deemed brokers under §4(b)(1) of the '33 Act

    Pending rules may require advanced Form D filing, supplemental disclosure, temporary provision of materials to SEC

    Required intermediaries Yes No; specified intermediaries not deemed brokers under §4(b)(1)
    Eligible issuers Private U.S.-based companies, excluding investment companies Anyone but "bad actors"
    Cost Probably high for $1 million Probably low
    Can I use it now? No, the SEC hasn't yet adopted rules Yes, but pending process rules may alter the landscape
    Preempts state law? Yes Yes


  2. The comment period for proposed Rule 506(c) process rules ended November 4. The link to the SEC's online comment form, here, was active as of today, however, which suggests you can still comment. No word yet on when rules will be adopted, or what they'll look like. In the meantime, however, at least a few issuers have taken advantage of general solicitation for offerings, see here and here.

  3. The Director of the SEC's Division of Corporation Finance updated Congress on JOBS Act implementation, here. Among other things, he notes the SEC staff is "finalizing rule recommendations under Title IV." This is the "Regulation A+" provision that would allow offerings up to $50 million in a 12-month period. The North American Securities Administrators Association, Inc. proposed a coordinated state review program for such offerings, which preempt state Blue Sky laws only when securities offered are listed on a national exchange or sold to qualified investors, here.

  4. SEC Chair White talked about information overload in SEC filings and the SEC's forthcoming JOBS Act report on whether changes should be made to Regulation S-K, the SEC's integrated disclosure rules. The speech is here and commentary on the speech is here and here.

  5. And speaking, once again, of disclosure overload, the SEC filed a brief defending its conflict mineral rules ("our hands were tied") here. The conflict mineral bill sponsors in Congress filed an amicus brief, here. Brief commentary on the filings is here.

  6. The PCAOB issued staff audit practice alert No. 11, Considerations for Audits of Internal Control Over Financial Reporting, here. Gripping bedtime reading, we assume.

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October 9, 2013

  1. The SEC extended the comment period for Regulation D "process rules" to November 4, 2013, perhaps after recognizing that in many ways, the proposed rules make Regulation D worse for issuers. See here. In the meantime, the SEC published a host of items to help people out, including:

    • An investor alert, here, that told investors to brace themselves for September 23, the effective date of the SEC rule allowing general solicitations under new Rule 506(c);

    • Another investor alert, here, that explains what "accredited investor" means; and

    • A summary of the "bad actor" disqualifications rules effective September 23, here, purportedly as a small entity compliance guide (but it serves as an "any" entity compliance guide).
  2. The SEC proposed the "pay ratio" disclosure rules, here, that were required by Dodd-Frank over three years ago. The comment period ends December 2. Although the SEC received over 22,860 prepublication comment letters about pay ratio disclosure, additional comments should be plentiful because these almost certainly are the dumbest of the Dodd-Frank mandated rules. To its credit, the SEC did at least try to make the disclosure less costly, if not less dumb. Generally, the proposed rules require that a company disclose its CEO's annual compensation, median annual total compensation for employees except the CEO (that's "median," not "average"), and the ratio. (Mathematically: X, Y and X/Y, where X = a lot and Y = much less.) The proposed rules allow statistical sampling and estimates to identify a "median employee" (based on, say, W-2 income) whose total compensation would then be calculated, and require that a company briefly disclose its methodology and identify estimates. Summaries of the proposed rules are here, here and here. The disclosure would be made in a company's annual report or proxy statement, and the disclosure may first be required in proxy statements filed in 2016, covering 2015 compensation, which should give everyone time to figure out what to do once final rules are published. (Spoiler alert: Whatever the form of the final rules, the gist of disclosures will read as follows, only with modestly expensive and time-consuming analysis surrounding it: "Our CEO makes a lot of money. It is a lot more money than the rest of our employees make. Some of them don't make very much at all. It is probably more money than you make too, and his annual salary might even be more money than you will ever make in your lifetime. But on an hourly basis our CEO still makes far less than Alex Rodriguez or Angelina Jolie, and it is just as silly to compare his salary to theirs as it is to compare his salary to the workers in our mail room. But we wanted to make sure you knew that not all of our workers make as much as our CEO.")

  3. The SEC will pay a whistleblower upwards of $14 million, according to a final order, here, late last month. That data point will almost certainly make companies and possible whistleblowers perk up and take more notice of the SEC's still relatively nascent Office of the Whistleblower, which previously disclosed a $50,000 award to a whistleblower in 2012 and another 2013 award that is expected to total about $125,000. Some characterize the award and the measures the SEC took to preserve the anonymity of the soon to be wealthy whistleblower as a "game changer," see, e.g., here and here. Information about the award is available here.

  4. Capital markets are all atwitter about the latest social networking IPO, see here. There really isn't much interesting to say about the IPO of a company that has consistently lost money but that promises huge returns if it can monetize its user base by sending spam ads without alienating them and selling user data. (Honestly, if this were the late '90s, the company's name would be "TwitTer.Com, Inc.") But Twitter's valuation is high, and comparisons to Facebook's IPO are obvious. Twitter's registration statement is available here, and commentary about the Twitter IPO is here and here.

  5. Finally, as the Federal Government shutdown persists, note that it's apparently business as usual at the SEC, at least for a few more weeks, see here. The SEC's plan of operations if Congress doesn't renew appropriations is here. Ominously, the SEC's plan was silent about what will happen if Twitter wants to complete its IPO while the SEC was out. But darned if the SEC didn't subsequently address that possibility here. For those who aren't Twitter, a summary of how the shutdown may already be affecting us is here.

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September 11, 2013

  1. As we run up the September 23 effective date of rules eliminating the prohibition on general solicitations under Regulation D and wait for final SEC "process" rules, a few additional resources are here (summary of comments on the proposed rules) and here ("practical implications" of the new and proposed rules).

  2. The GAO published its second Dodd-Frank required report about the effectiveness of conflict mineral rules, here. Given the delay in implementing the rules, the GAO second report still doesn't really have anything to say. But the report is 47 pages. Its conclusion: it's not clear smelter certification programs will be reliable because the DRC is a mess and nothing is secure or easy to track; the rules may impact even companies that aren't public; and the DRC is a horrible, horrible place. On another note, the National Association of Manufacturers filed its notice of intent to appeal the court ruling upholding the conflict mineral rules, see here: still likely too late to affect a public company's need to file its first report. In contrast, the SEC has apparently decided not to appeal the court decision that struck down its resource extraction disclosure rules and, instead, to re-write them. See here. And, finally, even while many wring their hands wondering why going public seems so unappealing these days, some suggest (see, e.g., here) that social legislation through burdensome disclosure is just getting started. (Um . . . connection?)

  3. The SEC approved NYSE rules that allow a one-year grace period for IPO-companies to develop an internal audit function (or outsource the function), here. Note that Nasdaq and other exchanges do not have the same requirement; Nasdaq withdrew its prior proposal requiring an internal audit function after some expressed concerns about its cost but plans to resubmit the proposal (see here).

  4. And, finally, some partial good news. According to Audit Analytics recent report, audit fees dropped in 2012 as a percentage of revenue for accelerated filers (see here), although non-audit fees have increased slightly.

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August 14, 2013

  1. As forecast, there is no shortage of law firm memos describing Regulation D changes, including the final rules eliminating the general solicitation ban (here) and prohibiting "bad actor" participation (here) and the proposed changes to the Regulation D offering process (here). On the theory that later published summaries have pilfered all the good material from earlier summaries, some recent materials are here, here, here and here. Our own presentation outline on the pending changes, along with a spiffy version of Regulation D that shows how it will and may change, is here. The final rules are effective September 23, 2013, which is the same day the comment period expires for the proposed rules. It's not clear whether the SEC will adopt the proposed rules on September 23 and whether they will be immediately effective, but that must at least have been its goal. A letter from SEC Chair White that suggests transition guidance may be forthcoming is here. Cautious issuers will wait for the offering process rules to be adopted before plunging ahead with general solicitations.

    The proposed SEC process rules are controversial, and some have gone from twerking1 at the prospect of unfettered money-raising through general advertising to fretting that restrictions on the offering process make general solicitations less appealing and worrying that mistakes will ruin the ability to use Rule 506 for one year, which is a very long time in the life of many start-up companies. Members of Congress have lobbed opposing comments to the SEC to shape the rules. For example, some pled for the advance Form D filing before the rules were proposed (here), and others suggest that advanced filing and other requirements are illegal (here).

    Other items and thoughts related to the new rules:

    • The SEC rules suggest lawyers could help a company certify an investor's accredited investor status, a fact-based inquiry that centers on how much money a person has or makes. A proposed form is here. It's not clear why the SEC calls out lawyers to make factual inquiries, aside from a generalized notion that lawyers are ubiquitous and smart, and that ethics rules and concerns about legal opinions may lead them to conduct an adequate investigation.

    • The SEC updated its report on the use of Regulation D in capital markets, here.

    • Nothing in the SEC rules or proposed rules suggests that failing to timely file a Form D affects the exemption with respect to which the Form D should have been filed. In other words, the hammer in the new rules is barring future reliance on Rule 506, not tagging you with a violation of the Securities Act for your current use of the exemption. See the SEC's CDI 257.07, here.

    • Failing to timely file means you can't rely on Rule 506 for one year, even in an offering for which you do not make a general solicitation (a Rule 506(b) offering). Because Regulation D is an interpretive rule and the Form D has always been considered a notice filing – one that many don't make – it's not clear how this ban will actually affect Rule 506(b) offerings. Probably many more Forms D will be filed, but there could be more reliance on Section 4(a)(2) (before the JOBS Act, "4(2)") of the Securities Act if a filing is missed, leading to fewer late-filed Forms D.

    • The enhanced accredited investor investigation only applies to general solicitation offerings under Rule 506(c). It makes sense you would need to more closely vet investors responding to a general solicitation. Although the circumstances of a Rule 506(b) offering are fundamentally different, issuers may nonetheless begin to more rigorously scrutinize investor status in Rule 506(b) offerings to shore up their "reasonable belief" that an investor is accredited, the standard under Rule 501.

    • We predict "D&O Questionnaire" type documents will become a regular component of Regulation D offerings to document that no bad actors are involved.

  2. Those hoping the SEC's conflict minerals rules would go the way of its resource extraction disclosure rules (see the June 12, 2013 ICYMI, here) were disappointed last month when a U.S. District Court granted the SEC's summary judgment motion to dismiss the suit challenging these rules, here. In concluding that the SEC did not act arbitrarily or capriciously, the court favorably noted the SEC statement that it isn't responsible for second-guessing Congress's determination that the rules would promote peace in the Congo. The court also held that the SEC sufficiently discharged its duty to consider the rules' impact on efficiency ("disclosure will help investors in pricing the securities … subject to the [rules]," "could improve informational efficiency," and could "divest capital away from other productive opportunities"), competition (public companies "could be put at a competitive disadvantage with respect to private companies that do not have such a [reporting] obligation," and the rules "may provide significant advantage to foreign companies that are not reporting in the United States") and capital formation (the SEC "[did] not expect that the rule would negatively impact prospects of the affected industries to the extent that would result in withdrawal of capital from these industries"). In other words, the rules may be bad for U.S. public companies, and we've considered that, but that's what Congress said to do. The court also did away with the plaintiff's free speech argument, which frankly sounded like a stretch to begin with. All of this means, of course, that those hoping this would all go away should be in a bit of a panic to ensure they are able to make the required conflict mineral disclosures. Any reversal on appeal likely won't be made before the May 31, 2014 disclosure deadline. PWC issued a report on "How companies are preparing" for new disclosures, or failing to do so, here.

  3. Speaking of regulations that many wish would go away, note reports that the SEC may act "in the next month or two" to propose the pay disparity disclosure rules required by Section 953 of the Dodd-Frank Act, here. Depending on what you read, these have been delayed either because "corporations" continue to keep down the little guy or because they are silly and the SEC has had better things to do. Our view – it's because they are silly: calculating average pay is expensive and burdensome, and its disclosure has no readily apparent benefit. Guess what? Average public company employees already know what they make compared to the CEO. And (this is just a guess) it will take more than this additional disclosure to embarrass a CEO into taking less.

  4. The mention of Dodd-Frank rules caused us to look up, just for fun, this progress report (here) on Dodd-Frank, now three years after it was enacted. 39% complete! Yahtzee!

  5. Your opportunity to complete ISS's policy survey, and to help shape its voting policies, has arrived! It is here. (And only a cynic would view ISS's annually shifting view on what constitutes good corporate governance as merely an attempt to stay relevant and in business. For shame.)

  6. And finally, the PCAOB proposed new auditing standards to "enhance the auditor's reporting model." Its press release is here, a fact sheet is here, and the proposal is here. FEI's summary of the proposal is here.

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    1A lewd dance. Your objections to the use of this term in this publication are noted in advance.

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July 10, 2013

  1. Brace yourself for an onslaught of law firm alerts following the SEC's elimination of the ban on general solicitations under Rule 506 and Rule 144A, here. In connection with the new rule, the SEC adopted a final rule, here, disqualifying "bad actors" from making Rule 506 offerings and proposed rules, here, intended to enhance the SEC's ability to evaluate market practices and to address concerns with general solicitations, including proposals to require pre-solicitation Form D filing and a closing amendment, submission to the SEC of solicitation materials, and disqualification of an issuer from relying on Rule 506 for a year if it misses a Form D filing. The SEC's news release, which includes links to "fact sheets" about the new and proposed rules, is here. Recall that the SEC was instructed by the JOBS Act to adopt rules removing the ban within 90 days. Enactment today means the SEC was off only by 371 days. Some, apparently including the SEC, speculate that the SEC lost the ability to enforce the general solicitation ban on July 5, 2012, the 91st day after the JOBS Act was signed. See here. Despite that, the new rules become effective 60 days after publication in the Federal Register, which also is the comment period for the proposed rules. Among other things, eliminating the general solicitation ban makes still pending crowdfunding rules under the JOBS Act even less useful and interesting. (News Flash: They were never going to be very useful.)

  2. The SEC's resource extraction disclosure rules, enacted under Dodd-Frank and which required disclosure of payments to foreign governments, were tossed out by the U.S. District Court for the District of Columbia a few days ago. See here. In determining that the rules were arbitrary and capricious, the presiding judge noted that the SEC's view that the law required public disclosure and that it couldn't consider exemptions for reports about countries, like China, where such reports are illegal, was based on shaky reasoning. Some speculate that this outcome should make the SEC worry about the fate of its conflict mineral disclosure rules, also challenged in the U.S. District Court in the District of Columbia, since "some of the arguments against the rule are similar to those in the resource extraction case" (see here). Hardly an insightful analysis, and certainly not enough for anyone to abandon efforts to comply with conflict mineral reporting requirements, but chalking up another loss for SEC rulemaking is at least encouraging for those challenging the conflict minerals rules.

  3. SEC Chair Mary Jo White announced a shift to a harder SEC enforcement stance, no longer necessarily defaulting to settlements that allow "neither admitting or denying" liability. See here. Commentary on the change is here, here and here.

  4. Perhaps our favorite corporate-law judge, Delaware Chancellor Leo Strine, opined that exclusive forum bylaws that require litigation relating to a corporation's internal affairs (derivative action, breach of fiduciary duty, claims under the Delaware General Corporation Law or claims under the internal affairs doctrine) are presumptively valid under Delaware law even if only approved by directors and not by shareholders. See here. A summary and commentary on the decision are here and here. Although likely to be appealed, count on resurgence in interest in this topic and a number of new bylaw amendments now that a successful defense of the provision, at least in one state, is on the books.

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June 12, 2013

  1. Although we would love to believe the pending lawsuit on conflict mineral disclosure rules will prevail (to be pending perhaps for awhile, a source suggests here), we note the SEC posted 12 FAQs, here, addressing interpretive issues under the rules. A host of law firms have slightly condensed the already skimpy FAQs, but we note three items we were heartened to see: (1) the packaging protecting or keeping fresh your products doesn't count; (2) if you are a cruise line, your product is services, not boats; and (3) a missed or bad Form SD does not ruin your eligibility to use Form S-3. To balance things, two items we were disheartened to see: (1) "generic" components included in a product are covered under the rule if they are essential even though you presumably have no influence over what's in those components; and (2) you must include an audit report on your conclusion that minerals are "DRC conflict free" if you source them from the DRC but not if you source them from outside the DRC. (Did we say we wanted to make it harder for violent warlords in the DRC to profit from mineral sales? We meant "everyone.")

  2. While the conflict mineral rules and FAQs make clear that mining ore, and related activities like smelting and shipping it, isn't "manufacturing" a "product" that subjects one to conflict mineral reporting, resource extractors have their own disclosure cross to bear in that they must disclose payments to governmental entities for the purpose of the commercial development of oil, natural gas or minerals. The SEC also published (a mere nine) FAQs about those rules, here.

  3. Recent SEC Compliance and Disclosure Interpretations, on a hodge-podge of topics, are summarized here.

  4. NASDAQ paid $10 million to the SEC to settle charges that it violated several Exchange Act rules when it mishandled trading during Facebook's IPO, including failing to comply with some of its own rules and to maintain sufficient net capital reserves. It also violated short sale rules, and pocketed a tidy $10.8 million profit, when it assumed a short position of more than 3,000,000 shares in an "error account" and subsequently covered while Facebook's early investors continued to wildly click the "I don't like" button. The SEC's blow-by-blow is here.

  5. NASDAQ also withdrew its proposal to require listed companies to have an internal audit function, here, to give itself time to adequately assess comments.

  6. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) released its much anticipated updated internal control-integrated framework, the framework for assessing internal controls over financial reporting. The release is announced here, an executive summary is here, FAQs are here, and a summary from Financial Executives International is here.

  7. And speaking of internal controls, note the SEC's apparent effort to apply algorithmic analysis to MD&A disclosure to help identify financial fraud, see here and here. It is not without irony that our editorial staff found the linguistics studies cited in the FEI blog extremely difficult to read (as did the writer of the blog, apparently: colons are good, Christopher), but here is what we gleaned: verbose disclosure with little content is a bad sign.

  8. Recall that July 1, 2013 is the date after which compensation committee adviser standards apply through NYSE (here) and NASDAQ (here) listing standards. An "adviser" includes not just a compensation consultant but also outside legal counsel and others. A compensation committee of a listed company can hire or accept advice from whomever it likes, but it must first consider the person's independence from management, including the six considerations specified in the listing standards ((1) other services the adviser provides to the company; (2) percentage of the adviser's revenue the company provides; (3) the adviser's conflict of interest policies; (4) whether the adviser has a business or personal relationship with a committee member; (5) stock ownership in the company; and (6) whether an adviser has a business or personal relationship with an executive officer). This is somewhat silly in the context of the company's general outside legal counsel, which interacts primarily with company management but which may also participate in compensation committee meetings and provide general advice to committee members about, for example, tax, corporate, accounting and disclosure obligations associated with compensation matters. But it is what it is, as they say. Practice among companies may develop as follows:

    • Annually, the compensation committee will consider the six factors, and perhaps request that its advisers, including the company's outside counsel, provide summary information that responds to the factors.

    • The committee will document in meeting minutes that it considered the factors before engaging advisers or receiving advice, and will document specifically its determination that its compensation consultant is independent.

    • The company will voluntarily disclose in its proxy statement that the compensation consultant is independent but not disclose information about others. (If the work of a compensation consultant raises a conflict of interest, proxy rules require disclosure of the nature of the conflict and how it is being addressed. In light of scrutiny of compensation consultants, negative assurance seems easy and beneficial.)

    Note too that companies should also review their compensation committee charters before July 1 to ensure they include the committee's authority to engage advisers only after considering the independence factors.


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April 10, 2013

  1. The SEC filed an initial brief, available here, in the lawsuit challenging its conflict mineral rules. Recall that the rules are effective now; the first conflict minerals report covering 2013 will be filed in 2014. The lawsuit claims, among other things, that the SEC failed to adequately assess the costs and benefits of the rule. In its brief, the SEC claims (and we're paraphrasing here) that, because Congress required it to adopt a rule with unquantifiable and uncertain social benefits, its hands were tied and it did the best it could. Oral arguments are scheduled for May.

  2. The Stop Trading on Congressional Knowledge (STOCK) Act required a GAO report on the role of political intelligence in financial markets, which was recently published here. "Political intelligence" is information from a political source and not a reference to the intelligence of the political class. Which certainly makes this report less slapstick. A summary of the GAO's conclusion: "Beats me."

  3. And speaking of cutesy acronymic laws, the Jumpstart Our Business Startups (JOBS) Act turned one year old on April 5. A few retrospectives, largely confirming that the law has been disappointing, are here, here, here and here. Although many lament that crowdfunding rules remain in limbo, we continue to believe crowdfunding won't be meaningful and that the only interesting result of the JOBS Act may be the rules allowing general solicitations for Regulation D and 144A offerings and proposed "Regulation A+"—each still pending with no firm word on timing.

  4. Related to startups, but unrelated to the JOBS Act, the SEC issued a no-action letter to the FundersClub Inc., here, saying the FundersClub need not register as a broker-dealer if it sets up a website where its members, all accredited investors, can participate in Rule 506 offerings. FundersClub would make money by negotiating the terms of investments in a startup if enough members are interested. Brief commentary about the development is here.

  5. The SEC announced, here, that it will not seek an enforcement action against the CEO of Netflix for violating Regulation FD by posting on his personal Facebook account that Netflix streamed 1 billion hours of content in June 2012. The SEC's press release about its decision not to act is here, and commentary on the development is here. Some revel in the stodgy SEC's recognition that disclosure through social media can be Regulation FD compliant, at least if you tell investors that's what you're doing, and eagerly await the day the SEC allows them to draft an IPO prospectus in 140 characters or less ("We sell things and make money. Usually. Investing is risky. Don't cry if you lose your shirt.") . Others lament that recognition of tweets and Facebook posts as adequate public communication is a sure sign our society is doomed. Whatever your view, note that the SEC report suggested the Netflix CEO almost certainly violated Regulation FD. So before you tweet or post, consider whether your insatiable need for attention should trump thoughtful communications about your company.

  6. The law firm with, we're told, more say-on-pay plaintiff lawsuits under its belt than any other, posted a piece on "emerging trends on Say-on-Pay disclosure" and a defense of its suits (attacked "with a complete lack of context," according to the firm), here. Meanwhile, the U.S. District Court in Delaware affirmed that negative say-on-pay votes are not sufficient to attack a board's executive compensation decisions, here, and the U.S. District Court in Northern Illinois dismissed a say-on-pay suit condemned as "painting a derivative claim with a disclosure coating," here. These decisions suggest to some, see here, that these suits are almost dead.

  7. Finally, in accounting news:

    • The PCAOB proposed reorganization of audit standards is here.

    • FASB issued its fifth XBRL implementation guide, each of which addresses a specific financial metric, here.
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March 14, 2013

 

  1. The normally neutral Swiss, historically unperturbed by fascists and neighboring warmongers, recently decided that who they really hate are rich executives, so they adopted a referendum requiring binding shareholder votes on executive pay. News about the referendum, which may take some time to work its way into Swiss law, is here, here, here and here. Although we haven't gone quite so far in the U.S., ICYMI noted last month the increased litigation risk associated with (inadequate) say-on-pay disclosure. Additional commentary on this topic is here.

  2. Nasdaq proposed, here, a new requirement that listed companies maintain an internal audit function. This should sound familiar because the requirement mirrors NYSE standard 303A.07(c), here, which has been around for close to a decade.

  3. Warren Buffet's eagerly awaited annual letter to shareholders, which many read for his insights into the world generally and some just because it's folksy, is here.

  4. The joint 2013 Director Compensation and Board Practices study by the Conference Board, Nasdaq OMX, and NYSE Euronext is available here.

  5. The PCAOB recently published a report that notes "trends" toward better auditing but continuing problems among smaller auditors, here, and smacked PricewaterhouseCoopers, here, for failing to remediate quality issues flagged by the PCAOB back in 2008/2009. The PCAOB published a portion of the "Part II" comments from its original reports on PWC here and here.

  6. ISS may be looking at your proxy statement this year to check on whether or not you have an anti-pledging/hedging policy that applies to company insiders. A few companies have adopted or publicized policies to ward off a "no" or "withhold" recommendation on the directors ISS considers responsible for failing to adopt a policy, which might mean Governance Committee members or all directors. A few resource materials as you grapple with this:

    • ISS Updates here.

    • ISS FAQs here.

    • Law firm commentary here, here and here.

    • Sample proxy statement disclosures about an assortment of policies are in public filings here (Qualcomm Inc.), here (Hill-Rom Holdings, Inc.), here (Concur Technologies, Inc.) and here (Rockwell Collins, Inc.).

  7. It is occasionally useful to be reminded (pay attention) of how good the SEC and others are at uncovering insider trading (see, e.g., here), but knowing what is actually illegal can be somewhat nuanced, as evidenced by the long-running SEC suit against professional jerk, amateur dancer, and publicity hound Mark Cuban (see here and here). Of course, it's also worth remembering that it's perfectly fine to use even obscure public information to make money and ruin iffy companies. See, e.g., here.

  8. Finally, we would be remiss for failing to note the U.S. Supreme Court action in two (count 'em, two) securities law cases:

    • Amgen, Inc. v. Connecticut Retirement Plan and Trust Funds, here, resolved a Circuit Court split and lowers the bar for plaintiff classes, at least in some Circuits, by holding that allegations, rather than proof, of materiality are sufficient for class certification. Dicta in concurring and dissenting opinions by four Justices, however, leads some to speculate that the "fraud-on-the-market" theory established in Basic v. Levinson is ripe for change, which would be a basic change indeed. ("Basic". . . Really? Nothing?) Commentary on the case is here, here, here, and here.

    • Gabelli v. SEC, here, says the five-year statute of limitations on SEC enforcement actions runs from the time of the violation, not from when the SEC discovers or reasonably should have discovered the violation.

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February 13, 2013

 

  1. A bit like the interpretive memo about "prohibited loans" under the Sarbanes-Oxley Act, joint interpretations of provisions of the Iran Threat Reduction and Syria Human Rights Act were issued by eight law firms, here, to fill the gap left by the SEC's seven new CD&Is on the rules, here. The new disclosure requirements, including a separate IRANNOTICE Edgar filing requirement, became effective last week.

  2. Speaking of efforts to burden public companies and public investors with the cost of implementing U.S. foreign policy, note that U.S. Chamber of Commerce filed briefs in the lawsuit to void conflict mineral rules claiming, among other things, that the SEC did not adequately assess the costs of the rule or whether it will achieve its intended goal of curbing violence in the Congo. An overview of the lawsuit is here, and a suggestion that the rules are already having the opposite of the desired effect is here. The SEC has responded: "We believe our legal interpretation and economic analysis are sound, and we look forward to defending the rule that Congress directed us to write." (Granted, our own views may well be warping our perception here, but does anyone else sense an element of "our hands are tied, we didn't ask to write this stupid rule" to that statement?)

  3. The SEC approved NYSE listing standards, here, and Nasdaq listing standards, here, that implement compensation committee rules required by the Dodd-Frank Act. A summary of the listing standards is here.

  4. As public companies prepare proxy statements, they might heed the warning from a Wall Street Journal blog, here, that it may be worth sweating the details a bit more this year to avoid the latest strategy on say-on-pay lawsuits. Recommendations on how to prevent and defend such suits are here.

  5. Time is dwindling for a public company to verify data used in ISS's new "QuickScore" rating system, which replaces its "Governance Rating Indicators." ISS posted information about the new rating system here and an overview of the new system is available here. A critique of ISS's return to a blunt instrument rating system more similar to its original governance quotient is here.

  6. A few other proxy items:

    • A summary of ISS and Glass Lewis 2013 voting policy updates is here.

    • Equilar's compensation and governance summary report, in which it assesses results from last year's proxy season and previews the 2013 season, is here.

    • Georgeson's rehash of 2012 proxy proposals and voting on governance issues is available here.

    • The NYSE's annual reminder to listed companies about NYSE notice and filing obligations is here.

__________________________

January 9, 2013

  1. Institutional Shareholder Services' 2013 proxy voting policy materials are collected here. Among other things, ISS recently posted 2013 FAQs about its peer group methodology here, executive compensation policies here and everything else here. Commentary on ISS's 2013 voting policies is here, here and here.

  2. Nasdaq proposed to amend, here, its rules relating to compensation independence and compensation consultants to fix timing issues. A summary of commentary on the NYSE and Nasdaq rules is here. None of these is particularly interesting, but it does give us the opportunity to remind you that these rules are coming soon (see here and here). Also, remember the new proxy disclosure about conflicts of interest with compensation consultants and how they were resolved (see Regulation S-K, Item 407(e)(3)(iv), adopting release here). And, just so you have it handy and to round out proxy news, here is SEC guidance on shareholder proposals from a few months ago.

  3. Speaking of proxy disclosure, a warning about the possible new plaintiff firm say-on-pay strategy, suits to enjoin shareholder meetings claiming inadequate disclosure, is here.

  4. The Auditor of auditors was unhappy with results of its audit of auditor internal control audits. (Now say it five times fast.) More simply put, the PCAOB says here that accounting firms stink at assessing their clients' internal controls. More politely put: "The Board is concerned about the number and significance of deficiencies identified in firm's audits of internal control during the 2010 inspections." Note too that the SEC approved PCAOB's Auditing Standard No. 16, Communications with Audit Committees, here.

  5. The SEC published its annual report about its whistleblower program for FY 2012 here. Whistleblowers from all 50 states and 49 foreign countries delivered 3,001 tips in 2012; the SEC made a single whistleblower payment of about $50,000. Some interesting items we choose to believe are true based on only casually looking at the bar charts at the back of the report and avoiding contradictory information: (1) about one-fourth of complaints fit in the "Other" category instead of a category the SEC has jurisdiction over, suggesting those whistleblowers are nuts, and (2) people in California really like to blow whistles.

  6. Implementation of the JOBS Act (remember that?) limps along. "Crowdfunding" rules (which President Obama naively called "a game changer") appear likely to sit on the shelf a while longer, see here. Meanwhile, one of the few JOBS Act provisions that could significantly change things, removal of the ban on general solicitation under Rule 506 (see here), may be slowed. Reuters reports here that two Commissioners are really unhappy about it and here that, perhaps, neither was departing SEC Chairman Schapiro.

  7. ICYMI's own home state of Oregon, apparently on the cutting edge of state securities law, adopted the "fraud on the market" presumption of reliance. See here. The theory is beloved by the SEC and oft-used in federal courts. Note too that the U.S. Supreme Court may have additional color to add to the theory, see here.

  8. The new year always brings an immediate, nostalgic look back, and 2013 is no exception. The D&O Diary notes the top 10 D&O stories of 2012 and collects a slew of other blogger retrospectives here. Perhaps the greatest lesson from 2012: people watched a lot of stupid stuff on YouTube.

  9. Commentary on the SEC's conflict mineral rules continues to trickle out, albeit more slowly than we anticipated, as people struggle with what the rules mean and how to comply. To add to your stack of resources, a recent law firm Q&A piece is here.

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October 10, 2012

  1. ISS released the results of its 2012 global corporate governance policy survey, which we imagine it will somehow use to formulate voting recommendation policies, here. According to ISS, executive compensation remains the top focus of investors and issuers, with risk oversight second for issuers and director qualifications third for issuers (second for investors). Also, Shearman & Sterling published its annual summary of big-company governance trends here and compensation trends here, and PWC published its annual director survey here.

  2. The compensation committee listing standards published to implement SEC Rule 10C-1 are here (NYSE) and here (Nasdaq). The 58 and 97 pages the exchanges have devoted to the new standards suggests there is something interesting going on. There isn't. Most public companies already have a separate compensation committee with independent directors; hiring independent compensation consultants should be easy, and one wonders why anyone thought it was OK to rely on consultants hired by executives. The new rules won't "fix" executive compensation, whatever that means, but may provide a veneer that legitimizes ever upward creeping salaries. A recent study that suggests peer group comparison, presumably even comparisons conducted by independent consultants, is a cause for executive compensation gone amok is available here. (And honestly, stop suggesting your policy to set compensation "near the 50th percentile" is thoughtful, unique or good governance—it is the opposite of those.)

  3. Litigation based on failed say-on-pay votes, essentially alleging that the shareholders saying "no" means directors aren't acting in good faith, continues to lose in court. A few recent examples are described here.

  4. In JOBS Act news,

    • The SEC posted updated FAQs (nos. 42-54), here.

    • The comment period for proposed rules eliminating the general solicitation ban for Rule 506 and Rule 144A offerings expired October 5. Among the comments, the North American Securities Administrator Association, Inc.'s disappointment with the lack of clear accredited investor verification standards is here.

    • The SEC posted a how-to guide for submitting a draft registration statement here, and posted a sample letter to issuers here, explaining how to transition existing draft registration statements to the new system.

  5. If you're planning on an offering soon, take note of the new SEC wire instructions and fees effective October 1, 2012, posted here.

  6. In auditing news, COSO published its exposure draft to update its internal controls assessment framework here. Significant, of course, because this is the framework most use.

  7. Issuers continue to ponder the SEC's conflict mineral rules that, on closer reading, we are willing to characterize as "vague" and "extremely unhelpful." Among other things, the SEC refused to define "product," "manufacture" or "contract to manufacture," which are kind of important. Recent law firm summaries of the rules are here, here, here and here. The Corporate Counsel recently sponsored a conflict minerals webinar, leaving one with the impression that those who have spent lots of time on the question are really hoping the SEC is going to provide some additional guidance, because no one knows where much of this will shake out. A few notes on some fundamental questions:

    • What is a "product"? An iPhone is a product, that's easy. But what product is an airline selling? Transportation services or the seat on a plane which contains conflict minerals? Are conflict minerals "necessary" to the product of transportation services? Sure, but intuitively, an airline shouldn't have to worry about conflict minerals. But Boeing certainly does, and are airlines caught if they contract to manufacture planes needed for their fleet? How about a DVD? Arguably, the content, not the physical DVD, is the product. But you can buy streaming movies, so where does that leave you? Does it matter that the cost of the DVD is passed through to the consumer? What about a cell phone service provider? Does it contract to manufacture phones? (This one is covered in the SEC release—it depends on how much influence the company exerts over the manufacture, and if the only specification is that the phone be compatible with the company's network, you should be fine. Super helpful.) What about utility companies that sell power but also sell meters that contain conflict minerals? What if they lease the meters?

    • Is the product being "manufactured"? It's evident and generally understood what "manufacturing" means, says the SEC in its release, but then proceeds to reject specific definitions, like the North American Industry Classification System's, which would exclude "assemblers" that piece together products from components not in raw form, which the SEC believes are supposed to be captured. Does the computer system integrator who sets up your network "manufacture" the system from off-the-shelf components? Almost certainly not. But how about a company that assembles computers from purchased components? Maybe yes, but the SEC confuses this analysis by saying that the contract-manufacture of components that go into a company's product should be captured if the company exercises "enough" influence over the manufacturing process, moving you into a different mode of analysis. (But if there's a reasonable substitute for the mineral, can you claim it's not "necessary" to the function of the product to escape the rule's reach? Seems too clever.)

    • What level of influence on the manufacturing process traps you? You're not in the clear merely because you don't specify the use of conflict minerals, the SEC clearly says, but how detailed do specification need to be before you are subject to the rule? If you only specify functionality requirements and avoid delving into production detail, is that enough? (If you know the functionality is going to require a specific conflict mineral, that almost certainly doesn't help you.)

    • What about packaging? If the package is important for marketing, are you selling the packaging or just what comes in it? Packaging probably isn't captured except, maybe, when it becomes part of what you're selling (like the hard tin holding cookies that is suitable for re-gifting) or is necessary to the product, like if it keeps "fresh cookies" fresh.

    • What are people doing now to get ready to report?

      • Some are starting to budget for this, or at least to get budget requests in. Also, most are begrudgingly moving to understand the rules and risks—like the private right of action under Section 18 (filing a report that contains a false or misleading statement)—and getting buy-in at the executive and board levels to set the proper compliance tone at the top.

      • Some are engaging suppliers, and some suppliers are engaging customers, on the diligence process.

      • The smart ones are not throwing lawyers at this in a "check the compliance box" kind of way, but are preparing to ease the pain of dealing with the rules by building an internal team that knows the products and supply chain, and can deal with customers, suppliers and contract manufacturers in something less than a ham-fisted way.

      • Some external parties are working on certification processes; some issuers may be hopeful this will do some of the work for issuers.

    • Finally, is a lawsuit going to save us from this mess? Commentators aren't willing to handicap the chances here. The SEC's release specifically addressed some of the questions raised by commentators, like the U.S. Chamber of Commerce, and punted a bit on the cost-benefit analysis, which depends on how you value the social benefits. Also, because these rules are mandated by Congress, in contrast to proxy access rules, the SEC's hands are somewhat tied.


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September 12, 2012


  1. The SEC adopted conflict minerals disclosure rules last month on a 3-2 vote. The final rules, all 356 pages of them, are here. Conflict mineral reports on new Form SD ("Specialized Disclosure") must be "filed" by May 31 of each year beginning in 2014. The report covers calendar years, irrespective of an issuer's fiscal year, and the first report covers the reporting period beginning January 1, 2013—just three and a half months from now. Really. A few useful resources:

    • The SEC press release, here, includes a fact sheet that outlines the rule requirements.

    • A useful disclosure flowchart is here (and on page 33 of the release).

    • A Conflict Minerals Resource Center is here.

    • A sampling of the many memos summarizing the rule requirements is here and here.

    • Expect auditors in particular to start serving up systems for rule compliance. See, e.g., here and here.

    You may now start scrambling to react to the rule requirements, which likely will entail at least: (1) figuring out which of your products use tungsten, tantalum, tin or gold, whether those materials are "necessary to the functionality or production" of the product, and, if not, whether they can be replaced so you don't need to file a report; (2) if you use conflict minerals, developing a process under OECD or other appropriate guidelines (see here) to trace their sources that can be replicated and taught to responsible employees, and consulting an independent auditor to ensure your process is up to snuff.

    A few interesting changes in the final rule:

    • The report must be made as an exhibit to the new Form SD rather than as an exhibit to Form 10-K, perhaps an explicit acknowledgement by the SEC that the disclosure is weird. A draft taxonomy for the form is here. The report also must be available on the issuer's website.

    • The rules recognize the burden of compliance for users of recycled or scrap conflict minerals, who still must file a Form SD but whose minerals derived from those sources are deemed "conflict free."

    • For a two-year transition period (four years for smaller reporting companies), products may be designated "DRC conflict undeterminable" if a company can't determine whether the minerals in its products originated in a covered country or financed or benefited armed groups in a covered country.

    • The rule includes an "audit objective" to opine on whether the design of the diligence measures conforms to the OECD framework or other appropriate framework and whether the measures were followed.

    The rules continue to be controversial, and the 3-2 adoption vote reflects the dissatisfaction by some Commissioners that appropriate executive muscle wasn't flexed to, for example, exempt de minimis mineral amounts or smaller issuers, or to make rule compliance cheaper. Some question whether, despite good intentions, the rules will help or hurt people in the DRC (see Commissioner Paredes' statement, here), and, more philosophically, when the SEC's mandate to protect investors extended to saving their souls. See, e.g., here.

    As noted last month, the rules may still be subject to challenge in the D.C. Circuit Court (see here), particularly given the disparity among estimates of the rule's costs. Anticipating this, the SEC included a savings clause in the release ("such invalidity shall not affect other provisions . . . that can be given effect without the invalid provision").

  2. The SEC also adopted rules regarding the disclosure of payments by resource extraction issuers, here, also on Form SD. In contrast to conflict mineral rules, these are anticipated to apply "merely" to 1,101 oil, natural gas and mining companies, and compliance costs are estimated to be "lots" less. Summaries of the rules are here, here, here, and here.

  3. The SEC proposed rules, here, to eliminate the general solicitation prohibition for Rule 506 offerings. General solicitation in Rule 506 offerings will be OK provided that:

    • The issuer takes unspecified "reasonable steps" to verify that purchasers are accredited investors;

    • All purchasers are reasonably believed to be accredited investors; and

    • The general conditions of Rule 506 are met, including integration principles and resale limitations.

    Although unspecified, the SEC suggests the level of necessary investigation of accredited investor status depends on (1) the nature of the purchaser and the type of accredited investor the purchaser claims to be; (2) the information the issuer has about the purchaser; (3) the nature of the offering, such as whether general solicitation was used; and (4) the terms of the offering, such as the minimum investment amount.

    The proposed rules would add a check box to Form D to indicate whether issuers used a general solicitation or general advertising in a Rule 506 offering, which presumably will help the SEC monitor how the new rules are working.

    The SEC also proposes to provide that securities may be offered pursuant to Rule 144A through a general solicitation or general advertising as long as they are ultimately sold only to persons the seller reasonably believes are qualified institutional buyers.

    The comment period for the rules expires October 5, which apparently is not fast enough for some who thought the rule should have been adopted as an immediately effective interim rule (see here).

  4. Rounding out the whirlwind of Dodd-Frank-related SEC activity in the last month, the SEC published its required report on retail investor literacy here. A summary: "poor."

  5. The SEC posted FAQs about JOBS Act provisions affecting research analysts and underwriters here.

  6. For those who still want to hear more about the Facebook IPO, here is SEC Chairman Schapiro's response to Congressman Issa's 34 IPO-related questions, driven, no doubt, by continued bafflement that a really cool company valued well beyond its financial prospects could trade down after its hyped IPO. Glaringly absent questions include: Would disclosure that no Facebook products contain conflict minerals have rallied the stock price? Does it matter that that's because Facebook doesn't produce anything?

  7. The PCAOB adopted Auditing Standard No. 16, here, to improve communications between auditors and the audit committee. A summary is here. Assuming the SEC approves the new rules, they will be effective for fiscal years beginning on or after December 15, 2012. You might dust off your audit committee charter to see if updates are required.

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August 15, 2012

  1. Next week, the SEC will consider, among other things, the adoption of Conflict Minerals disclosure rules, which have been in the works for two years (see GAO study here). For those who can't wait, a sneak peek at differences between the proposed rules and the draft final rules, from The Wall Street Journal, is here (subscription required). Of course, "final" doesn't necessarily mean final, since the rule-making process will almost certainly be challenged, à la proxy access, by business groups. See the U.S. Chamber of Commerce's threatening letter to that effect here. While we wait for the drama to unfold, note the useful resource center on Conflict Minerals here.

  2. Conflict Minerals requirements reflect the occasional penchant of Congress to inefficiently push public policy by requiring embarrassing disclosure by public companies and making self reporting a must, as it has done with adoption of the Iran Threat Reduction and Syrian Human Rights Act, here. The Iran THRESHR Act, as we hope it will come to be known, requires a public company to determine whether it or any affiliate has knowingly engaged in impermissible activities and, if so, to describe what it did in detail in its periodic reports and in a separate report the SEC will post on its website and forward to the President and Congress.

  3. Insider trading is what we in the securities profession like to call "bad." Fortunately, it also is sometimes amusing. Here, for example, is an SEC enforcement action that describes a Bristol-Myers Squibb executive's Internet research for tips to avoid getting caught before engaging in insider trading. That probably didn't help his defense. Nor, presumably, did recovery of Amazon recommendations based on his purchasing history--"You might also enjoy Insider Trading for Dummies, The ABC's of Avoiding Prosecution by the SEC, and The Count of Monte Cristo." (Yes, we made up that last part. But honestly, how is that less ridiculous than an Internet search?)

  4. The SEC posted a video explaining to potential whistleblowers how the SEC processes tips, here. Nowhere in its explanation does it suggest that an employer's Internet search of "how to punish whistleblowers without getting caught" is a fact it will consider in its process, so thank goodness we've already educated you with the entry above.

  5. The polls are now open for ISS's latest governance survey, here: your chance to influence ISS policies and voting recommendations. In other proxy news, Broadridge published its 2012 proxy review here.

  6. Finally, an M&A update on private equity purchases of public targets, here, notes lackluster activity in the first half of 2012, but according to PwC signs point to an uptick in the second half of 2012 (see here).

 

----------------------------------------------

July 12, 2012

  1. The SEC adopted final rules late last month, here, that:

    • Direct securities exchanges to prohibit the listing of a company with no compensation committee comprised of at least three independent directors. In determining independence, the exchanges must "consider" the source of the compensation paid to the member and whether the member is affiliated with the issuer. Also, the exchanges must require that compensation committee charters reserve the authority to hire independent compensation consultants, legal counsel and other independent advisers. Exchanges may adopt rules in time for the 2013 proxy season.

    • Require disclosure of the compensation committee's assessment of compensation consultant conflicts and how any conflicts were resolved. This will result in more clutter in 2013 proxy statements.

  2. The SEC also announced plans to:

    • Consider at an open meeting on August 22 (see here) adoption of conflict mineral rules, resource extraction payment disclosure rules, and the elimination of the Rule 506 prohibition on general solicitation. Public companies likely are dreading adoption of the first two; private issuers are likely salivating over the last one and maybe worrying a little about possibly enhanced requirements to confirm a funding source's "accredited investor" status.

    • Soon allow (see here) confidential registration statement filings through EDGAR for emerging growth companies and foreign private issuers.

  3. In contrast to its six-week advanced notice of rules to be considered in August, no doubt issued as a "get off my back" to Congress and maybe as a reaction to private lawsuits demanding rule-making action, the SEC changed its Dodd-Frank timeline to lump all pending rules under "pending action" rather than under estimated adoption windows, here, presumably to de-emphasize all the missed deadlines.

  4. When it does move on new rules, expect the SEC to amp up its economic analysis section, even of Congressionally-mandated rules, as outlined here, to avoid proxy access-like challenges à la Business Roundtable and Chamber of Commerce v. SEC, here.

  5. In accounting news:

    • FASB abandoned its controversial efforts to update accounting for loss contingencies. The agenda for the meeting where this was decided is here.

    • Materials from the PCAOB's second meeting on auditor independence and audit firm rotation are here.

