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:
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1 | Corp Fin's New Director: The Mighty Keith Higgins! (& Lona Nallengara Becomes SEC's Chief of Staff)
It couldn't happen to two nicer guys. Keith Higgins was tapped in mid-May to become Corp Fin's Director – and Acting Director Lona Nallengara was promoted to become SEC Chair White's Chief of Staff! Keith brings a wealth of knowledge to the job – and quite an entertaining personality. Always a favorite at our proxy disclosure conference. And it's great to have someone with a disclosure & deal background in the Chief of Staff position.
2 | Two New SEC Commissioners Nominated from the Senate Banking Committee
In late May, President Barack Obama nominated Kara Stein to succeed SEC Commissioner Elisse Walter whose term has expired. Kara is a lawyer and a long-time aide to Senator Jack Reed (D-RI), who is a senior member of the Senate Banking Committee. The President also nominated Michael Piwowar to succeed SEC Commissioner Troy Paredes whose term expires at the end of June. Michael is the Senate Banking Committee's Republican chief economist and has served in that role since ‘09 – he previously worked as a staff economist for the SEC for four years. Here's a Bloomberg article – and one from DealBook.
Since they both work for the Senate Banking Committee, their confirmation hearings should be smooth...and some think the fact that they both come from Congress will lead to more bipartisan work at the SEC. As if those in Congress provide a beacon of bipartisanship...
3 | Corp Fin Issues 15 New & Revised CDIs: Spring Cleaning
In mid-May, Corp Fin issued a batch of 15 new and revised Compliance & Disclosure Interpretations in both the ‘33 and ‘34 Act contexts. Sort of a hodge podge. Here they are:
4 | SEC Finally Issues FAQs on Conflict Minerals & Resource Extraction
Prepare for a snowstorm of law firm memos! In late May, the SEC finally issued two sets of FAQs – conflict minerals and resource extraction. Both are filled with helpful stuff.
5 | The SEC Staff Speaks on Whistleblower Developments
In this half-hour podcast, Sean McKessy, Chief of the SEC's Office of the Whistleblower brings us up-to-date on what is happening in his Office, including:
6 | Shareholder Proposals: Chevedden Loses "Proposal by Proxy" Case
Recently, a Texas judge granted summary judgment to Waste Connections in Federal District Court for the Southern District of Texas after the company had filed suit seeking a declaratory judgment to exclude a shareholder proposal from John Chevedden purportedly on behalf of Jim McRitchie and Myra Young. There is no court opinion – just the pleadings and summary judgment order (Pacer subscription required to obtain the pleadings unfortunately). However, this Rule 14a-8(j) exclusion notice to Corp Fin from Waste Connections includes the company's side of the story.
The complaint filed by Waste Connections alleged that Chevedden himself did not own any shares of the company and argued that his proposal was improper because Rule 14a-8 doesn't permit a shareholder to grant a proxy to another person for that other person to submit a shareholder proposal. This "proposal by proxy" issue is not new. For example, it was the basis for an exclusion request in this Ameriprise Financial no-action letter from late 2012 in which Corp Fin did not grant exclusionary relief when Chevedden filed a proposal "on behalf of" Kenneth Steiner. So the Texas court reached a different conclusion from the Corp Fin Staff.
Interestingly, the complaint notes that John has submitted more shareholder proposals than anyone in history, accounting for more than 11% of all shareholder proposals considered by Corp Fin in the no-action process during that time (879 out of 6958 proposals).
7 | Annual Meetings: Don't Bar the Press
Best way to get negative press about your annual meeting? Bar the press. This Pittsburgh Gazette article perfectly illustrates the point as a company gets slammed for barring the press. Only five shareholders attended the meeting. Was the bar worth it? Broc highly doubts it.
And it's a practice pointer made time and again during Broc's annual webcasts on conducting annual meetings. Also see our checklist on annual meetings and the press...
Here's an interesting article from an Australian director entitled "The AGM is badly broken."
