The RR Donnelley Securities Newsletter contains the latest developments and practical guidance for corporate & securities law practitioners. The content is provided by TheCorporateCounsel.net.
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Corp Fin's New Director: Meredith Cross' Return
Meredith Cross has been named the new Director of the SEC's Division of Corporation Finance. She had served in Corp Fin as Deputy Director, Chief Counsel and a few other capacities back in the '90s - and has been working at WilmerHale since then. We know Meredith will be a great asset to help Chair Schapiro accomplish her vast regulatory agenda as she is quite able and really knows her stuff.
The SEC's Corporate Governance Agenda Comes into Focus
In early April, SEC Chair Mary Schapiro laid out the agency's upcoming regulatory agenda in a speech at the Spring Meeting of the Council of Institutional Investors. Now a few months into her new role, Chairman Schapiro has a vision for the SEC's top priorities over the next several months, which will, not surprisingly, involve a lot of new rules for public companies. These rules will build on some common themes, including director accountability and enhanced disclosure about the role of risk in corporate decision-making.
The upcoming rulemaking agenda looks like this:
- Proposed rules designed to limit short sales in a down market were issued in early April, which is being followed by a Roundtable.
- In May, the SEC will consider a proxy access proposal, and in the process the Commission is considering the 2003 and 2007 proposals with "fresh eyes," as well as proposed Delaware law changes.
- In June, the SEC will consider whether to propose rules requiring enhanced disclosure about the experience, qualifications and skills of director nominees.
- The SEC will also consider whether boards should disclose the reasons for selecting a particular leadership structure, such as an independent chair, a non-independent chair, or a combined CEO/chair.
- Rule proposals are being developed to address how a company and its board of directors manage risks, both generally and in the context of compensation.
- The SEC will consider new rules relating to compensation. The rules would be directed at making sure that shareholders fully understand how compensation structures and practices drive an executive's risk taking. Further, the Commission will consider whether greater disclosure is needed about a company's overall compensation approach - beyond decisions with respect to the highest paid officers - as well as enhanced disclosure about compensation consultant conflicts of interest.
Not mentioned in the speech, but certainly looming on the horizon, is the proposed change to the NYSE's Rule 452, for which the comment period has now closed.
In addition to the proposals that are oriented toward public companies, Chair Schapiro indicated the SEC is considering a number of other reform measures (some of which will require legislation) in the financial services area, including issues with respect to custody, the respective roles of brokers-dealers and investment advisers, registering hedge fund advisers (and potentially the hedge funds themselves), more disclosure about credit rating agencies, oversight of the credit default swap market, enhanced standards for money market funds, municipal securities disclosure and disclosure about asset-backed securities.
Here It Comes! Schumer's Major Governance Legislation
According to this WSJ article, Sen. Schumer intends to introduce legislation soon that would overhaul a number of governance areas. This is the legislation that we all have been expecting since the financial crisis broke - and, with a few exceptions, its components should come as no surprise since most of them have been proposed before in one form or another before.
According to the article - whose authors saw a draft of the legislation - it will include these significant provisions (bear in mind that actual proposals could change from the draft):
- Say-on-Pay - require companies to give shareholders an annual nonbinding vote on executive pay practices
- Say-on-Severance - give shareholders a nonbinding vote on severance packages for executives following mergers or acquisitions
- Proxy Access - buttress potential SEC rules that would make it easier and cheaper for investors to nominate their own directors (article says SEC is considering a number of "proxy access" techniques and could issue a proposal in mid-May)
- No More Classified Boards - require companies to hold annual director elections rather than putting only a portion of the board up to vote each year
- Majority Vote Standard for Director Elections- require directors to resign if they don't win a majority of shares voted
- Independent Board Chairs - require board chair to be independent
- Risk Management Board Committees - require boards to appoint special committees to oversee risk management
The article says that House Financial Services Committee Chair Barney Frank is working on say-on-pay legislation as well. And we already have seen SEC Chair Schapiro's ambitious agenda for governance rulemaking that will take place in the near term.
This is all quite notable, particularly when combined with the high likelihood that the SEC will approve the NYSE's proposal to eliminate broker non-votes in director elections which, according to this WSJ article, may come soon.