  6. We maintain there are really only two things in the JOBS Act with the potential to significantly change capital raising: the Regulation D changes the SEC will consider in August and the pending "Regulation A+" exemption. While you wait for the SEC to propose rules on the latter, consider reviewing the JOBS Act-mandated study on factors that may affect trends in Regulation A Offerings, which led to a whopping one Regulation A offering in 2011, here. Spoiler alert: it's because $5 million isn't much, the costs of qualifying the offering with the SEC and state regulators are high, and Regulation D is better. Regulation A+ rules will raise the amount to $50 million and remove state regulators from the equation, which is helpful. Whether it will prove to be a useful exemption remains to be seen.

  7. FINRA published a notice, here, requesting comment on proposed regulation of crowdfunding activity.

  8. Last month, we noted a few summaries of proxy season results and trends. A few more are here, here and here.

  9. Proxy result watchers continue to devote much ink to advisory shareholder votes on executive pay. For an international perspective on say-on-pay, with a focus on the U.K.'s pending requirements for binding shareholder votes on director compensation, here, see the overview here.

  10. Finally, July 2 marked the 10-year anniversary of the Sarbanes-Oxley Act. A few retrospectives are here and here. A tune that remains catchy after all these years is here.


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June 13, 2012

  1. At the mid-way point of the 2012 proxy season:

    • Much has been written about the 2012 "shareholder spring" revolt against executive pay, and each nay on pay vote is noted by compensation wonks (about 46 so far this year), although as this mid-season summary notes, the rejection rate is only 2% for large accelerated filers, about the same as last year.

    • A useful analysis of "pay for performance" trends, with a discussion of proxy disclosures, ISS and Glass Lewis voting policies and analytics, and recommendations for public companies, is here.

    • An analysis of how groups like ISS affect mutual fund voting is here .

    • Although the SEC has no articulated plans to revive its proxy access rules, which were invalidated in July 2011 by the D.C. Circuit Court, ISS highlights action on the private ordering front here.

  2. After the initial furor, JOBS Act-related news has died down in the last month. Only two items:

    • The SEC established a secure email system for emerging growth companies and for foreign private issuers to submit confidential registration statements for review. Instructions for the system, and an update for foreign private issuers, are available here.

    • We've heard that the SEC has insisted in the IPO comment process that emerging growth companies disclose the risks to investors of scaled JOBS Act disclosures – or as we like to say, the risks of complying with the law. A CFO.com article notes the new phenomenon here.

  3. Last month, we suggested JOBS Act rulemaking would likely distract the SEC from its remaining Dodd-Frank rulemaking. Non-profit Oxfam America filed a lawsuit in Massachusetts U.S. District Court requesting that the Court order the SEC to issue final mineral extraction disclosure rules. The court filing is here and commentary is here. Mostly, though, we just find this amusing. Hard to believe it will go anywhere.

  4. In SRO news,

    • FINRA proposed, here, an immediately effective pricing change that increases fees from 0.01% to 0.015% of the proposed maximum offering price and that makes automatic shelf registrations by well known seasoned issuers subject to a maximum fee of $225,000 rather than $75,000. New fees apply July 2, 2012. (So make those shelf registrations now, WKSIs!)

    • Nasdaq proposed changes to director independence rules, here.

    • The NYSE proposed listing standard adjustments, here, to accommodate emerging growth companies that take advantage of the requirement to present only two years of audited financial statements.

  5. A curse, or blessing perhaps, of monthly client alerts is that for some topics anything that can be said has been said already by the media or by bands of white-shoe lawyers shackled to their desks until they produce a topical alert for clients. So it is with Facebook's IPO, not only one of the largest, but almost certainly the most-discussed, IPO in U.S. history. If you're already bored, stop reading. For those blissfully oblivious: Facebook, the world's preeminent social networking site, went public at $38 a share and a $104 billion valuation, traded up initially, then fell about 18% to close on day two at $31 (see here). Pundits lament the failure of the IPO and cast blame on Facebook executives (for being greedy and pricing shares too high), lead underwriter Morgan Stanley (initially for being greedy and pricing shares too high, subsequently for selectively communicating changed forecasts during the roadshow), and Nasdaq (for a sloppy initial trading process). At least one purported class action suit has followed, as have threatened suits and investigations from state regulators and from the SEC, which obliquely noted it will examine "issues" related to the offering. There have been so many stories about Facebook's IPO, it's hardly worth providing links, but here is a D&O Diary summary with additional links. And here are some general thoughts:

    • Who cares. (Or in Facebook speak, .) The rare investors given first crack at Facebook shares didn't make a killing in the first three days of trading. Boo hoo. Why not laud Facebook and its CFO, who allegedly had a firm hand on the IPO helm, for making loads of money for pre-IPO investors and for building an enviable cash war chest for company growth?

    • Facebook makes lots of money, mostly on ads and increasingly by taking a (big) cut of online purchases made through Facebook, but not $100 billion valuation worth of money. The value was based on the potential to make money off the brand and the hundreds of millions of Facebook users. A modest downgrade in projected second quarter earnings during the road show goes out in the wash of the fundamental valuation methodology the investors bought into—made up numbers based on assumptions about Facebook's ability to monetize its huge user base.

    • Facebook didn't hide that making money for investors isn't its top priority. Nor did it hide that Mark Zuckerberg maintains control. Zuckerberg, surely to the chagrin of Morgan Stanley, went so far as to include a letter to investors in the prospectus stating, "Facebook was not originally created to be a company. It was built to accomplish a social mission—to make the world more open and connected. We think it's important that everyone who invests in Facebook understands what this mission means to us, how we make decisions and why we do the things we do." Or phrased differently: "Listen, dude, I'm in charge and I don't care about investor returns."

    • The reputational harm Facebook may suffer from the failed IPO isn't likely to come from users. If you are interested in finding out how fat your high school flame is, or in letting 2,000 of your closest friends know what kind of muffin you just ate, you're likely unconcerned with Facebook's disappointing public trading price. But reputational harm could matter to advertisers, as could the additional publicity about how Facebook hasn't perfected advertising to mobile device users.

    • Facebook's IPO may give institutional investors more leverage in lowering offering prices in IPOs in the near term, perhaps even for "old economy" companies that actually make and sell things and whose future performance is tied more rationally to financial metrics. A win for the privileged few with a seat at the road show presentation, but a loss for issuers and pre-IPO investors. An IPO off-ramp event, as it were. (As if we needed that – see here.)

    • Mark Zuckerberg is almost certainly insufferable. He created Facebook in his Harvard dorm room eight years ago and built it into a dominant global company, likely being told the entire time how awesome he is. Let me be clear: I hate anyone younger and richer than I am just as much as the next guy, and yes, appearing in a hoody at investor presentations and occasionally not at all shows a lack of maturity and manners. So? (Did you not read his letter to investors?)

  6. Finally, because so much has been written about Morgan Stanley's "selective disclosure"to its customers, and how unfair it is that only some knew about the downgrade of Facebook's Q2 earnings forecast, a few notes on analyst reporting rules, and some handicapping of plaintiff's chances against Facebook and its underwriters:

    • Morgan Stanley's insistence that its IPO process adhered to standard practice is true. It just is.

    • "Selective disclosure" rules under Regulation FD (Fair Disclosure) don't apply during the IPO process but at the IPO when a company becomes an issuer.

    • Morgan Stanley's oral communications to large customers were intended to avoid publishing a "research report," which is a no-no under FINRA Rule 2711, here, and to make sure it wasn't issuing a "free-writing prospectus" that could be required to be publicly filed. (Note that the JOBS Act largely eliminated research report bans for emerging growth companies, which Facebook isn't. Note too that because most investment banks have signed the Global Research Settlement, see here, they are contractually bound to similar provisions about not publishing research reports.)

    • Analysts and investment bankers are largely segregated through the offering process, mostly to ensure that geeky analysts aren't influenced by charismatic investment banker types.

    In lawsuits, plaintiffs will hang their hats on the prospectus's failure to disclose material information, including the failure to disclose "known trends" likely to materially affect revenues or income under Item 303 of Regulation S-K (which was the subject of a recent court decision here). Is a "known trend" a modest downgrade in one quarter's earnings that wasn't in any rational way connected to the IPO price? Please.
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May 9, 2012


You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. The SEC scrambled last month to react to the immediately effective portions of the JOBS Act, including hastily assembling some FAQs, here, to guide emerging growth companies in registration. Some "IPO on-ramp" provisions of the JOBS Act that are the subject of the SEC's FAQs may be useful, but it's difficult to imagine they will lead to much of a bump in IPO activity generally. (Pending "Regulation A+" rules, which the JOBS Act requires the SEC to implement "sometime," will exempt offerings of up to $50 million and may be a legitimate alternative for small companies who need some significant cash and are willing to subject themselves to some SEC regulation but not ready to become full-blown public companies.)

  2. Crowdfunding still seems to get people in a tizzy, which undoubtedly led the SEC to warn, here, that the new crowdfunding exemption requires rule-making. So, if you're crowdfunding right now, you're breaking the law. Stop it. A litany of reasons we suspect crowdfunding won't be useful to most:

    • all fundraising is limited to $1 million per year, including crowd-sourced funds (what happens if you run out of money?!?);
    • unlike every other exempt offering, employees may not conduct the offering—it must go through a broker or crowdfunding portal, which also will be regulated and will charge yet unknown fees;
    • no advertising except for references to the funding portal;
    • some public disclosure is required, including audited financials for offerings over $500,000 and annual reports to the SEC with yet-to-be-determined content;
    • administrative expense of tracking many shareholders;
    • higher risk that unsophisticated shareholders will be more upset when they lose all their money and more likely that they will sue directors or others;
    • may be tougher to get follow-on financing from venture capitalists, who may not want the headache of finding room in your "crowded" capital structure;
    • for those with new product ideas, like, say, smart phone apps, contingent advanced sales may offer an alternative to crowdfunding (see, e.g., here); and
    • lingering fear that companies that can't get accredited investors interested may not be worth investing in, or are scams (see, e.g., here).

  3. Another reason crowdfunding may not be worth the time and effort is pending rules that eliminate the general solicitation prohibition under Rule 506 of Regulation D if sales are made only to accredited investors. Presumably, that means all kinds of people, including company executives, will be able to say all kinds of stuff about your company, its products and the offering on a website and accept money directly after determining the investor is accredited under whatever verification requirements the SEC adopts. Offerings exempt under Regulation D are already the dominant method for raising money in the U.S., according to a recent study by the SEC's Division of Risk, Strategy and Financial Innovation published, here. Under Regulation D, Rule 506, which allows sales to an unlimited number of accredited investors, was used over 90% of the time. With the elimination of the general solicitation requirement, that number may edge up, despite the reduction of accredited investor ranks when Dodd-Frank excluded the value of one's primary residence from the net worth test a few years ago (see conforming changes to SEC regulations here).

  4. A report on recent say-on-pay results for the Russell 3000 is here. Heartening to public company executives is that nearly all issuers get approval of pay practices. But at least some of the outliers tend to be interesting, as evidenced by the amount of internet space devoted to CitiBank's failed say-on-pay vote last month, which prompted it to release a statement, here. The possible reasons for Citi's unexpected no vote are described here.

  5. Also of note, Glass Lewis (the other institutional shareholder service) announced a portal through which issuers may engage with GL on governance topics, here.

  6. With all the hullabaloo about the JOBS Act, recall that the SEC is still behind in Dodd-Frank rule-making, in some cases (conflict minerals) blessedly so. A progress report on rule implementation is here.

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April 12, 2012

 

  1. It seems like the only thing anyone was writing about in the last month was the Jumpstart Our Business Startups, or JOBS, Act. President Obama signed the fast-tracked Act on April 5. The internet teems with information. Some is collected below.

    • The trim 22-page law is here.

    • Commentary on how the sausage got made is here and here, and a refresher on how this all works is here.

    • A brief summary of its seven titles:

      • Reopening capital markets to emerging growth companies. Those with annual revenues less that $1 billion are "emerging growth companies" and remain so for five years after an IPO. For recent IPOs, that rounds to "everyone but Facebook." Intended to provide an IPO on-ramp, these provisions reduce executive compensation disclosure, defer shareholder advisory votes on executive pay, defer internal control audit attestations, allow (initially) confidential submission of IPO registration statements, require only two years of audited financial statements, ease "gun-jumping" communication rules with sophisticated buyers to test the waters for an IPO, and remove the ban on research reports and allow analysts to communicate with the company. These provisions were effective when the Act was signed.

      • Access to capital for job creators. General solicitation will be OK for private placements, as long as you don't sell to anyone but accredited investors or qualified institutional buyers. There is no mandated timeline for SEC action. 

         
      • Crowdfunding. It's OK to raise up to $1 million over the internet from complete strangers who aren't accredited investors and don't give you more than $2,000 (or more depending on the investor's income level), and as long as you do it through a registered broker or funding portal. The rules shift compliance with disclosure obligations to brokers and funding portals, possibly bringing risk that will be reflected in fees and may make raising $1 million pretty expensive. Among other requirements, participating investors will have to acknowledge in writing they are likely to lose all their money. The SEC is to adopt implementing rules within 270 days. (Yeah, right.)

      • Small company capital formation. This "Regulation A+" provision requires the SEC to expand Regulation A, or adopt a new regulation, to exempt public offerings of $50 million from registration under the '33 Act and generally to make it easier to complete a small IPO. There is no mandated timeline for SEC action.

      • Private company flexibility and growth. A company may have up to $10 million in assets and up to 2,000 shareholders or 500 non-accredited shareholders before it is forced to become "public" and begin periodic reporting under the '34 Act. These provisions were effective when the Act was signed.

      • Capital Expansion. Banks also can have 2,000 shareholders before being forced to become public.  These provisions were effective when the Act was signed.

      • Outreach on changes to the law. The SEC must inform select groups about the changes to the law.

    • The SEC has let emerging growth companies know they may submit confidential registration statements to the SEC as required by the Act, here, and published FAQs on the submission process, here. A registration statement and amendments must be made public 21 days before the IPO roadshow.

    • The SEC also released FAQs on changes to the requirement for '34 Act registration and deregistration, here.

    • Also, the SEC opened a portal for public comment on the Act, here, even though it hasn't yet proposed implementing rules, and likely will post all JOBS Act-related materials here.

    • A group of 14 law firms published a collective view of the general solicitation exemption, here, noting that everyone needs to calm down and wait 90 days for the SEC rules that implement the Act's exemptions on general solicitations.

    • Some useful references:

      • General law firm summaries are here, here, and here.

      • Goldman Sachs' side-by-side summary of prior and changed law is here.

      • Implementation schedules by provision are here and here.

      • The implications of the Act for compensation disclosure and practices are summarized here.

    • Detractors and proponents of the Act are many, and none are shy about publishing views, with the debate generally as follows:

      • Point: Relief for start-ups will encourage capital formation and lead to more jobs. (See here.)

      • Counterpoint: No it won't. (See here and here.) It will just make fraud easier. (See here, here, here, here, and here.)

      • Supporting arguments for your view of the Act, whatever it may be, are encapsulated in a top five pros and cons list here.

  2. Expect a crowd to start offering crowdfunding services and proposing governance structures for the nascent fundraising process. A new crowdfunding association has commenced, here, and momentum builds for a crowdfunding SRO, like the stock exchanges, that would interact with the SEC in establishing rules of the game, see here and here. Given the $1 million fundraising limit and the regulatory burden likely to be imposed on brokers and funding portals, it remains to be seen whether the risk/reward pencils out for intermediaries and whether the cost of raising $1 million through crowdfunding will be worth it for start-ups, which might prefer to solicit investors broadly under revised Regulation D but limit sales to accredited investors.

  3. Lost in the shuffle of the JOBs Act, the STOCK Act, here, was also recently signed into law. The law prohibits trading by members and employees of Congress on the basis of material, nonpublic information received because of their position, and requires disclosure of stock trades and other information, including, bizarrely, personal mortgage information, by members of Congress. An online reporting system open to the public is to come. Information about the Act is here and here. (Is anyone else weary of the cutesy bill titles that have seemingly become the norm? Jumpstart Our Business Startups (JOBS) Act? Stock Trading on Congressional Knowledge (STOCK) Act? Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure (CROWDFUND) Act? Ugh. Enough.)

  4. Related to insider trading, the U.S. Supreme Court rejected indefinite tolling of Section 16(b) claims based on failing to make Section 16(a) filings, here. Commentary on the decision is here.

  5. The PCAOB has begun posting materials from its roundtable discussions about auditor independence and mandatory auditor rotation, here.

  6. Two more courts have ruled against plaintiffs in "say-on-pay" spawned fiduciary duty breach actions, Weinberg v. Gold in Maryland, here, and Witmer v. Martin in California, see here). (Recall that we reported on the first dismissal of such a case back in February, but in case you forgot, see here.)

  7. ISS established a feedback review board, see here, to facilitate communication with the ISS and for you to tell it what it screwed up in your governance rating or voting recommendation.

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March 14, 2012

 

  1. It has been a quiet month at the SEC. The only action on Dodd-Frank implementation was its joint release with the CFTC of identity theft red flags rules, here, which, between you and me, doesn't look very interesting. (Note that as the second anniversary of Dodd-Frank nears, regulators have met only 99 of 400 rulemaking requirements. See the progress update on Dodd-Frank implementation here.)

  2. A few other modest SEC items to note:

    • A letter to the SEC from several U.S. Senators criticizing elements of "draft final" conflict minerals rules spurred at least one commentator, here, to suggest the long-anticipated (dreaded?) adoption of those controversial rules is imminent. Note that the draft rules require a conflict minerals report in a company's second annual report after rule adoption, giving companies at least some time to absorb the rules and implement a system for gathering supply chain information for the report.

    • A few summaries of the SEC Staff's reactions to no-action requests about excluding shareholder proxy access proposals from a company proxy statement are here and here. It does not appear likely, at least in the short term, that the SEC will re-engage on proxy access rules, despite efforts by some to get this back to the fore (see, e.g., here).

    • Momentum appears to be gaining for mandatory public company disclosure of campaign contributions. See, for example, here, here, here, and here.

  3. PCAOB proposed a new auditing standard, here, relating to disclosure of related party transactions that Towers Watson speculates, here, could involve auditors in executive compensation decisions.

  4. There's lots of talk in the air about "public benefit corporations," a new-fangled form of entity, sort of, that requires directors to consider broader societal goods beyond narrow shareholder value. A useful discussion of benefit corporations from a D&O liability perspective, with links-o-plenty to other information, is here. Another overview is here. Seven states have adopted some variation of the Model Benefit Corporation Legislation, here, and several more are considering adoption, bolstered by an increase in ESG-driven investing (that's "environmental, social and governance"). An entity run by directors not strictly beholden to shareholders or, presumably, to state attorney general offices as are non-profits? What could possibly go wrong?

  5. Finally, Weil Gotshal, which apparently has a lot of time on its hands, has put together a comparison of Corporate Governance Principles and Guidelines from a variety of groups, here, including the American Law Institute, the Business Roundtable, the NACD, the OECD, CalPERS, the Council of Institutional Investors and others.


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February 15, 2012

  1. A smattering of bylaw amendments purporting to make Delaware the exclusive venue for shareholder derivative suits and claims of fiduciary duty breaches followed Vice Chancellor Laster's suggestion in a 2010 case that such provisions would be enforceable. A coordinated smattering of lawsuits challenging the provisions on due process grounds has followed. A summary with links to a smattering of additional information is here.

  2. As noted in a New York Times article, here, insurance regulators in California, New York and Washington have adopted rules requiring insurance companies to disclose how they assess and respond to climate change risk. Among others that pushed for the requirement were Ceres and the California State Teachers' Retirement System, also proponents of the SEC's release of climate change guidance in 2010. (Remember that? Here?) Ceres' description of the shocking inadequacy of climate change responses by insurers is here. Captain Renault's shocked discovery that gambling was occurring at Rick's Café Américain is here.

  3. In contemplation of the upcoming proxy season, note:

    • ISS updated its FAQs about how it assesses executive compensation policies, here.
    • The NYSE notified brokers, here, of corporate governance items it considers "non-routine" that brokers cannot vote on without instruction from beneficial owners. That means it may be harder for public companies to garner approval for "proposals to de-stagger the board of directors, majority voting in the election of directors, eliminating supermajority voting requirements, providing for the use of consents, providing rights to call a special meeting, and certain types of anti-takeover provision overrides."
    • A summary of new compensation disclosures for 2012 is here.
    • The SEC posted a new CDI about appropriate descriptions of say-on-pay proposals in proxy materials, here; notably "[t]o hold an advisory vote on executive compensation" doesn't work.
    • ISS posts a tally of 2012 proxy access proposals here. (Unless you've assiduously avoided reading these alerts, you know these represent the first "private ordering" of proxy access practices following negation of SEC proxy access rules by the D.C. District Court. And did you notice we provided this same link last month? Honestly, pay attention. We're not putting these out there for our health.) Some speculation about whether companies will move to adopt proxy access proposals to fend off more onerous shareholder-proposed versions is here.

  4. The first (of many, we expect) dismissal of a "say-on-pay" lawsuit is here. A summary of the case and commentary are here.

  5. KPMG's discussion of the increased complexity and volume of public disclosure and a handful of suggestions to decrease disclosure overload are here. Speaking of which, note that Forms 10-K (Part I, Item 4) and 10-Q (Part II, Item 4) should now include headings for "Mine Safety Disclosure" (formerly, "Removed and Reserved"). The SEC estimated only 100 companies will have anything to disclose under the mine safety disclosure rules, not to be confused with pending conflict mineral disclosure rules. Also, a summary of financial disclosure challenges in 2012 is here.

  6. Finally, a few litigation items.

    • A useful collection of links to information about M&A litigation activity, which increased in 2011, is here. Perhaps particularly relevant given speculation that 2012 is poised for an uptick in M&A activity (see here).
    • A review of 2011 insider trading litigation is here.
    • A synopsis of noteworthy 2011 Delaware court decisions is here.

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January 11, 2012

  1. The SEC adopted two 2011 rules just under the wire: mine safety disclosure rules, here, and the revised accredited investor definition, here. Each of these was made effective by Dodd-Frank itself, so consider the final SEC rules simply housekeeping and fine-tuning. The SEC also updated its Dodd-Frank rulemaking schedule, here, which now estimates activity within six-month spans rather than more specific periods. It, and other regulators, has missed most of the congressionally mandated implementation deadlines, see here. Here's the slate of SEC corporate governance action in the first half of 2012, by Dodd-Frank section:

    • §952: Adopt exchange listing standards about compensation committee independence and factors affecting compensation adviser independence; adopt disclosure rules regarding compensation consultant conflicts.
    • §§953 and 955: Propose rules for disclosure of pay for performance, pay ratios, and hedging by employees and directors.
    • §954: Propose rules about recovery of executive compensation.
    • §1502: Adopt rules for disclosure related to "conflict minerals."
    • §1504: Adopt rules for disclosure by resource extraction issuers.

    Chairman Schapiro also outlined some corporate governance areas of SEC focus in 2012, here, including proxy plumbing and beneficial ownership reporting changes.

  2. Schapiro's speech did not suggest the SEC will be going back, yet again, to the drawing board on proxy access; she emphasized that private ordering has the potential, over time, to improve shareholder access. ISS is keeping a tally of proxy access proposals for 2012 here.

  3. ISS released a white paper about how it will evaluate company pay-for-performance practices, here, and thus when it will ding board compensation committee members for fostering a "pay for performance disconnect."

  4. ISS also released an update to its Governance Risk Indicators (GRId), a scorecard to identify risky governance practices, here. Public companies may review their scorecards and make corrections between February 20 and 23.

  5. In the latest in the fierce battle for listings, the SEC approved Nasdaq's ability to give away free investor relations services, here. The order follows a previous order allowing the NYSE to do the same thing, here.

  6. As warned last month, here's an additional smattering of 2012 "looks ahead":

    • 12 director issues for 2012, from Deloitte, here.
    • Considerations for public company directors in the 2012 proxy season, here.
    • What's new for the 2012 proxy season, here.
    • What to expect in 2012 (just, you know, generally), here.
    • The corporate governance opportunity for 2012, here.
    • Risk management and the board of directors – an update for 2012, here.
    • Financial Executive International's Top Challenges for Financial Executives for 2012, here.
    • M&A trends for 2012, here.

  7. A survey of executive M&A outlook in 2012 is posted here. Depressingly, confidence seems depressed compared to 2010 and 2011.

    ------------------------------
December 14, 2011
  1. The first annual report to Congress by the SEC's nascent "Office of the Whistleblower" is here. Because the report covers only seven weeks of experience with the new SEC whistleblower reporting and bounty program, it's fair to say that there are no discernable trends, and certainly nothing that should cause you to run out and change your whistleblower policy. That hasn't stopped law firms from discerning trends, however—see, e.g., here and here. Commentators seem split on whether the 334 complaints fielded in the first seven weeks of operation are a lot, but, again, other than the raw number there is little else in the report. No bounties have been paid. Some SEC staff have indicated that, contrary to fears, the quantity of complaints has not rocketed but that the quality is higher, maybe because anonymous reporting means senior employees with better knowledge risk less when they make complaints and because lawyers, some of whom likely are working on contingency, are helping to draft reports.

  2. Also in SEC news:

    • The SEC curbed the ability of foreign private issuers to use a non-public review process in initial public offerings, here.

    • The SEC announced, here, that to enhance the transparency of the filing review process, it will publish comment letters and responses "no earlier than 20 business days" after completing the review, down from "no earlier than 45 days." Presumably, despite the shift from days to business days, and even though "no earlier" means the SEC is living up to its policy no matter how late correspondence is released, we glean from the title of the announcement that postings will be made more quickly.

    • The SEC approved tougher stock exchange listing standards for reverse merger shell companies, see here.

  3. ISS published its 2012 proxy policy updates, available here, for the U.S., Canada, Europe and "other." A few key items:

    • ISS promises better analysis of pay for performance rankings.

    • Its recommendations on proxy access proposals will continue to be made case-by-case, but it announced additional factors it will examine.

    • It will generally recommend voting for proposals to require political spending disclosure, a shift from its case-by-case approach in 2011.

    Glass Lewis also presented a preview of the 2012 proxy season and a recap of 2011 trends, see here.

  4. The first few shareholder proxy access proposals in the wake of the SEC's forced return to the drawing board on mandatory proxy access have been filed for the 2012 proxy season. An update is here. One group's model provision for a proxy access proposal is here.

  5. Proxy Monitor released its analysis of corporate governance and shareholder activism in 2011, here, in which it identifies the small subset of shareholders active in proposing governance changes and suggests that the push for shareholder democracy may be, in practice, a vehicle for special interest influence on corporate action rather than a focus on shareholder returns.

  6. A useful retrospective that slipped our notice in last month's ICYMI, on trends in executive compensation, is here.

  7. As year-end approaches, expect an onslaught of "what to expect in 2012" pieces. A bevy of predictions on what will be important to boards of directors in 2012 is here, here, and here.

  8. In audit news:

    • The PCAOB issued an alert, see here, to flag issues that, in these difficult economic times, might lead to material misstatements and therefore require more attention.

    • The PCAOB issued its annual report cards on auditors, noting that PWC and KPMG fared poorly compared to last year. See here.

    • The European Commission issued its proposed reforms for public company auditors and audits, here, including a proposal for mandatory audit firm rotation, a measure being considered by the PCAOB (see here). The EC proposal contains other reforms, e.g., a ban on non-audit services, already adopted in the U.S. through the Sarbanes-Oxley Act.

  9. Finally, on the private equity M&A front, note:

    • A report on the apparent resurgence of private equity transaction and "management" fees, here.

    • A private equity buyer/public company target M&A deal term study, here.

November 9, 2011

 

  1. The SEC's Division of Corporation Finance recently released:

    • Guidance, here, on disclosures about cybersecurity incidents and risks. The release follows, but isn't necessarily related to, revelations that hackers of Nasdaq's website may have accessed more confidential information than originally thought (see here). As with the SEC's climate change disclosure guidance (remember that? here?), the guidance serves as a reminder that rules exist and that, perhaps, they require disclosures about cybersecurity. Brace yourselves for public companies to largely plagiarize the last two paragraphs of the SEC's introduction to create what could become a standard risk factor. (Honestly, if the SEC is going to use phrases like "[risks] may include, but are not limited to," it's just begging to be plagiarized.)

    • Staff legal bulletin 14F about shareholder proposals under proxy rule 14a-8, here.

    • Staff legal bulletin 19 on legality and tax opinions in registered offerings, here, including an overview of opinion requirements and the staff's views regarding required opinion elements and its practice in reviewing them.

  2. The SEC recently held a roundtable discussion on conflict mineral disclosure rules. The archived webcast is here, a transcript of the meeting is here and the proposed rules from last December are here. The meeting covered the rule's scope and steps for compliance, including supply chain tracking, and the form, content and audit of the required conflict minerals report. Some commentary on the proposed rules and the roundtable meeting is here, here  and here. For detail on the OECD's parallel due diligence guidance, see here and here. Not to be cut out of the action, the nation-state of California recently banned state agencies from contracting with anyone subject to an SEC enforcement action for failing to comply with the federal rules, whatever they may turn out to be (see here). Finally, a summary suggesting SEC cost estimates associated with rule compliance are off by "a lot" is here. (As a possible reference point, recall the SEC's 2003 rules implementing internal control disclosure requirements, here, in which it estimated compliance costs "around $1.24 billion (or $91,000 per company)." That's right, $91,000. Whoops.)

  3. Another SEC roundtable discussion, on disclosing measurement uncertainty in financial reporting, was held yesterday. The briefing paper is here, and we expect a transcript and archived webcast will be posted in the next few days here.

  4. The SEC approved tougher NYSE, NYSE AmEx and Nasdaq listing standards for companies that go public through reverse mergers, here. (Recall the SEC guidance on shell company mergers from September, here, and its public alert from June, here).

  5. ISS released its 2011 U.S. post proxy season report, here. Among the findings, summarized here:

    • Most shareholders said "yes" on executive compensation (92.1% support on average), but companies engaged on the issue and, in some cases, modified pay.

    • An annual say-on-pay is preferred by shareholders (80.1% support on average).

    • "Withhold" votes on directors fell, likely because say-on-pay votes offered an alternative to voting against compensation committee members.

    • Support of board declassification proposals was up (73.5% support on average).

    • Support for environmental and social issues rose to 20.6% on average, and a record five proposals were adopted.

  6. OSHA published "interim final rules" implementing Dodd-Frank revisions to SOX whistleblower protections. Links to the rules and to the portal where you may comment on the rules are here. Note that OSHA compiles a host of whistleblower resources, including links to the 21 whistleblower statutes it administers, here.

  7. Finally, as we approach the end of the year, a few 2011 corporate governance surveys:

    • Davis Polk's review of IPO company governance is here (with controlled IPO companies here).

    • WSGR's survey of venture-backed IPO company governance is here.

    • At the other end of the public company spectrum, Shearman & Sterling summarizes the practices of the 100 largest U.S. public companies in governance, here, and director and executive compensation, here.

    • PWC's annual corporate director survey is here.

    • Stanford Graduate School of Business's survey of whether CEOs make the best board members is here.

    • ISS's annual survey of governance issues is here.

October 12, 2011

 

  1. The FDIC, Federal Reserve, Treasury and SEC published proposed regulations to implement the "Volcker Rule" requirements of Section 619 of the Dodd-Frank Act, which generally would prohibit banks from short-term proprietary trading for their own accounts and from specified relationships with hedge funds or private equity funds. The Federal Reserve's press release, and a link to the proposed regulation, is here. The rule has been characterized by some, pithily but perhaps incorrectly, as one of the "sharpest tools" to prevent future financial collapse due to unchecked speculation by banks.

  2. In news from the Securities and Exchange Commission,

    • The SEC published an updated Financial Reporting Manual, the playbook for the accounting staff in the Division of Corporate Finance and a handy resource for those preparing financial disclosures, here. The update includes a summary of the revisions and "Last Updated" tags in particular sections to help you keep track.

    • The Division of Corporation Finance published "CF Disclosure Guidance" based on its reviews of Forms 8-K reporting transactions, typically reverse mergers, in which shell companies cease to be shells. See here.

    • The SEC decreased securities registration fees by 1.2%, to $114.60 per million of aggregate maximum offering price of securities. See here. Let the capital raising begin!

    • The SEC published proposed rules prohibiting conflicts of interest in asset-backed securitizations, here, and proposed rules regarding registration of security-based swap dealers and participants, here.

    • The SEC will hold a public roundtable discussion on October 18, see announcement here, to solicit views in advance of publishing proposed conflict minerals disclosure rules.

    • Corporation Finance Director Cross testified before Congress in September on SEC initiatives to foster capital formation without endangering investor protection, which sounds like a splendid idea. Of particular interest are the references to potential activity on the internal controls/SOX 404 front for smaller issuers, summarized here. It's good to see the internal controls debate is still alive and kicking nearly a decade after SOX was enacted.

  3. ISS published, here, its 2011-2012 policy survey, a listing of what investors and issuers think are the hot corporate governance topics. Among its key findings: executive compensation is again a focus for many; more engagement between investors and issuers in 2011; environmental, social and governance issues are viewed by both investors and issuers to have "a significant impact on shareholder value."

  4. Some were taken aback to learn that at least one say-on-pay lawsuit has survived the summary judgment phase, see here, because "the business judgment rule imposes a burden of proof, not a burden of pleading." In its order denying the motion to dismiss, the Court allowed the trial to continue because the plaintiff's claim—that the board's approval of increased 2010 executive compensation despite poor company performance constituted a breach of the duty of loyalty—was "plausible on its face." Note that the claim relates to 2010 pay that 66% of the shareholders voted against at the 2011 shareholder meeting. The plaintiff cited the "overwhelming rejection" as evidence, apparently, that the duty of loyalty was breached. It's hard to imagine plaintiffs ultimately winning these types of cases, assuming directors do not document their intent to "stick it to shareholders" by wasting corporate assets on extravagant executive compensation, but the settlement and nuisance value of suits in the wake of a negative say-on-pay may have just gone up.

  5. The U.S. Department of Labor broadened, in Mendendez v. Halliburton, Inc., ARB No. 09-002 (Sept. 12, 20001), here, the kind of company "adverse action" that could form the basis for a whistleblower retaliation claim under Section 806 of the Sarbanes-Oxley Act, holding that identifying a whistleblower by name to his superiors and co-workers, in contravention of the anonymous reporting system required by SOX (which the Board said is a term and condition of employment), may be enough to support a claim even if a plaintiff can't show "tangible consequences" of retaliation. Recall that, in addition to requiring the much-discussed SEC bounty program (see here), Dodd-Frank added a new cause of action under the Securities Exchange Act of 1934 for whistleblowers who suffer employment retaliation after sharing information about potential securities law violations with the SEC, which allows suit directly in federal court before exhausting administrative remedies; expanded the statute of limitations to up to 10 years; and provided that prevailing whistleblowers can win reinstatement, attorney's fees and double back pay with interest.

  6. To cap off our foray into the world of litigation, a summary outline of the U.S. Supreme Court's "active year in federal securities cases" (apparently, we shouldn't expect any more this year) is here.

  7. FINRA published, here, a reminder that NASD Rule 2711 prohibits firms from exchanging favorable ratings to investment banking clients, and warns that scrutiny is heightened when "an issuer has communicated an expectation of favorable research as a condition of participating in an offering." In the release, FINRA specifies its concern: AIG CEO Robert Benmosche's complaints to senior I-bank executives about unfavorable ratings and his statement that "[F]or the next offering, I want to make sure there is a clear understanding of who AIG is and our trajectory, and why AIG is a stock that investors should own . . .. If I'm confident they can articulate that well, they will have a chance [at being selected as an offering participant]".

  8. Finally, an editorial comment on the "Occupy [insert metropolitan area of your choice]" movement, summarized by a siting in Portland, OR, of two signs held by side by side protesters: "End the FED" and "End Hunger." To us, an accurate statement of the divergent, though not necessarily inconsistent, interests represented at the protest.

 

----------------------------

September 14, 2011

  1. The biggest news in the last month may have been the announcement of what isn't going to happen. SEC Chair Schapiro stated, here, that the SEC will not seek a rehearing or Supreme Court review of the D.C. Court of Appeals decision to vacate SEC proxy access rules but that she remains "committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards." As noted in last month's ICYMI, the SEC's changes to Rule 14a-8 were not affected by the Court ruling. This means shareholders may require a company to include proxy access proposals in its proxy statement, paving the way for company-by-company proxy access standards. It's not clear whether proxy access proposals will have the same type of broad appeal to shareholders as, say, majority voting, and one imagines it may be more difficult for, say, a labor union, to garner support for a self-interested proxy access proposal. Prepare yourself, though, for the onslaught of templates and discussions of purported "best practices" on the subject (coming soon to a law blog near you).

  2. A recent study, available here, suggests that public company directors need not be so fearful of ISS voting recommendations and analyzes factors that influence shareholder votes and director "withhold" votes.

  3. A post on the Harvard Law School Forum on Corporate Governance and Financial Regulation cautions brokers, dealers, accountants and lawyers, here, not to take too much comfort from the recent U.S. Supreme Court decision in Janus Capital Group v. First Derivative Traders, the latest in a series of cases affirming there is no aider and abettor liability in federal securities law. The post notes that Dodd-Frank additions to the '34 Act, effective July 16, 2011, make it unlawful "to make . . . for the purpose of inducing the purchase or sale of such security, . . . any statement which was at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, and which that person knew or had reasonable ground to believe was so false or misleading." Although the holding in Janus suggests only an issuer "makes" a statement in a typical offering document, Dodd-Frank also amended the '34 Act to make liable any person who "willfully participates in any act or transaction in violation of" that provision. It may be that "willfully," which is not defined, requires knowledge that a statement was false, but count on allegations that a participant knew or should have known about the statement to carry plaintiffs past the summary judgment phase of a lawsuit.

  4. The PCAOB published a concept release, here, soliciting comments on "ways that auditor independence, objectivity and professional skepticism could be enhanced," including possible mandatory audit firm rotation.

  5. An article in CFO.com, here, notes the rise in compensation clawback policies in recent years. Recall that Dodd-Frank will ultimately require that stock exchanges require clawback policies as part of their listing standards (see here and here). Although the SEC hasn't yet proposed rules, it did recently flex its SOX 304 muscle (see here) to claw back bonus compensation and stock sale profits from an executive, even though the executive was not directly charged with committing accounting fraud.

  6. A hodgepodge of other items:

    • The SEC adopted changes to Form ID, the form one completes to obtain the EDGAR codes that are a prerequisite to making filings with the SEC, here.

    • The SEC requested comments, here, on how it should go about its required retrospective review of SEC regulations. On a related note, we couldn't agree more with the view of The Corporate Counsel's Broc "my name sounds like a superhero's" Romanek, here, on the "disturbing trend" of addressing social issues through public company disclosure requirements. Alas, don't expect the SEC's regulatory review to do anything about some of the more ridiculous requirements mandated by Congress, like conflict minerals disclosure, but who knows what the legislative future might bring (see, e.g., here).

    • Perhaps not surprisingly, last month saw the largest number of IPO withdrawals since 2008 and was the slowest IPO month since July 2009. See here. Also, the WSJ notes, here, that most 2011 IPO companies are trading below their IPO prices.

 

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August 10, 2011



You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. The D.C. Circuit Court of Appeals held, here, that the SEC's proxy access rules are invalid because the SEC failed to adequately consider the rules' effect on efficiency, competition, and capital formation as required by the Administrative Procedures Act. This is the latest setback in the SEC's long, bumpy road to proxy access reform, which in modern memory (meaning "since I started paying attention") began back in 2003 (see here) and at one point included dueling rule proposals (see here and here). It could be back to the drawing board, yet again, for the SEC to ramp up its economic analysis, although since the SEC is behind on Dodd-Frank implementation and has further delayed some rulemaking, see here, and may have its 2012 budget hopes dashed by Congress, see here, one wonders whether it will take another decade to get rules in place. In its expression of disappointment about the D.C. Circuit's ruling, here, the SEC noted that the rule allowing shareholders to submit proposals for proxy access, which was stayed by the SEC pending resolution of the challenge to its rules, was not affected by the court's decision. Can you say "private ordering"?

  2. As we warned last month, Dodd-Frank's July 21 birthday occasioned more retrospectives than you can shake a stick at. For a useful summary of implementation in year one, see here, and, for a more positive spin, see here. The editor at ICYMI received The Daily Show retrospective, here, from about 1,000 people. (Warning: Although aired on regular cable and readily accessible on the Internet, we consider The Daily Show segment inappropriate for small children, some securities lawyers, and anyone who will write to us complaining that we included a link to it.)

  3. ISS published its preliminary 2011 proxy season report, here. Included in its "key takeaways":

    • company compensation practices garnered 91.2% approval on average;
    • shareholders at 1.6% of companies said nay on pay;
    • annual say on pay is clearly favored by investors;
    • board declassification proposals got more support;
    • support for environmental and social shareholder proposals rose (to 20.6% on average); and
    • opposition to director nominees decreased, which was attributed to more engagement due to "say on pay" implementation.

  4. The SEC adopted, here, Dodd-Frank mandated rules to decrease reliance on credit agency ratings, replacing rating criteria for registering non-convertible debt securities on short forms S-3 and F-3 with a new four-part test. Some might consider Congress's implied views of ratings agencies in Dodd-Frank presciently self-serving, given the astounding recent downgrade of U.S. Treasury debt by S&P, see here. The SEC also re-proposed a rule regarding shelf eligibility conditions for asset-backed issuers, here.

  5. The FDIC adopted final rules, here, for the clawback of compensation from former and current executives and directors "substantially responsible" for the failed condition of covered institutions. And, speaking of clawbacks, note the SEC Commissioners' rejection of its enforcement staff's proposed settlement of its first ever effort to claw back compensation under Section 304 of the Sarbanes-Oxley Act from an executive not accused of complicity in accounting fraud. See here.

  6. Expect whistleblower bounty rules from the Commodity Futures Trading Commission this week, see here. The CFTC rules, which haven't gotten nearly the play of the SEC's whistleblower bounty rules, could be a double whammy for firms subject to regulation by both agencies. On the topic of the SEC's whistleblower rules, an admonition to take a breath, calm down, and do the best you can with your whistleblower system is here.
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July 13, 2011

  1. The Dodd-Frank Act turns one year old on July 21! Deftly maneuvering ahead of the slew of retrospectives we anticipate on July 22, a review of what the SEC has accomplished under the Act so far is here. The biggies, at least in the governance world, are:

    • Final say-on-pay rules, here. As noted in last month's ICYMI (see also here), say-on-pay litigation quickly followed, including an action filed last month in New York against BNY Mellon in which the plaintiffs did not let shareholder approval of pay practices stand in the way of their fiduciary breach claims.

    • Final whistleblower bounty rules, here. The Internet teems with secondary resources about whistleblower systems and the SEC's bounty program. A recent suggestion of "what corporate managers should know about the SEC whistleblower rules" is here.

    Proposed rules covering a slew of other governance and disclosure items under Dodd-Frank, now slated for adoption in the second half of 2011, include:

    • compensation committee and adviser independence rules;
    • conflict minerals, mine safety and resource extraction disclosures;
    • pay for performance disclosure;
    • pay disparity disclosure (but see a possible correction of this one, here);
    • compensation clawbacks; and
    • director and employee hedging disclosure.

    Don't be surprised if adoption of some of the proposed rules slips further, as has been the trend under the ambitious rule-making agenda imposed by Dodd-Frank. See page 11 of the progress report here.

  2. Keep in mind that the D.C. Court of Appeals may, any day now, issue a ruling on shareholder access to a public company's proxy statement, either clearing the decks for implementation or sending the SEC back to the drawing board yet again. For the last we heard on the issue, and a suggestion that business groups may have the upper hand in the case, see here, here and here.

  3. The SEC updated its Financial Reporting Manual, its playbook for accounting review of public filings, here. The SEC added a helpful "summary of changes" section to the manual.

  4. The SEC adopted and changed a few Compliance and Disclosure Interpretations, including some about compensation-related items. A description of the changes is here.

  5. The SEC staff also recently published observations, here, on common problems with XBRL implementation.

  6. The IRS proposed "clarifying" §162(m) regulations, here, that emphasize that (a) an incentive plan must specify maximum individual awards and (b) the transitional relief for private companies that go public does not apply to restricted stock units, phantom stock or other equity-based compensation except "stock options, stock appreciation rights, and restricted property." Recall, generally, that regulations under §162(m) allow exclusion of "performance-based compensation" from the $1 million cap on compensation tax deductibility for publicly traded companies and that transition rules provide that §162(m) does not apply to compensation paid pursuant to a plan or agreement that existed while the company was private.

  7. The PCAOB released a concept release on the possible revisions to standards for reports on audited financial statements, here, and announced a public roundtable on the topic to occur sometime later in 2011.

  8. The FTC and DOJ jointly published changes to the Hart-Scott-Rodino premerger notification form, generally expanding the information required to be provided. The final rule is here and the new notification form is here.

  9. ISS posted its 2011-2012 policy survey, here. This is your chance to influence ISS voting guidelines, at least until access to the survey ends on August 3.

  10. Finally, the NYSE released an Information Memo earlier this month, here, the subject of which is proper conduct at the NYSE, including on the trading floor. The list of prohibited activities makes the NYSE trading floor seem like a super fun place, at least before distribution of the memo, which prohibits "roughhousing", "use of air horns", "practical jokes", "smoking", "running," "consumption of alcoholic beverages" and "possession of firearms, illegal weapons and fireworks." It is encouraging to note NYSE policies also strictly prohibit gambling, including "organized for-profit betting activity relating . . . to outside events." Uh, wait . . . .

 

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June 15, 2011


You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. Final SEC whistleblower rules, here, will be effective August 12, 2011. A brief outline:

    • Whistleblowers who provide voluntary, original information to the SEC that leads to SEC sanctions over $1 million can earn a bounty.

    • Whistleblowers need not report concerns to the company first, but internal reporting is a factor the SEC will consider when determining the size of the bounty, and the whistleblower may get credit for its information and additional information the company self-reports after the whistle is blown.

    • If your job is compliance, including internal and external lawyers and accountants, you are not eligible for a bounty, except if the SEC really wants to give you one. (Or, more formally stated, if your disclosure was necessary to prevent "substantial injury to the financial interest of property of the entity or investors" or "conduct that will impede an investigation of the misconduct.")

