On November 25, 2009, the Securities and Exchange Commission (“SEC”) approved amendments to the corporate governance listing standards of the New York Stock Exchange (“NYSE”). The changes will take effect on January 1, 2010.

As discussed in more detail below, the amendments, which the SEC approved in the form proposed in the NYSE’s original release: (1) codify certain staff interpretations, (2) clarify various disclosure requirements, and (3) incorporate applicable SEC disclosure requirements into the NYSE listing standards. Because most of the amendments conform the NYSE listing standards to existing SEC rules, or are of a clarifying or updating nature, they should necessitate only minimal changes to a listed company’s governance practices and disclosures. The most significant change is the new requirement that companies notify the NYSE in writing after any executive officer becomes aware of “any” non-compliance with the corporate governance listing standards, rather than any “material” non-compliance, as currently required.

The SEC release approving the NYSE amendments can be found here. The NYSE filing outlining the proposed amendments includes a mark-up showing the proposed changes to the text of the corporate governance listing standards.

…continue reading: SEC Approves Amendments to NYSE Corporate Governance Listing Standards

(Editor’s Note: This post from John F. Olson is based on a Gibson, Dunn & Crutcher LLP client memorandum by Michael Bopp and Aditi Prabhu.)

This update focuses on the launching of the Financial Crisis Inquiry Commission (“FCIC” or “Commission”), which was created by Congress as section 5 of the Fraud Enforcement and Recovery Act, which became law on May 20, 2009. The bipartisan Commission is charged with examining the domestic and global causes of the current U.S. financial and economic crisis. In addition to discussing the Commission’s first meeting, which took place today, this alert summarizes the Commission’s broad investigatory mandate, its subpoena and other coercive powers, and its charge to gather information from private and public entities.

FCIC Holds First Meeting; Sets Course for Rigorous Investigations

The FCIC held its first public meeting today in order to outline for the public its mission and approach.  The majority of the meeting consisted of prepared statements by the Commissioners and concluded with a timeline for the investigation.  The Commissioners highlighted the importance of the FCIC’s work and their commitment to the daunting task of determining the causes of the economic crisis.  While the remarks were mostly broad in nature, the Commissioners repeatedly pointed to failures on the part of both the financial system and government regulators as contributing to the crisis.

Chairman Phil Angelides

Chairman Angelides related that while this is the FCIC’s first public meeting, it has held several working sessions.  The Commission has adopted rules and procedures and, most notably, has created whistleblower protections for those who convey information to the Commission.

Angelides introduced Thomas Greene as the newly-appointed Executive Director the Commission.  Greene previously served as Chief Assistant Attorney General of the Public Rights Division in the Office of the Attorney General of California.

Angelides noted that the purpose of the Commission is to determine the causes of the crisis, not to offer “prescriptions for the future,” although the Commission is permitted to do so.  He compared the FCIC to the 9/11 Commission, which conducted over 1200 interviews, reviewed 2.5 million pages of documents, and held 12 days of public hearings.  Angelides expressed the view that the FCIC should be “similarly thorough” and should “leave no financial stone unturned.”  He also compared the FCIC’s work to the Pecora hearings in the 1930s in terms of its aspired impact.

He noted that the Commission’s final report is due in 15 months.  To carry out its mission, the Commission will seek records from government agencies and financial institutions, and hold hearings.  Angelides mentioned that the FCIC will use its subpoena power if necessary.

Vice Chairman Bill Thomas

Vice Chairman Thomas distinguished the FCIC from congressional committees which are also working on similar issues by stating that the Commission need not respect any boundaries.  Rather, its real constraint is time.

…continue reading: Financial Crisis Inquiry Commission to Begin Investigations

(Editor’s Note: This post is a statement by the Aspen Institute Business & Society Program’s Corporate Values Strategy Group, of which John Olson is a signatory, along with 27 other business, investment, academic, & labor leaders.  The complete list of signatories is available here.)

Introduction
We believe a healthy society requires healthy and responsible companies that effectively pursue long-term goals. Yet in recent years, boards, managers, shareholders with varying agendas, and regulators, all, to one degree or another, have allowed short-term considerations to overwhelm the desirable long-term growth and sustainable profit objectives of the corporation. We believe that short-term objectives have eroded faith in corporations continuing to be the foundation of the American free enterprise system, which has been, in turn, the foundation of our economy. Restoring that faith critically requires restoring a longterm focus for boards, managers, and most particularly, shareholders—if not voluntarily, then by appropriate regulation.

