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

Yesterday, Mary L. Schapiro, Chairperson of the SEC, addressed the National Association of Corporate Directors. She reviewed several recent SEC proxy rules which pre-date Dodd-Frank and gave a timetable regarding future Dodd-Frank rulemaking.

Ms. Schapiro called out in particular the new proxy rules requiring disclosure of the factors in a director’s background and skill set that led the Board to select that person. She strongly suggested that vague generalizations, such as “our directors each have integrity, sound business judgement and honesty” do not hit the mark. Instead, the Commission is looking for detailed descriptions of how each individual director’s background enhances a Board and the Company.

She also noted the SEC’s new disclosure requirement that boards explain how they oversee risk. Again, sweeping generalities such as “risk is overseen by the board as a whole” did not find favor in her eyes.

Regarding Dodd-Frank rulemaking, Ms. Schapiro stated that the next proposal would concern rules that stock exchanges mandate new standards of independence for compensation committees. This disclosure would apply to all shareholder meetings taking place on or after July 21, 2011 and she expected the proposal would be published before the end of 2010.

Next summer, the Commission will be proposing rules on the disclosure on the median compensation of all employees of a company, and the ratio of CEO compensation to the median.

The Summer of 2011 will also see proposals to require disclosure of the relationship between senior executives’ compensation and the company’s financial performance; whether employees or directors can hedge against a decline in stock price; and standards for clawback policies (reclaiming executive compensation in the event of a financial restatement).

As to the rulemaking process, the Chairperson stated that SEC staff have been instructed to make every effort to accept requests for face-to-face meetings with paerties affected by the rules. Memoranda and materials regarding these meetings will be posed on line.

Finally, Ms. Schapiro reminded those present at the meeting that the SEC’s proxy voting infrastructure project, referred to as “proxy plumbing,” is ongoing. Major areas of concern are the role of proxy advisory firms; whether the OBO/NOBO system enhances or hinders communication with shareholders; and whether voting totals are being accurately tallied, which involves inquiries into over- and under-voting, and empty voting. If you would like to know more about these proxy plumbing matters, please contact the author.

The Commodity Futures Trading Commission, or CFTC, will hold a public meeting on Tuesday, October 26, 2010, to consider the issuance of the following proposed rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act:

  •  Prohibition of market manipulation and disruptive trading practices;
  • Provisions common to registered entities;
  • Removing any reference to or reliance on credit ratings in CFTC regulations and proposing alternatives; and
  • Process of review of swaps for mandatory clearing.

 In addition to the above proposed rulemakings, the CFTC will consider one Non Dodd-Frank proposed rule – Investment of customer funds and funds held in an account for foreign futures and foreign options transactions.

The CFTC has adopted proposed rules which address the protection of consumer information, including rules which implement amendments to the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act, rules regarding position reports for physical commodity swaps and a definition of agricultural commodity.

 Fair Credit Reporting Act–Protection of Consumer Information

 The Dodd-Frank Act amended the Fair Credit Reporting Act and the Fair and Accurate Credit Transactions Act of 2003 to:

  • Create a regime for consumers to prohibit entities that are subject to CFTC jurisdiction from using certain consumer information obtained from an affiliate to make solicitations to consumers for marketing purposes.
  • Require entities subject to CFTC jurisdiction that possess or maintain consumer information in connection with their business activities to develop and implement a written program and procedures for the proper disposal of such information.

 The proposed regulations will apply to futures commission merchants, retail foreign exchange dealers, commodity trading advisors, commodity pool operators, introducing brokers, swap dealers and major swap participants, regardless of whether they are required to register with the CFTC.

The Fair Credit Reporting Act required various federal agencies to issue regulations providing protections to consumer information held by entities that are subject to Commission jurisdiction. In particular, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, the Securities and Exchange Commission and the Federal Trade Commission issued final rules implementing these sections of the FCRA. The CFTC is now proposing to adopt similar rules to the final rules adopted by these federal agencies, to the extent possible, to ensure consistency and comparability.

 An entity subject to CFTC jurisdiction can make solicitations to a consumer based on that consumer’s information if:

  • The consumer is given clear, conspicuous and concise notice;
  • The consumer is given a reasonable opportunity to opt out of such use of the information; and
  • The consumer does not opt out.

 Amendments to Gramm-Leach-Bliley Act

 Title X of the Dodd-Frank Act amended Title V of the Gramm-Leach-Bliley Act to, among other things, affirm the CFTC’s authority to promulgate regulations to require entities that are subject to the CFTC’s jurisdiction to provide certain privacy protections for consumer financial information.  Title VII of the Dodd-Frank Act created two new entities that are subject to the jurisdiction of the CFTC: swap dealers and major swap participants. 