It will be interesting to see how hard corporate lobbying groups will fight the pay components of Schumer's bill. There are numerous examples that reflect little change in executive compensation practices. For example, see Bud Crystal's note on Six Flags.
The Impact of XBRL: Cover Page Changes to Forms 10-Q and 10-K
With the effective date of the SEC's XBRL rules coming up for larger companies fairly soon, it's time to bone up on their impact. Lawyers are mistaken if they don't think XBRL will impact their practice. Not only are there new liability standards to learn, but XBRL will change how they conduct due diligence and deal with internal control issues. Even more fundamental - there might be a change in the workflow process of how disclosure documents get drafted.
All lawyers should tune into the audio archive from our recent webcast - "XBRL: What Lawyers Need to Know" - to hear John Huber and Dave Lynn go over these types of issues; this program was not a re-hash of the SEC's new rules. At a minimum, lawyers need to be aware of the new rules because they impact the cover pages of Forms 10-Q and 10-K. Effective April 13th, the SEC added a new box to the cover page of those forms regarding compliance with the XBRL rules (the purpose of the statement is so third parties can determine whether Rule 144 is available). Thanks to Amy Seidel of Faegre & Benson, we have updated the Form 10-Q cover page - which is in a Word file - posted in our "Form 10-Q" Practice Area (as well as the 10-K cover page in our "Form 10-K" Practice Area).
What should you do with the box now since the rules won't impact filings until June? Tune into the webcast's archive to learn how to deal with this - or read the chain of answers in #4743 of our "Q&A Forum."
Recently, the SEC published this "Small Entity Compliance Guide" on XBRL. It's just a summary of the new rules, akin to a law firm memo - we have plenty of those posted in our "XBRL" Practice Area.
SEC Staff Issues SAB 111 re: Temporary Impairment
In mid-April, Corp Fin and the Office of Chief Accountant jointly issued SAB 111 regarding impairments of equity and debt securities (i.e. OTTI). Here is the related press release.
Meanwhile, the PCAOB voted in April to issue a concept release regarding possible revisions to the board's standard on audit confirmations. Learn more from FEI's "Financial Reporting Blog."
DGCL Amendments Become Law: Proxy Access, Reimbursement Bylaws, Etc.
After having been approved by the Delaware House in March and by the Senate in mid-April, House Bill #19 was signed into law by the Delaware Governor. As stated in the legislation, the amendments to the Delaware General Corporation Law will be effective August 1st.
In this podcast, John Grossbauer of Potter Anderson provides some follow-up to his podcast from last month now that the new Delaware legislation has been finalized. We have been posting numerous memos on these amendments in our "Delaware Law" Practice Area.
FASB Issues Three Fair Value Staff Positions
In mid-April, the FASB issued three final Staff Positions that provide application guidance and enhance disclosures regarding fair value measurements and impairments of securities (here is the related press release):
Note that the last one contains the dissent registered by the two FASB Board members (Linsmeier and Siegel) who voted against the recent rule change by the FASB regarding fair value accounting.
NYSE Finally Moves to Scrap Compulsory Press Releases
In the lead-off piece of our "Spring '09 Issue" of InvestorRelationships.com entitled "Facing an Unpredictable World: How to Change Earnings Guidance Practices," we mention how the NYSE recently filed a proposed rule change that would amend Section 202.05 and 202.06 of the Listed Company Manual to allow listed companies to comply with its "immediate release policy" by disseminating the information "by any Regulation FD compliant method." This follows a similar change that the Nasdaq made back in '02 (as discussed in #4777 of our "Q&A Forum"). The NYSE's rule change is immediately effective subject to a 30-day operative delay - since it was filed on April 8th, the operative delay will elapse on May 7th. In his IR WebReport Blog, Dominic Jones picked up the ball on this story and ran. Check it out.
First Whistleblower Action Over Executive Compensation Disclosures
In early April, the Chicago Tribune ran this article about a lawsuit brought against McDonald's by a former Senior Director of Compensation who balked against signing a subcertification related to the company's disclosure of executive compensation. The company denies the allegations. I'm pretty sure this is the first whistleblower suit related to executive compensation disclosure.