    Many had hoped internal reporting would be a prerequisite to a bounty, but alas, no. If you are overcome by the prospect of wading through the 305-page release, have no fear. The nation's law firms have, as usual, come to the rescue. A few summaries of the rule are here, here, here, here, here, here . . .. Perhaps not surprising, the "what to do now" sections of law firm memos amount to little more than "make sure your internal whistleblower program works," although some add that you should make sure it works before the end of the 120-day "look-back" in the rules. (If a whistleblower reports to the SEC within 120 days of reporting internally, the SEC uses the internal reporting date, not the later reporting date to the SEC, to determine priority over another whistleblower who reports the same information directly to the SEC.)

  2. Generally in the vein of SEC enforcement efforts, note the SEC's first ever use of a deferred prosecution agreement, here, for FCPA violations, a tool it announced last year to encourage companies to provide information about misconduct and assist with an SEC investigation.

  3. A summary of "Say on Pay So Far," which touches on ham-fisted ISS voting policies, among other things, is here. One answer to the question "so what if my shareholders don't like my pay practices" is, apparently, "litigation." See, for example, the summaries here and here about the lawsuit against Umpqua Bank being litigated mere blocks from ICYMI's world headquarters in Portland.

  4. The SEC proposed, here, Rule 506 "felon and bad actor" provisions that implement Dodd-Frank Section 926. Under the proposed rules, anyone with a disqualifying event, including one that occurred before the rules are adopted, can no longer rely on Rule 506, the mother of all private placement exemptions. Events that disqualify include criminal convictions, injunctions and restraining orders, SEC disciplinary orders, suspension or expulsion from a securities exchange, and "U.S. Postal Service false representation orders," whatever those are.

  5. Nasdaq proposed additional listing requirements, here, for companies that go public through shell company transactions. Among other things, the shares of the combined company must have traded on the OTC market or another national securities exchange for six months and maintained a bid price of at least $4.00 for at 30 of the last 60 trading days.

  6. It's always useful to remind those around you of the perils of insider trading—not only "bad," as we say in the legal business, but often easily caught. Summaries of recent enforcement actions, some brought only on evidence of "suspicious trading" and some involving misappropriation by family members, are here. Of course, not all who illegally trade are particularly subtle or, you know, smart: see here.

  7. In a speech that likely caught the attention of accounting firms, new PCAOB chair Jim Doty lamented, here, the persistent lack of auditor independence and skepticism, going so far as to suggest mandatory audit firm rotation.

  8. In a narrow 5-4 vote, the U.S. Supreme Court held, in Janus v. FDT, here, that an investment fund manager will not be held liable under Rule 10b-5 for material misstatements in the prospectus for one of its funds. The fund and not the manager, which was a distinct legal entity, "made" the statements in the prospectus, reasoned the Court. Devious lawyers salivate at the prospect of operating all public companies through separate management companies, allowing them to make grand statements without cowering in the safe harbor of '33 Act Section 27A, unlike their wimpy competitors. (No, not really. No one is salivating or planning any such thing.)

  9. Finally, the SEC re-adopted Rules 13d-3 and 16a-1, here, to ensure existing beneficial ownership rules continue to apply to persons who purchase or sell security-based swaps after the effective date of new Section 13(o) of the '34 Act, which was superfluously added by Dodd-Frank.

 

June 15, 2011


You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. Final SEC whistleblower rules, here, will be effective August 12, 2011. A brief outline:

    • Whistleblowers who provide voluntary, original information to the SEC that leads to SEC sanctions over $1 million can earn a bounty.

    • Whistleblowers need not report concerns to the company first, but internal reporting is a factor the SEC will consider when determining the size of the bounty, and the whistleblower may get credit for its information and additional information the company self-reports after the whistle is blown.

    • If your job is compliance, including internal and external lawyers and accountants, you are not eligible for a bounty, except if the SEC really wants to give you one. (Or, more formally stated, if your disclosure was necessary to prevent "substantial injury to the financial interest of property of the entity or investors" or "conduct that will impede an investigation of the misconduct.")

    Many had hoped internal reporting would be a prerequisite to a bounty, but alas, no. If you are overcome by the prospect of wading through the 305-page release, have no fear. The nation's law firms have, as usual, come to the rescue. A few summaries of the rule are here, here, here, here, here, here . . .. Perhaps not surprising, the "what to do now" sections of law firm memos amount to little more than "make sure your internal whistleblower program works," although some add that you should make sure it works before the end of the 120-day "look-back" in the rules. (If a whistleblower reports to the SEC within 120 days of reporting internally, the SEC uses the internal reporting date, not the later reporting date to the SEC, to determine priority over another whistleblower who reports the same information directly to the SEC.)

  2. Generally in the vein of SEC enforcement efforts, note the SEC's first ever use of a deferred prosecution agreement, here, for FCPA violations, a tool it announced last year to encourage companies to provide information about misconduct and assist with an SEC investigation.

  3. A summary of "Say on Pay So Far," which touches on ham-fisted ISS voting policies, among other things, is here. One answer to the question "so what if my shareholders don't like my pay practices" is, apparently, "litigation." See, for example, the summaries here and here about the lawsuit against Umpqua Bank being litigated mere blocks from ICYMI's world headquarters in Portland.

  4. The SEC proposed, here, Rule 506 "felon and bad actor" provisions that implement Dodd-Frank Section 926. Under the proposed rules, anyone with a disqualifying event, including one that occurred before the rules are adopted, can no longer rely on Rule 506, the mother of all private placement exemptions. Events that disqualify include criminal convictions, injunctions and restraining orders, SEC disciplinary orders, suspension or expulsion from a securities exchange, and "U.S. Postal Service false representation orders," whatever those are.

  5. Nasdaq proposed additional listing requirements, here, for companies that go public through shell company transactions. Among other things, the shares of the combined company must have traded on the OTC market or another national securities exchange for six months and maintained a bid price of at least $4.00 for at 30 of the last 60 trading days.

  6. It's always useful to remind those around you of the perils of insider trading—not only "bad," as we say in the legal business, but often easily caught. Summaries of recent enforcement actions, some brought only on evidence of "suspicious trading" and some involving misappropriation by family members, are here. Of course, not all who illegally trade are particularly subtle or, you know, smart: see here.

  7. In a speech that likely caught the attention of accounting firms, new PCAOB chair Jim Doty lamented, here, the persistent lack of auditor independence and skepticism, going so far as to suggest mandatory audit firm rotation.

  8. In a narrow 5-4 vote, the U.S. Supreme Court held, in Janus v. FDT, here, that an investment fund manager will not be held liable under Rule 10b-5 for material misstatements in the prospectus for one of its funds. The fund and not the manager, which was a distinct legal entity, "made" the statements in the prospectus, reasoned the Court. Devious lawyers salivate at the prospect of operating all public companies through separate management companies, allowing them to make grand statements without cowering in the safe harbor of '33 Act Section 27A, unlike their wimpy competitors. (No, not really. No one is salivating or planning any such thing.)

  9. Finally, the SEC re-adopted Rules 13d-3 and 16a-1, here, to ensure existing beneficial ownership rules continue to apply to persons who purchase or sell security-based swaps after the effective date of new Section 13(o) of the '34 Act, which was superfluously added by Dodd-Frank.
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May 11, 2011


You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. Frankly, not a whole lot of note has happened on the securities law front in the last month, leading to the generally unsatisfactory lead-off items in this issue: the SEC's extension to May 17 of the time period for comment on compensation committee listing standards, here; its proposed definitions of Dodd-Frank terms, including what is meant by "swap," "security-based swap," and "security-based swap agreement," here; and its proposals for the use of credit ratings in SEC rules and forms, here, as it "considers how to implement Section 939(a) of the Dodd-Frank Act." Don't get us wrong, if your life is spent commenting on compensation committee listing requirements, drafting security-based swap agreements, or wondering how the SEC will implement Congress's slap to credit-rating agencies' wrists, there is nothing you could better spend your time reading.

  2. SEC rulemaking on several Dodd-Frank items continues to slip, with planned adoption of its anxiously awaited whistleblower rules now in May-July. (That's right, "anxiously" not "eagerly.") See here. Some speculate adoption could come as early as the end of this month and that corporations won't be happy with the final rule. See here. D&O Diary predicts, here, that "whistleblower" will be the word of the year in 2011.

  3. "Conflict minerals" may well be the words of choice in 2012 (perhaps paired with additional choice words), as the SEC continues to tinker with implementing rules requiring disclosure of a company's use of minerals and derivatives, including gold, tungsten, tin, and tantalum, from bad places in Africa. At least some speculate, here, that the rules, now scheduled for adoption in August, will affect "nearly half of all U.S. public companies" and may require much more attention to, and documentation of, procurement and supply chain management. Yikes.

  4. When ICYMI started its monthly run back in 2003, we had an unending string of entries about internal controls, which most still think are synonymous with "the Sarbanes-Oxley Act." Internal controls are back this month, with the SEC's Dodd-Frank-mandated study of what to do to make the required auditor attestation less burdensome for smaller issuers. Our summary of the conclusions in the 113-page report, here, follows. "Nothing."

  5. As the tally of failed say-on-pay votes continues to inch upward (see here), there is some noise that ignored advisory votes could be an impetus to charge companies and directors with corporate waste and breach of fiduciary duties. See, e.g., here.

  6. The SEC published an investor bulletin, here, explaining the say-on-pay and golden parachute votes. Part, perhaps, of the SEC's efforts to bolster investor education generally, evidenced by its revamped investor education site, here, and its request for public comment on improving investor education, here.
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April 13, 2011


You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. The SEC published, here, proposed rules required by §952 of Dodd-Frank regarding compensation committee independence standards and compensation consultant independence and conflict disclosure. In its proposal, the SEC

    • punts to exchanges the task of defining "independence" for compensation committee members and instructs the exchanges to "consider" only what Congress told the SEC to tell the exchanges to consider;
    • tells exchanges to adopt the compensation committee charter requirements mandated by Congress (again, with no SEC additions), including that the committee "consider" enumerated consultant independence factors before hiring a consultant; and
    • requires additional proxy statement disclosures about compensation consultants, including whether a consultant was hired, the scope of the assignment and material instructions, whether the consultant's work raised any conflicts of interest and how they were resolved, and the total fees if non-compensation consulting fees paid to the consultant exceed $120,000.

    You must feel some sympathy for the SEC as it implements rules it too must find somewhat ridiculous (honestly, who other than a large shareholder do you want deciding how much of the company's money to pay executives?), which could explain its minimalist approach. (Also, don't fret too much about timing and deadlines—although Dodd-Frank says the SEC's rules must be adopted by July 16, the SEC recently, and quietly, extended its anticipated adoption timeline to August-December (here) and, in any case, the exchanges have 90 days after that to propose rules and one year to issue listing standards.)

  2. The SEC, along with six other government agencies, proposed rules on "incentive-based compensation arrangements" at covered financial institutions, here. These have been kicking around for a while, but as a reminder, the rules would require disclosure of "excessive" compensation and compensation that could expose the institution to "inappropriate risks."

  3. For those who have been eagerly awaiting news on the fate of the SEC's proxy access rules, a few morsels to tide you over, from last week's D.C. Circuit Court hearing, are here and here.

  4. The SEC updated its Financial Reporting Manual on April Fool's Day, here. Don't get your hopes up, though, because I'm pretty sure there's nothing amusing in the revisions. (No one at the SEC has exhibited a sense of humor since it was blamed for the Bernie Madoff scandal.)

  5. The SEC's proposal to "readopt" beneficial ownership disclosure rules 13d-3 and 16a-1, here, may leave you thinking: "Doesn't it have better things to do with its time?" The proposal confirms the status quo treatment of security-based swaps after §766 of Dodd-Frank becomes effective July 16, 2011 and dispels any thoughts that an SEC failure to enact rules before July 16 renders the beneficial ownership rules inapplicable to investors that buy or sell security-based swaps.

  6. In its periodic tally of say-on-pay happenings, CompensationStandards.com notes that, as of April 8, company recommendations for say-on-pay frequency among 1,698 companies ran:

    • 51% Annual
    • 43% Triennial
    • 3% Biennial
    • 3% No recommendation

    However, of the 132 companies that recommended say-on-pay votes be held every three years (and for which meeting results are available), 43% have seen their shareholders indicate a preference for annual votes. And a fifth company, Ameron International Corporation, joined the ranks of those whose shareholders rejected pay policies. Fueling the ire of shareholders may be the "I'm not responsible for economic downturns but I am for economic upturns" phenomenon that (may) have led to big pay bumps for CEO pay over the last year, see here and here. The SEC published its "small entity compliance guide" on say-on-pay rules, here, noting the say-on-pay and frequency rules don't apply to smaller issuers until meetings held on or after January 21, 2013, but that golden parachute voting rules apply in forms filed on or after April 25, 2011.

  7. Finally, and as a cautionary note, PWC released its 15th annual Securities Litigation Study, here, and suggested that we're at the precipice of a "new era" as Dodd-Frank rules take effect and enforcement activities increase as the SEC casts its net broader ("oversight will expand to include market participants") and wider ("[p]rovisions of Dodd-Frank also increase . . . extraterritorial jurisdiction in actions alleging violations of US antifraud provisions"), and as its whistleblower system and the promise of riches seeks to expand reporting of securities violations.

 

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March 9, 2011


You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

 

  1. According to CompensationStandards.com's running tally on say-on-pay voting, for the 365 proxy statements filed as of last Friday, company recommendations were running as follows:

    • 50% recommended a triennial vote;
    • 40% recommended an annual vote;
    • 6% recommended a biennial vote; and
    • 4% made no recommendation.

    Compared to earlier tallies, the trend is moving from triennial to annual vote recommendations, which makes sense considering early ballot returns on triennial vote recommendations. "Not good" would be a fair summary, at least from a company perspective. CompensationStandards.com reports that shareholders at 39% of the 74 companies (51% if you exclude smaller reporting companies) that recommended triennial votes supported instead an annual vote. (See also the slightly older summary here.)

  2. Glass Lewis posted its 2011 US Proxy Season Preview, here, including an overview of its voting guidelines, which, on a casual review at least, seem consistent with ISS's views on topics like say-on-pay ("no," if we don't like your policies) and voting frequency (annual).

  3. A new source for tracking public company shareholder proposals, Proxy Monitor, is available here. Among other things, it enables searches by industry and type of proposal and provides some statistical analyses of trends. Note too that the first-ever benchmarking study of "The State of Engagement Between U.S. Corporations and Shareholders" is here, although even the study admits it's not clear whether more engagement (the trend) means there will be more or fewer interesting shareholder proposals for Proxy Monitor to post.

  4. Towers Watson published its annual D&O Insurance survey, with insight into changes in coverage, here.

  5. The SEC has updated Compliance and Disclosure Interpretations on Regulation S-K Item 401 and 402 (here), Rule 144 and the use of Free Writing Prospectuses (here) and "say-on-pay" (here). (Hint, search "2011" to find the newest CDIs.)

  6. In the vein of "everyone should have such problems," note the FAA's interpretation disallowing most executive reimbursement of personal airline travel on the corporate plane, here. Relevant to public company disclosure because personal use of the company plane is a disclosable perk. Without actually caring to know, we're confident there's some sort of reason for the FAA's interest in prohibiting reimbursement. Probably.

  7. An admonition for auditors and lawyers to calm down about the interplay between lawyer audit response letters and accounting standards on litigation loss contingencies is here.

  8. In recent SEC activity,

    • The SEC proposed new rules on
      • Security-based swap clearing agencies, here and here.
      • References to credit ratings in Investment Company Act rules, here.
    • The SEC published its US GAAP taxonomy for eXtensible Business Reporting Language (XBRL) here.

 

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February 9, 2011


You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. The SEC adopted final say-on-pay rules, here. Recall that Dodd-Frank requires a say on pay at any meeting held on or after January 21, 2011; the SEC rule amendments, however, aren't effective until April 2011, later for smaller reporting companies. The final rules don't deviate in any interesting way from the proposed rules, but there are a few notable differences:

    • Final rules allow exclusion of a shareholder say-on-pay proposal if the company's policy was approved by a majority, rather than a plurality as proposed, of the shares voted.
    • Final rules require disclosure in a Form 8-K, rather than in a Form 10-K or 10-Q, regarding the company's decision to adopt a policy on the frequency of say-on-pay votes following a shareholder advisory vote on frequency, and new disclosure in the next proxy statement about the frequency of the vote and when the next vote will occur.
    • Final rules clarify when a company can vote signed but uninstructed proxies for its frequency recommendation.

  2. Meanwhile, CompensationStandards.com reports that, as of last week, the split of company say-on-pay frequency recommendations was:

    • Triennial vote: 127 (58%)
    • Annual vote: 66 (30%)
    • Biennial: 13 (6%)
    • No recommendation: 12 (6%)

    CompensationStandards.com also suggests that early trends show shareholder support of annual votes irrespective of company recommendations (see, e.g., here and here), a trend fueled, perhaps, by the statement from a group of 39 institutional investors, here, voicing a preference for an annual vote.

  3. In early returns, shareholders at two companies have said "no" to the company's executive compensation (see here and here). This may have some worried that the shareholder vote won't be the rubber stamp hoped for (recall that there were only three "no" votes last year).

  4. The CFA Institute published a Compensation Disclosure and Analysis Template, here, "as a first step toward making compensation communications clearer and more relevant to investors." Among other things, the template includes an index with links to "good" CD&A disclosure.

  5. The SEC extended the time to comment on Dodd-Frank required rules about Disclosure of Payments by Resource Extraction Issuers, here, Mine Safety Disclosure, here, and Conflict Minerals, here, and pushed back its implementation timeline for disclosure rules regarding:

    • Pay-for-performance (how compensation is related to financial performance).
    • Pay ratios (ratio of CEO pay to average employee pay).
    • Clawback policies (clawback of the compensation of current and former officers upon financial restatement).
    • Hedging policies (whether the company has a policy regarding hedging company stock positions by directors and employees).

    As noted on its scorecard on implementing Dodd-Frank, here, the SEC also:

    • Adopted rules regarding the use of representations and warranties in the asset-backed securities market (here).
    • Adopted rules regarding asset-backed securities' issuers' responsibilities to conduct and disclose a review of the assets (here).
    • Adopted streamlined procedural rules regarding filings by self-regulatory organizations (here).
    • Issued a report to Congress regarding the need for enhanced resources for investment adviser examinations and enforcement (here).
    • Completed its study of ways to improve investor access to information about investment advisers and broker-dealers (here).
    • Issued a report to Congress regarding the study of the obligations of brokers, dealers and investment advisers (here).
    • Proposed rules relating to the use of security ratings by credit rating agencies in SEC rules and forms (here).
    • Proposed rules regarding the registration and regulation of security-based swap execution facilities (here).
    • Proposed joint rules with CFTC regarding reporting by investment advisers to private funds and certain commodity pool operators and commodity trading advisers (here).
    • Proposed rules for the timely acknowledgment and verification of security-based swap transactions (here).
    • Proposed rules regarding suspension of reporting obligations for certain classes of asset-backed securities (here).

  6. The SEC also proposed rules, here, to change the regulatory definition of "accredited investor" to match the statutory change made by Dodd-Frank, eliminating the value of a primary residence from the calculation of net worth.

  7. For those who love the details, the University of Denver Sturm College of Law has collected, here, the briefs filed about the legality of the SEC's proxy access rules, including the SEC's own brief of the issues.

  8. The Financial Crisis Inquiry Commission's 633-page report about reasons for the financial crisis is here. Despite using pithy phrasing like "collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis" and "failures of credit rating agencies were essential cogs in the wheel of financial destruction," the report has garnered criticism from some for being uninteresting, political and, well, bad. See, e.g., here, here, and here.

  9. A slew of federal agencies, including the SEC, released proposed rules, here, under Section 956 of Dodd-Frank that require disclosure by a "covered financial institution" of incentive compensation arrangements that could result in excessive compensation or big losses to the financial institution.

  10. The Federal Trade Commission raised the HSR pre-merger notification threshold to $66.0 million for 2011, a 4% increase from 2010 levels. See here.

  11. Finally, two reminders:

    • Delaware franchise tax is due March 1.
    • Schedules 13G are due February 14, Valentine's Day. Nothing says "I own more than 5% of a public company's stock" like a Schedule 13G.

 

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January 12, 2011


You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. Towers Watson published the results of its mid-December say-on-pay frequency survey, here, revealing that 51% of respondents will recommend annual say-on-pay votes, 39% will recommend triennial votes, and 10% will recommend biennial votes. That jibes with predictions following ISS's recommendation of an annual vote and some emerging views that the frequency of the advisory vote shouldn't much affect how compensation committee members exercise their judgment and fulfill their obligations. Note, however, that expected recommendations from the Towers' survey don't jibe with results from the first 87 companies to file as of January 7, 2011, according to CompensationStandards.com: 52% recommend triennial, 29% recommend annual, 10% recommend biennial, and 9% make no recommendation.

  2. ISS published a few updated FAQs about its compensation policy recommendations, here, including clarifying that it has no policy with respect to management's recommendations on the frequency of a shareholder say on pay.

  3. Shearman & Sterling published its review of director and executive compensation for 2010, available here, "a year of consolidation, rather than innovation, in compensation disclosure" with compensation policies, not surprisingly, reacting to public disclosure requirements. Trends in 2010 included:

    • more attention to the risk profile of compensation strategies;
    • more clawback policies;
    • increased acceptance of shareholder say-on-pay votes; and
    • increased use of independent compensation consultants.

  4. The end of a year marks the publication of retrospectives and prognostications. Here are a few:

    • The Top Ten D&O Stories of 2010 are here.
    • The Top Ten Whistleblower Cases of 2010 are here.
    • Key Delaware Corporate and Commercial Decisions in 2010 are here.
    • A U.S. Health and Welfare Benefit Plans Year-End Wrap Up is here.
    • SEC Enforcement Trends 2011 are here.
    • The top challenges for financial executives in 2011 are here.
    • Key Issues for Directors in 2011 are here.
    • A collection of commentary on potentially significant legal issues in 2011 is here.

  5. The SEC approved, here, the PCAOB rules on auditing standards related to the auditor's assessment of and response to risk here. The rules are effective for audits of fiscal years beginning on or after December 15, 2010.

  6. COSO launched an online survey, accessible here, to gather input for updating its internal control framework, the near-universal standard for assessing the effectiveness of internal control over financial reporting. The survey is open until January 31, 2011, but the expected publication of new standards won't be until 2012.

  7. While some in Congress hope to rescind Dodd-Frank (see here), the EU pushes forward with changes to its Markets in Financial Instruments Directive ("MiFID," amusingly pronounced "miffed"). The proposed rules, summarized here, would, among other things, make it more difficult for non-EU countries to access EU trading markets and increase regulation of derivatives trading.

  8. Because relatively little has happened on the regulatory front over the holidays, we are drawn to include a few items we might not otherwise:

    • Brief analyses of the securities law issues in Goldman's non-public marketing of Facebook shares are here, here, and here. The WSJ reports, here, that the SEC is "examining" its rules in light of Goldman's tack.
    • Kudos to Groupon, which in its press release, here, announced "Groupon Raises, Like, A Billion Dollars" and highlighted its characterization as "'America's best website' by one of Groupon's television commercials."

    Sure, some may question whether it heralds the decline of Western civilization that America's most interesting companies are those that facilitate wasting time with virtual friends and getting killer deals on Bikram Yoga classes. But let's face it, it sure beats vomitoriums and struggling to keep the Goths at bay.

  9. Finally, shame on us for not updating you last month on The Onion's early reporting of Wikileaks' revelations about Bank of America here. Our humblest apologies.

 

December 15, 2010


You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. ISS published its 2011 proxy advisory policy updates, here, including its recommendation that a say on pay be held annually and its list of disfavored compensation practices.

  2. For those struggling with the say on pay frequency recommendation, note that ISS's policy has not stopped the first few companies out of the gate from recommending a triennial vote on pay (see here), stating:

    • Practices to support long-term value should be judged over the long-term ("[A] triennial vote will allow shareowners to better judge our executive compensation program in relation to our long-term performance.").

    • Three years is needed for the company to engage with dissatisfied shareholders and figure out what a no vote means ("An advisory vote every three years will be the most effective timeframe for the Company to respond to shareholders' feedback and provide the Company with sufficient time to engage with shareholders to understand and respond to the vote results.").

    • Shareholders will be unable to assess whether changes in response to a "no on pay" were effective if a vote is held each year.

    Here is a summary of pros and cons to the annual say on pay, and "Eleven Factors to Consider" when recommending the frequency of the vote are here. Additional samples of triennial recommendations are here (Costco) and here (Accenture); a rare biennial recommendation is here (Hormel Foods); an annual recommendation is here (Beazer Homes); and an example of a company making no recommendation is here (Tyco). Best guess based on early returns is that there will be a fairly even split between companies recommending triennial and annual votes.

  3. ISS published its post-mortem of the 2010 proxy season, here, noting less dissent from shareholders than last year as a general matter and that, despite the failure of Motorola, Occidental Petroleum and KeyCorp to get majority approval of executive compensation practices, average support for pay practices was 89.6%, up from 87.4% in 2009.

  4. The Council of Institutional Investors published its review of compensation at Wall Street banks pre- and post-financial crisis, here, and notes a continued failure to appropriately tie compensation to long-term performance.

  5. The challenge to the SEC's proxy access rules continues, with a few new filings in recent weeks. The Business Roundtable and U.S. Chamber of Commerce brief is here, and amicus briefs in support of the plaintiffs were filed by the Investment Company Institute, here, and by the State of Delaware, which claims the SEC's rules run counter to state law rights and Delaware legislation that establishes stockholders' ability to adopt a proxy access regime of their own design.

  6. The SEC updated its financial reporting manual, here, including updates on incentive shares in IPOs, MD&A disclosure, internal controls and selected financial data.

  7. The SEC also proposed rules implementing various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including:

    • Rules related to the Investment Advisers Act of 1940:

      • Defining a "venture capital fund" exempt from registration under the Act, here. (Previously, many advisers relied on the exemption for "private investment advisers," which was replaced and narrowed by Dodd-Frank).
      • With respect to other changes to the Act, here.
      • Providing a temporary rule regarding principal trades with certain advisory clients, here.

    • Rules relating to the process for a registered clearing agency's submission for review of any security-based swap, here, and end-user exceptions to mandatory clearing of security-based swaps, here.

    • Rules relating to mining and natural resources that require public disclosure by reporting companies regarding: 

      • Payments by resource extraction issuers made to foreign governments or the U.S. Federal Government for the commercial development of oil, natural gas, or minerals, here.
      • Specified health and safety violations by mine operators, here (like, say, this one here).
      • Whether "conflict minerals" necessary to the functionality or production of an issuer's product originated in the Democratic Republic of the Congo or an adjoining country, here. (Obviously, a sine qua non of Wall Street Reform.)

  8. Audit Analytics published its review of six years of SOX 404, here, noting the consistent decline in year-over-year adverse audit attestations. But, since there's nothing that can't be improved, COSO announced, here, that it will update its internal control integrated framework to "provide more comprehensive and relevant conceptual guidance and practical examples."

  9. PricewaterhouseCoopers published its summary 2011 M&A outlook, here, which it suggests is "better." Given this, the discussion of "hybrid go-shop" provisions here might be of interest.

  10. As the 2010 federal tax bill moves from the Senate to the House today, consider perusing the Joint Committee on Taxation's analysis of the bill, which is the prepackaged compromise between the Obama Administration and Congressional leaders, available here.

  11. Finally, leave it to lawyers to dampen your holiday cheer with a "Holiday Party Liability Prevention Checklist," here. For convenience, the checklist might be reduced to this formula: Open bar + mistletoe + unaccompanied employees = problems. In this holiday season, perhaps even more horrifying than potential holiday party liability is the prospect of receiving a Christmas e-card like the one here from a colleague at work. (But man, can those lawyers dance). Happy festival of lights! .



November 10, 2010


You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. The SEC published proposed bounty program rules that provide, among other things, guidelines to potential whistleblowers on what the awards might be under the Dodd-Frank mandated bounty program. The SEC's press release is here and its proposed rules are here. A summary of the proposed rules is here. To its credit, the SEC tries to address some obvious pitfalls; e.g., that monetary rewards mean the death of internal reporting, at least absent matching company bounty programs, and that advisers will try to cash in on clients' missteps. We'll see how these play out and whether the rules will spawn a new industry à la the Section 16 bounty program, but it's perhaps telling that the SEC has established a $452 million whistleblower fund to pay out claims, see here. Good luck to the SEC in separating the "there's a serious securities law violation" wheat from the "I hate my boss" chaff as its reporting system rolls out.

  2. The SEC also proposed rules for "say on pay," which, recall, must be included in upcoming proxy statements irrespective of whether final rules are adopted. The proposed rules, here:

    • Require an advisory vote on executive compensation disclosed under Regulation S-K, Item 402, including the Compensation Disclosure and Analysis section. (The SEC doesn't require a particular form of shareholder resolution.) CD&A would require discussion of how or whether the advisory vote guides compensation policies.

    • Require an advisory vote, at least every six years, on whether the say on pay should occur every one, two, or three years. Most companies, we suspect, will recommend an advisory vote every third year to avoid short-termism and expense, but must make clear that the vote is not an up or down say on the recommendation; ISS's draft policy recommends an annual vote, see here, purportedly to increase accountability and communication and to avoid confusion on what shareholders are voting on. Shareholders must be given four choices on the proxy card—one year, two, three, or abstain. The frequency must be announced in the first 10-Q following the advisory vote.

    • Require an advisory vote on golden parachute arrangements with named executive officers under new Regulation S-K Item 402(t), which looks a lot like Item 402(j), but which must include tabular disclosure. The advisory vote isn't required if the arrangement was previously approved by shareholders. On a somewhat related note, check out Frederic W. Cook's survey of the evolution of change-in-control practices, here, which it attributes to pressure from shareholder activists.

    • Clarify that including the say on pay does not necessitate filing a preliminary proxy statement.

  3. In a related release, the SEC also proposed rules, here, that would require institutional investment managers subject to Section 13(f) of the Securities Exchange Act to report annually how they voted proxies on executive compensation matters.

  4. Among other Dodd-Frank (see the SEC's scorecard, here) and non-Dodd-Frank related activities the SEC also:

    • Proposed rules intended to curb fraud, manipulation, and deception in connection with securities-based swaps, here, which certainly sounds like a good idea on its face.

    • Proposed rules to require an issuer registering the offer and sale of an asset-backed security to perform a review of the assets underlying the securities, here.

    • Sought comment on ways to reduce the burden of complying with the auditor attestation requirements of SOX 404(b), here.

    • Extended until February 4, 2011 compliance with short sale rules (Regulation SHO), here.

    • Adopted rules, here, requiring brokers and dealers with access to trading securities to establish, document, and maintain a system of risk management controls.

  5. The ICYMI staff, which recently requested confidential treatment of information in a filing with the SEC, found itself pondering: "You need a more detailed justification for why the client's bank account number should be kept confidential? Seriously?!?" With the release of the SEC Inspector General's report last month, here, and its admonishment that the Division of Corporation Finance's review of confidential treatment requests is not "robust" enough, the focus by the SEC on CTRs is understandable. (But guys, seriously, a bank account number?)

  6. It is worth being reminded, as we occasionally are by SEC enforcement actions, that the SEC takes Regulation FD violations seriously. The SEC enforcement action against Office Depot and its CEO and CFO, described here, also reminds us that disclosure through a wink and a nod is still disclosure. So don't be cute. Among other useful tips: company-initiated, private calls with analysts are risky; calls at the end of a quarter, when data appears firm, are even riskier; stock price movement following the contact will draw the attention of regulators and is compelling evidence that the information was material.

  7. The Business Roundtable and Department of Commerce and the SEC's joint motion in the D.C. Circuit Appeals Court for expedited consideration of the challenge to the SEC's proxy access rules, here, notes that the proposed timeline in the case "necessarily means" that the SEC's proxy access rules "will not be available for use by shareholders during the 2010-2011 proxy season." The delay has also provided a "useful natural experiment" that allowed researchers to assess share value changes resulting from the delay. Their study, here, suggests the financial markets place a positive value on shareholder access. Because we're nothing if not fair and balanced, except when we don't want to be, a discussion of the proxy access debate, with links to studies suggesting proxy access decreases shareholder value, is here. At least one study, available here, suggests all the debate on proxy access isn't really worth it because the effect of proxy access will be insignificant.

  8. ISS is soliciting public views on its proxy voting policies, here; it also posted feedback from its 2010 survey on corporate governance issues, here. (With the recent sale of RiskMetrics to MCSI, Inc., it looks like we'll start calling it "ISS" again.) Just for fun, here is a point and here is a counterpoint on the usefulness of proxy advisory services. See also the commentary on the SEC's proxy plumbing rules, here, where commentators battle over appropriate regulation of advisory services.

  9. The SEC recently posted a form letter to CFOs, here; a reminder that material risks related to real estate foreclosures have always needed to be disclosed and, apparently, are still manifest enough to warrant the SEC's form letter.

  10. The FASB will delay implementing its controversial loss contingency rules, see discussion here, which were slated to apply at year-end.

  11. The U.S. Sentencing Commission's sentencing guidelines, here, took effect November 1, 2010. Of import, of course, is consideration of whether changes to your compliance program are merited based on the USSC's views of what an effective compliance program that will reduce penalties looks like (as ICYMI reported back in May 2010, no surprises here—but note, again, that direct reporting by the compliance officer to the board or audit committee is a plus).

  12. Lexis/Nexis announced its Top 25 Business Law Blogs of 2010 here.

  13. Korn/Ferry International's report on board practices at the 100 largest market cap companies in the U.S., as a bellwether of "emerging best practices," is here.

October 13, 2010


  1. The SEC ordered a stay of its proxy access rules, here, on a motion filed by The Business Roundtable and the U.S. Chamber of Commerce, which also filed a joint petition for review of the rules with the D.C. Circuit Court, here. The effectiveness of both Rule 14a-11, mandating inclusion of shareholder director nominees in specified circumstances, and Rule 14a-8, allowing shareholder bylaw amendments to expand proxy access, is stayed pending action by the D.C. Circuit Court. The petition for review challenges the rules based on alleged violations of the Administrative Procedure Act and the First and Fifth Amendments to the U.S. Constitution. Goodness knows whether some extraordinary maneuvering will get these rules back on track for the 2011 proxy season, but it seems likely that the prior deadline (if you mailed your last annual meeting proxy materials on or after March 13, 2010, the rules applied to you) is moot and that calendar year-end public companies will enjoy another year's grace.

  2. Most law firms have taken the view that the timelines specified in Rule 14a-11, which dictate the notice period for shareholder director nominees, trump advance notice bylaw provisions, which meant that these provisions would need to be amended to exclude 14a-11 proposals like they exclude properly brought 14a-8 proposals. Hold your horses, says Cooley LLP, here, which cites an SEC staff member's suggestion that 14a-11 proposals are subject to advanced notice restrictions despite the specific timeline in the rules. It's fair to say the staff member's conclusion seems "odd" given the history of the provision and what it's intended to achieve; of course, if you roll the dice on your advanced notice provision, here's hoping you're not the test case for a shareholder suit challenging exclusion of its director nominee.

  3. The SEC published its schedule of Dodd-Frank related rulemaking, here (see also the NERA Economic Consulting list of rulemaking and studies, here). Noteworthy is the suggestion that much of the disclosure and governance requirements likely will not be in place until the 2012 proxy season. An exception is the "say on pay" and the "say on say-on-pay frequency," with respect to which the SEC will soon adopt implementing rules but which are required in proxy statements for meetings after January 21, 2011 irrespective of SEC rules.

  4. The SEC also lauds its progress on implementing Dodd-Frank, here. Among its achievements to date:

    • Conforming changes to its rules and forms that implement Dodd-Frank's permanent exclusion of auditor attestation requirements for non-accelerated filer internal control reports, here.

    • Rescission of rules that provided bounties for reporting insider trading that led to the recovery of civil penalties, here. The rules were rescinded because Dodd-Frank deleted Section 21A(e) of the Securities Exchange Act, the statutory basis for the rules, and adopted a broader bounty program under new Section 21F of the Act.

    • Final rule removing from Regulation FD the exemption for credit rating agencies, here. Because no SEC discretion was involved in implementing the language of Dodd-Frank, no public comment was sought on the rule. Chalk this up in Congress's column of "fixing problems that aren't" – most credit agencies are not, as they once might have been, "investment advisors" that are captured by regulation FD's, so the specific exemption for credit agencies likely wasn't necessary to begin with. In any case, signing confidentiality agreements with rating agencies, which will quickly become "standard" if it isn't already, gets you out of Regulation FD problems.

    • Proposed rules to exclude "family offices" – those managing their own families' financial portfolios – from regulation under the Investment Advisers Act of 1940, here.

    • Proposed rules for enhanced disclosures by issuers of asset-backed securities, here and here.

    • Proposed rules to mitigate conflicts of interest involving security-based swaps, see press release here, and adopted a final interim rule requiring reporting of security-based swaps entered into before passage of Dodd-Frank, here.

  5. Congress has already corrected a Dodd-Frank misstep, deleting the broad confidentiality provisions and SEC exemption from FOIA under Section 929I but clarifying when the SEC can use existing FOIA Exemption 8 to keep matters confidential, here. This despite the SEC's assurance that it would only use its broad exclusion for good (see staff guidance, here).

  6. A brief overview of the enforcement outlook under Dodd-Frank, largely a summary of the views of presenters at a recent audio conference, is available here.

  7. For a brief respite from Dodd-Frank commentary, consider the Treasury Department's Two Year Retrospective on the TARP, here, in which it states that "by objective measures, TARP worked."

  8. The SEC issued guidance on the presentation of liquidity and capital resource disclosure in MD&A, here, and simultaneously issued proposed rules to enhance disclosure about short-term borrowings, here. Generally, the proposed rules seek to let investors know whether short-term borrowings reported at the end of a reporting period accurately reflect the company's liquidity and investment risk, and whether they are consistent with amounts during the reporting period. Or, as commentators have more concisely put it, the rules address "balance sheet window dressing."

  9. In SRO news (that's "self regulating organization," like stock exchanges or FINRA):

    • The SEC approved the NYSE's rules disallowing discretionary broker voting on executive compensation matters, here, and Nasdaq's similar rules, here.

    • The SEC approved new FINRA Rule 5131, originally submitted WAY back in 2003 when it was still NASD, here. The rule is intended to curb abuses in how underwriters allocated and distributed IPO shares, including bans on "quid pro quo allocations," threatening to withhold shares for excessive compensation, and "spinning," allocating shares to directors or executives of the issuer, essentially as kickbacks. (Dear Lord – were people actually doing this stuff in the dot.com days?)

    • A NYSE independent commission published its list of 10 Core Corporate Governance Principles last month, here. Nothing surprising, but it was interesting to note the report's focus on shareholder responsibility (Principle 3) and its concern with unregulated proxy advisory services (Principle 8).

  10. The SEC's Division of Corporation Finance updated its Financial Reporting Manual as of June 30, 2010, so it doesn't include Dodd-Frank changes, here. (You can search the report for "/10" to find the updated sections.)

  11. The PCAOB published its observations of auditor failures during the economic crisis, here. Count on your auditor, and perhaps your audit committee, increasing its focus on the aspects of your financial statements noted in the report.

  12. Shearman & Sterling published its eighth annual survey of director and executive compensation for the 100 largest public companies, here, in which it notes the trend toward consolidation, rather than innovation, of compensation practices. S&S's report follows that of Towers Watson's bulletin on the flatness of director pay in 2009 over 2008, here.

  13. In litigation news:

    • The European Court of Justice recently held that attorney-client privilege can't be formed with an in-house lawyer, at least in the specific type of case before the Court. Analysis of the Court's decision in Akzo Nobel v. Euro Commission is here.

    • A summary of the 15 SEC enforcement actions you should know about, according to the Deputy Director of the SEC's Enforcement Division, is here.

    • The U.S. Second Circuit held in In re DHB Industries, Inc. Derivative Litigation that a settlement agreement that includes a release and indemnification for liability under the clawback provision of SOX Section 304 is uneforceable, because it that would vitiate the ability of the SEC and the Justice Department to enforce the provision against a CEO and CFO. See here.

    • The Delaware Chancery Court, in Airgas, Inc. v. Air Products & Chemicals, Inc., here, held valid a bylaw amendment that advanced Airgas's annual shareholder meeting by about eight months to facilitate a speedier takeover of its staggered board. The Court spends most of its time analyzing what "annual" and "full term" mean before concluding that the bylaw amendment was valid under the Delaware General Corporation Law and under Airgas's charter. The Court also suggests how one might better draft staggered board provisions. For us, though, the most important takeaway is to consider making the shareholder supermajority requirement apply to any bylaw change not approved by the board, not just specified changes as Airgas's bylaws did.

    • The Delaware Supreme Court upheld the Chancery Court's decision in Selectica, Inc. v. Versata Enterprises, Inc., here, a case that keeps commentators buzzing, mostly because it involves the first ever triggering of a poison pill and the first decision on a pill designed to protect net operating losses.

  14. Finally, a note on blogging. While it's pure Americana to both aspire to be and hate the super rich, or even those slightly better off than you, it's disheartening to see the backlash against the unfortunate Chicago law professor whose post on Truth on the Market, "We are the Super Rich," eventually led to his public apology, sort of (here), and his exodus from the blogging world. Sure, it may have been ill-advised to decry the Obama Administration's tax policies by citing that you already pay more in taxes than most people earn and that increased taxes might force you to give up your lawn guy and your housecleaner, but personal attacks? Goodness. (Of course, it's not without some sour grapes we note that this client alert has failed to inspired the same kind of passion from its readership. Rest assured that our editors will resort to attacks on world religions, lengthy and vitriolic discussions about what should or should not be built at Ground Zero, or (gasp!) politics if that's what it takes to gain a little notoriety, because apparently corporate governance and securities law is not doing it for us.)

 

September 15, 2010


  1. The biggest news of the last month is the SEC's adoption of proxy access rules, here. "Smaller reporting companies" get a three-year reprieve, but for others the rules almost certainly will be effective for the upcoming proxy season. The final rules are simpler than the proposals that have been kicking around for a few years. Generally, the rules provide for (a) a 3%, three-year shareholder's right to get director nominees on the ballot and in the company's proxy statement and (b) shareholder rights to require that a company include in its proxy statement a proposal to expand shareholder proxy access rights. Summaries of the rule are not lacking (see, e.g., here, here, here, and here). Now, you should:

    • Ensure your advance-notice bylaw provisions work, which could be as easy as providing that the notice requirements in the bylaws are satisfied if the shareholder complies with Rule 14a-11 (but for Pete's sake consult a lawyer to assess this and legal up the language). Note too that the proxy access rules are keyed off the prior year's annual meeting mailing date, and that if you move your meeting date too far, you now need to announce that on a Form 8-K.

    • Make sure majority voting policies, if you've got them, don't apply to contested director elections. (And boy, they better not.)

    • At least consider whether you've got shareholders likely to make nominations this year, and, if you do, what you will likely do about it—fight, negotiate, curl up in a ball and will it all to go away?

    It will still be difficult for shareholders to get nominees elected and the rule recognizes that by exempting from the proxy rules communications aimed at garnering a 3% shareholder group. Nonetheless, companies can expect, as always, that activists will make use of the new rules as negotiating leverage and to force a discussion. Even though the new rules aren't yet effective, one shareholder couldn't wait to start flexing its newfound muscle and has already announced its intent to nominate directors. See here.

  2. Even though the SEC waited for specific Congressional authorization and ballooned the final rule to 451 pages, many expect corporate groups will challenge the legality of the new proxy access rules, although on what basis is not clear. See here and here. If you really hate the new proxy access rules, you might take a spin through Professor Verret's proposed solutions to thwart and limit the reach of proxy access, here, including one novel director resignation defense he describes as a "scorched earth defensive tactic." If nothing else, we are enjoying the passion this new rule has evoked.

  3. Although proxy access has securities lawyers all atwitter (see, e.g., the declaration of the 2010 proxy season as "a brave new world," here), it apparently is of less immediate concern to directors and inside legal counsel, at least according to a joint Corporate Board Member/FTI Consulting study, here, each of which was much more worried about executive compensation and governance and compliance.

  4. Note that the deadline for your very last shot at correcting non-409A compliant agreements is December 31, 2010. IRS Notice 2010-6, here, says so.

  5. The SEC issued two releases seeking comments on IFRS implementation, one tackling contractual and corporate governance issues, here, and the other U.S. investors' knowledge and ability to use IFRS, here. A snapshot estimate of when new accounting changes resulting from GAAP and IFRS convergence will hit is provided by CFO.com, here.

  6. The New York State legislature has corrected the ill-conceived Power of Attorney changes it adopted last year, which were intended to cure estate planning problems, retroactive to the time of adoption. A summary of the amendments is here. Among other things, this means you won't have to ask your directors to drive to Connecticut to sign POAs in connection with registration statements. So, huzzah.

  7. A few items on Dodd-Frank:

    • A summary of its whistleblower protections is here.

    • Notes on the clawback provisions are here.

    • Dodd-Frank "compensation action items" are here.

    • An article on the "logistical nightmare" of "pay disparity" disclosure (the ratio of the CEO's compensation to the average employee's compensation) is here.

    • A condemnation of Dodd-Frank generally, for what it's worth, is here.

  8. Those concerned with poison pills might review the recent Delaware Chancery Court holding in Yucaipa American Alliance Fund v. Riggio, here. Commentary on the case is here. The Conglomerate's Poison Pill Forum, here, discusses Yucaipa and more.

  9. A recent Delaware Supreme Court case, City of Westland v. Axcelis, relating to a board's refusal to accept the resignations of directors who did not receive a majority vote, is here. While the plaintiff lost its bid to gain access to corporate records under DGCL §220, the Court noted that it might have succeeded had it pled that its purpose was to "determine an individual's suitability to serve as a director." While not an alarming decision, it does provide a pleading roadmap to shareholders and a caution that boards, although protected by the business judgment rule, should be careful and document the reasons for rejecting resignations.