A coalition has been working for several years on what business and investors can voluntarily do to address market short-termism, including the reform of executive compensation to focus on long-range value creation (See Appendix). A new administration in Washington and unprecedented public attention to business and financial markets, offer a unique opportunity for public policy recommendations in pursuit of long-term wealth creation to gain visibility, and to obtain real traction.

Others will study and recommend actions to be taken by boards, managers and regulation to restore long-term focus. The recommendations in this document, directed at influencing the behavior of shareholders, present an important step towards an integrated approach to ensuring long-term wealth creation.

Shareholder Short-Termism
The word “shareholders” evokes images of mom-and-pop investors saving for their retirement or their children’s college tuition. Individual investors do participate directly in the market, but they are mostly passive and unorganized and their role has diminished in recent years. The largest and most influential shareholders today are institutions — including pension funds, mutual funds, private investment (or “hedge”) funds, endowments and sovereign wealth funds — many of which serve as agents for the providers of capital, their ultimate investors. For example, one-third of U.S. corporate equity today is held by mutual funds and hedge funds.

The diversity of investment vehicles contributes to healthy competition and liquidity and is a strength of our capital markets. Properly incentivized institutions of different kinds can contribute to long-term wealth creation. However, the influence of money managers, mutual funds and hedge funds (and those intermediaries who provide them capital) who focus on short-term stock price performance, and/or favor high-leverage and high-risk corporate strategies designed to produce high short-term returns, present at least three problems:

• First, high rates of portfolio turnover harm ultimate investors’ returns, since the costs associated with frequent trading can significantly erode gains.
• Second, fund managers with a primary focus on short-term trading gains have little reason to care about long-term corporate performance or externalities, and so are unlikely to exercise a positive role in promoting corporate policies, including appropriate proxy voting and corporate governance policies, that are beneficial and sustainable in the long-term. Risk-taking is an essential underpinning of our capitalist system, but the consequences to the corporation, and the economy, of high-risk strategies designed exclusively to produce high returns in the short-run is evident in recent market failures.
• Third, the focus of some short-term investors on quarterly earnings and other shortterm metrics can harm the interests of shareholders seeking long-term growth and sustainable earnings, if managers and boards pursue strategies simply to satisfy those short-term investors. This, in turn, may put a corporation’s future at risk.

…continue reading: Overcoming Short-termism: A Call for A More Responsible Approach to Investment and Business Management

(Editor’s Note: This post by John F. Olson first appeared in BNA’s Corporate Accountability Report.)

This post was written together with Mark A. Borges, Charles M. Elson,
Ann Habernigg, Michael J. Halloran and Carol Hansell.

The global economic crisis has aggravated existing concerns about executive compensation practices. Executive and key employee pay practices among large financial sector companies in particular have drawn public scrutiny and condemnation. Lost jobs and lost savings, as well as extensive government support for the financial sector and the automobile industry, means that executive compensation is a concern not just to shareholders, but for everyone affected by the faltering economy. The issues are now seen as so significant and systemic that our elected representatives are taking the matter out of the hands of the private sector. Congressional proposals for sweeping corporate governance and executive compensation reforms and the new Administration’s interest in tackling this subject means that there is a very real prospect for significant changes to executive compensation regulation later this year.

We do not advocate a political solution to executive compensation issues, but if a legislative response is inevitable, it is imperative that it take the right form. As we have seen in the past, a piecemeal response to an assortment of perceived, and often isolated, executive compensation abuses will create as many problems as it solves—and is unlikely to take account of the systemic issues that must be addressed. After all, the intricacies of determining the ‘‘right’’ executive compensation across the diverse range of businesses and industries comprising corporate America defy a single solution, no matter how well intended and thoughtfully crafted.

Any government regulation of executive compensation should encourage compensation practices that will contribute to the sustainable long-term value of America’s business as we emerge from this crisis, rather than simply ‘‘fixing’’ specific compensation practices which are seen as having contributed to the crisis. What is needed is a set of principles to guide the design and operation of any responsible executive compensation program. The guidelines announced by the Obama Administration recently do this, focusing in part on pay for performance and, in particular, long-term performance. However, for guidelines of this nature to have real practical application, they must provide guidance to—and reinforce accountability by—the body that makes the decisions about executive compensation—the board of directors. A measured and principled approach overseen by corporate boards is the only way to ensure that the eroding trust between companies and their shareholders is restored, based on a shared commitment to the sustainable long-term value of the enterprise. Under the Administration’s plan, responsibility for crafting this approach will fall largely to the Securities and Exchange Commission.