The complaint was filed in US District Court for Northern Illinois - and includes allegations of (as noted in this blog):
- Setting up a reimbursement/repayment scheme to avoid disclosing golf club memberships for the regional President stationed in Hong Kong;
- Mislabeling the outgoing CEO as a "transitional officer" so he could keep his health and other benefits, and so the millions paid to him after his last day of work for McDonald's could be called salary and incentive pay, rather than severance; and
- Implementing a shareholder-mandated 2.99X cap on executive severance agreements with loopholes large enough to render the cap meaningless.
We'll be closely following this development since the topic is "near and dear" to many of our members...
Ca-Ca-Catfight! Banc of America vs. the Gov
Good heavens, who knows where to start commenting on the latest mess related to fixing this crisis. According to this WSJ article, BofA's CEO Ken Lewis says he was urged to lie to investors as part of testimony before New York Attorney General Andrew Cuomo. The NY AG's office has released a slew of documents related to this testimony, including this letter to Congress.
Probably best to just fire off a few quick thoughts (ours and others) and not drone on:
- The obvious: If proven true, it would mean the Treasury Secretary and Federal Reserve Chairman urged a CEO to break US federal securities laws. And if true, these type of actions taken by senior government officials raise serious questions as to whether citizens can trust their government, and what can be done to hold them accountable and increase transparency such that they can no longer engage in such actions behind closed doors, even during a financial crisis.
- On December 4th, then-SEC Chair Chris Cox delivered this speech, in which he warned of the danger of such actions by the government and how it would undermine the enforcement and regulatory regime in the US. It is notable this speech came during the timeframe the questionable practices were alleged to have occurred.
- WSJ's article entitled, "Are Ken Lewis, Ben Bernanke and Hank Paulson Heroes or Goats?"
- D&O Diary's blog entitled, "Ken Lewis, BofA and the Fed Strong-Arm: Ten Questions"
- This might have happened more than once. In March, this Washington Post article outlined how the head of FHFA (which oversees Fannie Mae, Freddie Mac and the FHLB) urged Freddie and Fannie to make misleading disclosures.
- BofA, under the leadership of the CEO, has the ultimate responsibility for ensuring compliance with its obligations to provide disclosure to investors. Notwithstanding what he was told to do by government officials, it was ultimately the company's decision as to whether or not to break the law. In the Freddie and Fannie case, it appears that they chose not to break the law and did make the required disclosures.
- Don't leave the investigating to Congress or even the NY AG in this case. The SEC should investigate, subpoena all people in the discussions and all the relevant emails, documents and telephone records and get to the bottom of this and get us the truth. Anyone, including any government officials, that are found to have broken securities laws, should be held accountable by the SEC so they can ensure the investing public that this is not a rigged market.
- BofA's annual shareholder meeting - held April 29 - surely was one for the ages! Ken Lewis - and other BofA directors - already were the subject of a "just vote no" campaign before this latest maelstrom.
The Bank Stress Tests: Fed's White Paper Outlines Standards
The Federal Reserve issued a "Design and Implementation" White Paper in late April, which includes the stress test standards for the 19 banks that are being subjected to the tests. The White Paper helps us somewhat understand how those tests are being carried out - particularly Table 1 which spells out the scenarios, etc. We indicate "somewhat" because some critics say the White Paper is too vague (eg. Bloomberg's article, "Fed's White Paper Leaves Questions Unanswered, Analysts Say").
For the most part, it seems like the government's tests are based on two potential economic scenarios - a baseline scenario - based on a early '09 consensus among economic forecasters - and a more "worser case" scenario, based on a longer, more severe recession. Here is the Fed's related press release - and here is a list of the 19 banks.
A First: Reincorporating to North Dakota
Thanks to Michelle Leder of footnoted.org for pointing out the first company - American Railcar - to reincorporate to North Dakota. Here's the proposal from the company's preliminary proxy statement; note that Carl Icahn owns a majority stake in the company.
As we have blogged about before, North Dakota changed its laws in '07 so that they are among the most shareholder-friendly. And some shareholders have urged a group of companies to reincorporate there, through the shareholder proposal process, etc.
Closings Then and Now
On the DealLawyers.com Blog, John Jenkins of Calfee Halter & Griswold continues to provide some great analysis of recent developments. Below is a more personal anecdote that he recently blogged that rang true to old-timers like us:
I started practicing law in 1986, but so much has changed since then that I often feel like I'm a complete relic. For instance, it boggles my mind when I think about the fact that there's an entire generation of lawyers out there who've never hand-marked an SEC filing, never dealt with trying to clear Blue Sky merit review, and never hand-delivered a filing package to the SEC reviewer and then raced to the bank of pay phones next to the file room to let the rest of the team know that the deal was effective.
