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Publication

November 10, 2010Client Alert

Developments In Securities Law - November

PROPOSED & FINAL RULES

Proposed Rules on the Securities Whistleblower Program

Earlier this month, the SEC proposed rules and forms to implement Section 21F of the Securities Exchange Act of 1934 entitled “Securities Whistleblower Incentives and Protection.” The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010 (“Dodd-Frank”), established the whistleblower program which requires the SEC to pay an award to eligible whistleblowers who voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement of an action brought by the SEC that results in monetary sanctions exceeding $1,000,000, and of certain related actions. Dodd-Frank also prohibits retaliation by employers against individuals that provide the SEC with information about potential securities violations. Comments on the proposed rules should be submitted on or before December 17, 2010.

Proposed Rules on Say-on-Pay, Say-on-Frequency, and Say-on-Golden-Parachutes

On October 18, the SEC voted to publish for comment proposed rules to implement the provisions of the Dodd-Frank Act relating to: (1) shareholder advisory votes on executive compensation (“say-on-pay”); (2) shareholder advisory votes on the frequency of say-on-pay votes (“say-on-frequency”); and (3) shareholder advisory votes on compensation arrangements in connection with significant corporate transactions (“say-on-golden-parachutes”).

Say-on-Pay

The proposed rules would require public companies to hold a say-on-pay vote at least once every three years. The proposed say-on-pay rules do not dictate a specific form of resolution or specific language to be used in structuring the shareholder vote. However, the vote must approve the compensation of the named executive officers as such compensation is disclosed under Item 402 of Regulation S-K, including the Compensation Discussion & Analysis (“CD&A”), the compensation tables and other narrative disclosures. Under the proposed rule, the CD&A must now include disclosure as to whether, and if so, how the issuer’s compensation policies and decisions have taken into account the results of previous say-on-pay votes. Issuers must also briefly explain in the proxy statement the effects of the vote, such as whether it is non-binding. However, issuers would not be required to state what action they would expect to take in response to a say-on-pay vote.

Say-on-Frequency

The proposed rules would also require issuers to hold at least once every six years a separate shareholder advisory vote on whether the say-on-pay vote should be held every one, two or three years. While issuers would be free to include their recommended alternative, the proxy card would need to make clear that the vote is not to approve or disapprove a company’s recommendation.

Whether or not the final rules are adopted, issuers are required to hold both say-on-pay and say-on-frequency votes at any annual or other shareholder meeting occurring on or after January 21, 2011.

Say-on-Golden-Parachutes

The proposed rules would also require, in connection with shareholder approval of an acquisition, merger, consolidation or proposed sale or disposition of all or substantially all of a company’s assets, disclosure of all “golden parachute” agreements that the soliciting company has with its named executive officers or the named executive officers of the acquiring company (if the soliciting company is the target company) with respect to compensation that is based on or otherwise relates to such transaction. Note that this covers all compensation related to the transaction, whether or not the payment would be a “parachute payment” under Section 280G of the Tax Code. In addition, these companies would be required to hold a separate shareholder advisory vote on these compensation arrangements unless all of the transaction-related compensation agreements and understandings were the subject of a prior say-on-pay vote.

The proposed rules do not dictate a specific form of resolution or specific language to be used in structuring this advisory vote. The disclosure would be required in merger proxy statements, Schedule 13E-3 going private transaction disclosure documents, tender offer disclosure documents and consent solicitations. It would not be required in an annual meeting proxy statement that does not involve a merger or extraordinary transaction.

The new disclosure would be presented in both narrative and tabular form, with tabular disclosure made in a new “Golden Parachute Compensation” table that would include columns for the following categories of compensation:

  • cash
  • equity
  • pension and nonqualified deferred compensation
  • perquisites and other personal benefits
  • tax reimbursements
  • other items
  • a total of the above items


Companies must also disclose any material conditions or obligations to the receipt of payment, including non-competition, non-solicitation, non-disparagement or confidentiality agreements, their duration and provisions regarding waiver or breach. The disclosure would require a summary of the specific circumstances that would trigger payment, whether the payments would or could be lump sum, or annual, and their duration, by whom the payments would be provided, and any material factors regarding each agreement.

Proposed Rules on Asset-Backed Securities Disclosure

On October 14, 2010, the SEC voted to publish for comment asset-backed securities disclosure rules in accordance with Sections 932 and 945 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Under these proposed rules, the following requirements apply:

  • issuers of asset-backed securities that are registered with the SEC would need to perform a review of the assets underlying the asset-backed securities;
  • proposed amendments to Regulation AB would require an issuer of asset-backed securities to disclose the nature, findings and conclusions of this review;
  • the issuer or underwriter for both registered and unregistered asset-backed securities offerings would be required to disclose the findings and conclusions of any review performed by a third party that was hired to conduct such a review.


Under the proposed rules, a third-party diligence provider whose findings and conclusions are included in a registration statement may be required to consent to being named in the registration statement as an expert and thus be subject to liability under Section 11 of the Securities Act.


SEC RELEASES & POLICY STATEMENTS

No relevant Releases or Policy Statements.


NEW COMPLIANCE & DISCLOSURE INTERPRETATIONS

No relevant Compliance & Disclosure Interpretations.


MICHAEL BEST COMMENTS

SEC Declines to Provide Section 16 Comfort in Proxy Access Rules

The SEC declined to provide any comfort with respect to some issues under Section 16 raised by the new proxy access rules.

It declined to adopt an exclusion from Section 16 for groups formed to make shareholder nominations under the new rules. In the SEC’s view, because the three percent threshold required for use of Rule 14a-11 is significantly lower than the 10 percent threshold applicable to Section 16, Section 16 should not be a deterrent to shareholders in forming groups for the purposes of using the new rule.

The SEC also indicated it would not provide any guidance regarding the potential application of the director by deputization theory to nominating persons who designate a particular person as their nominee to a company’s board of directors. The SEC stated that it believes the application of the deputization theory should be left to existing case law and the courts.

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