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

The Commodity Futures Trading Commission, or CFTC, has proposed rules to implement new statutory provisions enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The proposed regulations establish conflicts of interest requirements for swap dealers, or SDs, and major swap participants, or MSPs, for the purpose of ensuring that such persons implement adequate policies and procedures in compliance with the Commodity Exchange Act, or CEA, as amended by the Dodd-Frank Act.

 Conflicts of Interest in Research or Analysis

 Section 731 of the Dodd-Frank Act requires, in relevant part, that SDs and MSPs “establish structural and institutional safeguards to ensure that the activities of any person within the firm relating to research or analysis of the price or market for any commodity or swap . . . are separated by appropriate informational partitions within the firm from the review, pressure, or oversight of persons whose involvement in pricing, trading, or clearing activities might potentially bias their judgment or supervision.”

 Much of the relevant language in section 731 of the Dodd-Frank Act is similar to certain language contained in section 501(a) of the Sarbanes-Oxley Act of 2002, which amended the Securities Exchange Act of 1934 by creating a new section 15D.  In relevant part, section 15D(a) mandates that the SEC, or a registered securities association or national securities exchange, adopt “rules reasonably designed to address conflicts of interest that can arise when securities analysts recommend equity securities in research reports and public appearances, in order to improve the objectivity of research and provide investors with more useful and reliable information, including rules designed . . . to establish structural and institutional safeguards within registered brokers or dealers to assure that securities analysts are separated by appropriate informational partitions within the firm from the review, pressure, or oversight of those whose involvement in investment banking activities might potentially bias their judgment or supervision . . . .”

 Unlike section 15D of the Securities Exchange Act of 1934, section 731 of the Dodd-Frank Act does not expressly limit the requirement for informational partitions to only those persons who are responsible for the preparation of the substance of research reports; rather, section 731 could be read to require informational partitions between persons involved in pricing, trading or clearing activities and any person within a SD or MSP who engages in “research or analysis of the price or market for any commodity or swap,” whether or not such research or analysis is to be made part of a research report that may be publicly disseminated.

 However, the CFTC believes that an untenable outcome could result from implementing informational partitions between persons involved in pricing, trading or clearing activities and all persons who may be engaged in “research or analysis of the price or market for any commodity or swap,” given that persons involved in pricing, trading or clearing activities are routinely—or even primarily—engaged in “research or analysis of the price or market for” commodities or swaps.  Sound pricing, trading and/or clearing activities necessarily require some form of pre-decisional research or analysis of the facts supporting such determinations.

 Therefore, given the untenable alternative, the proposed rules reflect the CFTC’s belief that the Congressional intent underlying section 731 with respect to “research and analysis of the price or market of any commodity or swap” is primarily intended to prevent undue influence by persons involved in pricing, trading or clearing activities over the substance of research reports that may be publicly disseminated, and to prevent pre-public dissemination of any material information in the possession of a person engaged in research and analysis, or of the research reports, to traders.

 Many elements of the proposed rule, particularly those provisions relating to potential conflicts of interest surrounding research and analysis, have been adapted from National Association of Securities Dealers (NASD) Rule 2711.  To construct the “structural and institutional safeguards” mandated by Congress under section 731 of the Dodd-Frank Act, the proposed rule establishes specific restrictions on the interaction and communications between persons within a SD or MSP involved in research or analysis of the price or market for any derivative and persons involved in pricing, trading or clearing activities.  The proposed rules also impose duties and constraints on persons involved in the research or analysis of the price or market for any derivative.  For instance, such persons will be required to disclose conspicuously during public appearances any relevant personal financial interests relating to any derivative of a type that the person follows. SDs and MSPs similarly will be obligated to make certain disclosures clearly and prominently in research reports, including third-party research reports that are distributed or made available by the SD or MSP.  Further, SDs and MSPs, as well as employees involved in pricing, trading or clearing activities, will be prohibited from retaliating against any person involved in the research or analysis of the price or market for any derivative who produces, in good faith, a research report that adversely impacts the current or prospective pricing, trading or clearing activities of the SD or MSP.

 To address the possibility that the proposed rules could be evaded by employing research analysts in an affiliate of a SD or MSP, the proposed rules also will restrict communications with research analysts employed by an affiliate.  An affiliate will be defined as an entity controlling, controlled by, or under common control with, a SD or MSP.  Moreover, the exceptions to the definition of “research report” are designed to address issues typically found in smaller firms where individuals in the trading unit perform their own research to advise their clients or potential clients.  These exceptions do not in any way impact or lessen the restrictions placed on firms that prepare research reports and release them for public consumption.  According to the CFTC, any attempt by such firms to move research personnel into a trading unit to attempt to avail themselves of the exception will result in insufficient “structural and institutional safeguards” and will be a violation of Section 731 of the Dodd-Frank Act and the proposed rules.

