Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The CFTC’s final rule on position limits with respect to derivative contracts in 28 different physical commodities has been vacated and remanded back to the agency. Spot month limits under the rule had been set to go into effect on October 12, 2012.

On September 28, the U.S. District Court for the District of Columbia granted the motion for summary judgment of plaintiffs International Swaps and Derivatives Association (ISDA) and Securities Industry and Financial Markets Association (SIFMA), finding that, in promulgating the rule, the CFTC failed to first make a finding required by the Commodity Exchange Act (as modified by the Dodd-Frank Act) that the position limits were necessary to “diminish, eliminate, or prevent” the burden of undue speculation on interstate commerce. In a joint statement, the CEOs of ISDA and SIFMA stated: “The position limits rule would adversely impact commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility. On behalf of our members in the U.S. and around the world, we are pleased that the rule has been vacated and sent back to the CFTC for reconsideration.”

The CFTC may repromulgate the same or modified position limits, but will first have to make the required finding that the limits are necessary. This represents the first setback of this nature that the CFTC has encountered in rolling out its Dodd-Frank regulatory regime with respect to swaps.

Nasdaq has proposed rules regarding the independence of compensation committees in response to final rules issued by the SEC under the Dodd-Frank Act.  The Nasdaq proposed rules are far more complex than the NYSE’s proposed rules.  The Nasdaq proposed rules, like the NYSE proposed rules, must be approved by the SEC.

In General

Some principal changes from Nasdaq’s current rules regarding compensation committees include:

  • Companies must have a compensation committee consisting of at least two members, each of whom must be an Independent Director as defined under Nasdaq’s current listing rules;
  • compensation committee members must not accept directly or indirectly any consulting, advisory or other compensatory fee, other than for board service, from a Company or any subsidiary thereof;
  • in determining whether a director is eligible to serve on a compensation committee, a Company’s board must consider whether the director is affiliated with the Company, a subsidiary of the Company or an affiliate of a subsidiary of the Company to determine whether such affiliation would impair the director’s judgment as a member of the compensation committee;
  • explicit requirements regarding the compensation committee charter and factors to be considered when engaging advisers which are discussed below;
  • Companies must review and reassess the adequacy of the compensation committee charter on an annual basis;
  • Smaller reporting companies must have a compensation committee comprised of at least two Independent Directors and a formal written compensation committee charter or board resolution that specifies the committee’s responsibilities and authority, but such Companies are not required to adhere to the compensation committee eligibility requirements relating to compensatory fees and affiliation, or the requirements relating to compensation consultants, independent legal counsel and other compensation advisers that Nasdaq is proposing to adopt.

Compensation Committee Charters

Nasdaq proposes to require each Company to certify that it has adopted a formal written compensation committee charter and that the compensation committee will review and reassess the adequacy of the formal written charter on an annual basis. Nasdaq proposes that the compensation committee charter must specify:

  • the scope of the compensation committee’s responsibilities, and how it carries out those responsibilities, including structure, processes and membership requirements;
  • the compensation committee’s responsibility for determining, or recommending to the board for determination, the compensation of the chief executive officer and all other executive officers of the Company;
  • that the chief executive officer of the Company may not be present during voting or deliberations by the compensation committee on his or her compensation; and
  • that a compensation committee must have the specific compensation committee responsibilities and authority necessary to comply with SEC rules relating to the (i) authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel.

Selecting a Compensation Consultant, Legal Counsel or Other Adviser

Nasdaq concluded that the six independence factors enumerated in SEC Rule 10C-1 were sufficient to  provide compensation committees with a broad and sufficient range of facts and circumstances to consider in making an independence determination regarding a compensation consultant, legal counsel or other adviser.  Accordingly, when selecting advisers the compensation committee must consider:

  • the provision of other services to the issuer by the person that employs the adviser (the “Employer”);
  • the amount of fees received from the issuer by the Employer, as a percentage of the total revenue of the Employer;
  • the policies and procedures of the Employer that are designed to prevent conflicts of interest;
  • any business or personal relationship of the adviser with a member of the compensation committee;
  • any stock of the issuer owned by the adviser; and
  • any business or personal relationship of the adviser or the Employer with an executive officer of the issuer.

