ON Securities : Securities Lawyer & Attorney for Corporate Governance & Executive Compensation Matters

After all the speculation about effective dates of the new amendments to the proxy disclosure rules, the SEC on Tuesday published a set of Compliance & Disclosure Interpretations that clarifies the effective date of the new amendments. The C&DIs clarify that the effective dates are indeed in line with the statements made at the public hearing at which the amendments were adopted.

The most important clarification is that companies with a fiscal year ended before December 20, 2009 will not have to comply with the new rules this year. A company with a fiscal year ended on or after December 20, 2009 will be required to comply, unless the definitive proxy materials and the Form 10-K are filed before February 28, 2010. The C&DIs also clarify some of the transition rules in connection with IPOs and other special situations.

Of course, the section of the ON Securities Cheat Sheet discussing the amendments has been updated consistent with the C&DIs.

Next week, I will discuss some examples of risk-based compensation analysis. In the meantime, you might review this previous post that includes insights from a recent Deloitte program on compliance with the new rules.

Again, Happy Holidays! For those of you in the Upper Midwest, if you have to drive, drive carefully.

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The ON Securities Cheat Sheet has now been updated to provide a summary of the SEC's proxy disclosure amendments at the top of the second page. Descriptions of the some of the pending legislation and other regulatory developments have also been updated. The Cheat Sheet continues to put the new legislative and regulatory developments in context by providing short summaries in one short handy reference (never more than two pages).

Stay tuned for other updates in the coming weeks.

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On December 16, 2009, the SEC adopted its amendments to the proxy disclosure rules - see the press release and the full 129-page release that includes the text of the rules. The release has led to some confusion about when the new rules are effective - the release mentions an effective date of February 28, 2010, but it does not specify exactly what that means. I agree with Mark Borges in the Proxy Disclosure Blog (subscription site), who assumes that the amendments apply to proxy statements and other applicable filings on or after that date.

Part of the confusion about the effective date resulted from a comment during the open meeting/webcast, to the effect that the rules apply to companies with fiscal years ending on or after December 20, 2009. That's not the correct test. The December 20 date does appear in the final release, but only as a separate effective date for new calculation of the dollar amount of equity compensation reported in the Summary Compensation Table. Let's hope someone provides some clarification soon about effective dates.

I'll blog further about the rules themselves, and I'll post a new version of the ON Securities Cheat Sheet soon that reflects the new rules. In my last post, I mentioned one of the "sleepers" in the rules. But I think there may be another one. The Commission added a requirement to discuss the nominating committee's policy on diversity of Board nominees and, if there is a policy, to assess its effectiveness. The Commission declined to define "diversity" for this purpose. This is another area where some companies will be scrambling to figure out what to disclose, and may find it difficult to come up with a consensus on this sensitive topic with virtually no lead time.

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As many of you know, the SEC announced yesterday [December 9] that it will hold an open meeting on Wednesday, December 16 for the purpose of adopting its proposed amendments to the proxy disclosure rules. For a short summary of these amendments, see the ON Securities Cheat Sheet. The two questions on everyone's mind: When will the rules be effective? And what changes will the SEC make to the proposals? Most people I talk to believe the rules will apply to 2010 proxy season for companies with a December or later fiscal year end. However, that could certainly change. Assuming the final rules are similar to the proposals, many public companies will be busy over the next few weeks preparing for the new disclosures. Many people have focused on the requirements to include a risk disclosure in the CD&A section, the changes to the equity calculations in the Summary Compensation Table and the required disclosure of compensation consultant conflicts. But there are some "sleepers" too, such as the requirement to elaborate on the qualifications of each individual director nominee - drafting might be trickier than people think. We'll all be watching the SEC on Wednesday.

Other Updates

A few other thoughts:

• In the Corporate Counsel Blog this week, Broc Romanek gave a great report on the Supreme Court arguments in a case challenging the constitutionality of the PCAOB.
• Thanks to Mike Melbinger in the Melbinger Compensation Blog for pointing out this Chicago Tribune article, quoting U of Chicago business professor Steven Kaplan for his interesting perspective on why CEOs are not overpaid. Kaplan obviously is trying to be controversial - check it out. I especially like the comparison between the earnings of the 20 largest hedge funds in 2007 ($20 billion) and that of the S&P 500 CEOs combined in the same year ($7.5 billion).
• The Maslon Holiday E-Card came out this week, and it's outstanding. Please check it out and accept my wishes for a very happy holiday season and a great 2010!

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As I reported previously, the SEC enforcement staff is "loaded for bear," stepping up its enforcement activities to go after violations of the securities laws. Some recent stories reinforce that it is more important than ever to guard against these violations: The Wall Street Journal reported on Wednesday that the SEC has greatly expanded its insider trading investigations of broker-dealers and hedge funds (subscription required to view complete article). According to the report, the staff has sent at least three dozen subpoenas in the past month, including investigating the role of Goldman Sachs bankers. The staff is using sophisticated technology to examine the webs of relationships among traders, investment bankers, attorneys and others.

Comment: There is no reason to think that the current investigations are limited to broker-dealers and hedge funds, and the trail could easily lead the SEC staff to company personnel. It is more important than ever for companies to monitor and enforce their insider trading policies.

The SEC last month reported that it entered into a consent decree with former officers and accountants at SafeNet in the first enforcement action by the Commission under Regulation G. Reg G regulates the use (and abuse) of "non-GAAP financial measures" by reporting companies. The complaint accused the personnel of engaging in a scheme to meet or exceed quarterly EPS targets through improper accounting adjustments. The company represented that it was excluding "non-recurring" expenses from its results, when in fact it was excluding recurring operating expenses to make its earnings look better.

Comment: SafeNet obviously was engaged in outright fraud, and Reg G gave the SEC staff another means to go after bad people. However, it's no coincidence that the first Reg G proceeding is in late 2009 - again, the enforcement staff is actively looking for perceived wrongdoing, in part to justify the agency's continued existence. Public companies should be more careful than ever in complying with Reg G - for example, be careful about characterizing any excluded expenses as "non-recurring," which is a real hot-button issue with the SEC staff.

Westlaw Business Currents reported last week that there has been a "noticeable uptick" in companies disclosing Wells Notices relating to enforcement proceedings.

Comment: Be careful out there. And don't get caught cheating.

No News. I keep checking the SEC calendar to see whether the Commission has scheduled a meeting to consider adoption of the new proxy disclosure rules. Nothing posted yet. It's hard to predict whether anything will be adopted this year, or whether the new rules will be effective for the 2010 proxy season.

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