 Conflicts of Interest of Swap Dealers and Major Swap Participants in Clearing

Section 4s(j)(5), as established by section 731 of the Dodd-Frank Act, requires SDs and MSPs to implement conflicts of interest systems and procedures that “establish structural and institutional safeguards to ensure that the activities of any person within the firm . . . acting in a role of providing clearing activities or making determinations as to accepting clearing customers are separated by appropriate informational partitions within the firm from the review, pressure, or oversight of persons whose involvement in pricing, trading, or clearing activities might potentially bias their judgment or supervision and contravene the core principles of open access and the business conduct standards described in this Act.”

 The CFTC interprets the conflicts of interest provision under section 4s(j)(5) to require informational partitions between:

  • persons making clearing determinations; and
  • persons involved in pricing and trading swaps (i.e., risk-taking units).

 According to the CFTC, this interpretation would protect against potential bias or interference in relation to “providing clearing activities.”

 The provision of clearing activities includes acts relating to:

  • whether to offer clearing services and activities to customers;
  • whether to accept a particular customer for the purposes of clearing derivatives;
  • whether to submit a transaction to a particular derivatives clearing organization;
  • setting risk tolerance levels for particular customers;
  • determining acceptable forms of collateral from particular customers; or
  • setting fees for clearing services.

 However, the proposed rules are not intended to hinder the execution of sound risk management programs by SDs or MSPs, or by any affiliate of a SD or MSP.

 To prevent anti-competitive discrimination in providing access to central clearing, the CFTC proposed rules that will subject SDs and MSPs to restrictions that prevent risk-taking units from interfering with decisions by any affiliated clearing member of a derivatives clearing organization regarding whether to accept a client for clearing services.  Under the proposed restrictions, all such decisions regarding the acceptance of customers for clearing should be made in accordance with publicly disclosed, objective, written criteria.  Risk-taking units (i.e., those persons involved in pricing and trading swaps) would also be prevented from interfering with the provision of clearing activities.

An affiliate will be defined as an entity controlling, controlled by, or under common control with, a SD or MSP.  Under the term “affiliate,” in any situation where a person is dually registered as a SD or MSP, and as a futures CFTC merchant, or FCM, the restrictions on clearing activities set forth in the proposed regulations are intended to apply to the relationship between the business trading unit of the SD or MSP and the clearing unit of the FCM, even though the business trading unit and clearing unit reside within the same entity.

 Other Issues

 In addition to mandating the establishment of “appropriate informational partitions” within SDs and MSPs that focus on the activities of persons involved in the “research or analysis of the price or market for any commodity or swap,” section 731 of the Dodd-Frank Act also requires SDs and MSPs to “implement conflict-of-interest systems and procedures that . . . address such other issues as the CFTC determines to be appropriate.”  Having considered the potential conflicts of interest that may arise in a SD or MSP, the CFTC proposed rules that will address the potential for undue influence on customers.  The intended cumulative effect of the proposed rules is to fulfill Congress’s objective that SDs and MSPs construct “structural and institutional safeguards” to minimize the potential conflicts of interest that could arise within such firms.

 The CFTC recognizes the potential development of a complex web of incentives and relationships surrounding SDs and MSPs, particularly with respect to such questions as:

  • whether to enter into a cleared or uncleared trade,
  • whether to refer a counterparty to a particular futures CFTC merchant for clearing, or
  • whether to send a cleared trade to a particular derivatives clearing organization.

 To address this issue, the CFTC is proposing to require that each SD and MSP implement policies and procedures mandating the disclosure to its customers of any material incentives or any material conflicts of interest it has that relate to a customer’s decision on the execution or clearing of a transaction.  Such disclosures will enable customers to make fully-informed business decisions, thereby minimizing the potential influence of any incentives or conflicts of SDs and MSPs.

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

The Commodity Futures Trading, or CFTC, has proposed regulations to implement new statutory provisions enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The proposed regulations set forth certain duties imposed upon swap dealers and major swap participants registered with the CFTC with regard to:

  • risk management procedures;
  • monitoring of trading to prevent violations of applicable position limits;
  • diligent supervision;
  • business continuity and disaster recovery;
  • disclosure and the ability of regulators to obtain general information; and
  • antitrust considerations.

The proposed regulations would implement the new statutory framework of section 4s(j) of the Commodity Exchange Act, or CEA, added by section 731 of the Dodd-Frank Act, excepting regulations related to conflicts of interest pursuant to section 4s(j)(5), which is addressed in a separate rulemaking.  The proposed regulations set forth certain duties with which swap dealers and major swap participants must comply to maintain registration as a swap dealer or major swap participant.

