Federal Securities Law Blog : Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

As the 2010 proxy season gets started, below are changes implemented in 2009 that will affect proxy statements filed in 2010 (and a few changes likely to occur in 2010):

• NYSE Rule 452. Under new NYSE Rule 452, brokers are no longer permitted to vote for the election of directors without instructions from their clients. The rule is effective for all shareholder meetings held in 2010 and beyond and affects all public companies because it applies to all brokers regulated by the New York Stock Exchange (essentially all brokers).

• Delaware Corporate Law. Delaware corporate law now permits (but does not require) companies to adopt (i) a “proxy access” bylaw that would require the company to include shareholder nominees for director in the company’s proxy statement and (ii) a “proxy reimbursement” bylaw that would require the company to reimburse shareholders for the costs of proxy solicitation.

• Executive Compensation and Risk Disclosure. Public companies must disclose whether and how their overall compensation policies create incentives that increase risk. Examples of information companies must consider disclosing include: (i) the general design philosophy of compensation for employees whose behavior would be most affected by the incentives established by such compensation policies; (ii) the company’s risk assessment or incentive considerations in structuring its compensation policies; and (iii) how the company’s compensation policies relate to the realization of risks resulting from the actions of employees in both the short term and the long term. The required discussion of the relationship between compensation and risk applies to all employees, not just named executive officers.

• Compensation Consultants. Public companies must make a number of disclosures regarding compensation consultants, including fees paid for services, if consultant fees exceed $120,000 for all services not related to recommending executive/director compensation ("other services"). The rules are designed to prevent compensation consultant conflicts of interest.

• Grant Date Value of Equity Awards. Public companies must report the aggregate grant date value of stock options and other equity awards, calculated in accordance with FASB ASC Topic 718 (formerly FASB 123R), instead of the amount recognized for financial statement reporting purposes. The SEC believes compensation decisions are generally made based on the grant date value, not the amount the company ultimately recognizes for financial statement reporting purposes. The grant date value of performance based awards will be based on the “probable outcome of the performance conditions.”

• Voting Results. New SEC rules include a requirement to disclose proxy voting results in a Form 8-K filing within four business days after a shareholder meeting, instead of months later in a 10-Q filing.

• Nominee and Director Disclosures. Public companies must expand biographical disclosures about directors and nominees, including disclosure of (i) any directorship held in the past 5 years, (ii) specific legal proceedings involving a director in the past 10 years, and (iii) whether nominating committees consider diversity, as defined by the company, as a factor in choosing director nominees.

• Say on Pay. Some version of “say on pay” will likely be enacted by Congress in 2010 or 2011. Say on pay would most likely require a company to provide shareholders with an annual non-binding vote on the compensation policies and practices described in the proxy statement.

• Proxy Access. The SEC has again proposed allowing shareholders of a certain size (e.g., 3% holders of companies with assets of $75-700 million) to be able to include nominees for directors on the company’s proxy statement. The Commission did not implement the proposed rules in time for the 2010 proxy season, but may implement them sometime during 2010.
   

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Porter Wright is deeply honored to be ranked among the 30 elite firms in the country when it comes to client service.  In a national survey of in-house counsel at Fortune 1000 companies conducted by The BTI Consulting Group (BTI), Porter Wright ranked 22 out of 505 core firms named by in-house counsel.

Porter Wright was honored as a “Leader of the Best” when it comes to advising clients on business issues. According to the report, “Porter Wright differentiates itself with clients by translating legalese into business speak — a key method to prove your commitment to help clients.” The report also cites specific comments from corporate counsel about Porter Wright’s commitment to client service, specifically, “They know our business and us. They have skilled people in a number of areas critical to our business.”