 

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August 11, 2010


  1. Law firms and others have pulled out the stops to summarize, with an occasional dash of analysis, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted July 21, 2010. (For those interested in stepping back to see how the sausage was made, so to speak, see the Washington Post article here.) A handful of comprehensive (read, "really long") summaries are here (Gibson Dunn), here (Goodwin Procter), here (Haynes and Boone), here (Nixon Peabody), here (Cleary Gottlieb), and here (Davis Polk). A few targeted summaries of the Act's executive compensation and governance requirements for public companies are here (Cleary Gottlieb), here (Deloitte), here (Kirkland & Ellis chart), here (Gibson Dunn), and here (Goodwin Procter). Public companies need not panic, just yet, about these requirements since implementing rules are still to come. Depending on SEC action, however, public companies will likely face the following next proxy season: (1) a say on pay, (2) more disclosure about compensation (surprise!) and disclosure about the CEO/Board Chair role(s), employee and director hedging transactions, and compensation clawback policies, and (3) potential unwanted director nominations.

  2. It is perhaps telling of the monumental regulatory work yet to come that the SEC has opened a comment portal on Dodd-Frank even before proposing specific rules, here.

  3. The SEC updated, here, Securities Act Compliance and Disclosure Interpretations 198.08 and 233.04-.08 to react to Dodd-Frank. (The updated CDIs are easily found by searching "July 27, 2010.")

  4. The NYSE's information memo, telling everyone that discretionary broker votes won't be allowed on compensation matters after July 21, 2010, including any advisory vote on executive compensation, is here.

  5. In addition to the big effect Dodd-Frank will have on the financial sector and the medium-sized effect it will have on public companies generally, its change to the "accredited investor" definition in Regulation D means the class of people to whom companies can efficiently sell unregistered stock is smaller. Section 413 of the Act excludes the value of an investor's primary residence in calculating whether the investor (and spouse) has a net worth of at least $1 million. Here is an SEC CDI addressing how "primary residence value" should be calculated. Although the SEC has yet to modify the definition in its rules, the change is effective under Dodd-Frank as of July 21, 2010.

  6. Perhaps the most widely publicized mistake (to date) in Dodd-Frank, the odd grant to the SEC of immunity from Freedom of Information Act requests, appears headed for correction. See here and here.

  7. Many speculate that the SEC will (finally) adopt proxy access rules at its open meeting at the end of this month, see here, throwing open the gates to director nominations by shareholders in the next proxy season. As reported last month, some large institutional holders appear eager to flex anticipated new muscle and are assembling databases of potential director nominees. See here, here, and here.

  8. A few items of note regarding public company disclosure:

    • As reported by CFO.com, the SEC appears to have stepped up its comments to the risk factors described in public company filings, here.

    • Vladimir v. Bioenvision, Inc., here, reminds us that disclosure of acquisition negotiations is not automatically required under federal securities laws. More generally, it reminds us that there is not, and has never been, a general legal requirement that all material information be disclosed. (See also Levie v. Sears Roebuck & Co., here, and the U.S. Supreme Court's opinion in Basic v. Levinson here, just to round out your research.)

  9. The SEC stepped up its regulation of investment advisers recently, with

    • the adoption of rules to ban "pay-to-play" arrangements, here,

    • changes to Form ADV and related rules under the Investment Advisers Act to require supplemental disclosure to new and prospective clients, here, and

    • its request for public comment to inform its Dodd-Frank mandated study of the obligations and standards of care of broker-dealers and investment advisers, here.

  10. The PCAOB adopted new auditing standards for risk assessment, described here, which, if approved by the SEC, will be effective for audits of fiscal periods beginning on or after December 15, 2010.

  11. In litigation news,

    • Stanford Law School announced, here, that securities class action suits continued to decline in 2010, largely, it seems, because suits against financial companies following the economic implosion continue to wane.

    • Goldman Sach's record-breaking $550 million settlement of SEC charges has been heralded as a big win for Goldman, perhaps counterintuitively only to those of us who still naively think that's a whole lot of money. Goldman's stock got a big boost from the announcement of the settlement. See here and here. We are comforted that our naiveté is shared by others, who expressed surprise at Goldman's conviction that its bottom line will be unaffected by financial reforms, see here.

 

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July 14, 2010


  1. The Dodd-Frank Wall Street Reform and Consumer Protection Act, formerly the much catchier "Restoring American Financial Stability Act," appears to be inching closer to passage in the Senate, having already passed in the House. The Senate has been tinkering with the Act to garner the 60 votes sufficient to cut off a potential Republican filibuster. Presumably, the final Senate version will be quickly adopted by the House and sent to the President, albeit later than the targeted July 4 deadline. (Of course, since much of the Act mandates further action by regulators — 243 rule-makings by 11 different agencies — enactment is just the beginning of the reform process.) (According to the talking points and other items on this Democratic-controlled website, everything bad that has ever happened in the financial sector was the fault of Republicans. Huh, who knew?) Most of the items of interest to corporate governance wonks are in Subtitles E and G of Title IX of the Act, with a handful of other gems hidden in other sections. There is no lack of bill summaries in the web-o-sphere, including a comprehensive one from Davis Polk here. Among the more interesting items in the Act:

    • Creation of an "Investor Advisory Committee" within the SEC charged with advising it on, among other things, initiatives to protect investor interests, which is of course the SEC's core function—a not subtle back-hand from Congress. (Sec. 911)

    • Enhanced whistleblower protections and a bounty program. (Sec. 922-924)

    • The SEC must adopt rules disqualifying an offer from Regulation D if the person selling securities (1) has been convicted of a felony or misdemeanor, or has made a false SEC filing, in connection with a securities offering or (2) has been barred from association with regulated entities or from the business of selling securities. (Sec. 926)

    • The advisory stockholder "Say on Pay" is in the Act (duh), and at least every 6 years a company must seek an advisory stockholder vote to determine if the say on pay happens every 1, 2 or 3 years. Included in the provision is an advisory vote on "golden parachute" compensation in the context of an M&A transaction subject to stockholder approval. (Sec. 951)

    • The SEC must adopt rules requiring SROs like Nasdaq and the NYSE to require that all listed company compensation committee members be independent and that the committee have authority to hire its own counsel and consultants. (Sec. 952)

    • The SEC must adopt rules requiring a company to disclose the ratio of the CEO's compensation to the median employee's compensation and information that shows the relationship between executive compensation and financial performance, including stock performance and dividends. (Sec. 953)

    • The SEC must adopt rules requiring SROs to require that a listed company claw back excess incentive compensation paid to executive officers in the prior three years based on financial data required to be restated. (Sec. 954) (Note that the clawback provision in Section 304 of SOX applies to only CEOs and CFOs and does not require a company to take action to claw back compensation.)

    • The SEC must adopt rules requiring a company to disclose whether it allows its employees and directors to purchase financial instruments to hedge against decreases in the company's stock. (Sec. 955)

    • Codification of broker nonvote requirements. (Sec. 957)

    • The Act gives authority to the SEC to adopt proxy access rules, including authority to exempt small issuers. (Sec. 971) The SEC has said it may act in time for the 2011 proxy season, which suggests it knows what it wants to do (and should, since it has been kicking around proxy access proposals for more than seven years now). The current version of the proposed SEC rules is here. Some sources report that large institutional investors like CalPERS have already begun building databases of potential director nominees to quickly take advantage of expected rules.

    • The SEC must adopt rules requiring a company to disclose in its proxy statement why it has chosen to separate, or not, the CEO and Chairman of the Board positions. (Sec. 972)

    • Section 404 of SOX is amended to permanently exempt non-accelerated filers from the requirement for an auditor attestation on management's internal control report. (Sec. 989G)

    • The SEC must issue rules requiring disclosure by "resource extraction" issuers of information about payments to the U.S. or foreign governments for the commercial development of oil, natural gas, or minerals. (Sec. 1504)

    Fortunately, majority voting is not required by the Act. See here. (Phew!)

  2. Dodd-Frank is, of course, reminiscent of the Sarbanes-Oxley Act, which is to say, a massive piece of reactionary reform legislation, the full impact of which won't be known for years. It might be worthwhile, then, to consider, eight years later, whether SOX, and in particular its internal control provisions, was worth it. According to a recent protiviti compliance survey, here, the answer appears to be, by and large, "yes." And who knows, perhaps the focus on internal controls helped contribute to the decline in financial statement fraud noted in a recent report on occupational fraud and abuse, here, although the report does conclude that "internal controls will not prevent fraud from occurring, nor will they detect most fraud once it begins."

  3. The SEC's efforts to claw back compensation from a CEO under Section 304 of SOX survived a motion to dismiss based on the defense's charge that the provision required that the CEO participate in, or at least know about, the misconduct that led to the financial restatement. The U.S. District Court of Arizona's ruling in SEC v. Jenkins, here, notes that the application of Section 304 is subject to constitutional challenge, but that a motion to dismiss is not the place to determine that issue. The ruling likely will encourage the SEC to at least occasionally go after other clean-handed CEOs and CFOs, spurring all who are fond of their compensation to keep a close eye on their staffs. (See also the settlement announced in SEC v. Diebold, here.

  4. Apropos clawbacks and compensation policies generally, the views about sound incentive compensation policies from those charged with bank regulation are here.

  5. The SEC issued, here, a "proxy plumbing" concept release to solicit comment on whether it should revise its proxy rules "to promote greater efficiency and transparency in the U.S. proxy system to enhance the accuracy and integrity of the shareholder vote." The phrasing of the question (in contrast, say, to whether it should adopt rules to "make the proxy process more burdensome and silly") suggests which way the SEC is leaning on this one. Here is the SEC's announcement of the release, which includes a summary of the covered topics.

  6. To prevent a repeat of the "fat finger" trading calamity of May 6, the SEC adopted circuit breaker rules here and announced FINRA rules regarding breaking erroneous trades (see SEC release here and FINRA filings here and here).

  7. We previously reported on the Free Enterprise Fund's efforts to have the PCAOB declared unconstitutional. The U.S. Supreme Court recently held, here, that indeed, the provisions that allow removal of PCAOB commissioners only for cause violate the Constitution's separation of powers. For all the thunder, however, the decision was uneventful because the Court simply eliminated the offending provision, rather than tossing the entire Sarbanes-Oxley Act. Here is the PCAOB news release on the decision. For those pondering whether it wouldn't have been better to eliminate the PCAOB entirely, here is a recent Washington Post assessment of the agency's performance.

  8. On the topic of accounting, FASB and the IASB have issued

    • a proposed update on amendments for common fair value measurement and disclosure requirements under GAAP and IFRS, here.

    • a joint exposure draft to update guidance on revenue recognition from contracts with customers, here.

    • a draft on revised financial statement presentations, see summary here and full draft here.

    • a progress report on the convergence of U.S. GAAP and IFRS, here.

  9. The U.S. Supreme Court upheld the Second Circuit's dismissal of claims in Morrison v. National Australia Bank Ltd., here, limiting the extraterritorial reach of Rule 10b-5 and the ability of investors who purchased securities on a foreign exchange to sue in U.S. courts.

  10. Finally, consider whether requiring people to say they'll do better, rather than legislating "good" behavior, might result in a more sound financial system. Michael Lewis notes the proliferation of do-gooder oaths here.

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June 9, 2010



  1. As you might expect, the lead item this month is the Dodd Bill, or the "Restoring American Financial Stability Act of 2010," as it is optimistically styled. Its full text, you gluttons for punishment, is here. Those with an interest undoubtedly have unearthed a host of summaries about the Senate bill. Here are a few more:

    • A general overview by section is here.

    • A (very) short overview of the prospective impact on public companies is here.

    • Excerpted executive compensation and corporate governance portions are here.

    • A summary of potential implications for the 2011 proxy season is here.

    For political geeks, a side-by-side comparison of significant provisions of the House and Senate versions of the bill is here. As a brief refresher of your high school civics class, the House bill was introduced in the Senate and then wholly replaced by the Senate text. House and Senate delegates are appointed to meet in conference committee to reconcile the bills and send them back to each body. Usually, all kinds of interesting things come out of conference, including a committee report that typically explains what is in the bill, why and what it's supposed to mean. The timeline for adoption is aggressive, with the hope, we understand, to send a bill to the President within a month.

    Politicos are already odds-making on what will wind up in the final bill. Of interest to governance types:

    • The permanent exemption from internal control report audits seems likely to pass, but it's unclear whether proxy access will be mandated, as in the Senate bill, or whether the bill will merely say that the SEC has unequivocal authority to pass rules on proxy access, as in the House bill (see here).

    • Majority voting may not be in the final bill (see here).

    • Regulation D provisions in the Dodd Bill were eased, but not eliminated, by amendment before the bill was adopted by the Senate (see here).

    Although it's no guarantee, a few governance items that appear in both the House and Senate bills, and therefore likely to appear in the final bill, are:

    • Additional whistleblower protections that extend SOX provisions to company subsidiaries and affiliates and expand sanctions for retaliation.

    • Requirements for public company compensation committees (largely codifying exchange listing rules).

    • Shareholder "say on pay" (either by law or by direction to the SEC to adopt rules).

  2. Since Say on Pay is likely to become the law of the land, in one form or another, it's interesting to note yet another failure to attain majority approval of executive compensation practices, and the first for a TARP recipient, here. According to RiskMetrics, here, support for say on pay proposals remained "robust" in 2010 albeit down from last year. A summary list of "red flag" compensation practices that could garner a "nay" on pay is here.

  3. RiskMetric's released an updated Technical Document, which details its Governance Rating Indicator (GRId) rating system, available here. A brief overview of RiskMetric's compensation GRId, along with a do-it-yourself interactive spreadsheet to calculate your own score, is here.

  4. Last week the SEC published a host of new Compliance and Disclosure Interpretations. Broc Romanek at The Corporate Counsel has graciously collected them here.

  5. In litigation news,

    • In U.S. v. Schiff, here, the U.S. Third Circuit noted that there is no duty to correct another's misstatements under Section 10(b) of the Exchange Act or Rule 10b-5.

    • In Slayton v. American Express Co., here, the U.S. Second Circuit provided guidance one when cautionary language that accompanies a forward-looking statement is "meaningful" such that it pulls you into the safe harbor from liability for material misstatements in periodic reports to the SEC. The short answer: it's not meaningful if it's boilerplate.

    • Somewhat related to these 10b-5 cases, note the Delaware Chancery Court's recent decision in Maric Capital v. Plato Learning et al., here, noting materially inaccurate proxy statement disclosures about a proposed sale transaction, including failure to disclose management cash flow projections. Here and here is some analysis of the case, including its apparent inconsistency with the Delaware Supreme Court views in an earlier case.

    • Deloitte Forensic Center's summary of its review of financial statement fraud enforcement actions from 2000 to 2008 is here. Not surprisingly, "gatekeepers"—CFOs, CEOs, and GCs—were the most frequently named company insiders.

    • The SEC's action against a Disney employee and her boyfriend, here, refreshingly reminds us just how simple insider trading law is. Thank goodness someone finally dumbed it down for us.
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May 12, 2010


You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. The Dodd Bill continues to make its way laboriously through the Senate, although so much has been proposed that it's difficult to know what the likely Senate bill, to say nothing about the bill likely to emerge from the reconciliation process, will look like. Here is the 251-page Senate report on the bill. Here, here, and here are links to some information about the bill and the slew (we're pretty sure more than 200 is a "slew") of potential amendments.

  2. Everyone expects that mandatory shareholder "say on pay," currently in the Dodd Bill, will become the law of the land. The first (Motorola) and second (Occidental Petroleum) failures to gather a majority "OK on pay" vote are described here and here. (And this is even before the proposed elimination of broker discretionary votes on executive compensation that is in the Dodd Bill.) Many, we expect, will be watching to see what Motorola will do with executive pay now and what effect its action, or inaction, will have on investor relations.

  3. We were hopeful that when the SEC modified its risk assessment rules to require disclosure of only compensation risk "reasonably likely to have a material adverse effect on the company," it meant that companies that didn't base bonuses on sales of CDOs or CDSs were in the clear. Alas, commentators note that the SEC is routinely asking companies to (1) confirm that they really meant to exclude the disclosure, if they did, and (2) explain the process used to determine that there were no risks. "Negative disclosure"—disclosure that the assessment was made, no material risk exists, and therefore there's nothing to disclose—appears to have become common practice, and the SEC is routinely requesting information on the assessment process whether or not there's disclosure. A few articles on effective compensation risk assessment are here and here. An overview of how companies have disclosed the role of the board of directors generally in risk oversight is here.

  4. Speaking of sales of CDOs, here and here are some sources discussing the SEC's securities fraud action against Goldman Sachs, and here is the SEC's announcement of its suit. It's an American tradition to dislike people who make a lot of money, so following Goldman's travails is a fun pastime. Our bold and perhaps inflammatory guess: Goldman is likely to weather the storm with minimal damage, and in retrospect we'll decide this wasn't the best use of the SEC's time and resources. (And it doesn't help that the decision to proceed with the suit was decided on party lines by the Commissioners.) Here is information about the civil suits against Goldman that followed the SEC's action.

  5. The SEC approved, here, changes to the standards for listing on NASDAQ's "Global Select Market" and a change that lowered public float requirements from $70 million to $45 million for an IPO.

  6. IRS Announcement 2010-30, here, includes draft instructions on how corporate taxpayers are supposed to flag uncertain tax positions for the IRS. The draft schedule requires a concise description of each reported tax year and information on the magnitude, but not information on the tax reserves or risk assessment.

  7. FINRA issued a few notices in the last few weeks:

    • A discussion of what diligence broker-dealers should conduct in private, Regulation D-exempt offerings, here.

    • Guidance, here, on FINRA members' use of social media.

  8. The FTC recently proposed, here, new federal merger guidelines that offer a glimpse of how the FTC evaluates mergers for anti-competitiveness.

  9. The SEC's first use of the Sarbanes-Oxley Act bonus clawback provision against an executive not charged with wrongdoing is facing constitutional challenge in the U.S. District Court for the District of Arizona. The SEC seeks recovery for the $4 million in bonuses and stock sale profits that was paid to the CEO of a company when the company, but not the CEO, was allegedly committing accounting fraud. Information about the case is here. Stay tuned for further developments.

  10. The U.S. Sentencing Commission submitted amendments to its sentencing guidelines to Congress a few weeks ago, here, that include changes to encourage corporations to allow compliance and ethics officers to report directly to the board of directors as part of an effective compliance plan that might justify reduced criminal sentences.

 

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April 14, 2010

  1. Senator Dodd's anxiously awaited financial reform bill, here, went to the full Senate floor a few weeks ago. Among many, many (many) other things, the bill

    • Would qualify the Regulation D exemption, the most common exemption for angel and VC financings (for the perspective of those opposed to this change, see here).
    • Has no permanent SOX 404 exemption as in the House bill.
    • Includes even more potentially embarrassing executive compensations disclosure. (How unexpected.)
    • Mandates "Say on Pay."
    • Codifies, for some reason, the ban on discretionary broker votes for directors and adds a ban on discretionary votes on executive compensation matters.
    • Explicitly authorizes the SEC to adopt proxy access rules, but doesn't require them.
    • Introduces a whistleblower bounty program.
    • Requires the SEC to adopt majority voting rules.
    Word is, the Obama Administration is pushing for a bill before Memorial Day, with much to be done in the Senate and in the reconciliation process with the House.

  2. In a move surely not at all related to provisions of the Dodd bill, the SEC released a new Legal Bulletin, here, expressing its views on when issuers can suspend reporting obligations under Rule 12h-3.

  3. Possibly in an effort to pressure disclosure in upcoming proxy statements, RiskMetrics posted an oddly belated piece on the SEC's guidance on climate change disclosure, here. Somewhat related, a recent report, here, notes that the number of S&P 100 companies reporting on internal "sustainability" programs rose to 93 in 2008 from 58 in 2004.

  4. And speaking of proxy statements, the SEC issued three new CDIs on executive compensation disclosure, here (still must report a rejected award if it was granted and earned), here (no need to disclose a grant that an executive would have received if the executive advises the board prior to grant that he or she will not accept the grant) and here (no limit on "additional services" by a compensation consultant that count toward the $120,000 threshold).

  5. The SEC also reminds us, here, that yes, it will enforce Regulation FD violations. (Recall the earlier post in the October 2009 issue of ICYMI here.)

  6. The SEC approved changes to Nasdaq's press release rules, here, eliminating the need to file a press release for an item you disclose in a current report on Form 8-K.

  7. The SEC proposed rules, here, to modify the regulatory framework for asset-backed securities (ABS) that would create new registration forms and impose new disclosure requirements. (Recall that ABSs gone wild, in the guise of collateralized debt obligations and parallel credit default swaps, have been blamed for the collapse of the free world.) A summary of the release is here.

  8. In what might be a good sign for the economy, on the theory that no one would propose rules unless they might actually be applied, FINRA filed revised proposals, here, prohibiting abuses in underwriter share allocations in IPOs.

  9. In audit news, a few items of note:

    • Following the big rise in audit fees that followed the advent of SOX internal control requirements, auditors are now under the same pressure as the rest of us to reduce rates and increase services. See here.
    • The PCAOB issued an alert, here, reminding auditors of their obligations to narc out companies with significant unusual transactions.
    • The SEC issued a form of Dear CFO letter, here.
    • FASB released is exposure draft on its Conceptual Framework for Financial Reporting, here.

  10. The French Supreme Court determined that the SOX whistleblower provisions don't pass (French) constitutional muster. See the analysis here and the December 2006 issue of ICYMI, here, for information on European-law-compliant whistleblower systems. Rather than appeal, one wonders whether the losers will simply wait for a new republic to form. Let's face it, the French are about due. SOX whistleblower protection keeps going strong in the U.S., where it was applied to mutual funds for the first time, see here.

  11. The D&O Diary notes, here, a recent SEC enforcement action in which it went after a company's audit committee chairman for bad disclosure and a remarkably bad (lack of) investigative process. Some lessons for audit committee chairs are here.

  12. PWC released its 2009 Securities Litigation Study, here. Not surprisingly, fallout from the financial crises dominated the securities litigation landscape, although the total number of suits in 2009 declined. Ever upbeat, PWC suggests 2009 may simply be the calm before the storm of litigation aimed at non-financial industries. Cornerstone Research's 2009 securities class action retrospective is here.

  13. The U.S. Sentencing Commission modified the Federal Sentencing Guidelines for organizations, including the provisions describing the attributes of an effective compliance and ethics program. The guidelines are effective November 1, 2010, leaving you with plenty of time to digest the changes and to consider changes to your compliance programs.

  14. The Institute for Legal Reform, an affiliate of the U.S. Chamber of Commerce, released its ranking of state court fairness, here. Delaware ranks at the top, West Virginia at the bottom. To see where your state ranks, view the interactive map. The survey is based on the views of a sampling of 1,482 attorneys, and all I can say is that the two guys who had cases in North Dakota must have really enjoyed them.

 

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March 10, 2010



You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. It's no surprise that as calendar year-end filers wrap up their annual reports, many have begun focusing on proxy statements big time. Some items of note:

    • Here's a trick to dig up samples of how some are complying with the new proxy disclosure rules: go here and enter "DEF 14A" (definitive proxy statements) or "PRE 14A" (preliminary proxy statements) in the "Form Type" line. Voilà. (There are a few other codes for proxy statements if you want to expand your search.)
    • More updates to the SEC's CDIs on the new proxy rules were posted here.
    • The SEC published changes to its e-proxy rules here, although it's not clear whether anyone will be able to take advantage of them this year.
    • The SEC has a new spotlight website on proxy matters, including an investor alert on non-discretionary voting for directors, here. Recall that, since discretionary voting for directors isn't allowed this year, some companies will be scrambling to get enough shareholders for a quorum (if director elections is the only item on the ballot).
    • Harvard Law's Forum on Corporate Governance and Financial Regulation has a piece on considerations for directors in the 2010 proxy season, here.
    • RiskMetrics held a proxy season preview webcast yesterday, see here.
    • Chairman Schapiro says, here, the SEC is "nearing a vote" on proxy access rules. We've been hearing that since 2003, of course, but at some point you've got to believe it.
    • Warren Buffet's always entertaining annual letter to stockholders is posted here. We at the editorial staff of ICYMI read it mostly for inspiration, although we leave slightly envious that Mr. Buffet probably is never asked to tone down his letter ("too jokey") or criticized for shamelessly plugging his kids' latest books. (It helps to be a multi-billionaire. We understand.) Everything gets analyzed these days, and Buffet's letter is no exception (see here).
    • The Council of Institutional Investors published, here, a white paper on how shares are held and its implications for shareholder communication and voting, an interesting nuts and bolts guide to how the proxy process works and what might be done to improve it. On a slightly different, scarier note, the SEC joined a host of others, including the Financial Crimes Enforcement Network, in issuing guidance, here, on obtaining and retaining beneficial ownership information.

  2. Shearman & Sterling posted its latest annual survey of the 100 largest companies (1) corporate governance practices and (2) director and executive compensation, each available here. S&S's key take-aways:

    • More than half have majority voting for directors.
    • 69 have the CEO serving as chairman of the board, although 75 discuss bifurcation of those rules in their SEC filings.
    • Most limit service on multiple boards, and 92 address the issue of outside board membership.
    • 55 included governance-related shareholder proposals in their proxy statements.
    • Only 10 have "poison pills," down from 33 five years ago.
    • 57 use an e-proxy "notice-and-access model," up from 35 in 2008.
    • 44 voted on say-on-pay proposals at the last stockholder meeting; 8 adopted them. (See also RiskMetrics' query whether "say on pay" has reached a tipping point, here).
    • 62 companies publicly disclosed that they have a "clawback policy," up from 35 in 2007.

  3. The NYSE posted its governance letters to NYSE listed companies here (domestic) and here (foreign private issuers).

  4. The SEC recently updated its XBRL FAQs, here, with answers to such age-old questions as "How do I force a row that is entirely nil-valued facts to render?" and "Why is some of my escaped HTML rendering as raw HTML?" SEC is holding a free XBRL seminar on March 23, see here, at which we are confident it will tell us what those questions mean.

  5. The SEC published some technical corrections to Forms 10-Q, 10-K and 8-K here.

  6. The SEC adopted a new "uptick rule," which imposes restriction on short selling, here is the monstrous 334 page release.

  7. The Delaware Chancery Court upheld the only (as far as we know) triggering of a poison pill, Selectica's NOL pill. The opinion (here) would, frankly, only have been remarkable if it hadn't upheld the pill, but it's nonetheless a worthwhile read for those with or contemplating a shareholder rights plan adoption (all ten of you). Poison pills are revisited, in a useful and brief review of case law, here.

  8. For those with international (well, French) operations, note the French Supreme Court's recent ruling on SOX whistleblower protection and how it can run afoul of privacy and protection laws. The ruling is described here.

  9. Lest you are concerned that the SEC has lost focus on its core mission of protecting investors, you will be heartened to know it has charged nationally known psychic Sean David Morton whose self-proclaimed psychic powers were "nothing more than a scam to attract investors and steal their money." See here. I'm confident that next on the SEC's list is getting my money from that nice Nigerian woman I helped by facilitating her movement of millions and millions of dollars through my bank account.

 

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February 10, 2010



You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

  1. We greeted SEC Chairman Schapiro's recent statement, here, about the release of SEC interpretive guidance on climate change disclosure with some skepticism ("We're not saying climate change is real, but we are adopting guidance on how to disclose stuff about it so that you do it right"), but we naively assumed the guidance would be a simple recitation of the possibly relevant existing disclosure rules that would leave both environmental advocates and public companies dissatisfied. The release (here), however, appears to be only a slightly toned down version of the rule-making requests environmental advocates have previously filed (see here, here, and here) and clearly, albeit not explicitly, espouses the view that climate change is real, is caused by greenhouse gas emissions, and may have devastating physical, as opposed to merely regulatory, impacts. (For example: "As noted in [a March 2007] GAO report, severe weather can have a devastating effect on the financial condition of affected businesses. The GAO report cites a number of sources to support the view that severe weather scenarios will increase as a result of climate change brought on by an overabundance of greenhouse gases.").

    The release describes the sections of Regulation S-K that could require disclosure about climate change – Items 101 (business), 103 (litigation), 303 (MD&A), and, of course, 503 (risk factors) – and four climate change topics a company may need to address: legislation and regulation, international accords, indirect consequences of regulation or business trends, and physical impacts. Some particularly ominous items from the release:

    • "Unless management determines that it is not reasonably likely to be enacted, it must proceed on the assumption that the legislation or regulation will be enacted. . . . Unless management determines that a material effect is not reasonably likely, MD&A disclosure is required." (Emphasis added.)
    • "Registrants need to regularly assess their potential disclosure obligations given new [regulatory] developments."
    • "Management should ensure that it has sufficient information regarding the registrant's greenhouse gas emissions and other operational matters to evaluate the likelihood of material effect arising from the subject legislation."
    • "[A] registrant may have to consider whether the public's perception of any publicly available data relating to its greenhouse gas emissions could expose it to potential adverse consequences . . . from reputational damage."
    • "We will monitor the impact of this interpretive release on company filings as part of our ongoing disclosure review program. . . . We will consider our experiences with the disclosure review program . . . as we determine whether further guidance or rulemaking relating to climate change disclosure is necessary or appropriate in the public interest or for the protection of investors."

    The release purports to "remind" companies of their obligations under existing securities laws, stressing that the SEC is not changing the law. Irrespective of your views on climate change, however, don't be a sap – the point of the release is to change the application of the law. Although the extent to which enforcement actions or shareholder suits will flow from the SEC's "non-binding" guidance remains to be seen, count on "climate change" appearing more frequently in company risk factors, at least, in upcoming annual reports, and on public company boards spending more time talking about it.

  2. "Guidance" is all the rage with FINRA, too, which recently let securities firms and brokers know, here, FINRA's views on the use of social networking sites to communicate with the public.

  3. The SEC amended its proxy rules, here, to state the requirements for TARP participants' mandated "say on pay," which amount to little more than the requirement that "[TARP recipients] shall provide a separate shareholder vote to approve the compensation of executives . . . ."

  4. No further word on the likely direction of SEC proxy access rules, but the debate continues. Here is the transcript of Harvard Law School's recent proxy access roundtable.

  5. The SEC approved amendments to Nasdaq's delisting rules, here, so that an issuer must fall below a minimum market value for 30 (rather than 10) consecutive trading days and then has 180 (rather than 90) calendar days to regain compliance. The changes make the market value rules consistent with the time periods for Nasdaq's minimum bid-price standards. The amendments also increase from 105 to 180 the maximum number of days an issuer can remain non-compliant before being delisted and extend from 15 to 45 days the period in which an issuer must submit a compliance plan to Nasdaq to regain minimum requirements for stockholders' equity, the number of publicly held shares, and the number of shareholders. Just another depressing sign of the times.

  6. The SEC proposed changes to the Rule 10b-18 safe harbor for company stock repurchases, here. The rules "clarify and modernize" the safe harbor provisions, which haven't been updated since 1982. Comments on the proposed rule are due by March 1, 2010.

  7. The SEC posted a few CDIs to deal with the new proxy disclosure rules along with a few transitional updates, and a correction to a formerly posted CDI about Non-GAAP Financial Measures. Links to the CDIs are here and brief summaries of the proxy-related items are here and here.

  8. The SEC has revamped its enforcement division and added a new "spotlight" section to its website, here, on which it unveils new initiatives to encourage company and individual cooperation during SEC investigations. The site links to a few revised sections of the SEC's Enforcement Manual, here, among other things.

  9. RiskMetrics announced, here, the end of the Corporate Governance Quotient, which it will replace with GRId (that's "Governance Risk Indicators"). Beginning March 2010, the GRId will rate companies according to RM's "best practices" criteria across four areas of governance: audit, board, compensation/remuneration, and shareholder rights. RM's FAQs let issuers know where they can go to verify company data. Most significantly, though, the new rating system is color coded (see here)!

  10. A consortium of 51 law firms has published a white paper, here, aimed at garnering agreement among practitioners on interpretive issues in New York's new power of attorney law, namely that the law does "not apply to proxies for shares of New York corporations and non-New York corporations, certain powers of attorney executed in connection with the registration of transfer of certificated securities or many powers of attorney granted in connection with the formation and governance of non-New York limited liability companies and non-New York limited partnerships."

  11. The IRS announced, here, that it intends to require business taxpayers with more than $10 million in assets (or "almost everyone"), including taxpayers that prepare financial statements subject to FIN 48, Accounting for Uncertainty in Income Taxes, to file a schedule describing with specificity their uncertain tax positions, the IRC sections implicated, and the maximum potential liability attributable to each position, among other things. It's perhaps no coincidence that the IRS announcement follows the request to the U.S. Supreme Court to review an appellate court decision holding that attorney work-product doctrine does not shield tax work papers from an IRS summons (see here). Comment on the proposal described in the announcement is due by March 29, 2010. Count on accountants and tax lawyers being all over this interesting IRS effort to facilitate enforcement actions against business taxpayers.

  12. Pondering what to get that special public company this Valentine's Day? You just can't go wrong with a Schedule 13G, due February 14 (well, usually, but actually February 16 because of weekends and holidays). Remember, nothing says "I own more than 5% of a public company's stock" like a Schedule 13G.

 

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January 13, 2010

  1. The House of Representatives passed the "Wall Street Reform Act" on a 223-202 vote, with 27 Democrats joining all Republicans against. The bill is a big one, and proposed amendments came fast and furious. The "non-accelerated filer" permanent exemption from filing auditor attestation reports on internal controls remains in the bill, at least for now (but see fodder for opponents here). A version of the bill as passed hasn't been fully assembled yet and, in any case, it will have to be reconciled with the Senate bill(s). Some brief commentary on the accounting implications of the bill is here. Out of the gate, House Financial Services Chair Barney Frank has taken the early lead on adding his political veneer to the debate on the bill compared to Ranking Minority Member Bachus's release ("this is bad!").
  2. RiskMetrics issued its 2010 U.S. Proxy Voting Guidelines Summary last week, here, which includes the updates (here) we noted last month and which are effective for shareholder meetings on or after February 1, 2010. The 71-page "summary" condenses RM's U.S. Proxy Voting Manual, which it has not posted on its site.
  3. The SEC issued guidance, here, on transitional issues for the enhanced proxy disclosure rules, which we mentioned in a rare supplemental alert a few weeks ago (here). The upshot for calendar year-end companies: if you file your definitive proxy statement before February 28, 2010, you don't need to comply with the new rules until next year. (And if you're a registered investment company, check out the Division of Investment Management's FAQs here.)
  4. The SEC also re-opened, here, the comment period for its proxy access rules, allowing additional comments until January 19 and an opportunity for more debate among commentators. A key debate point is whether the SEC will adopt a "private ordering model" in which shareholder bylaw amendments to structure the director election process would be allowed but nothing would be mandated by the SEC, whether an "opt out" of SEC requirements should be implemented, or whether the SEC will retain the proposed "mandatory minimum" access requirements. The extension itself has caused a flurry of speculation about what the SEC's action heralds, and possibly some fear, or hope, that this proposal will fade like the SEC's effort in 2003.
  5. Although the risk-related disclosures in the SEC's enhanced proxy disclosure rules were toned down substantially from proposed rules, risk assessment, and the board's oversight role, remains a hot topic for 2010. Some items of note:
    • "A New, Practical Approach to Board Oversight of Risk" is here.
    • Commentary from Harvard Law School's Forum on Corporate Governance and Financial Regulation is here.
    • FEI's commentary on the PCAOB re-proposed risk assessment rules, which react to earlier comments and give more time to comment, is here.
  6. The SEC also posted new CDIs on non-GAAP Financial Measures, here.
  7. The SEC proposed rules, here, to amend SEC Rule 163(c) to further facilitate public offerings by WKSIs by allowing underwriters to gauge interest in an offering before a preliminary or shelf S-3 filing without violating gun-jumping rules.
  8. The IRS issued Notice 2010-6, here, offering employers yet another chance to correct non-409A compliant documents and providing yet more guidance on language that will be treated as 409A compliant, including, for example, amendments to "change in control" definitions in employment and severance agreements. (And note that some wacky transitional rules apply under the Notice.)
  9. The end of a year is always followed by a host of "year in review" summaries. Here are a smattering for 2009:
    • Securities class action filings, here (way down from the 2008 frenzy)
    • EEOC complaints, here (near record highs)
    • Criminal anti-trust enforcement, here (continuance of the "breathtaking pace of aggressive enforcement")
    • FCPA enforcement, here ("the single most dramatic year")
    • Shareholder proxy proposals, here (echoing but overshadowed by regulatory reform)
    • SEC Chair Schapiro in review, here
    • Winner of the worst proxy footnote for 2009, here ("we had darn good reasons for buying our CEO's map collection")
  10. Finally, a contract drafting suggestion. In credit and acquisition agreements, it's typical that a company represents it has had no "reportable events," events that must be reported to the Pension Benefits Guaranty Corporation unless reporting has been waived under PBGC regulations. In credit agreements, an unwaived "reportable event" may be an event of default or require reporting to the lender. It's likely the PBGC will adopt regulations to eliminate most automatic waivers of "reportable events" sometime in 2010. A brief summary of the regulations is here. It's not too early to pause, at least, to consider whether you need to set new internal standards to act on reportable events that are currently no cause for action because of the automatic waivers, or to change the default terms or reporting covenants in your credit agreements.


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December 17, 2009 Supplement

The SEC yesterday adopted final rules, here, that will require additional disclosure in definitive proxy statements filed after February 28, 2010, putting an end to the query: "Is the SEC really going to make us comply with even more difficult-to-understand rules in our upcoming proxy statement?" The SEC's press release announcing the adoption is here. In the short term, calendar year-end companies should update their D&O Questionnaires to address the new rules. The changes may be modest, and, as always, you should consider which of the new requirements are susceptible to useful answers from your directors and officers.

The SEC's rules "enhance" (or "require more," as we securities lawyers like to say) disclosure about (1) compensation policies that encourage risk-taking, (2) the role (and fees) of compensation consultants, and (3) director qualifications, director's involvement in legal proceedings, board diversity, board leadership structure, and the board's role in risk oversight. The rules also change how equity compensation is valued in the summary compensation table (and provide transition rules) and require disclosure of shareholder meeting results on a Form 8-K.
The most significant change from the proposed rules, for our money, is the requirement that only compensation policies that encourage risk-taking behavior that is "reasonably likely to have a material adverse effect" need to be disclosed, and not in the CD&A section. This is a useful change, since not every public company is a bank that compensated people for selling credit-default swaps on unsupported valuation assumptions, and therefore many likely won't have to address this new disclosure at all.
A host of commentators have already scrambled to describe the new rules. See, for example, here, here, here, here, here, and (gasp, pant, . . . ) here.

December 9, 2009
 
1. The U.S. Supreme Court recently heard oral arguments, here, about whether the PCAOB is constitutional. If not, the legislative scramble to fix this could lead to other SOX reforms, speculate some (see, e.g., here and here).
 
2. In proxy news,
 
  • Jockeying for the heart and mind of the SEC on "proxy access" continues with recent articles criticizing the private ordering model, here and here.
  • For its part, HealthSouth heralded its planned bylaw amendment to allow reimbursement for shareholder proxy solicitation campaigns, see here.
  • RiskMetrics' 2010 Proxy Voting Updates are available here. As a wholly unregulated yet powerful influencer of your shareholder base, it's good to know RM's views, including when it will recommend "withhold" or "no" votes on directors of companies with disfavored practices, the list of which continues to expand. As with most new legal developments, the Internet teems with law firm summaries about the changes. A few perfectly decent ones are here and here. A webcast review of RM's policy updates will be held tomorrow, December 10, here.
  • A look back at 2009, and a forecast of the 2010 proxy season, is here.
  • The Altman Group submitted to the SEC Practical Solutions to Improve the Proxy Voting System, its suggestions for improving the proxy plumbing, here.
  • There's still no word on whether the SEC's enhanced proxy disclosure rules, here, which it will consider at its open meeting December 16 (see here), will be effective for 2010, but time is running short. It's noteworthy, at least, that the SEC was still meeting with outside parties about the proposals in mid-November (see here) even though the comment period ended September 15.

3. AES Corporation recently joined Xcel Energy and Dynegy in agreeing to "fully detail financial liabilities posed by regulation of global warming pollution," a triumph of New York Attorney General Cuomo's disclosure initiative under New York's Martin Act (see here). The NY AG is also a signatory to the latest supplemental petition calling for SEC interpretive guidance on climate change disclosure, here, which appears to be merely an admonishment that the SEC really should act, given building momentum due to, among other things, the EPA's mandatory green house gas reporting rules (see here). The supplement claims that the EPA data gathering rules and other regulatory developments are a "known trend" that "trigger an obligation for companies to assess and disclose material emissions data and their analysis of climate risk and opportunities." Although that appears clearly wrong (how about waiting for substantive regulation, the financial impact of which is something other than pure speculation, guys?), time will tell whether the pull of momentum and politics will spur the SEC to action. Some speculation on that topic is here, and a collection of materials in RiskMetrics' new Climate Change Resource Center is here. "The clock is ticking," proclaims the RiskMetrics site, although what it is counting down is left opaque.

4. Microsoft shareholders nearly unanimously supported the company's compensation policies, reported Microsoft's Deputy General Counsel here. An explanation of why a three-year say-on-pay like Microsoft's is better than an annual say-on-pay appeared in Roll Call, the Capitol Hill newspaper, here. A little lobbying to shape the future of say-on-pay, perhaps?

5. Financial Executives International summarizes what the SEC's Office of Chief Accountant has in store for companies in 2010 here, including updating its Financial Reporting Manual, the SEC playbook for financial disclosure review, which it did earlier this week (see here).

6. In SRO news,

  • the SEC approved Nasdaq's market watch notification rules, here, and
  • the SEC approved the NYSE's corporate governance rule changes, here.

7. Harvard's Forum on Corporate Governance and Financial Regulation suggests What Boards Should Be Doing Right Now on a host of governance topics, here.

8. The SEC announced, here, that it has filed its first ever Regulation G enforcement action (use of non-GAAP financial measures).

9. The IRS published final regulations on ESPPs under IRC § 423 here. A brief summary of the regulations is here.

10. For those with lots, and we mean lots, of spare time, here is the text of H.R. 4173, the consolidated financial reform bill reported to the House floor from Barney Frank's Financial Services Committee. Among 1,279 pages of other things, the bill includes, at least for now,

  • say-on-pay for all, not just those who took TARP money, and the spiffily titled "enhanced compensation structure reporting to reduce perverse incentives" (Section 2002, et seq.), and
  • SOX amendments, including the exemption for non-accelerated filers (Section 7606) and a call for no less than two studies to decided if that's a good idea.

11. With all the noise about whether Congress will or should exempt small public companies from SOX 404 auditor attestation requirements, it's amusing, at least, to read that the SEC's internal controls again failed to pass muster, according to the GAO here.

12. An interesting discussion of M&A deal protection measures, in the context of Berkshire Hathaway's recent acquisition of Burlington Northern, and a suggestion that "it's market" should not end the discussion (which we love) is here.

 
November 11, 2009

1. The SEC recently fired a few proxy rule salvos in its retreat from proxy access rules, which it still plans to consider in the first quarter of 2010 (see Chairman Schapiro's speech here).

  • In a speech about executive compensation disclosure and analysis, CorpFin Director Parratt echoed (that's right, "echoed" instead of the obvious pun, because we're better than that), here, former Director White's 2007 "Where's the Analysis" query and his admonition that you please (pretty please?) disclose performance targets. Parratt also said what the SEC will focus on in its 2010 review, which seems to be the same stuff it has focused on the last two years but that many have ignored; but now, warns Parratt, the SEC may make you amend your proxy statement (or your Annual Report on Form 10-K) rather than letting you promise to do better next time: "Any company that waits until it receives staff comments to comply with the disclosure requirements should be prepared to amend its filings if it does not materially comply with the rules." Our guess is the SEC will likely make examples of at least a few violators this coming proxy season to drive home its point.
  • It's still not clear whether the SEC's enhanced proxy disclosure rules, here, will be effective for the 2010 proxy season. (Why bother, some might ask, if companies still aren't complying with the rules that have been around for three years?)
  • The SEC proposed changes to its notice and access e-proxy rules, here, that would allow changes to the form of notice, allow explanatory materials, and change time limits for non-issuers but do not address the annoying 40-day rule that makes these rules problematic for issuers. Comments are due on an abbreviated schedule – November 20 – so look for these non-controversial changes to be adopted in time for your 2010 meeting.
  • The SEC published Staff Legal Bulletin 14E, here, which alters the SEC's view of how the Rule 14a-8 exclusion for "ordinary business operations applies" to "risk assessment." Per the SEC, its change of tack – to look to the subject matter of the request and not to whether it involves an internal assessment of risk – swings the pendulum back toward allowing proposals if the "underlying subject matter transcends the day-to-day business matters . . . and raises policy issues so significant that it would be appropriate for a shareholder vote . . . ." If you're wondering what the profoundly unhelpful phrase "policy issues so significant" means, you're not alone (if that's any comfort). But, the SEC continues, from now on at least CEO succession planning disclosure fits that category. Here and here are analyses of this shareholder (read "activist") victory. (But honestly, is "News items and alerts related to corporate disclosures to investors of market trends and liabilities, as well as other trends, events or uncertainties that may materially affect corporate finances" the worst subtitle for a blog in the history of blogs, or what?)

2. The upcoming 2010 proxy season marks the first in which brokers may not cast discretionary votes, a.k.a. "broker non-votes," in favor of the company's slate of directors. As we've noted, that could cause problems for establishing a quorum and for those with majority voting. An article on the challenges companies will face is here. Obviously, the effect of the loss of these votes on your company depends on your (retail) shareholder base. A few ways to estimate the effect, and to figure out whether you might ramp up your proxy solicitation efforts:

  • If you've had a non-discretionary proposal at a shareholder meeting in the last few years, like option plan amendments, compare the last votes cast on non-discretionary items to the votes cast on director elections. (For example, if the director vote was 90% and the vote on the option plan was 60%, a fair guess is that 30% represents discretionary broker votes.)
  • Use the rule of thumb that, of your shares held in street name, you're likely to get only 20-25% of those votes, compared to roughly 80% on average in past years.

Keep in mind, the broker vote is likely to be much lower if you're using the e-proxy notice and access model.