Nasdaq emphasizes that a compensation committee is not required to retain an independent compensation adviser.  Rather, a compensation committee is required only to conduct the independence analysis described above before selecting a compensation adviser.

Transition

Nasdaq proposes that Rule 5605(d)(3), relating to compensation committee responsibilities and authority, shall be effective immediately. Specifically, this proposed rule states that a compensation committee must have the specific compensation committee responsibilities and authority necessary to comply with SEC Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange Act relating to the: (i) authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel.

Nasdaq proposes that Companies must comply with the remaining provisions of the amended listing rules on compensation committees by the earlier of (i) their second annual meeting held after the date of approval of Nasdaq’s amended listing rules; or (2) December 31, 2014.

A Company must certify to Nasdaq, no later than 30 days after the implementation deadline applicable to it, that it has complied with the amended listing rules on compensation committees. Nasdaq will provide Companies with a form for this certification.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The SEC has announced that EDGAR filing of draft registration statements for confidential, non-public review will be available on October 1, 2012.

Section 106(a) of the JOBS Act provides that an emerging growth company (EGC) can submit a draft registration statement to the SEC for confidential, non-public review. The first step in implementing this provision of the JOBS Act was the SEC’s establishment of a confidential hard-copy mailing system, which was replaced on May 14, 2012 by a secure e-mail submission system.  On June 28, 2012, the SEC announced that it would incorporate the confidential draft registration statement filing into the current electronic EDGAR system that is used for other filings with the SEC (which we wrote about here).  The EDGAR system will become available for such filings on October 1, 2012, but the secure e-mail submission system will remain in place, allowing EGCs to select either option. In the future, the SEC will announce a date by which EDGAR filing will be the only method for EGCs to file draft registration statements.

The submission process looks to be fairly straightforward, judging from the step by step instructions and screenshots released by the SEC.  If you find the current EDGAR system easy to use, you will likely have no problem with this new function. The JOBS Act requires that an EGC taking advantage of the draft registration statement review must publicly file the draft registration statement and all amendments at least 21 days prior to conducting a road show.  The EDGAR system allows an issuer to comply with this requirement without re-submitting the draft registration statement through the use of a “Disseminate Draft Registration Statement” button available from the draft registration statement EDGAR page.

As a reminder, an EGC is defined as a company that has total gross revenues of less than $1 billion at the end of its most recently completed fiscal year and has not conducted a registered IPO of its common stock on or prior to December 8, 2011.  An EGC can maintain its special status for up to five years, although EGC status will terminate prior to the expiration of the five year period if (i) total annual gross revenue exceeds $1 billion, (ii) the worldwide public float exceeds $700 million as of the end of the second quarter following the anniversary of the EGC’s IPO or initial reporting, or (iii) the EGC’s issues more than $1 billion in non-convertible debt in any consecutive three-year period.

Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The NYSE has proposed rules regarding the independence of compensation committee members and factors to be considered regarding the independence of advisers to compensation committees.  The proposed rules are being adopted as a result of the Dodd-Frank Act and final rules adopted by the SEC. The NYSE’s proposed rules are subject to approval by the SEC.

Compensation Committee Independence

The NYSE proposes to amend its rules to provide that in affirmatively determining the independence of any director who will serve on the compensation committee, the board of directors must consider all factors specifically relevant to determining whether a director has a relationship to the listed company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member.  The listed company board must specifically consider:

  • a director’s source of compensation, including any consulting, advisory or compensatory fee paid by the issuer; and
  • whether a director is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer.

Commentary to the proposed rule provides the board should consider whether the director receives compensation from any person or entity that would impair his ability to make independent judgments about the listed company’s executive compensation.  

Similarly, when considering any affiliate relationship a director has with the company or its subsidiaries,  the proposed commentary provides that the board should consider whether:

  • the affiliate relationship places the director under the direct or indirect control of the listed company or its senior management, or
  • creates a direct relationship between the director and members of senior management,

in each case of a nature that would impair his ability to make independent judgments about the listed company’s executive compensation.

The NYSE does not propose to adopt any specific numerical tests with respect to the factors discussed above or to adopt a requirement to consider any other specific factors. In particular, the NYSE does not intend to adopt an absolute prohibition on a board making an affirmative finding that a director is independent solely on the basis that the director or any of the director’s affiliates are shareholders owning more than some specified percentage of the listed company.