Based out of Boston, BTI is the leading provider of strategic market research to law firms and professional services firms. BTI’s analysis draws on candid feedback from 240 corporate counsel at Fortune 1000 companies to determine which law firms among 505 core firms nationally top the charts in client service. Corporate counsel ranked Porter Wright among the best in the country in 14 areas:

1. Anticipates the Client’s Needs
2. Breadth of Services
3. Brings Together National Resources
4. Commitment to Help
5. Deals with Unexpected Changes
6. Helps Advise on Business Issues
7. International Capability
8. Keeps Clients Informed
9. Legal Skills
10. Meets Scope and Budget
11. Provides Value for the Dollar
12. Quality Products
13. Understands the Client’s Business
14. Unprompted Communication

Click here for more information about this survey.

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On Monday the SEC Office of Inspector General released its Semiannual Report to Congress regarding ongoing and completed investigations at the SEC. As described here, the biggest investigation to come from the OIG this year was with respect to the Bernard Madoff Ponzi Scheme, but the Report also details several ongoing internal investigations.

The ongoing investigations range from somewhat minor allegations of misuse of email and failure to maintain a proper bar license to significantly more serious allegations of fraud, abuse of power, conflicts of interest, and investigative misconduct. Perhaps the most serious allegations involve two SEC attorneys accused of disclosing non-public information about SEC enforcement investigations to a corrupt FBI agent and short seller who have subsequently been convicted of several crimes.
 

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Last month the SEC issued Staff Legal Bulletin No. 14E, which among other things amends the Commission’s policy regarding risk-based shareholder proposals. The new policy may make it harder for a company to ignore a proposed shareholder resolution concerning climate change.

Under SEC Rule 14a-8(i)(7), companies are permitted to exclude shareholder proposals from the company proxy statement dealing with a matter relating to the company's ordinary business operations. Previously, the SEC permitted companies to exclude a proposal under this rule to the extent the proposal focused on a company engaging in an internal assessment of risk the company faces as a result of operations. The SEC has now clarified that the fact that a proposal requires an evaluation of risk does not mean it may be automatically excluded.

This change in analysis could be an opening for shareholder proposals regarding climate change risks for which the underlying subject matter of the proposal “transcends the day-to-day business maters of the company.” Such proposals may be more likely to gain entrance to the company proxy.
 

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Last month the SEC voted to issue rules to increase transparency of “dark pools” of liquidity.  Dark pools are a way of trading securities without publicly displaying quotes or orders.

Dark pools exist because many securities traders do not want to publicly display their desire to sell or purchase large amounts of shares for fear of significantly moving stock prices before being able to execute the order.  When an order is placed on an exchange, the exchange makes the order publicly available.  Historically, sophisticated traders could avoid public disclosure by enlisting a broker-dealer to inquire among other traders, or on the floor of an exchange, about taking a large order (without disclosing enough information to move the market).  Dark pools offer a modern, computerized way to confidentially search for a complementary trading interest.

Investors using a dark pool have access to information about potential trades that investors using public quotations do not, even though dark pools use the information from public markets to determine price.  Dark pools also network with each other to execute trades.  There are approximately 30 dark pools that transact in stock that trades on major US markets.

Dark pools raise the following concerns:

1. Dark pools hide the true value of securities traded on public exchanges by siphoning significant orders from public markets (the so-called “two-tiered market” in which the public does not have fair access to the best prices);
2. Dark pools create an information advantage for their operators and participants.  This information could potentially be misused to trade securities in public markets to the detriment of other investors not privy to the information;
3. An unmonitored market is a target for market manipulation; and
4. The phrase "dark pool" just sounds nefarious.

The SEC solution would seek to alleviate these concerns by:

1. Requiring that information about an investor’s interest in buying or selling a stock be made publicly available, instead of just to participants in a dark pool; and
2. Requiring that dark pools identify the trades for which they are responsible.

The next step is for the Commission to seek public comment.
 

