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

Deere and HP received shareholder proposals under Rule 14a-8 requesting that the Company’s Board of Directors and its Audit Committee establish an Audit Firm Rotation Policy that requires that at least every seven years the Company’s audit firm rotate off the engagement for a minimum of three years.  There was some speculation that  although the SEC has historically allowed companies to omit shareholder resolutions limiting auditor tenure, the SEC may take into account whether recent regulatory initiatives have elevated the issue to a policy matter engendering widespread public debate.

It appears that the SEC has not changed its position.  Deere and HP each received a response from the SEC staff stating “Proposals concerning the selection of independent auditors or, more generally, management of the independent auditor’s engagement, are generally excludable under rule 14a-8(i)(7). Accordingly, we will not recommend enforcement action to the Commission if [the Company]  omits the proposal from its proxy materials in reliance on rule 14a-8(i)(7).”

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The Municipal Securities Rulemaking Board (MSRB) reminds brokers, dealers, municipal securities dealers (“dealers”) and municipal advisors of amendments to MSRB Rule G-23, on activities of financial advisors, which are effective on November 27, 2011.  The Securities and Exchange Commission (“Commission” or “SEC”) on May 27, 2011 approved the MSRB’s proposed rule change to Rule G-23 concerning activities of financial advisors.  The proposed rule change consists of: (i) amendments to Rule G-23 (on activities of financial advisors) and (ii) an interpretive notice concerning Rule G-23, as described below.

In general, Rule G-23 has been amended to prohibit a dealer that serves as financial advisor to an issuer for a particular issue sold on either a negotiated or competitive bid basis from switching roles and underwriting the same issue.  The amendments to Rule G-23 will, subject to the exceptions described below:

  • prohibit a dealer financial advisor with respect to the issuance of municipal securities from acquiring all or any portion of such issue directly or indirectly, from the issuer as principal, or acting as agent for the issuer in arranging the placement of such issue, either alone or as a participant in a syndicate or other similar account formed for that purpose;
  •  apply the same prohibition to any dealer controlling, controlled by, or under common control with the dealer financial advisor; and
  • prohibit a dealer financial advisor from acting as the remarketing agent for such issue.

The amendments to Rule G-23 will not prohibit:

  • a dealer financial advisor from placing an issuer’s entire issue with another governmental entity, such as a bond bank, as part of a plan of financing by such entity for or on behalf of the dealer financial advisor’s issuer client;
  • a dealer financial advisor from serving as successor remarketing agent to an issuer for the same issue with respect to which it provided financial advisory services if the financial advisory relationship with the issuer has been terminated for at least one (1) year; or
  • a dealer financial advisor from purchasing such securities from an underwriter, either for its own trading account or for the account of its customers, except to the extent that such purchase is made to contravene the purpose and intent of the rule.

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The Federal Reserve Board has issued a final rule requiring top-tier U.S. bank holding companies with total consolidated assets of $50 billion or more to submit annual capital plans for review. 

Also, the Federal Reserve launched the 2012 review, issuing instructions to the firms, including the macroeconomic and financial market scenarios the Federal Reserve is requiring institutions to use to support the stress testing used in their capital plans. As a part of the review, known as the Comprehensive Capital Analysis and Review, or CCAR, the Federal Reserve in 2012 will carry out a supervisory stress test based on the same stress scenario provided to the firms to support its analysis of the adequacy of the firms’ capital.

The Fed believes the aim of the annual capital plans, which build on the CCAR conducted earlier this year, is to ensure that institutions have robust, forward-looking capital planning processes that account for their unique risks, and to help ensure that institutions have sufficient capital to continue operations throughout times of economic and financial stress. According to the Fed, institutions will be expected to have credible plans that show they have sufficient capital so that they can continue to lend to households and businesses, even under adverse conditions, and are well prepared to meet regulatory capital standards agreed to by the Basel Committee on Banking Supervision as they are implemented in the United States. Boards of directors of the institutions will be required each year to review and approve capital plans before submitting them to the Federal Reserve. 

Under the final rule, the Federal Reserve annually will evaluate institutions’ capital adequacy, internal capital adequacy assessment processes, and their plans to make capital distributions, such as dividend payments or stock repurchases. The Federal Reserve will approve dividend increases or other capital distributions only for companies whose capital plans are approved by supervisors and are able to demonstrate sufficient financial strength to operate as successful financial intermediaries under stressed macroeconomic and financial market scenarios, even after making the desired capital distributions.

The capital planning requirements are consistent with the Federal Reserve’s obligations to impose enhanced capital and risk-management standards on large financial firms under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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The National Retail Federation, the Food Marketing Institute, the National Association of Convenience Stores and two retailers filed a lawsuit in federal court today saying the Federal Reserve failed to follow key requirements of a 2010 law when it adopted a flawed cap on debit card swipe fees that took effect this fall.  NRF and the other groups say the failure has allowed big banks to continue charging unjustifiably high swipe fees and has discouraged price competition among credit card networks.