 Part 160 of the CFTC’s regulations set forth certain protections for the privacy of nonpublic, consumer information. The new proposed regulations primarily would expand the scope of Part 160 to apply to swap dealers and major swap participants, regardless of whether they are required to register with the CFTC.

 Position Reports for Physical Commodity Swaps

 The Dodd-Frank Act further amended the Commodity Exchange Act, or CEA, to:

  •  Require the CFTC to limit the amount of positions, other than bona fide hedge positions, that may be held by any person with respect to commodity futures and option contracts in exempt and agricultural commodities traded on or subject to the rules of a designated contract market (DCM).
  • Require the CFTC to establish position limits, including aggregate position limits, for swaps that are economically equivalent to DCM contracts in exempt and agricultural commodities (collectively, economically equivalent swaps). Such limits must be imposed simultaneously with limits on DCM contracts.

 The proposed regulations adopted today call for:

  •  Establishment of a reporting system to collect necessary data on economically equivalent swaps in order for the CFTC to be able to enforce aggregate position limits with respect to such swaps as mandated by the Dodd-Frank Act. The proposed system would be analogous to the CFTC’s current reporting structure for receiving data on large positions in physical commodity futures contracts traded on DCMs.
  • The proposed reporting system to serve as a transitional tool for swaps positional data until swap data repositories (SDRs) are in operation and potentially serving as the Commission’s primary source for swaps positional data, at which time the Commission may either continue or discontinue the proposed system.
  • A position to be deemed reportable under the proposed system if it is, in any one futures equivalent month, comprised of fifty or more economically equivalent swaps (on a futures equivalent basis) based on the same commodity underlying any of the DCM contracts listed in the proposed regulations.

 Agricultural Commodity

 There is no existing definition of the term agricultural commodity – as used in connection with the CEA or the CFTC’s regulations.  Accordingly the CFTC has proposed a definition of agricultural commodity. The CFTC is proposing to define the term agricultural commodity in order to, among other things, define the scope of the Dodd-Frank agricultural swaps rulemaking and the Dodd-Frank agricultural commodity position limit rulemaking.

 The proposed definition of agricultural commodity is broken down into the following categories:

  •  The enumerated commodities listed in section 1a of the Commodity Exchange Act, including such things as wheat, cotton, corn, the soybean complex, livestock, etc.;
  • A general operational definition that covers: “All other commodities that are, or once were, or are derived from, living organisms, including plant, animal and aquatic life, which are generally fungible, within their respective classes, and are used primarily for human food, shelter, animal feed, or natural fiber;”
  • A catch-all category for commodities that would generally be recognized as agricultural in nature, but which don’t fit within the general operational definition: “Tobacco, products of horticulture, and such other commodities used or consumed by animals or humans as the Commission may by rule, regulation, or order designate after notice and opportunity for hearing;” and
  • Finally, a provision applicable to: “Commodity-based contracts based wholly or principally on a single underlying agricultural commodity.”

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today voted to propose a comprehensive, long-range plan for deposit insurance fund management with the goals of maintaining a positive fund balance, even during periods of large fund losses, and maintaining steady, predictable assessment rates throughout economic and credit cycles. This plan was formulated in response to changes to the FDIC’s authority to manage the Deposit Insurance Fund contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

As part of the fund management plan, the Board adopted a new Restoration Plan to ensure that the fund reserve ratio reaches 1.35 percent by September 30, 2020, as required by Dodd-Frank. The Restoration Plan also foregoes the uniform 3 basis point assessment rate increase previously scheduled to go into effect January 1, 2011, and keeps the current rate schedule in effect. The Board’s decision was informed by an updated FDIC analysis that forecasts somewhat lower losses from 2010 through 2014.

The Board also adopted a notice of proposed rulemaking based upon an FDIC historical analysis of fund losses demonstrating that, to maintain a positive fund balance and steady, predictable assessment rates, the Deposit Insurance Fund reserve ratio must be at least 2 percent before a period of large fund losses and average assessment rates over time must be approximately 8.5 basis points.  The notice of proposed rulemaking would:

  • Set the designated reserve ratio at 2 percent as a long-term, minimum goal;
  • Adopt a lower assessment rate schedule when the reserve ratio reaches 1.15 percent so that the average rate over time should be about 8.5 basis points; and
  • In lieu of dividends, adopt lower rate schedules when the reserve ratio reaches 2 percent and 2.5 percent so that average rates will decline about 25 percent and 50 percent, respectively.

