It looks like the folks at AIG have taken "tone at the top" to heart. Unfortunately, their tone isn't of the type that is good news for taxpayers, who now own 80% of AIG. As this Washington Post article describes, two former AIG CEOs were grilled during a House Committee on Oversight and Government Reform hearing this week (one of whom received a $5 million performance bonus just before he left - in addition to a $15 million golden parachute - and another AIG executive was fired who still receives $1 million per month for consulting services). The former CEOs expressed no remorse for their actions that drove AIG into the arms of the government and didn't acknowledge making any mistakes. Rather, they blamed the accounting. The House committee members were visibly disturbed by the sheer audacity of these so-called corporate leaders. Given the long list of troubling practices at AIG described in this front-page WSJ article, we may well see these two in pinstripes someday.

The topper is the fact that AIG is now getting an additional $37.8 billion loan from the taxpayers, which is lumped on top of the $80 billion load the government provided last month. This came a day after it was revealed that the company held a junket for sales reps at a resort, spending unbelievable amounts of the taxpayer's money. How exactly does one spend $23,000 on spa treatments or $5,000 at the bar? The story is outrageous and listening to the radio, it's fair to say that AIG already has become the posterchild of all that is broken in Corporate America. If this doesn't get you mad, nothing will.

Reflecting on a True Corporate Leader

Kevin LaCroix does a masterful job reviewing the new uncensored - and authorized - biography of Warren Buffett in his "The D&O Diary Blog. In my opinion, Warren is one of the few leaders in Corporate America deserving of the title "leader." Reading Kevin's description, you can see that Warren values his reputation more than money. How many CEOs can you say that about?

It's worth noting that Warren's annual letter to shareholders is one of the only "straight talk" pieces out there when it comes to disclosure documents for shareholders. I've never understood why other CEOs haven't followed his lead. Just like few have followed his lead in the face of today's crisis to speak up, take actions to show they are accountable and try to produce calm.

So What Now? Does Board-Centric Oversight Really Work?

Given the events leading up to this crisis (and continuing today, see the AIG story above), there certainly will be a rash of regulatory reforms. It's clear that there are numerous practices that need fixing and right now, Corporate America doesn't seem capable of doing it on its own.

Exhibit A is excessive executive compensation. As I often state when debating defenders of today's pay packages, would you be motivated to work to 100% of your abilities if you made $10 million per year? If the answer is "yes," what purpose does paying you $20 million serve?

Apologists then trot out the argument that another company may pay you that $20 million - thus, your current employer should pony up. That may well be true in relatively rare circumstances - but the reality is that there are very few CEO superstars that could easily move from one company to another (just like there are few superstars in sports that could command top dollar from another team).

Boards continue the status quo of handing out oversized pay packages because it's the easy thing to do. Having that hard negotiation with a sitting CEO is tough to do - most directors have day jobs where they face tough situations every day and I imagine that it would be rough to go to a board meeting and continue fighting the good fight. But that is their job and they need to do it - or they need to drop off the board. As I blogged recently, I hear that the few companies that really make responsible changes are the ones where the CEO speaks up and voluntarily asks for the change. Sadly, boards and compensation committees are not the ones driving responsible change.

In the wake of the ongoing crisis, there may well be a push to dramatically alter the board-centric oversight model that exists today. In his most recent column, Jim Kristie of "Directors and Boards" looks at this topic, first noting Marty Lipton's speech defending the board-centric model from a few months ago, then pointing out that growing evidence of a lack of confidence in the board-centric model today and ending with the thought that "shareholder-centric governance may be one of the ways out of this financial crisis, widely thought to be the worst since the Great Depression."

Powerful food for thought. Are boards listening - and acting - to stave off this possibility? Like most others, I'm cynical at this point. My guess is that most would rather blame the accounting or short sellers than take responsiblity for their own oversight failures. True leadership is a rare commodity these days.

The Bottom Line: We Need Trust

I believe the reason that the government's daily solutions to the credit crunch are not working is because the trust within our system has evaporated. It is widely reported that banks refuse to lend to each other. The approval rating of our politicians are at historical lows.

And I wouldn't be surprised if many of the retail investors now leaving the stock market never return, particularly the older baby boomers who don't have the time to wait this out. And even though our markets are now dominated by institutional investors, their size often is attributable to participation by the masses. Look for their sizes to shrink as coffee cans are buried in the backyard. Without true leadership - setting the proper tone at the top and taking responsibility - I don't think this market will turn around. To start down the path to true leadership, CEOs can start by voluntarily reining in their excessive pay packages.

- Broc Romanek

With many law firms suffering from a dearth of transactional work - compounded by the biggest market crisis of our generation - the sheer number of firm memos being produced has been overwhelming lately. Here is where we have been posting the hordes of memos related to the crisis:

- Memos re: Bailout Legislation
- Memos re: Implementing TARP (includes memos on Money Market Guaranty Program)
- Memos re: Fair Value Accounting
- Memos re: CDOs/Credit Default Swaps
- Memos re: SEC's Emergency Orders
- Memos re: Lehman Bankruptcy
- Memos re: Covered Bonds
- Memos re: International Developments

In addition, we have posted these memos regarding related developments on these sites:

- Memos re: Fed’s Rule Relaxation for Non-Controlling Bank Investments (on DealLawyers.com)
- Memos re: Executive Compensation Provisions in Bailout Legislation (on CompensationStandards.com)

Work on Congressional Fair Value Study Commences: Comments Solicited

The SEC has commenced its study on "mark-to-market" accounting - and is authorized by Section 133 of the Emergency Economic Stabilization Act - and is soliciting comment. The Act requires the study to be completed by January 2nd and the SEC must consult with Treasury and the Federal Reserve. Notably, the IASB announced that it believes last week’s SEC-FASB clarification on fair value is consistent with IAS 39.

Last month, Corp Fin Director John White and Deputy Chief Accountant James Kroeker (who is heading up the SEC's study now) gave this testimony on transparency in accounting before the Senate Banking Committee.

The Brackets: A "Credit Crunch" Pool

- Broc Romanek

A few weeks ago, I blogged about the SEC's new "21st Century Disclosure Initiative," including a summary of a proposal from Joe Grundfest and Alan Beller - as well as my ten cents on the entire idea. Today, the SEC is holding a roundtable on the idea - and has posted these FAQs and this strategic plan.

Trotting this new initiative out now seems like a bad idea when it won't really bear on any of the problems associated with the current credit crisis. Bizarrely, the SEC issued this press release yesterday that revised the title of this roundtable so it's framed as if it's dealing with transparency in the credit crisis (here is the original press release).

At least, this illustrates that the SEC understands the need to tackle the credit crisis topic - unfortunately though, this roundtable isn't about it. During the roundtable, if one was to hold a drinking game with "credit crunch" as the trigger term, I fear there wouldn't be much action outside of the Chairman's opening remarks. This perceived inaction by the SEC in the face of a major crisis will continue to provide fodder for folks like those over at "The Conglomerate" blog, which recently wrote a daily list of regulatory actions to combat the crisis - with the SEC penciled in as "The SEC did nothing." The SEC should be in crisis mode and setting aside any unrelated projects.