The regulations, which took effect October 1, have also led to an increase in swipe fees for some small-ticket purchases, the lawsuit says. The suit was brought by NRF on behalf of both NRF and its National Council of Chain Restaurants division, which filed comments with the Fed earlier this year warning of the potential impact on small purchases. In addition to FMI and NACS, other plaintiffs include NRF member Boscov’s Department Store, based in Reading, Pa., and NACS member Miller Oil Co., a convenience store/gas station chain based in Norfolk, Va.

According to the plaintiffs, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the Federal Reserve to set guidelines that would result in debit card swipe fees that are “reasonable” and “proportional” to banks’ costs in processing debit card transactions. Financial institutions with less than $10 billion in assets were exemp

Frank Keating, president and CEO of the American Bankers Association, issued the following statement: “It is disgraceful that our nation’s big-box retailers are suing the Fed over their own Durbin amendment, which chopped bank interchange revenues in half and provided them a $7 billion windfall in profits annually. Now these giant retailers are back at the trough seeking more profits from government price controls, while their customers search in vain for the savings they promised to pass along but have failed to deliver. Retailers continue to enjoy the benefits of debit cards – faster checkout, customer convenience, lower fraud costs – yet clearly they don’t want to pay for it or keep their promises to U.S. consumers.”

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FINRA has filed a proposed rule change to amend FINRA Rule 13201 of the Code of Arbitration Procedure for Industry Disputes to align the rule with statutes that invalidate predispute arbitration agreements for whistleblower claims. The proposed rule change also would make a conforming amendment to FINRA Rule 2263.

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Sarbanes-Oxley Act of 2002 (“SOX”) by adding a new paragraph (e) to 18 U.S.C. § 1514A3 to provide, among other things, that “No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.” Prior to the Dodd-Frank Act, it was FINRA staff’s articulated position that parties were required to arbitrate SOX whistleblower claims under the Industry Code.

The proposed rule change provides “A dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under the Code. Such a dispute may be arbitrated only if the parties have agreed to arbitrate it after the dispute arose.”

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

Each spring, Fordham University School of Law hosts the Irving R. Kaufman Memorial Securities Law Moot Court Competition.  Held in honor of Chief Judge Kaufman, a Fordham Alumnus who served on the United States Court of Appeals for the Second Circuit, the Kaufman Competition has a rich tradition of bringing together complex securities law issues, talented student advocates, and top legal minds.    

The year’s Kaufman Competition will take place on March 23, 2012 to March 25, 2012.

The esteemed final round panel includes Judge Paul J. Kelly, Jr., of the Tenth Circuit; Chief Judge Alex Kozinski, of the Ninth Circuit; Judge Boyce F. Martin, Jr., of the Sixth Circuit; Judge Richard A. Posner, of the Seventh Circuit; Judge Jane Richards Roth, of the Third Circuit; and Commissioner Troy A. Paredes, of the United States Securities and Exchange Commission.

 Organizers are currently soliciting practitioners and academics to judge oral argument rounds and grade competition briefs.  No securities law experience is required to participate and CLE credit is available.

 Information about the Kaufman Competition and an online Judge Registration Form is available on our website, www.law.fordham.edu/kaufman.  Please contact Michael A. Kitson, Kaufman Editor, at KaufmanMC@law.fordham.edu or (212) 636-6882 with any questions.

Section 1042 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Consumer Financial Protection Bureau, or CFPB, to prescribe rules establishing procedures that govern the process, described in Section 1042(b) of the Dodd-Frank Act, by which state officials notify the CFPB of actions or proceedings undertaken pursuant to the authority granted in section 1042(a) to enforce the Dodd-Frank Act or regulations prescribed thereunder. In accordance with the requirements of the Dodd-Frank Act, the CFPB has proposed an interim final rule establishing that notice should be provided at least 10 days before the filing of an action, with certain exceptions, and setting forth a limited set of information which is to be provided with the notice (which substantially tracks the statutory language). The data will be received each time a state official files an action to enforce the Dodd-Frank Act or a regulation promulgated thereunder. It will be collected by the CFPB (through electronic mail submissions), and specifically by the Office of Enforcement and the Executive Secretary, who will share it as necessary and appropriate within the CFPB and elsewhere in government, pursuant to the process set out in the rules. It will also be collected by the prudential regulators (through postal mail or electronic mail submissions) where relevant.

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

ISS has issued its 2012 Policy Update. 

 Pay-for-Performance (P4P)

 ISS’ revised analysis will consider the following factors:

  • Peer group alignment.
    • The degree of alignment between the company’s Total Shareholder Return, or TSR, rank and the CEO’s total pay rank within a peer group, as measured over one-year and three-year periods (weighted 40 percent/60 percent);
    • The multiple of the CEO’s total pay relative to the peer group median.
  • Absolute alignment. The absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years – i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period.