The SEC has proposed amendments (Release No. 33-9153) to its rules to implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to shareholder approval of executive compensation arrangements.   Section 951 of the Dodd-Frank Act amends the Securities Exchange Act of 1934 by adding Section 14A, which requires companies to conduct a separate shareholder advisory vote to approve the compensation of executives, as disclosed pursuant to Item 402 of Regulation S-K or any successor to Item 402.   Section 14A also requires companies to conduct a separate shareholder advisory vote to determine how often an issuer will conduct a shareholder advisory vote on executive compensation.

 Some of the bigger picture items were resolved by the SEC as follows:

  •  Generally the say-on-pay requirement would approve compensation disclosed in the CD&A.  It would not pick up director compensation and there is certain relief for smaller reporting companies to account for scaled disclosure requirements.
  • The SEC’s proposed rule would not require issuers to use any specific language or form of resolution to be voted on by shareholders.
  • The SEC proposals would amend Item 402(b) to require issuers to address in the CD&A whether and, if so, how their compensation policies and decisions have taken into account the results of shareholder advisory votes on executive compensation.
  • The separate resolution “to determine” the frequency of the shareholder vote on executive compensation is intended to be non-binding on the issuer or the issuer’s board of directors.
  • A preliminary proxy filing would not be required under proposed amendments to Rule 14a-6(a).
  • Generally TARP recipients would only be subject to one say-on-pay vote.

 General Requirements

 The SEC has proposed Rule 14a-21(a), pursuant to which issuers would be required, not less frequently than once every three years, to provide a separate shareholder advisory vote in proxy statements to approve the compensation of executives.   Proposed Rule 14a-21(a) would specify that the separate shareholder vote on executive compensation is required only when proxies are solicited for an annual or other meeting of security holders for which SEC rules require the disclosure of executive compensation pursuant to Item 402 of Regulation SK.

 Proposed Rule 14a-21(a) would require a separate shareholder vote to approve the compensation of executives for the first annual or other such meeting of shareholders occurring on or after January 21, 2011, the first day after the end of the 6-month period beginning on the date of enactment of the Dodd-Frank Act.

 Proposed Rule 14a-21(a) would specify how an issuer must provide a separate shareholder advisory vote to approve the compensation of its named executive officers, as defined in Item 402(a)(3) of Regulation S-K.    In accordance with Section 14A(a)(1), shareholders would vote to approve the compensation of the issuer’s named executive officers, as such compensation is disclosed in Item 402 of Regulation S-K, including the Compensation Discussion and Analysis (“CD&A”), the compensation tables and other narrative executive compensation disclosures required by Item 402.

 Smaller reporting  companies are subject to scaled executive compensation disclosure requirements and are not required to include a CD&A.   Therefore, for smaller reporting companies, the shareholders would vote to approve the compensation of the named executive officers, as disclosed under Items 402(m) through 402(q) of Regulation S-K.   The SEC is also proposing an instruction to new Rule 14a-21 to specify that Rule 14a-21 does not change the scaled disclosure requirements for smaller reporting companies and that smaller reporting companies would not be required to provide a CD&A in order to comply with Rule 14a-21.

 Consistent with Section 14A, the compensation of directors, as disclosed pursuant to Item 402(k) and by Item 402(r) is not subject to the shareholder advisory vote.   In addition, if an issuer includes disclosure pursuant to Item 402(s) of Regulation S-K about the issuer’s compensation policies and practices as they relate to risk management and risk-taking incentives, these policies and practices would not be subject to the shareholder advisory vote required by Section 14A(a)(1) as they relate to the issuer’s compensation for employees generally.   The SEC notes, however, that to the extent that risk considerations are a material aspect of the issuer’s compensation policies or decisions for named executive officers, the issuer is required to discuss them as part of its CD&A, and therefore such disclosure would be considered by shareholders when voting on executive compensation.

 The SEC’s proposed rule would not require issuers to use any specific language or form of resolution to be voted on by shareholders.   However, the shareholder vote must relate to all executive compensation disclosure set forth pursuant to Item 402 of Regulation S-K.   New Section 14A(a)(1) of the Exchange Act requires that the shareholder vote must be “to approve the compensation of executives, as disclosed pursuant to [Item 402 of Regulation SK] or any successor thereto.”    In the SEC’s view, a vote to approve a proposal on a different subject matter, such as a vote to approve only compensation policies and procedures, would not satisfy the requirement of Section 14A(a)(1) or proposed Rule 14a-21(a).

