The following summary of significant U.S. legal and regulatory developments during 2009 may be of interest to our Canadian clients and friends.
1. Final Rules on XBRL: In March 2009, the SEC adopted final rules requiring SEC reporting companies to submit financial statement information in an interactive data format based on eXtensible Business Reporting Language (“XBRL”). XBRL involves the electronic “tagging” of financial statement line items and other information in a format that will allow investors and analysts to access and manipulate the data more easily through computer software applications. Canadian companies filing reports with the SEC that prepare their primary financial statements using Canadian GAAP or International Financial Reporting Standards must include XBRL data as part of their Form 20-F or 40-F for fiscal periods ending on or after June 15, 2011. For information on the XBRL requirements, including their application to Canadian companies, see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2250.
2. SEC Proxy Access Proposal: In June 2009, the SEC re-proposed proxy access. These proposed rules would create a federally mandated procedure to allow the inclusion of shareholder nominees in company proxy materials. The proposed rules would apply to U.S. listed companies that are subject to the SEC’s proxy rules. Because most Canadian companies are not subject to the SEC’s proxy rules, these rules would not apply to them.
The qualifications for nominating shareholders would include a tiered minimumownership requirement of:
- 1% of voting shares for large accelerated filers (public float ≥ US$700 million);
- 3% for accelerated filers (US$75 million ≤ public float < US$700 million); and
- 5% for non-accelerated filers (public float < US$75 million).
Shares must be held for at least one year prior to notification to the company of the shareholder’s intent to nominate a director, and the shareholder must intend to hold such shares through the date of the subject election of directors. For additional information on the SEC proxy access proposal, see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2399.
The SEC recently re-opened the comment period until January 29, 2010 to allow interested persons to comment on additional data and analyses added to the public comment file.
3. NYSE Ends Broker Discretionary Voting in Director Elections: In July 2009, the SEC approved the NYSE’s proposal to amend its rules to eliminate broker discretionary voting in director elections for all issuers except registered investment companies. Starting with shareholder meetings on or after January 1, 2010, brokers will no longer be able to vote uninstructed shares in director elections even if uncontested. Because the rules apply to all brokers of shares listed on the NYSE, the impact of the rule changes will be felt by all companies whose shares trade in the United States, including Canadian companies. For additional information, see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2414.
4. “Naked” Short Selling and Short Sale Disclosure: In July 2009, the SEC gave permanent effect to a short selling rule designed to reduce the potential for abusive “naked” short selling, i.e., selling an equity security short without owning or having borrowed the security. The rule, which was adopted in the fall of 2008 on an interim final basis, requires market participants to close out short sales within three days after the transaction date. A preliminary study by the SEC’s Office of Economic Analysis found that failures to deliver securities decreased by 57% as a result.
Also in July, the SEC deferred consideration of short sale disclosure rules, allowing a temporary rule requiring disclosure of short sales to the SEC on Form SH to expire on August 1, 2009. The SEC announced that it would be working with several selfregulatory organizations (“SROs”) to make short sale volume and transaction data available through the SROs’ websites. For additional information regarding the SEC’s announcement and a summary of the new rule, see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2447.
5. SEC Proposes Amendments to E-Proxy: In October 2009, the SEC published proposed amendments to its “notice and access” model of proxy material distribution (also known as “e-proxy”). In an effort to address the sharp decline in retail voting rates for companies who use notice-only e-proxy procedures, the proposed amendments would, among other things, allow companies the flexibility to tailor the Notice of Internet Availability of Proxy Materials by replacing the SEC’s specific legend and format requirements with requirements about the types of information that the Notice must contain, without specifying the exact language to be used. For more information on the proposed amendments, see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2497.
