PondelWilkinson spoke to Steve Cooke, Corporate Law Partner at Paul Hastings, about the SEC’s latest Reg FD enforcement action against a company that “signaled” to analysts, prior to making a public announcement, that its results would be worse than expected.
With more than a month since the Dodd-Frank Act was approved and signed in to law by President Obama, the interpretative dust is beginning to settle.
According to Skadden Arps, The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 affects almost every aspect of the U.S. financial services industry. Its goal is to restore public confidence in the financial system and prevent another financial meltdown. Put simply, it significantly increases regulation.
But, from a practical standpoint, what does it really mean?
Among other things, regulators will have the authority to take control of and liquidate troubled financial firms if their failure would “pose a significant risk to the financial stability of the United States.” The Federal Reserve will have the authority to extend credit in “unusual and exigent circumstances.”
Most important from a public company standpoint, the SEC’s enforcement program will be enhanced, disclosure of executive compensation will become mandatory, and shareholders will have the right to a “say-on-pay” vote on executive compensation.
SEC Enforcement
New SEC enforcement programs will effectively “increase the flow of enforcement tips from potentially knowledgeable insiders.” Skadden Arps recommends “robust compliance and self-evaluative programs for all entities that are subject to SEC regulation.” The Act also expands the SEC’s authority to bring enforcement actions against those who aid and abet violations of the securities laws.
Corporate Governance
One likely outcome of the Dodd-Frank Act is increased contesting of annual director elections. Activist investors will have more leverage to pressure companies to take short-term-focused actions rather than allow boards to focus on the long term. Skadden Arps notes that this could keep qualified directors from continuing to serve on public company boards. In keeping with PondelWilkinson’sview of investor communications, public companies should work to increase engagement with shareholders now, to develop and maintain long-term, mutually beneficial relationships.
Cravath, Swaine & Moore notes that public companies will also need to disclose in their annual proxy statements the reasons why the positions of chief executive officer and chairman are filled by the same person or by different people (although the SEC has already adopted rules requiring this disclosure). In a follow on to last year’s New York Stock Exchange ruling, which eliminated broker discretionary voting with regard to director elections, the Act also prohibits broker discretionary voting with regard to shareholder votes on executive compensation matters.
Executive Compensation (Say on Pay)
During a recent speech, SEC Chairman Mary L. Schapiro said that investors’ “concerns must be addressed to fully modernize our system and ensure that our markets continue to foster capital formation and serve as an efficient engine for turning savings into jobs and economic growth. And, I believe that the recently-enacted regulatory modernization legislation goes a long way to addressing them.”
— Laurie Berman, lberman@pondel.com
On Wednesday, February 24, 2010, the SEC narrowly approved curbs on short selling, addressing what some consider to be one of the major contributing factors of the 2008 financial crisis. The new rule is a modification of the “Uptick Rule,” which was designed to be a preventative measure against downward spiraling stock valuations in turbulent markets. However, the rule was eliminated in 2007 because of its lack of efficacy.
The new rule will operate much like a circuit breaker, taking effect once the price of a stock has declined by 10 percent in a given day. Once triggered, short sales will no longer be permitted at or below the National Best Bid or Offer for the remainder of the day and the following trading day.
The modified uptick rule will take effect in approximately 60 days, but stock exchanges have up to six months after that time period to implement the new rule.
Highly debated since the 2008 financial crisis, short sales have been one of the most controversial issues facing the SEC. Opponents of such regulation have pointed out that financial stock valuations tumbled even after regulators imposed a short-term ban on short selling late in 2008. Others have voiced strong disappointment that the modified uptick rule did not go far enough to protect investors. One thing is for sure – this is not the last we’ll hear on short sales.
— PondelWilkinson, investor@pondel.com
After delaying Section 404 compliance for small companies at least four times since Sarbanes Oxley became law in 2002, the SEC has set a compliance deadline of June 15, 2010 for companies with market caps of less than $75 million. Section 404 requires that companies publicly report on the effectiveness of their internal control over financial reporting.
In a recent public statement, Mary Schapiro, the SEC’s new chairman, commented that, “Since there will be no further commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance.”
Section 404 compliance is both time consuming and expensive, so if you haven’t begun planning with your auditor, there’s no time like the present.