 Compensation Discussion and Analysis

 The SEC proposals would amend Item 402(b) to require issuers to address in CD&A whether and, if so, how their compensation policies and decisions have taken into account the results of shareholder advisory votes on executive compensation.   This proposed new disclosure is not mandated by Section 951 of the Dodd-Frank Act, but the SEC believes that a requirement to provide that information would facilitate better investor understanding of issuers’ compensation decisions.   The SEC notes that the shareholder advisory vote on executive compensation will apply to all issuers, and as a result, the SEC will view information about how issuers have responded to such votes as more in the nature of a mandatory principles-based topic than an example. The manner in which individual issuers may respond to such votes in determining executive compensation policies and decisions will likely vary depending upon facts and circumstances.   Accordingly, the proposal would amend Item 402(b)(1) to require issuers to address in CD&A whether, and if so, how they have considered the results of previous shareholder votes on executive compensation required by Section 14A and Rule 14a-20 in determining compensation policies and decisions and, if so, how that consideration has affected their compensation policies and decisions.

 Frequency of Shareholder Votes

Under proposed Rule 14a-21(b), issuers would be required, not less frequently than once every six years, to provide a separate shareholder advisory vote in proxy statements for annual meetings to determine whether the shareholder vote on the compensation of executives required by Section 14A(a)(1) “will occur every 1, 2, or 3 years.”    Proposed Rule 14a-21(b) would also clarify that the separate shareholder vote on the frequency of shareholder votes on executive compensation would be required only in a proxy statement solicited for an annual or other meeting of shareholders for which SEC rules require compensation disclosure.    Under proposed Rule 14a-21(b), issuers would be required to provide the separate shareholder vote on the frequency of the say-on-pay vote for the first annual or other such meeting of shareholders occurring on or after January 21, 2011.

Section 14A(a)(2) requires a shareholder advisory vote on whether say-on-pay votes will occur every 1, 2, or 3 years. Thus, shareholders must be given four choices: whether the shareholder vote on executive compensation will occur every 1, 2, or 3 years, or to abstain from voting on the matter.   In the SEC’s view, Section 14A(a)(2) does not allow for alternative formulations of the shareholder vote, such as proposals that would provide shareholders with two substantive choices (e.g., to hold a separate shareholder vote on executive compensation every year or less frequently), or only one choice (e.g., a company proposal to hold shareholder votes every two years).   The SEC expects that the board of directors will include a recommendation as to how shareholders should vote on the frequency of shareholder votes on executive compensation.   However, the issuer must make clear in these circumstances that the proxy card provides for four choices (every 1, 2, or 3 years, or abstain) and that shareholders are not voting to approve or disapprove the issuer’s recommendation. Accordingly, the SEC is proposing amendments to its proxy rules to reflect the statutory requirement that shareholders must be provided the opportunity to cast an advisory vote on whether the shareholder vote on executive compensation required by Section 14A(a)(1) of the Exchange Act will occur every 1, 2, or 3 years, or to abstain from voting on the matter.

 Proxy Cards

 The SEC is proposing amendments to Rule 14a-4 under the Exchange Act, which provides requirements as to the form of proxy that issuers are required to include with their proxy materials, to require that issuers present four choices to their shareholders.   Under existing Rule 14a-4, the form of proxy is required to provide means whereby the person solicited is afforded an opportunity to specify by boxes a choice between approval or disapproval of, or abstention with respect to each separate matter to be acted upon, other than elections to office.   The proposed amendments would revise this standard to permit proxy cards to reflect the choice of 1, 2, or 3 years, or abstain, for these votes.

 Is the Frequency Vote Binding?

 Although the language in Section 951 of the Dodd-Frank Act indicates that the separate resolution subject to shareholder vote is “to determine” the frequency of the shareholder vote on executive compensation, in light of new Section 14A(c) of the Exchange Act, the SEC believes this shareholder vote, and all shareholder votes required by Section 951 of the Dodd-Frank Act, are intended to be non-binding on the issuer or the issuer’s board of directors.   Under new Section 14A(c), the shareholder votes referred to in Section 14A(a) and Section 14A(b) (which includes all votes under Section 951 of the Dodd-Frank Act) “shall not be binding on the issuer or the board of directors of an issuer.”   As proposed, new Item 24 of Schedule 14A would include language to require disclosure regarding the general effect of the shareholder advisory votes, such as whether the vote is non-binding.

 Shareholder Proposals

 The SEC believes that additional shareholder proposals on frequency generally would unnecessarily burden the company and its shareholders given the company’s substantial implementation of a plurality shareholder vote regarding the frequency of say-on-pay votes.   For the same reasons, a shareholder proposal that would provide an advisory vote or seek future advisory votes on executive compensation with substantially the same scope as the vote required by Rule 14a-21(a) would be subject to exclusion under Rule 14a-8(i)(10).    Section 14A(c)(4) provides that the shareholder advisory votes required by Sections 14A(a) and (b) may not be construed “to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation.”    As proposed to be amended, Rule 14a-8(i)(10) would only provide a basis for exclusion of a say-on-pay proposal if the company has adopted a policy on the frequency of say-on-pay votes that is consistent with the plurality of votes cast in the most recent shareholder vote.    Otherwise, simply having the required vote on frequency would not restrict or limit the ability of a shareholder to have a say-on-pay proposal included in the company’s proxy materials.