 Risk Management

 The proposed risk management regulation contemplates that each legal entity that falls within the definition of swap dealer or major swap participant under the CEA and CFTC regulations would be required to establish a risk management program and risk management unit.  However, the CFTC believes that the business activities engaged in and risks faced by one affiliate may increase the risk exposure or alter overall risk profile of another affiliate or the entity as a whole, and that, to be effective, a risk management program must protect against the risks resulting from the activities of interconnected or otherwise related entities.  Accordingly, the proposed regulations would require each swap dealer and major swap participant to be able to demonstrate that, to the extent possible, it is taking an integrated approach to risk management at the consolidated entity level.

 The CFTC recognizes that an individual firm must have the flexibility to implement specific policies and procedures unique to its circumstances.  The CFTC’s rule is intended to be designed such that the specific elements of a risk management program will vary depending on the size and complexity of a swap dealer’s or major swap participant’s business operations.  Risk management policies are expected to provide for appropriate risk measurement methodologies, compliance monitoring and reporting, and on-going testing and assessment of the overall effectiveness of the program. Consequently, proposed regulations 23.600, 23.601, 23.602, and 23.603 would establish the general parameters for the design, implementation, review, and testing of a swap dealer’s or major swap participant’s risk management program, as well as a limited number of additional elements that the CFTC believes are essential to an appropriate risk management program.

 The proposed rules would require a swap dealer or major swap participant to adopt policies and procedures to monitor and manage its risks, assess the effectiveness of those policies and procedures, and modify or update them, as necessary, from time to time.  In addition, the proposed rule would require certain elements to be included in each swap dealer and major swap participant’s risk management program to ensure that internal systems protect against universal risks.  For example, to ensure the independence of the risk management process, the unit at the firm responsible for monitoring risk must be independent from the business trading unit whose activities create the risks.  In addition, to ensure that trading losses cannot be hidden, personnel responsible for recording transactions in the books of the swap dealer or major swap participant cannot be the same as those responsible for executing transactions.  Similarly, all accounts, including suspense accounts, must be monitored.

 Finally, the swap dealer’s or major swap participant’s management must periodically review the firm’s business activities for consistency with established risk management policies. This will ensure that personnel are operating within the scope of activity that management has determined to be permissible.

 Monitoring of Position Limits

 Proposed regulation 23.601 would require swap dealers and major swap participants to establish policies and procedures to monitor, detect, and prevent violations of applicable position limits established by the CFTC, a designated contract market, or a swap execution facility.  This rule implements section 4s(j)(1) of the CEA, which requires each swap dealer and major swap participant to monitor its trading in swaps to prevent violations of applicable position limits.  In order to prevent violations, each swap dealer and major swap participant would be required to provide training to all relevant employees on applicable position limits, actively monitor trading, implement an early warning system, test the effectiveness of its policies and procedures, and report quarterly to its senior management and governing body on compliance with applicable position limits.

 Diligent Supervision

 Proposed regulation 23.602 implements section 4s(h)(1)(B) of the CEA, which requires each swap dealer and major swap participant to conform to CFTC regulations related to diligent supervision of the business of the swap dealer and major swap participant.  The proposed regulation provides:

  • a requirement for diligent supervision reasonably designed to achieve compliance with the CEA and CFTC regulations, and
  • requirements for qualification of supervisors and grants of appropriate supervisory authority.

 Business Continuity and Disaster Recovery

 Given the observed interconnectedness of the current swap market, and as part of a comprehensive risk management program, the CFTC believes that each swap dealer and major swap participant should be required to establish and maintain a business continuity and disaster recovery plan that is reasonably designed to minimize any disruption to the financial markets in the event of an emergency or a disruption of a swap dealer’s or major swap participant’s business operations.  Proposed regulation 23.603 would require swap dealers and major swap participants to establish and maintain a business continuity and disaster recovery plan designed to enable the swap dealer or major swap participant to resume normal operations within one business day of an emergency or other disruption.

 To accomplish this task, swap dealers and major swap participants would be required to provide the CFTC with emergency contacts; identify essential documents, data, facilities, infrastructure, and personnel, and maintain sufficient back-up facilities in a reasonably separate geographic location; design a plan for communicating with persons essential for recovery; and annually test the business continuity and disaster recovery plan’s effectiveness.

 Disclosure and Ability to Obtain Information

 In order to carry out its oversight and examination responsibilities, the CFTC would require access to certain information of swap dealers and major swap participants.  Sections 4s(j)(3) and 4s(j)(4) of the CEA require a swap dealer or major swap participant to:

  • disclose to the CFTC and to the swap dealer’s or major swap participant’s prudential regulator information regarding the terms and conditions of its swaps, its swap trading operations, mechanisms, and practices; its financial integrity protections relating to swaps, and other information relevant to its trading in swaps; and
  • establish internal systems to obtain necessary information to perform any of the functions described in section 4s and for disclosure of information to the CFTC or prudential regulator upon request. Proposed regulation 23.606 would implement these requirements.