- Is This Project Dealing with "Form over Substance"? - When I read the SEC's strategic plan, I was disappointed that the direction of the initiative clearly seems to be in the vein of "form over substance." The SEC's vision of this project seems to consist of creating a "Company File System," where all the core information about a company would be in a centrally and logically organized interactive data file. When you read that description, a fair question might be: "Isn't that what Edgar does today?" And a straight-faced answer would be: "For the most part, yes."

As I mentioned in my last ten cents on this topic, I believe the SEC should be focused more on updating its substantive requirements - without that kind of meat involved in this project, I find the phrase "21st Century Disclosure Initiative" to be undeserving. This rulemaking simply doesn't carry that kind of importance and it's misleading.

Nothing personal about Bill Lutz (who is leading this initiative), but as his biography shows, he is an English Professor - and that's not the best background to lead us down the path to better substantive requirements. At this point, this is Chairman Cox's baby and I don't feel a heavy Corp Fin presence in this project - and it's supposed to be about disclosure.

- Why a "Hash Mark System" Might Not Work - Putting aside my reservations about the timing of this initiative, I do have some thoughts about a "Company File System." I think it's important for companies to be required to file their core information - whatever the format (ie. HTML, XBRL) - on a single government site that is common for all reporting companies, like EDGAR is today. It's very efficient to be able to go directly to one site and type in the name or trading symbol of a company and go directly to a company's filings.

One of the ideas being considered is that companies would fill out online questionnaires and then they wouldn't file their questionnaire responses directly with the SEC - rather they would post the responses on their own websites, with a ‘hash' that authenticates the document as well as the date and time of posting. I have three concerns regarding this idea:

1. Challenges of Maintaining Content - I think this "hash mark" idea may be challenging for companies to implement. They would be required to ensure that those links stay active. You would think that this would be easy to accomplish, but I find that companies change the URLs of their IR web pages much more frequently than you would think. (I know this because I try to maintain a list of links to the IR web pages of widely-held companies and it requires constant updating).

2. Security Considerations - Another consideration for companies is the fear that the "official" documents now required to be on their servers would get hacked.

3. Investor Trust - Finally, and most importantly, investor studies show that investors trust documents filed - and found - on a government website more than documents found on a company's site. Rightfully so, investors tend to view documents posted on corporate websites as marketing material.

The SEC: Under Fire

Even before Senator McCain was calling for SEC Chairman Cox to be fired, the SEC has been under attack. The latest is a claim that the SEC censored a report to hide its role in the Bear Stearns implosion. According to this Bloomberg article, the SEC's Inspector General released a report a few weeks ago that "deleted 136 references, many detailing SEC memos, meetings or comments, at the request of the agency's Division of Trading and Markets that oversees investment banks" (the SEC's IG also released this companion report regarding the SEC's broker-dealer risk assessment program). An unedited version of this report is posted on Senator Grassley's website.

The SEC's Inspector General has issued another report - also requested by Senator Grassley (see his letter from yesterday) - regarding the 2005 firing of Gary Aguirre, an SEC lawyer who claimed superiors impeded his inquiry into insider trading at hedge fund Pequot Capital Management. This report was released by the Senate Finance Committee yesterday, but is not yet posted on the SEC's website - the articles states that the report "said the agency should consider punishing the director of enforcement and two supervisors over the firing."

Perhaps in response to the pressure, Chairman Cox hired a former head of the Congressional Budget Office as a senior adviser yesterday - and according to this article, recently hired two new public relations officers.

Treasury Department: Implementing TARP ASAP

As required by the Emergency Economic Stabilization Act, the Treasury Department is moving quickly to choose advisers, issue regulations, and hire companies to serve as asset managers for its "Troubled Asset Relief Program" (known as "TARP").

The first big move by Treasury was issuing a number of interim guidelines (egs. asset manager selection process; conflicts of interests) - as well as three "solicitations for financial agents," which have a deadline for comments by 5:00 pm today.

Neel Kashkari - age 35! - has been named the interim head of the new Office of Financial Stability, which will implement the TARP (he was the Assistant Secretary for International Economics and Development and has been a key adviser to Hank Paulson). This office will hire a small staff with expertise in asset management, accounting and legal issues.

- Broc Romanek

We thank the many of you who have registered to attend our upcoming conferences - to be held on October 21-22 – via video webcast: "Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference" & "5th Annual Executive Compensation Conference." And of course, we thank the many of you coming to New Orleans - for you, here are check-in/breakfast instructions.

For those watching by video webcast, to ensure you don’t have any technical snafus for the conferences, please test your access today.

- How to Test: Use this link to test for access (this test is only available this week) by using your ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing problems, follow these webcast troubleshooting tips.

- How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Both Conferences will be available for CLE credit in all states except Pennsylvania (but hours for each state vary; see the list for each Conference in the FAQs).

When you test your access, you can test our CLE Tracker as well as input your bar numbers, etc. You also will be able to input your bar numbers anytime during the days of the Conferences too (remember that you will need to click on the periodic “prompts” all throughout each Conference to earn credit).

- How Directors Can Earn ISS Credit: For those directors attending by video webcast, you should sign-up for ISS director education credit using this form.

- How to Attend by Video Webcast: If you are registered to attend online, just log in to TheCorporateCounsel.net or CompensationStandards.com on the days of the Conference to watch it live or by archive (it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference” on the home pages of those sites will take you directly to the Conference.

More Companies Using Internal Pay Equity as Alternative Benchmarking

During our Conferences, some of the most respected compensation consultants will describe how companies can implement internal pay equity as an alternative to peer group benchmarking (see the Conferences' agendas). With so much attention right now on excessive executive compensation, we predict that this methodology will really take off over the next year given how existing peer group surveys are comprised of inflated data.

Some companies have already taken the leap. In its 2008 proxy statement for Cerner Corporation, the company discloses that it uses internal pay equity guidelines that provide that its "CEO’s total cash compensation shall not be more than three times that of the next highest total cash compensation (the company's board must approve any exception to these guidelines)."

My Ten Cents: Overcoming Objections to Internal Pay Equity

To the extent there is pushback from compensation consultants about clients using internal pay equity as an alternative benchmark to peer groups, I can understand it - because internal pay likely will reduce the level of the consultant's role in the pay-setting process. With internal pay, consultants can advise clients about how to implement internal pay equity methodologies, but they wouldn't make money for the use of their peer group database. This is because internal pay equity is an "internal look" at the company's own pay scale.

But for the life of me, I can't understand why lawyers would advise their clients not to consider internal pay equity. Over the past few years, peer group benchmarking has been criticized by many quarters. It's not that peer group analysis is not useful per se, it's just that the current batch of CEO pay data is tainted because most boards sought to pay their CEOs in the top quartile for 15 years - thus driving CEO pay inflation through the roof.