— Laurie Berman, lberman@pondel.com
Published in IR Alert…
As a group, investors in publicly traded companies are still mad as hell. They don’t want to take it anymore, and… they aren’t.
The “it” reflects deep continuing pain from the protracted economic abyss—smaller paychecks, unrecovered losses in retirement savings, sustained near record unemployment and a litany of maladies that are redefining the role of capitalism.
Despite the market’s stellar performance so far this year, anger and angst abound among investors, be they professional money managers or individuals. They are flexing their muscles and reacting like never before.
They opined about executive compensation more loudly than ever. They supported measures to repeal board classification, separate the CEO from the chairman role and enact majority voting. If that wasn’t enough, investors continue to seek greater access to the proxy statement, and they are clamoring for the right to call special meetings.
Making things even more volatile, there is a strong anti-corporate sentiment among individual investors, plus more activists than ever among professional investors seeking to effect change (including a set of brand new activist investors, so challenging to identify because they have never been activists before).
Finally, insert the new leadership at the Securities and Exchange Commission as they seek to right the wrongs and laxity of the prior commission, and voila, we are experiencing unprecedented times and challenges for investor relations professionals.
With Q4 and the 2010 proxy season right around the corner, IROs have an opportunity to take an early lead and be heroes within their companies, learning what’s on their shareholders’ minds, along with what specific proposals—friendly or otherwise—may lurk ahead.
Aside from event-driven issues, corporate governance proposals will continue to dominate the landscape, with “Say on Pay” at the forefront. Golden parachutes will be going by the wayside. Investors will be looking at restricting post-retirement stock sales and requiring claw-back provisions. Most important of all, board members should be prepared to clearly communicate how senior management performance is measured and how it is rewarded.
IROs should comb the websites of advisory firms such as RiskMetrics Group, Glass, Lewis & Co. and PROXY Governance to be cognizant of last season’s proposals and results, which could serve as a preview of proposals to come. They should be certain that appropriate defense measures are in place, and they should review and update their companies’ corporate governance policies, many of which were put into place and filed in 2002, when Sarbanes-Oxley was first enacted.
Closely monitoring all regulatory and legislative developments is critical. Be on the lookout for comprehensive legislation introduced last May by U.S. Senators Charles E. Schumer, D-N.Y., and Maria Cantwell, D-Wash, in a bill called the “Shareholder Bill of Rights.”
The legislation, in one fell swoop, incorporates many of the proposals already being considered by the SEC and being offered by shareholders for inclusion in proxies. It requires that all public companies hold an advisory shareholder vote on executive compensation; that directors receive at least 50% of the vote in uncontested elections in order to remain on the board; that all directors face re-election annually; that a risk committee be established; and that the jobs of CEO and chairman of the board be split, with the chairman being an independent director.
The bill also instructs the SEC to issue rules allowing shareholders to have access to the proxy statement if they want to nominate directors to the board, as long as they have owned at least 1% of a public company’s shares for at least two years.
While the odds seem slim that the bill will become law, partially because it includes too many contradictions to state law, some pundits believe that if another scandal emerges, Congress can push this one through as it pushed SOX through following the Enron debacle.
But legislation aside, components and variations of the bill already are reaching boardrooms in droves in the form of individual shareholder proposals. When that happens, remember:
As Sen. Schumer stated in a press release when announcing the proposed Shareholder Bill of Rights legislation, “When you buy stock in a company, it should come with some peace of mind that the business is being run responsibly. During this recession, the leadership at some of the nation’s most renowned companies took too many risks and too much in salary, while their shareholders had too little say. This legislation will give stockholders the ability to apply the emergency brakes the next time the company management appears to be heading off a cliff.”
The proposed legislation is giving management and directors major headaches just thinking about it. And while investors these days may have a right to be mad as hell and are reacting in ways they never have before, all IROs understand that the best defense against defeating unwanted shareholder proposals and winning desired ones is to foster sound shareholder relationships year round through continuous transparency and ongoing outreach.
— Roger Pondel, rpondel@pondel.com
You know that feeling. A letter sitting on your desk. Return address, 100 F Street, NE Washington, DC 20549. Your heart sinks to your stomach. You open it slowly. Yup, there it is. An SEC comment letter.