Compensation Adviser Independence Factors

As required by SEC Rule 10C-1(b)(4), the proposed NYSE rules require the compensation committee to consider the following factors before selecting  a compensation consultant, legal counsel or other adviser to the compensation committee:

  • The provision of other services to the issuer by the person that employs the compensation consultant, legal counsel or other adviser;
  • The amount of fees received from the issuer by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser;
  • The policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest;
  • Any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the compensation committee;
  • Any stock of the issuer owned by the compensation consultant, legal counsel or other adviser; and
  • Any business or personal relationship of the compensation consultant, legal counsel, other adviser or the person employing the adviser with an executive officer of the issuer.

As proposed, the NYSE rule  would not include any specific additional factors for consideration not set forth in the final SEC rule.  The NYSE believes that the list included in NYSE Rule 10C-1(b)(4) is very comprehensive and the proposed listing standard would also require the  compensation committee to consider any other factors that would be relevant to the adviser’s independence from management.

Consistent with the final SEC rule, the proposed NYSE rule would specify that the compensation committee need not engage in an analysis of the independence factors before consulting with or obtaining advice from in-house legal counsel.

Transition Period

The NYSE  proposes to amend its rules to provide that listed companies would have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new compensation committee independence standards . Existing compensation committee independence standards would continue to apply pending the transition to the new independence standards.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The CFPB has commenced an investigation to determine whether the practice of ceding premiums from private mortgage insurance companies to captive reinsurance subsidiaries of certain mortgage lenders violates Section 8 of the Real Estate Settlement Procedures Act, or RESPA.  PHH Corporation publicly disclosed that it is a subject of the investigation.

The CFPB served PHH with a civil investigative demand, or CID, and PHH objected to the CID as being overbroad. The CFPB denied PHH’s petition to modify or set aside the CID.  The CFPB noted:

  • According to the CFPB, the CID was not a “fishing expedition.”  Though PHH repeatedly asserted that the CID was overbroad or unduly burdensome, the CFPB stated PHH offered little or no detail to make the kind of showing required to substantiate these claims.
  • PHH objected that the CID sought documents, items, and information extending outside the applicable limitations period. According to the CFPB, the issue is not whether all such information is itself actionable; rather, the issue is whether such information is relevant to conduct for which liability can be lawfully imposed.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

[Note this post was updated on September 30, 2012 to note pending rule proposals by the NYSE and Nasdaq regarding the independence of compensation committees and other matters.]

At this time, there are relatively few new items that need to be considered for the upcoming proxy and 10-K season.  Perhaps the biggest change is smaller reporting companies will have to hold say-on-pay and frequency of say-on-pay votes.  However, far ranging changes related to the conflict minerals rules and disclosures for resource extraction issuers will begin to take substantial time and attention.

Item Status
   
   
Proxy Statements  
1.  Compensation Consultant Conflicts of Interest: New S-K Item 407(e)(3)(iv) provides that if any compensation consultant has played a role in determining or recommending the amount or form of executive and director compensation, and the consultant’s work has raised any conflict of interest, then disclosure of the nature of the conflict and how the conflict is being addressed is required.  This rule is effective for any proxy or information statement for an annual meeting of shareholders at which directors will be elected occurring after January 1, 2013.  Effective
2.  Say-on-pay exemption for smaller reporting companies:  Companies that qualified as “smaller reporting companies” as of January 21, 2011, including newly public companies that qualify as smaller reporting companies after January 21, 2011, are subject to the say-on-pay rules as of the first annual or other meeting of shareholders at which directors will be elected and for which the rules of the SEC require executive compensation disclosure pursuant to Item 402 of Regulation S-K occurring on or after January 21, 2013 Effective
3.  Say-on-pay advisory vote: Whether other issuers are required to include a say-on-pay advisory vote depends on what frequency the Board adopted in prior years after considering the shareholder advisory vote on frequency.  If a say-on-pay vote is included: Effective
  • Rule 14a-21(a):  Resolution for an advisory vote on compensation of named executive officers as disclosed pursuant to Item 402 of Regulation S-K
 Effective
  • Item 24 of Schedule 14A:  Required disclosure that advisory votes under 14A-21 are included pursuant to Section 14A of the Exchange Act and the general effect of each such vote. 

