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The RR Donnelley Securities Newsletter contains the latest developments and practical guidance for corporate & securities law practitioners. The content is provided by TheCorporateCounsel.net.
The features in this issue include:
Please note the newsletter includes a few password protected links. To access these links, please sign up for a no-risk trial from TheCorporateCounsel.net.
1| Treasury's and Obama's Vision for the Future
In mid-June, the Obama Administration released its White Paper for financial reform; this executive summary was also posted. We are posting memos on this important development in our Regulatory Reform Practice Area.
The SEC would seem to fare well under the Administration's proposals. The white paper indicates that the SEC and the CFTC would maintain their current authorities and responsibilities as market regulators, while the statutory and regulatory frameworks for futures and securities would be harmonized. As previously discussed, the SEC would oversee the registration of advisers of all hedge funds and other private capital pools. Regulation of securitizations and over-the-counter derivatives will be accomplished through a "coherent and coordinated" regulatory framework.
Further, the white paper calls for expanded authority for the SEC to promote transparency in investor disclosures, and states that the SEC should be provided with new tools to increase fairness for investors, through the establishment of a fiduciary duty for broker-dealers offering investment advice and harmonizing the regulation of investment advisers and broker-dealers.
Among the new regulators proposed are a:
- Financial Services Oversight Council (FSOC), chaired by the Treasury and composed of prudential regulators tasked with identifying emerging systemic risks (replacing the President's Working Group on Financial Markets);
- National Bank Supervisor with the authority to supervise all federally chartered banks;
- Office of National Insurance within the Treasury Department; and
- Consumer Financial Protection Agency, tasked with protecting consumers from "unfair, deceptive and abusive practices."
The FSOC would also establish the Financial Consumer Coordinating Council, with membership including federal and state consumer protection agencies, and a permanent role for the SEC's newly created Investor Advisory Committee.
Seemingly back "on the front burner" with the white paper proposals is the issue of IFRS, with the report recommending that accounting standard setters make substantial progress by the end of 2009 toward development of a single set of high quality global accounting standards.
As widely expected, the Federal Reserve would gain more authority under these proposals, including authority over Tier 1 Financial Holding Companies and oversight over the payment, clearing and settlement systems.
Whether any or all of these proposals move forward is tough to say at this point, but at least today we now have a much clearer picture of the complete package of reforms under consideration.
2 | The SEC and Treasury on Executive Compensation Practices
June was a significant month in the ongoing involvement of the US government in executive compensation, as Treasury Secretary Geithner outlined a series of broad-based principles that companies - particularly financial institutions - should consider in connection with the design and implementation of their executive compensation programs. Secretary Geithner's statements followed a meeting involving SEC Chairman Schapiro, Federal Reserve Governor Dan Tarullo and several compensation experts.
The principles that Secretary Geithner outlined should come as no surprise to those who have been reading our publications over the last several years. The principles draw on best practices that we have seen developing in the marketplace over time, and for the most part can be universally applied. (Nothing in Geithner's comments seemed to indicate that the guidance was limited strictly to financial institutions, but banks will see these standards in more concrete terms as they are worked into the supervisory process of bank regulators.)
Here are the principles:
1. Compensation plans should properly measure and reward performance - Incentive compensation plans should be tied to performance in the sense of long-term value creation, which could be accomplished by using a wide range of internal and external metrics (and not just the company's stock price), including metrics that distinguish the company's performance from its peers.
2. Compensation should be structured to account for the time horizon of risk - Continuing the theme of aligning pay with long-term value creation, the principles encourage conditioning compensation on longer-term performance and thereby obviating the need for specific clawbacks, while encouraging the holding of equity awards for longer periods.
3. Compensation practices should be aligned with sound risk management - As we have heard repeatedly since the financial crisis, compensation committees are encouraged to conduct and publish risk assessments of compensation plans in order to "ensure that they do not encourage imprudent risk taking."
4. Golden parachutes and supplemental retirement packages should be reevaluated - Companies should reexamine the extent to which golden parachutes and supplemental retirement packages are aligned with shareholder interests, whether they incentivize performance and whether they result in value to executives even when shareholders lose value.
5. Promotion of transparency and accountability in the compensation-setting process - Citing the lack of independence of compensation committees and the lack of clarity in disclosures (including the lack of a true "walkaway" number for top executives), two legislative initiatives are proposed.
