In a joint press release issued on January 15, 2014, five federal agencies indicated their approval of an interim final rule to permit banking entities to retain interests in collateralized debt obligations backed primarily by trust preferred securities (“TruPS CDOs”). These interests would have otherwise been prohibited
Apparently, corporate governance cannot be dictated by the stock exchanges. As we had blogged about last year, Section 952 of Dodd-Frank required each national securities exchange to review its independence standards for directors who serve on an issuer’s compensation committee. Each national securities exchange had to ensure that its independence definition considered relevant factors
Compensation of public company executives re-emerged back into the public limelight after the recent financial crisis which began in late 2007. The public perception was one of outrage in large part due to the fact that many investors in public companies were experiencing significant losses in their investment portfolios while CEOs and other executives were still being paid record levels of compensation and bonuses.
As a direct result, Congress enacted a number of new laws intended to fix these perceived social injustices, most of which were included in the Dodd-Frank Act. Section 953(b) of Dodd-Frank, for example, was a highly controversial part of Dodd-Frank which directed the SEC to adopt rules requiring public companies to disclose the ratio of the CEO’s total compensation to that of its median employee. The crux of the controversy surrounding this rule related to how companies should determine median employee salary. Should part-time employees be included or just full-time employees? How should companies treat international employees in countries that have significantly lower relative wages as compared to the U.S.? Another concern of critics was whether the pay ratio metric was useful for investors.
On September 18, 2013, the SEC promulgated proposed rules regarding CEO pay ratio disclosures. As required by the Dodd-Frank Act, the proposal would amend existing executive compensation disclosure rules to require companies to disclose:
The proposed rule would not specify any required calculation methodologies for identifying the median employee in terms of total compensation for all employees. Instead, it would allow companies to select a methodology that is appropriate to the size and structure of their own businesses and the way they compensate employees.
Like the other SEC disclosure rules mandated by Dodd-Frank, it seems that Congress is attempting to indirectly fix situations it views as problematic for one reason or another by mandating that public companies disclose certain things in their public filings. I presume the thought is that companies will be incentivized to change their practices so as not to be publicly shamed through these disclosures in their public filings. My presumption is supported, to some extent, by
Continue Reading Government mandated pay ratio disclosure will fail to achieve its intended objectives
When managing investments and strategies for personal financial goals, retail investors often seek guidance from their investment advisers, and on an increasing basis, from their broker-dealers. Broker-dealers and investment advisers are regulated extensively, but the regulatory requirements differ. Broker-dealers and investment advisers are also subject to different standards under federal law when providing investment advice about securities.
The Investment Advisers Act of 1940 regulates specified financial professions, including financial planners, money managers, and investment consultants. Under the Advisers Act, an investment adviser is any person who, for compensation, is engaged in a business of providing advice to others or issuing reports or analyses regarding securities. With regard to the required standard of care applied to investment advisers when providing advice to their clients, applicable case law requires a fiduciary standard which, essentially, requires that the advisor put the client’s interests first, ahead of his or her own interest.
The Securities Exchange Act of 1934 and its implementing rules comprise the most central regulatory apparatus for broker-dealers. The Exchange Act defines a broker as a “person engaged in the business of effecting transactions in securities for the account of others,” while a dealer is a “person engaged in the business of buying and selling securities for his own account.” In comparison to the fiduciary obligation of an investment advisor, broker-dealers currently have a less stringent “suitability standard” that requires that investment products they sell fit an investor’s financial needs and risk profile.
Under the Investment Advisers Act, registered broker-dealers are excluded from its terms so long as
Continue Reading Uniform fiduciary standard for broker-dealers and investment advisers? Proceed with caution!
The mission of the U.S. Securities and Exchange Commission (“SEC”) is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. This sounds great, but how does the SEC actually carry out its mission? The answer lies in the SEC’s oversight and regulation function of the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. A key player in how the SEC exercises this function is the SEC Chair, essentially, the SEC’s chief executive.
On April 10, 2013, the SEC announced the swearing in of Mary Jo White as the 31st Chair of the SEC. So who is Mary Jo White? White is a former federal prosecutor, specializing in complex securities and financial institution frauds and international terrorism cases from 1993-2002. After working as a prosecutor, White became a partner at Debevoise & Plimpton where she represented high-profile clients, including JPMorgan Chase & Co, former Bank of America Corp. CEO, Ken Lewis, UBS AG and accounting giant, Deloitte & Touche LLP.
So what’s not to like? The confirmation from the Senate came with little dissent: it voted unanimously in her favor, and its Banking Committee voted 21-1 in her favor. The one nagging criticism of White stems from her ability to effectively navigate conflicting interests. Essentially, some critics fear that her ties to Wall Street will cloud the SEC’s decision-making with respect to these institutions’ behavior during the 2007-09 financial crisis.
Importantly, because of White’s vast experience as both a federal prosecutor and Wall Street defense lawyer, she must, as SEC Chair, recuse herself from investigating former clients for at least a year. Notably, after defending JPMorgan Chase for its role in the financial crisis, for example, White could have to sit out an SEC investigation into the bank’s recent $6 billion trading loss.
