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

One of the changes to ISS’ methodology on evaluating executive compensation this year related to the construction of peer groups.  The ISS peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for financial firms), and GICS industry group, via a process ISS believes is designed to select peers that are closest to the subject company, and where the subject company is close to median in revenue/asset size.

The problem is compensation committees often use a peer group that they believe is tailored to be comparable to their specific issuer.  The use of a different peer group by ISS can lead to differing judgments in an appropriate amount of executive pay.

United Technologies Corporation highlighted the problem in its additional definitive proxy materials noting “80% of the companies within the ISS comparison group are irrelevant for purposes of benchmarking shareowner returns against UTC because they are in completely unrelated industries.”  UTC’s materials also stated “Unfortunately, rather than attempting to construct a reasonably relevant group, ISS constructed a group based solely on market capitalization and revenue, without regard to industry, which we believe is critical in any TSR comparison. For example, Apple Inc.’s performance is of little, if any, relevance to UTC’s performance, yet ISS has used it as a comparison company.”

Most industrial companies would probably not appreciate having their shareholder returns compared to Apple.

Disney also alluded to improper comparisons in its additional definitive proxy materials, noting that its compensation committee “looks at performance and compensation in relation to the single most appropriate set of peers available: the five major publicly held entertainment companies whose management issues and challenges most closely resemble those of The Walt Disney Company.”

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The FDIC Board has approved two Notices of Proposed Rulemaking.

 The first would implement section 201(c)(16) of the Dodd-Frank Act, which permits the FDIC as receiver for a failed SIFI to enforce and prevent termination of the contracts of the institution’s subsidiaries or affiliates.

 The second would make limited clarifications and definitional changes to the deposit insurance assessment system for insured depository institutions with more than $10 billion of assets. The proposed rule would fine tune the large-bank assessment system by amending the definitions of leveraged loans and subprime loans used to identify concentrations in higher-risk assets. The proposal would allow the FDIC to implement the changes without materially affecting the overall assessments that large institutions pay. There were 107 institutions with more than $10 billion in assets, as of Dec. 31, 2011.

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

The Dodd-Frank Act requires the CFPB to share consumer complaint information with the Federal Trade Commission, or FTC, and other state and federal agencies. Last August, the Bureau took the first step towards fulfilling this mandate by signing an agreement with the FTC that allows the CFPB to access consumer complaints in the FTC’s Consumer Sentinel system.

Consumer Sentinel is an online database of consumer complaints maintained by the FTC that helps law enforcement track and respond to consumer complaints.

Recently, the Bureau started sharing its complaints with Consumer Sentinel. The database is accessible only to law enforcement.  The CFPB believes adding the CFPB’s complaint data to the database will increase its effectiveness as a law enforcement tool.

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

On November 21, 2011, the Financial Industry Regulatory Authority, Inc., or FINRA, filed with the SEC a proposed rule change to amend FINRA Rule 13201 of the Code of Arbitration Procedure for Industry Disputes (‘‘Industry Code’’) to align the rule with statutes that invalidate predispute arbitration agreements for whistleblower disputes. Specifically, the proposed rule change amended Rule 13201 to add a new provision to provide that a dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under the Industry Code.

The SEC has approved the proposed change.

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

The Treasury’s Office of Financial Research, or OFR, released its Strategic Framework for FY 2012 to FY 2014. The strategic framework explains the goals and principles that will guide the OFR’s work, spells out the architecture for the OFR, and sets out a framework for accountability.

The Dodd-Frank Act established the OFR within the Treasury Department as part of a broader financial reform effort to address weaknesses exposed by the financial crisis. The OFR’s mission is to serve the Financial Stability Oversight Council, or FSOC, its member agencies, and the public by improving the quality, transparency, and accessibility of financial data and information, by conducting and sponsoring research related to financial stability, and by promoting best practices in risk management.

The framework takes as its foundation the statutory mandates from the Dodd-Frank Act and reflects broad based consultations—with FSOC members, their agencies and staff, members of Congress, and industry representatives, as well as academics, financial authorities, and other researchers. It describes the mission, goals, objectives, and implementation priorities that will help ensure that the OFR’s efforts and investments are well targeted.

