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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| SEC Brings Relatively Rare Reg FD Case against a CFO
It's been quite some time since the SEC's Enforcement Division brought a Regulation FD case (two years since the last one) - and I count only nine such cases since Reg FD was adopted earlier this decade (according to the list in our Regulation FD" Practice Area). In late September, the SEC announced an administrative proceeding in which a former American Commercial Lines CFO (Christopher Black, who was the company's de facto IRO) agreed to pay $25,000 for a Reg FD violation that occurred a few years ago. The CFO is alleged to have selectively disclosed material, nonpublic information regarding the 2nd quarter '07 earnings forecast to a limited number of analysts. Here is the SEC's complaint.
Here is a summary of what allegedly happened according to the complaint:
- In mid-2007, the company issued a press release projecting second quarter earnings in line with 1st quarter earnings.
- Later that week, the CFO sent an e-mail from his home to the eight sell-side analysts who covered the company that said that the company's earnings per share for the second quarter "will likely be in the neighborhood of about a dime below that of the first quarter," effectively cutting in half the second quarter earnings guidance.
- This selective disclosure and resulting analysts' reports triggered a significant drop in the company's stock price.
The SEC's litigation release identified these factors to explain why an enforcement action wasn't pursued against the company itself:
- Prior to the selective disclosure by Black, the company cultivated an environment of compliance by providing training regarding the requirements of Regulation FD and by adopting policies that implemented controls to prevent violations.
- The CFO alone was responsible for the violation and he acted outside the control systems established by the company to prevent improper disclosures.
- Once the illegal disclosure was discovered by the company, it promptly and publicly disclosed the information by filing a Form 8-K with the SEC the same day.
- The company self-reported the conduct to the SEC Staff the day after it was discovered and the company provided extraordinary cooperation with the Staff's investigation.
- The company took remedial measures to address the improper conduct, including the adoption of additional controls to prevent such conduct in the future.
These factors noted by the SEC serve as a good reminder that companies should have Regulation FD policies and well-documented compliance training programs in place. In our "Regulation FD" Practice Area, we have a bunch of sample Reg FD policies.
2 | SEC Creates New Division of Risk, Strategy and Financial Innovation
In mid-September, the SEC announced the creation of a new Division - the Division of Risk, Strategy and Financial Innovation. The new division combines the Office of Economic Analysis, Office of Risk Assessment and "other functions to provide the Commission with sophisticated analysis that integrates economic, financial, and legal disciplines." At least for starters, this Division will have quite a small staff.
As rumored, the SEC lured Professor Henry Hu from Texas to head the new Division. Henry has become famous for his writings on derivatives, including problems with proxy voting. The addition of his expertise comes at a critical time given that broker nonvotes are eliminated next year for director elections - we continue to expect numerous problems as votes become more hotly contested and wind up in court.
When Was the Last Time the SEC Created a Division? 1972
Surprisingly, this question stumped Broc when he pondered this one. So he went to the first logical source he could think of - the SEC Historical Society's site - and he got zip. Then he turned to a place that has been gathering dust on his bookshelf - the Louis Loss Treatise - and found these nuggets buried in a footnote:
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Current Divisional organization dates back to August 1972.
- Before then the SEC had three divisions: (i) Trading and Markets, (ii) Corporate Regulation (which administered PUHCA and John Huber informs me was the biggest and most important division during the Depression) and (iii) Corporation Finance (actually, Loss uses the term "Corporate Finance," a common misspelling!).
- '72 reorg divided Trading and Markets into a Division of Enforcement and a Division of Market Regulation.
- The '72 reorg also created a new Division of Investment Company Regulation, spun off from the Division of Corporate Regulation.
- In January 1973, the Division of Investment Company Regulation was renamed the Division of Investment Management
- In December 1983, the SEC delegated authority to its General Counsel that ended the Division of Corporate Regulation (and became an Office within the Division of Investment Management).
- In November 2007, the SEC renamed the Division of Market Regulation back to its '72 name: Division of Trading and Markets.
Note that the sizable Office of General Counsel has never been a Division.
Bonus Question: When was Corp Fin created? The SEC's 1943 annual report says the agency was reorganized in 1942, creating the Corporation Finance Division. This new Corporation Finance Division was referred to that way in subsequent annual reports until the '48 annual report, when the SEC (without explanation) referred to the division as the Division of Corporation Finance. Thanks to Alan Dye for digging this nugget out! It should be required learning as part of a new Staffer's initiation. . .
