SEC Finalizes New Proxy Access Rule

Posted on August 27, 2010 by Jack J. Gravelle

Earlier this week, the SEC finalized a new proxy access rule for 3% shareholders (or larger) that was first proposed over a year ago. Proxy access refers to the right of a shareholder to use the company’s proxy statement to solicit votes for a nominee for the board of directors. Prior to the new rule, a shareholder that wanted to solicit votes for a nominee had to prepare its own proxy statement at significant cost. Now 3% shareholders (or larger) can use the company proxy statement to nominate directors.

In general, if a shareholder (or group of shareholders) holds at least 3% of the voting power of a company for at least three years, among other requirements, it can include nominees in the company proxy statement for as many as 25% of the seats on the board.

The new rule is in effect for the 2011 proxy season, except it will not apply to smaller reporting companies for three years.

The new rule has considerably more potential to affect smaller reporting companies because it is easier to obtain 3% of a smaller reporting company than a larger company. And, three years is a long time to tie up the estimated $3.5 billion needed to reach the 3% threshold at any of the 20 largest U.S. corporations by market cap. The 3% threshold may ensure that only significant long-term shareholders at large companies will be granted access, which was a stated goal of the Commission, but it could prove more likely to affect smaller reporting companies.
 

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Wall Street Reform Legislation Requires Public Companies to Revise Clawback Policies

Posted on August 11, 2010 by Greg Daugherty

President Obama, on July 21, 2010, signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Although the Act focuses primarily on banking, the Act does contain a section that requires the Securities and Exchange Commission to publish rules that direct the national securities exchanges and associations to prohibit the listing of any security of an issuer that does not develop and implement an appropriate clawback policy.

The Act requires that the SEC rules require the clawback policy to provide that in the event that the issuer is required to restate its financial statements because of a material violation of any financial reporting requirements under the securities’ laws, the issuer will recover from any current or former executive officer who received incentive-based compensation (including stock options) during the 3-year period preceding the date on which the restatement is required, the amount in excess of what would have been paid to the executive officer under the issuer’s restated financial statements. In other words, public companies must recover the difference between the actual pay-out under the original financial statements and the amount payable under the restated financial statements. The Act also requires that companies disclose this clawback policy to shareholders.

The effective date of the Act is July 22, 2010; however, the clawback policy requirement is not fully effective until the SEC publishes its regulations. The SEC currently is suggesting it will publish these rules to be effective for the 2011 proxy season. As such, all public companies should review their clawback policies now, or if they have not yet developed one, they should begin to develop a clawback policy. Although many companies have adopted clawback policies already, it appears that once the SEC publishes its regulations, all clawback policies may need to be revised.
 

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By The Numbers: Dodd-Frank Wall Street Reform and Consumer Protection Act

Posted on July 20, 2010 by Jack J. Gravelle

Tomorrow, President Obama is expected to sign Congress’s financial regulatory reform bill known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. The focus of the new law is banking, and the reforms are indeed “sweeping,” but the Act will also have a direct and immediate impact on the SEC. Consider this by-the-numbers summary of what the Act requires, as reported by Law360:

  • 800 new positions at the SEC according to SEC Chairwoman Mary Schapiro;
  • 533 new regulations;
  • 94 reports and
  • 60 studies to provide guidance on future regulations;
  • 12% increase in the SEC’s budget for fiscal 2011, as requested by President Obama (to date) to help implement the reforms;
  • 5 new offices to be created by the Commission; and
  • 1 independent consultant to monitor SEC structure, operations, and funding.
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SEC Keeps Proxy Access Discretion in Current Draft of Financial Reform Bill

Posted on June 28, 2010 by Jack J. Gravelle

The financial reform bill calls for the SEC to write proxy access rules that would give shareholders the ability to use the company’s proxy statement to nominate candidates for the board of directors.  Currently, shareholders who wish to solicit votes for nominees must prepare and send their own proxy statement, which is expensive and rarely attempted.  Some senators had proposed only allowing proxy access for shareholders holding 5% or greater of a company's shares, but it appears negotiations have reverted to the original language of the bill, which does not specify a minimum holding requirement.  When the SEC last proposed proxy access rules in 2009, the language contained minimum holding requirements of between one and five percent depending on the size of the company.

In the midst of financial reform negotiations in Congress, several questions remain about proxy access, which is not a focus of the bill:

  • What should be the minimum holding period to allow shareholders proxy access?
  • What should be the minimum ownership requirement?
  • Should directors elected via proxy access rules be required to own stock in the company?
  • Should long-term investors with small holdings be treated the same as large investors?

The financial reform bill will likely answer the question of whether the SEC has authority to create proxy access rules with a resounding yes, but the specifics of proxy access will likely be at the discretion of the Commission.

