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

The Board of Directors of the Federal Deposit Insurance Corporation, or  FDIC, today approved a joint proposed rulemaking to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Section 956 prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and are deemed to be excessive, or that may lead to material losses.

Consistent with Dodd-Frank, the proposed rule does not apply to banks with total consolidated assets of less than $1 billion, and contains heightened standards for institutions with $50 billion or more in total consolidated assets.  For these larger institutions, the rule requires that at least 50 percent of incentive-based payments be deferred for a minimum of three years for designated executives. Moreover, boards of directors of these larger institutions must identify employees who individually have the ability to expose the institution to substantial risk, and must determine that the incentive compensation for these employees appropriately balances risk and rewards according to enumerated standards.

Although the FDIC Board acted on the proposal today, the proposal is a joint rule making by the five federal members of the Federal Financial Institutions Examination Council, or FFIEC, the Securities Exchange Commission, or SEC, and the Federal Housing Finance Agency,  or FHFA, who must each independently approve the proposed rule before it is published in the Federal Register.

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Section 1502 of the Dodd-Frank Act requires certain disclosures and other matters regarding issuers who use “conflict minerals . . . necessary to the functionality of production of a product manufactured by such person” that originate in the Democratic Republic of Congo or an adjoining country.  Broc Romanek of TheCorporateCounel.net has identified this issue as a “sleeper for disclosure lawyers.”  The provisions are currently subject to SEC rulemaking.  Some issuers have begun making disclosures about the eventual impact of the rules as set forth below.

Multi-Fineline Electronix, Inc.

We are subject to a variety of environmental laws and regulations relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used in the manufacture of flexible printed circuits and component assemblies in our operations in the United States, Europe and Asia.  In addition, certain of our customers have, or may in the future have, environmental policies with which we are required to comply that are more stringent than applicable laws and regulations and certain provisions of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act may soon require us to report on “conflict metals” used in our products and the due diligence plan we put in place to track whether such metals originate from the Democratic Republic of Congo.  A significant portion of our manufacturing operations are located in China, where we are subject to constantly evolving environmental regulation.  The costs of complying with any change in such regulations or customer policies and the costs of remedying potential violations or resolving enforcement actions that might be initiated by governmental entities could be substantial.

Nvidia Corporation

There is also a movement to improve the transparency and accountability concerning the supply of minerals coming from the conflict zones of the Democratic Republic of Congo.  New U.S. legislation includes disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries and procedures regarding a manufacturer’s efforts to prevent the sourcing of such “conflict” minerals.  The implementation of these requirements could affect the sourcing and availability of minerals used in the manufacture of semiconductor devices.  As a result, there may only be a limited pool of suppliers who provide conflict free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices.  Also, since our supply chain is complex, we may face reputational challenges with our customers and other stockholders if we are unable to sufficiently verify the origins for all metals used in our products.

Advanced Micro Devices, Inc.

Environmental laws are complex, change frequently and have tended to become more stringent over time.  For example, the European Union (EU) and China are two among a growing number of jurisdictions that have enacted in recent years restrictions on the use of lead, among other chemicals, in electronic products with other countries considering similar restrictions.  These regulations affect semiconductor packaging.  There is a risk that the cost, quality and manufacturing yields of lead-free products may be less favorable compared to lead-based products or that the transition to lead-free products may produce sudden changes in demand, which may result in excess inventory.  Recently, there has been a movement to improve the transparency and accountability concerning the supply of minerals coming from the conflict zones of the Democratic Republic of Congo (DRC).  There is new US legislation that includes disclosure requirements for those manufacturers who use “conflict” minerals mined from the DRC and adjoining countries.  The implementation of these requirements could affect the sourcing and availability of minerals used in the manufacture of semiconductor devices. As a result, there may only be a limited pool of suppliers who provide conflict free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices.  Also, since our supply chain is complex, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins for all metals used in our products.

Cabot Corporation

We have not purchased or sourced any material containing tantalum, including coltan, from the Democratic Republic of the Congo.

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Through February 4, 2011, 30 issuers have reported voting results for non-TARP say-on-pay matters.  Of these, 20 boards recommended a triennial frequency and three recommended a biennial frequency.