3 | Full Steam Ahead: SEC Decides to Pursue BofA Bonus Disclosure Trial
In mid-September, in a sternly-worded 12-page order, US District Court Judge Jed Rakoff refused to approve a $33 million settlement between the SEC and Bank of America over allegations of misleading proxy materials because the bonus obligations due to Merrill Lynch employees were not fully disclosed.
The following excerpt from this NY Times article gives you a sense of how Judge Rakoff felt about the settlement:
He accused the S.E.C. of failing in its role as Wall Street's top cop by going too easy on one of the biggest banks it regulates. And he accused executives of the Bank of America of failing to take responsibility for actions that blindsided its shareholders and the taxpayers who bailed out the bank at the height of the crisis.
The sharply worded ruling, which invoked justice and morality, seemed to speak not only to the controversial deal, but also to the anger across the nation over the excesses that led to the financial crisis, and the lax regulation in Washington that permitted those excesses to flourish.
Implicit in the judge's remarks were broader questions on the anniversary of one of the most tumultuous weeks in Wall Street's history: What do the giants of finance owe their shareholders and the investing public? And who will adequately oversee these behemoths?
In late September, the SEC filed a case management plan in Rakoff's court and issued a statement that it would proceed "vigorously" to pursue its case against Bank of America, including:
"As we alleged in our complaint last month, Bank of America did not provide investors with complete and accurate information about the bonuses to be paid by Merrill Lynch to employees. We believe that this disclosure failure violated the federal securities laws.
We firmly believe that the settlement we submitted to the court was reasonable, appropriate and in the public interest. As we consider our legal options with respect to the court's ruling, we will vigorously pursue our charges against Bank of America and take steps to prove our case in court. We will use the additional discovery available in the litigation to further pursue the facts and determine whether to seek the court's permission to bring additional charges in this case.
In deciding how to proceed, we will, as always, be guided by what the facts warrant and the law permits."
As part of its announcement, as noted in this Washington Post article, the SEC said it intends to broaden its investigation into alleged wrongdoing at the company and may seek additional charges as it prepares for the trial. . .
As the drama of this case continues to unfold, Bank of America awaits the findings of NY Attorney General Andrew Cuomo, as some expect him to file a complaint charging individuals at Bank of America in connection with the disclosure of Merrill Lynch bonuses in the near future.
4 | Corp Fin Updates a Number of CDIs
In mid-September, Corp Fin updated a slew of new Compliance & Disclosure Interpretations in a variety of topic areas (and issued new interps in one area). It looks like the Division will take advantage of the Web to quickly distribute updated guidance rather than relying on major overhauls every few years like the old days. That's good news!
Here are the updated (and new) CDIs:
With Corp Fin updating a bunch of new CDIs over the last few months (we also blogged about August's updates), a number of members have sought redlined versions of the changes. You may want to check out the redlines on the ABA's Disclosure and Continuous Reporting Subcommittee page, where WilmerHale's Jonathan Wolfman and Carter Ledyard's Guy Lander are now manning the fort. The massive redline of the August CDIs comes courtesy of Jonathan, with the legwork done by WilmerHale's Michelle Vervais and Alex Greene.
5 | SEC Adopts (and Proposes) Rules to Further Strengthen Oversight of Credit Rating Agencies
In mid-September, at an open Commission meeting, the SEC adopted (and proposed) a bunch of rules changes designed to strengthen their oversight of the credit rating agencies (specifically, these rules). Here are Chair Schapiro's opening remarks. Some of the proposals could impact the disclosure obligations that companies have - so this is not just news for rating agencies.
Some aren't convinced that the SEC's approach to reform of the rating industry is sound - they worry that the inherent conflicts of interest will continue to entice the agencies to give more favorable ratings than deserved since the SEC's rule changes don't alter that dynamic at all. For example, see Steve Pearlstein's mid-September column in the Washington Post.
6 | Another IG Report: SEC Bears Barrage of Renewed Madoff Criticism
In early September, the SEC released this 22-page executive summary from its Inspector General David Kotz regarding the SEC's failure to nail Bernie Madoff (ahead of the full 477-page report released later that same week - note that it's the "public" version, some names have been redacted). SEC Chair Schapiro released this statement with the executive summary - and this one with the full report, both of which highlight the 13 reforms undertaken post-Madoff.
As could be expected, the IG's report resulted in front-page news as the gruesome details of the SEC's failures would sink any former Staffer's heart. And this is a story that won't end for quite some time (FEI's "Financial Reporting" Blog notes Senate Banking Committee hearings have already commenced) and is likely to produce more heartache.
7 | Upshot of Madoff Mess? SEC to Finally Be Self-Funded?