 Preliminary Proxy Statement

 The SEC is proposing to amend Rule 14a-6(a) to add the shareholder votes on executive compensation and the frequency of shareholder votes on executive compensation required by Section 14A(a) to the list of items that do not trigger a preliminary filing.   Under the proposed amendments, a proxy statement that includes a solicitation with respect to either of these shareholder votes would not trigger a requirement that the issuer file the proxy statement in preliminary form, so long as any other matters to which the solicitation relates include only the other matters specified by Rule 14a-6(a).

 TARP Recipients

 Issuers that have received financial assistance under the Troubled Asset Relief Program, or TARP, are required to conduct a separate annual shareholder vote to approve executive compensation during the period in which any obligation arising from the financial assistance provided under the TARP remains outstanding.    Because the vote required to approve executive compensation pursuant to the Emergency Economic Stabilization Act of 2008, or EESA, is effectively the same vote that would be required under Section 14A(a)(1), the SEC believes that a shareholder vote to approve executive compensation under Rule 14a-20 for issuers with outstanding indebtedness under the TARP would satisfy Rule 14a-21(a).   Consequently, the SEC would not require issuers who conduct an annual shareholder vote to approve executive compensation pursuant to EESA to conduct a separate shareholder vote on executive compensation under Section 14A(a)(1) until such issuers have repaid all indebtedness under the TARP.   These issuers would be required to include a separate shareholder advisory vote on executive compensation pursuant to Section 14A(a)(1) and proposed Rule 14a-21(a) for the first annual meeting of shareholders after the issuer has repaid all outstanding indebtedness under the TARP.

 Even though issuers with outstanding indebtedness under the TARP have a separate statutory requirement to provide an annual shareholder vote on executive compensation so long as they are indebted under the TARP, these issuers would be required, pursuant to Section 14A(a)(2) of the Exchange Act, to provide a separate shareholder advisory vote on the frequency of shareholder votes on executive compensation for the first annual or other such meeting of shareholders on or after January 21, 2011.    In the SEC’s view, however, because such issuers have a requirement to conduct an annual shareholder advisory vote on executive compensation so long as they are indebted under the TARP, a shareholder advisory vote on the frequency of such votes while the issuer remains subject to a requirement to conduct such votes on an annual basis would not serve a useful purpose.    The SEC has considered, therefore, whether issuers with outstanding indebtedness under the TARP should be subject to the requirements of Section 14A(a)(2) of the Exchange Act.   The SEC does not believe it is necessary or appropriate in the public interest or consistent with the protection of investors to require an issuer to conduct a shareholder advisory vote on the frequency of the shareholder advisory vote on executive compensation when the issuer already is required to conduct advisory votes on executive compensation annually regardless of the outcome of such frequency vote.    Because Section 14A(a)(2) would burden TARP issuers and their shareholders with an additional vote while providing little benefit to either the issuer or its shareholders, the SEC believes an exemption by rule is appropriate, pursuant to both the exemptive authority granted by Section 14A(e) of the Exchange Act and the SEC’s general exemptive authority pursuant to Section 36(a)(1) of the Exchange Act.   As a result, Rule 14a-21(b), as proposed, would exempt issuers with outstanding indebtedness under the TARP from the requirements of Rule 14a-21(b) and Section 14A(a)(2) until the issuer has repaid all outstanding indebtedness under the TARP.     Similar to the approach for shareholder advisory votes under Rule 14a-21(a), these issuers would be required to include a separate shareholder advisory vote on the frequency of shareholder advisory votes on executive compensation pursuant to Section 14A(a)(2) and proposed Rule 14a-21(b) for the first annual meeting of shareholders after the issuer has repaid all outstanding indebtedness under the TARP.

 Transition

 Because the mandates of the Dodd-Frank Act apply to shareholder meetings taking place on or after January 21, 2011, any proxy statements, whether in preliminary or definitive form, even if filed prior to this date, for meetings taking place on or after January 21, 2011, must include the separate resolutions for shareholders to approve executive compensation and the frequency of say-on-pay votes required by Section 14A(a) without regard to whether the SEC has adopted rules to implement Section 14A(a) by that time.