8 | The "Proxy Season BrocScape"
Inspired by the LumaScapes that are popular out in Silicon Valley, I recently cobbled together this "Proxy Season BrocScape" that includes some of the service providers that help us get through the proxy season. Each logo is a link to that service provider's site. Let me know if you think I am missing anyone – including whether I am missing any providers in this extensive new list of service providers.
9 | Our New "Internal Controls Disclosure Handbook"
Spanking brand new. Posted in our "Internal Controls" Practice Area, this comprehensive "Internal Controls Disclosure Handbook" provides a heap of practical guidance about how to deal with Item 308 of Regulation S-K and Rules 13a-14 & 13a-15. This one is a real gem – 61 pages of practical guidance.
10 | COSO Updates Its Internal Controls Framework: Time to Pay Up!
Perhaps not a big a story as the reveal of "The Mother" on "How I Met Your Mother," but it's big: COSO issued its updated "Internal Control-Integrated Framework" yesterday. A framework which hadn't been updated since ‘92. This framework is the one most commonly used by companies for designing and implementing their internal controls. This update was authored by PwC, under the direction of the COSO board – and officially takes effect in 2014. Here's a summary from FEI's "Financial Reporting Blog."
Here is the Executive Summary and related FAQs. To obtain the actual framework, you have to buy the three new volumes that comprise it from COSO. Broc knows it takes a lot of work to develop a framework and that COSO is not a governmental body, but the fact that folks have to pay for what has become a regulatory framework bothers him. Perhaps he's still scarred from when FASB's accounting standards (here's an example) and the AICPA's auditing standards (back before the PCAOB was born) also were not free...
11 | Status of SEC's Political Contribution Disclosure Rulemaking: Not Yet (& Maybe Never)
Each time Broc sees an article from the mass media indicating that an imminent proposal from the SEC on political contribution disclosure rules, he tweets about how misinformation is so easily spread (here is the latest example of misinformation). A rumor of a proposal coming in April started last year – which he quickly blogged as being unlikely. Now in the course of testifying before a House committee, SEC Chair White laid to rest the rumors that a proposal was coming soon, as noted in this Reuters article. As noted in this Davis Polk blog, House Republicans were disturbed to learn that the SEC is considering such a petition, believing the initiative to be "highly partisan" in light of the controversy surrounding the IRS' examination of certain groups. Rep. Garrett pressed Chair White to commit that the SEC will not be "bullied by these outside radical groups." However, Chair White declined to take a position.
As would be expected, there is a groundswell of public support for a SEC rulemaking, evidenced by the 600,000 signatures on the petition for rulemaking and pieces like this Forbes' article.
12 | The Battle Over JPMorgan's CEO/Chair Split Proposal: The Gloves Are Off!
The vote for what looks to be the most contentious battle of the proxy season was held in mid-May – at least if the metric is ink spilt – here is the timeline of events as far as Broc can glean from media reports:
Here are long-time inspector Carl Hagberg's thoughts on the facts as he knows them:
There is fresh news here about Broadridge giving information to folks who had paid them to send materials out on a closely contested matter which apparently was the case here – and which, arguably, might give them "standing" to receive such updates.
The most important thing to note regarding this ruckus is that such updates are mostly meaningless, given the fact the deciding votes are not usually cast until the evening before the meeting – and sometimes the morning of – which is likely the situation at JPMorgan. In other words, knowing this information typically doesn't allow anyone to predict what the final outcomes will be – because of the high percentage of "last minute votes" that are being cast by activist investors these days. At many meetings I've inspected, large shareholders will change their positions just before the polls officially close. And in really closely contested elections they may show up and cast their votes then and there – after hearing directly from the management at the meeting.
Also, knowing the results a few days or weeks early doesn't necessarily indicate what might be the best thing to do about them from a tactical perspective – but that is another matter altogether. At best, all one can expect to learn from any sneak previews is if the voting is following previous trends on similar or identical matters.
Here is Broc's take based on the facts as he knows them:
Unfortunately, the conduct of annual meetings is not subject to much scrutiny other than proxy disclosures. The regulatory framework is sort of a Bermuda triangle between state law, exchange listing standards and SEC rules. As I have said for a while, as the outcomes of annual meetings continue to grow into "real" events, this is going to be a huge problem. Think hanging chads and much litigation.