 Proposed regulation 23.606(a) requires that swap dealers and major swap participants make available for disclosure and inspection all information required by the CFTC, including those items listed in section 4s(j)(3).  This information would be required to be disclosed promptly to the CFTC or applicable prudential regulator in the manner and frequency as set forth in the relevant regulation.  Proposed regulation 23.606(b) would require a swap dealer or major swap participant to establish and maintain adequate internal systems that will permit it to obtain any information required to satisfy its duties under section 4s(j) of the CEA.

 Antitrust

 Section 4s(j)(6) of the CEA prohibits a swap dealer or major swap participant from adopting any process or taking any action that results in any unreasonable restraint of trade or imposes any material anticompetitive burden on trading or clearing, unless necessary or appropriate to achieve the purposes of the CEA.  Proposed regulation 23.607 would implement these prohibitions by requiring that the swap dealer or major swap participant adopt policies and procedures that would prevent unreasonable restraint of trade or the imposition of a material anticompetitive burden on trading or clearing.

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

The CFTC has published its proposed whistleblower rules.  In a keynote address to the Practising Law Institute’s Securities Regulation Institute on November 11, 2010, CFTC Chair Gary Gensler stated the CFTC rules were intended to be the same as the recently announced SEC whistleblower proposal, except where the Dodd-Frank Act required a different result.  That certainly seems to be the case, so much so that the CFTC forgot to change all of the references in the proposed forms it copied from the SEC from “SEC” to “CFTC” (see Part IV: Instructions for Completing Form WB-DEC; Section C, Question 3b; page 103 of the proposed rules).

 SEC registrants often engage in transactions subject to the jurisdiction of the CFTC, a violation of which could cause a person to submit information to the CFTC as a whistleblower.  In such an instance, it is not hard to imagine a set of circumstances where that same violation is also a violation of securities law.  For instance, a CFTC violation could lead to a claim that the SEC reports were misleading in some respect and therefore result in a violation of securities laws.  It therefore also is not hard to imagine that the same CFTC whistleblower would simultaneously submit information to the SEC as a whistleblower.

 The dual whistleblower possibility has a number of implications.  First, public companies that engage in significant transactions or are otherwise subject to CFTC jurisdiction should ensure their compliance programs are functioning at the highest level reasonably possible.  Second, the CFTC and the SEC should do more to coordinate their proposed rules to envision this possibility.  It seems obvious that the respective agencies should take into account awards paid by the other agency to the same individuals for the same conduct when granting further awards, to the extent permissible by statute.  The SEC takes this into account somewhat in its proposed Rule 21F-3(d) (Payment of Awards).  That provides the SEC will not make an award for a “related action” if the whistleblower has already been granted an award by the CFTC for that same action.  However, it appears a whistleblower would still be eligible to collect an award from the SEC in an SEC action.  Curiously, the proposed CFTC rules do not appear to include a similar explicit provision like SEC Rule 21F-3(d), which seems to lead to a real possibility a whistleblower could collect twice on the same dollars.

There are other curious differences between the two proposed rules.  For instance, proposed SEC Rule 21F-4(b)(4)(iv) provides compliance personnel and others generally cannot collect a whistleblower award unless the entity did not disclose the information to the SEC “within a reasonable period of time.”  The counterpart CFTC Rule 165.2(g)(4) requires the entity to self-report to the CFTC within 60 days.  This inconsistency is certaintly going to make it diffuclt for entities subject to dual jurisdiction to determine when to self-report.

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

The Commodity Futures Trading Commission, or CFTC, will hold a public meeting on Friday, November 19, 2010, to consider the issuance of proposed rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act on the following topics:

  •  Swap data repositories;
  • Real-time public reporting of swap transaction data;
  • Protection of collateral of counterparties to uncleared swaps, and treatment of securities in a portfolio margining account in a commodity broker bankruptcy; and
  • Data recordkeeping.

 In addition to these proposed rulemakings, the CFTC will consider the issuance of an Advance Notice of Proposed Rulemaking involving Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies.

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

A final rule imposes three notice and disclosure requirements to ensure that Insured Depository Institutions, or IDIs, and depositors are aware of and understand the types of accounts that will be covered by a temporary deposit insurance coverage for noninterest-bearing transaction accounts.  As explained in detail in the Federal Register notice:

  •  IDIs must post a prescribed notice in their main office, each branch and, if applicable, on their Web site;
  • IDIs currently participating in the Transaction Account Guarantee Program (“TAGP”) must notify Negotiable Order of Withdrawal (“NOW”) account depositors and Interest on Lawyers Trust Accounts (“IOLTA”) depositors (currently protected under the TAGP) that, beginning January 1, 2011, those accounts no longer will be eligible for unlimited protection; and
  • IDIs must notify customers of any action they take that would affect the deposit insurance coverage of funds held in noninterest-bearing transaction accounts.