Given that most boards rely on peer group benchmarks as the paper trail to show that they were informed when exercising their fiduciary duties - and given that peer group benchmarking is now widely discredited - shouldn't lawyers be advising boards to find another source of documentation for their files? Or urging them to obtain at least an additional layer of protection by balancing peer group benchmarking with internal pay equity?

The old adage that "everyone else is doing it" simply doesn't work anymore with regulators and courts. Imagine a courtroom where several experts are brought in to show how peer group data is tainted and that everyone "should have known" it. It's easy if you try...

Learn how to implement internal pay equity from the resources in our "Internal Pay Equity" Practice Area on CompensationStandards.com.

- Broc Romanek

Want to know how your future looks in the wake of the bailout legislation? Tune in tomorrow for this webcast - "Latest Developments in Capital Market Deals" - to hear how the markets are functioning right now and what the future holds. The panel includes both an equity and a debt banker, as well as legal experts from the East Coast, West Coast and the Midwest. The panelists include:

- Edward Best, Partner, Mayer Brown
- Michael Kaplan, Partner, Davis Polk & Wardwell
- J. Maurice Lopez, Managing Director, Citigroup Global Markets
- Patrick Schultheis, Partner, Wilson Sonsini Goodrich & Rosati
- Bill Schreier, Head of Equity Capital Markets, BM Capital Markets

Coming Soon? Code of Ethics for Proxy Advisory Services

For the past few months, Meagan Thompson-Mann, a visiting fellow at Yale’s Millstein Center for Corporate Governance and Performance, has been soliciting comment regarding voting integrity in the proxy voting process in response to a draft study she drafted. Among other things, her study suggests a code of ethics for proxy advisory services and includes a proposed code. It raises the possibility of sharing information with companies, but leaves it up to the advisor (p. 21) - and it also provides that a proxy advisor should not give companies any assurances of a particular recommendation prior to its release (p. 15). Weigh in with your thoughts if you can.

RiskMetrics Begins Advising on Tender Offers

As I noted recently on the DealLawyers.com blog, RiskMetrics' ISS Division recently broke with tradition and advised its clients not to tender Longs Drug Stores' shares into CVS' tender offer. Historically, RiskMetrics has only made recommendations on shareholder votes and left tender offers alone. So changing the structure of a deal from a merger to a tender offer will no longer have the incidental effect of removing RiskMetrics from the equation...

- Broc Romanek

In testimony last week before the Senate Banking Committee, SEC Chairman Cox pointed out the enormous regulatory black hole in which credit default swaps have come of age since pretty much the dawn of the 21st century. He pointed out that the SEC’s Enforcement Division was focused on using its antifraud authority in this area, and noted that credit default swaps provided a way for market participants to “naked short” the debt of companies without restriction. Cox asked that Congress “provide in the statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets,” but he didn’t say who should have such authority. Interestingly enough, I don’t recall any similar discussion of the lack of authority to regulate credit default swaps and other derivatives up until this point, while the excesses in the market - and the lack of transparency - have been known for some time.

A day earlier, New York Governor Paterson and the New York Insurance Department announced that, beginning on January 1, 2009, the New York Insurance Department would regulate some credit default swaps as a form of financial guaranty insurance, whenever the credit default swap is issued in New York or issued to a New York purchaser who “holds, or reasonably expects to hold, a ‘material interest’ in the reference obligation.” Governor Paterson also called on the federal government to regulate credit default swaps.

One interesting thing pointed out by the statements of Chairman Cox and Governor Paterson is that no one seems to know for sure how big the market is for credit default swaps. Chairman Cox cited in his testimony “the $58 trillion notional market,” while Governor Paterson referred to the “$62 trillion market.” Any estimates such as these are pretty much educated guesses, since there really isn’t any transparency into the scope of the credit derivatives market. Also, these types of notional amount estimates are often cited to state the size of derivatives markets, but really those amounts overstate the actual exposure that these derivatives present, since the notional amount is really just the basis on which payments are calculated - but not how much any counterparty owes on the actual derivative contract. Something closer to $2 trillion in fair value is perhaps a better estimate of the size of the credit default swap market, at least up until the events of the last few months.

Congress did not yet heed the calls for more federal authority over credit default swaps, as no provisions have been included in the two versions of the bailout bill that would vest regulatory authority over credit derivatives with the SEC or any other agency; however, this may be an issue that Congress will turn to quickly once the latest fire drill has died down.

While I am by no means running for president of the credit default swaps fan club, I think that now is the absolute worst time to start beating the drum for more regulation of derivatives in general and credit derivatives in particular. While speculative activity in credit default swaps no doubt contributed to some of our problems today, credit derivatives have also mitigated risk for countless institutions by spreading the risk of default around the globe. Policymakers should have been paying attention long ago, before the market has grown to the size – and level of interconnectedness – that prevails today. Now, vague talk of regulation only serves to call into question the enforceability of agreements, make counterparties even more nervous about ultimately collecting on their contracts, and put further pressure on credit markets when those markets are least able to handle the pressure.

A Change to the Audit Committee Report

Back in the summer, the SEC approved the PCAOB’s new rule regarding communications with audit committees regarding independence. Last week, the SEC made a conforming amendment to Item 407 of Regulation S-K to change the language of the audit committee report. Previously, the audit committee report referred to “Independence Standards Board No. 1 (Independence Standards Board No.1, Independence Discussions with Audit Committees), as adopted by the Public Company Accounting Oversight Board in Rule 3600T.” Now, the audit committee report must refer to “applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence.” The applicable requirement is PCAOB Rule 3526, but apparently the SEC does not want to refer directly to the rule itself.

The SEC didn’t amend Item 407 Regulation S-B, which is hanging around for transition purposes until March 15, 2009. But the SEC said interpretively that any filers using Regulation S-B should follow the Regulation S-K language in their audit committee report.

The change to Item 407 of Regulation S-K was effective on September 30.

September-October Issue: Deal Lawyers Print Newsletter

This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

- Boards Can’t Watch a Sale Unfold from the Balcony: Nine Take-Aways from Lyondell
- Dealing with State Anti-Takeover Statutes in Negotiated Acquisitions
- Cross-Border M&A: Checklist for Successful Acquisitions in the US
- Outside Termination Dates: No Way Out from a Purchase Agreement
- Broken Deals: Validation of Naked No-Vote Termination Fee
- Lessons Learned: Seeking Block Bids as Schedule 13D Discloseable Events
- The Shareholder Activist Corner: Spotlight on Steel Partners

Try a 2009 no-risk trial to get a non-blurred version of this issue (and the rest of '08) for free.