6. Credit Ratings and Credit Rating Agencies: In 2009, the SEC proposed and adopted several rules that focus on fostering accountability, transparency and competition in the credit rating agency industry. In October 2009, the SEC proposed rules that would require disclosure of information regarding credit ratings when a company or an underwriter uses a credit rating in connection with an SEC registered offering (not including those done on MJDS forms). Among other things, the proposed rules would require disclosure of:
- The credit rating, including its scope, limitations and other related information;
- The identity of the party who paid for the credit rating and whether the credit rating agency provided non-rating services (and the fees for such services) to the company over a specified period of time;
- Final ratings not used and “preliminary credit ratings” that were obtained from credit rating agencies other than the agencies providing final ratings that were used; and
- Changes to previously disclosed credit ratings.
In October 2009, the SEC also issued a concept release seeking comments on whether the current rule exempting nationally recognized statistical rating organizations from liability as “experts” under the U.S. Securities Act should be rescinded.
7. SEC Approves Enhanced Disclosure About Risk, Compensation and Corporate Governance: In December 2009, the SEC approved amendments to its disclosure requirements related to executive and director compensation, corporate governance and director and director nominee background. The amendments become effective on February 28, 2010, and will cover proxy statements mailed after such date and Form 10- K’s filed after such date. Because most Canadian companies are not subject to the SEC’s proxy rules, these new requirements will not apply to them. The key amendments include:
- requiring companies to discuss the relationship of their risk oversight practices to their compensation policies and practices for all employees, rather than just named executive officers, if such policies and practices create risks that are reasonably likely to have a material adverse effect on the company;
- requiring disclosure and justification of the board’s leadership structure (including whether there are separate board chair and CEO positions, and, if not, whether there is a lead independent director), and describing the role of the board in the oversight of risk;
- requiring (1) enhanced disclosure of a director and director nominee’s background, including the particular experience and skills that led the board to conclude that the person should serve as a director, public company directorships held during the past five years (instead of only current directorships) and involvement in legal proceedings within the last ten years (rather than five years) and (2) disclosure as to whether, and if so, how, a company’s nominating committee considers diversity (which is not defined in the amendments) in identifying director nominees; and
- requiring disclosure of fees and services relating to compensation consultants. Additional details regarding the new rules can be found at http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2551; and http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2552.
8. Initiatives to Reform the U.S. Marketplace:
A. Federal Legislation Relating to Corporate Governance: During the course of 2009, several pieces of legislation were proposed and are pending in the U.S. House and Senate that would restructure certain aspects of U.S. corporate governance. The legislation would leapfrog state laws by federalizing key aspects of corporate governance that until now have stood firmly under state purview. These bills would, among other things:
- Require companies listed on U.S. securities exchanges to comply with the following listing standards:
- have an independent board chair who has not previously served as an executive officer of the company;
- eliminate classified boards and elect all directors annually;
- require majority voting for uncontested director elections; and
- establish an independent risk committee of the board;
- Require certain actions relating to say-on-pay and golden parachutes:
- holding a non-binding advisory shareholder vote on executive compensation; and
- requiring the disclosure of any compensation agreements with executive officers by any person soliciting proxies in connection with a business combination transaction.
It is clear that the say-on-pay and golden parachute provisions of these bills would not apply to Canadian companies, but it is less clear whether the corporate governance provisions would apply to them. There is precedent for Congress to mandate such requirements for non-U.S. companies listed in the United States (for example, the audit committee requirements mandated by the Sarbanes-Oxley Act of 2002). On the other hand, one of the notable bills proposing corporate governance reforms, the Shareholder Bill of Rights Act of 2009, includes broad exemptive authority for the SEC, which the SEC may use to exempt non-U.S. issuers in conformity with historical practice of U.S. securities exchanges. For information on the Shareholder Bill of Rights Act of 2009, see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2353.
B. Financial Sector Reform: In November 2009, Senator Dodd, chairman of the Senate Committee on Banking, Housing and Urban Affairs, circulated a discussion draft titled “Restoring American Financial Stability Act of 2009,” proposing legislation aimed at financial sector reform. The discussion draft covered many areas of financial sector regulatory reform, including systemic regulation, the regulation of advisers to hedge funds and other investment vehicles, the insurance industry, the regulation of over-the-counter derivatives, credit rating agencies, consumer protection, corporate governance and executive compensation. For more information on the corporate governance proposals in the Dodd discussion draft, see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2520.