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

The Securities and Exchange Commission will hold an open meeting on November 19, 2010.  The subject matter of the open meeting will be:

  •  The SEC will consider whether to propose new rules and rule amendments under the Investment Advisers Act of 1940 to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules and rule amendments are designed to give effect to provisions of Title IV of the Dodd-Frank Act that, among other things, increase the statutory threshold for registration by investment advisers with the SEC, require advisers to hedge funds and other private funds to register with the SEC, and address reporting by certain investment advisers that are exempt from registration.
  •  The SEC will consider whether to propose rules that would implement new exemptions from the registration requirements of the Investment Advisers Act of 1940 for advisers to venture capital funds and advisers with less than $150 million in private fund assets under management in the United States. These exemptions were enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules also would clarify the meaning of certain terms included in a new exemption for foreign private advisers.
  •  The SEC will consider whether to propose new rules under Section 763(i) of the Dodd-Frank Wall Street Reform and Consumer Protection Act governing the security-based swap data repository registration process, the duties of such repositories, and the core principles applicable to such repositories.
  •  The SEC will consider whether to propose Regulation SBSR under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act to provide for the reporting of security-based swap information to registered security-based swap data repositories or the SEC and the public dissemination of security-based swap transaction, volume, and pricing information.

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

Section 955 of the Dodd-Frank Act requires the SEC to promulgate rules which require issuers to disclose policies regarding employee and director hedging of equity securities.  While we cannot predict what rules the SEC may ultimately adopt, issuers may wish to familiarize themselves with current publicly disclosed practices.  We found the following examples on EDGAR, most of which are short and sweet.

Microsoft—September 30, 2010

The Board of Directors and our executive officers are prohibited from hedging their ownership of Microsoft stock, including trading in publicly-traded options, puts, calls, or other derivative instruments related to Microsoft stock or debt.

Comcast—April 9, 2010

Our policy prohibits any named executive officer from buying or selling any of our securities or options or derivatives with respect to our securities without obtaining prior approval from our General Counsel. This seeks to assure that the named executive officers will not trade in our securities at a time when they are in possession of inside information. We do not have a policy that specifically prohibits our named executive officers from hedging the economic risk of stock ownership. However, federal securities laws generally prohibit our named executive officers from selling “short” our stock.

American International Group—April 12, 2010

AIG’s Code of Conduct prohibits employees from engaging in any hedging transactions with respect to any of AIG’s securities including trading in any derivative security relating to AIG’s securities.

Boston Scientific—March 26, 2010

Our executive officers, including our NEOs, are prohibited from entering into transactions which “hedge” the value of Boston Scientific stock.

ACL Semiconductor-November 1, 2010

We do not permit the Named Executive Officers to “hedge” ownership by engaging in short sales or trading in any options contracts involving our securities.

MGP Ingredients—September 9, 2010

We do not have a hedging policy, but our code of conduct prohibits short sales and trading in our stock on a short term basis.

Global Payments—August 20, 2010

Our insider trading policy prohibits directors and employees from engaging in any transaction in which they profit if the value of the Company’s Common Stock falls.

Retractable Technologies—August 12, 2010

We prohibit certain stock transactions by employees and Directors, including:

            1.  Purchases and sales of stock within a six month period;

            2.  Short sales; and

            3.  Transactions in puts, calls, or other derivative securities.

Furthermore, employees and Directors are required to pre-clear any hedging transactions.

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

The CFTC has published a Notice of Proposed Rulemaking (NOPR) with respect to its anti-manipulation authority over swaps, commodities, and futures markets under the Dodd-Frank Act. Two rules are proposed. The first implements the new section 6(c)(1) of the Commodity Exchange Act (CEA), patterned after section 10(b) of the Securities Exchange Act of 1934. Similar to the manner in which section 10(b) has been enforced, the CFTC proposed to interpret CEA section 6(c)(1) as a broad, catch-all provision reaching fraud in all its forms—that is, intentional or reckless conduct that deceives or defrauds market participants. The CFTC included some discussion in the NOPR regarding how it intends to interpret various elements of this proposed rule:

(1) Manipulative or Deceptive Devices or Contrivances—to be given a broad, remedial reading, embracing the use or attempted use of any manipulative or deceptive contrivance for the purpose of impairing, obstructing, or defeating the integrity of the swaps, commodities, or futures markets
(2) “Scienter”—requires intent or recklessness to deceive, manipulate or defraud
(3) “In Connection With” a transaction under CFTC jurisdiction—relevant conduct must have been reasonably calculated to influence market participants
(4) Attempt—attempted fraud is captured by the prohibition
(5) Materiality—to be measured objectively, i.e. whether a reasonable person would have considered the alleged misrepresentation or omission significant

