A. A Flurry of Year End Departures at the Securities and Exchange Commission
- Chairwoman Mary Schapiro to Depart December 14
Securities and Exchange Commission Chairwoman Mary Schapiro announced that she would depart from the agency on Dec. 14. For more on Chairwoman Schapiro’s departure, see this SEC press release. President Obama announced that he intends to designate Elisse Walter, a current Commissioner, as Chair upon Ms. Schapiro’s departure. She will serve on a temporary basis and will be able to continue serving at least until the end of December 2013. Reuters has some details on Ms. Walter’s career and appointment.
- Director of the Division of Corporate Finance, Meredith B. Cross, to Leave SEC
The Securities and Exchange Commission announced that Meredith B. Cross, Director of the Division of Corporation Finance, will leave the agency at the end of the year to return to the private sector.
- Director of the Division of Trading and Markets, Robert W. Cook, to Leave SEC
The Securities and Exchange Commission announced that Robert W. Cook, Director of the SEC’s Division of Trading and Markets, plans to leave the agency.
- General Counsel Mark Cahn to Leave SEC
General Counsel Mark D. Cahn will leave the agency at the end of the year to return to the private sector.
B. Securities Regulation and the Danger of Social Media
Last week, the New York Times reported that Netflix disclosed that the SEC issued a Wells Notice to the company and its CEO, Reed Hastings, for a post made by Mr. Hastings on his public Facebook page congratulating his employees on the company’s performance and including a figure representing the number of hours users viewed programs on the website in June of 2012. The SEC is concerned that the post violated Reg FD by failing to announce information that is material to its business to all investors at the same time. Greengopost.com also reported on the Netflix developments.
At the Practising Law Institute’s (PLI) Annual Securities Regulation Institute panel, “Ongoing Disclosure and Compensation Challenges,” the panelists noted that there are similar examples of company executives releasing non-public information via social media. Click here for a summary of the panel. The panel encouraged the adoption of social media policies, monitoring the use of social media and publicize the use of social media so all potential investors are aware of any material information.
C. Dodd-Frank Conflict Minerals Disclosure Requirements and Challenges for the Coming Year
This past August, the SEC adopted rules to implement Section 1502 of the Dodd-Frank Act with a disclosure requirement that calls on companies to determine whether their products contain conflict minerals – by carrying out supply chain due diligence – and to report this to the Securities and Exchange Commission (SEC). The first disclosures are due May 31, 2014 covering products manufactured during the 2013 calendar year.
At the PLI’s Annual Securities Regulation Institute, a panel entitled “Ongoing Disclosure and Compensation Challenges” noted that companies must determine whether the rule applies to them. Companies are now determining, by year end 2012, how to track conflict minerals in 2013. The panel suggested that corporations determine whether conflict minerals originated in the covered countries and analyze the applicability of rules and develop plans for the country of origin inquiry and due diligence, develop for ongoing monitoring. For a summary of this panel, see here.
On November 21, 2012, a group of challengers including the National Association of Manufacturers and the Chamber of Commerce of the United States filed a preliminary statement of issues as part of its suit seeking to bar implementation of this regulation. They were granted expedited consideration of their petition based upon irreparable injury stemming from the “extraordinary costs” implementation of the Rule will impose upon them given the difficulty of determining country of origin and other matters relevant to compliance. Companies will have to absorb some cost of compliance, as even with this expedited schedule, the briefing should not be completed until March 2013, meaning a decision may not be rendered by the end of that year. For further details about the conflict rules and the challenge against them, see this post from theracetothebottom.org.
D. SEC Denies Motion to Stay Resource Extraction Rules
The SEC has issued an order denying the motion by the American Petroleum Institute, Chamber of Commerce, Independent Petroleum Association of America and national Foreign trade Counsel to stay the effective date of final rules relating to disclosure of resource extraction. The SEC rules require issuers to comply for fiscal years ending after September 30, 2013, with each annual report due no later than 150 days after the end of the most recent fiscal year, such that the first reports would be due on February 28, 2014, at the earliest. This timing largely drove the Commission’s decision on this motion.
At the PLI Annual Securities Regulation Institute, a panel entitled “Ongoing Disclosure and Compensation Challenges” noted that these rules do not affect as many issuers as the rules on conflict minerals but it is still a big deal for those who fall under it. Disclosure must be made on a project by project basis of any payments made to the US government or any foreign government for the purposes of commercial development of oil, natural gas or minerals. See this link from PLI for a summary of this panel.
E. SEC/DOJ Resource Guide to Foreign Corrupt Practices Act
On November 14, 2012, the Securities and Exchange Commission and the Department of Justice released A Resource Guide to the U.S. Foreign Corrupt Practices Act. The 120-page guide provides a detailed analysis of the U.S. Foreign Corrupt Practices Act (FCPA) and closely examines the SEC and DOJ approach to FCPA enforcement.
F. JOBS Act Rulemaking — Comments on the SEC’s General Solicitation Proposal
As mandated by Congress pursuant to Section 201 of the JOBS Act, the Securities and Exchange Commission recently released its proposed rules to eliminate the prohibition against general solicitation and advertising in connection with offerings and sales pursuant to Rule 506 under Regulation D of the Securities Act. The removal of the general solicitation and advertising ban is conditioned upon issuers taking “reasonable efforts” to verify accredited investor status. The comment letters can be found here. Comment letters continue to be submitted, with most looking for clarification on what constitutes “reasonable efforts” to verify accredited investor status.
At PLI’s Annual Securities Regulation Institute, a panel, “Jumpstarting Capital Formation - the New Legislation and Other Developments,” warned that “reasonable efforts” to verify accredited investor status may differ depending on the facts and circumstances. “One of the big dividing issues will be what other knowledge an issuer needs to have of an investor. There is a big difference between an open website where investors merely have to claim to be accredited versus an issuer having extensive knowledge of the investor (account information, etc.) steps to ensure that only accredited investors participate in the underlying offerings.” See this link from PLI for a summary of this panel.