Even without consideration of White’s association with Wall Street, she takes over at the SEC at a time of transition, and is faced with grave challenges. According to many, the SEC has been “stuck in a rut” since former SEC Chair, Mary Schapiro, resigned in December of 2012, leaving the SEC’s five-member panel divided between two Democrats and two Republicans. But White is starting to make changes. Recently, she appointed Keith Higgins as the new Director of Corporation Finance and appointed acting director, Lona Nallengara, as SEC chief of staff. Also, President Obama nominated two U.S. Senate aides to replace
Continue Reading New SEC Chair: Mary Jo White
On Tuesday, the Securities Law Committee of the Society of Corporate Secretaries and Governance Professionals met with officials from the Divisions of Corporation Finance, Investment Management, and Trading and Markets and the Office of the Whistleblower. While neither new Chair Mary Jo White (confirmed in April) nor new Director of Corporation Finance Keith Higgins (starts at the SEC in June) was present at the meeting, the Staff provided some important takeaways. Although the two hour meeting covered a significant amount of issues, the most important discussions involved the following topics:
Issuers listed on the NYSE or Nasdaq should pay close attention to the rules proposed by the exchanges last week because the proposed rules will impact compensation committees; however, the impact may be a “tale of two exchanges” because the impact is more significant to Nasdaq-listed companies. As you may recall, Congress included several provisions in the Dodd-Frank Act to combat perceived public concerns over excessive executive compensation. One provision, say-on-pay, has been implemented, but other more controversial provisions such as executive compensation clawbacks and executive compensation pay ratios have not been implemented. Last week, the exchanges proposed rules to implement the independence requirements for compensation committees required under Dodd-Frank.
As we have mentioned before, Section 952 of the Dodd-Frank Act does not infringe on traditional state corporation law by requiring an issuer to have a compensation committee or to have a compensation committee actually approve executive compensation. Instead, it directs the exchanges to design and implement their interpretations of corporate governance best practices based on the parameters of Section 952. The NYSE and Nasdaq proposed rules are different, and I highlight some of the most important aspects of each of the set of rules below. In general, NYSE-listed companies are impacted significantly less than Nasdaq-listed companies.
Director Independence
The SEC rules implementing Section 952 require that the exchanges’ definition of independence consider relevant factors such as (i) the source of the director’s compensation, including any consulting, advisory, or other compensatory fees paid by the listed company and (ii) whether the director has an affiliate relationship with the company. The two exchanges interpreted the SEC’s rules vastly different.
The NYSE merely maintains its current definition of “independence” and requires the issuer to consider the two additional factors set out by the SEC. In practice, it would be highly unlikely that the two additional factors set out by the SEC would impact a board’s assessment of a particular director’s independence.
Nasdaq’s current definition of “independent director” remains in effect; however, Nasdaq has elected to overlay a separate independence
Continue Reading Proposed compensation committee independence rules will impact some issuers more than others
Finally, we have had some recent bipartisanship in Congress. The only problem, of course, is that the recent bipartisanship further burdened public companies with additional disclosure requirements. As Broc Romanek noted in his blog last week, Congress overwhelmingly passed the Iran Threat Reduction and Syria Human Rights Act of 2012 requiring public companies to disclose to the SEC its dealings with Iran.
As we have been blogging about for nearly a year, Congress has picked up a bad habit of burdening public companies in advancing an agenda that has nothing to do with the protection of investors. These so called “social disclosures” (many of which are really “political” – or politically motivated – disclosures) while arguably related to important issues, burden public companies with specific tasks to compile and disclose certain information. These same burdens, however, are not placed on private companies. Yet, Congressman Darrell Issa, the Chairman of the House Committee on Oversight and Government Reform, has been demanding to know why there are fewer public companies today as compared to a decade ago.
To be fair, I note that the House has recently passed (in bipartisan fashion) HR 4078, Red Tape Reduction and Small Business Job Creation Act, which would limit the ability of the SEC to add more regulatory burden on public companies, but given recent Congressional acts, HR 4078 appears more “Do as I say and not as I do.” For example, Congress passed the American Jobs Creation Act of 2004, which requires public companies to disclose in its Form 10-K if the company incurs a specific type of tax penalty from the IRS involving abusive or tax avoidance (shelter) transactions. More recently, as everyone is keenly aware, laws have passed pertaining to conflict minerals, mine safety, and executive compensation pay ratios. Laws that have been proposed, but have not passed (yet), include
Continue Reading You asked for it: Bipartisan agreement in congress
Compensation committees remain on the hot seat. Stemming from the Dodd-Frank Act, the SEC has adopted rules directing each national securities exchange to require companies with listed equity securities to comply with new compensation committee and compensation advisor requirements. Among other things, these new rules require national securities exchanges to implement listing standards that require :
As we noted when these rules were originally proposed, the SEC has not infringed on the traditional rights of states to define corporate law because these new rules do not require an issuer to have a compensation committee. Rather, the new rules require that the independence rules be applied to committees performing functions typically performed by a compensation committee regardless of the name of the committee (compensation committee, human resource committee, etc.). Under the final rules, the SEC has broadened the independence requirement to apply also to the members of the listed issuer’s board of directors who, in the absence of a compensation committee, oversee executive compensation matters.
The final definition of “independence” for a compensation committee will largely depend on the final rules of each national
Continue Reading Are your compensation committee members independent?
Section 1502 of the Dodd-Frank Act mandates the SEC to adopt rules requiring reporting companies to disclose whether certain minerals used in production chains originate from the Democratic Republic of the Congo or its neighboring countries. Minerals sourced from these areas of central Africa often fund militia and other military groups’ operations which have exacerbated