The second proposed rule implements new section 6(c)(3) of the Dodd-Frank Act, regarding the CFTC’s continued authority regarding price manipulation and attempted price manipulation. The Commission proposes to continue interpreting this prohibition to encompass every effort to improperly influence the price of a swap, commodity or futures contract that is intended to interfere with the legitimate forces of supply and demand in the marketplace. Early manipulation cases involving “corners” and “squeezes” have provided the relevant framework, which requires that the Commission establish the following to prove a violation:

(1) That the accused had the ability to influence market prices;
(2) That they specifically intended to do so;
(3) That artificial prices existed; and
(4) That the accused caused the artificial prices.

Finally, the CFTC also published an advanced NOPR (ANOPR) with respect to its antidisruptive practices authority under the Dodd-Frank Act. The ANOPR requests comments on how to implement amended section 4c(a) of the CEA, which makes it unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of CFTC-registered entities that:

(1) Violates bids or offers;
(2) Demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or
(3) Is, is of the character of, or is commonly known to the trade as “spoofing” (bidding or offering with the intent to cancel the bid or offer before execution).

Specifically, the Commission asks commenters to address 19 different questions posed in the ANOPR. Notably, several of the questions concern whether the Commission should promulgate rules to regulate the use of algorithmic or automated trading systems to prevent disruptive trading practices.

Drafting models for the upcoming proxy season can be found from issuers who voluntarily provided say-on-pay disclosures or were required to do so under banking legislation.  You can also see our sample language for a say-on-pay proposal under the proposed rules here.  Here are some examples we found, with some associated commentary.  You have to be carful to craft your proposals, because 2012 CD&A’s will require subsequent disclosures.

 Microsoft—September 29, 2009

 We have adopted an advisory vote every three years (a “triennial” vote), which we believe will be the most effective means for conducting and responding to a say-on-pay vote.

 Although the vote is non-binding, Board and the Compensation Committee will review the voting results. To the extent there is any significant negative say-on-pay vote, we would consult directly with shareholders to better understand the concerns that influenced the vote. The Board and the Compensation Committee would consider constructive feedback obtained through this process in making future decisions about executive compensation programs.

 Commentary: Note that disclosures like the above must be crafted with care. The proposed say-on-pay rules will require disclosure in subsequent CD&A’s “[w]hether and if so, how the registrant has considered the results of previous shareholder advisory votes on executive compensation required by section 14A of the Exchange Act . . . and previous shareholder advisory votes on executive compensation required by §240.14a-20 of this chapter in determining compensation policies.”

 SUPERVALU—May 12, 2010

 The Board of Directors of the Company is providing SUPERVALU stockholders with the opportunity to advise the Board as to whether SUPERVALU should conduct an advisory vote with respect to its executive compensation policies and procedures at every third annual meeting of stockholders, beginning with SUPERVALU’s 2011 Annual Meeting of Stockholders. If this proposal is approved, SUPERVALU stockholders would vote at every third SUPERVALU annual meeting of stockholders on the compensation policies and procedures as described in the “Compensation Discussion and Analysis” section of the proxy statement for that meeting. The triennial advisory vote would be non-binding, but the Board and the Leadership Development and Compensation Committee (the “Compensation Committee”) would take into account the outcome of the vote when making future decisions about the Company’s executive compensation policies and procedures.

 SUPERVALU’s compensation program is designed and administered by the Compensation Committee of the Board, which is composed entirely of independent directors and carefully considers many different factors, as described in the Compensation Discussion and Analysis, in order to provide appropriate compensation for our executives. Our executive compensation program is intended to attract, motivate and reward the executive talent required to achieve our corporate objectives and increase stockholder value.

The Compensation Committee has designed our compensation program to be competitive with the compensation offered by those peers with whom we compete for executive talent. Targets for base salaries, annual cash incentive and long-term incentive awards for executives are based on competitive data. The fact that a large proportion of our executive officers’ total compensation is performance-based is intended to align their interests with those of our stockholders and place more of their compensation at risk and emphasize a long-term strategic view. The Compensation Committee deliberately designs compensation objectives in order to allocate a significant percentage of each of our NEOs’ compensation to performance-based measures.

