Financial Services
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:
1 | The SEC's New Whistleblower Rules 2 | House Bill: Attacking Dodd-Frank's Whistleblower Provision 3 | Whistleblower Laws in Court 4 | SEC Proposal: Changes to Rule 506's "Bad Actor" Disqualification 5 | Capital-Raising Reform: SEC Chair Schapiro Testifies Before the House 6 | Say-on-Pay: Now 27 Failed Votes 7 | Posted: Complete List of Say-on-Pay Additional Soliciting Materials 8 | The SEC's First Deferred Prosecution Agreement 9 | The PCAOB's Nomination Process: SEC Adds a Little More Transparency 10 | Corp Fin's Revised "Completion of '34 Act Filing Review" Notice 11 | AFSCME Study: Vanguard Tops List of Excessive CEO Pay Enablers 12 | Turn Back the Clock! SEC Staff Issues New Electronic Roadshow No-Action Letter 13 | Survey Results: Disclosure Controls and Disclosure Committees 14 | "The Office" Tackles the Annual Shareholder Meeting 15 | Corporate Governance Analysis: Issues Raised by "The Office" 16 | March-April Issue of The Corporate Executive 17 | People: Who's Doing What and Where 18 | TheCorporateCounsel.net Conference Calendar 19 | What's New on TheCorporateCounsel.net and sister sites
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1 | The SEC's New Whistleblower Rules
In late May, the SEC adopted rules - by a 3-2 vote - to implement Section 922 of Dodd-Frank, which added Section 21F to the Exchange Act. Here's the 305-page adopting release - and here's the press release and SEC Chair opening remarks.
Despite much criticism and lobbying, in the end, the SEC didn't change its proposed framework to require whistleblowers to use a company's internal reporting system as a condition to receiving a SEC bounty - although the final rules do include more incentives for whistleblowers to "blow" internally first. This controversial rulemaking will produce a torrent of memos and opinion pieces - we'll post them in our "Whistleblowers" Practice Area as they come in. Here's memos from Cooley, Morgan Lewis and Morrison & Foerster. The final rules become effective 60 days from Federal Register publication.
2 | House Bill: Attacking Dodd-Frank's Whistleblower Provision
Recently, House Representative Michael Grimm (R-NY) introduced a bill that seeks to change the whistleblower provision in Dodd-Frank. Some believe the bill was introduced to put pressure on the SEC ahead of its rulemaking. This May 24th letter from a group of groups asks Congress to leave the whistleblower provision intact.
3 | Whistleblower Laws in Court
On May 3rd, as noted in this memo, the 9th Circuit Court of Appeals held in Tides v. Boeing that the whistleblower law in Section 806 of Sarbanes-Oxley does not protect leaks to the media. This is the latest in a long line of whistleblower cases brought since SOX was enacted nearly a decade ago.
The next day, the US District Court - Southern District of New York - in Egan v. TradingScreen Brokerage Services - issued this order that takes a detailed look at who may invoke the anti-retaliation provisions under Section 922 of Dodd-Frank and what is required to invoke the protection. Although we are still waiting for final whistleblower rules from the SEC regarding whistleblower bounties, Dodd-Frank does allow for a private right of action. We believe this is the first whistleblower case under Dodd-Frank. Learn more in Kevin LaCroix's "D&O Diary" Blog.
4 | SEC Proposal: Changes to Rule 506's "Bad Actor" Disqualification
In late May, also by a 3-2 vote, the SEC proposed amendments to Rule 506 of Regulation D to implement Section 926 of Dodd-Frank, which would disqualify offerings by companies involving persons covered by the rule if they were subject to a "bad actor" order from the SEC (formerly known as "bad boys" in a less-politically correct world). Here's the proposing release - and the press release. As this Skadden memo notes: "With more than 90% of the offerings made under Regulation D seeking exemption pursuant to Rule 506, these proposed rules could have a significant impact on the applicability of the exemption."