C. Transparency in Over-The-Counter (“OTC”) Derivatives and Securitization Markets: In June 2009, the U.S. Treasury Department submitted to Congress its report on reforming many aspects of the U.S. financial regulatory system, including establishing comprehensive regulation of the financial markets. Among other things, the Treasury proposed to (1) create comprehensive regulation of all OTC derivatives, including credit default swaps, (2) harmonize the regulation of futures and securities and (3) strengthen the supervision and regulation of the securitization markets. This report is instructive in suggesting the direction of future legislation. For additional information on the Treasury’s proposed regulatory reforms, see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2403.
D. Federal Legislation to Require Private Funds to Register: In January 2009, Senators Grassley and Levin introduced the “Hedge Fund Transparency Act,” which would require certain private investment funds to register with the SEC, make significant public disclosures (including the identities of investors) and adopt antimoney laundering programs. Also, on December 11, 2009, the U.S. House of Representatives passed “The Wall Street Reform and Consumer Protection Act of 2009.” The bill would require any investment adviser to a private investment fund to register with the SEC and subject those private investment funds to substantial regulatory reporting requirements. For additional information on these bills and their requirements, see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2172; and http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2543.
9. Current Disclosure Considerations: Public companies should be mindful that, although the worst of the financial crisis is hopefully behind us, shareholders, potential investors, rating agencies and regulators remain focused on corporate fundamentals. Where a year ago market participants sought to understand the impact of the implosion of the banking system and the following recession, attention has since shifted to focus on how companies are positioned to cope with new market realities and emerging trends. While the following client memorandum was prepared for Canadian and other non-U.S. companies reporting on Form 20-F, the memorandum may also be of interest to Canadian Form 40-F filers as it discusses important disclosure considerations for SEC reporting companies: http://www.paulweiss.com/files/upload/23Nov09_20-F.pdf.
10. SEC’s Latest Selective Disclosure Enforcement Action Highlights the Benefits of a Strong Compliance Program: The SEC’s latest selective disclosure (Regulation FD) enforcement action in October 2009, brought against the former chief financial officer of American Commercial Lines, Inc., highlights the benefits of having a strong compliance program. In its complaint, the SEC alleged that the CFO selectively disclosed material, nonpublic information regarding the company's earnings forecast to a limited number of analysts without simultaneously making that information available to the public. Recognizing the compliance program that the company had in place and the company's prompt and appropriate reaction to the improper selective disclosure of the information, the SEC did not bring an action against the company. This action represents the first instance in which the SEC did not also include the company as a party to a Regulation FD enforcement action. For additional information, please see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2491.
11. Other 2009 Enforcement Activity: In response to calls for increased securities regulatory enforcement following the market failures, the Madoff scandal and other alleged Ponzi schemes in late 2008, the SEC and the Financial Industry Regulatory Authority, Inc. (“FINRA”) gained new leadership and increased their enforcement activity. Comparing the calendar year 2009 with 2008, the SEC opened 6% more investigations (944, compared to 890). Comparing January to August 2009 with the same prior year period, the SEC issued 118% more formal orders (275, compared to 126) and filed 147% more TROs (52, compared to 21).
There have also been substantial policy changes:
- The “penalty pilot” program, which required SEC enforcement staff attorneys to obtain formal approval of settlement ranges before commencing corporate penalty negotiations, was terminated, making it easier for staff to settle enforcement actions without delay.
- The requirement that all five Commissioners approve the issuance of a formal order of investigation was modified to allow any single Commissioner to approve such orders.
- FINRA established a Whistleblower Office in March 2009 to expedite the review of tips which may prevent future Ponzi schemes.
Based on a survey of reported enforcement actions, the SEC’s current enforcement priorities appear to include Foreign Corrupt Practices Act violations, insider trading, subprime mortgages, Ponzi schemes, auction rate securities and municipal securities fraud.