As reported by Business Insider, Senator Carl Levin (D-MI) sent a terse letter to the SEC, reprimanding the SEC for drafting a proposed rule that ‘provides no certainty to issuers and fails to establish methods sufficient to ensure that only accredited investors participate in the offerings.’ He further notes that it was made clear that ‘self-certification’ of accredited investors is inadequate, suggesting that the SEC’s proposed rules need to require common-sense documentation and/or verification practices and procedures.
G. Major Proxy Advisory Firms Glass Lewis and Institutional Shareholder Services, Inc. Release Voting Guidelines
On November 16, 2012, Institutional Shareholder Services Inc. released its final policy updates to its voting guidelines for the 2013 proxy season. These updates will generally be effective for shareholder meetings on or after February 1, 2013. ISS has indicated that it is holding a webcast on December 6, 2012 and releasing Frequently Asked Questions in December, which will provide further discussion and elaboration on the revised guidelines.
In addition, on November 8, 2012, Glass Lewis & Co. (“Glass Lewis”) released its updated voting guidelines for the 2013 proxy season. These updated guidelines will go into effect for shareholder meetings occurring after January 1, 2013. For a summary and short analysis of both of these new releases, see this article from Lexology.
- 2013 Glass Lewis Proxy Paper Guidelines
The 2013 guidelines complement material compensation-related updates that went into effect this past July when Glass Lewis began sourcing peer companies for its pay-for-performance analyses from Equilar. Although the recent policy update primarily focuses on issues outside of executive compensation, there are some changes with potential implications for executive pay in the upcoming proxy season
- ISS Corporate Governance Policy Updates
Consistent with the draft policies released previously, the key policy changes are related to peer group methodology, the use of realizable pay, say on parachutes and pledging of company stock. The revised policies will apply to all U.S. companies with shareholder meeting dates on or after February 1, 2013.
On December 6, ISS released a detailed set of frequently asked questions (FAQs) on how it will select a company’s peer group for purposes of conducting its pay-for-performance analysis. ISS uses this peer group to measure a company’s total shareholder return and CEO pay in deciding how to recommend for the say-on-pay vote. The FAQs provide information on how ISS will select 14-24 peers from the company’s own GICS code, as well as the GICS code of the peers named in the subject company’s proxy statement. Subject to size constraints based on revenues or assets and market value, ISS describes the order in which peers will be selected from the potential universe of companies that will come up based on those GICS codes. Other questions address the use of size parameters, which are clearly key to the selection process, the GICS industry groups (financial services) where assets will be used instead of revenue, and what happens if a company discloses using more than one peer group.
H. Iran & Syria Sanctions: SEC Division of Corporate Finance Issues Seven Compliance and Disclosure Interpretations
The SEC Division of Corporate Finance issued seven Compliance & Disclosure Interpretations relating to Section 13(r) of the ’34 Act, which was created by the Iran Threat Reduction and Syria Human Rights Act of 2012.
I. Treasury Issues FX Swap and FX Forward Exemption
On November 16, 2012, the Secretary of the Treasury issued a much awaited determination that foreign exchange (“FX”) swaps and FX forwards should not be regulated as swaps under the Commodity Exchange Act for most purposes, including registration, mandatory clearing and trade execution, and margin. As was the case in the proposed determination, FX derivatives other than FX swaps and forwards, such as FX options, currency swaps and non-deliverable forwards, are not covered by the exemption and would be regulated as swaps.
J. Updates from the Federal Reserve and other U.S. Banking Agencie
- Final Rules from the Federal Banking Agencies
On October 19, 2012, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Federal Reserve Board approved final rules, which were proposed for comment in January of this year, implementing the Dodd-Frank Act’s company-run stress testing requirements for all insured depository institutions with total consolidated assets of $10 billion or more. In addition, the Board has simultaneously published final stress-testing rules, covering the Dodd-Frank Act’s requirements for Board-run and company-run stress-testing requirements for banking organizations with more than $50 billion in total consolidated assets. For a summary of the final rules, including: (1) coverage of the rules, (2) Effective Dates, (3) stress test scenarios, (4) stress test methodologies, (5) reports and reporting deadlines, (6) publication requirements, (7) board-run stress tests, (8) and stress test cycles, see this blog post on the Harvard Law School Forum on Corporate Governance and Financial Regulation.
- Federal Reserve Instructions for CCAR and Non-CCAR Bank Holding Companies
The Federal Reserve launched the 2013 capital planning and stress testing process for large bank holding companies (“BHCs”) with the publication, on November 9, 2012, of two sets of instructions: one set for the 19 BHCs that participated in the 2011 Comprehensive Capital Analysis and Review (“CCAR”) process (“CCAR BHCs”) and another set for the 11 other U.S.-domiciled, top-tier BHCs with total consolidated assets of $50 billion or more that did not participate in the 2011 CCAR process (“non-CCAR BHCs”).
- Regulatory Capital: January 1, 2013 Deadline Eased
On the same day, the Federal Reserve joined with other U.S. banking agencies to announce that recent proposals to implement Basel III in the United States will not become effective on January 1, 2013. The three federal bank regulatory agencies announced that their proposed new capital rules based on Basel III (and other Basel standards would not take effect on January 1, 2013, a date previously proposed apparently in order to adhere to international consensus. The announcement was overdue. The comment period for the three proposed capital rules ended only a few weeks ago on October 22, 2012. The agencies received hundreds of comments that they will have to digest in order to finalize the rules, making implementation on January 1, 2013, a practical impossibility.