3. Despite the now imminent concern that broker non-votes will create director election problems for those with majority voting, evidence suggests directors may be in little danger in that, without an alternative, company boards will likely reject a director's mandatory resignation (see here). Companies are undoubtedly heartened by the Delaware Chancery Court's recent suggestion that that's not a problem, see City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc. here and critical commentary on that case here.

4. A recent paper suggests "say-on-pay," expected to continue to gain traction this year, may benefit companies with questionable compensation practices, but can harm others. The study is available here.

5. The Federal Reserve issued a proposal on executive compensation policies for banks under its supervision, which is, like, all of them. The proposal is available here and analysis is here.

6. Recall that the SEC published, here, the results of its review of SOX 404 internal control implementation last month. Reading between the lines of the report ("It was a mistake, but what can you do?") may be what prompted the proposed amendment to exempt non-accelerated filers from the auditor attestation requirement, here, which was tacked on to the Investor Protection Act, see here, sent to the House floor earlier this month. Now, before you get too excited about the amendment, you might review the video here to remind yourself just how unlikely passage is, although apparently the amendment has the President's support (see here).

7. We are reminded, see here, that to preserve the deductibility of performance-based awards under IRC §162(m), some companies may need to amend employment agreements if the agreements don't otherwise meet the criteria for the IRS's transitional relief. We noted this development way back in our February and March 2008 issues of ICYMI. But reminders are good.

8. President Obama signed the Worker, Homeownership, and Business Assistance Act of 2009 last week. Our highlights of the new tax act are here.

9. You have undoubtedly been dealing with the FTC's "red flag" rules (see materials here), which define an enormously broad mix of "creditors" who must implement identity theft prevention programs. The House took a stab at fixing the rules by passing, 400-0 under a suspension of House rules, H.R. 3763, see here, which would exempt health care, accounting and legal practices with 20 or fewer lawyers from the rules. The ABA argues that the exemption doesn't go far enough and filed suit, see here, in D.C. district court seeking to bar the FTC from enforcing the rule against lawyers. (Granted, our receivables are hanging out there longer than we would like, but seriously, "extending credit"?)

10. The SEC has proposed rules, see here, to "shed greater light on dark pools," which are private trading systems in which participants can transact trades without displaying quotations to the public. Right about now we're wishing we'd gone for the cheap pun in Item 1 above.

11. In accounting news,

  • The PCAOB proposed revisions to Auditing Standards No. 7, Engagement Quality Review, here.
  • The FASB and IASB affirmed their commitment to working together to harmonize US GAAP and IFRS, here.
  • PLI has graciously allowed access to its outline of GAAP "Codification": What Attorneys Need to Know about the New Accounting Rule System, here.
  • The SEC's Office of Chief Accountant issued Staff Accounting Bulletin No. 113, here, to update interpretive guidance on accounting for oil and gas reserves and production activities. (And new CDIs on oil and gas rules are here.)

12. In litigation news,

  • The SEC's "misappropriation" theory of insider trading suffered a blow in a Texas district court, which dismissed a claim against Mark Cuban even though Cuban did not dispute that he orally agreed to keep non-public information confidential and then sold shares to avoid a $750,000 loss. But, because the complaint did not allege that Cuban agreed not to trade on the information, the SEC lost.
  • Delaware Vice Chancellor Chandler reminds us, in Trados Incorporated Shareholder Litigation here, that a director's fiduciary duties run to all shareholders, but that "generally it will be the duty of the board, where discretionary judgment is to be exercised, to prefer the interests of common stock – as the good faith judgment of the board sees them to be – to the interests created by the special rights, preferences, etc., of preferred stock, where there is a conflict."
The Ninth Circuit held in Siracusano v. Matrixx Initiatives, see here and discussion here, that, for 10b-5 liability purposes, the statistical insignificance of a product problem does not necessarily mean the problem is immaterial to investors.
 
 
October 14, 2009 

 


1. The SEC has indicated, see here, that its proposed proxy access rules, originally slated for consideration at its November meeting, likely won't be adopted until early next year and therefore won't affect the 2010 proxy season. A summary of input gleaned from more than 500 comment letters on the proposal, which may have contributed to the delay, is here.


2. Microsoft has jumped on the "say-on-pay" bandwagon by proposing an advisory vote on executive pay every three years. Its release is here and its GC's more detailed statement is here. On some level, Microsoft is likely positioning itself to play the "substantial implementation" card to avoid anticipated future battles, since it will be very difficult for a company to exclude well-crafted say-on-pay proposals from its proxy statement. For all the attention, however, early returns suggest that say-on-pay yields more sound and fury than substantive change (see here).


3. Proxy Governance reports, here, that shareholder "no" or "withhold" votes increased significantly in the 2009 proxy season, although the increase has had little practical impact according to RiskMetrics (see here). Has there been a real shift in shareholder attitudes on governance, or does this merely reflect declines in company performance? Is it possible the evils of "short-termism" (see point three in SEC Chairman Schapiro's speech here) could be fueled by increased shareholder voice in company governance (sacrilege, we know)? In this vein, see the Aspen Institute's report on "Overcoming Short-termism" here.


4. Some recent developments on Internal Controls Over Financial Reporting:
  • Commentary on the PCAOB's report on AS5, An Audit of Internal Controls Over Financial Reporting, is here, here, and here.

 

  • The SEC's report on the costs and benefits of SOX 404 implementation is here. A summary of the summary: (a) it's expensive, (b) it's nominally more expensive for big companies and relatively more expensive for small ones, (c) costs go down after the first year, (d) costs went down after 2007 reforms, and (e) most see "some" benefit to the rules but think the costs far outweigh the benefits.

 

  • The SEC announced it is giving yet another reprieve to non-accelerated filers, who now will need to include auditor attestations on their internal control reports starting with fiscal years ending on or after June 15, 2010. And this time, the SEC seems to mean it (see here and here). One hopes, since seven extensions might begin to suggest this all wasn't very well thought out.


5. Regulation FD hasn't appeared on the SEC's enforcement docket for quite awhile, perhaps because it's just so darn easy to comply with and violations so darn difficult to detect. Alas, apparently not for the CFO of American Commercial Lines, who according to the SEC (see here) gave nary a thought to fair disclosure principles when he sent a Saturday email updating eight sell-side analysts on company projections and cutting in half the company's earnings guidance. Unsurprisingly, ACL's stock price plunged on Monday. As a (we hope unnecessary) reminder, Regulation FD says you can't disclose material nonpublic information (for example, that your earnings guidance is cut in half) to security holders likely to trade or to financial market professionals (for example, sell-side analysts) without simultaneous public disclosure, typically on a Form 8-K. The lesson is this: comply with the law, because, yes, the SEC is serious about enforcing it.


6. Advocates of public disclosure of climate change risks and impacts continue to buzz in the background of SEC rulemaking and public disclosure practices. RiskMetrics' summary of 2009 environmental proxy activity, as reported by The Corporate Counsel, is here, and its recent White Paper on Addressing Climate Risk (a best practices report), is here. SEC Commissioner Walter recently (but weakly) suggested, here, that climate change disclosure could be taken up by the SEC ("I believe that it is time for us to consider issuing interpretive guidance regarding disclosure in this area."). To some, the near-religious fervor of advocates on each side of the climate change issue long ago obscured rational discourse on the science behind climate change and a debate on whether predictive models are good enough, for example, to form the basis of useful disclosure in a company's MD&A section, as opposed to throw-away disclosure in risk factors that amounts to little more than "climate change could affect us in bad ways, and its regulation could be expensive." The rulemaking petitions from climate change disclosure advocates, which have been around awhile, are here and here; here is a counter-salvo, fired by the Free Enterprise Action Fund, that claims bold statements about the impact of climate change are themselves materially misleading.


7. A few other SEC tidbits we couldn't find room for elsewhere:
  • The SEC announced a new Division of Risk, Strategy, and Financial Innovation, here.

 

  • The SEC's Five-Year Plan is here.

 

  • The SEC posted, see here, updated CDIs on Exchange Act Sections 13(d) and 13(g).


8. Nasdaq sent a request, here, for comments to listed companies on a proposed shift in governance standards, from mandated requirements to a "comply or disclose" model similar to the SEC's model, and on "best practice" proposals it may, at some point, consider adopting.


9. For those just plain tired of keeping track of the overwhelming flurry of rules, legislation and other reform actions,
  • Kirkland & Ellis issued a 32-page inventory of proposed corporate governance reforms here. (It's not clear that interesting reforms will be adopted ever, much less in time for 2010 shareholder meetings, so this is probably most useful as a list of "things you should know about" rather than an action list for changing your governance practices.)
  • Davis Polk published a 271-page Financial Crisis Manual, here, that collects the various laws, regulations and contract terms associated with federal bailout programs. (Missing from the cover only are the words "Don't Panic" in large, friendly letters.)


10. If you've ever pondered, "who rates the raters?", you will be interested in the study Rating the Ratings: How Good are Commercial Governance Ratings?, available here. The conclusion: "Not very."


11. And finally, on the M&A front:
  • JP Morgan's M&A Holdback Escrow Report is summarized here.

 

  • RiskMetrics' 2009 Corporate Background Report on Poison Pills is briefly summarized here.
__________________________ 

September 10, 2009 



1. The SEC has been busier than anticipated over the summer. Among other things, it
  • proposed modifying proxy statement disclosures, including tweaks to executive pay disclosures, here. Among other things, the proposals call for disclosure in the CD&A about how executive pay incentives encourage risk-taking; reverts to the requirement that a company disclose the grant date fair value of equity awards in the summary compensation table rather than the FAS 123R value included in its financial statements; and expands disclosure about compensation consultant fees to ferret out consultant conflicts of interest. The SEC also solicits comments in a host of areas but doesn't propose specific rule changes, including whether disclosure should expand beyond "named executive officers"; dealing with performance target disclosure (or lack thereof); and requiring additional disclosure about clawbacks, hold until retirement requirements, tax gross-ups, internal pay equity and compensation committee expertise. Also tucked into the proposal is the requirement that annual meeting results be disclosed on Form 8-K, rather than in a company's next periodic report. Comments on the proposed rules are due September 15. (As a side note, a free copy of CompensationStandards' Proxy Disclosure Updates is available here).

 

  • proposed another stab at enhancing shareholder participation in director elections ("shareholder access"), here. Unlike the proposals WAY back in 2003, which had triggering events that delayed shareholder nominations for at least a year, the proposed rules just impose the requirement that a shareholder group has owned for at least one year 1% (large accelerated filers), 3% (accelerated filers) or 5% (non-accelerated filers) of the company and that it represents it intends to hold the shares through the meeting date. Shareholder-nominated candidates would be limited to the greater of one director or 25% of the board. The change does not trump state law or company charter documents, but the proposed rules also would amend Rule 14a-8 to allow shareholder proposals to amend a company's charter documents to allow shareholder nominations consistent with the new nominations rules. The comment period for the release ended August 17. Goodness only knows when the SEC might try to make the rules effective, but it would be surprising (to us, at least) if it's as soon as the next proxy season. Here's an interesting tête-à-tête from practicing (here) and teaching (here) lawyers, and here is an admonishment from several heavy hitters that the SEC has better things to worry about right now than proxy access. An ABA draft bylaw provision allowing shareholders to nominate directors in a proxy statement is here; another model, for Delaware companies, is available here.

 

  • posted updated CD&Is, including some new ones on Section 16 filings, and continued consolidating its old telephone interpretations manual into the CD&I's, including all the Regulation FD materials, see here.

 

  • approved amendments to NASD Rule 2720 regarding underwriter conflicts of interest, see here.

 

  • adopted changes to Regulation SHO, here.

 

  • according to Fox Business, sent a 42 item "wish list" of securities law changes to Congress, here.

 

  • approved the NYSE's change to Rule 452 to eliminate discretionary voting for the election of directors (see here). These rules are effective for meetings beginning January 1, 2010. As noted in previous ICYMI posts, this poses issues for establishing a meeting quorum and could be particularly troublesome for those companies with majority voting requirements. Also note that because the rules apply to brokers generally, the rule change may impact all public companies not just those listed on the NYSE.


    2. The NYSE proposed to amend its corporate governance listing standards, here—there appears to be nothing earth-shattering in the proposed changes.


    3. "Say on Pay" continues to roll forward with the Obama Administration's submission of a legislation as part of its regulatory agenda, and the House's passage of the Corporate and Financial Institution Compensation Fairness Act of 2009, see here. Two recent academic studies on "say on pay" are available here. Obama also included proposed revisions to compensation committee independence standards, see here.


    4. RiskMetrics' Preliminary Postseason Report, a summary of all things proxy for 2009, and its 2009 Proxy Season Scorecard are available here.


    5. The Treasury Department has now sent the final piece of Obama's financial regulatory reform agenda to Congress (see here). We haven't yet built enough momentum to peruse the completed White Paper on Financial Regulatory Reform the Administration issued a few months back, here (Executive Summary here).


    6. In our accounting corner,
    • The SEC posted an updated Financial Reporting Manual, a disclosure guidebook for SEC accountants and a handy resource for those interacting with them or preparing financial disclosures, in pdf here and in html here.

     

    • FASB has taken up deliberations on disclosure of litigation loss contingencies in financial statements, see here.

     

    • The SEC is soliciting final comments, here, on the PCAOB's proposed rules requiring audit firms to file annual and special reports, indicating (perhaps) they will be adopted soon.

     

    • FASB released Statement No. 168, the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. Analysis is here. The SEC's interpretive release about the codification is here.

     

    • The U.S. Supreme Court agreed to consider whether the D.C. District Court's holding that PCAOB is constitutional should be upheld, see Free Enterprise Fund v. Public Co. Oversight Bd. here.


    7. And in our litigation corner,
    • Some analysis of the insider trading cases brought by the SEC against Mark Cuban and Oleksandr Dorozhko, and the SEC's efforts to expand the reach of the misappropriation theory of insider trading, is here.

     

    • A review of the D.C. Appellate Court in Zacharias v. SEC, which suggests an expansion of the definition of who is an "underwriter", is here.

     

    • The SEC requested a clawback under SOX Section 304 for a former CEO it didn't otherwise charge with violating securities laws, and suggests in its press release, at least, that being in charge when fraudulent financial misinformation is disclosed is sufficient to establish the required "misconduct" (see here). One hopes the SEC has more. We'll see how the case turns out, but this should scare executives who received bonuses from public companies with subsequent financial restatements and it could make conversations about the need for restatements that much more tense.

     

    • Some analysis of two cases dealing with "the vexing question of extraterritorial application of the securities laws" is here.

    __________________________
     
     

    May 13, 2009



    1. To begin, a few tidbits on non-binding shareholder votes on executive compensation, better known as "say on pay":
    • The AFSCME (American Federation of State, County and Municipal Employees) notes how shareholder anger is beginning to manifest itself in 2009 tallies on say-on-pay proposals. 10 of 29 proposals had been approved as of May 4 compared to 11 of 79 last year.

       

    • "Yeah, that's right," adds RiskMetrics here.

       

    • CalSTRS (California State Teachers' Retirement System) offers its model executive pay principles and guidelines, including its indication that say on pay is a must, here.

    So, will say on pay become the law of the land and not just something TARP participants have to put up with? "Yes," suggest at least some. See commentary here and Senator Charles Schumer's letter in support of his forthcoming bill here, which also apparently would eliminate staggered boards, require an independent board chairman, and possibly preempt all other sorts of state corporate law. Of course, Schumer could just save time by requiring everyone to reincorporate in North Dakota. (See item 7 below).



    2. A recent AP article suggests the SEC may alter the way option grants are disclosed in a company's summary compensation table as, ominously, "part of a broader rethinking of the agency's compensation disclosure requirements." The change would reverse the SEC's unexpected December 2006 changes (disclose the annual FAS 123R accounting expense of option grants) to the original methodology in its comprehensive February 2006 executive compensation disclosure rules (disclose the full grant date value of the option grant).


    3. We noted last month that the SEC is working to figure out how to regulate short sales, perhaps backtracking, at least somewhat, on its jettison last year of the uptick rule (short sales allowed only if the last trade shows an uptick in stock price). The SEC has spotlighted all things short, including its releases and archived roundtable webcasts, here.


    4. Your financial printer, if you use one, may have recently told you to update the cover page of your Form 10-K or 10-Q to included the "check the box" statement about XBRL compliance ("Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T"). And you should, because the cover page change became effective April 13 (see final rule here and the updated forms here) even though no one needs to check "yes" or "no" yet because the XBRL rules are phased in starting with the fiscal period ending on or after June 15, 2009 (for mondo-ginormous filers, later for others). Then why add meaningless words to the cover of your periodic reports? Well, because it's required.


    5. SEC Chair Mary Schapiro continues to prepare us for upcoming proxy access rules that make easier shareholder nominations for directors, see here, which she indicated here would be on their way "very soon" and which will be discussed at the SEC's open meeting on May 20 (see here).


    6. Speaking of proxy access, here (somewhat belatedly) is the Thomson Reuters report on shareholder activism in 2008. Among other things, the report notes that, compared to 2007, companies were more willing to compromise with shareholders, increasing the compromise rate (38% of the time compared to 12% in 2007) and decreasing the shareholder success rate (29% of the time compared to 41% of the time).


    7. In the vein of shareholder activism, some time ago (2007 in fact) we noted the enactment of North Dakota's shareholder-friendly laws regarding public company proxy access, declassified boards, independent board chairs, a mandatory shareholder advisory vote on executive compensation, and other governance provisions (see here). The ND law is making news again as a few notable companies are asking shareholders to vote on whether or not to reincorporate there (see here), including American Railcar Industries, which is controlled by Carl Icahn, dealmaker and rich guy who was a strong advocate for the ND law (see here). So, will "Bismarck" come to mean something to corporate bigwigs other than a cream-filled doughnut or an iron chancellor? Not a chance, claims UCLA Law Professor Stephen Bainbridge, in his not obliquely titled "Why the North Dakota Publicly Traded Corporations Act Will Fail," here.


    8. Law firm summaries of the changes to the Delaware General Corporation Law we mentioned last month abound. (Delaware's effort to stem an exodus to the Peace Garden State?) A perfectly fine one is here.


    9. Our friends at The Corporate Counsel have extended through 2009 the give-away of their publication InvestorRelationships, which you can access, after signing up, here. The Spring 2009 issue addresses, among other things, changing earnings guidance practices. Also available for free is the Spring 2009 issue of CompensationStandards, here.


    10. Finally, for your reading pleasure, the Treasury Department released, here, its "General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals," which, although "general," is still a weighty 131 pages. The publication follows releases about the Obama Administration's international tax reforms here, here and here. Enjoy!
     
    __________________________
     
    April 15, 2009
     

    You can look at archived issues of these emails, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.



    1.

    SEC Chairman Shapiro revealed in a recent speech, here, her "immediate agenda" for SEC action, including a commitment to take up once again controversial "proxy access" proposals. Recall that the SEC had competing proposed rules to reform how shareholders may put agenda items in a company's annual proxy statement, and many were unhappy with the SEC's adoption of the "status quo" rather than the (let's call it) "expanded access" proposals back in 2007. Expect more fun on this touchy subject soon. (See the December 12, 2007 and November 14, 2007 issues of In Case You Missed It, here, for some history and useful links.)



    2.

    The SEC updated, here, its Compliance and Disclosure Interpretations about Rule 10b5-1 (insider trading "on the basis of" material nonpublic information). Among other tidbits, the SEC notes (CDI 120.19) that although cancelling a plan if the stock price dips doesn't void the affirmative defense under the rule, entering into a new plan after termination could make the SEC ponder whether actions were "in good faith and not as part of a plan or scheme to evade." Also, the SEC quite curtly says (CDI 120.20) that the affirmative defense of the rule is not available if a person establishes a plan when aware of material nonpublic information but delays the plan's effectiveness until after the information is public. This latter interpretation strikes us as just plain wrong (guys, you can't trade "on the basis of" nonpublic information if the information is public when the trade occurs), but there you have it.



    3.

    The SEC proposed rules, here, to amend Regulation SHO to implement two approaches to restrictions on short selling—a price test that applies to all, and a "circuit breaker" test that would apply to a particular security in a severe market drop. The proposal is the SEC's latest attempt to grapple with short sales and follows its abandonment of the "uptick" rule in 2007, a recent SEC report (here) on the perils of "naked shorts" (which makes us shudder every time we hear it), and the specter of Congressional action (see here). SEC Chairman Shapiro's statement about the proposed rules is here.



    4.

    Comments (see here) have been rolling in on the NYSE's proposal to eliminate broker discretionary voting for the election of directors, which seems on the cusp of adoption after a long wait. For a preview of how this might affect you, Broadridge provides a useful analysis of the effect of broker votes in 2007, including with respect to companies with majority voting provisions, in its comment letter, here.



    5.

    Nasdaq proposed, here, to extend its suspension of minimum bid and market value of public float requirements for continued listing. This second extension would push the temporary suspension originally adopted in October 2008 to July 19, 2009.



    6.

    Anger continues to simmer over executive compensation excesses, including the House of Representatives' not unexpected but pretty silly enactment of a special 90% tax on bonuses paid to executives at companies who receive $5 billion in bailout money (read "AIG"), see here. Not surprisingly, the public apparently hates that executives, particularly if they work at companies getting federal bailout funds, make so much money (see here). While the House continues to echo public outcry, the Obama Administration has apparently moved to give bailout participants a way to avoid Congressional restrictions, including those related to executive compensation, to encourage participation (see here).



    7.

    Speaking of the bailout, the Treasury Department released a "fact sheet," here, with details on its Financial Stability Plan, including how it plans to deal with toxic assets through its Public-Private Partnership Investment Program in an effort to get banks lending again.



    8.

    The D&O Diary speculates that public outrage is fueling an increase in executive compensation-related litigation (see "Executive Compensation: The New Front in the Litigation Wars?", here), alleging things like corporate waste, breach of fiduciary duties, unjust enrichment and the like.



    9.

    Also, unsurprisingly, 2008 saw the second straight year of increased securities law litigation, with the financial industry seizing the honor of "most sued" from high-tech companies, according to PricewaterhouseCoopers' 2008 Securities Litigation Study, here.



    10.

    Given market declines, companies are increasingly interested in adopting "Poison Pills" to ward off low-ball acquisition offers. The core of a pill (usually styled a "shareholder rights plan") is simple: "if you try to buy my company, you better negotiate with me, because if you don't I'll give everyone except you lots more shares, making your attempted acquisition way too expensive." Because pills have been effective, none had ever been triggered, until, that is, 2008 when Versata Enterprises triggered Selectica, Inc.'s NOL pill (a special type of poison pill designed to ensure net operating losses don't disappear because of changes in share ownership). "Lessons" from the Selectica experience are here. Stay tuned for the Delaware Chancery Court's decision on the validity of Selectica's rights plan, including its exchange feature, when it rules on Selectica's request for a declaratory judgment that its plan is "valid, binding and enforceable." (Also, brace yourselves for the flurry of law firm commentary about the ruling.)



    11.

    The Delaware Supreme Court recently reversed the Chancery Court's decision in Lyondell v. Ryan, here. As you recall, the Chancery Court had refused to grant summary judgment on claims that the Lyondell directors breached the duty of loyalty by failing to act in good faith in conducting the sales process, noting "unexplained inaction" when the company was put in play. For those paying attention, the Supreme Court holding affirms directors' wide discretion in managing a sales process and further assures directors they won't be personally liable for their responses to acquisition proposals. Long live the business judgment rule!.



    12.

    The Delaware Governor, rumor has it, last week signed into law changes to the Delaware General Corporation Law that affect proxy access, reimbursement for proxy expenses, stockholder record and notice dates, and indemnity coverage. The changes, here, will be effective August 1, 2009.



    13.

    Finally, in accounting news,

    • The SEC released Staff Accounting Bulletin No. 111, regarding impairment of investments in debt and equity securities, here, and FASB issued a staff position on the same topic, here.
    • FASB issued staff positions on determining and disclosing "fair value," here and here. (More accounting intrigue in the push and pull of the "mark to market" debate.)
    • The PCAOB announced it will issue a concept release on audit confirmations, see here.

    ________________________

     
    March 11, 2009
     

    1.

    You are undoubtedly hearing more than you want to about the American Recovery and Reinvestment Act of 2009 (TARP II). But don't expect that to change any time soon.

    • If your company is not a financial institution that receives TARP funds, the executive compensation restrictions in the Act do not apply to you. The provisions may guide the views of shareholder advisory services like RiskMetrics, however, and some will undoubtedly begin citing them as "best practices." So brace yourselves.
    • Here is the SEC's interpretive guidance on the "say on pay" provisions of the Act and here is RiskMetrics' commentary on those provisions. The SEC adopts whole hog Senate Banking Chair Chris Dodd's statement about what the bill means in his letter to SEC Chair Schapiro, here, including his view that "permit" a nonbinding vote on executive compensation means "must have" a vote, even if not requested by shareholders, and his view that the vote must be included in proxy statements filed after February 17, 2009.
    • Here is a suggestion that President Obama may be having some difficulty with his more populist party members on executive pay policy.
    • A few alerts on the executive pay provisions in the Act are here and here.
    • A few of our own client alerts on pieces of the Act are here (tax) and here (renewable energy), and here (telecom).
    • Also, don't be surprised if you start hearing more about the "TALF" than you'd like. Details of the Term Asset-Backed Securities Loan Facility were recently announced by the Board of Governors of the Federal Reserve here.

    2.

    Say on Pay just won't go away. (Catchy, no?) According to Smart Pros (and who doesn't wish she had named her company that?), more than 100 companies face shareholder proposals for a nonbinding shareholder vote on executive pay, although apparently only five have agreed to include them (see here). (Again, a company receiving TARP money must have such a vote even if shareholders don't ask for it, and many must scramble to include the vote in the proxy statement for this year's shareholder meeting.)



    3.

    Every corporate crisis aftermath comes with a lecture on how better corporate governance could have prevented it. Here is the OECD's report on how the financial crisis could have been averted "if only." The report touches on compensation arrangements that encouraged excessive risk-taking, lax accounting and regulatory standards, poor board oversight . . . the usual.



    4.

    Since we added a dash of international flavor with our mention of the OECD, note also the recent statement by EU Commissioner McCreevy, here, complaining about the U.S.'s apparent unwillingness to recognize the adequacy of EU audit standards. Mostly, we like that McCreevy uses the phrase "based upon mutual trust" three times in the brief release (meaning there isn't any). On the flip side of the foreign audit coin, the PCAOB adopted rules on the timing of non-U.S. audit firm inspections, see here.



    5.

    For NYSE-listed companies, note:

    • The SEC approved NYSE's temporary abandonment of minimum price and market cap standards, here.
    • With its recent filing of a fourth amendment, adoption of the NYSE's proposal to prohibit broker discretionary voting for election of directors appears nigh, see here. If adopted, the rule change would affect shareholder meetings held after January 1, 2010 and we would expect to see more routine, or even throw-away, proposals showing up in proxy statements as NYSE companies maneuver to address quorum issues presented by the rule change. (If there are no broker votes to count, at least as "present," a company may fail to get a quorum and properly constitute the shareholder meeting.) If proxy solicitor Okapi Partners is right, even this year may see a shift in how broker votes are cast—i.e., not with management's recommendations but proportionally with beneficial holder instructions, see here.

    6.

    The SEC adopted final rules, here, that allow applicants for EDGAR codes to submit the required "authenticating documents" in PDF, rather than fax. The rule was adopted in anticipation of a flood of applications from companies now required to file Forms D electronically.


    7.

    Just in case anyone plans an IPO (stop laughing), the SEC staff posted observations from its review of smaller reporting company IPOs, here. Tailored to small companies, obviously, but a useful reminder for all.



    8.

    Giving Harvard's Corporate Governance Forum a run for its money, Yale's Millstein Center for Corporate Governance and Performance (see here) published a guide on Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry, here. It is perhaps a useful reminder, if nothing else, that there are no industry ethics rules governing influential groups like RiskMetrics and other shareholder advisers.



    9.

    The first year of mandatory e-proxy has spawned increased criticism of the e-proxy effort, including from SEC Commissioner Aguilar here, who suggests the SEC must either fix or scrap e-proxy given its correlation with decreased shareholder participation. For those facing e-proxy requirements, you might also peruse the free issue of Investor Relations, here, which has tips on online annual reports and proxy statements: What's Wrong and How to Fix It.



    10.

    It's not surprising, at least to most securities lawyers, that climate change disclosure didn't gain much traction in 2008, except among public energy companies and in particular those subject to the Martin Act and threats by New York's Attorney General. Here is (yet another) review of 2008 climate change disclosure, confirming the lack of disclosure but hoping 2009 will see more. We're doubtful, given the Obama administration's focus on other things; our view that, without some catalyst, the call for disclosure is growing stale (the same arguments have been put forth by environmental activists for years); the lack of a coherent, meaningful disclosure regime that gives useful information to investors and our view that the SEC is unlikely to propose such a regime any time soon; and the SEC's explicit requirement that companies "[d]o not present risks that could apply to any issuer" (see here). Of course, that instruction is routinely ignored (dilution risk factor? please), but there you go. Editor's note: Please don't start a letter writing campaign against ICYMI. Understand, we think the environment is swell. But we're securities lawyers.



    11.

    As our occasional reminder, lest you forget, option backdating is still an SEC enforcement focus. It brought an action last month against BlackBerry maker Research in Motion and four of its executives alleging backdating misdeeds, see here.



    12.

    In Delaware corporation news:

    • In re Citigroup Inc. Shareholder Derivative Litigation, here, suggests the business judgment rule will survive even in the financial downturn.
    • In Gantler v. Stephens, here, the Delaware Chancery Court warns that executives of Delaware corporations have the same fiduciary duties as directors, but may not benefit from the DGCL exculpation clauses (see commentary here).
    • Pending amendments to the DGCL, here, include changes that could affect proxy access, reimbursement for proxy expenses, stockholder record and notice dates, and indemnity coverage.

    13.

    Finally, the SEC warns not to be misled by SEC impersonators. The SEC's release, in which it explains that it will never tell you to wire money somewhere or request your brokerage account access codes, is here. Of course, your willingness to give your bank account details to a member of the Nigerian royal family who is just trying to get his assets out of the country and will richly reward you for helping . . . well, that's your call.

     
    __________________________
     
    February 11, 2009
     

    1.

    Scandals, real or imagined, tend to spawn all kinds of ideas about how to "fix" things. So brace yourselves for "solutions" to executive compensation gone awry. President Obama recently remarked on the "shameful" bonuses paid on Wall Street in 2008, see here, and revised the executive compensation provisions for those participating in the TARP (now, the "Financial Stability Plan"), see here, including a $500,000 cap on tax deductibility, albeit with a gigantic restricted stock loophole. The hope, at least, is that this will spur a cultural change among executives, see here. The Senate-passed version of the "American Recovery and Reinvestment Act", here, contains a hodgepodge of executive compensation fixes that aren't consistent with Obama's. And just to complicate things, here is Compensation Standards' top four TARP executive compensation fixes. (The "no executive bonus if the company laid off more than 3% of its workforce" strikes us as a bit odd, in a "let's reward executives who maintain bloated work forces even if the company is not making money" kind of way. God bless America.)



    2.

    A few other executive compensation items:

    • A statistical investigation of the "Lake Wobegon Effect" (where all CEOs are above average) and its contribution to CEO compensation growth is here.
    • An analysis of board committees and CEO pay is here.
    • According to RiskMetrics, see here, most companies are repricing underwater options without shareholder approval (presumably because their option plans permit this—note that the interpretation of Nasdaq rules in the Blog probably is not accurate based on Nasdaq's statements, under "Materiality of Amendments" here, that shareholder approval of a repricing is required unless the option plan specifically permits repricing without shareholder approval). Not surprisingly, RiskMetrics is not a fan of this practice.
    • Spurred by the national mood, more corporations are heeding the call for non-binding shareholder "say on pay" votes, see here, although the number remains small (16, according to the Wall Street Journal).

    3.

    A consensus seems to be building, already, that the TARP hasn't been a raving success, see, e.g., here, which might explain the Obama Administration's renaming it the "Financial Stability Plan." Even the Congressional Oversight Panel convened to watchdog the TARP doesn't know what has happened to the money, see here, although what the Panel has figured out so far hasn't been good, see here. Periodic reports from the Panel are available here. Of course, the Panel may have even more to not understand, as President Obama's administration begins phase II of the bailout (see here).



    4.

    The SEC published, here, its final XBRL rules. Soon, a company's financial data in eXtensible Business Reporting Language will need to be filed as an exhibit to its periodic reports and posted on its website. The phase-in begins with companies reporting in 2009. Mondo-ginormous companies (large accelerated filers with over $5 billion in public float) must comply starting with the 10-Q for the period ending after June 15, 2009; large accelerated filers must comply starting with the 10-Q for the period ending after June 15, 2010; and everyone else must comply starting with the 10-Q for the period ending after June 15, 2011. Failing to file the interactive data means your filing isn't complete and therefore isn't "timely," so you wouldn't be able to use Form S-3 and your stockholders couldn't make Rule 144 sales. But, once you file the late data, your prior filings become timely. In the unlikely event your financial printer hasn't already hit you up for the great services it offers to make you XBRL-compliant, don't worry, it will.



    5.

    The SEC's Division of Corporation Finance posted updated compliance & disclosure interpretations that book-end public company life—'33 Act guidance, here, and "going private" guidance, here.



    6.

    If you love long reports as much as we do, look no further than ICYMI.

    • The SEC published its 21st Century Disclosure Initiative Report, available here, which focuses on updating the filing system, rather than changing disclosure content.
    • The GAO published its framework for modernizing the outdated U.S. Financial Regulatory System, here.
    • Not to be outdone, the Congressional Oversight Panel charged with TARP monitoring—yes, that panel—published a special report on regulatory reform, here.

    7.

    New SEC Chairwoman Mary Schapiro's first public statement, at the PLI's "SEC Speaks" program, is here.



    8.

    The NYSE proposed, here, a rule change to temporarily lower the market cap requirements for continued listing from $25 to $15 million. Just another sign of the times. The NYSE also published its annual corporate governance letter to listed companies, here, a reminder of all the things to remember as proxy season approaches.



    9.

    FINRA published its first notice of 2009, here, a reminder to broker-dealers of their obligations to ensure Rule 144 sales are on the up and up.



    10.

    A few items on internal controls:

    • The PCAOB issued guidance to auditors of small businesses, here, for integrated audits of internal controls and financial statements. Recall that small public companies (those who are not accelerated filers) must include the auditor attestation of management's assessment of internal control over financial reporting for the first time for fiscal years ending on or after December 15, 2008 (see here).
    • COSO published guidance on effective monitoring of internal controls. The introduction to the three-volume report is here.
    • Just for fun, here is an academic paper suggesting audit committee strength is correlated with good internal controls. Well thank goodness.
    • The U.S. Ninth Circuit affirmed, here, the dismissal of securities claims regarding Digimarc, including affirming that execution by the CEO and CFO of SOX 302 certifications was insufficient to establish scienter.

    11.

    The IRS published Notice 2008-113, here, which among other things describes how you can avoid onerous tax penalties under IRC Section 409A for inadvertent option pricing screw-ups, provided you act quickly enough and take steps to ensure it doesn't happen again.



    12.

    The Harvard Corporate Governance Blog offers another reminder (everywhere these days) to consider take-over defenses to ward off unsolicited takeover offers, see here. Meanwhile, the bargain sales expected in 2009 have not yet materialized because private equity types are waiting for "rational sellers," see here.



    13.

    Finally, a few reminders:

    • For you Delaware corporations, note that your annual franchise fee payment and annual report is due by March 1. Information on calculating the tax is here. The report must be filed electronically, either through your registered agent or directly, here.
    • If you're making unregistered securities sales under Regulation D, beginning March 16, 2009, you will need to make those filings electronically on Form D. That means you'll need to apply for filing codes from the SEC. To make sure you don't miss the 15 day deadline for getting your Form D filed, apply for the codes before the sale. (See final SEC rule here.)
    • Valentine's Day is nigh and, like most hot-blooded securities lawyers, our thoughts turn to compliance with Regulation 13D and the annual filing of Schedules 13G, due February 14 (well, usually, but actually February 17 because of weekends and holidays). Remember, nothing says "I own more than 5% of a public company's stock" like a Schedule 13G.
     __________________________
     
    January 14, 2009
     

    1.

    As attention turns to this year's proxy season, a host of information wends its way onto the scene.

    • As we noted last month, RiskMetrics posted its preview of 2009 proxy proposals, here. Not surprisingly, financial scandals and bailouts are going to fuel executive compensation proposals. RM's summary is consistent with a post on Harvard's Corporate Governance Blog, here.
    • All public companies must now comply with e-proxy rules, see here, which means each company must post materials on its website and notify shareholders of their availability, and may choose to deliver materials in paper copy, opt for the "notice and access" method, or use the hybrid delivery method allowed by the e-proxy rules. Statistics on e-proxy use last year have been gathered by Broadridge here. Note in particular the 40-day advance Notice of Internet Availability (which means if you need to file a preliminary proxy statement, you need to do it at least 50 days before the annual meeting) that is required if you want to take advantage of the "notice and access" option, which has the greatest potential for cost savings.
    • Hoping the Obama Administration will be more sympathetic to shareholders (or at least to shareholders who are unions, investment funds or environmental advocates who think they should be able to tell a public company what risks to disclose), a coalition of investors sent a letter to Obama, here, requesting that his administration "reverse a pattern of recent SEC staff decisions that have been closing the door to important dialogues between shareholders and management." More directly, signers want the SEC to stop permitting exclusion of all sorts of shareholder proxy proposals to require risk evaluation disclosures under the "ordinary business" exception of Rule 14a-8, which accounted for 65 of the 223 excluded proxy proposals in 2008 according to RiskMetrics (see here).

    2.

    Environmental groups Ceres and the Investor Network on Climate Risk, together with RiskMetrics, published an assessment of climate change-related corporate governance practices of companies across a range of industries.



    3.

    If even possible, the spotlight on executive compensation appears to be brightening in 2009. (Because let's face it, if there's one thing we all hate when times are tough, it's rich people.)

    • Here is a Washington Post story about the "growing sense of outrage" and here is one about the potential "toothlessness" of TARP provisions. Ben Heineman Jr., senior fellow at Harvard Law, published, here, an article reciting "principles for reforming executive pay."
    • Limits on executive compensation (and a requirement to get rid of corporate jets!) made its way into Bush's plan to rescue the U.S. auto industry, see here, part of the TARP since Congress put the kibosh on a separate bailout.
    • U.S. House Financial Services Committee Chairman Barney Frank seems confident, see here, that with all the momentum, "say on pay" legislation, generally requiring a non-binding shareholder advisory vote on executive comp packages, will be enacted by the 111th Congress. As reported by The Corporate Counsel, the (quite high) 38% "no" vote on executive compensation packages at Jackson-Hewitt, the fifth company to allow a say on pay vote, is a harbinger of things to come (see here).
    • Rep. Frank also isn't satisfied with the TARP, already holding hearings on HR 384, a bill to reform the TARP and ensure accountability, here.
    • On the sunny side of executive comp, here is an article noting which high-powered CEOs are only being paid an annual salary of $1.00. It will be interesting to see the reaction to publication of other compensation paid to these folks (often much higher than base salary) when proxy statements come out (see, e.g., here).

    4.

    Marty Lipton et al. posted "Some Thoughts for Boards of Directors in 2009," here. No particularly surprising thoughts, but useful reminders—pay attention to risk, executive compensation, CEO succession planning and take-over defenses, and expect shareholder activism and think about how to communicate with shareholders. These thoughts might be read together with RiskMetrics' summary of Trends in Board Practices, based on analysis of proxy statements from July 2007 through June 2008, here. To summarize the summary: Boards are apparently becoming slightly more independent, and having a non-CEO Board Chairman more common.



    5.

    In accounting news,

    • FASB proposed new staff positions on disclosure about fair value of financial instruments, here, and business combination accounting under Rule 141(R), here, and issued a new staff position on accounting for transfers and servicing of financial assets and extinguishments of liabilities, here.
    • The SEC published its report on "mark-to-market" accounting, as required by the TARP, here, recommending against abandoning fair value accounting but suggesting improvements.

    6.

    The SEC approved, see here and here, the requirement that public companies and mutual funds begin using interactive data for financial information (XBRL, baby). FEI gives some color on the meeting where the vote was taken here.



    7.

    In market regulation news,

    • Nasdaq extended its minimum bid price and market value rule suspensions until April 20, 2009, see here, and also proposed to reduce the initial minimum bid price from $5 to $4 for Global and Global Select market companies, here.
    • FINRA published, see here, its first batch of NASD and NYSE consolidated rules. It also published a series of spiffy conversion charts, available here, for those playing at home.
    • The General Accountability Office released its framework for modernizing the U.S. financial regulatory system, here.
    • The SEC adopted temporary exemptions to securities laws for eligible credit default swaps, here, to facilitate implementing a central clearing house for CDSs.

    8.

    The SEC's Office of Economic Analysis invites public companies to participate in its web-based survey of the costs and benefits of internal control over financial reporting requirements that implement Sarbanes-Oxley Act Section 404. You can participate in this timely investigation (uh. . . sarcasm) through the link here. (To be fair, the results will help the SEC assess whether its guidance on how to conduct the internal controls evaluation and PCAOB's Auditing Standard No. 5 have worked.)



    9.

    The SEC has been, not surprisingly, fairly quiet in the last month as senior staff leaves with the Bush administration. Also, many at the SEC's enforcement division may be preoccupied with the internal investigation of Madoff oversight mistakes. See Chairman Cox's unusual statement, here, about the investigation.



    10.

    In our litigation corner,

    • The U.S. 8th Circuit opined, here, that the Trust Indenture Act does not impose an independent duty to "timely" file SEC reports.
    • The U.S. 9th Circuit reminds us, in Glazer v. Magistri, here, that a representation in an agreement filed as an exhibit to an Annual Report on Form 10-K may form a basis for a securities fraud claim, even though qualified by non-public disclosure schedules and even though the agreement had a "no third party beneficiaries" clause. The position reminds us of the SEC's view in SEC v. Titan Corporation (2005), here, which also alerted M&A lawyers that representations could form the basis for securities law violations. Those familiar with M&A likely would have been comfortable asserting that reliance on a qualified representation in a filed M&A agreement was not "reasonable," but the 9th Circuit's dicta cautions us that a "reasonable investor" is not, apparently, so insightful.
    • The 9th Circuit also confirmed, here, that Section 304 of the Sarbanes-Oxley Act does not create a private right of action to force disgorgement of executive bonuses.
    • The U.S. DOJ recently published, see here, model leniency letters and Q&As on the letters, which suggest when cooperating can help you avoid fines and jail time for antitrust violations. One helpful tip: don't dawdle in ceasing to violate the law after you discover the violation. (The DOJ's failed attempt to revoke amnesty for Stolt-Nielsen Transportation Group, see here, led to the revised letters.)
    • Two state courts remind us that, although courts recognize the pressures and uncertainties created by financial turmoil, they still will analyze a board's business judgment against this backdrop and won't just give boards a bye. See In re Bear Stearns Litigation, here, and Ehrenhaus v. Baker, here.
     __________________________
     
    December 10, 2008
     

    1.

    In bailout related news (what isn't related these days?),

    • The GAO issued, here, its first assessment of the TARP, including tidbits on problems with monitoring participant executive pay practices.
    • RiskMetrics muses, here, on the effect federal investment in the private sector will have on corporate governance.
    • A draft Congressional plan for the first (yes, "first"—don't kid yourself) $15 billion in aid to the auto industry went to the President two days ago for review, see here; it includes expected caps on executive compensation and might also require these companies to lose the corporate jets (if only they had driven hybrids on the first trip to D.C.).
    • Nasdaq posted updated 2008 listing standard interpretations, here, which include guidance on when financial emergency overrides Nasdaq shareholder approval requirements. Nasdaq's FAQs, here, also address that exception.
    • Compliance Week reports that labor unions are coat-tailing on TARP executive compensation restrictions to build support for proxy proposals seeking more restriction for TARP participants, see here. (In all likelihood, companies will be able to exclude the proposals from their proxy statements under Rule 14a-8.)
    • AIG, chastened by the earlier reaction to its spa trip, announced, here, executive pay cuts (now, doesn't the $85 billion you're giving AIG go down easier?).
    • Senators Sanders, Boxer and Lincoln introduced the "Stop the Greed on Wall Street Bill," here, which would outright cap aggregate compensation of TARP participant employees at $400,000, the U.S. President's salary. (Kudos to them for selecting a catchier title than the "It Will Die In Committee But Enable My Political Sound Bites Bill".)
    • The G-20 nations published, here, a declaration on the financial crisis and areas of focus and joint cooperation.
    • The SEC, Treasury and Federal Reserve released a joint memorandum of understanding regarding central counterparty services for credit default swaps and other efforts to strengthen over-the-counter derivative infrastructure and regulation.

    2.

    Thanks to the bailout focus on executive compensation some commentators foresee the revival of "say on pay" legislation, which Obama supported while a Senator (see here). DolmatConnell published a report on executive compensation in troubled times, a purported guide for compensation committees, here.



    3.

    In the last few weeks, the SEC

    • posted the CorpFin Office of Chief Accountant's updated Financial Reporting Manual, here, its internal guide and a useful resource for understanding SEC positions on financial reporting,
    • proposed rules to strengthen oversight of credit rating agencies, here,
    • updated '33 Act Compliance and Disclosure Interpretations, here,
    • provided guidance to companies with expiring shelf registrations, here,
    • published its proposed IFRS roadmap, here,
    • posted a small business compliance guide, here, that parses the cross-border rules adopted in September, see here,
    • posted Chairman Cox's remarks to the AICPA National Conference on SEC and PCAOB developments, here,
    • posted CorpFin Director White's last formal speech, a plea not to jettison good regulation in the overhaul of disclosure systems, here.

    4.

    If you have questions about SEC rules, or about any old thing, the SEC now allows electronic submission of questions to the SEC on a new online form, here. Wisely, the SEC cautions that you better do your research and requires that you include the research results with your question.



    5.

    The PCAOB issued an alert on audit considerations in the current economic environment, here.



    6.