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Following a change to New York Stock Exchange Rule 452 in July, brokers for investors who do not provide voting instructions will no longer be able to cast discretionary votes in uncontested director elections. Prior to the change, uncontested director elections were considered “routine” matters, and shares held in street name could be voted by brokers, at their discretion, if the beneficial owners failed to instruct the brokers how to vote. The new rule characterizes all director elections, including uncontested elections, as “non-routine” and applies to all annual meetings held after January 1, 2010. The rule affects all public companies because it applies to all brokers regulated by the NYSE.

One significant effect of the rule change will be increased difficulty in obtaining a quorum. If uninstructed brokers do not vote because all matters presented to the shareholders are non-routine, shares held in street name will not be treated as present for quorum purposes. Broker non-votes are only counted toward a quorum if stockholders will be voting on a routine matter.

The solution to the quorum problem appears to be including at least one routine matter on the proxy to ensure brokers vote. The most routine of all routine matters is auditor ratification, a proposal that many companies have abandoned but will likely revive.
 

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Earlier this month, SEC Chairman Mary Schapiro said the Commission will postpone finalizing a proxy access rule that would allow investors to propose director candidates on the company proxy statement.  The SEC is still committed to having a rule in place in 2010, but does not want to rush the process after receiving hundreds of comment letters.  Previously, a proxy access rule was expected to be in place in time for the 2010 proxy season.

When the proxy access rule is finalized, large shareholders (most likely owning 1% or greater of large public companies) will be able to submit their nominations for directors to the company, and the company will have to include the nominations on its proxy statement (if certain requirements are met).  The measure is supported by several members of Congress, but disagreement exists over how many shares must be owned (and for how long) to get access.  Currently, shareholders can nominate their own slate of directors if they are willing to pay for the expensive cost of a proxy fight.

Proponents of proxy access claim it is a tool to stop management entrenchment and to empower shareholders currently hampered by the expense of proposing directors.  Opponents argue that states should regulate proxy access (not the Feds) and that shareholders already have tools for fighting management entrenchment (for example, they can sell their shares).  Despite opponents concerns, some form of proxy access is inevitable as it is supported by the SEC, Congress, and the Obama administration.
 

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Recently the SEC’s Inspector General reported on recommendations to the Commission’s Enforcement Division to improve enforcement in direct response to the Bernie Madoff scandal. The report focuses on what went wrong that allowed the Madoff scandal to happen and what can be done to make sure it does not happen again.

The answers in the report to the question of “What went wrong?” can be separated into two categories: failures that resulted from the enforcement staff not having the proper tools and failures that resulted from the enforcement staff not using the proper tools it had.

How one designates a failure depends in large part on whether one wants to blame the actual investigators for shirking their duties or the policymakers for having ineffective systems for catching fraud. To some extent, the Inspector General blames both. For example, the IG recommends both (i) a better tip and complaint handling system with a record of how a complaint is vetted and who is accountable and (ii) increased resources and time for evaluating complaints.

Of all the findings, the most troubling is that 99 respondents (13.2%) to the IG’s questionnaire said they have been involved in a situation where they felt there was a lack of impartiality in the performance of official duties, such as preferential treatment toward former SEC employees or improper external influences. If true, this problem may require a culture change that cannot necessarily be fixed with increased resources or better control mechanisms.
 

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Back in January when securities lawyers were predicting what 2009 held in store for the SEC, lots of people predicted more credit rating agency regulations. Thursday, the SEC followed through with a number of credit rating agency proposals.

The proposals with the most potential to shake up the current ratings environment are:

1. Create a system that allows competing rating agencies to obtain access to the same information about a structured finance product to enable competing ratings of the same product. The increased competition may result in more accurate ratings;

2. Require the disclosure of “preliminary ratings” obtained from a previous rating agency to discourage ratings shopping; and

3. Require that an issuer that includes a credit rating in a registration statement obtain the consent of the rating agency, thus resulting in potential liability for the rating agency under the Securities Act similar to how other experts are treated. The SEC acknowledges this could be a far-reaching change and is only seeking comment as to whether it should propose such a rule at this time.
 

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