I had no idea that Broadridge's practice was to share early voting results with proponents if they conducted a solicitation through Broadridge – although that certainly seems the fair thing to do. I don't have Carl's extensive experience with meetings, but I do think that having knowledge of early voting results can be beneficial in a contested situation. Regardless, the uproar over this situation points a spotlight on the need for the SEC's proxy plumbing project to get back on track.
There are several other debates related to this vote, including whether it matters whether the positions are split or not. Here's a Columbia Law School blog that illustrates the difference between a lead director and a non-executive board chair...
13 | Leaks of JPMorgan's Early Voting: Confidentiality Concerns
"Ah, you're crazy." "Am I? Or am I so sane that you just blew your mind?!" "It's impossible!" "Is it? Or is it so possible that your head is spinning like a top?!" "It can't be." "Can it? Or is your entire world just crashing down all around you?" "Alright, that's enough." "Yaaaaaaahhh!!!" – Jerry & Kramer in "The Stall" episode
That Seinfeld dialogue pretty much sums up Broc's reaction to reading in the middle of last week about how JPMorgan's voting on its controversial CEO/Chair split proposal was faring – even though the voting was supposed to be confidential ahead of today's annual meeting. It's a first for him to read about early returns in the paper.
A leak leads to several concerns. One is whether leaks other than to reporters are happening? The traditional insider trading stuff. Another concern is whether a leak might impact whether other shareholders bother to vote – or how they vote. Of course, this cuts both ways – investors irked about this development might choose to vote against a company who has leaked results. Although Carl Hagberg might be right that knowledge of early voting results may not be useful in all cases – Broc certainly don't think that means that leaks are not problematic. They could move the market. What if this was a proxy contest for which early results were leaked?
14 | A European Proxy Advisor's Views on Voting Leaks
Here's an excerpt from a blog detailing Manifest's concerns with the voting tally leak:
With Dimon threatening to walk away if shareholders support the splitting of roles, thereby requiring him to relinquish the chair, the question is now material to the immediate valuation of the company. Investors generally don't like uncertainty, and with commentators talking about the potential for a 10% drop in share price if the vote wins, access to information about how the vote might turn out is valuable.
Let's be clear about one thing: although investors around the world may already have instructed how they wish to vote, they have not voted yet. The vote does not commence until shareholders at the meeting are invited to vote on the resolution in Tampa next week. Nor is Broadridge, from which the data has come, actually the entity tasked with formally tallying the votes at the meeting (don't forget, they only have the information in the first place because of the regulation-supported monopoly the enjoy). That makes counting votes already submitted akin to counting the chickens before the eggs have hatched. Yet we are told that so far, the proposal to split the roles has 40% support, and that means "inside JPMorgan they believe they're going to win this vote" (Dividend.com).
Investors, especially those outside the US, will be shocked to see that their private voting instructions may be used to try to influence other shareholders in their decisions on the same issue (in the same vein, investors should also be equally concerned that some proxy advisors are urging shareholders to support the split – it's none of our business as analysts!).
Clearly, it's in the board's interest and it's their prerogative to discourage shareholders from supporting the proposal. But to take advantage of their access to early voting intentions as a part of their strategy is, at best, very bad sportsmanship, at worst potentially manipulative – not least when the issue at hand is potentially immediately material. This is especially true because access to the pre-meeting voting data is unavailable to all but the issuer – giving them a distinct information advantage ("Shareholders Denied Access to JPMorgan Vote Results").
To European investors, this is nothing new – shareholder voting is a private matter between them and the company. However, the other side of the pond, things have never been as clear cut, and this week's move by the US financial services trade lobby SIFMA to prevent leakage of sensitive voting data by Broadridge is an important development in the US recognizing the sanctity – and market value – of shareholder voting information. With the furor over Bloomberg accessing confidential user data, the breakdown of the LIBOR and oil price setting mechanisms, potential irregularities in transition management (to name but a few hot issues) the financial services industry also seems to be at last waking up to the importance of integrity in all aspects of investment operations.