The first legislative initiative outlined is a push for an advisory vote on executive compensation, which goes beyond the previously introduced legislation and the pending Shareholder Bill of Rights, in that it would require a vote on executive compensation as disclosed in the proxy statement (including the CD&A and the compensation tables) and a vote targeting the compensation reported for each of the named executive officers. Similar to the prior proposals, a non-binding vote on golden parachutes would also be required in merger proxies.
The second legislative initiative coming out of the announcement is a new framework for compensation committees that would be analogous to the audit committee provisions of the Sarbanes-Oxley Act. Under SEC-mandated listing standards, the compensation committee members would be subject to the higher independence standards applicable to audit committee members, the compensation committee would get resources to hire and oversee its own advisors and independence standards would be prescribed for outside compensations consultants and outside counsel. This initiative comes as somewhat of a surprise, because while compensation consultant conflicts have been a concern, we have not heard much in the post-Sarbanes-Oxley era about concerns that compensation committees lack sufficient independence.
Chairman Schapiro also released a statement in mid-June, reiterating the rulemaking efforts under consideration on executive pay and corporate governance. Proposals will be considered at an open Commission Meeting on July 1.
3 | Treasury Issues Much-Anticipated Rules Implementing TARP Exec Comp Restrictions
In mid-June, the Treasury announced that it had finally published interim final rules implementing the executive compensation provisions from the Recovery Act. The lack of guidance had created difficulties for financial institutions participating in the TARP program, since they were not sure what to do with their compensation programs in the absence of greater clarity in how the legislation was to be applied.
The rules implement and expand on the Recovery Act provisions. Some new provisions that go beyond the statutory requirements include:
- Prohibiting tax gross-ups to senior executive officers and the 20 next most highly compensated employees;
- Requiring additional disclosure (to the Treasury and the principal regulator) of perquisites in excess of $25,000 for employees subject to the bonus restrictions, including a narrative description of, and justification for, the perquisites.
- Requiring a disclosure (to the Treasury and the principal regulator) of the use of compensation consultants, including a discussion of any non-compensation services performed and the use of "benchmarking procedures."
4 | More Congressional Reform Activity: The Peters and Durbin Bills
Senator Charles Schumer's Shareholder Bill of Rights is not the only legislation floating around the Hills these days seeking to reform corporate governance. Here are three others:
A. Shareholder Empowerment Act
As we recently blogged about, Rep. Gary Peters introduced the Shareholder Empowerment Act. Similar to Schumer's bill - but going further - Peters' bill would implement eight governance reforms that were highlighted in a Council of Institutional Investors letter to Congress late last year, including:
- Require majority voting for directors
- Allow long-term investors to have proxy access by nominating their own director candidates
- Eliminate uninstructed broker votes in uncontested director elections
- Require separation of board chairs and CEO positions
- Implement nonbinding annual shareholder approval of executive compensation
- Require independent compensation consultants
- Strengthen clawbacks of unearned incentive compensation
- Bar severance agreements for executives terminated for poor performance
B. Excessive Pay Shareholder Approval Act and Excessive Pay Capped Deduction Act of 2009
In May, Senator Richard Durbin introduced two bills in May aimed at curbing "excessive" compensation: the Excessive Pay Shareholder Approval Act (Bill S. 1006) and the Excessive Pay Capped Deduction Act of 2009 (Bill S. 1007).
The Excessive Pay Shareholder Approval Act would require a supermajority vote (60%) to approve a compensation structure in which any employee is paid more than 100x more than the average employee of that company. In addition, in connection this vote, proxy disclosure would need to include:
- Compensation paid to its lowest paid employee
- Compensation paid to its highest paid employee
- Average compensation paid to all of its employees
- Number of employees who are paid more than 100x the average employee compensation
- Total compensation paid to employees who are paid more than 100x the average employee compensation
The Excessive Pay Capped Deduction Act would limit the federal income tax deduction for compensation paid to executives to 100x average employee compensation. Any amounts paid in excess of this cap would be considered excessive compensation and would be non-deductible.
In addition, any company that paid excessive compensation would be required to file a report with Treasury for such taxable year that included:
- Amount paid to the employee receiving the lowest amount of compensation during such year
- Amount paid to the employee receiving the highest amount of compensation during such year
- Average compensation of all of its employees during such year
- Number of employees receiving compensation that is more than 100x the average employee compensation during such year
- Amounts paid to the employees receiving compensation that is more than 100x the average employee compensation during such year.