Frequency Vote

Biennial

Of the three boards recommending a biennial frequency, only one issuer, Hormel, received shareholder support.  As a Minnesota-based law firm we have the greatest respect for Hormel, but this vote is of little predictive value as approximately 51% of the shares are owned by Hormel Foundation or insiders.  Of the remaining two issuers, perhaps Rochester Medical had a decent chance of having a biennial frequency approved with only 40% institutional ownership and 19% being controlled by insiders or others.  However, broker non-votes of 46% prevented that from occurring.

Triennial

To date six issuers with a market of over $10 billion had boards that recommended a triennial frequency.  None have succeeded in obtaining shareholder support.

To date four issuers with a market cap of over $1 billion to $10 billion had boards that recommended a triennial frequency.  Only one, Sally Beauty, with 51% institutional ownership and 5% broker non-votes, has succeeded in obtaining shareholder support.

To date two issuers with a market cap of over $200 million to $1 billion had boards that recommended a triennial frequency.  Only one, Laclede, with institutional ownership of 45%  and broker non-votes of 19% succeeded in obtaining shareholder support.

To date eight issuers with a market cap of $200 million or less had boards that recommended a triennial frequency.  Each issuer has received shareholder support for a triennial frequency.  It is still difficult to predict success in this area because either many issuers have significant insider or other controlling parties of more than 15% or market caps of less than $20 million.

No Votes on Say-on-Pay

A total of 13 issuers with a market cap of over $1 billion have reported say-on-pay results.  Of these, only seven issuers, or 54%, received votes against executive compensation of approximately 5% or less.  Here we eliminated Hormel because of a controlling shareholder.  No votes are calculated by dividing the votes against executive compensation by the total of votes for and against executive compensation and abstentions.

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The federal bank and thrift regulatory agencies announced proposed changes to reporting requirements for savings associations and savings and loan holding companies regulated by the Office of Thrift Supervision, or OTS. 

The proposed changes include a change from quarterly Thrift Financial Reports to quarterly Consolidated Reports of Condition and Income, commonly known as Call Reports. 

The agencies — the OTS, the Office of the Comptroller of the Currency, or OCC, the Federal Deposit Insurance Corporation, or FDIC, and the Federal Reserve Board — are proposing the changes pursuant to the Dodd-Frank Act.  Provisions of the Dodd-Frank Act require the transfer of OTS functions to the OCC, the FDIC, the Federal Reserve Board and the Bureau of Consumer Financial Protection on July 21, 2011. 

Perceived benefits of the proposed changes include uniform reporting systems and processes among all FDIC-insured banks and savings institutions.  These changes also would make uniform all reporting requirements among all holding companies supervised by the Federal Reserve Board. Also, the agencies would have a common set of reports for monitoring and evaluating financial condition and trends. 

The proposed changes would:

  • Require savings associations to file quarterly Call Reports, beginning with the March 31, 2012 report date. Effective on that date, all schedules of the Thrift Financial Report (including Schedules CMR and HC) would be eliminated;
  • Require savings associations to file data through the Summary of Deposits with the FDIC, beginning with the June 30, 2011 report date. Effective on that date, the OTS’s Branch Office Survey would be eliminated;
  • End collection of monthly median cost of funds data from savings associations, effective January 31, 2012; the last cost of funds indices would be published as of December 31, 2011; and
  • Require savings and loan holding companies to file the same reports with the Federal Reserve that bank holding companies file, beginning with the March 31, 2012 report date.  

Under the proposals, savings associations and their holding companies would continue their current reporting processes until the effective dates cited above.

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

The Director of Consumer and Community Affairs of the Federal Reserve Board asked the Federal Trade Commission, or FTC, for information concerning the FTC’s enforcement activities related to compliance with the following regulations: Regulation B (Equal Credit Opportunity); Regulation E (Electronic Fund Transfer); Regulation M (Consumer Leasing) and Regulation Z (Truth in Lending), among other things.