There's a reason why France has election laws that prohibit public opinion poll data being published in the final few days before an election. That's because the chief architect of the Constitution of the Fifth Republic, Charles de Gaulle (not known for shunning powerful executive positions himself, don't forget), recognized that the influence of the press and speculation about potential voting results can skew general opinion and the vote.
In the high stakes poker hand currently on the JPMorgan AGM table, the absence of a similar rule this time could prove significant in enabling Dimon to continue in both his current roles. Apart from the sheer quantity of votes cast against Bond, the other notable fact was the complete silence around the progress of the vote and its likely outcome which showed that we should not worry that confidential voting prevents the effective exercise of shareholder choice.
The JPMorgan/Dimon vote is a watershed in more ways than one. Let's not miss this opportunity to ensure we have a proxy plumbing system which is fit for 21st century shareholder democracy
15 | Now Up to 31 Say-on-Pay Failures (Including One With 9% Support!)
Here are the latest failures, including one with 9% support – we're talking single digits! – the lowest level since say-on-pay became law:
Thanks to Karla Bos of ING for the heads up on these!
16 | Transcript: "Social Media: Parsing the Hypos"
We have posted the transcript for our webcast: "Social Media: Parsing the Hypos." Note that the number of companies announcing social media channels via Form 8-K has slowed to a trickle. Here's our list.
17 | Corp Fin Issues BTR No-Action Relief for the 1st Time!
In mid-May, Corp Fin issued its inaugural no-action relief on Regulation BTR (Blackout Trading Restrictions) in this no-action response. As you may recall, BTR restricts sales and purchases of certain equity securities by directors and executive officers during any period in which at least a majority of employees are blacked out from selling or purchasing securities in an employee benefits plan. This provision was required to be adopted by Congress in Section 306 of Sarbanes-Oxley to address the issue that employees of Enron had when they couldn't sell company securities because of a change in employee benefit plan administrators and Enron's share price was dropping significantly.
Corp Fin's no-action letter – issued to Skadden Arps' Brian Breheny on behalf of Pfizer – clarifies that sales by directors and executive officers of equity securities pursuant to a tender offer conducted in compliance with SEC rules are exempt from Section 306 and Reg BTR.
18 | More on our "Proxy Season Blog"
We continue to post new items regularly on our "Proxy Season Blog" for TheCorporateCounsel.net members. 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:
19 | May-June Issue: Deal Lawyers Print Newsletter
This May-June issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
If you're not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue on a complimentary basis.
20 | Comp Committee & Advisor Independence: Actions to Take Now
We mailed the March-April Issue of The Corporate Executive, featuring a comprehensive article by Mark Borges about the new comp committee & advisor rules, including:
Act Now: Get this issue rushed to when you try a 2013 No-Risk Trial to The Corporate Executive.
21 | People: Who's Doing What and Where
At the SEC, President Barack Obama nominated Kara Stein to succeed SEC Commissioner Elisse Walter whose term has expired. Kara is a lawyer and a long-time aide to Senator Jack Reed (D-RI), who is a senior member of the Senate Banking Committee. The President also nominated Michael Piwowar to succeed SEC Commissioner Troy Paredes whose term expires at the end of June. Michael is the Senate Banking Committee's Republican chief economist and has served in that role since ‘09 – he previously worked as a staff economist for the SEC for four years. Here's a Bloomberg article – and one from DealBook. Since they both work for the Senate Banking Committee, their confirmation hearings should be smooth...and some think the fact that they both come from Congress will lead to more bipartisan work at the SEC. As if those in Congress provide a beacon of bipartisanship.
Acting Deputy Director of the SEC's Enforcement Division and Director of the Boston Regional Office David Berger announced his departure after 13 years of service.
In Corp Fin, Keith Higgins was tapped to become Corp Fin's Director – and Acting Director Lona Nallengara was promoted to become SEC Chair White's Chief of Staff.
22 | TheCorporateCounsel.net Conference Calendar
23 | What's New on TheCorporateCounsel.net and sister sites
Among other new additions, during the last month we have:
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