Those events were rites of passage for generations of young deal lawyers, and I think that today's lawyers have actually missed out on something by not being able to take part in them. Sitting bleary-eyed in the Judiciary Plaza Roy Rogers forcing down another cup of coffee while waiting for the SEC's file desk to open - along with a bunch of other sleepy junior associates toting overstuffed deal bags - was a shared experience that built a kind of camaraderie among young deal lawyers. Regardless of where you worked, misery loved company, and after a couple of all nighters at the printer, those early mornings at Judiciary Plaza were definitely miserable!
But I think the biggest thing that most young lawyers miss out on today is what an epic event a deal closing used to be. Today, it seems every closing is done by e-mail and overnight delivery. I can't tell you the last time that I went to a closing or sent someone to physically attend a closing. Closings with actual people signing actual documents are increasingly rare events. Things were sure different back in the day.
Closing a public offering wasn't a big deal - the closing was over in a couple of hours at most, and was pretty anti-climactic in light of everything that came before it. However, there was nothing anticlimactic about the closing of a big M&A transaction. These closings were elaborate, multi-day, round-the-clock affairs that involved lots of paper, little sleep, all the boredom, stress, caffeine, and nicotine that you could handle, and all the cold pizza and warm deli trays you could eat.
Oh yeah, I almost forgot - this drama usually played itself out across a bunch of dreary conference rooms that featured fluorescent lighting that sometimes looked like it came straight out of the office scene in Joe Versus the Volcano (okay, maybe it just seemed that way at the time). The M&A people were in one room, the Bank people were in another, then there were often war rooms and usually a much nicer room where the client's executives were ensconced. This last room was definitely for the grownups. Aside from the client's senior people, nobody who wasn't a senior investment banker or partner spent much time in this sanctuary. You only went into this room to get signature pages signed, and you rarely spoke above a whisper.
Today, closing a deal still involves a tremendous amount of work, but most of the time is spent writing and responding to e-mails, revising closing documents at your desk and generally staring at a computer screen. Sure, there may be cold pizza and caffeine involved, but there's definitely no nicotine unless it's contained in a stick of gum. What's more, there's just not the commotion. No conference rooms full of people, nobody rushing around calling back to their office to find out what happened to the tax clearance certificate from Massachusetts, no big shot partners arguing face-to-face over last minute changes to somebody's legal opinion (or an eleventh hour request for a new opinion).
Of course, all of those things still happen; it's just that they happen in cyberspace or on conference calls. In many respects, that's a real benefit. Don't get me wrong; 99% of everything I've just described stunk worse than Battlefield Earth, but the other one percent represents the kind of shared experience that helps lawyers develop a little empathy for one another. Personally, I think we could use more of those kinds of experiences.
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The Latest TARP Oversight Report: Concerns Over Fraud
As we all know too well, where there is money - there is bound to be fraud. In mid-April, Neil Barofsky, TARP's Special Inspector General sent a 247-page quarterly report to Congress detailing a long list of concerns about government efforts, including the lack of safeguards in handing out the money. Unlike the Congressional Oversight Panel led by Harvard Professor Elizabeth Warren, Barofsky's office is focusing on criminal and civil wrongdoing in addition to more general recommendations and audits.
As this Washington Post article notes, the report states that Treasury Department lawyers have determined that companies participating in a $1 trillion program to relieve banks of toxic assets could be subject to limits on executive compensation (see page 110 of the report), contradicting the Obama Administration's public position.