The FTC responded in part by noting that under the Dodd-Frank Act, the FTC retains its authority to enforce Regulations B, E, M, and Z (and was granted the authority to enforce any Bureau of Consumer Financial Protection, or CFPB, rules) regarding the entities within the FTC’s jurisdiction, which includes most providers of financial services that are not banks, thrifts, and federal credit unions.  The Dodd-Frank Act requires that the FTC and the CFPB coordinate certain law enforcement activities, and negotiate an agreement to do so by January 21, 2012.  The FTC noted it is committed to continuing to vigorously enforce Regulations B, E, M, and Z.  The FTC stated it looks forward to coordinating with the Federal Reserve Board, the CFPB, and other federal agencies in the implementation of the Dodd-Frank Act.

The Dodd-Frank Act assigns the FTC new enforcement authority regarding payment cards by adding a new Section 920 to the Electronic Funds Transfer Act, or EFTA, which, among other things, restricts certain practices related to debit and credit card transactions.   These new provisions generally address business-to-business relationships and interactions between merchants, networks, issuers, and acquirers in the payment card transaction process.  The Federal Reserve Board must issue several implementing regulations regarding certain of the new EFTA requirements, and it recently issued new proposed rules to implement the debit card interchange fee and routing provisions of the Dodd-Frank Act.  The FTC has responsibility for enforcing the new requirements and any implementing regulations for payment card networks and certain other nonbank entities, such as non-federally chartered credit unions, that are covered by the rules.  The FTC noted that it is continuing to monitor this area.

The FTC stated that in connection with the Dodd-Frank Act, the FTC’s staff has been engaged in ongoing and significant coordination with the U.S. Department of the Treasury regarding a possible new mortgage shopping form and streamlined mortgage disclosures, including those that may relate to the Truth In Lending Act, or TILA, and the Real Estate Settlement Procedures Act.   The FTC pointed out that its staff has previously conducted research on mortgage disclosures generally, and it continues to be actively involved in evaluating the efficacy of such disclosures.

Finally, Section 1029 of the Dodd-Frank Act gives the FTC new and expanded authority regarding motor vehicle dealers.  The FTC retains its current law enforcement authority over motor vehicle dealers, although it will share that authority with the CFPB with respect to dealers engaged in certain practices.  The FTC also obtains new authority as of July 21, 2011, to issue rules prohibiting unfair and deceptive acts and practices in connection with motor vehicle dealers, using the notice and comment rulemaking procedures in Section 553 of the Administrative Procedure Act rather than the more elaborate rulemaking procedures in Section 18 of the FTC Act.   The FTC stated that in connection with this new authority, the FTC is conducting outreach activities and reviewing a wide range of motor vehicle dealer practices. Section 1029 of the Dodd-Frank Act also requires the FTC and the Federal Reserve Board to coordinate with the CFPB’s Office of Service Member Affairs to address certain motor vehicle issues related to members of the military. The FTC stated it looks forward to working with the Federal Reserve Board, the CFPB, and other federal agencies on this initiative.

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

The Federal Reserve Board announced that it does not expect to finalize three pending rulemakings under Regulation Z, which implements the Truth in Lending Act, or TILA, prior to the transfer of authority for such rulemakings to the Consumer Financial Protection Bureau, or CFPB, under the Dodd-Frank Act. 

The proposed rules were published as part of the Board’s comprehensive review of its mortgage lending regulations under TILA. The first phase of the review consisted of two proposals issued in August 2009, which would have reformed the consumer disclosures under TILA for closed-end mortgage loans and home equity lines of credit (Docket Nos. R-1366 and R-1367).  The third proposal was issued in September 2010 (Docket No. R-1390).

General rulemaking authority for TILA is scheduled to transfer to the CFPB in July 2011.  The Dodd-Frank Act also requires that the CFPB issue a proposal within 18 months after the designated transfer date to combine, in a single form, the mortgage disclosures required by TILA and the disclosures required by the Real Estate Settlement Procedures Act, or RESPA.  In light of that mandate, and the upcoming transfer date, the Board has carefully evaluated whether there would be public benefit in proceeding with the rulemakings initiated with the Board’s August 2009 and September 2010 proposals at this time.  Because the Board’s 2009 and 2010 TILA proposals would substantially revise the disclosures for mortgage transactions, any new disclosures adopted by the Board would be subject to the CFPB’s further revision in carrying out its mandate to combine the TILA and RESPA disclosures.  In addition, a combined TILA-RESPA disclosure rule could well be proposed by the CFPB before any new disclosure requirements issued by the Board could be fully implemented.