 

 Effective

 

 Effective
4.  Other say-on-pay disclosures where a prior vote was held: Effective
  • S-K Item 402(b)(1)(vii):  Disclose in the CD&A the extent to which previous shareholder say-on-pay votes has been considered.
 Effective
  • Item 24 of Schedule 14A:  Disclose current frequency of shareholder advisory votes on executive compensation and when the next shareholder advisory vote will occur.

 

 Effective
5.  Say-on-pay frequency vote Effective
  • Rule 14a-21(b):  A frequency vote must be held every six calendar years.  For most issuers the next frequency vote will be for the 2017 proxy season.
 Effective
  • Rule 14a-21(b): Resolution on advisory vote as to whether say-on-pay vote shall be held every one, two or three years.

 

 Effective
  • Rule 14a-4(b)(3):  Form of proxy—must offer choice between 1, 2 or 3 years or abstain.

 

 Effective
   
Form 10-K  
1.  Mine Safety Disclosure  
  • Part I of Form 10-K:  If applicable, issuers must note that they have mine safety violations or other regulatory matters to report in accordance with Section 1503(a) of the Dodd-Frank Act, and the required information must be included in an exhibit to the filing.
 Effective
2. Iran Threat Reduction and Syria Human Rights Act of 2012  
  • Certain disclosures must be made and other actions must be taken if certain sanctions against Iran are not complied with.
 Effective
3.  XBRL:  Detailed footnote tagging will be required. Effective
   
Form SD  
1.   Conflict Minerals:  Final rules require certain companies to disclose their use of conflict minerals if those minerals are “necessary to the functionality or production of a product” manufactured by those companies.  See our three step analysis here, here and here.  Issuers must comply with the final rule for the calendar year beginning January 1, 2013 with the first reports due May 31, 2014. Effective
2.  Resource Extraction Issuers: Final rules require resource extraction issuers to include in an annual report information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals.  A resource extraction issuer must comply with the new rules for fiscal years ending after September 30, 2013. For the first report filed for fiscal years ending after September 30, 2013, a resource extraction issuer may provide a partial year report if the issuer’s fiscal year began before September 30, 2013. For any fiscal year beginning on or after September 30, 2013, a resource extraction issuer will be required to file a report disclosing payments for the full fiscal year. Effective
   
   
   
Awaiting Further Action  
   
1.   Compensation committees, consultants and advisers  (Section 952 of the Dodd-Frank Act)

  • Independent compensation committee
  • Authority of committee to retain consultants and advisers
  • Compensation consultants conflict of interest

 

 Final rules have been published by the SEC which require in certain circumstances further action by the exchanges; the NYSE and Nasdaq have both proposed implementing rule changes; effective disclosures under S-K Item 407(e)(3)(iv) discussed above.
   
2.   Pay for performance disclosures (Section 953 of the Dodd-Frank Act)

  • Demonstrate relationship between compensation actually paid and the financial performance of the issuer
 No proposed rules have been published.  The SEC no longer publishes a proposed rulemaking time frame.
   
3.   Pay disparity ratio (Section 953 of the Dodd-Frank Act)

  • Annual compensation of CEO
  • Median total compensation of all employees other than the CEO
  • Ratio of median total compensation to CEO compensation
 No proposed rules have been published.  The SEC no longer publishes a proposed rulemaking time frame.
   
4.   Clawback requirements  (Section 954 of the Dodd-Frank Act)

  • Disclosure of policy on incentive-based compensation based on financial information
  • Clawback in the event of an accounting restatement
No proposed rules have been published.  The SEC no longer publishes a proposed rulemaking time frame.
   
5.   Disclosure of hedging policy (Section 955 of the Dodd-Frank Act)

  • Disclose whether directors or employees are permitted to hedge company securities
 No proposed rules have been published. The SEC no longer publishes a proposed rulemaking time frame.
   

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The CFTC has approved the application of DTCC Data Repository, LLC (DTCC-DR) for provisional registration as a swap data repository (SDR) for interest rate, credit, foreign exchange and equity asset classes. Notably, this list does not include the “other commodity” asset class.

