SEC D - Polsinelli · may expose the company to material risk. The rules appear particularly applicable to financial firms, but are not limited to that industry. Although the rules

August 2009

SECURITIES ALERT: NEW SEC DISCLOSURE AND

SHAREHOLDER VOTING PROPOSALS

KANSAS CITY | ST. LOUIS | CHICAGO | DENVER | PHOENIX | WASHINGTON DC | NEW YORK | WILMINGTON DE

OVERLAND PARK | ST. JOSEPH | SPRINGFIELD | TOPEKA | EDWARDSVILLE

Corporate Finance and Securities | e-Alert

© 2009 Polsinelli Shughart PC

he Obama Administration and Congress have introduced important legislative and regulatory proposals designed to increase corporate transparency and accountability, and improve the regulation of

financial firms. The scale of these proposals is hardly surprising given the severity and viral spread of the financial crisis and the Democrats’ intention to address what they believe are its root causes and the corporate cultural shortcomings it exposed. These developments will have a profound effect on public companies and financial firms and the deliberations of their compensation committees, and will largely define the 2010 proxy season.

T

8 SEC Implements Say on

Pay for TARP Participants

8 SEC Approves NYSE Rule

Eliminating Uninstructed Broker Voting in Director

Elections

9 Treasury Introduces

Legislation to Regulate Hedge Funds and Ratings

Agencies

10 Treasury Advocates New Regulatory Architecture

For Financial Firms

12 Chairman Frank Introduces

Corporate and Financial Institution

Compensation Fairness Act of 2009

In this issue:

of 14 © 2009 Polsinelli Shughart PC

Corporate Finance and Securities | e-AlertAugust 2009

NEW SEC DISCLOSURE AND SHAREHOLDER VOTING PROPOSALS

The Securities and Exchange Commission (SEC) has been very busy proposing new compensation and corporate governance disclosures, implementing the “say on pay” provisions of the Emergency Economic Stabilization Act and approving a New York Stock Exchange rule prohibiting uninstructed broker voting in director elections.

The new rulemaking initiatives are part of a broader effort to improve corporate transparency, accountability and governance in response to the financial crisis. When combined with other efforts in the Administration and Congress to redesign the financial regulatory architecture, address systemic risk, and enhance shareholder participation in the compensation process, and informed by a greater understanding of the complexity and unpredictability of our financial system, the regulatory landscape will be significantly changed by year end. In response, companies should conduct a comprehensive review of their policies and practices to improve their resilience and adaptability in this dramatic new environment.

New Compensation and Governance Disclosures

As promised, the SEC has proposed a series of new disclosure rules on compensation and corporate governance. Although the proposals are subject to public comment and additional comments have been solicited, SEC Chairperson Mary Schapiro has been talking about them for awhile, so their adoption in some form is highly probable.

The proposing release (33-9052, 34-60280, IC-28817) also recommends amendments to the proxy rules to clarify the manner in which soliciting parties communicate with shareholders.

Topics Covered

The proposed disclosure rules cover the following topics:

• A company’s overall compensation policies and their impact on risk-taking

• Executive and director equity compensation awards

• Director and nominee qualifications and involvement in legal proceedings

• Company leadership structure

• Directors’ role in risk management

• Compensation consultant conflicts of interest

• Announcement of shareholder voting results


Corporate Finance and Securities | e AlertAugust 2009

Compensation Discussion and Analysis Disclosures The SEC continues to argue that the structure and application of financial firm incentive arrangements had the propensity to induce employees to take unnecessary and excessive risks that endangered their companies and the economy. Recognizing that well-designed compensation policies may enhance business interests by encouraging innovation and appropriate risk-taking, the SEC has proposed a new section in Compensation Discussion and Analysis (CD&A) that will analyze how a company’s overall compensation policies can affect risk-taking and risk management. The rules would require a company to discuss its compensation policies and practices for employees generally (including non-executive officers) if those policies or practices may expose the company to material risk. The rules appear particularly applicable to financial firms, but are not limited to that industry. Although the rules will generally require disclosure only if a company’s incentive arrangements materially increase its risk profile, every company should perform an incentive compensation risk analysis to determine if the disclosures are warranted, and should consider disclosing the conclusions of that analysis in CD&A. The circumstances requiring disclosure will vary depending on the company and its compensation programs, but may include policies or practices of a business unit:

• That carries a significant portion of the company’s risk profile • With compensation structured differently than other units • That is significantly more profitable than others • Where the compensation expense is a significant percentage of the unit’s revenues • That vary significantly from the overall risk and reward structure of the company, such as

when bonuses are awarded upon accomplishment of a task, while the income and risk to the company from that task extend over a significantly longer period of time



Although one size won’t fit all, following is a nonexclusive list of principles-based disclosures that should be considered:

• The general design philosophy of the company’s compensation policies for employees whose behavior would be most affected by incentives and how the policies affect risk-taking by those employees

• The risk assessment or incentive considerations, if any, in structuring compensation policies or

awarding compensation • How compensation policies relate to the realization of risks resulting from the actions of

employees in both the short term and long term, such as through claw backs or holding periods

• Policies on adjustments to compensation programs to address changes in risk profile • Material actual adjustments to compensation policies or practices resulting from changes in

risk profile • The extent to which a company monitors its compensation policies to determine whether its

risk management objectives are being met by its incentive programs The SEC solicited additional comment on a number of related topics, including whether smaller reporting companies (who are exempt from CD&A) should provide some disclosure about the risk management impact of their incentive arrangements. As with all the compensation disclosures adopted since 2006, these rules encourage careful thought and planning by compensation committees.

Revisions to Compensation Tables When the new compensation disclosure rules were adopted in 2006, they required that equity compensation awards be disclosed in the Summary Compensation Table (SCT) and Director Compensation Table (DCT) at their aggregate grant date fair value computed in accordance with FAS 123R. Within weeks, the SEC amended its rules to require that grant date fair value be disclosed in the Grants of Plan-Based Awards Table, and that the SCT and DCT disclose equity awards on the basis of the compensation expense recognized for financial reporting purposes.



The SEC is now returning to the original rule, proposing again that equity awards be disclosed in the SCT and DCT at their 123R grant date fair value. The SEC is making the switch because it believes the grant date fair value method correlates more closely with actual decision-making and provides a clearer picture to investors of the true value of equity awards. Many companies already report grant date fair value supplementally in the footnotes or narrative to the SCT. Smaller reporting companies, which need not provide a Grants of Plan-Based Awards Table, have been exempt from disclosing the grant date fair value of equity awards. The new rule will place all reporting companies under the same standard. If a company does not believe that grant date fair value accurately reflects an individual’s compensation, it can provide an appropriate explanatory narrative. The presentation of aggregate grant date fair value would include the incremental fair value of any options reprised during a year. The amendments would also:

• Rescind the requirement to report the grant date fair value of each individual award in the Grants of Plan-Based Awards Table and the footnotes to the DCT

• Amend Instruction 2 to the salary and bonus columns of the SCT to provide that registrants

will not be required to report in those columns the amount of salary or bonus foregone at a named executive officer’s election, and that non-cash awards received instead be reported in the column applicable to the form of award elected.

The SEC has received a rule-making petition requesting that it require SCT reporting of the annual change in value of equity awards, which could be a negative number in a down market. For

restricted stock, restricted stock units and performance shares, the reported amount would be the change in stock price from year-end to year-end. For options, it would be the change in the in-the-money value over the same period. This is an interesting approach that could provide a clearer picture of the value of equity awards held over time.



Enhanced Director and Nominee Disclosure

The SEC is proposing amendments to Item 401 of Regulation S-K to expand the disclosure of director and nominee qualifications, past directorships held by directors and nominees, and the time frame for disclosing legal proceedings involving directors, nominees and executive officers.

What the SEC is seeking is more information about the experience, qualifications, attributes and skills of directors and board committee members, including their capacity to assess and manage risk, so that shareholders may make more informed voting decisions.