Ironically, this Bernie Madoff mess may result in the SEC finally getting funded more adequately. Cries for self-funding have resurfaced, led by Senator Schumer who issued this press in early September noting that he is drafting legislation that would enable the SEC to fund itself from the fees it collects. The SEC historically has collected a level of transaction and registration fees for the US Treasury Department that far outweighs - by about 50% - the funds that Congress appropriates to the SEC to operate. It's a gravy train that will be hard for the US government to wean itself from.
Beginning in early August, SEC Chair Schapiro began beating the drum for self-funding, as noted in this Financial Times article. This follows a long-line of SEC Chairs seeking the same thing, as it's hard to run an independent agency when you are dependent on politicians for funding. The SEC is one of only two financial regulators that must go through the annual Congressional appropriations process. Banking regulators got self-funding a couple of decades ago.
Drilling down into the details, the SEC is part of the appropriations and budget request that includes the Departments of Justice and Commerce. Indirectly, Congress uses the fees that the SEC collects to help balance the budgets of the DOJ and Commerce, even though those paying the fees are not receiving benefits from those agencies. Essentially, the excess fees that market participants pay serve as a "tax." Here is a mid-'02 GAO report that provides numerous details about a self-funding alternative.
Ah, perhaps a silver lining to the Madoff fiasco. . .
8 | Microsoft Becomes First Company to Adopt Triennial Alternative for Say-on-Pay
In mid-September, Microsoft announced that its board authorized moving forward with a triennial say on pay approach starting with this year's meeting, being held on November 19th. On the "Microsoft on the Issues" Blog, the company's General Counsel and Deputy General Counsel provide more background on the issue and details of the plan adopted.
You may recall that the Carpenters Union had been pushing this triennial alternative (as noted in this blog) - but that it had more recently withdrawn the proposals it had submitted to 20 companies on the topic in the wake of the House considering but rejecting the idea when it passed a say-on-pay bill in early August. Maybe Microsoft's action will provide some momentum towards the idea, although it could be too late as the Senate plans to consider a bill in the coming months...
9 | The Return of Virtual-Only Shareholder Meetings? Herman Miller's Third Year in a Row
Well, it's been done before. Annual meetings held solely online. Inforte was first company to conduct their annual meeting solely online in April '01. Ciber did it in '02 and ICU Medical in '04. Siebel Systems had plans to do it in '03 - but changed course in the face of criticism.
Now we have a relatively small company - Herman Miller - that filed this proxy statement in early September, indicating that it would be the latest company to hold a virtual meeting. And you want to know the biggest surprise of it all - this will be the third year in a row that the company will do so! Slipped under the radar. Anyone aware of any other companies out there doing this?
Although we drafted them about eight years ago, these FAQs on conducting electronically-only meetings remains the best thing out there on the topic (because it’s about the only thing written on the topic) - it's posted in our "Annual Shareholder Meetings" Practice Area.
Here is one of the FAQs worth considering:
What risks does a company face if it holds an electronic-only stockholders' meeting with no physical counterpart?
Increased shareholder activism is quite possible - as well as potential negative media coverage based on the scorn of disappointed stockholders that like to have the opportunity to attend physical meetings.
Some investors have expressed concerns that electronic-only meetings would deprive them of the opportunity to meet with company representatives face to face. They believe that these physical meetings allow investors to better express their positions - and that management and the board listen more closely when communications are made in person.
After Delaware changed its laws in 2000, the Council of Institutional Investors wrote letters to the CEOs of all companies incorporated in Delaware urging them not to conduct electronic-only meetings. Unions also are concerned about the changes in the Delaware law.
Particularly for matters that are contested at a stockholders' meeting, electronic-only meetings pose the risk that a company can be surprised by large stockholders who vote at the meeting or change their vote - thereby making the outcome of meetings less predictable.
A risk for management is that an electronic-only meeting likely would result in greater attendance with more questions asked compared to a physical meeting - since attending an electronic meeting is fairly easy. This is a risk for those companies who like their meetings small and intimate (i.e., the fewer questions, the better) - but an advantage for those who don't mind the attention.
10 | Stir It Up: Latest Controversial Textron Work Product Decision
The most recent U.S. Circuit Court of Appeals for the First Circuit decision in United States v. Textron - a 3-2 en banc decision - has caused quite a stir. This decision follows one from January, in which we blogged thoughts from Stan Keller, who noted then: "The First Circuit decision may amount to an illusory victory for Textron with mischievous consequences."
In its new en banc decision, the court significantly narrows the "work product" doctrine by ruling that it did not protect tax accrual work papers. The court found that the law “does not protect from disclosure documents that are prepared in the ordinary course of business” instead of in anticipation of litigation or in preparation for trial. Textron had argued that if it were not for the possibility of litigation with the IRS, the papers would not be prepared at all because no reserves would be needed. We have posted the opinion - and memos analyzing it - in our "Audit Documentation/Work Papers" Practice Area.