- Dave Lynn

Last night, the Senate voted 74 to 25 in favor of Emergency Economic Stabilization Act of 2008, seeking to create an offer that members of the House can’t refuse when the bill goes up for a vote there by Friday. Here is a Summary and Section-by-Section Analysis of the 451-page bill. As noted in this NY Times article, some of the “sweeteners” added to the Senate bill have nothing to do with the credit crisis or the bailout, including $150 billion in tax breaks for individuals and businesses and legislation requiring insurers to afford parity between mental health conditions and other health problems. The Senate also adopted a temporary increase in the FDIC’s limit on insured bank deposits, raising the ceiling from $100,000 to $250,000.

As Mark Borges noted last night in his CompensationStandards.com blog, the only substantive change to the corporate governance and executive compensation provisions of the House bill was in Section 111, where the limits on compensation that Secretary of the Treasury must adopt to exclude incentives for encouraging executives to take unnecessary and excessive risks now applies to “senior executive officers,” rather than just “executive officers.” As Mark notes, this change is consistent with the application of the other two standards in Section 111 and thus limits all of these provisions to the “named executive officer” group. Apparently, the Senate did not see the need to add any real teeth to the executive compensation and corporate governance provisions of the bill, perhaps because any changes along those lines might not have improved the bill’s success in the House.

Now the market will be on pins and needles until the House acts. After the market’s swoon on Monday, it seems much less likely that constituents will be beating down members’ doors opposing the plan. At this point, whether there will be enough support to pass the bill in the House is anyone’s guess.

SEC Extends Emergency Orders

The SEC announced that it has extended its short sale emergency orders, as well as the emergency order loosening the timing and volume conditions on issuer repurchases in Exchange Act Rule 10b-18. The SEC also announced that the Form SH filing requirement for Exchange Act Section 13(f) filers is also extended, and will become a permanent requirement under interim final rules that the SEC plans to adopt. Based on the language of the press release, it doesn’t appear that information filed on Form SH (under the emergency order at least) will be made public. What the SEC plans to do with the information on short positions obtained on Form SH remains a mystery, and the fact that the information is not being made public seems a little at odds with the SEC’s “full disclosure” mission.

The SEC stated in a press release that the orders are being extended to “allow time for completion of work on the anticipated passage of legislation,” referring to the Congressional efforts to pass a bailout plan. The order banning short selling in “financial” companies is extended until 11:59 p.m. eastern time on the third business day after enactment of the legislation, but in any case no later than October 17th. The order requiring the filing Form SH will be extended until October 17th, but the requirement will remain in place after the expiration of the order under to-be-adopted interim final rules. The relaxed Rule 10b-18 conditions will be extended through October 17th.

The emergency order specifically directed at naked short selling – through Rule 204T, the repeal of the options market maker exception from short selling close-out provisions in Reg. SHO, and Exchange Act Rule 10b-21 – has been extended through October 17th. The SEC also adopted the Staff’s guidance on the application of the initial order. It appears from the press release that the SEC plans to adopt interim final rules to implement this order on a permanent basis as well.

It seems odd that the outright short sale ban on shares of financial companies is now tied to the legislative efforts in Congress. That approach seems to pin a lot of hope on the fact that just the enactment of the legislation (no matter how the legislation comes out) will restore order and calm to the markets. For those companies who are not on the list of companies subject to the ban but who have seen their competitors added to the list, it makes it tougher to judge whether they should contact the exchange to get added, since there is now significant uncertainty as to how long the order will actually remain in effect. In any event, this much is assured: when the ban is lifted, people will go right back to shorting companies with bad assets, bad management and little prospect for success.

Our October Eminders is Posted!

We have posted the October issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

- Dave Lynn

Last night, Corp Fin posted a series of new Compliance and Disclosure Interpretations replacing three sections of the Manual of Publicly Available Telephone Interpretations. The new Compliance and Disclosure Interpretations cover:

- Exchange Act Sections

- Exchange Act Rules

- Exchange Act Forms

These Compliance and Disclosure Interpretations include many of the old Telephone Interpretations, as well as a number of new notable interpretations that answer some fundamental, recurring questions.

For example, Question 130.02 of the Exchange Act Sections Compliance and Disclosure Interpretations notes that a delinquent filer must file all delinquent reports in order to be considered current in its Exchange Act reporting. Delinquent filers often ask the Staff if they can become current by filing the latest Form 10-K or some sort of consolidated “catch-up” filing, and now this interpretation makes clear that all missed reports must be filed. Further, Questions 116.04 through 116.06 of the Exchange Act Sections Compliance and Disclosure Interpretations address the issues around the automatic effectiveness of a Form 10, including the ability to withdraw the Form 10 in limited circumstances prior to effectiveness and the necessity of filing Exchange Act reports once the Form 10 is automatically effective, even if the Staff’s review of the Form 10 is ongoing.

In the Exchange Act Rules Compliance and Disclosure Interpretations, the Staff includes some detailed guidance on the ability of companies to use an effective Form S-3 during and after the Rule 12b-25 period, as well as some helpful guidance on delisting and deregistration mechanics. Further, following up on some helpful guidance in the Regulation S-K Compliance and Disclosure Interpretations posted over the Summer about correcting CEO/CFO certifications (see our discussion of those interpretations in the July-August 2008 issue of The Corporate Counsel) , the Staff has consolidated much of its guidance on CEO/CFO certifications in new Compliance and Disclosure Interpretations under Exchange Act Rule 13a-14.

Fair Value Accounting Guidance from the SEC and FASB Staff

In the face of intense lobbying calling for the suspension of fair value accounting, the SEC’s Office of Chief Accountant and the FASB Staff issued a press release outlining a series of “clarifications” on fair value accounting.

The press release answers the following questions on the application of FAS 157:

1. Can management's internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?

2. How should the use of “market” quotes (e.g., broker quotes or information from a pricing service) be considered when assessing the mix of information available to measure fair value?

3. Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?

4. Can transactions in an inactive market affect fair value measurements?

5. What factors should be considered in determining whether an investment is other-than-temporarily impaired?

While the new Staff guidance is not inconsistent with what has been said before, it appears that the intent is to provide at least some flexibility for issuers to depart from market prices in certain circumstances, particularly when an active market does not exist.

It seems unlikely that the latest round of guidance will satisfy the mounting criticism of fair value accounting. Yesterday, a bipartisan group of 65 House members sent a letter to Chairman Cox asking that the SEC immediately “suspend” mark to market accounting in favor of a “mark to value” mechanism that “better reflects the value of the asset.” The Congressmen state that until new guidance is put in place, the fair value of assets should be estimated by “using the best available information of the instrument’s value, including the entity’s intended use of that asset, from the point of view of the holder of that instrument.”

Some opposition to the suspension of fair value is emerging. Last week, Federal Reserve Chairman Bernanke told the Senate Banking Committee that abandoning fair value “would only hurt investor confidence because nobody knows what the true hold-to-maturity price is” (as noted in this Reuters article), while this article by Judith Burns of the Dow Jones Newswires reports that US accounting firms are now opposing calls for rescinding mark to market accounting.