In cases where alignment appears to be weak, further in-depth analysis will determine causal or mitigating factors, such as the mix of performance- and non-performance-based pay, grant practices, the impact of a newly hired CEO, and the rigor of performance programs.

ISS will provide additional guidance on the 2012 Pay-for-Performance methodology in a technical document that is scheduled for release in December. ISS will also disclose its peer group methodology and rationale in various communications leading up to the 2012 proxy season, allowing institutional investors and corporate issuers to understand how peer groups are constructed by ISS.

Say-on-Pay Opposition

ISS will recommend case-by-case on compensation committee members (or, in exceptional cases, the full board) and the Management Say-on-Pay, or MSOP,  proposal if the company’s previous say-on-pay proposal received the support of less than 70 percent of votes cast on the prior management say-on-pay proposal, taking into account the company’s response, including:

  • disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support;
  • specific actions taken to address the issues that contributed to the low level of support;
  • other recent compensation actions taken by the company;
  • whether the issues raised are recurring or isolated;
  • the company’s ownership structure; and
  • whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.

Say-on-Pay Frequency Votes 

ISS would recommend against or withhold from the entire board, if the board implements an advisory vote on executive compensation on a less frequent basis than the frequency which received the majority of votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency.

 

In a situation where voters have more than two choices, the possibility exists that no choice will receive a majority vote. In cases where no option received a majority of the votes cast, the preference of shareholders may be unclear. Therefore, if a board implements an option that is less frequent than that which received a plurality, but not majority, of votes cast, additional factors will be taken into consideration on a case-by-case basis including the board’s rationale for implementing a less recurring say-on-pay vote, ownership structure, compensation concerns, and say-on-pay support level from prior year. 

Proxy Access Proposals

 

ISS’ existing case-by-case policy on proxy access shareholder proposals did not incorporate certain expected core features of such proposals and overemphasizes the proponent’s rationale given ISS’ support in principle for these proposals. The existing policy also does not address management proposals, which may also appear in 2012. While the revised policy for 2012 remains case-by-case, ISS expands and refines the factors that will be examined in the evaluation and broadens the policy to apply to management proposals as well. ISS will consider a range of company-specific and proposal-specific factors, including:

  • the ownership thresholds proposed in the resolution (i.e., percentage and duration);
  • the maximum proportion of directors that shareholders may nominate each year; and
  • the method of determining which nominations should appear on the ballot if multiple shareholders submit nominations, as well as any other factors deemed relevant.

 

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

A statement that explains how the total assets of an insured bank, thrift or credit union will be measured for purposes of determining supervisory and enforcement responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act was issued today by five federal financial supervisory agencies.

Under section 1025 of Dodd-Frank, the Consumer Financial Protection Bureau has exclusive authority to examine for compliance with federal consumer financial laws and primary authority to enforce those laws for institutions with total assets of more than $10 billion, and their affiliates. Section 1026 confirms that the four prudential regulators—the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency—will retain supervisory and enforcement authority for other institutions. The policy statement issued today clarifies the application of sections 1025 and 1026 by addressing two key matters: the measure to be used to determine asset size and the schedule for making such determinations.

The statement explains that a common measure of the asset size of an insured depository institution is the total assets reported in the quarterly Reports of Condition and Income (“Call Reports”), which banks, thrifts, and insured credit unions are required to file.

The statement also explains the need to establish a schedule for determining the size of an institution that avoids unwarranted uncertainty or volatility regarding the identity of an institution’s primary supervisor for federal consumer financial laws. Such conditions could both impose increased burden on institutions and interfere with the orderly implementation of the agencies’ responsibilities with respect to the federal consumer financial laws. In order to avoid these adverse consequences, the agencies are adapting criteria used for deposit insurance assessment purposes. Accordingly, after an initial asset size determination based on June 30, 2011, data, an institution generally will not be reclassified unless four consecutive quarterly reports indicate that a change in supervisor is warranted.

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, today announced that it is seeking information from students, schools, industry, and other stakeholders on the private student loan market.  The CFPB is interested in a complete picture of private student lending, so it is seeking a broad swath of information, including:

  • Information available to shop for private student loans
  • The role of schools in the marketplace
  • Underwriting criteria
  • Repayment terms and behavior
  • Impact on choice of field of study and career choice
  • Servicing and loan modification
  • Financial education and default avoidance

The CFPB will use the collected input to assist with preparation of a report to Congress on private student lending. The Dodd-Frank Act requires the CFPB and the Department of Education to produce this report by July 21, 2012. The CFPB will also use the information it gathers to prioritize its own regulatory and education work.

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