In their 26-page dissent, Judges Torruella and Lipez noted that there was a split among the circuits and that the "time is ripe for the Supreme Court to intervene and set the circuits straight on this issue." The depth of the dissent may help those fighting for work product protection going forward as it seems more reasoned than the majority opinion.
The Textron decision is a continuing attack on the work product doctrine, which is likely to continue partly because the definition of "work product" is not all that clear. A split in the 2nd Circuit - as well as the far-reaching implications of the 1st Circuit's decision - may well lead the US Supreme Court to grant certiorari in this case.
11 | PCAOB Issues 1st Year AS #5 Implementation Report
In late September, the PCAOB issued a report on the first year of implementation of AS #5 regarding internal controls. In FEI's "Financial Reporting Blog," Edith Orenstein wonders whether the SEC's "Study of the Costs and Benefits" regarding internal controls reporting under the SEC & PCAOB rules is not far behind. . .
12 | Survey Results: Stock Ownership Guidelines
Many companies have adopted stock ownership guidelines requiring executives and directors to own stock in their company based on a multiple of their salaries or board retainers. With the current market downturn and drop in net worth for many people, some companies are changing their stock ownership guidelines. Below are the results from a recent survey we conducted on this topic:
- At our company, we are:
- Enforcing our stock ownership guidelines without change - 52.2%
- Revising our ownership requirements - 23.3%
- Terminating or suspending our stock ownership guidelines entirely - 5.6%
- Granting waivers selectively to executives or directors who aren't meeting the guidelines - 3.3%
- We don't have stock ownership guidelines - 15.6%
Please take a moment to respond anonymously to respond to our "Quick Survey on "Board Committees Interacting with Full Board."
13 | Nasdaq Proposes "Comply or Disclose" Approach
As noted by Gibson Dunn: Recently, the Nasdaq Listing and Hearing Review Council sent a paper to Nasdaq companies seeking comment on whether it should adopt a "comply or disclose" approach for certain corporate governance practices as an alternative to additional, substantive requirements, noting that some non-U.S. markets follow a "comply or disclose" model and that it "offers flexibility to companies and transparency to investors and allows practices to evolve in a logical manner."
Accordingly, the Nasdaq paper solicits comment about a range of practices, including board leadership, resignation policies for directors that fail to receive majority votes, annual director elections, and shareholder ratification of a company's outside auditor. Any required disclosures would appear either in a company's proxy, in the case of most U.S. companies, or in its annual report filed with the SEC for all other companies. Comments are due by October 30th.
14 | More on "The Mentor Blog"
We continue to post new items daily on our new blog - "The Mentor Blog" - for TheCorporateCounsel.net members. This blog might be misnamed - it's not just about mentoring - it covers all types of developments and practice pointers that can prove useful in your daily practice.
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. Here are some of the latest entries:
- Annual Report Distribution Service: Scam?
- How Common are "Risk Committees"?
- Delaware Chancery Court Mulls Lawsuit Over Director Resignations
- Tweaking Stock Ownership Guidelines
- Pricing Committees: Pros and Cons
- How to Market Yourself Through Us
- Twitter This, Twitter That: Corporate & Securities Law Issues to Consider
- A Primer on "Overboarded" Directors
15 | September-October Issue: Deal Lawyers Print Newsletter
The September-October issue of the Deal Lawyers print newsletter includes articles on:
- Convertible Debt Exchange Offers: Considerations for Distressed Issuers
- Mitigating Value and Dilution Risks in Stock-for-Stock Mergers
- Caveat Everybody: Changes in Control as Assignments of Contract Rights
- Substituting Tort for Contract: Tortious Interference Claims Against M&A Affiliates
If you're not yet a subscriber, try a "free for rest of '09" no-risk trial to get a non-blurred version of this issue for free.
16 | People: Who's Doing What and Where
At the SEC, Brian Bussey was named Associate Director for Trading Practices and Processing in the Division of Trading and Markets. Atlanta Regional Office Director Kit Addleman announced she is leaving the SEC.
Professor Henry Hu from Texas was hired to head the new Division of Risk, Strategy and Financial Innovation - and Gregg Berman was hired from RiskMetrics Group to join the new Division as Senior Policy Advisor.
At the PCAOB, Board Member Charley Niemeier announced that he is leaving the PCAOB.
17 | TheCorporateCounsel.net Conference Calendar
18 | New on TheCorporateCounsel.net and sister sites
Among other new additions, during the last month we have:
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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