5 | Capital-Raising Reform: SEC Chair Schapiro Testifies Before the House
A month ago, Broc blogged about the back and forth letters between SEC Chair Schapiro and Rep. Darrell Issa on capital-raising reform, particularly for pre-IPOs. Below is an excerpt from near the end of Chair Schapiro's testimony that she delivered in mid-May before the House Committee on Oversight and Government Reform. In her testimony, Chair Schapiro lays out a list of potential rulemakings in the capital-raising area that could happen in the near future (here's a related Mercury News article):
As discussed above, I recently asked the staff to take a fresh look at our offering rules in light of changes in the operation of the markets, advances in technology and the acceleration in the pace of communications. I also requested that the staff think creatively about what the SEC can do to encourage capital formation, particularly for small businesses, while maintaining important investor protections. Areas of focus for the staff will include:
the restrictions on communications in initial public offerings; whether the general solicitation ban should be revisited in light of current technologies, capital-raising trends and our mandates to protect investors and facilitate capital formation; the number of shareholders that trigger public reporting, including questions surrounding the use of special purpose vehicles that hold securities of a private company for groups of investors; and regulatory questions posed by new capital raising strategies.
In conducting this review, we will solicit input and data from multiple sources, including small businesses, investor groups and the public-at-large. The review will include evaluating the recommendations of our annual SEC Government-Business Forum on Small Business Capital Formation, as well as suggestions we receive through an e-mail box we recently created on our website. In addition, I expect our efforts to benefit from the input of the new Advisory Committee on Small and Emerging Companies the Commission is in the process of forming, which will provide a formal mechanism for the Commission to receive advice and recommendations about regulatory programs that affect privately held small businesses and small publicly traded companies.
6 | Say-on-Pay: Now 27 Failed Votes
During the last month, 16 more companies filed Form 8-Ks reporting failed say-on-pay votes, bringing the total number of failed votes to 27. We maintain a list of Form 8-Ks for failed SOPs in CompensationStandards.com's "Say-on-Pay" Practice Area.
There was also a near failure, well described by Mark Borges in his "Proxy Disclosure Blog" on CompensationStandards.com: "Cooper Industries reports that its "Say on Pay" proposal was approved by a vote of 50.36% - 49.64%. While the company indicates in its proxy statement that abstentions are not to be considered votes cast at the annual meeting (and, thus, have no impact on the vote's outcome), there were over 2 million abstentions recorded. Had they been considered "negative" votes, the proposal would have been defeated, 50.4% 0 49.6%. Needless to say, the company would be well advised to pay close attention to its shareholders' concerns about its executive compensation program."
In addition, we have found a Form 8-K filed by IsoRay from February where the company reported failing its SOP even though there were many more "For" votes than "Against" based on the way it decided to interpret Minnesota law (in comparison, Target - another Minnesota corporation - described the SOP standards a bit differently in its proxy statement - their way seems to make more sense).
7 | Posted: Complete List of Say-on-Pay Additional Soliciting Materials
We have greatly expanded the list of additional soliciting materials filed by companies who campaigned for their say-on-pay - typically by disputing recommendations made by ISS in a letter to shareholders - in CompensationStandards.com's "Say-on-Pay" Practice Area. We have 70 examples posted.
A note from a respected compensation consultant: "One of the reasons the Europeans are so muted in their criticism of pay is they get a fraction of the information the US and UK puts out. It is also worth noting that equity is vastly less in the EU than the US, so pay levels are much less."
8 | The SEC's First Deferred Prosecution Agreement
Here's news culled from this Wachtell Lipton memo (we are posting memos on this action in our "White Collar Crime" Practice Area):
The SEC recently announced its first use of a deferred prosecution agreement, one of the initiatives announced in January 2010 to encourage greater cooperation in enforcement investigations. The announcement of this agreement with Tenaris S.A. follows the agency's first non-prosecution agreement in December with Carter's Inc.
Tenaris, a manufacturer of steel pipe products, is incorporated in Luxemburg and has American Depository Receipts listed on the New York Stock Exchange. Tenaris allegedly bribed Uzbekistan government officials in bidding for government pipeline contracts, and made almost $5 million in profits from the contracts. A world-wide internal investigation triggered by other matters and conducted by outside counsel revealed Foreign Corrupt Practices Act violations in Uzbekistan. The company self-reported to the SEC and the Department of Justice, cooperated with the government and undertook extensive remediation efforts.
The SEC explained that Tenaris was an "appropriate candidate" for the agency's first deferred prosecution agreement because of the company's "immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training." The SEC noted that the "company's response demonstrated high levels of corporate accountability and cooperation."