For these reasons, the Board has determined that proceeding with the 2009 and 2010 proposals would not be in the public interest.  Although there are specific provisions of these Board proposals that would not be affected by the CFPB’s development of joint TILA-RESPA disclosures, adopting those portions of the Board’s proposals in a piecemeal fashion would be of limited benefit, and the issuance of multiple rules with different implementation periods would create compliance difficulties.  Accordingly, the Board does not expect to finalize the August 2009 and September 2010 proposals prior to the July 2011 date for transfer of rulemaking authority to the CFPB.

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

The FDIC, the Federal Reserve Board, or FRB, the Office of the Comptroller of the Currency, or OCC, and the Office of Thrift Supervision, jointly prepared a plan required by Section 327(a) of the Dodd-Frank Act.  It provides an overview of actions taken to date by the agencies to efficiently and effectively implement Sections 301 through 326 of the Dodd-Frank Act.  Among other things, it describes the steps the agencies are taking to transfer the responsibilities of supervising federal savings associations to the OCC, state savings associations to the FDIC, and savings and loan holding companies to the FRB.

The plan was submitted to the Committee on Banking, Housing, and Urban Affairs of the Senate, the Committee on Financial Services of the House of Representatives, and the Inspectors General of the Department of the Treasury, the FDIC, and the Board of Governors of the FRB.

The next step will be for the Inspectors General of the Department of the Treasury, the FDIC, and the Board of Governors of the FRB to submit a report to certain congressional committees and others as to whether the plan complies with Sections 301 through 326 of the Dodd-Frank Act.

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

Through February 1, 2011, 17 issuers have reported voting results for non-TARP say-on-pay issuers.  Of these, 12 boards recommended a triennial frequency.

Frequency Vote

For issuers with a market cap of over $10 billion where the board recommended a triennial frequency, shareholders in every circumstance expressed support for an annual frequency vote for all four reported results.  In two votes, the percentage expressed in favor of an annual frequency was 52%, and in the other two votes the percentage was 60% and 62%.

For issuers with a market cap between $1 billion and $10 billion, four boards recommended a triennial frequency, and in only one (Sally Beauty) did the shareholders support a triennial frequency.

For issuers with a market cap of under $1 billion, the tale so far is decidedly different.  Four boards recommended a triennial frequency and in each case the shareholders supported that decision.  Three of these however, were in the under $55,000,000 market cap territory, some with significant concentrated ownership, including insiders or related ESOPs.

No Votes

One issuer had a majority of votes cast against its say-on-pay resolution.  The arithmetic average of no votes on say-on-pay for issuers with a market cap in excess of $1 billion (regardless of frequency), with ten issuers reporting, is approximately 16%.  Outliers in the no vote category are Jacobs Engineering (53%), Monsanto (34%) and Johnson Controls (36%). When these issuers are removed from the calculation, the arithmetic average for the seven remaining issuers is a little over 5%.  For issuers wondering what the results of a “good vote” are, this might be the start of a good yard-stick measurement.

How Are Institutions Voting on the Frequency Issue?

If all institutions were following ISS’s recommendation for an annual frequency vote, one would expect that the percentage of votes cast in favor of an annual frequency would equal or exceed the amount of reported institutional ownership for an issuer.  That is not in fact the case, suggesting institutional voting policies are not yet understood.  For the eight issuers requesting a triennial frequency with a market cap of over $1 billion, it appears only institutions holding shares representing 74% of the votes cast are following ISS’s recommendation (obtained by dividing percentage of votes cast in favor of an annual frequency by reported institutional ownership).  Individual issuer votes range from 63% to 85% using the same measure.  A crude test admittedly but it raises some questions on overall trends.

Broker Non-Votes

There are some interesting broker non-vote results being reported.  If broker shares present at a meeting and are voted on permitted broker vote matters, one would expect the exact same number of shares being reported as broker non-votes on matters where brokers are not permitted to be voted.  That is not always the case.  For instance. Johnson Controls reported 62,828,788 broker non-votes on the frequency vote, but only 55,985,310 on the say-on-pay vote, and 55,982,192 on director election votes.  I am unable to explain why, but it probably has something to do with proxy plumbing issues, with issuers reporting what the vote tabulators tell them.

