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

In this post, I report on the final financial reform bill from the Conference Committee in Washington. And then I start to sing (see video link below)!

After an all-night session last week, the Conference Committee passed the final version of what is now called the “Dodd-Frank Wall Street Reform and Consumer Protection Act”. Title IX of the Act (362-page PDF) includes the corporate governance and executive compensation provisions (contained in Subtitle E, starting on page 207). The Act still needs to be passed by both houses and signed into law. In the coming days, I'll be blogging about specific provisions, including mandatory Say-on-Pay and granting authority to the SEC to adopt proxy access rules. The final version of the Act gives the SEC the authority to exempt certain companies (possibly including smaller companies) from these requirements, and the SEC will be “filling in the blanks” in these and other provisions. It promises to be an interesting year of rulemaking.

I Sing “My Attorney Bernie”

Last week, I performed as part of the “Lawyers With (More Than Legal) Talent” competition, which capped off the Minnesota State Bar Association Convention. I didn’t win (the winners were two Minnesota District Court judges). But I had a great time, and so did everyone else. My song was the hilarious “My Attorney Bernie”, written by Dave Frishberg. In my introduction, I said that this song is about the greatest “client testimonial” ever received by an attorney:

Tax attorney David Haynes of the Leonard Street firm provided the piano accompaniment. And speaking of great Frishberg songs, see this previous post for an animated video of “I’m Just a Bill”, which educates listeners about how a bill becomes law.

Video: YouTube

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This month’s meeting of the Twin Cities Chapter of the National Association of Stock Plan Professionals featured an excellent webinar by William Gerek (PDF) and Dana Martin (PDF) of Hay Group in Chicago. View the webinar, “Executive Pay – A New World Order, or Business As Usual?”, to hear their analysis of the recently released results of The Wall Street Journal/Hay Group 2009 CEO Compensation Study. The webinar slides (PDF) may also be downloaded.

The speakers commented that 2009 was an unusual year. Many companies’ performance suffered in 2009 compared to previous years, because of ongoing effects of the economic downturn. However, many companies beat their budgets in 2009 (partly because budgets and targets were set at a more modest level in 2009 than in 2008). Also, total shareholder return increased in 2009 due to some rebound in stock prices from their very low levels at the end of 2008. Even though these factors made it difficult to draw a lot of conclusions, Hay Group had some interesting observations, including the following:

• Total direct compensation to CEOs declined for the second straight year, a first in the history of the study.
• The prevalence of perks declined, and among the companies still providing them, the values of various perks declined dramatically.
• The Hay Group commentators observed a greater use of a “portfolio approach” to long term compensation. They believe compensation committees may be trying to address risk elements of compensation by emphasizing “balance” among compensation elements. However, they pointed out a danger in too much balance, which can water down the message a compensation committee wants to send about the specific types of performance that will be rewarded.

Happy viewing!

Image: Picasa Web Albums

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As I have reported previously, Dodd Bill, the Restoring American Financial Stability Act of 2010 (1,600 page PDF), includes extensive governance and compensation reforms that apply to all public companies (or, in some cases, all listed companies), not just financial institutions. However, a lesser-known provision in the Dodd Bill could also have a significant impact on public companies: a program that would pay whistleblowers a bounty for reporting violations of securities law.

Under Section 922 of the Dodd Bill (starting on page 974), if a whistleblower provides information on a securities law violation that leads to monetary sanctions of more than $1 million, the SEC will be required to pay the whistleblower an amount ranging from ten percent to 30 percent of what has been collected. This bounty would apply to a wide range of securities law violations, including violations of the Foreign Corrupt Practices Act. The Frank Bill, which is being reconciled with the Dodd Bill in conference committee, contains a similar provision, without the ten percent minimum. Because the Senate and House versions are similar, it seems likely that the provision will be part of the final bill, expected to be passed this summer.