What’s the best way to handle this bit of assumingly unwanted news? According to Steven Jacobs, an associate chief accountant with the SEC’s Division of Corporation Finance, you should engage the SEC in dialogue to determine exactly what they are looking for rather than rushing to restate your financial results. At a conference sponsored by the New York State Society of Certified Public Accountants, Jacobs said that picking up the phone makes it easier to “assure that the issuer’s response addresses the staff’s concerns.”
For other great tips for dealing with the SEC, check out CFO.com’s recap of Jacob’s speech. Sarbanes-Oxley calls for an SEC review of the financial filings of publicly traded companies at least once every three years. Last year, the SEC reviewed the filings of nearly 5,000 issuers, up from the prior two years. It’s bound to happen sooner or later, so be prepared and don’t be afraid to talk to your friendly neighborhood SEC officer. It might be easier than you think.
— Laurie Berman, lberman@pondel.com
I recently spent a couple of days at a gathering that was attended by investor relations executives from some of America’s most loved and largest companies who listened intently to, and had the opportunity to converse with, former SEC chairmen, noted economists, authors of best-selling business books, the head of a large investment bank and astute peers.
Since the meeting was not open to the media and the executives paid big bucks to attend, I will not quote anyone directly or provide the color to which only paid attendees should be privy. Nevertheless, here is a link to advice on legal harm and a few solid nuggets of advice and opinion that came forth—pragmatic, to save one from legal harm; worrisome to keep us up at night when we are starting to sleep a little better; and, alas, some feel-good opinion.
— Roger Pondel, rpondel@pondel.com
In the next several weeks, a confluence of events will occur that historically have caused significant trading volumes and some volatility in the equity market.
A recent NASDAQ seminar provided some interesting information regarding these events. One panelist postulated that the volatility might not be as pronounced this year as in the past due to diminished risk appetite that could limit some “gaming.” Another noted the SEC’s crackdown on naked shorting that should have a dampening effect. All said, it’s better to be prepared and level headed as we ride out some of the heaviest trading days of the year.
— PondelWilkinson, investor@pondel.com
Last Wednesday, the Securities and Exchange Commission (SEC) adopted a proposal requiring that companies’ financial statements be filed with the agency in XBRL, otherwise known as eXtensible Business Reporting Language.
The SEC has outlined a three-year XBRL phase in schedule that begins for the largest accelerated filers in the fiscal period ending on or after June, 15 2009 and concludes with the fiscal period ending on or after June 15, 2001 for non-accelerated filers.
According to NIRI, the National Investor Relations Institute, the phase in schedule is as follows:
| Year 1 | Year 2 | Year 3 |
|---|---|---|
| U.S. (or non-U.S.) accelerated filers with a public float of $5B using U.S. GAAP (about 500 companies) | All other accelerated filers | All other filers, using U.S. GAAP or IFRS |
| Fiscal period ending on or after June 15, 2009 | Fiscal period ending on or after June 15, 2010 | Fiscal period ending on or after June 15, 2011 |
If you’d like to learn more about XBRL and what it means for your company, Business Wire recently hosted an informative webinar on the subject. The SEC offers a host of information on its site at www.sec.gov/spotlight/xbrl.shtml and XBRL US, a local jurisdiction of XBRL International – a not-for-profit consortium of approximately 500 companies and agencies worldwide working together to build the XBRL language and promote and support its adoption, provides news and other information in an easy-to-use format.
XBRL is now a reality, so it’s time to take the plunge and begin planning for the inevitable.
— Laurie Berman, lberman@pondel.com
For the first time since the SEC created the Division of Enforcement in 1972 to consolidate enforcement activities that previously had been handled by the various operating divisions at the Commission’s headquarters, the agency has published a document containing the internal policies and procedures that SEC staff must follow when conducting investigations.
According to Bowne’s SEC and Edgar Monitor, there are several noteworthy sections:
While most of us will never be involved in an SEC investigation, it is good to know we now have more insight into exactly what to expect should such a situation arise.
— Laurie Berman, Senior Vice President, lberman@pondel.com
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PondelWilkinson Inc. is a leading investor relations and strategic public relations firm that has earned a national reputation for innovative, aggressive, professional service.
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