 While the Board of Directors believes that the Compensation Committee and the Board of Director are in the best position to determine executive compensation, the Board appreciates and values stockholders’ views and supports management’s proposal for a triennial advisory vote on executive compensation. The ability of stockholders to provide an advisory vote on executive compensation has been the subject of proposed legislation in the United States Congress, as well as stockholder proposals and management initiatives at a number of publicly-held companies. A stockholder proposal in favor of implementing Say on Pay was presented at our 2009 Annual Meeting of Stockholders and was approved by a narrow margin. The Board has continued to review the evolution of Say on Pay over the past year and has carefully studied the alternatives to determine the approach that will best serve the Company and our stockholders. The Board has determined that a three-year advisory vote on executive compensation is the best approach for SUPERVALU based on a number of considerations, including the following:

  •  Our compensation program is designed to induce and reward performance over a multi-year period. As discussed in the Compensation Discussion and Analysis, beginning with fiscal 2010, the Compensation Committee changed the design of its performance share program from a two-year performance cycle to a three-year performance cycle. The Board has concluded that Say on Pay votes should occur over a similar timeframe; 
  • A three-year cycle will provide investors sufficient time to evaluate the effectiveness of our short- and long-term compensation strategies and the related business outcome of the Company; 
  • Many large stockholders rely on proxy advisory firms, which evaluate the compensation programs of over 12,000 public companies, for vote recommendations. We believe holding Say on Pay votes every three years, rather than annually, helps proxy advisory firms provide more detailed and thorough analyses and recommendations; 
  • A three-year vote cycle gives the Board and the Compensation Committee sufficient time to thoughtfully respond to stockholders’ sentiments and to implement any necessary changes to our executive compensation policies and procedures; 
  • Rules of the New York Stock Exchange require the Company to seek stockholder approval for new employee equity compensation plans and material revisions thereto. This requirement provides our stockholders with the opportunity to provide additional feedback on important matters involving executive compensation even in years when Say on Pay votes do not occur; and 
  • The Board will continue to engage with our stockholders on executive compensation during the period between stockholder votes. As discussed under “Other Information — Communications with the Board of Directors,” the Company provides stockholders an opportunity to communicate directly with the Board of Directors, including on issues of executive compensation. 

 The Board of Directors is making this recommendation on its own initiative, while recognizing that Say on Pay proposals continue to be under consideration in the United States Congress. SUPERVALU will of course comply with any requirements that emerge either through federal or state legislation or through regulatory changes adopted by the SEC, and any such requirements will supersede this proposal to the extent they are inconsistent.

 Winn Dixie—October 4, 2010

 The Board of Directors is providing shareholders with the opportunity to cast an advisory vote on the compensation of our named executive officers. This proposal, commonly known as a “say on pay” proposal, gives you, as a shareholder, the opportunity to endorse or not endorse our fiscal 2010 executive compensation programs and policies and the compensation paid to the named executive officers. Our Governance Principles currently provide that this advisory “say on pay” vote will be provided to our shareholders on a biennial basis, although we note that the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) will require a say on pay vote at our 2011 annual meeting, as well as an advisory vote with respect to whether future say on pay votes will be held every one, two or three years. We expect that our Board of Directors will review our Governance Principles in view of the say on pay vote required under the Dodd-Frank Act and also after our shareholders express their preferences for having say on pay votes every one, two, or three years.

 As discussed in the Compensation Discussion and Analysis section of this Proxy Statement, our compensation principles and underlying programs are designed to attract, motivate and retain key executives who are crucial to our long-term success. The compensation paid to our named executive officers reflects the following principles of our compensation program:

  •  We structure our executive compensation programs within a framework that measures performance using a variety of financial and non-financial metrics. We do this to promote and reward actions that strengthen the Company’s long-term health while promoting strong annual results
  • We make annual compensation decisions based on an assessment of each executive’s performance against goals that promote the Company’s success by focusing on our shareholders, customers and employees. We focus not only on results but on how results were achieved.
  • We structure our executive compensation programs to be consistent with and support sound risk management. We have reviewed the design and controls in our incentive compensation program to assess the effectiveness of the program and our compensation practices in controlling excessive risk.
  • In fiscal 2010, implementation of our “pay for performance” incentive plan caused all of our NEOs to receive Annual Incentive Plan payouts that were 80% lower than their target bonus opportunities. This translated into a 40% reduction in total cash compensation (salary and annual incentive award) for our CEO, and an average of 35% reduction in total cash compensation for our other NEOs.
  • In fiscal 2010, we made a one-time performance grant to our named executive officers which included performance criteria under which the shares vest only in the event such criteria are met.
  • We require substantial stock ownership by our named executive officers.
  • We have a clawback policy that allows the recoupment of performance-based compensation from any executive officer whose fraud or misconduct may cause the Company to restate its financial statements . . .

 This vote will not be binding on or overrule any decisions by the Board of Directors, will not create or imply any additional fiduciary duty on the part of the Board, and will not restrict or limit the ability of our shareholders to make proposals for inclusion in proxy materials related to executive compensation. The Compensation Committee will take into account the outcome of the vote when considering future compensation arrangements for our named executive officers.