The Rise of Sovereign Fund Investing

Tune in tomorrow for this DealLawyers.com webcast - "The Rise of Sovereign Fund Investing" - and hear about the role of sovereign wealth funds in this crisis marketplace and more:

- G. Christopher Griner, Partner, Kaye Scholer
- Michael Hagan, Partner, Morrison & Foerster
- Jerry Walter, Partner, Fried Frank Harris, Shriver & Jacobson
- Steven Wilner, Partner, Cleary Gottlieb Steen & Hamilton

- Dave Lynn

Remember those halcyon days when Treasury Secretary Paulson was mostly concerned about the competitiveness of the US capital markets, rather than fighting 24/7 for the survival of the US capital markets? Well, back then when the Treasury Department’s time might have been better spent worrying about the systemic risks posed by credit default swaps or the looming mortgage crisis that was beginning to show its ugly face, the Treasury Department’s Advisory Committee on the Auditing Profession (ACAP) was established. In my view, it was always a little strange that the ACAP (which was headed by Arthur Levitt and Don Nicolaisen) was a Treasury Department creation, rather than a committee established by the SEC or the PCAOB, but then again I don’t think that Treasury has been too worried about stepping on the SEC’s toes.

On Friday, Treasury announced that the ACAP had adopted its Final Report. As noted in this Fact Sheet, the three principal areas of focus in the ACAP’s recommendations were human capital, firm structure and finances, and concentration and competition. A Draft Final Report has been posted, with the Final Report expected to be posted some time this week.

One of the areas that the ACAP studied which has garnered some attention over the past year is liability reform for accounting firms, however the Subcommittee on Firm Structure and Finances was unable to reach any consensus on recommendations in this area. Rather, the final report reflects the divergent views of the committee members on that topic.

Among the areas that the ACAP asks the SEC to consider are (1) amending Form 8-K disclosure requirements to characterize appropriately and report every public company auditor change, and (2) requiring disclosure by public companies of any provisions in agreements with third parties that limit auditor choice. The ACAP also asks the SEC and the PCAOB to undertake a number of other initiatives. The PCAOB issued a statement indicating that it welcomed the Committee’s recommendations, while the SEC issued no statement about the ACAP’s Final Report.

Back to the Drawing Board on Proposed FAS 5 Amendments

Last week, the FASB approved a recommendation from its Staff to reconsider the Exposure Draft issued last June that proposed significant changes to the reporting of loss contingencies under FAS 5. In deciding to reconsider the proposals, the FASB particularly noted comments that the proposed standard would compel defendants to waive their attorney-client privilege and disclose prejudicial information, as well as comments expressing implementation concerns with a potential effective date for fiscal years ending after December 15, 2008.

Now the FASB is seeking some volunteers to “field test” two alternative proposals using disclosure about already resolved lawsuits. A roundtable is also planned for the first quarter of 2009. The expectation is that a revised Exposure Draft will be considered in the first half of 2009, with a possible effective date for fiscal years ending after December 15, 2009.

No Change for SEC Filing Fees

Yesterday, the SEC issued a fee rate advisory indicating that when the new Federal fiscal year clicks over tomorrow, filing fees will remain at their current rates. I suspect the SEC will be operating under a continuing resolution for a while. It seems unlikely that Congress will be acting on budget legislation any time soon when the House can’t even pass the bailout bill.

Posted: The SEC's Adopting Release for Cross-Border Deals

The SEC has finally posted its adopting release for cross-border deals. We have started to post memos on DealLawyers.com analyzing these rule changes.

- Dave Lynn

Based on the thankful press releases issued last night by the President and the Treasury Secretary, you would almost think that the Emergency Economic Stabilization Act of 2008 has actually been signed into law – but, in fact, it still faces a tough vote in the House today and a vote in the Senate on Wednesday. What did happen over the weekend were marathon negotiations that brought about the current bill, which Nancy Pelosi (D-CA) has described as “frozen” (as noted in this Washington Post article). As a result, we now have a clear picture of what the “TARP” program will look like if the bill is ultimately enacted.

Mark Borges has described the latest provisions of the bill directed at executive compensation and corporate governance matters in his CompensationStandards.com blog. Needless to say, executive compensation limits were retained in the bill (and apparently remained a source of debate throughout the weekend), but whether these vague provisions will impose any real changes on compensation practices at participating institutions – or set a new standard for other companies to follow – remains to be seen. What does seem to be developing that may have more of a long-term impact on executive compensation is a groundswell of public outrage over executive pay in light of the financial crisis. All weekend long, I either read or watched “man on the street” type stories where people expressed disdain for a bailout of financial institutions and their executives while so many others are struggling.

Notably, the House bill also targets mark-to-market accounting, directing the SEC to conduct a study of Financial Accounting Standard No. 157, including as a minimum:

- the effects of FAS 157 on the balance sheets of financial institutions;

- the impacts of mark-to-market accounting on bank failures in 2008;

- the impact of such standards on the quality of financial information available to investors;

- the process used by the FASB in developing accounting standards;

- the advisability and feasibility of modifications to such standards; and

- alternative accounting standards to those provided in FAS 157.

The bill also restates the SEC’s authority to suspend the application of FAS 157 if the SEC determines that such a suspension is in the public interest and protects investors. I guess this goes to prove that when all else fails, blame the accounting.

I still feel like I am missing something on the financial crisis. I don’t think I have yet heard a complete explanation of what has caused such an extreme level of apparent panic among the administration’s economic policymakers that would lead to, among other things, former Master of the Universe Hank Paulson begging on his knees to Nancy Pelosi, as reported in this NY Times article from Friday.

The Plight of Short Sellers

I have sympathy for those who have routinely employed short selling strategies to not only turn a profit, but also to hedge their positions, conduct market making activities, and exploit arbitrage opportunities. Short selling has, rightly or wrongly, become the SEC’s bogeyman in the financial crisis, and lots of unintended consequences are flowing from that status. Don’t get me wrong – I am no apologist for naked short sellers or those who engage in abusive short selling activities. Rather, I have spent an enormous amount of time thinking about short sale issues over the course of my career, and I am a firm believer in the power of short selling to maintain fair, orderly and liquid markets while helping to mitigate individual risks and market exposure.

The SEC’s ban on short sales of shares of financial firms (as amended) is now more than a week old, and is set to expire this Thursday, unless further extended. The likelihood that the ban will be extended seems high, as uncertainty reigns in the marketplace, particularly for the shares of financial institutions. But, as noted in this Wachtell Lipton memo, the ban has created confusion in the marketplace, particularly with respect to the convertible bond market. Further, as recently discussed on TheCorporateCounsel.net Q&A Forum, the short sale ban may be interfering with bona fide market-making activities, as market makers seek to widen the bid/ask spread by increasing the asked price so as to avoid going short and having a “fail to deliver.” Lastly, I fear the consequences if steps are not taken to prevent a massive market slide whenever the short sale ban is ultimately lifted, as “pent up” short selling has the potential to overwhelm an already shaky equity market.