    RiskMetrics posted its 2009 proxy voting policies, here, including its views on option repricing, takeover defenses and social proposals. A potentially handy guide if you have anything interesting planned for your 2009 shareholder meeting. It also posted a look at how the 2009 proxy season is shaping up, based on filings to date, here.



    7.

    The Southern District of New York rejected Harvard Law Professor Lucian Bebchuk's effort (see materials here) to expand shareholder access to proxy statements, at least for one company. Bebchuk asked that Electronic Arts (EA) include in its proxy statement for shareholder approval a proposal to embed in EA's bylaws the requirement that EA include future shareholder proposals in its proxy statement that are otherwise excludable under SEC Rule 14a-8, essentially taking away EA's discretion to exclude. Bebchuk is an outspoken advocate for increased shareholder rights and was no doubt dismayed at the SEC's adoption of the "status quo," rather than the "expanded access," shareholder proxy proposal rule at the end of 2007 (see here). His proposal to EA has more than a passing similarity to the rejected SEC rule. Stay tuned for the Court of Appeals' view of Bebchuk's proposal.



    8.

    The ABA's M&A Market Trends Subcommittee released its 2008 Deal Points Study for Strategic Purchasers of Public Targets, here. The study rounds out the Subcommittee's collection of similar 2008 studies of public purchasers of private targets and equity fund purchases of public targets.



    9.

    The Treasury Department's Committee on Foreign Investment in the United States adopted final rules, here, to implement amendments of the Foreign Investment and National Security Act of 2007 and the Defense Production Act of 1950. The rules don't provide bright-line guidance, but encourage, without requiring, pre-filing with the CFIUS to check if there's a problem with the acquisition of "control" by a "foreign persons" of a U.S. entity in light of "the potential national security-related effects on United States critical infrastructure, including major energy assets."



    10.

    KPMG released, see here, its 2008 Anti-Bribery and Anti-Corruption Survey, in which it overviews FCPA compliance programs of U.S. multi-nationals.



    11.

    ASTM International (formerly the American Society for Testing and Materials) published for comment a proposed voluntary standard entitled "Financial Disclosures Attributed to Climate Change," intended to provide guidance on when public company disclosure of climate change "stuff" is required. It's astounding, and annoying, that the standard itself isn't posted on the Internet, but a summary from the Brattle Group is here and we have a copy if you're interested. There isn't much meat in the proposal, and certainly none of it is new (see, for example, Global Reporting Initiative materials here and Carbon Disclosure Project materials here), or even as detailed as last year's petition to the SEC by a coalition of environmental groups and investment funds, itself a rehash of prior years' efforts. We remain skeptical that companies will do much more than note in filings the generalized risks posed by climate change and concomitant regulation ("our profits may suffer if the earth is destroyed") or occasionally allow "green" marketing language to seep into their disclosures. Generally speaking, public disclosure is, as it should be, backward looking and conservative, and it's doubtful that anything but substantive, measurable things—lawsuits, new environmental regulation, required capital expenditures—will spark interesting disclosure. Public companies are required to disclose "known trends" that impact financial condition and results of operation, but those disclosures typically spring from quantifiable and consistent data—it's unlikely financial types would be as comfortable as environmentalists saying that the financial effects of climate change are either "known" or a "trend." That said, environmental groups, both on the disclosure front and the proxy proposals front (see here), and the New York Attorney General (see here) continue to push.



    12.

    In somewhat related news, the U.S. Department of Labor issued guidance, here, to the effect that ERISA fiduciaries may not pursue a political agenda when making investments and must put financial criteria first. Of interest to those following the climate change disclosure debate is the following example in the guidance: "A plan sponsor adopts an investment policy that favors plan investment in companies meeting certain environmental criteria (so-called 'green' companies). In carrying out the policy, the plan's fiduciaries may not simply consider investments only in green companies. They must consider all investments that meet the plan's prudent financial criteria. The fiduciaries may apply the investment policy to eliminate a company from consideration only if they appropriately determine that other available investments provide equal or better returns at the same or lower risks, and would play the same role in the plan's portfolio."



    13.

    While on the Labor Department, note that it issued final Family and Medical Leave Act rules, here, including rules on military leave.



    14.

    Finally, the Ninth Circuit Court of Appeals joined the Eleventh and Fifth Circuits in holding that merely signing a Sarbanes-Oxley certification does not demonstrate "a strong inference of scienter" in securities fraud cases. Its holding in Glazer v. Magistri is here.


     __________________________ 
     
    November 12, 2008
     

    1.

    Try as we might, we can't get out from under the TARP. For the curious, the Treasury Department's form documents for those participating in the TARP are here.



    2.

    On the edges of the financial bailout, accounting regulators have reacted to "fair value" financial reporting pressures:

    • the SEC held its first roundtable session on "mark to market" accounting, see here. (Note too FASB's letter to SEC Chairman Cox regarding fair value accounting, here, urging the SEC not to bow to knee-jerk political pressure.)
    • the FASB agreed to issue guidance on FAS132-a, Employers' Disclosures about Postretirement Benefit Plan Assets (and guidance on FAS141R, Business Combinations), see here.
    • the FASB published a staff position on determining fair value of a financial asset when the market for the asset is not active, here.
    • the International Accounting Standards Board amended IAS 39, Financial Instruments: Recognition and Measurement, and IFSR 7, Financial Instruments: Disclosure, here.
    • the SEC chief accountant's letter to the FASB, regarding fair value assessment for perpetual preferred securities, is here.


    3.

    Also in response to market turmoil, Nasdaq has proposed, here, to suspend temporarily continued listing standards related to bid and market value of publicly held shares until markets calm down.



    4.

    Related to the TARP, and as a slick segue to other proxy statement news, outgoing SEC CorpFin Director White (see here) discussed here the executive compensation provisions of the bailout bill and how they are relevant to non-financial institution types. Somewhat opaquely, White says "[I]t is already clear that the TARP and the unusual market events that led up to its enactment will introduce new compensation disclosure challenges. So this is certainly something that companies should, and no doubt are, beginning to gear up for, as are we in Corp Fin." Huh. White hints, at least, that in crafting its 2009 CD&A review program, the SEC may look for discussion of how incentives affect executive risk-taking. He also reviews second-year compensation disclosures, noting where companies continue to fall short (performance targets, benchmarking, analysis).



    5.

    In proxy statement/shareholder meeting news:

    • RiskMetrics has posted its 2009 Proxy Season policies for comment, here. (Your chance to influence how RiskMetrics will tell your shareholders to vote or at least to get an idea of what storms you will have to weather.)
    • The SEC refused to say, see here, that Hain Celestial Group could exclude from its proxy statement a shareholder proposal to reincorporate from Delaware to North Dakota. Why North Dakota? (Aside, obviously, from the easy access to sunflowers, hotdish, Scandinavian Americans, barley and dry edible beans - #1 producer in the nation!) Because the North Dakota Publicly Traded Corporations Act, here, has all kinds of provisions shareholder activists like. (See the supporting statement for the proposal, here and commentary here). The beginning of a public company exodus to the Peace Garden State?
    • The SEC issued Staff Legal Bulletin 14D, here, with some additional staff guidance on shareholder meeting proposals and links to earlier staff guidance.


    6.

    A private company, Xtensible Data, announced it has available compensation data for over 4,000 public companies in XBRL here. The SEC's test XBRL sitehas data for only 500 companies posted.



    7.

    The PCAOB proposed seven new audit standards, see here and here, to replace interim standards on audit risk and materiality, audit planning and supervision, consideration of internal control in an audit of financial statements, audit evidence, and performing tests of accounts and disclosures before year end.



    8.

    In litigation news,

    • The U.S. Second Circuit, in Morrison v. National Australian Bank Ltd., here, gave guidance on when "f-cubed" litigation (foreign plaintiff suing foreign corporation based on foreign sales) is sustainable in U.S., finding no jurisdiction in Morrison despite the SEC's urging the contrary, see here.
    • The U.S. Seventh Circuit Court opined in Joyce v. Morgan Stanley, here, that shareholders could not sue a financial advisor based on the fairness opinion provided to the board. In finding the advisor owed no fiduciary duty to shareholders, the Court parsed the disclaimer language in the fairness opinion.
    • The U.S. Ninth Circuit discussed in Thompson v. Paul, here, lawyers' liability under Section 10(b) of the Securities Exchange Act in connection with issuance of securities in a settlement. Yes, lawyers can be liable for misrepresentations in connection with the sale of securities, just not on the facts in Thompson.


    9.

    As it does each year, the SEC ballyhooed its enforcement efforts in FY2008, here, which include a big upswing in insider trading and market manipulation actions. Perhaps more interesting, NERA Economic Consulting published a study of trends in SEC settlements in the post-SOX era, available here along with other information on securities litigation trends.



    10.

    The FINRA issued guidance on structure, trends and conflicts of interest associated with SPACs, here. It also proposed rules to replace NASD and NYSE analyst research and conflict of interest rules, see here (comment period ends November 14).



    11.

    Sherman & Sterling published its annual 2008 Corporate Governance and Compensation Surveys of the 100 largest public companies, accessible here. In a somewhat related, albeit more international, vein, KPMG reported, here, on the increase in disclosure of environmental, social and governance data by large multinational companies.



    12.

    Last month, we noted the steep decline in M&A activity in the last few months, and the dim immediate prospects. The National Venture Capital Association adds the depressing report, here, that venture-backed IPO activity is also low. Low, low, low.

     __________________________ 
     
    October 15, 2008


    1.

    The SEC's Division of Enforcement posted its Enforcement Manual earlier this month, here. The Manual is intended to "provide guidance only to the staff of the Division," but will obviously be dissected by those under, or worried about, investigation. Of note, given the recent kerfuffle about the US Department of Justice's attorney-client privilege waiver policies (see our prior discussion here) is the SEC's admonition that "the staff should not ask a party to waive the attorney-client or work product privileges and is directed not to do so."



    2.

    It's possible, we suppose, that you haven't already been inundated with client alerts about the impact of the "Emergency Economic Stabilization Act of 2008." Unless you own a large sub-prime mortgage portfolio and are seeking respite from stormy economic conditions under the TARP (Troubled Asset Relief Program), most of the bailout bill isn't interesting, aside from a general interest that the global economy not fail. In addition to the dig at executive compensation for those who participate in the TARP, and some chatter that those provisions foreshadow the future of executive compensation regulation generally, the sweeteners in the Act, like energy tax incentives (see our alert here), are of more interest to non-financial institution types.



    3.

    A few other fun fallouts of the bailout bill include

    • the SEC's reactions to much-maligned mark-to-market accounting requirements of FASB Statement No. 157, see here.
    • SEC Chairman Cox's public response to McCain's (dare we say "silly"?) attempt to blame him for the crisis, here.
    • a host of final SEC rules addressing short sales, here, here, and here.
    • the earlier emergency SEC order giving temporary relief under Rule 10b-18 for issuer stock buy backs, here (expired October 2).
    • a smattering of "more damn things to worry about" from the D&O Diary, here.
    • your September Madness bracket, here.
    • Treasury Secretary Paulson's open letter to Americans, here.


    4.

    The Treasury Department published its final report on the auditing profession on October 6, here. Confidence is high that if people weren't distracted by other things—like the survival of the Western world—this report would have made a bigger splash.



    5.

    In other audit news, the SEC approved PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements, here. Also, credit trial lawyers for successfully delaying implementation of FAS 5, Contingency Disclosures, see here. The ABA has made a plea, here, to FASB to delay implementing Statement 141(R), Business Combinations, which it says raises many of the same contingent liability concerns as FAS 5.



    6.

    RiskMetrics released its 2008 Proxy Postseason review, here, noting that amidst suffering stock prices, shareholders didn't punish directors as expected for poor foresight, but did seem willing to punish them for not taking a hard stance on executive compensation. "Say on pay" proposals also went up, but activism generally seemed to take a back seat to economic concerns. Social and climate change proposals were stagnant.



    7.

    The New York Attorney General's office, not to be deterred by general economic decline, settled its Martin Act investigation of Xcel, with Xcel promising to disclose in its Annual Report on Form 10-K additional details about climate change and its potential impact on Xcel's business, see here. Activists herald the settlement as a victory in the push to elevate climate change disclosures to the level of material information required in SEC filings. Commentary is here.



    8.

    The Council of Institutional Investors, an association of pension funds with combined assets over $3 trillion, adopted seven new corporate governance policies at its October 7 meeting, see here, including a few related to executive compensation (the CII is "anti").



    9.

    The SEC recently adopted final rules implementing

    • technical amendments to Regulation S-K, Item 407 here. (From now on, make sure the audit committee report in your proxy statement refers to "the written disclosures and the letter from the independent accountant required by applicable requirements of the Public Company Accounting Oversight
      Board . . .").
    • foreign private issuer reporting enhancements, here.
    • changes and interpretations to facilitate cross-border transactions, here.


    10.

    The SEC also published a smorgasbord of other items, including

    • its compliance guide for small businesses regarding electronic filing of Forms D, notices of exempt sales of securities, here. A company can either file Forms D electronically or in paper, at least until March 16, 2009 when electronic filing becomes mandatory. The guide also says how to get CIK and CCC numbers, which you'll need to make the electronic filings.
    • its roundtable discussion on modernizing the SEC's disclosure system, here, along with some FAQs, here, and its strategic plan, here.
    • updated Compliance and Disclosure Interpretations for Exchange Act Sections, Exchange Act Rules and Exchange Act Forms. They (and more!) are available here.


    11.

    Finally, in our litigation corner,

    • The DE Chancery Court issued its opinion in Hexion v. Huntsman, which among other things re-emphasizes that it's tough to show a Material Adverse Change that allows a buyer to get out of an M&A deal. The opinion and order are here and here, and commentary here.
    • The DE Chancery Court gave insight into the materiality of financial projections in connection with the $18 billion combination of two online gaming companies in Wayne County Employees' Retirement System v. Corti, here. In its whimsical (that's right, "whimsical") opinion, the Court concludes that disclosures to plaintiff shareholders were adequate. Game over.
    • The DE Supreme Court agreed, here, to review the Chancery Court's decision in Ryan v. Lyondell, which occasioned an avalanche of commentary about director fiduciary duties and monetary damages exculpation clauses in the M&A context.

    Of course, the case law on M&A deals may seem increasingly moot given the ever-decreasing circumstances where the law matters, see here regarding the plummet in M&A activity in August.

      __________________________

    September 10, 2008


    1.

    In a 2-1 decision, the DC Circuit Court of Appeals held, here, that the PCAOB is constitutional. In rejecting the Free Enterprise Fund's claim that it wasn't, the Court may also have saved the Sarbanes-Oxley Act, which created the PCAOB, because SOX lacks a severability clause. "Whew," say the SEC and the PCAOB, here and here.



    2.

    In the march to globalization, the SEC approved a series of rules regarding cross-border investment, see here, including:

    • changes to facilitate U.S. investor participation in cross-border M&A transactions, which already enjoy relief from US tender offer and registration requirements (see the 1999 release here). No release is available yet, but remarks at the open meeting where the changes were adopted, and which explain them, are here.
    • a rule, here, allowing limited foreign private issuer security sales over-the-counter without registration as long as specified English-language disclosures are made abroad. (See the rule summary here). The rule makes it easier for FPIs to dip into U.S. capital markets, which they won't do if capital is too expensive, as a recent study, here, unremarkably concludes.
    • changes to foreign private issuer disclosure, including acceleration of reporting deadlines for annual reports on Form 20-F (see here).


    3.

    The SEC also voted to publish for public comment a "roadmap" for implementing International Financial Reporting Standards, which have a shot at ultimately replacing GAAP and its various national permutations. The SEC noted in its press release, here, that it is "duty bound to determine what role IFRS should play in U.S. capital markets." As more countries allow or require IFRS, it's logical that it will become the standard in the U.S., but then again, a decimalized system of measurement (see here) and a universal language with rationalized construction and grammar rules (see here) also are logical. (And see here.) Speeches about the roadmap are here and here. The SEC's spotlight on IFRS, with more information than anyone should want to read, is here.



    4.

    The SEC announced, here, it will eventually replace EDGAR with Interactive Data Electronic Applications, or "IDEA," which will host eXtensible Business Reporting Language. The sheer volume of puns that spring immediately to mind would ordinarily guarantee that IDEA is renamed before the final adoption of the new system, but it looks like the SEC already invested heavily in the logo,

    http://www.stoel.com/images/graphics/IDEALogo.jpg

    so maybe not. Note that we're getting you out way in front of the curve, since IDEA won't be "mature" for about five years, assuming the SEC can get the software help it needs (see commentary here).



    5.

    The NYSE, here, and NASDAQ, here, modified their bright line director independence tests to raise the direct payment test from $100,000 to $120,000, which matches the SEC's related party disclosure threshold in Reg. S-K, Item 404. The NYSE also changed the test relating to auditor affiliation to match NASDAQ's—a director can have an immediate family member who is an employee of the company's auditor if the employee doesn't work on the company's audit. (Time again to tweak your D&O Questionnaire.)



    6.

    The SEC is considering a proposal, here, to consolidate responsibility for SRO investigations of insider trading. The SEC's press release on the rule is here.



    7.

    A few recent Delaware decisions about director fiduciary duties in the M&A context have commentators abuzz, including

    • the recent opinion by our favorite Delaware VC, Leo Strine, in In Re Lear Corp. Shareholder Litigation (board's "naked no-vote termination fee" perfectly OK), see here and here;
    • the decision of the Court of Chancery in Ryan v. Lyondell (lack of market check, insufficient facts supporting the target board's knowledge of the market and other factors did not allow summary judgment that the board had acted in good faith) here.
    • VC Lamb's bench ruling in Optima International of Miami v. WCI Steel, Inc. (written consent of stockholders obtained within 24 hours after signing the acquisition agreement not a problem) and the "long, slow death of Omnicare," here.


    8.

    Finally, in the world of attorney-client privilege, two items of note:

    • Hoping to avoid Congressional action, the DOJ has revised its guidelines, here, for prosecution of companies to parallel requirements in the Attorney-Client Privilege Protection Act of 2008. No longer (it says) will the AG wield prosecutorial discretion as a club to require attorney-client privilege waivers. The DOJ's press release is here and remarks by Deputy AG Filip are here. We'll see if the revised guidelines derail the Act.
    • The 2nd Circuit affirmed, in U.S. v. Stein, here, that it is unconstitutional to coerce waivers of Sixth Amendment rights to counsel, on the facts in Stein, by conditioning advancement of legal fees on the waiver. A victory for the Defense Bar (and, sure, also civil rights).
     
     __________________________
     
     
    August 13, 2008
    1. The SEC recently posted its guidance on the use of company web sites, in which it recognizes that a company's web site is a fine place for the company to make disclosures about itself but warns that companies might be liable for those disclosures. Here is the press release about the guidance, here is the Staff statement about the guidance, and here is the guidance itself. The SEC's four-part guidance addresses, among other things, when posting satisfies Regulation FD and how to post historical information or links without being liable for content.

       

    2. Broadridge posted, here, updated statistical information on e-proxy use as of June 30, 2008 by the 653 companies that tried it. Next year may see more California-based companies using e-proxy, since the state finally adopted a law to eliminate the conflict between e-proxy rules and state law, see here.

       

    3. The good folks at The Corporate Counsel have published their second free copy of InvestorRelations, here, which covers a host of proxy and related topics. Get it while it's free!

       

    4. RiskMetrics released its preliminary 2008 postseason proxy report, here, in which it suggests shareholders' concerns about governance and social issues took a back seat to concerns about losing their shirts, which translated into more support for management. The Investment Company Institute published, here, its analysis of how registered investment companies voted in the 2008 proxy season. RiskMetrics also noted, here, that the level of support for social and environmental proposals that made it to a vote fared better than last year (average support of 14.7%); a record number of such proposals were withdrawn.

       

    5. The RiskMetrics review of shareholder proposal support is consistent with a recent U.S. Chamber of Commerce report, here, that suggests shareholder proposals don't do anything to improve the performance of U.S. businesses.

       

    6. In a somewhat similar vein, Stanford University's Center for Corporate Governance published, see here, a piece suggesting that corporate governance ratings, such as those by public company RiskMetrics, are (and we're paraphrasing the study since we didn't get the authors' permission to quote it) "junk." One of the more interesting findings: ratings among the raters don't correlate well, suggesting they are either measuring different things or are measuring the same things differently.

       

    7. Undeterred, RiskMetrics posted its Corporate Governance Survey here, and announced that it is, for the first time, soliciting views from corporate issuers in formulating voting recommendation policies.

       

    8. The Treasury Department released draft #2 of its report on the auditing profession, here. Although only partially complete, the draft gives you much insight into how dull the final report will be.

       

    9. Not to be outdone, the Advisory Committee on Improvements to Financial Reporting issued its dry final report to the SEC earlier this month, see here.

       

    10. Last month, we noted FASB had proposed revisions to Auditing Standard No. 5, Disclosure of Certain Loss Contingencies, that would require more detailed disclosure about litigation matters (here). Among others, the ABA and Association of Corporate Counsel, see here, roundly criticized the proposal and the harm it will cause companies and their shareholders, including the risk of attorney-client privilege waiver. A recent WSJ editorial suggests the rule will lead to settlement extortion, see here.

       

    11. But at least it seems like the U.S. DOJ is backing off its assault on attorney-client privilege. As we noted last month, U.S. Senator Specter, ranking member of the Senate Judiciary Committee, wasn't happy about the waiver for leniency trades DOJ has made. Assistant AG Filip's letter to the Committee promising reform is here. More commentary on the DOJ's efforts to effect reform, before Congress does it, is here and here.

       

    12. In the first ever Delaware Supreme Court review of questions certified to it by the SEC, the Court held, in CA, Inc. v. AFSCME Employees Pension Plan, here, that a bylaw amendment generally is a proper proposal for shareholder action, but that the particular amendment sought by AFSCME, reimbursement of reasonable expenses of shareholders who seek elections of less than 50% of the board and who manage to elect at least one director, was not.

       

    13. The SEC approved Nasdaq's listing standards for SPACs, here. (An uninspired way to end this alert, we know.)
    ___________________________
     
    July 9, 2008

    You can look at archived issues of these emails, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

    1. The SEC's Division of Corporation Finance continues to consolidate and update its compliance and disclosure interpretations, including guidance on:
      • Regulation S-K disclosure (executive comp, governance . . . really, the bulk of required SEC disclosure), here.
      • Form 8-K disclosure, here.
      • Section 16 disclosure, here.
      CorpFin also published a rare new Staff Legal Bulletin regarding the 3(a)(10) registration exemption for securities in specified exchange transactions here and some useful information about its filing review process here. You can plunder the entire treasure trove of staff guidance here.

       

    2. The SEC proposed a slew of rules reacting to the subprime mortgage crisis, including rules about credit rating agency conflicts and new disclosure, here and an overhaul of the way existing SEC rules use credit ratings, here, here and here. Speeches on the new rules by Chairman Cox and CorpFin are here and here.

       

    3. The SEC has extended for another year the date when non-accelerated filers must include the auditor attestation of management's report on internal control over financial reporting, see here. Now, the attestation is required in annual reports filed on or after December 15, 2009. We've almost lost interest in tracking how many extensions this makes.

       

    4. Given the latest internal control extension and the approaching six-year anniversary of the Sarbanes-Oxley Act, is it finally safe to criticize the ham-fisted, delayed, re-jiggered, partial implementation of internal control requirements and the Sarbanes-Oxley Act generally? Yes, apparently. Here is commentary on CEO views of SOX. A complete copy of the 2008 National Survey of CEOs on Business Ethics is here.

       

    5. The SEC adopted rules, here, to streamline the SRO rule process (rules by FINRA, Nasdaq, the NYSE, the PCAOB, among others), including changes that mean a larger number of rules could become effective immediately.

       

    6. FINRA filed a proposal with the SEC, here, that would require broker-dealers in private placements to make specified disclosures in private placement memoranda, file the PPM with FINRA and commit that at least 85% of the offering proceeds will be used for business purposes identified in the PPM. And while things seem to be getting harder for domestic broker-dealers, the SEC proposed to expand and codify broker-dealer exemptions for foreign entities, here--perhaps providing more fodder for critics of outsourcing securities compliance? (See here).

       

    7. The Attorney-Client Privilege Protection Act of 2008, which would prohibit federal prosecutors from trading leniency for privilege waivers, seems to have regained legs. Arlen Specter, an old prosecutor himself, introduced the House-passed bill in the Senate. See articles here and here.

       

    8. In accounting news, the FASB published exposure drafts for changes to hedge accounting rules, here, and disclosure of loss contingencies, here.

       

    9. The good folks at The Corporate Counsel have posted results from two of their surveys on earnings release practices, here and here.

       

    10. Just because it makes those in our profession sound tough, we note an article, here, urging litigation rule reforms to protect accountants entitled "Could the lawyers kill the auditors?"

       

    11. Towers Perrin published its annual report on 2007 trends in D&O liability and insurance coverage, available here. A useful resource, at least if the question is "what did everyone else do last year?"

       

    12. The IRS published, here, a new revenue ruling that discusses whether a director who served as an interim CEO is still an "outside director" for purposes of IRC Section 162(m) after he stops being interim CEO. "No" is the answer, at least under the specific facts in the ruling. Just to make sure things remain confusing, note the potential difference between the IRS's view and the NYSE and Nasdaq views of interim service as an executive, here and here.
     __________________________
     
    June 12, 2008
     
    1. Broadridge has updated its statistical overview of e-proxy use, a.k.a. "notice and access," here. RiskMetrics reviewed the Broadridge stats here. The review notes a new website, ProxyDemocracy.org, where you can find how some institutional shareholders have said they'll vote at annual shareholder meetings. Also recently, the SEC published its Small Entity Compliance Guide on e-proxy, here; a useful overview of the rules if you're in a hurry.

       

    2. For those who just can't wait, RiskMetrics posted here its "Midseason Review" of shareholder proposal success, noting "strong showings" by say on pay, governance and climate change proposals. On a related note, ICR recently published a white paper, here, on "Shareholder Activism: Proactive Defense and Informed Response."

       

    3. Under the title "Explorations in Executive Compensation," RiskMetrics published, see here, two sets of white papers aimed at "sparking constructive dialogue and stirring new ways of thinking" about executive compensation: "Considerations," which provides context and, well, considerations; and "Innovations," which offers new methods to evaluate company practices for peer benchmarking and aligning executive interests with shareholders. If you've time to kill, you might read them. Or, you could read the book of student poetry my high school published in 1987, also called "Explorations" and billed as sparking constructive dialogue and stirring new ways of thinking. Up to you.

       

    4. The SEC finally issued its proposed XBRL rules, here. RR Donnelly and EdgarOnline have put up a website, "Try XBRL," here, where you can, conveniently enough, try XBRL. Some additional XBRL links: SEC press release, here; Chairman Cox's opening statement, here; CorpFin's opening statement, here; the IR Web Report's summary of the rules, here. IR Web suggests the SEC's $30,000 implementation estimate is a low-ball figure. (Remember the SEC's 2003 final rule on internal controls? "[W]e estimate the aggregate annual costs of implementing Section 404(a) of the Sarbanes-Oxley Act to be around . . . $91,000 per company." Those were the days.)

       

    5. SEC Chairman Cox's latest speech on International Financial Reporting Standards is here and CorpFin Director White's latest speech is here. According to CFO.com, see here, each of the Big Four accounting firms is jockeying to boost its relevance in the coming internationalism. The SEC announced signing new protocols for sharing information on international accounting standards, here. On the home front, the SEC has published for comment, here, four SEC Advisory Committee reports on improvements to financial reporting.

       

    6. The Free Enterprise Funds' defeated 2006 claim that the PCAOB is unconstitutional, see here, is on appeal in the D.C. Circuit. The argument in a nutshell: the provisions creating the PCAOB violate separation of powers principles. Commentary on the suit is here. The Sarbanes-Oxley Act doesn't have a separability clause, so if the provisions creating the PCAOB are unconstitutional, the whole thing could be thrown out. Ouch.

       

    7. We've written a few times about SPACs—special purpose acquisition companies, essentially shells with a management team that promises to buy something. The Wall Street Journal suggests, see here and here, they may not be as big a deal as initially thought.

       

    8. The Committee of Sponsoring Organizations released for public comment its exposure draft, "Guidance on Monitoring Internal Control Systems," here. Its two objectives are to improve controls and reduce compliance costs. The comment period (which sounds less creepy than "exposure period") for guidance ends August 15, 2008.

       

    9. While at least tangentially on the issue of internal controls, and as a segue to litigation matters, we note that the ABA recently published, here, an article on the use of SOX 302 certifications to plead scienter in securities fraud cases.

       

    10. Option backdating, although too oft reported to be considered a "hot" topic, continues in the news. In part as a reminder to take your option grant process seriously, and in part because we haven't seen allegations this fun since the Comverse scandal, here is an article about the former CEO of Broadcom (for whom admittedly allegations of option backdating seem the least of problems). For a broader overview of backdating cases, RiskMetrics provides a scorecard here.

     

    __________________________
     
     May 14, 2008 
    1. The march to economic globalization continues. The SEC posted, here, proposed changes to cross-border transaction rules geared to encourage foreigners to allow US security holders to participate in those transactions. And the European Commission announced that it may be jumping on the International Financial Reporting Standards bandwagon, see here. Many believe IFRS will replace GAAP. (Editor's note: Diligent but ultimately failed efforts were made to use the phrase "closing the GAAP" in this paragraph.)

       

    2. Year one experience with e-proxy has elicited mixed reviews, including some dissatisfaction with the rigidity of the SEC's rules and its just plain awful notice provision, see here. For those looking for free e-proxy pointers, check out the inaugural issue of InvestorRelationships.com here (subscriptions are free, for now), which gives practice pointers and pitfalls to avoid in the move to e-proxy, including taking care not to overestimate the potential savings ($2 million, Intel? Really?). From talking to a handful of early adopters, the consensus seems to be that cost-savings in year one have been modest, but expectations are for bigger savings next year as kinks are worked out of the process. It may be unavoidable that early movers to e-proxy will also laud the environmental benefits of reduced printing. Intel notes that less printing will avoid generating 4 million pounds of carbon dioxide equivalents (whatever that means) and 13 million gallons of wastewater. Huh.

       

    3. We have noted in prior issues of ICYMI, see cumulative archive here, the push for climate change disclosure and the uptick in climate change related shareholder proposals. Here is a link to materials we distributed at a recent presentation on the topic, covering SEC disclosure, shareholder proposals and carbon cap and trade in the western states. We maintain that it's unlikely the SEC will act on climate change disclosure, unless pressure becomes irresistible, but note the recent legislation introduced in the independent nation state of California here. A harbinger of things to come?

       

    4. Early returns on "Say on Pay" proposals are rolling in, with many companies having held their 2008 shareholder meetings in April or May.
      • Articles on the first companies to run the non-binding shareholder advisory vote gauntlet are here and here.
      • A few articles noting the declining support for such proposals are here and here.
      • Putting its money where its mouth is, RiskMetrics included a "say on pay" proposal in its first proxy statement, here. (For those who don't know, RiskMetrics, which advises public company shareholders on how to vote and doles out corporate governance ratings, went public in January 2008. Count on its filings, and its approach to shareholder issues and things like "say on pay" proposals, being among the most scrutinized by other companies.)

       

    5. The SEC today considered rules to implement XBRL (that's Extensible Business Reporting Language). Word is, there is a push to require at least large, calendar year end public companies to report with XBRL in the next Annual Report on Form 10-K. Here and here are Chairman Cox's most recent speeches about XBRL, and here is the SEC General Counsel's recent speech.

       

    6. The PCAOB sent to the SEC for final approval its rules regarding independence discussions an Audit Committee must have with company accountants, see here and here.

       

    7. The Delaware Chancery Court fired another advance notice bylaw provisions warning shot across the bow of public companies (see the discussion of Jana v. CNET in last month's ICYMI here). In Levitt v. Office Depot, here, the Court allowed an activist shareholder to nominate directors via its own proxy statement in advance of Office Depot's annual shareholders meeting without providing advance notice because the election of directors was "business properly brought before the annual meeting." If Jana didn't get you to review your bylaws, maybe Levitt will.

       

    8. Finally, a cautionary note for companies subject to an SEC investigation. The Ninth Circuit recently reversed a lower court finding that the SEC engaged in deceitful conduct when it funneled information provided by the defendant to the DOJ for its criminal investigation. The court relied on the defendant company having signed a standard acknowledgement that the information it was giving could be used in a subsequent criminal proceeding. A brief review of U.S. v. Stringer, and a link to the holding, is here. On a somewhat related note, check out the DOJ's Morford memo, here, which describes the use of monitors to ensure company compliance with the conditions of non-prosecution agreements. (A key question: why can't the DOJ afford a better scanner?)

     

    __________________________
     
    April 9, 2008
    1. The SEC posted revised consolidated Form 8-K FAQs last week, here, which update and replace the 8-K interpretations in its telephone interpretations and in prior FAQs about Non-GAAP financial measures and Form 8-K.

       

    2. No surprise to those in the business of buying and selling companies that M&A activity is way down in the first quarter of 2008 and the rest of the year looks gloomy. Here is a New York Times article on the topic.

       

    3. The US Department of Treasury released its much anticipated blueprint for a modernized financial regulatory structure, here. SEC Chairman Cox's brief release regarding combining the SEC and the Commodity Futures Trading Commission among other things is here. Expect commentary on the proposal to start lighting up the blogosphere.

       

    4. Nasdaq modified its proposed rules for listing special purpose acquisition companies (SPACs) here. SPACs, which raise money based on the strength of management and their promise to buy something (or your money back), may sound a bit sketchy, but the money to be made has prompted Goldman Sachs to join other banks in backing them, albeit a version "kinder and gentler" to investors, see here.

       

    5. The number of "social" shareholder proposals continues to increase in 2008. Here is RiskMetrics' 2008 preview of such proposals (excluding climate change proposals, the highest-ranking category) and here is RiskMetrics' review of the "troubling" rate at which the SEC is agreeing that companies can exclude corporate governance-related proposals (which it distinguishes from social proposals).

       

    6. A few items of note for those watching corporate law developments in Delaware:

       

      • The Delaware Chancery Court's decision in Jana v. CNET may have public Delaware companies scrambling to review their advance notice bylaw provisions, which in Jana's case apply (pending appeal) only to shareholder proposals sought to be included in the company's proxy materials under SEC Rule 14a-8 and not independently financed proxy solicitations, see the decision here and commentary here.
      • The good folks at Potter Anderson offer a solution to the problem of how to instantly access Delaware corporate and other law on your BlackBerry here.

       

    7. Unless you refuse to read business news, you have undoubtedly been peppered with news of JPMorgan's proposed acquisition of Bear Stearns and the "interesting" acquisition agreement. Like Arthur Andersen (remember them?), Bear Stearns merited its own set of SEC FAQs, see here, which followed a few other SEC releases on Bear Stearns, see here and here. Although there's no dearth of information about the deal, we particularly liked The Onion's concise summary (warning, rated NC-17) here.

       

    8. Speaking of fall-out from the credit crisis, CFO.com published, here, a piece about the flak "fair-value" accounting is getting for exacerbating bad financial news. The SEC recently posted, here, a sample letter regarding MD&A disclosure about the application of fair value measurements under SFAS 157 disclosure.

       

    9. Also in accounting news, the FASB adopted SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, which amends SFAS 133, see its press release here and the SFAS here.

       

    10. In what might be interpreted as a transparent attempt to increase the hits on the web-version of this client alert, we note the SEC's proposed rules to further clamp down on the use of oxymoronic-sounding naked shorts, the practice of selling stock when you don't have the shares to settle the trade within the required T+3 period, here.

       

    11. A few other SEC items that don't warrant their own entry:

       

      • It announced its "next steps" in mutual recognition of foreign securities regulatory agencies, see here.
      • It published a slew of technical rule corrections, including to e-proxy rules, here.

       

    12. Click here to take a look at the inaugural Stoel Rives monthly summary of noteworthy Labor & Employment happenings.

       

    13. An NYU professor published a paper, see here, suggesting insiders rely on inside information to gift stock right before news that decreases the stock price, thus maximizing the tax deduction. If the data evidences fraudulent backdating, that's "bad," as we lawyers say. But note that there is no problem with using inside information to make gifts, which may just be good tax planning. Nonetheless, media attention (see here, e.g.) and the American tradition of not liking rich people might result in new rules to curb this perceived abuse. Or maybe no one will care.

       

    14. Finally, for interesting insight into employee option exercise practices, take a look at the April 1 statistical survey, here, from those cards at the National Association of Stock Plan Professionals.

     

    __________________________
     
     
    March 12, 2008 
    1. On February 19, a consortium of law firms asked, here, the IRS to reconsider its position in its recent 162(m) private letter ruling, in which it said performance-based compensation that could potentially vest based on termination without cause or for "good reason"—that is, even if performance criteria aren't met—is not qualified Section 162(m) compensation even if there is no employment termination and the award is actually earned. "No," said the IRS in its February 21 Revenue Ruling 2008-13 confirming the earlier 162(m) private letter ruling, here. The ray of sunshine in the ruling: it's prospective and won't apply to compensation if the performance period starts on or before January 1, 2009 or if compensation is paid under an employment agreement in effect at February 21, 2008.

       

    2. The SEC proposed a few rules last month to make life easier for Foreign Private Issuers, including:

       

      • changes to public disclosure requirements, here, and
      • facilitating use of the exemption to security registration under the Exchange Act by making it automatic and allowing electronic publication of information, here.

       

    3. It isn't all about foreign companies for the SEC, however. It continues to let smaller companies know it cares, most recently by publishing FAQs on smaller company disclosure, here.

       

    4. The SEC requested comments on the progress report of its Advisory Committee on Improvements to Financial Reporting, here. In its continuing efforts to make financial information more useful, the SEC also announced the release of "Financial Explorer," here, to "help investors quickly and easily analyze the financial results of public companies." The web-based tool "paints the picture of corporate financial performance with diagrams and charts" using interactive XBRL data.

       

    5. The PCAOB proposed new audit standards regarding auditor engagements, here, to replace the interim concurring audit partner review standard.

       

    6. Each of Nasdaq, here, and the NYSE, here, has recently proposed rules to allow listing of SPACs, that's "special purpose acquisition companies" to you and me. A description of SPACs and their growing use is here. The jury is still out on whether "SPAC" really sounds better than "blank check" or "shell" company.

       

    7. The changes to SEC Rule 144 (and 145) became effective February 15, 2008. Here are some useful resources:

       

      • A compliance guide, including a handy chart, is here.
      • The rule is here.
      • Form 144 is here.
      • The adopting release is here.
      • SEC FAQs (older) about Rule 144 are here.

       

    8. As calendar year-end filers turn their attention to preparing this year's proxy statement, we pause to consider:

       

      • A summary of e-proxy statistics compiled by Broadridge, here, and interviews with those who have implemented e-proxy systems, here.
      • Inside Counsel's description of the top five areas ripe for shareholder proposals in 2008, here.

       

    9. With all the hullabaloo about the Microsoft bid for Yahoo, and with an eye toward shining at the next cocktail party you attend, a refresher on hostile takeovers might be in order. (And lo and behold, the good folks at the Practicing Law Institute have provided one, here.)

       

    10. We are always on the lookout for verbal pearls from our favorite Delaware Vice Chancellor, Leo Strine. Here is a recent piece by VC Strine on corporate governance and, among other things, the role of the "professional independent director," whose expanded influence in the wake of SOX and exchange reforms, he suggests, may not be the best thing. In Delaware, at least, complete control by independents isn't yet manifest, see here.

       

    11. To continue our continuous 5½-year string of tidbits about internal controls over financial reporting, we note that Compliance Week published an interesting article about the clash of the SEC and the PCAOB on Auditing Standard No. 5 and the SEC's push to swing the 404 compliance pendulum farther back than the PCAOB was willing, here. We also unearthed a useful review of researched questions on internal controls, here.

       

      __________________________
       
       February 13, 2008
      1. The IRS surprised everyone with a recent Section 162(m) private letter ruling, here, in which it said performance-based compensation that could vest based on termination without cause or for "good reason," even if performance criteria aren't met, is not qualified Section 162(m) compensation even if there is no employment termination and the award is actually earned. The ruling contradicts a 1999 letter ruling, here, which equated these types of "involuntary" terminations to explicit exceptions in 162(m) rules. The letter raises two concerns: an unexpected loss of tax deductibility for what you thought was performance-based compensation and the corresponding adverse tax provision impact in accounting for these awards. Likely, more will come from the IRS soon as commentators chatter about the impact of the ruling.

         

      2. In more upbeat tax news, Congress passed—with a final vote tally reminiscent of communist elections—a tax stimulus package which the President signed today.

         

      3. The SEC issued its final rules on part one of its Regulation D changes, here, which permits electronic filing of Forms D beginning September 15, 2008 and requires it beginning March 16, 2009. The rules reorganize and change some information on the form and will require filers to get Edgar codes to complete the online filings. The SEC predicts the new process may decrease legal costs because simplified filings will be done in-house. Maybe, but the reverse may happen because lawyers will have to explain to start-up ventures why they need SEC filing codes and how to fill out a Form ID.

         

      4. To boost the use of electronic shareholder forums, the SEC also adopted last month, here, exemptions from proxy solicitation rules and securities law liability for compliant e-forums.

         

      5. The SEC continues to be active in its efforts on behalf of the little guy.

         

        • It published a series of Small Business Compliance Guides, here, intended to guide non-accelerated filers in the transition from "small business issuer" rules to "smaller public company" rules.
        • It adopted yet another delay of Section 404 implementation for smaller public companies, here, stalling auditor attestation requirements for another year (for annual reports covering years ending on or after December 15, 2009).
        • It announced the begin of its study of auditor internal control attestation costs for smaller issuers, here.

         

      6. SEC Chairman Cox laid out 2008 SEC enforcement and rulemaking priorities in a speech last week, here. Perhaps most significantly, the Chairman began the speech with a series of Latin jokes. (Geeky? Res ipsa loquitor.) Corporation Finance Director White also revealed his division's 2008 priorities in a speech here.

         

      7. The SEC's Advisory Committee on Improving Financial Reporting held an open meeting a few days ago to discuss its draft progress report, available here. The unsurprising bottom line: the Committee likely will suggest better standards and better reporting, including increased use of interactive data (XBRL) and electronic forums (websites). As always, the devil's in the details of the 117 page draft report.

         

      8. The PCAOB announced, here, adoption of Auditing Standard No. 6, Evaluating Consistency of Financial Statements, which according to the PCAOB will improve the quality of the auditor's reporting on items that affect the consistency of financial statements, such as a company's adoption of new accounting principles or its correction of a material misstatement.

         

      9. On the securities litigation front, on remand of Makor v. Tellabs the Seventh Circuit took the first stab at interpreting the US Supreme Court's standard for establishing a "strong inference" of scienter ("at least as compelling as any opposing inference one could draw from the facts alleged"), see analysis here and the opinion here. The Seventh Circuit affirmed its earlier decision to reverse the district court's dismissal of the suit, holding that even under the new standard the plaintiff had sufficiently pled scienter under the Private Securities Litigation Reform Act. As in Tellabs, the US Supreme Court also came down on the side of the angels, although not as firmly as it could have, in Stoneridge v. Scientific-Atlantic, here, in which it held that vendors were not implicated in a "scheme" that defrauded investors because the investors didn't rely on the vendors' deceptive acts. Many had hoped the Court would slam the door on the "scheme liability" theory, which it didn't. Analyses of the holding are here and here.

         

      10. On the executive compensation front, a few items:

         

        • According to a Watson Wyatt survey, see here, many companies appear to have no intention of disclosing performance goals in upcoming proxy statements, despite the SEC's likely continued focus on these disclosures.
        • Representative Waxman's House Committee on Oversight and Government Reform recently sent letters to each of the Fortune 250 companies as part of its investigation into the role of compensation consultants in the executive compensation process.
        • RiskMetrics speculates that proxy pay proposals will have legs in 2008, possibly bolstered by a desire to punish executives in the face of a painful recession, see here.

         

      11. Valentine's Day is nigh and, like most hot-blooded securities lawyers, our thoughts turn to compliance with Regulation 13D and the annual filing of Schedules 13G, due February 14. Remember, nothing says "I own more than 5% of a public company's stock" like a Schedule 13G.

         

      12. Thus pricked by cupid's arrow, consider the following Valentine's Day inspired links:

         

       

      __________________________
       
      January 9, 2008
      1. The SEC got around to publishing a few final rules we mentioned in last month's ICYMI:

         

        • Rules regarding scaled disclosure for smaller public companies and integration of Regulations S-B and S-K, here.
        • Changes to eligibility requirements for use of Forms S-3 and F-3, here.
        • Rules accepting International Financial Reporting Standards from foreign private issuers without reconciliation to U.S. GAAP, here. Also, here is a speech by Accounting Division Deputy Director Erhardt about the IFSR rules (kudos to her for working the lyrics of "Aquarius" into her speech), and here is a link to all sorts of IFRS-related materials, including the transcripts of two recent SEC roundtable meetings.

        Still no publication of the Regulation D form revisions and mandatory electronic form filing requirements, although it could be that that SEC is waiting to publish those rules until it acts on its more substantive proposed Regulation D changes.

         

      2. The SEC also issued in December a concept release to solicit views on changes to required oil and gas reserve disclosures, here.

         

      3. The SEC announced, here, that its "Executive Compensation Reader," designed to allow quick comparison of executive compensation, at least among the 500 large companies with tagged XBRL (eXtensible Business Reporting Language) data, is up and running. Mixed reviews so far on its usefulness.

         

      4. The SEC is apparently backing off prior suggestions that it wouldn't further extend 404 compliance deadlines for small businesses, see Chairman Cox's speech here. Cox says the SEC will issue a report on internal controls compliance some time around mid-year, and will recommend yet another one-year delay (to fiscal years ending after December 15, 2009) to ensure non-accelerated filers gain the advantage of the report data and know in advance where to focus their time and money to get up to snuff. And this despite the near manic glee with which small businesses appear to greet the prospect of compliance, at least as portrayed in this SEC brochure.