Under the deferred prosecution agreement (available here), the SEC will refrain from bringing civil charges against the company; however, if the Enforcement Staff determines that the company has failed to comply with its obligations under the agreement, the Staff may then proceed with an enforcement recommendation to the Commission. The agreement includes a statement of facts that is not binding against Tenaris in other proceedings. Tenaris also agreed to cooperate with the SEC, DOJ and other law enforcement agencies; although the company shared the results of its internal investigation with the government, its continuing cooperation does not require it to waive the attorney-client privilege. Tenaris further agreed to pay $5.4 million in disgorgement and prejudgment interest. Relatedly, the company entered into a non-prosecution agreement with DOJ under which the company is paying a $3.5 million criminal penalty.
The factors and considerations that the Staff will rely upon in determining whether to enter into a non-prosecution agreement, a deferred prosecution agreement or a conventional settled enforcement action remain uncertain at this point, but, based upon the Commission's actions to date, it is apparent that the breadth of any misconduct, the involvement of more senior corporate officers and a willingness to disgorge all profits from the alleged misconduct will likely be relevant factors beyond those specifically highlighted by the Staff in the Carter's and Tenaris cases.
9 | The PCAOB's Nomination Process: SEC Adds a Little More Transparency
One of the oddest provisions of Sarbanes-Oxley was Congress creating the PCAOB with a dotted line to the SEC. We're not sure that this was an obligation that the SEC wanted, particularly after a lawsuit involving this unusual regulatory framework (ie. one regulator reporting to another) wound up in the Supreme Court. After its SCOTUS victory, the SEC posted written procedures for appointment of a member or chair of the PCAOB in November.
Now that the SEC is actively seeking a PCAOB board member with a CPA background, it has taken another new step - posting information about this job search and even posting "sample letters" that it sent on Friday to 14 leaders in the financial industry seeking their input (e.g., Ben Bernanke, Timothy Geithner, Jim Doty).
10 | Corp Fin's Revised "Completion of '34 Act Filing Review" Notice
Corp Fin has posted a "Division Announcement" on its web page that states:
Beginning May 9, 2011, the letter the Division staff will send to companies upon completion of the review of their Exchange Act filings will contain the following paragraph:
"We have completed our review of your filing[s]. We remind you that our comments or changes to disclosure in response to our comments do not foreclose the Commission from taking any action with respect to the company or the filing[s] and the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. We urge all persons who are responsible for the accuracy and adequacy of the disclosure in the filing[s] to be certain that the filing[s] include[s] the information the Securities Exchange Act of 1934 and all applicable rules require."
As Corp Fin's notice merely repeats the Tandy language that companies already provide when they respond to Staff comments, that's not really news. But the real news may be that Corp Fin may start regularly using this "Division Announcements" avenue to communicate with us.
11 | AFSCME Study: Vanguard Tops List of Excessive CEO Pay Enablers
The American Federation of State, County, and Municipal Employees has released its annual report regarding how mutual funds vote on compensation agenda items. The report reviews how 26 large fund groups voted on 10 specific items, including the voluntary "say on pay" votes at Motorola and Occidental Petroleum, compensation committee members at Nabors and Abercrombie & Fitch, and a shareholder proposal to end "golden coffin" benefits at Verizon Communications. The report doesn't include any 2011 votes, as mutual funds aren't required to disclose those votes until this August.
As noted in their press release, the report criticizes four mutual fund groups as "pay enablers" (Vanguard, BlackRock, ING and Lord Abbett). On average, these four fund groups supported over 90 percent of management proposals. In comparison, AFSCME praises four other fund families for being "pay constrainers" (Dimensional, Dreyfus, Oppenheimer and Wells Fargo).
12 | Turn Back the Clock! SEC Staff Issues New Electronic Roadshow No-Action Letter
We were surprised to see that the SEC's Division of Trading and Markets issued a new no-action response related to electronic roadshows last week - this one to Roadshow Broadcast LLC. We were surprised because a string of these letters were among the first positions that the SEC Staff took back in the late-90s related to the Internet (remember NetRoadshow I and II? Private Financial Network?) - Broc worked on a few of the letters when he served in Corp Fin - and then the Staff said they would issue no new letters. In 2005, the SEC adopted rules that superseded these no-action positions as part of its huge Securities Act Reform rulemaking. But Broc believes this new letter is different, relating to broker-dealer activity and not covering the same ground as in the prior letters. In fact, Corp Fin is not even a party to this new letter...