Today is the day that Section 13(f) filers will need to file new Form S-H to report information about their short positions. Due to the SEC’s flip-flop on the public availability of this information, we won’t have access to these reports on Edgar for another two weeks. Last Friday, the SEC posted an updated submission template for Form S-H and some guidance on the disclosure required by the form.

Podcast: The Latest on the SEC’s Short Sale Actions

Last week, I spoke with Larry Bergmann, who is Special Counsel at Willkie Farr & Gallagher LLP and was Senior Associate Director in the SEC’s Division of Trading & Markets, about the emergency actions targeting short sellers and what the future might hold for short sale regulation. In this podcast, Larry discusses:

- What has the SEC done recently to target short sales?
- How are the SEC's new rules being implemented on such short notice?
- What impact might the SEC's recent actions have on the market?
- What else can the SEC do to address abusive short selling?

- Dave Lynn

We've posted a copy of the US Senate's "agreement in principles" that was reached yesterday for the bailout legislation (this WSJ article analyzes the odds of passage - and Dominic Jones explains the importance of retail investors for passage). Here is the very first principle:

Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies.

The notion that a group of government staffers may be setting the parameters for a number of CEO pay packages is nearly incomprehensible. I'm glad it isn't me.

What are "Appropriate Standards" for "Shareholder Disclosure"?

From Will Anderson of Bracewell & Giuliani: The draft language in the Senate bill released earlier this week contains what I view as a potentially significant "sleeper" issue that seems to have escaped the attention of the media, commentators and the Congress (although I confess that I have had trouble keeping up with the flow of information). The Senate draft provides that the Treasury Secretary require sellers to meet "appropriate standards" for "shareholder disclosure." The draft from the House Financial Services Committee includes the same requirement for "corporate governance".

It's not clear to me what the Senate's "shareholder disclosure" requirement means, but it could be read to grant very broad and virtually unlimited authority to Treasury to establish a disclosure system for participating financial institutions. Or perhaps this language is limited to only executive compensation disclosure, although that is not what the language says. Or maybe it means something entirely different – one lawyer I spoke with thought it could be read to mean disclosure of the identity of the shareholders of financial institutions, but I doubt that is the intent (but who knows).

Hopefully, the shareholder disclosure language will simply be deleted from the bill that comes out over the next few days – or at least add a "related thereto" after the words "shareholder disclosure" so that it is limited to executive compensation. Perhaps the House has it right and it will be replaced with "corporate governance", although that requirement presents a host of issues that are better left for another day. Here is the Senate's most recent text (emphasis added):

SEC. 17. EXECUTIVE COMPENSATION.

The Secretary shall require that all entities seeking to sell assets through a program established under this Act meet appropriate standards for executive compensation and shareholder disclosure in order to be eligible, which standards shall include—

Here is the House Financial Services Committee's most recent text (emphasis added):

SEC. 9. EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE.

(a) IN GENERAL.—The Secretary shall require that all financial institutions seeking to sell assets through the program under this Act meet appropriate standards for executive compensation and corporate governance in order to be eligible.

The Short-Sleeve Culture: Celebrating Twenty Years

Twenty years ago, fresh off the bar exam, I started my professional career as a junior lawyer in Corp Fin. Five other lawyers started that day with me, including Bill Tolbert, Mark Coller and Larry Spaccasi (folks like Marty Dunn, Scott Freed, Celia Spiritos and Todd Schiffman started a few weeks before). Back then, more lawyers were hired right out of school - rather than the laterals that get into the SEC today - so a new batch always started in the Fall.

After a half-day of fingerprinting and general orientation, my branch chief, Steve Duvall, handed me a set of CCH books (ie. the rules) and told me to read them. That was my task for the week - a straight read of the rules. Ken Tabach was riding out his last week on the Staff before splitting for a law firm and he gave me some loose guidance about how to read a registration statement and write up comments.

Those comments that passed muster were read over the phone to an outside lawyer, who taped them and had them transcribed into a comment letter (eventually, we had a SEC secretary type the letter too - but that would take weeks as six or seven lawyers shared each secretary).

There were no computers and no voicemail for the phones. People could smoke in their offices if so inclined - and the old-timers followed an informal policy that they could wear short-sleeves if it was hotter than 90 degrees. And there were government-sponsored keg parties - or is that my vivid imagination playing tricks on me? Right after I started, Market Reg sponsored a party at a local bar to note the one-year anniversary of the '87 "market break" (that was a day when the market crashed at record levels for a day).

When I returned for my second tour of duty in Corp Fin years later, Bill, Mark and I would grab a morning donut together every year on this date to commemorate our anniversary. For those guys, I'm having two today...

- Broc Romanek

Stock Repurchase Programs: Full Speed Ahead?

Last Friday, as part of its temporary emergency actions, the SEC issued an emergency order temporarily suspending the timing restrictions and significantly increasing the volume limitation for issuer repurchases under Rule 10b-18. Since then, I've seen a few announcement of stock repurchase programs from companies of all shapes and sizes, including Microsoft ($40 billion) and 3Com ($100 million). The SEC's order expires next Thursday.

South Dakota's Short-Selling Ballot Initiative

Below is an excerpt from a Morrison & Foerster memo on short-selling:

Some contend that the SEC’s actions are too little, too late. This November, voters in South Dakota will consider a ballot initiative called Measure 9 that could impact short selling across the United States. Promoted by American Entrepreneurs for Securities Reform, or ESR, a non-profit organization backed by small businesses, Measure 9 would amend sections of the South Dakota Uniform Securities Act of 2002.

The initiative is cast by ESR as a consumer protection measure that will protect South Dakota’s small investors by curbing naked short selling. Opponents of Measure 9 argue that the initiative is unnecessary, impractical, poorly drafted and unconstitutional, with the potential to halt all legitimate short selling activity in the U.S.

Several commentators oppose Measure 9 on the grounds that, as written, the ballot measure would effectively ban short selling altogether. The proposed law would permit the state to take action against a seller of stock in a publicly traded company if that seller engaged in a pattern of commercially unreasonable delay in the delivery of securities sold, or “has sold securities that the person did not own or have a bona fide contract to purchase.” This language tracks the definition of a short sale in Regulation SHO. The law would apply to any brokerage registered in South Dakota even if it does not have an office there.

If interpreted to ban short sales altogether, a broker that transacts short sales with investors in South Dakota would violate the law, regardless of where the transaction takes place or whether the transaction takes place or whether the transaction complies with federal law. Because a broker-dealer’s South Dakota registration is all that would be required to trigger liability under the law, some have predicted that Measure 9 would result in broker-dealers leaving the state or, alternatively, ceasing all short selling activities.