5 | SEC Creates an Investor Advisory Committee
There is no doubt that the SEC has a laser-like focus on its investor protection mission these days. In mid-June, the SEC announced that it will be getting some help from a newly-established investor advisory committee. Commissioner Aguilar will serve as the Commission's "sponsor" of the Committee, and it will be made up mostly of institutional investors and representatives of individual investor organizations.
The SEC said that the Advisory Committee's main goals will be providing:
- Advice to the Commission on areas of concern to investors;
- Investors' views on "current, non-enforcement, regulatory issues;" and
- Information and recommendations to the Commission regarding regulatory programs.
The SEC is free to set up these sorts of advisory committees under the Federal Advisory Committee Act (5 U.S.C. App. 2 §§ 1-16), if it can be determined that the establishment of the advisory committee is in the public interest. An advisory committee can be established (15 days after the publication of a notice in the Federal Register) by filing a charter for the committee with the Senate Committee on Banking, Housing, and Urban Affairs and with the House Committee on Financial Services. A copy of the charter is also filed with the SEC Chairman, furnished to the Library of Congress, placed in the Public Reference Room at the SEC, and posted on the SEC's site.
The charter for the committee must provide that the duties of the committee are to be solely advisory, and specify the time frame during which the committee will operate. The charter also provides that the SEC alone will make any determinations of action to be taken and policy to be expressed with respect to matters within the SEC's authority that are recommended by the committee.
The advisory committee approach can be a useful way for the SEC to obtain a more detailed understanding of matters without expending scarce Staff resources. In our view, they seem to work best when they operate relatively independently and their specific agenda is not more or less directed by the SEC.
6 | The SEC vs. Mozilo: Insider Trading and Rule 10b5-1 Plans
For some time now, we have been waiting to see if the SEC would bring any insider trading actions involving the use of Rule 10b5-1 plans. Ever since the SEC Enforcement Staff first mentioned concerns with potential abuses of Rule 10b5-1 plans back in 2007, much has been made of how to avoid invalidating a Rule 10b5-1 defense (for comprehensive coverage of these issues, see our Rule 10b5-1 Practice Area). Now, in mid-June, the SEC filed a complaint against Countrywide's former CEO Angelo Mozilo and others as a first of its kind SEC case questioning trades made under Rule 10b5-1 trading plans.
The SEC's complaint in the Countrywide case alleges that Mozilo and two co-defendants misled investors about the problems that the mortgage lender faced, with contemporaneous e-mails painting a picture of significant internal concern over the company's lending practices, while at the same time the company was portraying a rosy picture to the investment world. In this regard, SEC Enforcement Director Robert Khuzami, waxing poetic, called the situation "a tale of two companies" in the SEC's press release announcing the action.
In the complaint, the SEC notes that Mozilo entered into four Rule 10b5-1 sales plans in late 2006, in each case while he was in possession of material non-public information about the mounting credit risk that Countrywide faced and the expected problems with the Countrywide-originated loans. With respect to his October 2006 sales plan, for instance, the SEC alleges that Mozilo established the plan one day before sending an e-mail to his co-defendants stating "we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales." Over the course of the next 12 months, Mozilo exercised over 5 million options and sold the underlying shares pursuant to the Rule 10b5-1 plans, resulting in proceeds of over $139 million.
The Mozilo complaint for the most part focuses on one of the most fundamental elements for a successful Rule 10b5-1 defense - that the person entering into the plan must not be in possession of material non-public information at the time of entering into, or amending, the plan. We still get the question from time to time of whether a person can enter into a plan while in possession of material non-public information so long as trading does not commence until after the information is made public, which obviously can never work.
It will probably be some time before this case makes it to trial. It remains to be seen whether the Mozilo case is just one isolated incident of allegations involving Rule 10b5-1 plans, or whether more of its type are on the way. In any event, we think that the threat of the SEC cracking down on Rule 10b5-1 plans has in all likelihood cleaned up most abuses in this area (if there were any to start with).
In this entry from the D&O Diary blog, Kevin LaCroix provides a great explanation of why it is appropriate for Bank of America to be advancing Mozilo's defense expenses.
7 | A Preliminary Postseason Report
Whew, the proxy season is over. And it's now fair to ask: just how wild and crazy was this proxy season? Given all the coming reforms, probably not as crazy as next year's proxy season will be - but it certainly wasn't dull. You can read details about how the various proposals were supported in RiskMetrics' new Preliminary Postseason Report.