Survey Results: Hedging and Other Trading Prohibitions in Insider Trading Policies
In the last seven years, we've conducted an average of one survey on some aspect of insider trading policies (here is a list of them from our "Blackout Periods/Insider Trading" Practice Area). Recently, we wrapped up our latest one - this "Quick Survey" related to hedging and other trading prohibitions in insider trading policies. Below are the results:
- Our company's insider trading policy prohibits insiders from trading in any of the following:
- Exchange-traded options - 41.1%
- Hedging/monetization transactions (e.g., zero cost collars, forward sale contracts) - 36.7%
- Puts and calls - 45.6%
- Margin accounts - 25.6%
- Pledges - 23.3%
- None of the above - 10.0%
- We don't have an insider trading policy - 1.1%
- Our company discourages - but still permits - the following:
- Exchange-traded options - 18.2%
- Hedging/monetization transactions (e.g., zero cost collars, forward sale contracts) - 25.0%
- Puts and calls - 13.6%
- Margin accounts - 47.7%
- Pledges - 52.3%
- None of the above - 29.6%
More Proxy Season Developments
If you haven't signed up to get TheCorporateCounsel.net's new "Proxy Season Blog" pushed out to you, here are a few of the items you've missed:
- Tracking Voting Results: FundVotes.com
- Examples: The Latest Efforts by Activists to "Just Vote No"
- Five Cool Web Sites: UK-Style
- E-Proxy Questions: Meeting Directions on Notice
- More Governance Proposals Survive No-Action Challenges
- Amgen's Compensation Survey for Investors
- "Books & Records" Being Used to Check Compensation Committees
Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog (just like you can accomplish that functionality for Broc and Dave's blog).
Facing an Unpredictable World: How to Change Earnings Guidance Practices
TheCorporateCounsel.net just posted the "Spring '09 Issue" of InvestorRelationships.com (InvestorRelationships.com is maintaining this publication as complimentary thru '09 as a "Thank You" to loyal members in a down economy). The "Spring '09" issue includes articles on:
- Facing an Unpredictable World: How to Change Earnings Guidance Practices
- The Box: Updating Guidance Mid-Quarter-and the Duty to Update
- Implementing Mandatory Retirement Ages for Directors: Practice Pointers
- Web Archival Practices: Answering "How Long?"
- Chair Schapiro Announces the SEC's New Corporate Governance Agenda
- Draft E-Proxy Standards: NIRI Seeks Comment
If you're not yet a member of InvestorRelationships.com, simply provide your contact information in this sign-up form and gain free and immediate access to the issue. If you signed up last year, your ID/password will continue to work - if you forgot what those are, you can get a reminder.
People: Who's Doing What and Where
At the SEC, Jamie Brigagliano and Dan Gallagher were named as Co-Acting Directors of the SEC's Division of Trading and Markets, replacing Erik Sirri, who left the agency in late April.
In late April, Senators Schumer and Shelby introduced an amendment to an existing anti-fraud bill that would increase the SEC's budget by $20 million to allow it to hire 60 additional Enforcement Staffers and upgrade its technology.
In Corp Fin, Meredith Cross was named the Division Director.
At the PCAOB, Marty Baumann was promoted to Chief Auditor and Director of Professional Standards.
TheCorporateCounsel.net Conference Calendar
What's New on TheCorporateCounsel.net
Among other new additions, during the last month we have:
- Held the webcast - "XBRL: What Lawyers Need to Know" (4/23) for TheCorporateCounsel.net members
- Interviewed a number of experts for Inside Track on TheCorporateCounsel.net, including:
- Posted the results of our survey on D&O Questionnaires
- Posted a new survey on Corporate Airplane Use by Outside Directors
- Posted a new survey on Compliance Committees
- Posted TARP's Special Inspector General's 2nd Quarterly Report and the Congressional Oversight Panel's 5th Report on how the government is managing TARP funds.
- On the "Q&A" forums available at Section16.net, TheCorporateCounsel.net, CompensationStandards.com and DealLawyers.com, dozens of timely questions have been answered.
- Posted tons of new Law Firm Client memos and other publications
Please let us know what you like - and don't like - so we can tailor TheCorporateCounsel.net to be more of a hands-on resource for you and your colleagues.
Because we view TheCorporateCounsel.net as a "community" site, let us know if you would like to contribute content to our site. E-mail comments, suggestions and other input to broc.romanek@thecorporatecounsel.net.
(c) 2009 Executive Press.
This email newsletter is provided for informational purposes only and does not constitute legal advice. Executive Press is not engaged in rendering legal or other professional services. Publication of this newsletter is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. Do not act or rely upon the information and advice given in this publication without seeking the services of competent professional counsel. You may decline to receive further email solicitations from us by sending an email to info@thecorporatecounsel.net or contacting us at Executive Press, PO Box 21639, Concord, CA 94521-0639
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