ESR and its supporters contend that the SEC’s efforts to restrict naked shorting have been ineffective and support additional regulation at the state level. From their perspective, the purpose of Measure 9 is to ban naked short selling by permitting South Dakota regulators to take action against broker-dealers engaged in a pattern of fails-to-deliver. Opponents of Measure 9 argue that the trading of securities occurs on a national market and accordingly, should be regulated solely by federal law to preserve consistency, making additional state regulation both unnecessary and impractical.

They predict that the introduction of additional legislation in various states will result in a confusing patchwork of inconsistent and contradictory rules, choking the very markets they are designed to protect. Additionally, they contend that proposed law would be preempted by the National Securities Market Improvement Act (and thus would be unconstitutional). These opponents point out that litigation over the law after it has been adopted (on preemption grounds) would be costly and time-consuming for the parties opposing it, as well as for South Dakota taxpayers.

Conclusion

Measure 9 is not the first proposal of its kind. Measures seeking to limit shorting have popped up in other states such as Virginia and Arizona, where legislation was introduced and quickly withdrawn, and Utah, where such a measure was overturned. Despite setbacks for these similar proposals, ESR plans to lobby for similar legislation in 19 additional states. Opponents of Measure 9 are concerned that the initiative, which addresses relatively sophisticated matters of securities law, will pass due to a lack of voter understanding, leading to unintended consequences in the national markets. Even if Measure 9 is not approved by South Dakota voters or is subsequently overturned, it, and similar proposals, as well as continuing market pressures, will place additional pressure on the SEC to demonstrate that it is proactive in its efforts to curb abusive short-selling practices. The impact of the SEC’s newest regulations on shorting activities, legitimate or otherwise, and whether the results will satisfy activist groups like ESR remains to be seen.

- Broc Romanek

Predictably, the bare-boned Treasury proposal for a bailout bill - fraught with Constitutional problems - is receiving backlash on the Hill. Also predictable - given that elections are coming up - many key Republicans have come around to the notion that the bailout bill should include limits on executive pay (see this Washington Post article and NY Times' article).

However, the bailout plan is missing a strategy to fix the problems that caused all the problems that the market faces. Without a going-forward plan, I don't see an end to shoveling money to the bailout. Simply banning short sales ain't gonna do it. Yesterday, SEC Chairman Cox testified about some of these problems before the Senate Banking Committee - here is an excerpt:

The failure of the Gramm-Leach-Bliley Act to give regulatory authority over investment bank holding companies to any agency of government was, based on the experience of the last several months, a costly mistake. There is another similar regulatory hole that must be immediately addressed to avoid similar consequences. The $58 trillion notional market in credit default swaps - double the amount outstanding in 2006 - is regulated by no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market.

Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS. Whereas a person who owns a bond profits when its issuer is in a position to repay the bond, a short seller profits when, among other things, the bond goes into default. Importantly, CDS buyers do not have to own the bond or other debt instrument upon which a CDS contract is based. This means CDS buyers can “naked short” the debt of companies without restriction. This potential for unfettered naked shorting and the lack of regulation in this market are cause for great concern. As the Congress considers fundamental reform of the financial system, I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets.

What Companies are Disclosing: Form 8-Ks Filed in Response to the Crisis

With the market in crisis, it would be expected that some companies would be be filing Form 8-Ks to disclose material developments. Here are just a few of the many Form 8-Ks filed regarding potential fallout due to exposure from Lehman Brothers and/or AIG:

- Primus Guaranty

- Ambac Financial Group

- Protective Life Insurance Company

- Dynegy

- Ford Motor

- Conseco

- Magellan Health Services

- Portland General Electric

- Commonwealth Edison

- Humana

- New York Community Bancorp

A Classic Cousin of the "Nigerian Loan Scam"

I received this classic email yesterday:

Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.

This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.

Yours Faithfully Minister of Treasury Paulson

- Broc Romanek

The latest version of the House "bailout" legislation includes provisions for a "say on pay" vote, limits on severance, clawbacks and shareholder access to the proxy for those companies involved in the bailout. See Section 9 on pages 11-13. The Senate version of a bailout bill contains the executive compensation provisions (see Section 17 on pages 30-31), but not the shareholder access one.

Bear in mind that both of these are just drafts and that they likely are just the Democratic versions of a bill. Media reports indicate that the bailout plans changes from hour to hour. In fact, I can't even be sure I have linked to the latest drafts...

The World is Changing: Why Can't CEO Pay?

With the very real possibility of executive compensation constraints being part of the Congressional bailout legislation, it seems like a good time to examine why executive compensation practices haven't changed - even though 99% of this country believes they should. With Wall Street and our financial markets undergoing a complete transformation and the regulatory framework certain to be reformed in ways we never imagined, why does CEO pay remain "untouchable" for many boards and their advisors?

Here are a few of my thoughts:

1. Lots of Lip Service - Personally, I am tired of having conversations with colleagues who tell me that compensation committee meetings really have changed. I believe that. The problem is it's just the committee processes that have changed - to pass judicial muster after Disney - but the committee's actions remain the same. When I have these conversations, it's telling how perfunctory committee meetings used to be!

2. When There is Responsible Change, It's Driven by the CEO - Most often when I talk to someone who regularly advises boards, I hear that the few companies that really make responsible changes are the ones where the CEO speaks up and voluntarily asks for the change. Sadly, boards and compensation committees are not the ones driving responsible change.

3. Debunking "Everyone Else is Doing It" - How often has this justification lead us down the garden path? Just because everyone is using peer group benchmarking instead of alternative benchmarking - like internal pay equity - doesn't make it right. In fact, some plaintiff lawyers may argue that it's now widely known that 15 years of broken peer group benchmarking has made that methodology unreliable - and that boards that continue to heavily rely on that broken database are not fulfilling their fiduciary duty to be reasonably informed. (And remember that today's excessive CEO pay packages are a relatively new phenomenon, only about 15 years old as I've explained before).

4. You Won't Lose Your CEO If You Trim $10 Million - Probably the most frequent justification to maintain the status quo is that the CEO will walk if the pay package is cut from $20 million to $10 million. I find this an empty argument in most cases (and for the many really hurting in today's economy, even the $10 million produces anger). Sure, the grass is always greener - but the reality is the grass is brown all over right now.

I realize that having a pay-cutting conversation is hard - but there are baby steps that can be taken to bring executive compensation back in line. Start with implementing a clawback provision with teeth, eliminate severance arrangements that have no purpose and require executives to hold-til-retirement. Use better tools to ensure a fairer process, like internal pay equity and wealth accumulation analyses.

5. Congressional Solution Not Preferred, But Perhaps Inevitable - I don't believe Congressional intervention into pay practices is a sound idea, but the failure of boards to fix pay practices on their own has brought us to where we are today. And it shouldn't be a surprise that Congress is now focusing on this topic - the House has held hearings on CEO pay repeatedly this year and both Presidential candidates have stated their intention to pass "say on pay" legislation next year. I believe we are at a "last chance" stage for boards to truly get their act together or else we will wind up with laws that do it for them.