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

The Federal Financial Institutions Examination Council issued a notice substantially to the following effect:  Consistent with Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended by Section 1473(p) of the Dodd-Frank Act, the Appraisal Subcommittee (“ASC”) must determine within six months of the Dodd-Frank Act’s enactment whether a national appraisal complaint hotline exists.  In making the determination, the ASC must consider whether a national hotline exists to receive complaints of noncompliance with appraisal independence standards and the Uniform Standards of Professional Appraisal Practice.  Further, the national hotline must have the capability to receive complaints from appraisers, individuals, or other entities concerning the improper influencing or attempted improper influencing of appraisers or the appraisal process.  Based on research by ASC staff of national consumer and other complaint hotlines currently operated by various federal government agencies, including those of the ASC member agencies and the Federal Trade Commission, the ASC has determined that there is no one hotline that fully complies with the Dodd-Frank Act.  In making this determination, the ASC initiated a project to study the establishment and operation of a national appraisal complaint hotline as required by Dodd-Frank Act.  Consistent with the Dodd-Frank Act, the national appraisal hotline must receive complaints, refer complaints to the appropriate federal or state agency for resolution, and provide the capability to monitor the resolution of complaints.

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

We found four issuers that reported the results of their annual meeting on Form 8-K today.  The most notable development was 53% of Jacobs Engineering’s shareholders voted against executive compensation on the say-on-pay vote.  Jacobs must have seen it coming because they filed additional solicitation materials further explaining one time grants of restricted stock to its named executive officers for retention purposes.  The proxy statement discloses the grant to the CEO had a value of $2,121,500.  Perhaps the situation could have been avoided if disclosures akin to the additional solicitation materials were highlighted in the proxy statement—the CDA had only a perfunctory overview and the grants were otherwise barely addressed.  Or perhaps it was one of those situations where ISS was not going to budge.

The other notable development was all four issuers requested a triennial vote frequency and only one, Sally Beauty, succeeded in obtaining shareholder support.  Sally Beauty may have been successful because of its relatively low market cap ($2.4 billion), lower institutional ownership (51%) and fewer broker non-votes (5%).  In addition, Sally Beauty’s shareholders seem extraordinarily comfortable with its executive compensation as less than one percent voted against the say-on-pay resolution.

Results to date suggest, with a mere 11 reported results, that issuers with a market cap of over $2. billion and greater than 50% institutional ownership are going to have difficulty in achieving shareholder support for a triennial vote.  For those who want to proceed with a triennial recommendation consider the following math, adapted to your historic voting results.  Perhaps only 85% of shares will be represented at the meeting and of those perhaps 15% will be broker non-votes.  Up to 5% may vote for a biannual frequency or abstain.  That leaves 65% of the outstanding shares available to be voted for a triennial frequency and you will want strong support from this group.

Details of today’s results are as follows:

Jacobs Engineering

53% voted against the say-on-pay resolution.  The board recommended a triennial frequency and the results were: 67% annual; 2% biannual;  29% triennial, 1% abstain.  Other factors: 80% institutional ownership; 6% held by insiders; market cap $6.3 billion; 15% broker non-votes.

Woodward Inc.

6% voted against the say-on-pay resolution.  The board recommended a triennial frequency and the results were: 56% annual; 4% biannual; 39% triennial,  1% abstain.  Other factors: 66% institutional ownership; 1% held by insiders; market cap $2.3 billion; 13% broker non-votes.

Air Products

14% voted against the say-on-pay resolution.  The board recommended a triennial frequency and the results were: 60% annual;   less than 1% biannual;   39% triennial, less than 1 % abstain.  Other factors: 87% institutional ownership; less than 1% held by insiders; market cap $18 billion; 7% broker non-votes.

Sally Beauty

Less than 1% voted against the say-on-pay resolution.  The board recommended a triennial frequency and the results were: 36% annual; less than 1% biannual; 62% triennial,  1% abstain.  Other factors: 51% institutional ownership;  3% held by insiders; market cap $2.4 billion; 5% broker non-votes.

Market cap and institutional ownership staistics were derived from money.cnn.com.

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