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  1. ISS released the results of its 2012 global corporate governance policy survey, which we imagine it will somehow use to formulate voting recommendation policies, here. According to ISS, executive compensation remains the top focus of investors and issuers, with risk oversight second for issuers and director qualifications third for issuers (second for investors). Also, Shearman & Sterling published its annual summary of big-company governance trends here and compensation trends here, and PWC published its annual director survey here.
  2. The compensation committee listing standards published to implement SEC Rule 10C-1 are here (NYSE) and here (Nasdaq). The 58 and 97 pages the exchanges have devoted to the new standards suggests there is something interesting going on. There isn’t. Most public companies already have a separate compensation committee with independent directors; hiring independent compensation consultants should be easy, and one wonders why anyone thought it was OK to rely on consultants hired by executives. The new rules won’t "fix" executive compensation, whatever that means, but may provide a veneer that legitimizes ever upward creeping salaries. A recent study that suggests peer group comparison, presumably even comparisons conducted by independent consultants, is a cause for executive compensation gone amok is available here. (And honestly, stop suggesting your policy to set compensation “near the 50th percentile” is thoughtful, unique or good governance—it is the opposite of those.)
  3. Litigation based on failed say-on-pay votes, essentially alleging that the shareholders saying “no” means directors aren’t acting in good faith, continues to lose in court. A few recent examples are described here.
  4. In JOBS Act news,
  • The SEC posted updated FAQs (nos. 42-54), here.
  • The comment period for proposed rules eliminating the general solicitation ban for Rule 506 and Rule 144A offerings expired October 5. Among the comments, the North American Securities Administrator Association, Inc.’s disappointment with the lack of clear accredited investor verification standards is here.
  • The SEC posted a how-to guide for submitting a draft registration statement here, and posted a sample letter to issuers here, explaining how to transition existing draft registration statements to the new system.
  1. If you’re planning on an offering soon, take note of the new SEC wire instructions and fees effective October 1, 2012, posted here.
  2. In auditing news, COSO published its exposure draft to update its internal controls assessment framework here. Significant, of course, because this is the framework most use.
  3. Issuers continue to ponder the SEC’s conflict mineral rules that, on closer reading, we are willing to characterize as “vague” and “extremely unhelpful.” Among other things, the SEC refused to define “product,” “manufacture” or “contract to manufacture,” which are kind of important. Recent law firm summaries of the rules are here, here, here and here. The Corporate Counsel recently sponsored a conflict minerals webinar, leaving one with the impression that those who have spent lots of time on the question are really hoping the SEC is going to provide some additional guidance, because no one knows where much of this will shake out. A few notes on some fundamental questions:
  • What is a “product”? An iPhone is a product, that’s easy. But what product is an airline selling? Transportation services or the seat on a plane which contains conflict minerals? Are conflict minerals “necessary” to the product of transportation services? Sure, but intuitively, an airline shouldn’t have to worry about conflict minerals. But Boeing certainly does, and are airlines caught if they contract to manufacture planes needed for their fleet? How about a DVD? Arguably, the content, not the physical DVD, is the product. But you can buy streaming movies, so where does that leave you? Does it matter that the cost of the DVD is passed through to the consumer? What about a cell phone service provider? Does it contract to manufacture phones? (This one is covered in the SEC release—it depends on how much influence the company exerts over the manufacture, and if the only specification is that the phone be compatible with the company’s network, you should be fine. Super helpful.) What about utility companies that sell power but also sell meters that contain conflict minerals? What if they lease the meters?
  • Is the product being “manufactured”? It’s evident and generally understood what “manufacturing” means, says the SEC in its release, but then proceeds to reject specific definitions, like the North American Industry Classification System’s, which would exclude “assemblers” that piece together products from components not in raw form, which the SEC believes are supposed to be captured. Does the computer system integrator who sets up your network “manufacture” the system from off-the-shelf components? Almost certainly not. But how about a company that assembles computers from purchased components? Maybe yes, but the SEC confuses this analysis by saying that the contract-manufacture of components that go into a company’s product should be captured if the company exercises “enough” influence over the manufacturing process, moving you into a different mode of analysis. (But if there’s a reasonable substitute for the mineral, can you claim it’s not “necessary” to the function of the product to escape the rule’s reach? Seems too clever.)
  • What level of influence on the manufacturing process traps you? You’re not in the clear merely because you don’t specify the use of conflict minerals, the SEC clearly says, but how detailed do specification need to be before you are subject to the rule? If you only specify functionality requirements and avoid delving into production detail, is that enough? (If you know the functionality is going to require a specific conflict mineral, that almost certainly doesn’t help you.)
  • What about packaging? If the package is important for marketing, are you selling the packaging or just what comes in it? Packaging probably isn’t captured except, maybe, when it becomes part of what you’re selling (like the hard tin holding cookies that is suitable for re-gifting) or is necessary to the product, like if it keeps “fresh cookies” fresh.
  • What are people doing now to get ready to report?
  • Some are starting to budget for this, or at least to get budget requests in. Also, most are begrudgingly moving to understand the rules and risks—like the private right of action under Section 18 (filing a report that contains a false or misleading statement)—and getting buy-in at the executive and board levels to set the proper compliance tone at the top.
  • Some are engaging suppliers, and some suppliers are engaging customers, on the diligence process.
  • The smart ones are not throwing lawyers at this in a “check the compliance box” kind of way, but are preparing to ease the pain of dealing with the rules by building an internal team that knows the products and supply chain, and can deal with customers, suppliers and contract manufacturers in something less than a ham-fisted way.
  • Some external parties are working on certification processes; some issuers may be hopeful this will do some of the work for issuers.
  • Finally, is a lawsuit going to save us from this mess? Commentators aren’t willing to handicap the chances here. The SEC’s release specifically addressed some of the questions raised by commentators, like the U.S. Chamber of Commerce, and punted a bit on the cost-benefit analysis, which depends on how you value the social benefits. Also, because these rules are mandated by Congress, in contrast to proxy access rules, the SEC’s hands are somewhat tied.