The disclosure enhancements include:

• The specific experience, qualifications or skills that qualify an individual to serve as a director and committee member, including information about his or her risk assessment skills, relevant past experience, area of expertise, and why his or her service as a director benefits the company

• Directorships at other public companies held during the past five years, as opposed to the existing rule which is limited to current directorships

• Lengthening the disclosure of legal proceedings from five years to ten years

If adopted, the new disclosures will require updates in companies’ director and officer questionnaires.

The SEC is also soliciting comment on whether investors believe boardroom diversity is a significant issue that merits proxy statement disclosure.

The SEC is proposing amendments to Item 407 of Regulation S-K and Item 7 of Schedule 14A to require disclosure of a company’s leadership structure and why management believes it’s the best structure for the company. The disclosures would provide more transparency on how boards function, answering such questions as:

• Whether and why companies have decided to combine or separate the positions of chairman and CEO

• Whether and why the company has a lead independent director and, if so, the specific role played by that person



• The board’s role in the risk management process, including information about how the company perceives the role of the board and its relationship with senior management on this issue. Examples would be which board committee, if any, oversees risk management, whether risk management executives report directly to the board or a board committee, and how the board or committee monitors risk.

Fund Governance Disclosures

The proposed rules would also apply to registered management investment companies, which would be required to provide disclosures in their proxy or information statements about their leadership structure and the board’s role in risk management. The rules would also require disclosure about whether a fund’s chairperson is an “interested person” and, if so, whether the fund has a lead independent director and the role that person plays in fund leadership.

New Disclosure on Compensation Consultants

The SEC is proposing amendments to Item 407 to require the following disclosures about compensation consultants:

• The nature and extent of all additional services provided by the consultant or its affiliates during the year

• The aggregate fees paid for all services, and the aggregate fees related to determining or recommending the amount or form of executive or director compensation

• Whether the decision to engage the consultant or its affiliates for non-compensation services was made, recommended, screened or reviewed by management

• Whether the board approved any non-compensation services provided by the consultant

The disclosures would only apply if the consultant plays any role in determining or recommending the amount or form of executive or director compensation, and not if the consultant’s role is limited to advising on broad-based non-discriminatory benefit plans.

Reporting Voting Results on Form 8-K

The SEC is proposing that shareholder-voting results be disclosed within four business days under a new Item 5.07 of Form 8-K. The requirement to disclose voting results in 10-Q or 10-K would be eliminated. If the vote involves a contested election and is not definitively determined in four business days, then a company would report preliminary results in the 8-K and the final results by amendment four business days after the results are certified.



SEC IMPLEMENTS SAY ON PAY FOR TARP PARTICIPANTS

Section 111(e) of the Emergency Economic Stabilization Act of 2008 (EESA) requires companies that have received financial assistance under the Troubled Asset Relief Program (TARP) to allow a separate shareholder advisory vote on executive pay during any period in which any TARP obligations remain outstanding. The SEC has adopted proposed rules to implement this mandate.

The SEC is proposing a new Exchange Act Rule 14a-20 requiring the advisory vote at any annual or special meeting at which proxies are solicited for a director election. TARP participants would be required to disclose in their proxy statement that they are providing a separate shareholder vote on executive pay pursuant to the EESA mandate, and to briefly explain the general effect of the vote, such as whether or not it is binding.

The SEC has elected not to amend Exchange Act Rule 14a-6 by adding say on pay to the routine items that don’t require filing a preliminary proxy statement. Accordingly, TARP participants will have to file a preliminary proxy statement and await any staff comments when providing an advisory vote on executive pay.

SEC APPROVES NYSE RULE ELIMINATING UNINSTRUCTED BROKER VOTING IN DIRECTOR ELECTIONS

The SEC has approved a proposal by the New York Stock Exchange (NYSE) to amend NYSE Rule 452 to eliminate broker discretionary voting in both contested and uncontested director elections. Brokers holding shares in street name may no longer give a proxy to vote those shares in director elections without first obtaining instructions from their customers.