 Commentary:  Note that under certain circumstances, under the proposed rules, a say-on-pay vote can restrict certain shareholder proposals in the future.  See the proposed modification to Rule 14a-8.

 Cisco—September 28, 2010

 Executive compensation is an important matter for our shareholders. The core of Cisco’s executive compensation philosophy and practice continues to be to pay for performance. Cisco’s executive officers are compensated in a manner consistent with Cisco’s strategy, competitive practice, sound corporate governance principles, and shareholder interests and concerns. We believe our compensation program is strongly aligned with the long-term interests of our shareholders. We urge you to read the Compensation Discussion and Analysis (“CD&A”) section of this proxy statement for additional details on Cisco’s executive compensation, including Cisco’s compensation philosophy and objectives and the 2010 compensation of the named executive officers.

 Although Congress has recently enacted legislation requiring a non-binding advisory Say on Pay vote on executive compensation beginning in 2011, in accordance with the vote of our shareholders at the 2009 Annual Meeting, we want to give our shareholders an advisory vote on executive compensation at our 2010 Annual Meeting. Next year, in accordance with the recently enacted legislation, in addition to an advisory Say on Pay vote, we will ask shareholders whether they would prefer an advisory vote every year, every two years or every three years . . .

 As an advisory vote, this proposal is non-binding. Although the vote is non-binding, the Board of Directors and the Compensation Committee value the opinions of our shareholders, and will consider the outcome of the vote when making future compensation decisions for our named executive officers . . .

 The affirmative vote of a majority of the shares of Cisco common stock present or represented by proxy and voting at the annual meeting, together with the affirmative vote of a majority of the required quorum, is required for approval of this proposal. If you own shares through a bank, broker or other holder of record, you must instruct your bank, broker or other holder of record how to vote in order for them to vote your shares so that your vote can be counted on this proposal.

 Aflac—March 19, 2009

 We believe that our compensation policies and procedures are centered on a pay for performance culture and are strongly aligned with the long-term interests of our shareholders. This advisory shareholder vote, commonly known as “Say-on-Pay,” gives you as a shareholder the opportunity to endorse or not endorse our executive pay program and policies through the following resolution . . .

 Because your vote is advisory, it will not be binding upon the Board. However, the Compensation Committee will take into account the outcome of the vote when considering future executive compensation arrangements.

 We believe the “Say-on-Pay” proposal demonstrates our commitment to our shareholders; that commitment extends beyond adopting innovative corporate governance practices. We also are committed to achieving a high level of total return for our shareholders.

 Since August 1990, when Mr. Daniel Amos was appointed as our CEO through December 31, 2008, our Company’s total return to shareholders, including reinvested cash dividends, has exceeded 2,852% compared with 418% for the Dow Jones Industrial Average and 309% for the S&P 500.

 Goldman Sachs—April 6, 2009

 Our Board is committed to and recognizes the importance of responsible executive compensation practices. As described above under Compensation Discussion and Analysis, our Compensation Committee, at the request of our Senior Executives, determined not to pay bonuses to these executives, including our NEOs, for fiscal 2008. This was done because, in light of the circumstances, it was the right thing to do.

 Our Board and our Compensation Committee believe that our commitment to these responsible compensation practices, as evidenced by the determinations made with respect to 2008 compensation to our NEOs, justifies a vote by shareholders FOR the resolution approving the compensation of our NEOs as disclosed in this Proxy Statement.

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

The Board of Directors of the Federal Deposit Insurance Corporation, or FDIC  approved on November 9, 2010, two proposed rules that would amend the deposit insurance assessment regulations.  The first would implement a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that changes the assessment base from one based on domestic deposits (as it has been since 1935) to one based on assets. The second proposal would re-propose changes for the deposit insurance assessment system for large institutions given Dodd-Frank’s changes to the assessment base. This proposal replaces a proposed rule approved by the Board in April.

 In accordance with a provision in Dodd-Frank, the FDIC is proposing to change the assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity.

 Since the new base would be much larger than the current base, the FDIC is also proposing to lower assessment rates, which achieves the FDIC’s goal of not significantly altering the total amount of revenue collected from the industry.

 The second assessment-related item replaces a proposed rule revising the deposit insurance assessment system for large institutions that was approved by the FDIC on April 13, 2010. The proposal approved today by the Board would eliminate risk categories and debt ratings from the assessment calculation for large banks and would instead use scorecards. The scorecards would include financial measures that are predictive of long-term performance. A large financial institution would continue to be defined as an insured depository institution with at least $10 billion in assets.

 Both proposals will have a 45-day comment period upon publication in the Federal Register. The FDIC is also proposing that both changes in the assessment system be effective as of April 1, 2011.

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