13 | Survey Results: Disclosure Controls and Disclosure Committees
We have posted the survey results regarding the latest disclosure controls and disclosure committee trends, repeated below (this new survey supplements the 2005 survey on disclosure committees):
1. Does your company have a formalized, written set of "Disclosure Controls & Procedures"? Yes - 66.7% No - 33.3% 2. Have your company's Disclosure Controls & Procedures been formally updated and revised in the last year? Yes - 30.6% No formal changes, but there have been some informal changes during the last year - 27.8% No, there have been no changes in the last year - 41.7% 3. Does your company have a Disclosure Committee Charter? Yes - 58.3% No - 41.7% We don't have a formal Disclosure Committee - 0% 4. If there is a formal Disclosure Committee, who is the chairman of the Disclosure Committee? General Counsel - 14.3% Securities Counsel - 5.7% CFO - 31.4% COO - 2.9% Controller - 25.7% Corporate Secretary - 0% Other - 20.0%
Please take our new "Quick Survey on Regulation FD Practices ."
14 | "The Office" Tackles the Annual Shareholder Meeting
In memory of Steve Carell's departure from a fine show. An episode of "The Office" from a few seasons ago was a classic. Entitled "Shareholder Meeting," the episode deals with a suffering corporate performance by Dunder-Mifflin - which is close to declaring bankruptcy - and an annual shareholder meeting that is not too far off the "bizarro" mark from Fortis' crazy meeting a few years ago. [The episode is archived on Hulu.]
The episode peaked at the end when Dwight Schrute endeavored to come up with a better way to run the meeting by making these suggestions during his turn to ask a question of management during the Q&A portion of the meeting:
"I've been standing in line all day. If this is any indication about how this company is being run, we are in big trouble. I want to say that there are options. What about taking a number? What about line varieties? Like an express line for quick comments of ten words or less that could move much more efficiently. What about ropes along the lines that you can hold on to?"
15 | Corporate Governance Analysis: Issues Raised by "The Office"
Taking a page from the "That's What She Said" Blog - a blog devoted to analyzing the employment law issues raised by "The Office" - below is Broc's analysis of a few of the governance issues raised by this shareholder meeting episode:
A. Heavy security presence - Although a heavy security presence can needlessly scare attendees, it does make sense if a company believes there can be trouble and it wants to dissuade any would-be troublemakers from acting out. Given that Dunder Mifflin was in financial trouble, it probably was reasonable in this case. B. Informing attendees of the ground rules - Attendees got rowdy pretty early, booing management right off the bat. Management should have done a better job controlling the meeting so it wouldn't get out of control. One step in this direction is handing out ground rules for meeting conduct as folks came in the door. C. Handling speakers - The all-white male senior management team also did poorly in managing its own microphone - allowing a middle manager (Michael Scott) to go beyond prepared remarks and blurting that the company had a 45-day plan when it didn't. Not that I believe management's remarks need to be completely scripted - but only true spokespersons should be delivering key statements. Then again, management was clueless in the face of angry attendees, essentially forcing Michael to do something to stem the tide. D. 15-minute break during meeting - After Michael's outburst about a non-existent plan, management called for a meeting break. This is not a bad idea if a meeting is getting out-of-control. E. Long lines to ask questions - Perhaps the biggest surprise was that in terms of good governance, the meeting wasn't a total wash. Numerous microphones were available and management appeared prepared to allow any and all questions. F. Whistleblower protection - "That's What She Said" provides analysis of the whistleblower implications of this episode, as well as the employee relations nightmare caused by management showing up in limos.
A. Heavy security presence - Although a heavy security presence can needlessly scare attendees, it does make sense if a company believes there can be trouble and it wants to dissuade any would-be troublemakers from acting out. Given that Dunder Mifflin was in financial trouble, it probably was reasonable in this case.
B. Informing attendees of the ground rules - Attendees got rowdy pretty early, booing management right off the bat. Management should have done a better job controlling the meeting so it wouldn't get out of control. One step in this direction is handing out ground rules for meeting conduct as folks came in the door.
C. Handling speakers - The all-white male senior management team also did poorly in managing its own microphone - allowing a middle manager (Michael Scott) to go beyond prepared remarks and blurting that the company had a 45-day plan when it didn't. Not that I believe management's remarks need to be completely scripted - but only true spokespersons should be delivering key statements. Then again, management was clueless in the face of angry attendees, essentially forcing Michael to do something to stem the tide.