The new rule will apply to shareholder meetings held by NYSE listed companies after January 1, 2010. The rule is designed to improve board accountability by ensuring that beneficial owners with an economic interest in the company actually vote on its directors. Both the NYSE and SEC believe the previous rule tended to entrench management because brokers routinely voted shares held in street name in favor of managements’ nominees. When combined with the SEC’s new proxy access rules, revised Rule 452 may

increase the influence of significant shareholders on corporate policy by making the election of managements’ candidates less inevitable.

The rule would not apply to registered investment companies, but would codify staff interpretations that do not permit broker discretionary voting on material amendments to advisory contracts.



TREASURY INTRODUCES LEGISLATION TO REGULATE HEDGE FUNDS AND RATINGS AGENCIES The Treasury Department has introduced legislation to regulate the hedge fund and ratings agency industries.

Hedge Fund Regulation

The Investment Advisers Act would be amended to provide for the regulation of private fund managers with more than $30 million in assets under management. The legislation would authorize the SEC to:

• Require hedge fund managers to maintain records regarding the private funds they advise

• Require hedge fund managers to report on the amount of assets under management, their use of leverage (including off-balance sheet leverage), counterparty credit risk exposure, trading and investment positions, trading practices and other topics mandated by the SEC

• Subject hedge fund managers to periodic, special and other examinations

• Specify disclosures to be provided to hedge fund investors, prospective investors, counterparties and creditors

The bill is part of the effort by Treasury and the Federal Reserve Board to improve the oversight of financial institutions they believe could expose the economy to systemic risk

Ratings Agencies

Treasury has also introduced legislation to increase transparency, improve oversight, and reduce reliance on credit ratings agencies such as Moodys and Standard & Poor’s by strengthening the SEC’s regulatory authority over ratings agencies.

Treasury has argued that investors were overly reliant on ratings agencies that often failed to accurately describe the risk of rated financial products, and that a lack of transparency in the credit rating industry prevented investors from understanding the full nature of the risks they were taking.

The bill would:

• Bar ratings agencies from providing consulting services to any company whose securities they rate



• Strengthen disclosure and management of ratings agency conflicts of interest

• Require disclosure of fees paid by issuers for the ratings and the total amount of fees paid to each ratings agency during the prior two years

• Address conflicts arising from ratings agency personnel who become employed by rated issuers

• Require that ratings agencies designate a compliance officer

• Require disclosure of preliminary ratings to reduce “ratings shopping”

• Require different symbols to distinguish the risks of structured financial products such as asset-backed securities

• Require qualitative and quantitative disclosure of the risks measured in the ratings process, including assessments of data reliability, the probability of default, and the sensitivity of ratings to changes in assumptions

• Require that the SEC establish a dedicated office for regulation of ratings agencies

• Require mandatory registration of ratings agencies with the SEC

• Require ratings agency documentation and SEC review of policies and procedures for the determination of ratings, with emphasis on internal controls, due diligence and implementation of ratings methodologies

• Require Treasury and the SEC to determine where the scope of federally mandated reliance on credit ratings can be reduced

TREASURY ADVOCATES NEW REGULATORY ARCHITECTURE FOR FINANCIAL FIRMS

Seeking to fill the gaps in regulatory authority that contributed to the financial crisis, Treasury is advocating “a new foundation for financial regulation and supervision that is simpler and more effectively enforced, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market.”



Treasury’s proposal is intended to meet the following key objectives:

Promote robust supervision and regulation of financial firms

• A new Financial Services Oversight Council of financial regulations to identify emerging systemic risks and improve interagency cooperation

• New authority for the Federal Reserve to supervise all firms, including non-banks, that could pose a threat to financial stability

• Stronger capital and prudential standards for all financial firms, and even higher standards for large, interconnected firms

• A new National Bank Supervisor to supervise all federally chartered banks

• Eliminate loopholes in bank holding company regulation

• Registration of hedge fund advisers

Establish comprehensive supervision of financial markets

• Enhanced regulation of securitization markets, including new requirements for market transparency, stronger regulation of ratings agencies, and a requirement that issuers and originators retain a financial interest in securitized loans

• Comprehensive regulation of over-the-counter derivatives

• New authority for the Federal Reserve to oversee payment, clearance and settlement systems