Regarding one of the hottest topics, as of June 1, "say-on-pay" shareholder proposals averaged 46.7% support, representing an increase of over 5% from 2008. The 2009 figure is based on preliminary or final voting results for 50 of the 85 proposals voted so far this year. Meanwhile, RiskMetrics is tracking 18 majority votes in favor of the resolution as of June 1st, compared with 11 in all of 2008. Proposals at another five companies received between 49 and 49.9% support.
8 | "Shareholder Value" vs. "Value for Shareholders": The Leaders Speak
Below is some important reading that has recently been brought to our attention that we commend to each of you. It shows that this country has some pretty amazing leaders:
1. Pepsi's CEO Indra Nooyi, who was educated in India and then the Yale Business School, recently gave these impressive remarks about corporate values (you can watch Ms. Nooyi deliver them on this video).
2. JPMorgan's CEO Jamie Dimon annual letter to shareholders is a must read, particularly starting on page 13. Note what Mr. Dimon says about compensation: It also is clear that excessive, poorly designed and short-term oriented compensation practices added to the problem by rewarding a lot of bad behavior. And see the steps he has taken at JPMorgan (at pg 26). When I saw the bullet about no special severance provisions, I remembered that he had a huge severance provision in his contract when he went from BankOne to JPMorgan in 2004. Well, I did a little research and sure enough, it turns out that he voluntarily gave it up in '06 without any fanfare.
3. Roger Martin, Dean of the Rotman School of Management at Toronto puts a fresh lens on compensation and metrics in Undermining Staying Power: The Role of Unhelpful Management Theories. His important observations recently were summarized in this Financial Times article.
4. Finally, one of this year's best media articles is this one entitled The Executive Pay System is Broken by Alistair Barr of MarketWatch. It explores possible solutions to fix executive pay and answers why it's important to do so...
By the way, on the right side of the CompensationStandards.com home page, we still maintain a group of complimentary videos of prominent leaders speaking out about excessive pay under the caption of Respected Leaders Speak Out for Responsible Practices. We just posted an extended video (i.e. 6 mins) of when Jesse Brill spoke out on how to fix pay practices recently on The Today Show.
9 | Survey Results: Compliance Committees
TheCorporateCounsel.net recently wrapped up its Quick Survey on Compliance Committees practices. Below are the results:
1. Does your company have a Chief Compliance Officer:
- Yes, and with that title - 57.8%
- Yes, but not with that title - 26.7%
- No - 15.6%
2. Does your board have a Compliance Committee, with that or a similar title:
3. If the answer to #2 is yes, how old is the compliance committee:
- Less than one year - 14.3%
- 1-2 years - 28.6%
- 3-4 years - 35.7%
- More than 4 years - 21.4%
4. If the answer to #2 is yes, how often does the compliance committee meet:
- Once a year - 14.3%
- 2-3x per year - 50.0%
- More than 3x per year - 35.7%
- As needed - 0.0%
Please take a moment to participate in TheCorporateCounsel.net's new Quick Survey on Audit Committee Oversight and Subsidiaries.
10 | Corp Fin's New and Updated "Compliance & Disclosure Interpretations"
In late May, Corp Fin issued two new batches of CD&Is (which is an easier acronym than the more accurate term of C&DIs that Corp Fin uses) and updated five sets of older CD&Is. The new CD&Is relate to XBRL and Regulation S-T. [The SEC's Office of Interactive Disclosure also posted this new set of XBRL FAQs.]
The updated CD&Is relate to:
11 | All You Need to Know About Rule 144
Members will be excited to know that we have moved the video archives - and more importantly, the critical course materials, including lots of sample letters, instructions and memos - from our popular conference Rule 144: Everything You Need to Know - And Do NOW to our Rule 144 Practice Area. Previously, this content was just available to those that paid for the Conference.
As always, we continue to post useful sample documents, either in the relevant Practice Area or in our Sample Documents Portal. For example, we just posted this updated chart comparing NYSE and Nasdaq listing requirements.
12 | Going to Print: The Popular "Romeo & Dye Forms & Filings Handbook"
Good news. Peter and Alan just completed the 2009 edition of their popular "Section 16 Forms & Filings Handbook," with numerous new - and critical - samples included among the thousands of pages of samples (remember that a new version of the Handbook comes along every 3 years or so - so those with the last edition have one that is dated). If you don't try a '09 no-risk trial to the "Romeo & Dye Section 16 Annual Service," we will not be able to mail this invaluable resource to you in early July when it's done being printed.