 Rule 14a-6 currently requires the filing of a preliminary proxy statement at least ten days before the proxy is sent or mailed to shareholders unless the meeting relates only to the matters specified by Rule 14a-6(a).    Until the SEC takes final action to implement Exchange Act Section 14A, the SEC will not object if issuers do not file proxy material in preliminary form if the only matters that would require a filing in preliminary form are the say-on-pay vote and frequency of say-on-pay vote required by Section 14A(a).

 Rule 14a-4 under the Exchange Act currently provides that persons solicited are to be afforded the choice between approval or disapproval of, or abstention with respect to, each matter to be voted on, other than elections of directors. Exchange Act Section 14A(a)(2) requires a “separate resolution subject to shareholder vote to determine whether [the say-on pay] votes … will occur every 1, 2, or 3 years.”   Until the SEC takes final action to implement Exchange Act Section 14A, the SEC will not object if the form of proxy for a shareholder vote on the frequency of say-on-pay votes provides means whereby the person solicited is afforded an opportunity to specify by boxes a choice among 1, 2 or 3 years, or abstain.   In addition, the SEC understands that some proxy service providers may have difficulty in the short term in programming their systems to enable shareholders to vote among four choices and that their systems are currently set up to register at most three votes – for, against, abstain.    If proxy service providers are not able to reprogram their systems to enable shareholders to vote among four choices in time for the shareholder votes required by Section 14A(a)(2), until the SEC takes final action to implement Exchange Act Section 14A, the SEC will not object if the form of proxy for a shareholder vote on the frequency of say-on-pay votes provides means whereby the person solicited is afforded an opportunity to specify by boxes a choice among 1, 2 or 3 years, and proxies are not voted on the frequency of say-on-pay votes matter in the event the person solicited does not select a choice among 1, 2 or 3 years.

 Finally, issuers with outstanding indebtedness under the TARP are already required to conduct an annual shareholder advisory vote on executive compensation until the issuer has repaid all outstanding indebtedness under the TARP.    Because such issuers are subject to an annual requirement to provide a say-on-pay vote, a requirement to provide a vote on the frequency of such votes would impose unnecessary burdens on issuers and shareholders.   Until the SEC takes final action to implement Exchange Act Section 14A, the SEC will not object if an issuer with outstanding indebtedness under the TARP does not include a resolution for a shareholder advisory vote on the frequency of say-on-pay votes in its proxy statement for its annual meeting, provided it fully complies with its say-on-pay voting obligations under EESA Section 111(e).

Check dodd-frank.com frequently for updates on the Dodd-Frank Act

Staff of the Commodity Futures Trading Commission (CFTC) will hold a public roundtable on October 22, 2010, from 1:00 p.m. to 4:00 p.m., to discuss issues related to individual customer collateral protection. The roundtable will assist the CFTC in the rulemaking process to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 Major agenda items include:

 First session:

  • What are the concerns of customers?
  • What models might meet these concerns?
  • What infrastructure changes would be necessary to implement such models?
    • Firms.
    • Clearinghouses.
    • How should the cost of such infrastructure changes be measured?

 Second session:

  • What changes to financial resources [e.g., performance bond, guaranty funds] would need to be implemented to address the changes in the risk environment that would follow as a result of implementing such models? 
    • How can such risk issues best be mitigated?
    • How can the related costs be fairly analyzed and estimated?

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

The Securities and Exchange Commission and Commodity Futures Trading Commission staffs will hold a public roundtable on October 22 from 9 a.m. to noon to discuss issues related to the clearing of credit default swaps.

 The roundtable is intended to assist both agencies in the rulemaking process to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 Major agenda items are as follows:

  Session on Products and Processing:

  •  Characteristics of credit derivatives, including corporate index and single name CDS and other credit derivatives.
  • Standardization, eligibility for clearing, and pricing issues.
  • Operational issues, including credit event processing.
  • Reporting to trade repositories.

 Session on Clearing Initiatives

  •  Current products offered for clearing.
  • Prospective products offered for clearing.
  • Risk management practices, including access to price information, clearing member default management, and management of jump-to-default risk.
  • Effect of clearing mandates.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

Our further review of Dodd-Frank disclosures in SEC filings indicates disclosures continue to be included in risk factors, descriptions of internal control matters and descriptions of regulatory implications of the Dodd-Frank Act.  Examples from our previous review can be found here.  Examples from more recent filings are set forth below. 

Risk Factors

China New Media Corp.  (Form 10-K filed October 13, 2010)

Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses and pose challenges for our management team.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

Gilman Ciocia, Inc.  (Form 10-K filed October 13, 2010)

Changing laws and regulations have resulted in increased compliance costs for us, which could affect our operating results.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and newly enacted SEC regulations have created additional compliance requirements for companies such as ours. We are committed to maintaining high standards of internal controls over financial reporting, corporate governance and public disclosure. As a result, we intend to continue to invest appropriate resources to comply with evolving standards, and this investment has resulted and will likely continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

F.N.B. Corporation (S-4 filed October 13, 2010)

FNB’s expenses have increased and may continue to increase as a result of increases in FDIC insurance premiums.