Protect consumers and investors from financial abuse

• A new Consumer Financial Protection Agency to protect consumers from unfair, deceptive and abusive practices

• Stronger regulations to improve the transparency, fairness and appropriateness of consumer and investment products

• A level playing field between and higher standards for banks and other providers of financial services



Provide the government with the tools it needs to manage financial crisis

• A new regime to resolve nonbank financial institutions whose failure could have serious systemic effects

• Revisions in the Fed’s emergency lending authority to improve accountability

• Raise international regulatory standards and improve international cooperation

CHAIRMAN FRANK INTRODUCES CORPORATE AND FINANCIAL INSTITUTION COMPENSATION FAIRNESS ACT OF 2009 House Banking Committee Chairman Barney Frank has introduced new legislation called the Corporate and Financial Institution Compensation Fairness Act of 2009. The Act would impose the following requirements:

• A separate annual shareholder vote on executive compensation. The vote would not be binding on the board, would not be construed as overruling a decision of the board, and would not create any additional fiduciary duties for the board, nor would the vote limit shareholders’ ability to make compensation-related proposals for inclusion in the proxy statement

• A separate shareholder advisory vote on any “golden parachutes” awarded as a result of acquisitions, mergers, consolidations or sales

• New independence standards for compensation committees that would parallel the audit committee independence standards in Exchange Act Rule 10A-3

• Give the compensation committee sole authority to engage and oversee compensation consultants

• New disclosures on compensation consultants

• Enhance disclosure of financial firm compensation arrangements, to enable regulators and investors to evaluate whether those arrangements are aligned with sound risk management, are structured to account for the time horizon of risks, or could threaten the safety and soundness of the institution or the financial system.



Corporate Finance and Securities Attorneys

William W. Mahood III, Chair

Kansas City 816.360.4350

[email protected]

Paul J. Cambridge St. Louis

314.552.6893 [email protected]

Jennifer A. Feldhaus

St. Louis 314.889.7096

[email protected]

Larry K. Harris St. Louis


Scott M. Herpich


[email protected]

Amy Hornbeck Abrams Kansas City


Arnold R. Kaplan

Denver 720.931.1163

[email protected]

Paul G. Klug St. Louis


Gregory M, Kratofil, Jr.


[email protected]

Philip N. Krause Kansas City


Cortney E. Lang Kansas City


Jay E. Pietig Kansas City


William E. Quick


[email protected]

Michael A. Sabian Denver


Marc Salle


[email protected]

William M. Schutte Kansas City


Kelly Sullivan-Deady


[email protected]

Kevin R. Sweeney Kansas City


Andrew M. Wilcox


[email protected]

Whether a private or public company, our Corporate Finance and Securities attorneys have the expertise and insight to help you get deals done. We have represented a diverse range of clients from small businesses and venture capitalists to Fortune 100 companies. Our attorneys have played a vital role in helping clients achieve successful results through:

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Because of our firm’s entrepreneurial background, we have represented some of the Midwest’s hottest new companies with private placement offerings - including one of the fastest growing Internet security companies and a pioneer in the field of alternative energy.

Our public securities practice is exemplified by our representation of two of the Federal Home Loan Banks in connection with their Securities and Exchange Commission reporting obligations. Members of our firm also have experience advising some of Kansas City's leading public companies on their Exchange Act reporting and compliance and the public offering of equity and debt securities. With a former general counsel to the Kansas Securities Commission and a former employee of the Securities Exchange Commission on our team, we bring a comprehensive perspective to every deal. Whether you are private or public, we are a committed team of energetic workers and innovative thinkers ready to help you tackle your next big deal. To learn more about our services, visit us online at www.polsinelli.com.

About Polsinelli Shughart’s Corporate Finance and

Securities Group

Alan C. Witte St. Louis 314.889.7085 [email protected]

Kevin M. Zeller Kansas City 816.572.4533 [email protected]



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Documents

SEC D - Polsinelli · may expose the company to material risk. The rules appear particularly applicable to financial firms, but are not limited to that industry. Although the rules