You can use this order form or order online. The Annual Service not only includes the "Forms & Filings Handbook," it also includes the popular "Section 16 Deskbook" and the quarterly newsletter, "Section 16 Updates." Get all three of these publications when you try a '09 no-risk trial to the Romeo & Dye Section 16 Annual Service now.
13 | Introducing "The Mentor Blog"
We recently launched a new blog - The Mentor Blog - for TheCorporateCounsel.net members. Launching this blog was something we've been mulling over for quite some time, well before the financial meltdown led to so many scrambling for new jobs (and careers). Now that the transformation of the legal profession, the corporate secretary and IR worlds - and more - is in full swing, the time is now to help foster the conversation that hopefully will lead you to better manage your career. The goals of this blog are threefold:
- Provide practice pointers in the area of career development, regardless of the stage of your career
- Provide guidance on how to use technologies to make you more efficient and market yourself
- Provide guidance to newbies on basic areas of the law
As with our other blogs, this is a community blog. Contributions are welcome and encouraged from each and every one of you! 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 this blog).
Here are topics covered in the blog so far:
- Networking with Your Legal Recruiter
- A Guide to Public Company Auditing
- Do Your Corporate Policies Consider Social Media?
- Overcoming the Challenges of In Transition
- Quasi-Insider Trading Question: Suppliers
- Obtaining a Job in a Tough Market
14 | How to Monitor Shareholder Activism in a Changing World
The Summer '09 Issue of InvestorRelationships.com is now available (we are maintaining this publication ascomplimentary thru '09 as a "Thank You" to our loyal members in a down economy). The Summer '09 issue includes articles on:
- How to Monitor Shareholder Activism in a Changing World
- The Art of Handling Director Resignations: Practice Pointers
- Parsing the SEC's Proxy Access Proposal
- My Last ExxonMobil Annual Meeting
- Online Document Sharing Services: Legal and Reputation Concerns for IROs
If you're not yet a member of InvestorRelationships.com, simply provide your contact information in this sign-up form and gain free and immediate access to the issue. If you signed up last year, your ID/password will continue to work - if you forgot what those are, you can get a reminder.
15 | May-June Issue of The Corporate Counsel
The May-June issue of The Corporate Counsel includes pieces on:
- SEC Guidance on Shell Companies
- Augmenting the Schedule 13D/G Disclosure Requirements-Enhanced Advance Notice Bylaws
- Filing Form 10-Q With Non-Reviewed Financials-Impact on S-3/8 Eligibility
- Earnings Release and 10-Q Filing on Same Day-Impact on 8-K Item 2.02
- Merger Lock-Ups and Written Consents-Staff Iterates/Firms Up Its Position on Pre-Proxy Solicitation
- Voluntary Filer CDIs
- Staff Review Update
- The Staff's Nine-Month IPO Dormancy Rule-Some Relief in Today's Market
- Even if IFRS Roadmap Adopted, Don't Expect Voluntary Early Switching to IFRS
- NSMIA Blue Sky Pre-Emption-Litigation Update
- Some Reverse Engineering of the Facebook and WorleyParsons RSU No-Action Letters
Try a half-price for Rest of '09 no-risk trial today to receive this issue and more.
16 | "IDEA" is Dead! Long Live EDGAR!
As noted in this National Law Journal article, the SEC has settled the trademark infringement lawsuit brought against it by CaseWare International by agreeing to stop using IDEA. As Broc blogged a while back, Caseware has been using the IDEA name for twenty years and registered the name with the Patent and Trademark Office in '01, well before the SEC began using the term.
In our opinion, this is a blessing in disguise for the SEC since Edgar is well-branded with investors and we thought it was a huge mistake to change the name last year. It looks like the SEC already has purged any vestiages of IDEA from its website. We sure hope they just stick with Edgar and not pick another new name. Long live Edgar!
17 | People: Who's Doing What and Where
At the SEC, George Canellos has joined the SEC as Regional Director of the New York Office.
In Corp Fin, former Staffer Courtney Schuster Kamlet has joined Arbitron as Senior Attorney.
At the PCAOB, Chairman Mark Olson announced his resignation, effective July 31st.
18 | TheCorporateCounsel.net Conference Calendar
19 | What's New on TheCorporateCounsel.net
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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