         

      5. The SEC's Division of Accounting issued Staff Accounting Bulletin 110, here, in which it expresses its willingness to accept the "simplified" method for estimating the term of employee options for valuation purposes beyond the December 2007 deadline it suggested in SAB 107.

         

      6. The end of another year heralded an onslaught of retrospection. Among the more interesting:

         

        • Sherman & Sterling loosed researchers on the proxy statements of the 100 largest companies, yielding its fifth annual Corporate Governance Survey and its first annual survey of Director and Executive Compensation, both available here.
        • Renaissance Capital posted its review of IPO activity in 2007, here.
        • Kevin LaCroix, of D&O Diary, posted his top ten D&O stories of 2007, here.
        • Steven Davidoff, of M&A Law Prof Blog, posted his top ten M&A stories of 2007, here.
        • Cornerstone Research published its review of 2006 securities fraud class action lawsuits, here.

         

      7. For those public companies behind the curve in ensuring their listed securities are DRS (Direct Registration System) eligible, fear not (or, at least, not so much), the SEC approved a delay in compliance until March 31, 2008, see here. Still, that isn't much time, particularly if your articles or bylaws don't allow uncertificated shares or if you haven't yet spoken to your transfer agent.

         

      8. RiskMetrics reports, here, that the American Federation of State, County, and Municipal Employees is teeing up binding proxy proposals for the 2008 season that call for the reimbursement of solicitation expenses in proxy fights — under such a proposal, rather than requiring a company to include proposals in its proxy statement, the company would need to reimburse others for proxy solicitations in limited circumstances (essentially, reimbursement in lieu of access). Stay tuned to see whether companies are successful in excluding these types of binding proposals, and don't forget that SEC Chairman Cox has promised a return to the drawing board on shareholder access rules, see here.

         

      9. On the tax front,

         

        • President Bush signed into law the Tax Increase Prevention Act of 2007, which provides temporary relief for noncorporate taxpayers subject to the alternative minimum tax (AMT). Our earlier alert on the law is here.
        • The IRS announced, here, a limited correction program for operational failures of nonqualified deferred compensation plans under Section 409A.

         

      10. The National Labor Review Board recently announced its view that employers can limit non-business email solicitations, including union solicitations.

       

      __________________________
       

       

      December 12, 2007
      1. The SEC has been productive in the run-up to year end.

         

        • Yesterday, the SEC adopted two proposals to aid small company access to capital (see here):

           

          • the less interesting of its two proposed Regulation D reforms, regarding form amendments and mandatory electronic filing (final rule not yet published). No word yet on the later proposed and meatier Regulation D changes, which permit limited advertising to a new class of "large accredited investors" and shrink integration periods (see proposed rules here); and
          • changes to eligibility requirements for use of Forms S-3 and F-3 (final rules not yet published).

         

      2. A few weeks ago, the SEC adopted:

         

        • Exchange Act registration exemption for compensatory employee stock options, here;
        • Rule 144/145 changes, here;
        • Rules accepting International Financial Reporting Standards from foreign private issuers without reconciliation to U.S. GAAP (final rules not yet published);
        • Rules regarding Scaled disclosure for smaller public companies and integration of Regulations S-B and S-K (final rules not yet published); and
        • Proxy access rules regarding director elections, here.

           

         

      3. Of the new rules, the most controversial is the SEC's adoption of the "status quo" proxy access rules, here, over the competing "expanded access" proposal. If you've followed this, it won't surprise you that people — institutional shareholders, shareholder rights groups, Congressman Barney Frank — weren't happy, and set the Internet and the SEC's P.O. Box a hummin' with their displeasure. Here's the SEC's press release about adoption of the rules, here's the Staff statement, here's Chairman Cox's statement, and here's Commissioner Nazareth's dissenting speech. Chairman Cox previously suggested, here, that the Commission will return to the drawing board on shareholder access proposals, but he thought it important to close the book on the controversy for the upcoming season. Look forward to more fun in 2008.

         

      4. Part of the proxy rule changes involves the SEC's efforts to encourage shareholder e-forums. Here is the SEC's press release and here is the SEC Staff's statement on the e-forum aspects of the rule.

         

      5. The SEC made its first use of the SOX Section 304 clawback provision to recover roughly $448 million (that's right, $448 million) in cash bonuses, profits from the sale of stock, and unexercised options from William ("Show Me the Money") McGuire, the former CEO of UnitedHealth Group, in connection with option backdating misconduct and the ensuing accounting restatement (see here). In addition to the clawback and the helpful reminder that option backdating is, as we in the legal profession say, "bad," settlement of the option backdating enforcement is notable for, well, its enormity. About $468 million in all. Ouch.

         

      6. RiskMetrics (ISS) published its 2008 proxy voting guide, see here (press release) and here (U.S. guidelines). RiskMetrics expects executive compensation proposals, including "say on pay," will continue to dominate the proxy landscape next year.

         

      7. The firm of Neal Gerber published, here, an interesting piece on the spate of majority voting schemes implemented in advance of the 2008 proxy season, which it dubs an "activist success story."

         

      8. The FASB adopted FAS No. 141(R), Business Combinations, here, which among other things reconciles U.S. domestic and international reporting standards. According to the FASB's press release, here, the statement "improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements." FASB also announced, here, its plan to "codify" — i.e., write down in one place — the various authoritative pronouncements that comprise GAAP. Expect publication of the draft "FASB Accounting Standards Codification™" (a mark that just begs for infringement) soon.

         

      9. Nasdaq published a draft revision of its marketplace rules, here, which rationalizes and reorganizes the piece-meal changes it has made over the last 30 years to make the rules "as clear and understandable as possible." Nasdaq is taking comments from listed issuers before sending the proposed change to the SEC for approval.

         

      10. On the executive compensation front,

         

        • Alan Kailer has published his useful annual update, Preparing the Executive Compensation Disclosure Tables, see here (members only); and

           

        • The U.S. House Oversight Committee released a report, here, highlighting conflicts between executives and the consultants who help determine their pay and suggesting there is a correlation between (high) recommended pay and (high) fees collected by consultants.

         

      11. Finally, on the heels of last month's announced 409A relief, the IRS issued additional 409A guidance, here.

      __________________________

       

      November 14, 2007
      1. The IRS (finally) stepped up to extend the deadline for compliance with 409A to January 1, 2009, see here. Our alert on the extension is here. Keep in mind, the extension gives you time to amend employment agreements and plan documents existing before 409A was adopted to make them compliant, not to ignore 409A until next year.

         

      2. Additional proxy-related news continued to roll in on the heels of last month's SEC debrief on executive compensation disclosure in 2007 proxy statements (see here):

         

        • RiskMetrics (formerly ISS) published its 2007 post proxy season report on shareholder proposals, here, suggesting "unprecedented" company engagement with shareholders, evidenced by high proposal withdrawal rates, and a sustained focus on corporate accountability reflected in the number of proposals on compensation and director elections.

           

        • RiskMetrics also published proposed executive compensation disclosure "best practices," here, and promised to publish its definitive views with examples.

           

        • Could the SEC's dueling 2007 shareholder access proposals, here and here, go the way of the SEC's ill-fated effort in 2003 (see here)? "Yes," suggests House Financial Services Committee Chair Barney Frank, who threatened a Congressional reversal if the SEC acts without a full complement of democrats on the five member commission and said that, in any case, both proposals stink. A hodge-podge of 39 law professors, see here, also don't like either proposal.

           

        • For those pondering the transition to an e-proxy system, The Corporate Counsel has provided links to a few e-proxy front-runners, including Sun Microsystems, here; NIKE; and Microsoft, here.

           

        • Say on Pay proponents got a boost from Verizon's announcement that it will give shareholders an annual non-binding vote on executive compensation, see here.

         

      3. On the substance of executive compensation:

         

        • President Bush took a recent stab at high executive compensation, see here. Ironically, most executives seem to agree that they are overpaid, see here, although the New York Times ponders "What if it's Fair" here, citing the staunch defense of compensation practices by Ira Kay, a head honcho at compensation consultant Watson Wyatt Worldwide.

           

        • Note too what Mr. Kay and other participants at the 4th Annual Executive Compensation Conference had to say about severance pay (nothing good) and other matters, here.

           

        • Frederick W. Cook & Co. published its summary of 2007 long-term incentive trends here.

         

      4. Look for the SEC to adopt rules on the following at its meeting tomorrow (see the notice, here):

         

        • Accepting International Financial Reporting Standards from foreign private issuers without reconciliation to U.S. GAAP, see here.

           

        • Scaled disclosure for smaller public companies and integration of Reg. S-B and S-K, see here.

           

        • Rule 144/145 reforms, see here.

           

        • Additional registration exemptions for employee stock options, see here.

        Noticeable for their absence from the agenda are consideration of two Reg. D reforms, including allowing limited advertising to a new class of "large accredited investors" and shrinking the offering integration period, see here, and changes to the required notice filing and filing process for Reg. D offerings, see here. The former, and more significant of the Reg. D changes, was proposed on August 3, later than the proposals slated for action tomorrow, so don't read anything into this.

         

      5. On the Internal Controls front:

         

        • The PCAOB issued preliminary guidance for the audit of smaller companies, here.

           

        • Despite PCAOB efforts and the SEC's oft-repeated statement that it won't further delay small company compliance with SOX 404, pressure is building to do just that as the compliance date draws nigh. Here is the U.S. Chamber of Commerce's plea on behalf of the little guys and here is its survey on the projected high costs of compliance.

           

        • COSO released draft guidance on monitoring internal controls, here.

         

      6. The Business Roundtable published key findings from its fifth annual Corporate Governance Survey.

         

      7. The SEC approved on an "accelerated basis" changes to rules governing broker/dealer fairness opinions which were proposed by the NASD (now FINRA) back in 2005 and amended four times, see here.

         

      8. Finally, note the US Treasury's beginning step to solicit views on regulation applicable to financial institutions as part of its effort to boost U.S. competitiveness. Generally, "um . . . should we do something?"
       __________________________
       
      October 10, 2007
      1. The SEC yesterday posted, here, the results of its executive compensation review project. The report gives two main, and expected, directives:

         

        • provide more focused disclosure of how and why you make specific executive compensation decisions and

           

        • focus on the manner of presentation to provide more direct, specific, clear and understandable executive compensation disclosure.

        The report follows the SEC's second wave of executive compensation comment letters sent two weeks ago and the flurried analysis of its first wave of comment letters in August. If the SEC hasn't commented on your proxy statement yet, you likely weren't included in the group of 350 companies selected for review and you won't get comments. SEC Corporation Finance Director White echoed the report's themes in a speech entitled "Where's the Analysis?", here. (Say what you like, plays on the 1980s "Where's the Beef" ads still make for solid gold speech titles.)

         

      2. Last month ICYMI told you about a somewhat modest effort by the IRS to ease your 409A pain by extending the deadline for 409A compliant documentation. Here is a more comprehensive alert we put out a few weeks ago about the "relief," which we equate to over-the-counter aspirin. A consortium of law firms has pled for something more akin to Demerol, a full-blown extension of compliance, here. Stay tuned.

         

      3. In litigation news, two interesting developments regarding attorney-client privilege:

         

        • The U.S. Senate held hearings on the privilege and the McNulty Memo, the playbook for federal prosecutors. Congressional action to rein in the DOJ is at least possible, fueled by criticism of DOJ prosecutorial abuse in forcing waiver of the privilege even after the McNulty Memo's mellowing influence. See commentary here.

           

        • In the French tradition, a European Union court all but beheaded the notion of legal privilege between in-house counsel and the corporation that employs him or her. Here is our client alert from a few weeks ago on the topic. Zut alors!

         

      4. Yesterday the U.S. Supreme Court heard arguments in Stoneridge v. Scientific Atlantic and will have a crack at the issue of whether vendors (um, lawyers?) can be liable under Section 10b of the Securities Exchange Act for "engaging in deceptive conduct as part of a scheme to defraud" investors, which the plaintiffs hope to differentiate from "aiding and abetting" 10b violations. Central Bank of Denver tells us there is no private right of action for this latter claim. Here is a summary of what the WSJ calls the business case of the year.

         

      5. In the July 11 issue of ICYMI, here, we noted increased interest in the legal implications of climate change, including its possible intersection with securities and commercial law. A few weeks ago, a group of institutional investors and environmental organizations launched an effort, in the form of a 116-page petition to the SEC, to include "global warming" in the lexicon of securities law. The petition, here, asks the SEC to issue guidance on a process for assessing the physical, financial and regulatory risks global warming poses to a company's business and on disclosure of material risks. An accompanying letter to the SEC's Division of Corporation Finance, here, asks the SEC to ramp up its review of periodic reports to make sure disclosure is adequate. The letter also asks the SEC to change its interpretation of Rule 14a-8 to require a company to include in its proxy statement shareholder proposals for reports on climate change risks. The letter and petition follow lesser efforts in prior years by many of the same petitioners, see here. As with earlier efforts, we predict the impact of the petition on federal securities disclosure will be modest, although it's certainly true that "climate change" could start appearing in the general litany of risks that might result in bad things. Here is our earlier alert on the pressure for such disclosure.

         

      6. The deadline for comments on the SEC's dueling shareholder access proposals passed October 2. RiskMetrics notes, here, that a victor will likely be determined too late to impact the 2008 proxy season. To tide you over, opposing Congressional testimony on the proposals from institutional investor and business groups is here, and here is the ABA securities regulation committee's view (no more access).

         

      7. Recently, we've fielded a few questions asking "what, exactly, is FINRA and why did it just call me". As a brief refresher, FINRA (Financial Industry Regulatory Authority) was formed in 2007 through a combination of the NASD, the former owner of the NASDAQ stock market, and NYSE Regulation, Inc., the regulatory affiliate of the New York Stock Exchange. Despite its admittedly overbroad name, FINRA regulates those who deal in debt and equity securities—underwriters, brokers, dealers. FINRA might also call to check into possible insider trading violations. You can look here to keep up on the latest FINRA rule proposals.

         

      8. The SEC approved three NASDAQ rules in the last few weeks:

         

        • one here allowing delivery of annual reports through website posting, clearing the way for NASDAQ companies to take advantage of e-proxy rules;

           

        • one here requiring that late filers notify NASDAQ of quarterly changes in outstanding shares so NASDAQ can assess fees for listing additional shares, rather than waiting to pick up share numbers automatically when the late filing is made; and

           

        • one here that expands and explains its discretionary authority to refuse to list, or to delist, a company with a bad person working at it.

         

      9. The Corporate Counsel informs us the NYSE recently notified listed companies it won't revise Rule 452 to eliminate broker discretionary voting in director elections for next proxy season. Recall from our November 2006 issue of ICYMI, here, the havoc the change could play with annual shareholder meeting quorum requirements.

         

      10. Although it seems like only yesterday we were stretching our brains to wade through the SEC's executive compensation rules, here is RiskMetrics' summary of "trends" in the 2007 proxy season.

         

      11. The SEC has released the source code for the Interactive Financial Report Viewer that enables investors to analyze companies' interactive data filings, available here. SEC Chairman Cox announced, here, completion of the data tagging that will make financial data easily located and analyzed through the magic of XBRL.

         

      12. The SEC updated its FAQs, here, on management reports on internal controls. Not particularly interesting, true, but we're not about to interrupt our 62-month run of continuous reporting on SOX 404 tinkering just because you're bored.
       __________________________
       
      September 12, 2007
      1. The IRS announced that taxpayers have an extra year, until December 31, 2008, to bring documents into compliance with final nonqualified deferred compensation rules under section 409A of the Internal Revenue Code. Operational compliance with 409A is still required by January 1, 2008, however, so don't get too excited about the "reprieve." (For those blissfully unaware of 409A, it specifies what conditions must be met to defer tax on income; if the conditions aren't met, tax is immediate and, if the 20% penalty is triggered, especially painful.) The IRS also provided additional guidance on employment agreements and cash out features under 409A and foreshadowed its adoption of a limited voluntary compliance program to correct inadvertent screw-ups and lessen their tax impact.

         

      2. The SEC sent "hundreds" of comment letters about executive compensation disclosure in proxy statements in the last few weeks. The Corporate Counsel summarizes key areas of comment as follows:
        • Additional analysis in the CD&A of the compensation process, including benchmarking and peer group descriptions, the role of executives in setting compensation, the relationships of CEO compensation to other executive compensation, the amount of discretion in setting pay, and change in control and termination payments,
        • Justification for omitting performance targets,
        • Termination and change of control disclosure, including discussion of triggers.
        Expect generalized guidance later this fall in the form of an SEC Staff Report summarizing what the SEC didn't like and setting expectations for next year's proxy statements.

         

      3. In case you're wondering about the status of Canada's executive compensation rules (because who isn't, eh?), their adoption was delayed, see here. Presumably the delay results from comments garnered on the proposals so far and also possibly to allow a little more time to glean lessons from Canada's neighbor to the south.

         

      4. We're still hearing rumblings about "Say on Pay," generally a non-binding advisory shareholder vote on executive compensation. Here is a summary from ISS of companies that have adopted Say on Pay proposals at shareholder meetings.

         

      5. Option backdating news continues through the summer.
        • CFO.com published, here, the provocatively (at least to lawyers) titled article "Backdating: Are the Lawyers to Blame?" The article recounts the role of an in-house lawyer at KLA-Tencor Corp. and subsequently at Juniper Networks that led to an SEC enforcement action, see here.
        • The AFL-CIO sent a letter to the Big 4 Accounting Firms suggesting they do a better job ferreting out option accounting shenanigans, see here.
        • The Delaware Chancery Court reiterated, see here, Chancellor Chandler's view in his February 2007 opinion in Tyson Foods that option spring-loading practices might be a breach of director fiduciary duties. (Chandler's gratification of the affirmation may have been tempered by his authorship of the second opinion, denying a motion on the pleadings in the same case).

         

      6. SEC Division of Corporation Finance Director White provided a useful update of SEC goings-on in this speech to the ABA last month, including the status of Corp Fin's activities in executive compensation disclosure, e-proxy and proxy access, and internal controls.

         

      7. On the M&A front, a few publications of note:
        • Boston Consulting discusses, here, M&A trends and tips in the "brave new world" of M&A.
        • You can find here (members only) the ABA Negotiated Acquisitions Subcommittee 2007 deal point studies for private company targets and public company targets.
        • Here is Vice Chancellor Strine's application of the Blasius review standard to a board's decision to delay a stockholder meeting to garner more votes for a merger the board thought a good idea but that it knew stockholders would reject at the meeting. (The delay was OK.)

         

      8. Finally, as a minor diversion, not without a shade of schadensfreude has the legal community discussed Nixon Peabody's unintentionally self-parodying non-theme song, "Everyone's a Winner at Nixon Peabody," see here. Oh, the humanity.
       __________________________
       
      August 15, 2007
      1. As usual, the anniversary of adoption of the Sarbanes-Oxley Act spurred a flurry of retrospection. For observers over the years, it's interesting to note the various pendulum swings—from "I'm afraid to criticize SOX," to "SOX has destroyed U.S. competitiveness," to "No, really, it hasn't been that bad." Here is a paper and here is a Financial Times article in the latter vein. For its part, the U.S. DOJ's Corporate Fraud Task Force unabashedly trumpeted its accomplishments in prosecuting fraud over the last five years, here. (Of course, the prosecutions would have happened with or without SOX).

         

      2. On the topic of federal prosecutions, and as a continuing cautionary corporate governance note, remember: (A) make sure you are not funding terrorists, and (B) even if you don't directly benefit from misdeeds, you still can be thrown in jail, see here (re Brocade option backdating).

         

      3. The SEC posted a host of new interpretations and guidance in the last few weeks, including
        • related person transaction disclosures (Reg. S-K 404), here.
        • compensation disclosures (Reg. S-K 402), here.
        • auditor independence, here.
        One notable item in the compensation disclosure guidance—you may only report "negative compensation," resulting from a FAS 123R expense reversal, for example, if you previously disclosed the expense as compensation.

         

      4. The SEC posted its proposed revisions to Regulation D a few days ago, which we discussed in last month's In Case You Missed It, here.

         

      5. Also, the SEC posted several final rules in the last few weeks:
        • Rules defining "significant deficiency," here.
        • Rules prohibiting investment advisers from making false or misleading statements, here.
        • E-proxy rules, here, which require mandatory Internet posting of proxy materials. (A company can still send paper copies, of course, and must send paper copies free of charge if an investor requests.)
        • Technical amendments to SEC Form 144, Forms 3, 4 and 5, and Schedules 13D, 13G and TO, here, to remove IRS identification numbers.
        • Regulation M amendments, here, regarding short sales following a public offering.
        • Regulation SHO amendments, here, to further curb abusive short sale practices.

         

      6. In addition to the expected final e-proxy rules, the SEC unexpectedly posted competing "shareholder access" proxy rule proposals, here and here. The former proposal re-establishes the status quo, which was disrupted by the Second Circuit's decision in AFSCME v. AIG, in that it establishes by rule the SEC's historical view that a company can exclude from its proxy statement a shareholder proposal that would result in a director election contest (we call this the "file your own damned proxy statement" rule); the latter proposal would require a company to include in its proxy statement a binding shareholder proposal to amend company bylaws regarding director nomination procedures. A concise summary of the proposals is here. Recall, SEC historians, that the SEC proposed shareholder access rules way (way) back in October 2003, see here, which created quite a stir but ultimately died on the vine. Unlike the 2003 proposals, which laid out when shareholder nominees would need to be included in a company's proxy statement, the new proposal gives shareholders free rein to propose a shareholder nominating process that would be incorporated in company bylaws.

         

      7. The SEC posted its concept release allowing U.S. issuers to use International Financial Reporting Standards as published by the International Accounting Standards Board, rather than U.S. GAAP, in preparing financial statements, here.

         

      8. Finally, we note our disappointment in the much anticipated GAO report, titled: "Issues Relating to Firms that Advise Institutional Investors on Proxy Voting," here. We were hoping it would be titled "ISS—How a huge private company with no stake in your company and obvious conflicts of interest nonetheless holds your fate in its hands."

       

      __________________________
       

       

      July 11, 2007
      1. As we approach the fifth anniversary of the Sarbanes-Oxley Act, we can't help but admire the SEC's endurance in continuing to tinker with SOX 404 implementation, that pesky internal control over financial reporting, which it has taken to calling "ICFR." Amid a flurry of SEC action in the last month, it:

         

        • Adopted final rules effective August 27, here, clarifying that an evaluation that complies with companion interpretive guidance, here, is one way to satisfy management's ICFR evaluation obligation. It's just "one way," not "the way," the SEC reminds us. (Hmmm. Maybe.) The final rules also define "material weakness," rather than leaving it to the PCAOB or accountants, as "a deficiency or combination of deficiencies . . . such that there is a reasonable possibility that a material misstatement of . . . financial statements will not be prevented or detected on a timely basis." We eagerly anticipate the fight about whether a system of ICFR that provides "reasonable assurance," the general ICFR standard, may nonetheless contain a "reasonable possibility" of missing something important. Finally, the rules require the issuer's auditor to audit ICFR but no longer require it to comment on management's assessment. The SEC releases should be read along with the PCAOB's proposed AS No. 5, here, which (re)sets the bar for internal control audits.

           

        • Proposed a definition of "significant deficiency," here. Generally, "not a material weakness, but, you know, important enough to tell the CFO."

        Despite the SEC's good work on the SOX 404 front, the U.S. House of Representatives adopted a further delay of 404 implementation for smaller companies, see here, which likely won't make it through the Senate (but who knows).

         

      2. The SEC also published a package of proposed rule changes intended to benefit smaller public companies, based on the work of its Advisory Committee on Smaller Public Companies. The proposals, previously announced here, are spread through a few releases.

         

        • Here the SEC proposes to combine "small business issuers" and "non-accelerated filers" into a single category of those with a public float of less than $75 million and to eliminate Regulation S-B ("small business") and the SB forms, integrating disclosure with Regulation S-K by adding a separate instruction for small companies to relevant S-K items.

           

        • More significantly, here is the proposal to eliminate public float eligibility criteria from Forms S-3 and F-3 as long as other conditions are met. This means even OTC and pink-sheet companies can file shelf registration statements to more quickly access capital markets. Note that sales from the mini-shelf can't exceed 20% of the company's public float over a rolling 12-month period. Also note, it doesn't apply to shell companies.

         

      3. Other SEC proposals that were packaged with small-company proposals, but which perhaps more appropriately fit under the heading "making things easier for everyone," are:

         

        • A fairly dramatic overhaul of Rule 144, which is a safe harbor for resales of securities without registration, here. As a brief refresher, Rule 144 governs "restricted securities," those never publicly registered for sale, and "control securities," those held by issuer affiliates. For both kinds of securities, the initial one-year holding period before you can sell is cut in half to six months, although it would be tolled for up to a year if the holder engages in hedging transactions. The volume limits and manner of sale and Form 144 filing requirements would apply only to affiliates' sales after six months (only the public information requirement would apply to non-affiliates' sales, and it would drop off after one year). The SEC is also considering integrating the Form 4 and Rule 144 filing requirements and making resales under Rule 145, which governs resales of securities acquired in business combinations, easier.

           

        • Modifications to Form D and adoption of an electronic, web-based filing system (a la Section 16 reports), which the SEC hopes will be accepted by states, here. Note that one SEC proposal mentioned in the prior press release about the reform package — revisions to Regulation D to allow some advertising for private sales to a new class of "Rule 507 qualified purchasers," update the "accredited investor" criteria and reduce the integration safe harbor to 90 days — has not yet been published.

           

        • Exemption from registration for compensatory employee stock options, here. If adopted, an issuer may grant options to more than 500 people without being forced to file public reports, although if all 500 exercised the options or it otherwise had 500 shareholders, it would need to begin filing '34 Act reports.

         

      4. A couple other equity compensation/benefits items of note:

         

        • The ABA Joint Committee on Employee Benefits published its annual Q&A of technical issues with the SEC, here, including a number of responses to executive compensation disclosure questions, and with the IRS, here.

           

        • Nasdaq published additional FAQs about shareholder approval of equity compensation plans, here.

         

      5. The SEC adopted final, mandatory e-proxy rules a few weeks ago. It hasn't yet published the final rules, but here is the CorpFin staff's speech about the rules. The e-proxy requirements will be phased in over two years. For those pondering potential cost-savings and what, exactly, they should do, The Corporate Counsel has posted the transcript of its webcast, How to Implement E-Proxy: Avoiding the Surprises and Making the Calculations, here (subscribers only).

         

      6. The SEC proposed rules to allow a gap in GAAP, a.k.a. no longer requiring foreign private issuers to reconcile their accounting to U.S. GAAP as long as they comply with the English language version of the International Financial Reporting Standards, here.

         

      7. The SEC announced the advent of a new Advisory Committee on Improvements to Financial Reporting, here, which is charged with making financial statements more understandable. Sounds like fun.

         

      8. The SEC also introduced proposed revisions to Regulation M to make short selling in connection with an IPO even more difficult, see here.

         

      9. ISS published its 2007 proxy debrief, here, in which it notes the relative successes of "say on pay," clawback and golden parachute proposals.

         

      10. There appears to be much more lawyer commentary these days about global warming. The Corporate Counsel suggests the issue is important enough to securities and commercial lawyers to merit a free webinar, see here.

         

      11. Finally, a few judicial notables from the past few weeks:

         

        • The U.S. Supreme Court, in Tellabs v. Makor Issues and Rights, here, discussed what creates an inference of scienter (intent) in securities fraud cases. Here is some analysis of the case.

           

        • The Supreme Court also decided, in Leegin v. PSKS, here, that a manufacturer setting minimum resale prices for its products is no longer per se prohibited by antimonopoly rules and should be judged under the "rule of reason," which requires looking at the facts and context to determine if the practice has an anticompetitive effect.

           

        • ICYMI's favorite Delaware Vice Chancellor, Leo Strine, discusses Revlon duties, a board's responsibility to get the most favorable price in an auction, and the use of post agreement market checks to meet the standard (favorably noting that "for 40 days, the Topps board could shop like Paris Hilton") in In re Topps Company Shareholders Litigation, here. Strine ended up enjoining the Topps deal until additional disclosure was made about fairness issues and also granted substantive relief regarding the standstill provision in the agreement. Strine held similarly in In re Lear Corporation Shareholder Litigation, here, which came out a day after Topps, that additional disclosure to shareholders of potential conflicts was necessary before shareholders were asked to approve a deal. Both are interesting reads and suggest what a "good" sales process should look like.

       

      __________________________

       

       
       June 13, 2007
      1. The SEC and PCAOB continue to tinker with SOX Section 404, those costly Internal Controls Over Financial Reporting.

         

        • The PCAOB adopted Auditing Standard No. 5, the new standard for auditing internal controls (as published by the SEC, here; Chairman Olson's summary, here). The standard must still be approved by the SEC — the public comment period ends 30 days from the date the SEC gets around to publishing the rule in the federal register.
        • Both SEC Chairman Cox, see here, and PCAOB Chairman Olson, see here, suggest the new standard will push down 404 compliance costs, which continue to drop as we get further from the madness of year one implementation.
        • At its May 23 open meeting, the SEC adopted interpretive guidance on 404, see here. Expect publication soon (the proposed guidance, published back in December 2006, is here). Speeches by the bigwigs about the forthcoming guidance are here (Commissioner Campos), here (Campos again re smaller companies), here (CorpFin Director White), here (Chief Accountant Hewitt) and here (Deputy Chief Accountant Palmrose).
        • Notably, the SEC has not further extended compliance deadlines for small companies, citing "excellent progress" in revising standards and guidance in time for small companies to react. As always, though, it's not too late for the SEC to buckle to Congressional pressure.

         

      2. May 23 was a busy day for the SEC. It also adopted (see here and here), but hasn't yet published, proposals in six categories for scaled regulation of smaller companies (up to $75 million public float) that are intended to aid capital formation and ease disclosure burdens:

         

        • Regulatory Relief and Simplification
        • Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3
        • Exemption of Compensatory Employee Stock Options from Registration under Section 12(g) of the Exchange Act
        • New Regulation D Limited Offering Exemption
        • Electronic Filing of Form D
        • Revisions to Securities Act Rules 144 and 145

         

      3. The SEC's 404 and small business reform efforts could be viewed as efforts to fix capital markets and lower compliance costs in the face of competitive pressures. The Financial Times notes that money raised in private placements outstripped IPOs for the first time in 2006 (see here) and there appears to be increased activity in innovative private trading systems — among other things, Goldman Sachs introduced GS TRuE (Goldman Sachs Tradable Unregistered Equity) for institutional investors to trade unregistered securities (see here) and Nasdaq is making efforts to reestablish a trading system for PORTAL securities (see here).

         

      4. The SEC has completed its three proxy discussion panels, which covered federal proxy rules and state corporate law; proxy voting mechanics; and shareholder proposals. Materials regarding these are here. Among other things, the voting mechanics panel discussed proposed NYSE rules to make director elections "non-routine" and therefore ineligible for discretionary broker votes (see here). The NYSE has amended its proposed rule to exclude mutual funds, see here. ISS has published its mid-season proxy review, here. In only tangentially related proxy news, and in an effort to appear worldly, we note that Canada has jumped on the executive compensation disclosure bandwagon, see here.

         

      5. While we wait for the SEC's post-mortem on compensation disclosures in recent proxy statements, we are kept entertained by unabated news of optionbackdating and other equity compensation issues, including some perspective, here, on the recent Desimore v. Barrows Delaware Chancery Court ruling, here, penned by ICYMI's favorite Vice Chancellor Leo Strine, who shares his thoughts on backdating, springloading and bullet dodging. Also in recent news, civil fines in settlements against Mercury, here, and Brocade, here, for their D&O's misdeeds. Finally, we're bemused that the Investigations Subcommittee of the US Senate's Committee on Homeland Security and Government Affairs held a hearing on whether the IRS and investors are getting adequate information on executive stock options, see here. Investor access to option information can't relate to Government Affairs, which leaves us puzzling how improving access will make us all safer.

         

      6. In North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, the Delaware Supreme Court suggests directors do not owe fiduciary duties to company creditors when the company is in the "zone of insolvency." Here, is a link to Layton Finger's brief summary of the case, which is here. Additional commentary on the case, by Temple Professor Lipson, is here. Lipson concludes: "The basic effect of Gheewalla — and this may have been its real point — was to make it very difficult, if not impossible, for tort and other involuntary creditors to sue corporate directors."

         

      7. The IRS has published, here, interpretive guidance on who is a "covered employee" under IRC Section 162(m). Guidance was needed because the SEC amended last December the definition of "named executive officers" in SEC regulations, to which the tax code language is oddly tied. The upshot of the guidance: chief financial officers, no matter how much they're paid, are not "covered employees." Why should companies care? Because they may get to deduct more compensation than otherwise for amounts paid to CFOs, at least until Congress gets around to fixing the tax code.

         

      8. Following the NYSE (see here), Nasdaq finally proposed its rule change regarding electronic distribution of annual reports through website disclosure, see here. Combined with the SEC's e-proxy rules (see the February 14 issue of ICYMI here), financial printers have got to be sweating bullets.

         

      9. Finally, here (finally) is amendment No. 1 to the proposed NYSE corporate governance rule changes, originally proposed back in 2005.

       

      __________________________
       
      May 9, 2007
      1. The director of the SEC Division of Corporation Finance, John White, revealed in a May 3 speech, here, that the SEC staff has a "review project" to check compliance with compensation disclosure rules and likely will issue additional interpretive guidance later this year. In particular, White says the staff will look hard at companies that don't disclose specific incentive plan targets. There are many, and probably at least some are pushing the limits of what would justify the competitive harm exception to disclosure. Note too White's view of the alternative disclosures being made by those who don't give specifics: "I am not impressed by disclosure that targets 'are difficult but possible to achieve' without more."

         

      2. Speaking of executive compensation, here is a study analyzing a number of CD&A's and other texts (to provide context) under the "readability" tests SEC Chairman Cox trotted out in March (see here). Heavens knows when disclosure of such test scores will be required. The worst scores for readability? The SEC's executive compensation rules. (Gasp!)

         

      3. Following on last month's ICYMI link to the media's view of the "right" way to determine executive compensation (see here), Moody's published (see here) its User's Guide to the SEC's New Rules for Reporting Executive Pay (members only, here), which describes the elements of the new disclosure that indirectly work their way into Moody's credit analysis.

         

      4. The next frontier for executive compensation, now that we all know too much confusing detail on what executives make, is "Say on Pay," a catchy battle cry for shareholder advocates, for sure. Here is ISS's tally of companies that have allowed some sort of shareholder vote on executive compensation, and here is an update on the Say on Pay legislation in the U.S. Senate. (Barney Frank's companion bill passed in the House.)

         

      5. For those interested in all things proxy, not just compensation disclosure, here are materials posted so far on the SEC proxy roundtable held on Monday and the other two the SEC will hold later this year.

         

      6. Here is a brief article on 10b5-1 trading plans, which queries whether they are the next big scandal. A useful discussion of the trading plans, the recent Stanford University study that suggests they have been used "too" strategically, and potential stepped-up SEC enforcement action is here.

         

      7. There always seems to be more news on internal control reporting, which, as a reminder, the SEC and others have been struggling with for nearly five years. A few tidbits:

         

        • The PCAOB reported on year two of 404 implementation, here

           

        • SEC Chairman Cox and PCAOB Chairman Olson testified, here and here, on pending reforms to the Senate Committee on Small Business and Entrepreneurship.

           

        • Congress continues to occasionally weigh in. In addition to listening to testimony, recent proposed legislation, here, was tabled; a "sense of the Senate," here, was adopted.

        8. ISS recently touted Comverse Technology's adoption of a bylaw provision that gives shareholders expanded proxy access, here. Of course, no one (no one) has had as tough a go in the last year as Comverse, so don't expect others to emulate its behavior now (see the January 10, 2007 ICYMI, here, which clearly take too much prurient joy in Comverse's travails.)

       

      __________________________
       
      April 11, 2007
      1. A slightly more clear picture of executive compensation disclosures begins to emerge as proxy statement filings pour in. Among the things that are clear: disclosure is unclear. SEC Chairman Cox took another swipe at the length of CD&A disclosure and its general unhelpfulness. A few excerpts from his March 23 speech, here:

         

        • "We had it in mind that [the CD&A would] be just a few pages long."
        • "[M]ost of it's as tough to read as a Ph.D. dissertation."

        Cox cites a study by Clarity Communications that tested 40 CD&As for readability, here. Its general findings: the stuff is dense. The NY Times Special Report on executive compensation, here, concurs. Cox's "just a few pages" reference is undoubtedly concisely set forth in the SEC's compact 436-page release on the new disclosure rules (plus a 53-page amendment), all of which is drafted at a fifth grade reading level. We're pretty sure.

         

      2. Companies concerned with how compensation will be reported by the media might note the analysis of the Associated Press methodology, here and the NY Times guide to getting "real" numbers, here.

         

      3. Many companies have struggled with disclosure of incentive pay targets in the CD&A. Taking the SEC at its word, the test for excluding quantitative targets is strict: could you justify a confidential treatment request. Despite that, many companies are keeping the numbers close to the vest. A study by Watson Wyatt Worldwide, see here, showed 46 of the top 100 S&P 500 companies didn't disclose numerical targets used to determine bonuses. Another study, by DolmatConnell on a much smaller sampling suggests only about one-third of companies are disclosing target numbers. Excuses for excluding targets range from the plausible ("this is a key metric our competitors would kill to know") to the defensible ("our competitors could use these numbers to reverse engineer our budget and gain insight into our strategy") to the silly ("these numbers show that a bonus is really, really easy to earn"). Keep in mind that the ultimate hammer the SEC has is to deem a proxy statement incomplete and require refiling and recirculation of the proxy statement. That would be quite a move by the SEC.

         

      4. During his March 23 speech, here, Chairman Cox also demonstrated how investors can use the new data coding system being phased into Edgar, XBRL, to analyze compensation numbers for themselves. XBRL coding is only voluntary for now, but Cox said the SEC would code compensation data for several hundred of the largest public companies by June. Here is the SEC's spotlight explaining XBRL and the brave new world of interactive data.

         

      5. Barney Frank's "say on pay" legislation was passed in the House of Representatives a few days ago, see here. The jury is out on how the bill will fare in the Senate, where (believe it or not) calmer, less populist heads tend to reign.

         

      6. Hats off to the SEC for putting out a release on April 1 (that's April 1, April Fool's Day, a day when many pull pranks, like, for example, issuing fake press releases) previewing forthcoming executive compensation disclosure modifications, here.

         

      7. As part of the general reorganization of its website, updated SEC compliance and disclosure interpretations (formerly, "telephone interpretations") are posted here. Updated interpretations include those relating to Regulation S-K (items 201, 403, 404 and 407), Rule 144 and the Trust Indenture Act.

         

      8. The SEC recently voted to implement changes to reduce the burden of internal control reporting particularly for smaller public companies, including aligning SEC and PCAOB guidance. A summary of action at the SEC's open meeting is here.

         

      9. The PCAOB has been busy in the last month or so, publishing
        • a proposed new auditing standard (evaluating consistency of financial statements), here
        • a concept release for tax services provided to internal auditors, here
        • Q&As on tax services and auditor independence, here
        • a report suggesting that auditors are not doing enough to identify and ferret out fraud, here

         

      10. In other PCAOB news, the US District Court for the District of Columbia dismissed the lawsuit filed by Free Enterprise Fund claiming the PCAOB was unconstitutionally formed, here. FEF will appeal.

         

      11. The SEC posted its final rules that make easier foreign private issuer termination of filer status, here. The rules are effective June 4, 2007.

         

      12. The IRS announced (1) "final" regulations about how executive deferred compensation arrangements are affected by IRC Section 409A plus (2) Notice 2007-34 which discusses split-dollar life insurance and 409A. The IRS promised that the final regulations ". . . comprehensively address how employers can identify nonqualified deferred compensation plans and arrangements subject to section 409A and provide rules to help employers and employees comply ... [and] ... guidance regarding the requirements for deferral elections and payment timing under section 409A."

         

      13. For a different voice on option-backing, peruse NERA's white paper "Options Backdating: The Statistics of Luck," which suggests that some methodologies that have fueled the atmosphere of scandal might be flawed.

       

      __________________________
       
      March 14, 2007
      1. This month we offer a treasure trove of executive compensation tidbits. Mark Borges continues to highlight "interesting" executive compensation disclosure in his blog on CompensationStandards.com. Recent proxy statements of note:

        Borges also notes an unintended consequence of tying compensation disclosure to equity award accounting treatment, citing the Brookfield Homes proxy filing, here, which shows the CEO earned negative $2.3 million in 2006. And you thought you were underpaid.

         

      2. A few days ago in a speech to the Corporate Counsel Institute, here, SEC Chairman Cox fired a salvo at CD&A disclosures that are, to paraphrase, long but unhelpful. Cox describes them as "overlawyered" (as opposed to "over compensation consultanted," a term we prefer but which admittedly is less mellifluous). Among other things, Cox notes that including columns in the tables when you don't have anything to say is "slavish adherence to boilerplate," leading us to believe Mr. Cox's definition of "boilerplate" is likely different than ours.

         

      3. The Corporate Counsel has graciously offered up its March/April issue for perusal, here. It includes helpful proxy tips, among other things.

         

      4. Warren Buffett published his annual letter to shareholders, here. Buffett's folksy, informative and subtly cantankerous style is always a good read. This year he stabs at executive compensation, noting that disclosure requirements won't change irrational and excessive compensation practices and decrying consultants' deft selection of "peers" that perpetuate excesses.

         

      5. Barney Frank (D-Mass.) continues his crusade against executive pay by introducing the "Shareholder Vote on Executive Compensation Act," here, which would require an annual non-binding shareholder vote on executive compensation.

         

      6. A reminder that companies with securities on Nasdaq or the NYSE have until January 1, 2008 to comply with direct registration program requirements. Here, is an old but useful guide on the process of getting rid of paper certificates. Here is the Nasdaq alert sent to listed companies last month and here is the NYSE letter. In addition to talking to your transfer agent about the requirements, you should review state law and your charter documents to ensure uncertificated shares are permitted and take action to allow uncertificated shares if necessary. Here is discussion of Delaware law and a company's ability to issue uncertificated shares under DGCL Section 158.

         

      7. Financial restatements were at an all-time high last year according to a recent Glass Lewis survey, summarized here. The survey also noted that restatements among companies required to report on internal controls is down from last year.

         

      8. Two reports of note were floated in the last few weeks on the corporate governance front.
        • A joint task force of the Council of Institutional Investors and the National Association of Corporate Directors recently issued recommendations for majority voting, SOX 404 revisions and executive compensation, here.
        • The US Chamber of Commerce released its mammoth 179-page report on improving US capital markets, including SOX and regulatory reforms, available here. An executive summary of the executive summary is provided by FEI.

         

      9. Finally, to fill out last month's ICYMI report on option backdating, here is a link to the Delaware Chancery Court's opinion in Tyson Foods, Consolidated Shareholder Litigation, which talks about how "spring-loading" options—granting them at the public trading price and disclosing that as the "fair market value" when you know pending material information will drive the value up—is a breach of a fiduciary duty to stockholders and, "if not a lie, exceptional parsimony with the truth" (or, as some might say, "a lie"). Also just for fun, here is a list of option back-dating litigation.

       

      __________________________

      February 14, 2007 
      1. The SEC published the e-proxy rules it adopted back in December here. A company may make use of the rules beginning July 1, 2007, likely too late for most in the upcoming proxy season. The final rules allow e-proxy delivery; companion proposed rules, here, would require it.

         

      2. The SEC published 19 pages of long-awaited interpretive guidance for the new executive compensation disclosure rules here. It has already updated the guidance once to address whether a preliminary proxy statement that excludes compensation information starts the 10-day review period (no, except yes for first-time compliers in most circumstances). Be on the look out for more guidance as people continue to slog through the rules and ask the SEC what they mean. Last month, Cleary Gottlieb published a useful compilation of 52 common questions and answers about the new disclosure rules here. Also, Alan Kailer's outline of tabular reporting requirements, including the SEC's December changes, has been posted here (members only). Finally, executive compensation proxy disclosures are starting to pour in. The folks at CompensationStandards.com have compiled the following sampling of February filings:

           

        • In less exciting but nonetheless related compensation news, here is a summary of the ISS review of 2006 director compensation. The gist: higher pay, fewer options. The October 2006 Cook report on director compensation is here.

           

        • ISS has also posted its 2007 Proxy Season Watchlist, a running tally of proxy season trends, here.

           

        • The SEC's Corp Fin Division posted an updated outline of current issues in accounting and disclosure here. The Corporate Counsel has generously summarized a Davis Polk analysis of it here.

           

        • The SEC published NYSE and NASD proposed changes to research analyst conflict of interest rules, including rationalizing the rules for reporting black-outs following offerings and near lock-up terminations, here. The proposal incorporates recommendations from the NYSE/NASD Joint Report published over a year ago, here.

           

        • Option back-dating, the scandal that keeps on giving, doesn't appear to be fading from consciousness any time soon. A few tidbits since last month's ICYMI:
          • IRS Section 409A has apparently resulted in some companies ferreting out back-dating problems to avoid even bigger tax problems, see here.
          • The IRS published Announcement 2007-18, which announced an employer compliance program to relieve employees from the 409A tax burden for discounted (not just "back-dated") option exercises in 2006, see here. You need to notify the IRS by February 28 if you want to participate. Our client alert on the program is here
          • The D&O Diary questions whether option back-dating is criminal here.
          • The FBI, apparently, believes it is, see here.
          • The SEC issued, in the form of a sample letter to a CFO, interpretive guidance on disclosure of back-dating problems that require financial restatements here.
          • Preliminary decisions in Ryan v. Gifford (see here) and In Re Tyson Foods (not yet published) suggest Delaware may be a preferred jurisdiction for option-backdating claims and that board approval of these may violate fiduciary duties (per the Tyson court: "all backdated options involve a fundamental, incontrovertible lie"—yikes).

           

        • Finally, we hope your large shareholders remembered to file their Schedule 13Gs today, Valentine's Day. Remember, nothing says "I own more than 5% of a public company's stock" more than a Schedule 13G.