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Chambers USA 2010 Ranks Porter Wright Among Leading Corporate/M&A practices in Ohio

Posted on June 18, 2010 by Erin Hawk

We are pleased to share with our Federal & Securities Law Report friends that Chambers USA has ranked Porter Wright’s Corporate/M&A practice among the leading practices in Ohio in their most recent report.

To read about our review, please click here:

Corporate/M&A - Ohio

 

Chambers USA also ranked three of our attorneys individually for their experience and reputation in Corporate/M&A Law.

Curtis Loveland - Corporate/M&A - Ohio
Theodore D Grosser - Corporate/M&A  --Ohio
Mark Koogler - Corporate/M&A - Ohio

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Community Banks Raise Capital, Face SEC Reporting Requirements

Posted on June 16, 2010 by Jack J. Gravelle

Many community banks under pressure to raise capital are considering selling new shares of stock to investors; however, doing so may cause some banks to be required to register under Section 12(g) of the Securities Exchange Act of 1934. The Act provides that even if a company has never made a public offering of stock, it must register its stock with the SEC if has more than $10 million in assets and 500 shareholders of record. Once registered, the company must comply with the SEC’s costly periodic reporting requirements.

Even the smallest of banking organizations typically have more than $10 million in assets so the important requirement to avoid registration is to remain below 500 shareholders of record. As banks seek new investors, remaining below the threshold becomes difficult.

The American Bankers Association has long argued that the 500 shareholders threshold should be raised to somewhere between 1,500 and 3,000.  The ABA argues that when the 500 shareholders threshold was set in 1964, the number of investors in the marketplace and the market presence of 500 shareholders were 3-6 times smaller than they are now. Thus, the 500 shareholders threshold should be increased 3-6 times. The ABA laments that many community banks have had to redeem stock at the expense of capital to reduce the number of their shareholders of record to below 300, the requirement to deregister under the Exchange Act.

The SEC has considered updating the 500 shareholders threshold at various times since 1996 but has not yet done so. Community banks eager to raise capital without burdensome SEC reporting costs continue to push for change.
 

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Amendment to Financial Reform Bill Preserves Regulation D for Accredited Investors

Posted on May 18, 2010 by Jack J. Gravelle

The Senate voted yesterday to approve an amendment to Senator Dodd’s financial reform bill that preserves the current mechanics of a securities offering under Rule 506 of Regulation D.  The original language of the bill would have required a 120 day period for the SEC to review the filings of companies seeking to raise money from “accredited investors.”  If the SEC failed to review the offering, the security would not have been considered a “covered security” exempt from additional requirements of state securities regulators.  This provision, coupled with other language in the original bill would have allowed state regulators to review smaller financings “not of sufficient size of scope.”  In short, the bill would have made it harder and more expensive for start-ups to raise money by subverting federal preemption of state law that has been in place for over a decade.

The original language of the bill had left a lot of commentators, including the Angel Capital Association, wondering why Congress had any interest in restricting how start-up companies raise money from angel investors.  Several circumstances may have contributed to the financial crisis, but few analysts are willing to blame angel investors.

SaveRegD.com, a website started to lobby against the offending language of the original bill, is understandably supportive of the recent amendment.
 

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Investment Advisers Face New Custody Rules

Posted on May 3, 2010 by Jack J. Gravelle

On December 30, 2009, the SEC adopted amendments to the custody and recordkeeping rules under the Investment Advisers Act of 1940 (the “Advisers Act”) and related forms. The amendments are designed to strengthen the prior custodial controls imposed by Rule 206(4)-2.

When an adviser or its related person serves as a qualified custodian for client assets, the new rules require that the adviser undergo an annual surprise examination and obtain, or receive from its related person, an internal control report with respect to custody controls, both of which must be performed or prepared by an independent public accountant that is registered with, and subject to regular inspection by, the PCAOB.  This annual surprise examination will likely result in significant increased costs for many registered investment advisers.