Under the Federal Deposit Insurance Act, as amended by the Dodd-Frank Act, absent extraordinary circumstances, the FDIC must establish and implement a plan to restore the deposit insurance reserve ratio, or the reserve ratio, to 1.15% of insured deposits at any time that the reserve ratio falls below 1.15%. If additional bank failures continue to occur, it will result in continued charges against the deposit insurance fund. The FDIC has implemented a restoration plan that changes both its risk-based assessment system and its base assessment rates. As part of this plan, the FDIC imposed a special assessment in 2009. The recently enacted Dodd-Frank Act provides for a new minimum reserve ratio of not less than 1.35% of estimated insured deposits and requires that the FDIC take steps necessary to attain this 1.35% ratio by September 30, 2020. We expect that assessment rates may continue to increase in the near term due to the significant cost of  bank failures, the relatively large number of troubled banks and the requirement that the FDIC increase the reserve ratio. Any increase in assessments could adversely impact FNB’s future earnings.

Return Enhanced Notes Linked to the J.P. Morgan Alternative Index Multi-Strategy 5 (USD) due October 24, 2013 (FWP filed  October 15, 2010)

THE COMMODITY FUTURES CONTRACTS UNDERLYING THE RELEVANT STRATEGIES ARE SUBJECT TO UNCERTAIN LEGAL AND REGULATORY REGIMES — The commodity futures contracts that underlie the relevant Strategies are subject to legal and regulatory regimes in the United States and, in some cases, in other countries that may change in ways that could adversely affect our ability to hedge our obligations under the notes and affect the value of the Multi-Strategy Index. The effect on the value of the notes of any future regulatory change, including but not limited to changes resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted on July 21, 2010, is impossible to predict, but could be substantial and adverse to your interest.

Sierra Bancorp (424(b)(5) filed October 14, 2010)

Recently enacted and potential further financial regulatory reforms could have a significant impact on our business, financial condition and results of operations. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) into law. The Dodd-Frank Act is expected to have a broad impact on the financial services industry, including significant regulatory and compliance changes. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of business activities, require changes to certain business practices, impose more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. In particular, the potential impact of the Dodd-Frank Act on our operations and activities, both currently and prospectively, include, among others:

   •   a reduction in the ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;

   •   increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;

   •   the limitation on the ability to raise new capital through the use of trust preferred securities, as any new issuances of these securities will no longer be included as Tier 1 capital going forward;

   •   a potential reduction in fee income due to limits on interchange fees applicable to larger institutions which could effectively reduce the fees we can charge; and

   •   the limitation on the ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations.

Further, we may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act, which may negatively impact results of operations and financial condition.

Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced or how such changes may affect us. However, the costs of complying with any additional laws or regulations could have a material adverse effect on our financial condition and results of operations.

Internal Controls

Teletouch Communications, Inc.  (10-Q filed October 15, 2010)

Certain non-recurring expenses are expected to be incurred in fiscal year 2011 related to the arbitration proceeding against AT&T and the startup and expansion costs related to the new products and services.  The Company believes that these non-recurring expenses will be manageable and will not materially impair its operating results during fiscal year 2011. In addition, on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law and a permanent delay of the implementation of section 404(b) of the Sarbanes Oxley Act of 2002 (“SOX”) for companies with non-affiliated public float under $75,000,000 (“non-accelerated filer”). Section 404(b) under SOX is the requirement to have an independent accounting firm audit and attest to the effectiveness of a Company’s internal controls. As Teletouch currently qualifies as a non-accelerated filer under the SEC rules and expects to remain one through fiscal year 2011, there are no additional costs anticipated for complying with Section 404(b) under SOX.

WES Consulting, Inc.  (10-K filed October 13, 2010)

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Internal control over financial reporting was not subject to attestation by the Company’s independent registered public accounting firm in accordance with recent amendments to Section 404 of the Sarbanes-Oxley Act of 2002 pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit the Company to provide only management’s report in this Annual Report.

Regulatory Discussions

Smithtown Bancorp (Proxy statement filed October 14, 2010)

The Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, President Obama signed into law the sweeping financial regulatory reform act entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” that implements far-reaching changes to the regulation of the financial services industry, including provisions that, among other things will:

  •   Centralize responsibility for consumer financial protection by creating a new agency responsible for implementing, examining and enforcing compliance with federal consumer financial laws.