Fortunately, there is no need to create a new set of governing principles out of whole cloth. Legislators should look closely at the work that has already been done in this area. A useful example is the guidance developed by the Aspen Institute’s Corporate Values Strategy Group. The thinking of this group was motivated by a concern with excessive short-term pressures in the capital markets that result from intense focus on quarterly earnings and incentive structures that encourage companies and investors to pursue short-term gain with inadequate regard to long-term effects. The Aspen group recommends that companies and investors do three things to promote sustainable long-term value creation. First, define the metrics of long-term value creation. Second, focus corporate-investor communication around long-term metrics. Third, align compensation policies with those long-term metrics. While the group’s guidance describes several features of a compensation structure that supports long-term value creation, it does not purport to prescribe any particular framework.

…continue reading: The Need for a Principled Approach to Compensation Reform

On July 15, 2009, the Obama administration (the “Administration”) delivered to Congress draft legislation, the Private Fund Investment Advisers Registration Act of 2009. Under the proposed legislation, managers of most hedge funds, private equity funds and venture capital funds in the U.S. would be required to register with the Securities and Exchange Commission (the “SEC”) under the Investment Advisers Act of 1940 (the “Advisers Act”). The existing exemption for investment advisers with fewer than 15 clients would be eliminated, and specific information reporting would be required for advisers to any “private fund.” A limited exemption will continue to apply to certain “foreign private advisers.” The existing threshold of $30 million of assets under management for mandatory SEC registration would continue to apply.

Andrew Donohue, the SEC’s Director of Investment Management, discussed these and other potential regulatory reforms in his testimony on July 15, 2009, before the Subcommittee on Securities, Insurance, and Investment of the U.S. Senate Committee on Banking, Housing, and Urban Affairs concerning the regulation of hedge funds and other private investment pools.

Applicability to Advisers to Private Funds

The new reporting requirements will generally apply to investment advisers to any “private fund,” which would be any investment fund that is relying on Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 for exemption from registration, and that is either organized in or created under the laws of the U.S. or has 10 percent or more of its outstanding securities owned by U.S. persons.

Additional Reporting to the SEC

In addition to the existing regulatory obligations of registered investment advisers to private funds, the draft legislation would require all registered investment advisers to private funds (including newly registered advisers) to submit reports to the SEC as are necessary or appropriate in the public interest and for the assessment of systemic risk by the Federal Reserve Board (the “Federal Reserve”) and the proposed Financial Services Oversight Council (the “FSO Council”).

The reports would include at least the following information for each private fund:

1. Amount of assets under management;
2. Use of leverage, including off-balance sheet leverage;
3. Counterparty credit risk exposures;
4. Trading and investment positions;
5. Trading practices; and
6. Such other information as the SEC and the Federal Reserve determines are necessary or appropriate.

These records and reports would be deemed records and reports of the investment adviser, which would be required to maintain and keep them in accordance with retention requirements prescribed by the SEC. The SEC would be required to make the new systemic risk data and reports available to the Federal Reserve and the FSO Council. In addition, because the private fund’s records would be deemed records of the investment adviser, they would be subject to periodic examination by the SEC and its staff.

Although the draft legislation provides that the SEC would not be required to disclose the reports or their content, the SEC would not be permitted to withhold information from Congress or any federal agency or self-regulatory authority. Accordingly, confidentiality would not be completely safeguarded.

…continue reading: Administration Proposes Regulations for Private Fund Investment Advisers

Class action lawsuits are an increasingly pervasive force in today’s business world. Defending and defeating these cases efficiently and prudently is a top priority for many in-house legal teams and their outside counsel. This year-end update reports on key trends in class action practice. It provides an overview of Rule 23, reviews key class action decisions from 2008, and identifies important class action issues likely to be litigated in 2009 and in the years ahead.