I view this provision as the “sleeper” in the Dodd Bill for public companies. It’s received less publicity than other provisions such as mandatory Say-on-Pay and a majority voting requirement for directors in listed companies. However, its impact on public companies could be even greater than those other provisions. The bounty provision may encourage employees to report perceived violations in a greater number of cases than before. Considering the recent increases in SEC enforcement staffing and activity, public companies will also be at greater risk of SEC investigations and enforcement proceedings.

In preparation for the likely passage of the bill, public companies should ensure that their whistleblower policies are up to date and that they are prepared to process a possible increase in whistleblower reports. The policies should provide clear procedures for employees to report possible violations within the company. Careful preparation may help reduce the chances of an expensive and time-consuming problem in the future.
 

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The new version of the ON Securities Cheat Sheet gives more detail on the Dodd Bill, the Restoring American Financial Stability Act of 2010 (1,600 page PDF). The Dodd Bill includes more extensive governance and compensation reforms than the Frank Bill, also described in the Cheat Sheet. The differences will need to be worked out in conference committee.

One interesting feature of the Dodd Bill is a requirement for majority voting for directors in uncontested elections (Section 971 of the Dodd Bill, at page 1103). The requirement applies to companies listed on securities exchanges (including Nasdaq). If the director does not receive a majority of votes cast in the election, the director must tender his or her resignation. The Board can choose to accept the resignation or can reject it by a unanimous vote. Within 30 days after the vote, the Board must disclose the specific reasons that the Board did not accept the resignation, and that this decision was in the best interests of shareholders, along with a discussion of the analysis used in reaching the conclusion.

The majority voting provision is not included in the Frank Bill, so the conference committee must decide whether it will be included in the final bill. As reported in a Reuters article, “Wall Street Critic Frank to Shepherd Final Reform Bill”, the committee could have a final bill ready for signature by the President by July 4. In a post in the RiskMetrics Blog, “Majority Voting May Not Appear in Final Reform Bill”, Ted Allen reports that Representative Frank is “unsure” whether the majority voting provision will appear in the final bill. One way or another, by July 4 there could be "fireworks" on Capitol Hill for public companies.
 

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The 2010 Bowne SEC Accounting, Compliance & Legal Issues Conference held in Minneapolis last week was a major success. More than 250 public company representatives and advisors attended to hear a day-long program featuring up-to-date information on disclosure, corporate governance, executive compensation and accounting issues.

I moderated a panel discussion on public company disclosure issues that also featured my partner, Paul Chestovich. Paul provided an update on the SEC’s new positions on climate change disclosures and non-GAAP financial measures, also the subject of a very handy article Paul wrote for the Small Public Company Forum called “Generation Non-GAAP”. We also participated in a discussion of tips for public companies to avoid disclosure problems. The SEC has beefed up its enforcement staff and enforcement activity, making compliance especially important these days, to avoid being “busted” by the SEC. Some of our disclosure and compliance tips were as follows:

• When making tough disclosure calls, remember the current public skepticism and SEC activism (business as usual may not be enough).
• Revisit forward looking disclaimers, risk factors and MD&A in light of current conditions.
• Before you have a problem, check your D&O policy – does it cover SEC investigation expenses? (Many do not.)
• Focus on process, process, process - in light of SEC scrutiny, it’s important to have consistency and proper oversight, and to be able to demonstrate that with good documentation.
• Make sure disclosure controls are formalized (written and compiled), and that the internal disclosure committee keeps proper records.
• Re-examine whistleblower policies, especially in relation to reporting of financial fraud. Note that, under the new financial reform bills, whistleblowers may receive a “bounty” for reporting financial fraud, which will encourage further activity by whistleblowers.
• Consider a formal Communications Policy to control the flow of information to analysts, media, etc. This will reduce the risk of inconsistent or misleading statements and help promote compliance with Regulation FD (prohibiting selective disclosures to analysts).
• Review the corporate website and make sure disclosures are consistent with public reports.
• Focus on your insider trading policy - make sure the policy is up to date and policed. Even the appearance of insider trading gives plaintiffs and SEC additional basis for actions, where a disclosure issue alone might not trigger a proceeding.

Our complete presentation is available here (PDF).

If you were not there, hope you can make it to the Conference next year!
 

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