         

        __________________________
         
          January 10, 2007
        1. The SEC caught us a bit off guard last month when it issued final interim modifications to its executive compensation disclosure rules, here. While we've been expecting additional guidance about the rules, no one contemplated changes. The changes, which became effective December 29 but which nonetheless allow for comment until January 29, generally conform the disclosure of stock-based awards to FAS123R, which, quite reasonably, ties disclosure more closely to the company's financial statements. Now, you disclose in the Summary Compensation Table the value of the award when it is recognized for financial reporting purposes and you disclose the full grant date fair value of awards in the Grants of Plan-Based Awards Table, each according to the FAS except that you don't include estimated forfeitures in the latter calculation. The changes also caught off guard, and angered, institutional investor-types and even House Financial Services Chairman-Elect Barney Frank who is clearly delving into the subtleties of the issues and not merely lashing out for political gain. (Was that sarcasm?)

           

        2. The SEC has again delayed the first internal control report and auditor attestation for small companies and adopted transition rules for new public companies. Here is the final rule and here is the SEC's press release about it. Non-accelerated filers now must include the management report on internal controls and the related auditor attestation in the annual report for the fiscal year ending on or after December 15, 2007. A new public company may include the report and attestation in its second annual report on Form 10-K but must disclose in its first that it will do so. For those with scorecards, this is the fourth time the SEC has extended the compliance deadline for non-accelerated filers, and the release leaves the door open for further extension.

           

        3. The SEC also proposed new interpretations and additional changes to internal control rules, see here. The SEC's interpretive dance goes like this: (1) we are giving you interpretive guidance on the kind of top-down, risk-based evaluative method we would like to see and (2) we're amending our rules to indicate that an evaluation under our interpretive guidance automatically satisfies the requirement that you use a suitable framework. Although the SEC indicated its guidance is "a non-exclusive safe-harbor," it's not fooling anyone, and likely everyone will begin using the SEC-recommended framework. The SEC also proposed to change Regulation S-X to clarify that the auditor attestation must report directly on the efficiency of internal controls and not indirectly by reporting on the accuracy of management's report. You may comment on the proposals through February 26.

           

        4. A few days after the SEC published its releases, the PCAOB announced a proposed replacement for Auditing Standard No. 2, see here. The proposal and related materials are here. Since the proposed standards are presumably easier than the existing ones, there is no reason for the PCAOB to delay effectiveness. That said, calendar year-end filers shouldn't count on any relief under the revised standards for upcoming reports — the comment period ends February 26, same as the SEC's interpretive guidance proposal, and any standards finally adopted by the PCAOB must still be submitted to the SEC for approval. The SEC and PCAOB have tried to coordinate efforts on the 404 front, but, well, this stuff is complicated. Quite helpfully, the SEC clarified in its press release about the PCAOB's proposed changes, here, that all 404 problems to date have been the PCAOB's fault ("The PCAOB's proposal to repeal the unduly expensive and inefficient auditing standard under Section 404 of Sarbanes-Oxley . . . is an exceptionally positive step . . . ."), so we're sure the PCAOB is champing at the bit to begin collaborative work.

           

        5. The Committee on Sponsoring Organizations, which drafted the framework for assessing internal controls, at least in the U.S., announced, here, it has commissioned Grant Thornton to help it develop internal control monitoring standards, which presumably will dovetail with the SEC's guidance and the new PCAOB auditing standards and make continued compliance with internal control requirements cheaper and easier. Or at least, here's hoping.

           

        6. The SEC voted last month to adopt rules for electronic proxy statement delivery, see here. Beginning July 1, 2007, a company may take advantage of a "notice and access" model and (probably) save printing and mailing costs by sending a "Notice of Internet Availability of Materials" and posting materials on its website. A proxy card may not accompany the original notice, which must be sent 40 days before the meeting, but you can send one with another copy of the notice 10 or more days later. The notice must contain some basic information about the meeting and indicate that you'll send paper copies of materials if requested. In addition to company savings, the rules also make it less expensive for someone to launch a proxy battle. Interestingly, the SEC also said it will propose rules to make e-proxies mandatory for all matters but business combination transactions, although the notice of Internet availability could also include the full-blown proxy statement and proxy card. As of today, the SEC hasn't published final or proposed rules, but here are Commissioner Campos' remarks about the rules to tide you over.

           

        7. Other SEC actions last month:

           

          • The SEC has reproposed standards to make it easier for foreign private issuers to deregister under the '34 Act and cut off public filing requirements, see here and here.

             

          • The SEC has proposed rules intended to safeguard investors in hedge funds, including higher thresholds for "accredited investor" status (but it is not talking about changing the accredited investor definition for Regulation D purposes), see here and here.

           

        8. Option backdating continues to be a hot topic in corporate governance, and the SEC seems determined to keep it in the public eye. Here is the SEC's announcement of its settlement with William Sorin, the former General Counsel of Comverse charged with backdating options for profit. Under the settlement, Sorin must pay $3.1 million and is barred from serving as a public company officer or director and can't practice law before the SEC. Sorin already pled guilty to a federal criminal charge of conspiracy to commit securities fraud. Because former Comverse CFO David Kreinberg settled in November, that leaves only former CEO Jacob Alexander, who, apparently mistaking the world for a John Grisham novel, not only allegedly made $138 million on the scam, but, as the feds closed in, transferred $60 million to a bank in Israel, fled the country, and was hunted by the FBI and Interpol and eventually nabbed in Namibia. No word yet on the terms of his settlement. Also, just for cocktail party material, here is a reprint of a WSJ op-ed piece about Apple's backdating woes.

           

        9. Finally, you may be interested in the New York State Bar's November 2006 report on the lawyer's role in corporate governance. The 298-page report is here, and the more manageable 18-page executive summary is here. Among other things, the report has pithy chapter headings like "'Where Were the Lawyers?': Nine Scandals Examined?" and "Conclusion: no clear rules." Enjoy!
         
         
         
        December 13, 2006
        1. There has been a lot of chatter among commentators about the interim report of the Committee on Capital Markets Regulation, here. The Committee, comprised of rich, smart people who are likely to be taken seriously, proposed 32 changes in four general areas: shareholder rights (more); SOX 404 (ease through regulatory changes); the regulatory process (move to principles-based reporting, generally calm down); and public and private enforcement (calm down). Rep. Barney Frank, the incoming chairman of the House Financial Services Committee, has indicated he'll hold hearings on the report early next year (see here) and the SEC will undoubtedly add the report to the pile of criticisms it has accumulated since SOX was adopted in 2002.

           

        2. Among other things, the Committee's report suggests making it easier for foreign private issuers to exit US markets. The SEC has already picked up that change, stalled for over a year, and indicated it will re-propose rules to allow deregistration based solely on volume thresholds (see here).

           

        3. Foreign Private Issuer relief is one item on the SEC open meeting agenda today, which includes some juicier topics, including proposals to allow for electronic delivery of proxy materials and internal control report reforms. Here is the agenda. Notably, the SEC pulled from consideration at today's meeting proxy rule changes to counter the U.S. Second Circuit's ruling in AFSCME v. AIG regarding shareholder director nominees (see our ICYMI September 23, 2006 issue below) now, it's not clear whether those rule changes will be in place for the upcoming proxy season.

           

        4. The PCAOB will hold an open meeting next week to consider replacing Auditing Standard No. 2, the internal control audit rules (see here). The good folks at FEI have summarized some recent scuttlebutt on potential SEC and PCAOB changes to SOX 404, here.

           

        5. The NASD and NYSE announced, here, that they will form a new SRO to regulate US brokers and dealers. For good or ill, that means brokers and dealers will no longer have to worry about some of the subtle differences between rules. If all goes well, the new SRO will begin operating in the second quarter of 2007.

           

        6. The upcoming Form 10-K filings mark the first that will need to be filed within 60 days of year end for Large Accelerated Filers. This CFO.com article, here, tells us to expect record-breaking Form 12b-25 (late notice) filings. The article refers to an "automatic, 15-day extension" and that certainly seems to be the way the SEC has treated Forms 12b-25, possibly believing that publication of lateness is punishment enough. We've always wondered, however, whether the SEC might start cracking down on these filings if there are too many of them. Recall that a company must represent in the form that the reasons for filing late couldn't have been eliminated without "unreasonable effort or expense" and it must specify the reasons. The SEC would be within its authority to say "that's not a good enough."

           

        7. In the past, we've helped clients with foreign operations deal with the uncomfortable collision of SOX whistleblower requirements and foreign data protection laws. (For obvious reasons—think 1940's France—Europeans are awfully touchy about the notion of co-workers informing on each other.) The SEC has published its side of the correspondence with the EU here. We haven't found a public posting of the more useful EU-side correspondence, but we will send you copies if you are interested. For the sake of completeness, here is a link to the EU's opinion on implementing whistleblower programs that comply with data protection laws from earlier this year.

           

        8. ISS put out its 2007 corporate governance policy updates, here, which indicate how ISS will recommend shareholders vote in upcoming meetings. According to the accompanying press release, here, the most important topics to those ISS surveyed before settling on its policies were option backdating, pay for performance and majority voting for directors.

           

        9. The SEC posted a release about its new full-text search engine, here, which has the potential to help you hone in on disclosure you care about. The release includes a link to the search engine. Our preliminary assessment is that the search engine needs some work, but at least it's a start. Don't expect this to help you find useful CD&A disclosures though—we haven't yet seen any posted, which isn't unexpected since the new executive compensation disclosures apply only to fiscal years ending on or after December 15.

           

        10. The US DOJ acted to revise and replace the infamous Thompson Memorandum with the newly dubbed "McNulty Memorandum," posted here. The McNulty Memorandum modifies DOJ procedures relating to seeking corporate privilege waivers and discouraging legal fee reimbursements. With the changes, the DOJ may forestall Congressional action to reign in federal prosecutors, whose actions on these fronts have been controversial and, at least in a few cases, probably unconstitutional. Our White Collar Crime Bulletin about the McNulty Memorandum is here.

           

        11. Late last week, Congress passed the Tax Relief and Health Care Act of 2006, which President Bush is expected to sign. The Act contains a broad package of tax, health and trade items, including the extension of several expiring tax cuts. Here is a summary of the energy-related tax provisions. A summary of the other tax provisions is posted here
        November 15, 2006
        1. The NYSE has proposed to eliminate discretionary broker voting on directors (Rule 452) by reclassifying director elections as a "non-routine matter" (view here). This implements the recommendation of the NYSE's Proxy Working Group (here). The rule change is relevant for Nasdaq-listed companies too because Rule 452 applies to brokers, not issuers, and many brokers who are Nasdaq members are also NYSE members. The NYSE pondered doing away with discretionary voting altogether but recognized the importance of broker votes in establishing a quorum. The NYSE Proxy Working Group noted that the NYSE could grant brokers "the limited authority . . . to represent unreturned or uninstructed proxies at shareholder meetings for the sole purpose of establishing a quorum," but it hasn't done this in its proposed rule change. The NYSE's comment suggests its view that checking "withheld" on the proxy card is actually casting a vote, which would be prohibited without instruction under revised Rule 452. It's not clear to us that "withheld" is a vote (although on proxy cards where there is not a "no" option, arguably it is), or that brokers need the NYSE's permission to check a box that says "shares are represented but not voting." Of course, brokers have no incentive to buck the NYSE just to help out a company. Companies may begin including something silly in their proxy statements just so brokers can cast a discretionary vote for purposes of establishing a quorum (did someone say "auditor confirmation"?). As we've mentioned before, elimination of discretionary voting for directors would be especially problematic if a company has some form of majority voting for director elections.

           

        2. Don't forget the new Form 8-K rules took effect November 7, 2006. The Form 8-K changes were buried in the SEC's executive compensation disclosure release (here). Like other updated SEC forms, you can find the revised Form 8-K here.

           

        3. Also don't forget, amidst the furor of preparing for new executive compensation disclosure, companies will need to disclose in the proxy statement information about processes for vetting related party transactions (check out new Reg. S-K Item 404 here). Think of it merely as the price of bumping the related party threshold from $60,000 to $120,000.

           

        4. Speaking of executive compensation disclosure, Mark Borges of CompensationStandards.com notes that, at least so far, no one has voluntarily made the new executive compensation disclosures. He predicts the first slew of disclosures, and perhaps some insight on "trends," will start appearing in December and January. In the meantime, we have archived the webcast of our presentation on the executive compensation disclosure rules, which qualifies for Oregon and Washington CLE credit, here.

           

        5. It could well be months before we tire of writing about Comverse. Here is a link to the SEC's press release about its enforcement action against, and the NY AG's prosecution of, former CFO Kreinberg. You would have thought not transferring money to a foreign account and not fleeing the country would have helped the CFO more than it did. Comverse's General Counsel also did not escape unscathed, see here. The PCAOB, jumping on the option backdating bandwagon, issued FAQs last month (here) that provide guidance on option timing and valuation.

           

        6. The PCAOB also adopted on October 31 an extension to rules prohibiting auditor-provided tax services to audit clients, here. Any prohibited tax services had to be completed by October 31, however. As always, if your auditor is doing something it shouldn't, its independence, and ability to give an audit opinion or to review your quarterly financials, may be blown.

           

        7. The SEC amended its "best price" tender offer rules (the press release is here and the final rule is here). Courts have differed on whether severance or other compensatory payment to company executives who own stock violates the rule that you must offer the same price for shares to all shareholders; now, it's (mostly) clear that it doesn't.

           

        8. We hope that all will be revealed about Internal Control (SOX 404) changes at the December 13 open SEC meeting. We haven't yet been able to pick up a clear idea of precisely where PCAOB and SEC discussions are leading (see here and here). On a related note, reports are that there will be less stomach generally for legislated SOX revisions given November election returns, with democrats likely leaving reforms to regulators (view here).

           

        9. Also noteworthy, and not surprising, is this tidbit from the ABA, which affirms that lawyers are free to look at the metadata in documents they receive (view here). A different result ("you are unethical if you look at things I send you by accident") would have seemed silly. The ABA's opinion, though, is a good reminder that particularly if you love marking documents in "track changes," you should eliminate things you don't want the recipient to see (Microsoft Office has an online article titled "find and remove metadata (hidden information) in your legal documents" that you should look at, here). To the extent you are recycling agreements or documents, failing to clean out metadata might reveal confidential information about other parties or (gasp) potentially even ruin privilege.

           

        10. Finally, plaintiffs claiming that CEO/CFO certifications are evidence of "scienter" (almost always, "guilty knowledge") in securities litigation cases were blissfully shot down last month by the 11th Circuit Court of Appeals (here). The 10b-5 Daily's quote of note from the decision (here): "If we were to accept [plaintiff's] preferred interpretation of Sarbanes-Oxley, scienter would be established in every case were there was an accounting error or auditing mistake made by a publicly traded company, thereby eviscerating the pleading requirements for scienter set forth in the [Private Securities Litigation Reform Act]." The 11th Circuit result jibes with district court decisions in Oregon and Washington (view here). Thank goodness.

         

        October 11, 2006
        1. We understand if you accuse us of badgering — we are. But you really do need to pay attention to the new executive compensation disclosure requirements. Useful materials from our recent seminar on the topic are here. Other tidbits regarding executive compensation:

           

          • Corp Fin Director White's latest speech on the topic, to a group of CFOs, is here. (Finally, the SEC is putting the screws to public company CFOs, who we're pretty sure have just been goofing off and taking luxury vacations since SOX was enacted in 2002).
          • The SEC's initial FAQs about the compensation rules, most of which answer "when do I have to comply?" are here.
          • The Corporate Counsel has posted a free supplement to its September-October issue, devoted to the new CD&A, here. Its affiliated publication, Compensation Standards, has also posted a useful freebie for directors here.

           

        2. Two items of note on the tax front:

           

          • The IRS issued Notice 2006-79, which among other things extends the good faith compliance period and pushes back the final plan amendment deadline for Code Section 409A by a full year to December 31, 2007. More 409A regulations are expected later this fall.
          • The IRS increased the high-low per diem rates for post-September 30, 2006 travel. Rev Proc 2006-41 is here. The high-cost area rate increased $20 to $246; the low-cost area rate increased $7 to $148. An employer who pays its employees the IRS-approved high-low per diem rates (or actual per diem rates) for lodging, meals, and incidental expenses for business travel generally need not withhold employment taxes or report the per diem amounts on W-2s. Simplified substantiation is required; receipts are not.

          Although frankly we'd be more impressed than appalled if you figured out a way to use the preceding information to market a transaction or avoid federal tax penalties, we're nonetheless duty bound to stamp anything even remotely tax related with the following:

          IRS Circular 230 notice: Any tax advice contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.

           

        3. Perhaps as a result of criticism that the ISS itself isn't beholden to anyone, ISS has asked for comments on at least some of its policies. If you've ever wanted to give voice to your view that shareholder ratification of auditor appointment is a ridiculous waste of time (for example), you can do so here. Other topics for comment include director election reform and option backdating.

           

        4. Speaking of option backdating, here is a useful letter issued last month by the SEC's Office of the Chief Accountant on the topic.

           

        5. And speaking of accounting, there have been a few accounting pronouncements of note in the last month:

           

          • FASB issued SFAS 157, "Fair Value Measurements," here. The new pronouncement kicks in with financial statements issued after November 15, 2007.
          • FASB also issued SFAS 158, "Employer's Accounting for Defined Benefit Pension and Other Post-Retirement Plans," here. This statement, which requires recognition and disclosure of specified plan funding status, applies to fiscal years ending after December 15, 2006 for public companies, and after June 15, 2007 for non-public companies.
          • The SEC issued SAB 108, here, explaining how to correct minor accounting errors whose impact builds over time.

           

        6. In a significant clarification of the reach of whistleblower protection under SOX, the DOL's Administrative Review Board recently ruled that whistleblowers are protected under SOX only if the alleged action impacts investors and not just whenever a public company does something "bad." The decision, in Platone v. FLYi, is here.

           

        7. Nasdaq filed a recent amendment to conform its director independence rules to Item 402 of Regulation S-K, which was amended to increase the disclosure threshold from $60,000 to $120,000. The proposed change is here. Last month, the SEC approved Nasdaq's changes to cure period rules when a company loses an independent director, here.

           

        8. The debate regarding the impact of SOX on U.S. competitiveness has been picking up steam. Last month's testimony before the House Financial Services Committee, including SEC Chairman Cox's statement, is here. Nothing new since last month's ICYMI on the PCAOB's proposed amendments to Auditing Standard No. 2, which are still, apparently, in the "informal" stage.

           

        9. The Corporate Counsel points us to this request for comment on a proposed California broker-dealer exemption for "finders" (view here). When a finder is considered a "broker-dealer" is not crystal-clear, which makes California's efforts to grapple with the issue admirable.

           

        10. Finally, we can't help but report that former Comverse CEO Kobi Alexander, who fled the U.S. on the heels of an option backdating scandal, absconding with millions, has been nabbed in Namibia. Read about it here. Our favorite quote: "By fleeing from his prosecutors, Alexander may have undermined his own case, some scholars said." You think?
         
        September 13, 2006
        1. The SEC finally, on September 8, published the new executive compensation disclosure rules in the Federal Register (view here). This means you must start complying with the Form 8-K rule changes beginning November 7, 2006 (60 days after publication). The SEC's 436-page release is reduced to a mere 110 pages in the multiple-column, microscopic Federal Register print, making it easier to carry around, if not read. We have condensed the rules to a mere 18 pages for you here. Note that in addition to the changes it adopted, the SEC asked for further comment on the proposal to include compensation disclosure for a few non-executives who make more than the "named executive officers" (dubbed the "Katie Couric amendment" by some) (view here). As proposed, the rule would not require naming the persons, just describing their jobs ("anchoring a prime time news show" might be a give away) and pay, would exclude those who don't have "significant policy influence" (whatever that means), and would apply only to Large Accelerated Filers. The comment period ends October 23. Expect the buzz about the executive compensation rules to continue for a while. They're extensive, new, complicated, and will require a concerted effort by internal personnel at public companies to ensure compliance.

           

        2. Don't forget, in addition to disclosure about executive compensation, the rule package adopted by the SEC requires additional corporate governance disclosure, including disclosure about the compensation committee and the processes it uses to set executive pay, and the process for vetting and clearing related-person transactions. It's worth pulling committee charter and other governance documents off the shelf and reviewing them with the new rules in mind, particularly new Regulation S-K Item 407. Among other things, you might add in your compensation committee charter, which you'll need to publish if you haven't already, the committee's responsibility for reviewing the new Compensation Disclosure and Analysis section of the annual report.

           

        3. SEC CorpFin Director John White spoke at The Corporate Counsel's conference on the new executive compensation disclosure rules a few days ago. His remarks, entitled "The Principles Matter," are here and reference his speech from a week earlier entitled "Principles Matter" here. We surmise Mr. White's point regarding the principles-based executive compensation disclosure rules is this: "Don't try to be cute with hyper-technical readings of the rules. We mean it."

           

        4. Mr. White has been busy. His September 12 speech on Section 404 implementation, and the need for a company to continually communicate with auditors to improve internal controls, is here. Recall that last month, we noted the proposed SEC rules regarding internal controls (view here). CFO.com reports that the PCAOB also continues to tinker with its rules and has informally proposed to the SEC changes to Auditing Standard No. 2 (view here).

           

        5. The SEC approved the NYSE's rule change allowing a company to satisfy the annual financial statement delivery requirement by posting a link to its 10-K on its website and undertaking to provide a paper copy (view here). Note that, because proxy rules require distribution of annual financial information, cost-savings won't be forthcoming for U.S. filers, at least, until the SEC makes a corresponding change to proxy rules. Rule 14a-3(b) requires that a proxy by "accompanied or preceded by an annual report" and the SEC has not yet adopted a general "access equals delivery" interpretation, although it proposed rules back in December 2005 (view here). (In 2000, the SEC noted that "the time for an 'access-equals-delivery' model has not arrived yet" (view here). Here's hoping that, with pressure from the NYSE's rule and completion of the executive compensation disclosure rules, the time is now).

           

        6. Last month we noted that, among others, Comverse (not NIKE-owned "Converse", no, no) was being investigated for option backdating. The Comverse scandal gets juicier as more facts are revealed (click here). Who doesn't love a good scandal, especially when the alleged behavior--a hidden slush fund with a sophomoric name, a CEO who flees to Sri Lanka with nearly $60 million--is so beyond the pale? In related but more mundane option backdating news,

           

          • The Corporate Counsel notes that the NY AG and SEC actions against Comverse give further weight to the notion that you can't date granting resolutions "as of" a date earlier than when the last director signs, which suggests it's probably a good idea to make sure there's a date line next to each director signature.

             

          • Glass Lewis credits the concern over option backdating with the record number of late Form 10-Q filings last quarter (view here).

             

          • SEC Chairman Cox testified about backdating before Congress on September 6 (view here).

             

          • Kevin LaCroix (of D&O Blog) notes the trend toward filing derivative suits in backdating scandals (view here).

           

        7. SEC Rule 14a-8 appears likely to get a face-lift from the SEC in time for the 2007 proxy season (view here). The rule change would counter the U.S. Court of Appeals (Second Circuit) September 5 decision in AFSCME v. AIG that a company could not exclude from its proxy materials a shareholder proposal to adopt a bylaw amendment providing for inclusion of shareholder director nominees on certain conditions. The decision counters recent SEC interpretations that such a proposal is excludable because it "relates to elections." The Court decision is here. If left, the decision essentially allows shareholders to implement, on a company by company basis, a variation of the shareholder access rules the SEC proposed way back in 2003. Those proposals died on the vine and haven't been mentioned since, although responding to the Court ruling may spark further debate on the matter.

           

        8. In a further blow to the U.S. DOJ's efforts to curb corporate abuses, or in a brief respite from the assault on individual liberties, depending on your perspective, a U.S. District Court in New York deemed inadmissible the statements of two KPMG partners because they were impermissibly coerced into testifying. The opinion is here. This latest Fifth Amendment rebuke to the DOJ's "Thompson Memo" guidelines (here) comes on the heels of the Court's ruling in June that cutting off promised reimbursements for the defendants' legal fees violated their Fifth and Sixth Amendment rights. The earlier opinion is here. The U.S. Senate Judiciary Committee held hearings on the Thompson Memo yesterday.

           

        9. Last month, President Bush signed the Pension Protection Act of 2006, which imposes stricter funding requirements on defined benefit plans. A host of materials regarding the changes are located here.
         
        August 9, 2006 
        1. Today the SEC put out two new releases offering relief from SOX Section 404 for smaller public companies, new IPO companies and many foreign private issuers. The press release summarizing them is here. Final rules extending the 404 compliance date until the first annual report filed on or after July 15, 2007 for foreign private issuers who are "accelerated filers" (but not "large accelerated filers") are here. The SEC also proposed rules to help small (non-accelerated) filers and new IPO companies, here. The proposed rules:

           

          • extend the compliance date from fiscal years ending July 15, 2006 to fiscal years ending December 15, 2007 (no relief here for calendar year-end filers)
          • require the auditor attestation to accompany the management report filed with the annual report for the period ended on or after December 15, 2008, essentially giving smaller companies an auditor "bye" on the first management report (at least officially)
          • add a transition period for new public companies, so that they don't have to include a management report and attestation until their second filed annual report

          The proposed transition rules for new public companies are huge for companies thinking about or on the cusp of an IPO, and should help significantly with market timing. The SEC notes that it may extend compliance deadlines even further if it and the PCAOB can't get their acts together on additional guidance and Auditing Standard No. 2 modifications. We've lost track of how many times compliance deadlines have been extended in the (nearly) four years since 404 rules were proposed.

           

        2. The big news last month, at least for us securities lawyers, was the SEC's July 24 vote to adopt final rules on executive compensation disclosure. Here is a link to our summary, with links to other items of interest. A few notable differences between proposed and final (albeit not yet published) rules:

           

          • only non-qualified deferred compensation that earns more than "market" needs to be reported, and even above-market returns (and annual pension benefit changes) are excluded when determining "named executive officers"
          • a compensation committee report, signed by the members, complements the new Compensation Disclosure & Analysis section
          • the required defined benefit pension plan disclosure is limited to the actuarial present value of a named executive officer's accumulated benefits rather than estimated annual retirement benefits
          • the required disclosure of potential severance and change-in-control payments will be computed assuming benefits were triggered as of the end of the last completed fiscal year
          • the proposed requirement to disclose the compensation of up to three non-executive employees will be re-proposed to apply only to large accelerated filers and to require disclosure by position, not name
          • additional disclosures regarding option award timing

           

           

        3. As expected, the SEC executive compensation rules will require disclosure about a company's option-granting process. In typical SEC fashion, the disclosures are designed to make companies tighten the process for option grants to avoid embarrassing disclosure. Option backdating continues to be at the fore of current events, with the PCAOB issuing guidance on option grant timing and the U.S. Attorney's Office taking the first ever criminal action, against the CEO and VP of Human Resources of Brocade Communications, based on (admittedly, plain old fraudulent) backdating. Expect more SEC enforcement actions, like this one filed against Comverse, in the coming weeks.

           

        4. Two items of Nasdaq news for the month:

           

          • Nasdaq is now a "national securities exchange." Here's the SEC order to prove it.
          • Nasdaq proposed to change its definition of "independent director." The proposed changes, here, make Nasdaq's definition look more like the NYSE's.

           

        5. CFO.com published an article that extensively quotes Delaware Chancellor Chandler, with a few insights into what corporate issues he anticipates will be appearing on the court's docket soon.

           

        6. Here's a brief analysis suggesting that the Milberg Weiss indictment (note: don't pay kickbacks to class action plaintiffs) may be the leading cause for the decline in class action lawsuits.

           

        7. Finally, the SEC announced it has settled its civil insider trading action against Martha Stewart. In addition to disgorgement and a fine, sources report that as part of the settlement, Stewart must redecorate Chairman Cox's office, decorate birthday cakes for all SEC staff birthday parties in 2007, and find an eye-pleasing use for worn commemorative SEC stress balls.
         
        July 13, 2006

         

        1. Our brief item last month on option backdating did not, apparently, sate all appetites for information about this topic de jour. With that in mind, a more expansive discussion of the topic is posted here. Note too that reasonable voices are being heard over the din of those looking for the next big scandal—SEC Commissioner Paul Atkins, for example, who cautioned in a speech last week that "it is worth taking a step back before we plunge headlong into wholesale condemnation of all options practices." Of particular interest was Commissioner Atkins' reference to "spring-loading" options—granting them immediately before announcing positive news—and whether that should be considered an insider trading violation . . . or even "bad." He says no.

           

        2. Speaking of hot topics, here is a link to the ABA Committee on Corporate Law's June 20 Model Business Corporation Act amendments that would facilitate adoption of provisions for majority voting for directors, and here is a link to enacted amendments to Delaware law effective August 1. To ensure a fair and balanced presentation, here's a short op-ed piece from a Harvard business law professor about why majority voting is a bad idea.

           

        3. The PCAOB published some Q&As on what to do if you're adjusting prior financials audited by a predecessor auditor.

           

        4. A few months ago, we wrote about the annoying New York law that would have subjected LLCs and other non-corporations formed in the Empire State to severe penalties, including possibly invalidating contracts and subjecting members to personal liability, if they failed to adhere to amped-up publication requirements. "Just kidding," the NY legislature told us last month, at least with respect to the most worrisome of the sanctions. A few law firm memos on the topic are posted here, here, and here.

           

        5. We are completely unable to get away from reporting additional tidbits about internal controls. Here is a blog excerpt noting potential action by the PCAOB to rationalize the internal control audit process. Generally, this seems to build on the theme the SEC and PCAOB have adopted since February 2004—"calm down." The SEC also published on July 11 a "concept release" on 404 intended to solicit feedback in advance of additional SEC guidance, which it currently anticipates as new rules and which will address three topic areas: risk and control identification, management's evaluation, and documentation requirements. A summary of the concept release is here.

           

        6. The SEC approved the NASD's proposal to turn Nasdaq into a "national securities exchange." Nasdaq anticipates it will fulfill the order's conditions and become an exchange sometime in August.


        June 16, 2006

        1. The SEC is working hard to adopt executive compensation disclosure rules (view here) sometime this year, hoping to make them applicable to the 2007 proxy season. This despite receiving over 18,000 comment letters, although admittedly most of them are letter-writing campaign forms and likely say something like "executives get paid too much, please do something about it." Here is a link to SEC Chairman Cox's recent speech suggesting that the SEC Staff will be making recommendations for final rules in an open meeting "soon."

        2. Cox's speech also mentions the problem of back-dating option grants, about which there has been buzz for a while, and indicates that disclosure about option pricing dates likely will be included in new compensation disclosure rules (view here). The Corporate Counsel devoted most of its March-April issue to the topic of option dating and more than a dozen companies are being investigated for their option practices. The upshot of advice generally: don't game option grants, don't be sloppy about them, and standardize the procedures to make them.

           

        3. The NYSE's Proxy Working Group recently made recommendations for changes to NYSE Rule 452 (view here), which discusses when brokers can vote without direction from beneficial owners. Among other things, the group recommends that a director election be deemed a "non-routine matter," which would eliminate discretionary votes. If combined with a majority voting policy, this could be problematic for companies that have relied on brokers to cast votes in favor of directors.

           

        4. On the subject of majority voting for directors, which we've mentioned in each of our last two updates, we note that Senate Bill 322 was introduced in the Delaware General Assembly last month (view here). The bill would amend the Delaware General Corporation Law to allow Delaware companies to implement majority voting. Not to brag, but we've posted some excellent materials about majority voting on our website. Everything your heart desires - background, statistics, examples and links - is available here.

           

        5. No client update would be complete without an internal controls reference, and we're certainly not going to break with well-established tradition. The SEC announced in May the actions it would take to continue honing SOX 404 rules, including issuing additional guidance (view here). The PCAOB similarly announced it would proceed with a four-point plan to revise internal control requirements, including amendments to Auditing Standards No. 2 (view here). The SEC has a useful compilation of internal control materials here.

           

        6. The Delaware Supreme Court affirmed the Chancery Court's opinion in In Re Walt Disney (view here). As a brief refresher, the case was significant for, among other things, its discussion of when failure to exercise a duty of care would be a breach of the duty of good faith, which would disallow exculpation and indemnification of a director by the company. The court punted a bit on the issue, finding that, because it upheld the Chancellor's finding that there was no breach of good faith, it really didn't need to get into the issue more deeply. It did note, however, that "to adopt a definition that conflates the duty of care with the duty to act in in good faith by making the violation of the former an automatic violation of the latter, would nullify [. . .] legislative protections and defeat the General Assembly's intent." That's good news for directors.

           

        7. We reminded you a few months ago of the NASD's efforts to make Nasdaq a "national exchange," to create a new, "elite" trading market and to rename the "national market." The NASD sent to the SEC its proposed rule to accomplish the latter changes earlier this month (view here). It has moved the date to become a national exchange from June to August (view here). Nasdaq has FAQs about the transition to a national exchange here, which includes a link to the bulletin it sent to listed companies in May. Note that as a national exchange, Nasdaq-listed companies will need to deliver Forms 144 and Section 16 reports to Nasdaq, although it would be bizarre if the SEC denies the NASD's request that Edgar-filed documents be deemed delivered.

           

        8. A few tidbits on the SEC front. It has begun posting registration statement effectiveness notices online. Here's what they look like. Potentially more significantly, the SEC is beta-testing a word-search feature for public filings that you can try here. It's not nearly as sophisticated as LiveEdgar, but, for that, it's also not nearly as expensive.

           

        9. In the quest to reduce (and eventually eliminate, notwithstanding Nasdaq's assertions to the contrary) the use of paper stock certificates, which always seem to go missing or at least slow transaction closings, Nasdaq, AMEX and the NYSE submitted proposed rules to the SEC (here, here, and here) that would require all listed shares to be direct registration system (DRS) eligible. Going wholly electronic could save companies a bit of cash and hassle and, unless you're incorporated in Arizona or Puerto Rico, your state corporate law allows it. A recent presentation that clarifies some of the terms you might hear your transfer agent bandy about, along with other useful information on electronic shares, is here (PPT).

           

        10. We all know the practice of law is fascinating, challenging, and rewarding. That said, if you can't laugh at yourself, whom, other than accountants, can you laugh at? In that spirit, here is a link to a site poking fun at law firms (not that I'm implying our law firm, or any other law firm for that matter, even remotely resembles the one described there - because that would be libel).


        May 10, 2006

           

        1. The SEC's Advisory Committee on Smaller Public Companies released its final recommendations for how securities regulation should be changed to accommodate the little guy (view here). Key to its 33 recommended changes is a new system of scaled regulation that replaces the current concept of "small business issuer" with "microcap," "smallcap," and "smaller." Proposals within this framework include exemptive relief from Section 404 reports and auditor attestations for the smallest of the small, at least until an appropriate assessment standard is developed. The GAO also published a report on SOX 404 and small businesses, including a few jabs at the non-specificity of the advisory committee's recommendations (view here). At least one group (admittedly, a group that would be out of business if it weren't for SOX 404) released a study suggesting 404 is worth it, at least to investors (view here). The bottom line is, don't expect a "bye" from 404 strictures for small businesses. SEC Chairman Cox is adamant that the question is "how", not "whether" 404 applies (see here), and note too that there's no deadline for the SEC to act on the Advisory Committee recommendations (or to act at all).

           

        2. Practice continues to develop with respect to whether to include a complete set of risk factors in quarterly reports on Form 10-Q or to include just updates to the risk factors in Form 10-K. Recall that, while the SEC release (here) noted "[t]he amendments do not otherwise require, and we discourage, unnecessary restatement or repetition of risk factors in quarterly reports," it also recognized that "[i]ssuers may already include risk factor disclosure in their Exchange Act reports for varying reasons, including to take advantage of the safe harbor for forward-looking statements in Securities Act Section 27A and the 'bespeaks caution' defense developed through case law." Our guess is that those who have included the full-blown risk factors in each 10-Q will continue to do so unless the SEC explicitly tells them to stop.

           

        3. On April 12, the US Supreme Court approved a host of new federal court rules, including some governing discovery of electronically stored data (view here). Among other things, the rules provide a safe harbor for destroying electronic records as part of a document retention policy (which for obvious reasons no one calls, more accurately, a document destruction policy). The rules also require a court order to get at electronic data the respondent identifies as "not reasonably accessible because of undue burden or cost." The requesting party can still get the information if there is "good cause" and, although it doesn't necessarily have to pay, the "willingness to share or bear the access costs may be weighed by the court in determining whether there is good cause." These rules take effect in September 2006 unless Congress goes out of its way to say "no."

           

        4. Again, on a litigation note, the US Sentencing Commission voted April 5 to delete a sentence added to its guidelines in 2004 that prosecutors have since used to force attorney-client privilege and work product waivers, at least if you want a check next to "fully cooperated in the investigation" on your sentencing tally sheet, which at least theoretically results in less jail time (view here). A victory for the criminal defense bar, to be sure, but prosecutorial pressure to waive will continue because similar offending language remains in the notorious 2003 "Thompson Memo" (here), part of the DOJ's playbook for deciding whether to bring criminal charges in the first place.

           

        5. The mild victory for the criminal bar segues nicely into mild good news for public companies. Two recent reports on SOX costs, an FEI survey (here) and a CRA International study (here), both show 2005 compliance costs, which are almost entirely wrapped up in internal controls, were substantially less than in 2004. Of course, it would be news only if this weren't the case, since accelerated filers were buying compliance systems for "worst case" regulation, fueled by external auditor angst, in the run-up to the first internal control report at the end of 2004. Those systems were largely in place last year and in addition, (dare we say it?) some cost-benefit rationality may be returning to the process.

           

        6. For those who reported material weaknesses in internal controls, it might at least make you feel a bit better that the SEC suffers from internal control weaknesses as well. According to the annual GAO report (here), the SEC has made progress, but hasn't cured the material weaknesses the GAO noted in its 2004 audit.

           

        7. Majority voting news continues. According to the ISS, the corporate section of the Delaware bar recommended changes to the Delaware corporate code that would facilitate implementation of majority voting standards (but not change the plurality voting default) (view here). For those contemplating adoption of majority voting requirements, The Corporate Counsel has posted (subscribers only) the transcript of its webcast "Practical Considerations: Implementing a Majority Vote Standard" (here).

           

        8. The SEC approved the PCAOB ethics rules we noted last month (view here and here). In wholly unrelated PCAOB news, it also published an overview of AS4, the standards it adopted a while ago for auditing internal control weakness fixes (view here). The four page overview is a much better read than the 386-page release itself.

           

        9. You've just got to love Jesse Brill, chair of CompensationStandards.com and the National Association of Stock Plan Professionals, who posted another letter to the SEC regarding executive compensation disclosure rules that among other things summarizes some of the more well-thought out comments on the rules (view here).

           

        10. If you have a limited liability entity incorporated or qualified to conduct business in New York, you should be aware of changes effective June 1, 2006 that require publication of a newspaper notice when the entity is formed or qualified in New York. Failing to publish could have harsh consequences, possibly including loss of limited liability during periods of non-compliance. A summary of the law is here.

           

        11. The DOJ recently imposed a $1.8 million fine on Qualcomm for violating the anti-trust waiting period when it started operating Flarion Technologies before the deal was cleared (view here). Not a new legal development, but a good reminder (1) to consider whether merger agreement provisions give the acquirer too much veto power over routine operations of the target business and (2) that the DOJ takes its waiting periods seriously. A good summary of the case is here.

           

        12. Finally, for you NYSE companies, a reminder of changes in the NYSE annual certification forms. A comparison of the 2006 form and the 2005 form is here.


        April 12, 2006

           

        1. The SEC released the NASD's proposed rules regarding fairness opinions for comment earlier this month (view here). A brief summary of the purpose of the rules is contained in the NASD's notice to members issued way back in November 2004 (view here).

           

        2. The ABA's annual deal points studies for public and private company M&A deals is available to ABA members and those who know them. If you can't get copies here and would like one, let us know. At minimum, a handy resource to counter that second-year lawyer's claim that provision "X" is "standard", "in every deal", or (shudder) "what The Street expects."

           

        3. On the topic of M&A, here's an interesting story in the NY Times about "go shop" provisions. Here's hoping if you're ever selling, you've got the leverage to get this.

           

        4. We know you've probably got lots of checklists, but here are a few items to keep in mind when preparing your Form 10-Q this time around:
          • Due date is 40 days for Large Accelerated Filers and Accelerated Filers (no final phase-in to 35 days).
          • New box to check to indicate whether you're a LAF, an AF or a NAF.
          • New Item 1A, Risk Factors, just like in Form 10-K.
          • Disclosures suggested by SAB 107 regarding FAS123R (view here (see page 48)).

           

        5. We corporate types occasionally like to prove we can still read case law. In that vein, we note the US Supreme Court's recent holding in Merrill Lynch v. Dabit: the Securities Litigation Uniform Standards Act preempts a state claim that a person was fraudulently induced to hold securities rather than buying or selling them. Come to think of it, we didn't really need to read past the headnote, but rest assured — we could if we had to.

           

        6. Unabashed, after having entered litigation waters unscathed, here is a link to some materials we recently presented at our white-collar crime breakfast series, including "tools for minimizing the company's risks" (view here).

           

        7. Similarly, and in a shameless plug for our own client retention efforts, materials from our presentation about the SEC's proposed executive compensation rules are posted here. Of particular interest, we think, is the "before and after" sample compensation disclosure we've ginned up. The proposed rules are here, and here are links to a few recent speeches by SEC Chairman Cox (view here) and by new SEC Corp. Fin. Director White (view here), the latter of which includes actions a company should be taking now.

           

        8. We've heard increasingly that auditors are pushing indemnification clauses in audit engagement letters. In a likely fruitless effort to head off claims that this is "standard" (and we know, it's likely too late), here are some potentially helpful links for negotiating leverage:
          • PCAOB brief regarding the effect of indemnity provisions on auditor independence: view here.
          • AICPA proposed ethics interpretation 101-16
          • FFIEC advisory on unsafe and unsound use of limitation of liability provisions in external audit engagement letters (solid gold, albeit applicable on its face only to financial institutions): view here.
          • SEC FAQs (See Q4 under "other matters"): view here.
          • Also ponder — does inclusion of exculpatory clauses make these agreements "material" for proxy statement disclosure and S-K Item 601 purposes?

           

        9. On March 7, the PCAOB issued proposed Ethics and Independence Rules Concerning Independence, Tax Services, and Contingent Fees (view here); it also recently published adjustments to its implementation schedule for the new rules (view here). Nothing even mildly amusing to say about these.

           

        10. Practitioner's chatter about majority, rather than plurality, voting for directors continues, with Alaska Air and Safeway joining Intel, Dell, and SuperValu, among others, with these provisions. Here's a link to a 49-page study on the topic, with a blissfully brief executive summary. The ABA has published a report on majority voting and its proposal to change the model business corporations act to allow shareholders to implement a form of majority voting through a bylaw amendment (but not to make majority voting the default) (view here). It's too much to say majority voting is a "trend," even though The Corporate Counsel has dubbed its on-line informational portal "Majority Vote Movement" (Members only — view here). We're willing to say, at least, that it's a "hot topic" given the amount of coverage corporate governance types have given it. (Just to clarify, "plurality voting" means a director is elected if he or she receives more votes than any other nominee for the slot, even if more "no" than "yes" votes are cast for the director; "majority voting" means either a majority of votes cast or a majority of votes entitled to be cast are required to elect a director.) The genesis of the majority voting requirement is the complaint that because shareholder access to the proxy process is limited and a proxy battle is expensive, shareholders don't have a meaningful way to boot directors they don't like. In typical shareholder meetings, director slots are uncontested and the proxy card gives an option for "yes" or "withheld." We're still pondering what ever happened to the SEC's proposed rules to increase shareholder access to the proxy statement to elect directors — recall that the SEC proposed rules way back in October 2003 (view here) that it hasn't yet acted on. (You might think the SEC would have the good grace to announce it's given up on the idea. But in thinking this, you would be dead wrong.).

           

        11. Occasionally, we like to gather links about internal controls over financial reporting (we lead unexciting lives, we realize). Here are a few over the last several weeks:
          • The SEC's Small Business Advisory Committee draft report on smaller public companies on February 21: view here.
          • Messrs. Sarbanes and Oxley say the SEC can exempt small businesses from 404, for what that's worth: view here.
          • Information on the PCAOB's May 10 roundtable, and other nifty 404 items: view here.

           

        12. There's been all kinds of interesting Nasdaq news in the last few months.
          • For one, it's changing the name of its "National Market" to "Global Market", which continues its effort to make listed companies feel better about themselves — in 2005, it renamed the "Nasdaq Small Cap Market" the "Nasdaq Capital Market". In addition, it plans to create a new, elite market with higher listing standards — the "Global Select Market". Here's the press release announcing the program. Here's the initial listing standards for the new market (the maintenance standards won't vary from the "Global Market" standards). If all goes well, a company that qualifies will move onto the Global Select Market in 2008, although it can opt out if it wants. What's the benefit of being a Global Select Market company? Marketing. Just marketing.
          • The SEC approved Nasdaq's application to be a "national securities exchange" rather than an "automated quotation system" (view here). The change was effective April 1 (no joke), which means Nasdaq companies need to start checking a different box on Form 10-K (securities will be registered on Nasdaq under 12(b) rather than 12(g) now). The SEC also approved Nasdaq's request that it be allowed to fix existing Form 8-A filings for listed companies so they don't need to (recall, Form 8-A is the '34 Act form on which companies register their securities on an exchange): view here.
          • Finally, the NASD submitted a request to the SEC that it consider securities traded on the Nasdaq Capital Market to be "covered securities", which means they would be exempt under state Blue Sky laws (view here). Most consider this a welcome fix to an inadvertent slip in the 1996 NSMIA, which left these (we're still saying) smallcap securities out.

           

        13. On an accounting note, FASB released a 159-page report on accounting for defined benefit pension and other post-retirement plans: view here. Confidence is high that the report is as gripping as its title suggests.

           

        14. Finally, you might recall the Delaware case, Vantagepoint v. Examen which held that California's corporate code section 2115, which purports to apply California corporate law to out-of-state corporations with significant connections to California, was unconstitutional under the "internal affairs" doctrine. The issue (or at least an opportunity to comment on it) may be headed to the California Supreme Court on appeal of Grosset v. Wenaas, although probably not for a while: view here.

         

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