The framework outlines five strategic goals:

  • Support FSOC through the secure provision of high-quality financial data and analysis needed to monitor threats to financial stability.
  • Develop and promote data-related standards and best practices.
  • Establish a center of excellence for research on financial stability and promote best practices for financial risk management.
  • Provide the public with key data and analysis, while protecting sensitive information.
  • Establish the OFR as an efficient organization and world-class workplace.

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

The Consumer Financial Protection Bureau, or CFPB, is now accepting complaints from borrowers having difficulties with their private student loans. The CFPB will assist all borrowers experiencing problems taking out a private student loan, repaying their private student loan, or managing a student loan that has gone into default and may have been referred to a debt collector.

Until recently, private student lenders have only been regulated by a patchwork of state and federal authorities. Prior to the Dodd-Frank Wall Street Reform and Consumer Protection Act, there was no federal supervisory program over nonbanks that issued student loans. That authority has now been given to the CFPB. Among its reforms, the law created a private student loan ombudsman to assist borrowers and review complaints. The ombudsman, Rohit Chopra, is also responsible for examining the complaints in order to develop recommendations to Congress and other federal government agencies.

Among the complaints that the Bureau anticipates receiving:

  • Difficulties making full payment;
  • Confusing advertising or marketing terms;
  • Billing disputes;
  • Deferment and forbearance issues; and
  • Debt collection and credit reporting problems.

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

The SEC staff has made available an analysis of market data related to credit default swap transactions.  The analysis, which was conducted by the staff of the SEC’s Division of Risk, Strategy, and Financial Innovation, is available for review and comment as part of the comment file for rules the SEC proposed, jointly with the CFTC, to further define the terms “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” and “eligible contract participant.”  The SEC and CFTC jointly proposed those rules in December 2010 as one part of the implementation of Title VII of the Dodd-Frank Act.

The SEC staff believes that the analysis of market data has the potential to be informative for evaluating certain final rules under Title VII, including rules that further define “major security-based swap participant” and “security-based swap dealer,” and rules implementing the statutory de minimis exception to the latter definition.  Analyses of this type particularly may supplement other information considered in connection with those final rules, and the SEC staff is making this analysis available to allow the public to consider this supplemental information.  The SEC staff expects that the Commission will consider the adoption of rules defining these terms in the next several weeks.

The staff believes the following attributes may be relevant when determining whether an entity is a dealer:

  •  Whether an entity transacts with multiple counterparties.
  • Whether an entity transacts with multiple counterparties, excepting those entities recognized by ISDA as dealers.
  • Whether an entity’s aggregate buy notional amount is within 45-55% of its aggregate gross notional transactions.
  • Whether an entity’s aggregate number of buy orders are within 45-55% of its aggregate number of transactions.
  • Whether an entity’s frequency of posting initial margin on orders occurs in less than 10% of their aggregate transactions.

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

 

The Consumer Financial Protection Bureau, or CFPB, has issued a proposed rule that would codify protections for privileged information submitted to the CFPB by the financial institutions it regulates.

In January 2012, the CFPB advised the institutions that it supervises that the submission of privileged information to the CFPB does not waive any applicable privilege with respect to third parties. The proposed rule is intended to provide supervised entities further assurances that providing privileged information to the Bureau will not adversely affect the confidentiality of such information. The proposed rule also clarifies that the CFPB’s transfer of privileged information to another Federal or State agency does not result in a waiver of any applicable privilege.

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

SEC Commissioner Daniel M. Gallagher urged the use of exemptive authority by the SEC for certain fund managers in a speech given before the Investment Adviser Association’s Investment Adviser Compliance Conference.

The Dodd-Frank Act eliminated the exemption from registration for advisers with 15 or fewer clients. Commissioner Gallagher believes this was Congress’s attempt to address what it viewed as a problem in the financial markets: namely, the existence and practices of highly leveraged hedge funds. As a result, many private fund advisers are undergoing the process of registering for the first time with the Commission.