New Rule 206(4)-2(a) provides that it is a fraudulent practice for a registered investment adviser to have custody of client funds or securities unless:

  1. Qualified Custodian.  A qualified custodian maintains those funds or securities in a separate account for each client or in accounts that contain only clients’ funds and securities under the adviser’s name as agent or trustee for the clients.
  2. Notice to Clients.  The adviser notifies the client of the qualified custodian and the manner in which the funds or securities are maintained promptly when the account is opened.  If the adviser sends account statements to a client, it must include a statement urging the client to compare account statements of the custodian and the adviser.  The purpose of this amendment is to ensure advisory clients will receive a statement from the qualified custodian that they can compare with any statements they receive from their adviser to determine whether account transactions are proper.
  3. Account Statements to Clients.  The adviser must have a reasonable basis, after due inquiry, for believing that the qualified custodian sends an account statement, at least quarterly, to each of the adviser’s clients for which the custodian maintains funds or securities, identifying the amount of funds and of each security in the account at the end of the period and setting forth all transactions during the period.
  4. Independent Verification.  The client funds and securities for which the adviser has custody are verified by actual surprise examination annually by an independent public accountant pursuant to a written agreement between the adviser and the accountant.  The written agreement must require the accountant to file a certificate stating it has performed the examination, notify the SEC of discrepancies, and notify the SEC of any termination of the engagement and any problems that contributed to the termination.  The purpose of this rule is to provide “another set of eyes” on client assets and an additional set of protections against asset misappropriation.  Additionally, this rule is expected to deter fraudulent conduct by investment advisers.

Rule 206(4)-2(a)(6) provides that if an adviser maintains (or has custody because a related person maintains) client funds or securities as a qualified custodian in connection with advisory services the adviser provides to clients, the following rules apply:

  1. The independent public accountant retained to perform the independent verification must be registered and subject to regular inspection by the PCAOB.
  2. The adviser must obtain or receive from its related person at least once per calendar year a written report that includes an opinion from the independent public accountant regarding controls related to custody of client assets.  The purpose of this rule is deter fraud given the fact that related person custody arrangements can present higher risks to advisory clients than maintaining assets with an independent custodian.
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SEC Issues Small Entity Compliance Guide

Posted on April 2, 2010 by Jack J. Gravelle

The Securities and Exchange Commission has issued a small entity compliance guide to help small companies comply with new proxy statement disclosure rules effective February 28, 2010 requiring information about board structure, corporate governance, director qualifications, and compensation.

The guide does not specifically define what constitutes a small entity, but in general the SEC characterizes small entities as those that have a public float of less than $75 million (computed by multiplying the total number of outstanding shares held by non-affiliates by the stock price) or annual revenues of less than $50 million.

The guide summarizes the new proxy statement disclosure rules that apply to small companies, which are described below:

Disclosures Regarding Board of Directors

  • Disclose for each director and nominee the particular experience, qualifications, attributes or skills that led the company’s board to conclude that the person should serve as a director of the company.
  • Disclose any public company directorships held by each director and nominee during the past five years (the previous rule required disclosure of current positions only).
  • The types of legal proceedings involving directors and nominees that must be disclosed have been expanded to include, among others, any proceedings based on violations of banking or insurance laws and any disciplinary sanctions imposed by self-regulatory organizations. Such disclosures must cover the past ten years (the previous rule was concerned with only the past five years).
  • Disclose how diversity is considered in identifying director nominees (the term “diversity” is not defined).
  • Describe the board’s leadership structure, including whether the same person serves as both chairman and chief executive officer and whether the board has a lead independent director and why such structure is appropriate.
  • Describe the extent of the board’s role in the risk oversight of the company and what effect such role has on the board’s structure.

Disclosures Regarding Compensation

  • The value of awards of stock and options should be reported in the summary compensation table as the aggregate grant date fair value in accordance with FASB ASC Topic 718 (the previous rule required disclosure of the amount recognized for financial statement reporting purposes).
  • For stock and option awards that are subject to performance conditions, disclose in the summary compensation table the value at the grant date based upon the probable outcome of such conditions and disclose by footnote the grant date value of the award assuming the highest level of performance conditions will be achieved.
  • If the board has engaged a compensation consultant for compensation advice and the consultant also provides additional services in excess of $120,000 per year, disclose the fees for the additional services and the compensation services. Disclose whether the decision to hire the consultant was made or recommended by management and whether the board approved of such additional services.

Voting Results for Shareholder Meetings

  • Shareholder voting results must now be disclosed on Form 8-K within four business days after the shareholder meeting at which the vote was held (the previous rule required disclosure on the next Form 10-Q or 10-K for the time period in which the vote took place).

The small entity compliance guide is available on the SEC’s website at www.sec.gov/rules/final/2009/33-9089-secg.htm.
 

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SEC Spotlight on Proxy Matters

Posted on March 5, 2010 by Jack J. Gravelle

The SEC has started a new webpage titled, “Spotlight on Proxy Matters” to provide investors with general information on the mechanics of proxy voting, the e-proxy rules, corporate elections, and proxy matters generally.

The website includes frequently asked questions regarding corporate elections and voting procedures and may be a direct response to the decline in proxy voting by retail shareholders that has occurred since e-proxy was implemented.  In announcing the website, the SEC stated that the goal of the new program is increased investor participation in corporate elections.
 

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