  •   Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to bank holding companies.

  •   Require the FDIC to seek to make its capital requirements for banks such as Bank of Smithtown countercyclical so that the amount of capital required to be maintained increases in times of economic expansion and decreases in times of economic contraction.

  •   Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital.

  •   Implement corporate governance revisions, including with regard to executive compensation and proxy access by stockholders, that apply to all public companies, not just financial institutions.

  •   Make permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000, and provide unlimited federal deposit insurance until January 1, 2013, for non-interest bearing demand transaction accounts at all insured depository institutions.

  •   Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

  •   Increase the authority of the Federal Reserve to examine Smithtown Bancorp and its non-bank subsidiaries.

Many aspects of the act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on Smithtown Bancorp, its customers or the financial industry more generally. Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.

First Bancshares, Inc.  (Form 10-K filed October 13, 2010)

New Legislation.  On July 21 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things, will:

—On July 21, 2011 (unless extended for up to six additional months), transfer the responsibilities and authority of the OTS to supervise and  examine state savings associations, including the Savings Bank, to the FDIC, and transfer the responsibilities and authority of the OTS to supervise and examine savings and loan holding companies, including the Company, to the Federal Reserve Board. 

—Centralize responsibility for consumer financial protection by creating a new agency within the Federal Reserve Board, the Bureau of Consumer Financial Protection, with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts.  Smaller financial institutions, including the Savings Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

—Require new capital rules and apply the same leverage and risk-based capital requirements that apply to insured depository institutions to savings and loan holding companies beginning July 21, 2015.

—Require the federal banking regulators to seek to make their capital requirements countercyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.

—Provide for new disclosure and other requirements relating to executive compensation and corporate governance.

—Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions.

—Effective July 21, 2011, repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

—Require all depository institution holding companies to serve as a source of financial strength to their depository institution subsidiaries in the event such subsidiaries suffer from financial distress.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company and the financial services industry more generally.  The elimination of the prohibition on the payment of interest on demand deposits could materially increase our interest expense, depending our competitors’ responses.  Provisions in the legislation that require revisions to the capital requirements of the Company and the Savings Bank could require the Company and the Savings Bank to seek additional sources of capital in the future.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

On October 14, the SEC recently issued a release requesting public comment in connection with a study relating to ways in which the SEC could reduce the burden of complying with Section 404(b) of the Sarbanes-Oxley Act of 2002 for companies whose public float is between $75 million and $250 million.   The study is called for by Section 989G(b) of the Dodd-Frank Act and must be completed within nine months of the Act’s passage. 

Public companies and their independent auditors are each required to report on the effectiveness of internal control over financial reporting pursuant to Section 404 of SOX.  While Section 404(a) requires an assessment by company management, Section 404(b) requires the independent auditors to report on management’s assessment.  Title IX of the Dodd-Frank Act amends SOX by providing an exemption from the Section 404(b) requirement for companies with a float of less than $75 million.  The study mandated by Section 989(G) of the Dodd-Frank Act is intended to examine whether further relief from the Section 404(b) compliance burden for companies with public floats of between $75 million and $250 million would encourage companies to list their initial public offerings on exchanges in the U.S. rather than elsewhere.

The release contains a list of 23 items on which the SEC is specifically requesting comment.  Highlights include: 

1.     The impact of costs of complying with the auditor attestation requirement of Section 404(b) on company decisions to list on exchanges in the United States versus foreign exchanges in initial public offerings for subject issuers after the offering.

2.     The potential effect of a complete exemption from Section 404(b) for subject issuers on matters such as: raising capital; engaging in mergers, acquisitions and similar corporate transactions; and attracting and retaining qualified independent directors.

3.     Quantitative and qualitative information about whether and how compliance with Section 404(b) has benefited investors and other users of financial statements of subject issuers.

4.     Whether and to what extent auditor attestation reports on internal control over financial reporting enhances confidence in management’s assessment of the effectiveness of its internal control over financial reporting, improves the reliability of financial reporting and improves the prevention and detection of fraud and other misconduct for subject issuers.

Check back frequently at Dodd-Frank.com for updates on this and other developments relating to the Dodd-Frank Act and its effects.

The Commodity Futures Trading Commission (CFTC) will hold a public meeting on Tuesday, October 19, 2010, at 9:30 a.m. to consider the issuance of the following proposed rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act:

  •  Definition of “agricultural commodity”;
  • Position reports for physical commodity swaps and swaptions;
  • Expanding scope of privacy protections for consumer financial information under the Gramm-Leach-Bliley Act; and
  • Business affiliate marketing and disposal of consumer information rules under the Fair Credit Reporting Act.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act.