DTCC-DR is the second SDR granted such status. In June of this year, ICE Trade Vault, LLC also received provisional registration. Additional registrations are pending for Global Trade Repository for Commodities, Reval SDR, Inc., and Chicago Mercantile Exchange Inc.

Swap dealers and major swap participants must begin reporting interest rate and credit swaps to SDRs on October 12, 2012 and all swaps beginning January 10, 2013. End users must begin reporting all swaps on April 10, 2013.

As we previously noted, the SEC finally released proposed rule 506(c) on August 29, which lifts the ban on general solicitation and advertising in private offerings in which all purchasers are accredited investors and in which the issuer has taken “reasonable steps” to verify the accredited investor status of each purchaser.

While we wait for the end of the proposed rule’s public comment period on October 5, 2012 and the release of the final rule, here are three perspectives on the proposed rule that demonstrate the breadth and variation of opinion over how the SEC has proposed to comply with the mandate of the JOBS Act.

The Proposed Rule is Too Burdensome for Issuers and Investors

Chris Leyerle, an entrepreneur and principal of Fingo Consulting, opines that the proposed Rule 506(c) is a failure because it doesn’t provide certainty to markets or improve access to capital:  “The proposed rule doesn’t make it simpler and cheaper; it makes it more costly and harder.”

The Proposed Rule Fails to Adequately Protect Investors

At the Huffington Post, Barbara Roper of the Consumer Federation of America laments the status of the SEC as an “industry lapdog” and concludes that the agency has failed in its task because it has ceded investor protections without giving due consideration to the consequences (and without even following the SEC’s own guidelines for evaluating rule proposals):  “While the Commission is given no discretion over whether to lift the ban, it remains responsible for ensuring that investors are adequately protected when it does so. The Commission chose to ignore that responsibility, issuing a rule proposal that doesn’t include any enhanced investor protections to offset the increased risks.”

The Proposed Rule is Just Right

And then there are those who think the SEC has actually hit the mark with proposed rule 506(c), like Joe Wallin at Startup Law Blog: “The SEC should be applauded. They maintained the integrity of existing Rule 506. They didn’t propose rules that would have made Rule 506 substantially more difficult to use. The proposed rules, if adopted after the comment process is completed, will go a long way toward opening up additional capital sources for startups.”

Check back at jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The SEC staff has issued a report to Congress on credit rating standardization required by Section 939(h)(1) of the Dodd-Frank Act. The SEC staff recommended that the SEC not take any further action at this time with respect to:

  • standardizing credit rating terminology, so that all credit rating agencies issue credit ratings using identical terms;
  • standardizing the market stress conditions under which ratings are evaluated;
  • requiring a quantitative correspondence between credit ratings and a range of default probabilities and loss expectations under standardized conditions of economic stress; and
  • standardizing credit rating terminology across asset classes, so that named ratings correspond to a standard range of default probabilities and expected losses independent of asset class and issuing entity.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

On September 13, 2012, the Government Accountability Office (GAO) released a report to Congress examining the impact of the Dodd-Frank act on community banks and credit unions.  The report contains lots of data relating to community banking and consolidation of the industry over the last 20 years or so, but you can skip to page 19 to read about potential impacts of the Dodd-Frank Act on community banks and credit unions.

The main thrust of the report is that, although there are a number of provisions of the Dodd-Frank Act that may affect community banks and credit unions, most of those impacts depend upon the development and implementation of rules by various agencies (Table 1 on page 3 contains a handy chart showing the various agencies and the subject matter of their regulatory authority).  Until the agencies complete their work and begin any necessary enforcement actions, it will be difficult to assess the benefits or burdens on community banks and credit unions.  According to the report, 119 of the 398 rulemakings required under the Dodd-Frank Act, or about 30%, had been completed as of July 2, 2012.  That number doesn’t even include rulemakings that are not mandatory, but are instead within the discretion of the applicable agency.

At this point, some of the impacts of the Dodd-Frank Act are expected to benefit community banks and credit unions (such as “depository insurance reforms and CFPB supervision of nonbank providers of financial services and products”), while others are expected to increase regulatory burdens (such as provisions relating to “proprietary trading, remittance transfers, and executive compensation”).  In the end, though, the title of the report says it all: “Impact of the Dodd-Frank Act Depends Largely on Future Rule Makings.”

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.