What Can You Do? You can be informed and learn as much about responsible practices as possible. Our upcoming "5th Annual Executive Compensation Conference" can help you get started by providing a roadmap of practical tools and processes that you - and your board - can use to make things right. If you can't make it to New Orleans on October 21st-22nd, you can still catch this important conference by video webcast.

If times are tight and your company doesn't have the budget to cover the full cost of registration, send me an email and we'll accommodate you. We are far more interested in getting CEO practices back on the right track than making money from the Conference. Note that when you register for the "5th Annual Executive Compensation Conference," you also get access to the "Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference" as these two practical Conferences are bundled together. The two Conferences are being held on successive dates.

Fixing the "No Short List": The SEC Punts to Stock Exchanges

In my rush to blog before I left for a speaking engagement yesterday morning, I had missed the part of the SEC's revised emergency order that now requires each stock exchange to post a list of the financial institutions that should be covered by the SEC's temporary short-selling ban. Last night, the exchanges posted their lists with additional companies on them (here is the NYSE list and Nasdaq list), which are subject to further refinement.

This is probably a wise move given the snafus made by the SEC so far - but pretty embarrassing given that the SEC went through the exercise of creating a "No Short List" for financial institutions just a month ago (read some of the quotes at the end of this WSJ article). As a SEC Staff alumni, this Bloomberg article makes me cringe and I worry that the SEC will be made a scapegoat for the ongoing crisis and that Congress will fold it into another federal agency...

- Broc Romanek

The US Treasury's initial draft of Congressional legislation to provide Treasury with authority to purchase up to $700 billion in mortgage-related assets is unbelievably simple, providing broad authority for the Treasury to set their own guidelines about how to spend the money. So simple that I think it was drafted on the back of a napkin. However, there is much Congressional haggling to be done over the next few days and the final product likely will look much different.

Here is a Davis Polk memo that summarizes the legislation pretty nicely - and here are some articles on the proposed legislation:

- WSJ's "Lawmakers Battle Over Rescue Plan"

- NY Times' "Democrats Set Terms as Bailout Debate Begins"

- Washington Post's "As Hill Debates Bailout, Wall St. Shifts Continue"

- WSJ's "Paulson Presses Congress to Act On $700 Billion Bailout Plan"

- NY Times' "A Bailout Plan, but Will It All Work?"

- NY Times' "Bipartisan Support for Wall St. Rescue Plan Emerges"

- Bloomberg's "Treasury Seeks Authority to Buy Mortgages Unchecked by Courts"

Between the time I drafted this blog last night and this morning, things were already changing. Things are moving so fast. One of the key bones of contention regarding the legislation is whether there should be limits on CEO pay - including severance pay - at those companies that benefit from the legislation. Last night, Mark Borges covered this story in his "Proxy Disclosure" Blog.

Patching Up the SEC's Temporary Emergency Actions

Wow, what a wild week last week was. And I imagine this week will be more of the same as Congress seeks to act. In the SEC's haste to take action, its temporary emergency actions had holes in them, some of which were addressed by clean-up amendments adopted on Sunday - see this SEC press release. In addition to making technical amendments, the SEC's revised order provides that the information disclosed by investment managers on new Form SH will be nonpublic initially, but will publicly available on Edgar two weeks after it is filed with the SEC (see footnote 8 of the revised order).

Here is a WSJ article describing some of the holes and below is an excerpt from a Davis Polk alert:

"Unlike a similar action taken by the U.K. Financial Services Authority on September 18th, the prohibition is not limited to the active creation or increase of net short positions. Without this exception, it would appear that financial institutions (including those the SEC is trying to protect) and other market participants who hold convertible securities, options and other equity derivatives, cannot adjust their delta hedge positions in the underlying common stock that hedge their risk of owning the equity derivatives. Therefore, contrary to its intent, the SEC action may significantly limit the ability of the indentified financial institutions to access the convertible and equity derivative markets.

The SEC has been addressing a number of specific questions and concerns that have been noted. For example, we understand that the SEC staff has informally advised market participants that, despite the reference to 'publicly traded security' in the order, the order is not intended to cover debt securities."

A few members were not happy with my dig against McCain on Friday, about his jab against SEC Chairman Cox. I just want the record to show that I had written that piece before I had read this op-ed entitled "McCain's Scapegoat" in Friday's WSJ, which expressed a similar sentiment. Don't worry, I'm not gonna start blogging about politics - but that one was too hard to resist.

The Importance of Your SIC Code

On Friday morning, the SEC took temporary emergency action to prohibit short selling in 799 financial companies. These actions were effective immediately and will expire at the end of the day on October 2nd (unless extended by the SEC). For its "No Short List" (see Appendix A for the list), the SEC selected the 799 companies based on their Standard Industrial Classification code (known as a "SIC" code; these codes are a US government system for classifying industries by assigning a four-digit code to each company). A total of 31 SIC codes were included in the list.

I received a number of emails from panicky members whose financial service companies were not part on the SEC's list. Some of these companies have SIC codes covered by the SEC's emergency order, but they were not listed by name in the SEC's order. For example, this situation applies to AllianceBernstein Holding, Invesco and Legg Mason. They've all filed Form 8-Ks stating that they believe they should be on the list since they were covered by the SIC code used by the SEC (eg. Legg Mason's 8-K).

Others believe their companies are financial services companies and should be on the list, but their companies don't have SIC codes - at least, as they show up in the SEC's database (however, EDGAR shows their SIC code) - that correspond to the range of SIC codes covered by the SEC's "No Short List." To illustrate, CNBC reported that several companies - like General Electric - may be added to the list because their financial services businesses are substantial. GE's SIC code in the EDGAR database shows up as "SIC: 3600 - Electronic & Other Electrical Equipment (No Computer Equip)." CNBC mentioned several other financial service companies not on the SEC's list, including CIT Group and American Express. Watch this CNBC video, which points out the problems and quirks with the list (egs. there aren't 799 names on the list and at least four non-trading companies were inadvertently included).

Note in the SEC's order, the SEC took pains to say that its list was prepared on a "best efforts basis." I've heard that the SEC expects to post an amended list soon.

Lesson learned? Re-consider your company's SIC code to ensure it properly fits your company. Remember that companies pick their own SIC code when they file their Form S-1 to go public - there is a spot on the facing page - and the SEC has no input (although in theory, the Staff could question your choice). The SIC code also is submitted as part of the header when the filing is Edgarized (note a SIC code isn't solicited on the Form ID).

Note that the SEC is one of the few - if not the only - government agency that still uses SIC codes (probably because those codes are so hard-wired into much of the SEC’s disclosure framework). The more recent - and widely used - identification system is the North American Industry Classification System (NAICS), which has largely replaced SIC codes in other contexts.

- Broc Romanek