D. 15-minute break during meeting - After Michael's outburst about a non-existent plan, management called for a meeting break. This is not a bad idea if a meeting is getting out-of-control.
E. Long lines to ask questions - Perhaps the biggest surprise was that in terms of good governance, the meeting wasn't a total wash. Numerous microphones were available and management appeared prepared to allow any and all questions.
F. Whistleblower protection - "That's What She Said" provides analysis of the whistleblower implications of this episode, as well as the employee relations nightmare caused by management showing up in limos.
16 | March-April Issue of The Corporate Executive
The March-April Issue of The Corporate Executive includes pieces on:
Dodd-Frank Update: Proposed Compensation Committee and Adviser Independence Rules Update on Restricted Stock and RSUs Correcting Social Security Withholding Errors Say-on-Pay: The Results So Far
Act Now: Get this issue rushed to you by trying a No-Risk Trial today.
17 | People: Who's Doing What and Where
At the SEC, the White House submitted to the US Senate a pair of nominees as SEC Commissioners, requesting a second term for Democrat Luis Aguilar and naming former SEC staffer Dan Gallagher for a Republican seat that is due to become vacant in June when Commissioner Casey term expires. Mr. Gallagher, now a partner at Wilmer Cutler, served as a top official in the SEC's Division of Trading & Markets. He had served for several months as that Division's acting co-head before he left the agency in January 2010.
The SEC announced it had hired Vandy Professor Craig Lewis to serve the twin roles of Chief Economist and Risk Fin Director.
Last year, Broc blogged several times about Senator Grassley's desire for a study to be conducted regarding SEC Staffers who depart for jobs at organizations that they regulate. Broc also blogged that this issue is as old as the SEC itself. And note that it's an issue that exists at most federal agencies, not just the SEC (eg. recent FCC Commissioner announcement).
Ahead of reports expected from the GAO and the SEC's Inspector General on the topic, the Project on Government Oversight (POGO) released a study in mid-May that shows - between 2006 and 2010 - at least 219 former SEC staffers appeared before their former agency on behalf of private-sector clients in 800 different matters. POGO also has made its database available online, where you can search by Division or even an individual (yes, Big Brother is watching). Here's an article covering the study.
Perhaps even more troublesome for the SEC, a House Financial Service Committee hearing produced fireworks in mid-May when it was revealed that the former Chief of the SEC's Fort Worth Regional Office - Spencer Barasch (now at Andrews Kurth) - has become the subject of a criminal investigation for continuing to represent fraudster Allen Stanford even after he was repeatedly told by the SEC's Ethics Office that he couldn't under rules barring former senior Staffers for appearing before the SEC on matters that they worked on during their time on the Staff. This NY Times article notes that Barasch blocked efforts to pursue Stanford at least 6 times over 7 years when he was at the SEC.
In Delaware, as noted in this press release, Delaware Chancellor William Chandler announced he's headed to Wilson Sonsini to open a Georgetown, Delaware office (as well as work in NYC). This WSJ blog captures the essence of the story - and here is more from Francis Pileggi.
18 | TheCorporateCounsel.net Conference Calendar
19 | What's 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.
© 2011 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 June 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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SEC Chair Mary Schapiro Just Added: TheCorporateCounsel.net "Say-on-Pay Intensive" Conference Lineup
We are excited to announce that SEC Chair Mary Schapiro will open the second day of our annual package of executive pay conferences to be held on November 1st-2nd in San Francisco and by video webcast: "Tackling Your 2012 Compensation Disclosures: 6th Annual Proxy Disclosure Conference" and "The Say-on-Pay Workshop Conference: 8th Annual Executive Compensation Conference." Save by registering by June 24 at our early-bird discount rates.
As you can see from our agendas, this year's pair of Conferences (for one low price) will be workshop-oriented more than ever before in an effort to provide the practical guidance that you need in the new say-on-pay world that we live in:
1. November 1st's "Tackling Your 2012 Compensation Disclosures: 6th Annual Proxy Disclosure Conference" includes:
2. November 2nd's "The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference" includes:
Upcoming Events from RR Donnelley:
For a full list of upcoming RR Donnelley events, please click here.
Upcoming Webcasts from TheCorporateCounsel.net (and sister sites):