Commissioner Gallagher noted he has met with several representatives from advisers that do not use leverage as part of their business strategy and market only to sophisticated and institutional investors. He believes the rationale for imposing the full weight of the SEC’s registration regime on such advisers is questionable, and, historically, the SEC has conserved its resources by allowing the sophisticated clients of such advisers to police the conduct of their advisers privately.

Commissioner Gallagher pointed out the Advisers Act explicitly provides that “[t]he Commission . . . may conditionally or unconditionally exempt any person or transaction, or any class or classes of persons, or transactions, from any provision or provisions of this title or of any rule or regulation thereunder, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title.”  This clear grant of authority to the Commission was not revoked by the Dodd-Frank Act.

Commissioner Gallagher believes that there will be cases, moving forward, when an individual adviser or a particular class of advisers ought to be granted some measure of relief from the full panoply or requirements that come with registration under the Advisers Act.

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

The Staff of the Division of Corporation Finance has issued its initial no-action rulings on requests by public companies to exclude shareholder proxy access proposals.  The proposals, in one form or another, ask (or require) the corporation to adopt measures to permit shareholders to include nominees in the company’s proxy statement.  The Staff permitted exclusions in some circumstances but not others.  As usual, the SEC Staff has attempted to resolve issues on the narrowest grounds possible when a controversial issue is involved.  Some of the permitted reasons for exclusion are easily rectifiable, meaning these proposals will live to see another day, as proponents work around small defects cited by the Staff to permit exclusion.

Unanswered – Is Proxy Access  the Best Defense to Proxy Access?

KSW sought exclusion of a shareholder proposal on the basis that it already had a by-law that allowed a shareholder who owned more than 5% of the outstanding stock to include a nomination for director in its proxy.  KSW claimed it had already substantially implemented the proposal as a basis for exclusion.  The shareholder proposal set the ownership threshold at 2%.  The Staff disagreed, noting that the difference in ownership thresholds meant the proposal has not been substantially implemented under Rule 14a-8(i)(10).

But that is not the end of the story.  KSW may be able to plausibly argue to its shareholders that its 5% threshold makes more sense than the 2% threshold proposed by the shareholder proponents.  So in the end, proxy access may be a powerful defense to proxy access proposals.

Inoperative Web Site Links Are Not a Basis For Exclusion Where the Proponent Provides the Content to be Included at a Later Date

Western Union and Wells Fargo sought to exclude proxy access proposals by Norges Bank on the grounds the information was false and misleading under Rule 14a-8(i)(3).    The reason asserted was Norges’ had included a hyperlink to a web site which was to contain more information on its proposal. The web site was inoperative at the time of the submission of the proposal to the issuer.  Norges apparently intended to make the website operative later and provided the issuers with the content to be included.  The Staff disagreed with these issuers and did not permit exclusion of the proposals, noting that  the proposed information had been provided.  However, neither issuer asserted that content was false and misleading.

Shareholder Proposals Which Include More Than One Proposal May be Excluded

Textron, Bank of America and Goldman Sachs sought to exclude proposals submitted by retail shareholder activists on the basis that these submissions included two proposals, instead of one, in violation of Rule 14a-8(c).  The first part of these proposals sought proxy access for a shareholder nominee while another part stated that board seats filled by such nominees do not constitute a change of control.  The Staff agreed with these issuers that the submission included two proposals.

Vague and Indefinite Proposals May be Excluded

Chiquita, Sprint Nextel, and MEMC argued shareholder proposals seeking proxy access may be excluded because the proposals were vague and indefinite as set forth in Rule14a-8(i)(3).  Rather than set forth a specific percentage of ownership a shareholder must meet to permit inclusion of a nominee in a proxy statement, these proposals stated a company must include the nominee of any shareholder that satisfied “SEC Rule 14a-8(b) requirements.”  The Staff agreed that this was vague and indefinite, noting that many shareholders may not be familiar that requirement and would not be able to make a determination based on the language of the proposal.

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