The number of class actions has grown exponentially in recent years. Although reliable numbers are hard to come by, Federal Judicial Center statistics suggest that new class action cases filed in or removed to federal court increased 72% between 2001 and 2007,[1] reaching approximately 4,000 to 5,000 annually as of mid-2007 (the last period for which data are available). This represents more than a dozen new lawsuits every day.[2] And while the Class Action Fairness Act (“CAFA”) has shifted many putative nationwide class actions from the state to the federal system, our class action lawyers, who, according to Law360, are running one of the top five busiest federal class action practices in the country, report that state court class action activity in many courts has not diminished. CAFA has prompted a flurry of single-state class actions filed in state courts, and recent statistics show that in at least one forum favored by the plaintiffs’ bar (Los Angeles), state class action filings continue to grow.

Gibson Dunn predicts that these trends will increase in 2009, as recently enacted and anticipated legislation will expand the ability of the plaintiffs’ bar to bring new suits. Gibson Dunn already is seeing a surge in labor and employment, consumer fraud, and products liability litigation. That trend will continue, as a new administration and Democratic Congress enact laws–such as the Lilly Ledbetter Fair Pay Act–that expand or create new legal remedies, and cut back on or repeal federal statutes and administrative regulations that have in the past preempted state-law based suits.

Gibson Dunn also expects the Supreme Court to enter the debate over Rule 23. To date, there has been a significant mismatch between the Supreme Court’s docket and the pervasiveness of Rule 23 cases in the federal system. Despite the overwhelming number of class action cases flowing through the federal judiciary, the Supreme Court has continued to steer clear of core Rule 23 and class certification issues for many years–a trend that should not and cannot last much longer. In the last five terms alone, the Supreme Court has decided seven tax cases, six ERISA cases, five Title VII cases, and five cases under the Age Discrimination in Employment Act. However, in the last thirty-five years, the Supreme Court has decided fewer than a dozen cases involving core class action issues.[3] Splits across an important range of issues continue to develop and percolate in the lower courts, and it is appropriate and urgent for the Court to provide much-needed guidance on these issues.

…continue reading: Year-End Update On Class Actions

In a recent novel decision in one of the mutual fund market timing cases brought by the SEC (SEC v. Tambone, ___ F.3d ___ (1st Cir. 2008), available at 2008 U.S. App. LEXIS 24457), the First Circuit held that the SEC had adequately alleged a primary violation of Section 10(b) and Rule 10b-5(b) for material misstatements “impliedly” made by the defendants. A sharply worded dissent criticized the Court’s holding for enlarging the scope of primary liability and blurring the line between primary and secondary liability that the Supreme Court recently drew in Stoneridge. Even though its impact remains to be seen, the First Circuit opinion has potentially significant implications for the scope of liability of defendants in both SEC enforcement actions and private civil securities litigation.

In an article entitled “A Wider Scope of Primary Liability?,” Mark Schonfeld and Akita St. Clair address the implications of the SEC v. Tambone decision. This article recently appeared in Law360.

The article is available here.

I. E-Proxy Update

In 2007, the Securities and Exchange Commission (the “SEC”) adopted rules providing for proxy materials (including the proxy statement, a proxy card, the “glossy” annual report and any other soliciting materials) to be made available to shareholders via a publicly accessible Internet website other than the SEC’s EDGAR website (the “E-Proxy Rules“).[1] Starting January 1, 2009, all public companies must comply with the E-Proxy Rules.[2] As a result, all companies conducting proxy solicitations will have to post materials on the Internet and can choose among the delivery options for proxy materials available under the E-Proxy Rules: the “notice and access option,” the “full set delivery option,” or a hybrid of these options.

A. Notice and Access
Under the notice and access option, a company can satisfy the proxy delivery requirements by delivering a Notice of Internet Availability of Proxy Materials (a “Notice of Internet Availability”) to shareholders at least 40 calendar days before the annual meeting date and posting proxy materials on an Internet website.[3] The information that can be included in the Notice of Internet Availability is limited and must conform to specified criteria set forth in the SEC rules.[4] The Notice of Internet Availability may not be accompanied by a proxy card or other information. Even though proxy materials are electronically delivered under this option, issuers must deliver proxy materials to any shareholder upon request.[5]

An intermediary (such as a broker or a bank who holds the shares on behalf of beneficial owners) may not independently elect to use the notice and access option, but is required to do so if requested by the issuer. To facilitate this process, an issuer must provide required information to intermediaries sufficiently in advance for the intermediary to prepare and send a Notice of Internet Availability at least 40 days before the date of the annual meeting.[6]

According to Broadridge Financial Services, Inc., as of June 30, 2008, 653 issuers used the notice and access model for distribution of their proxy materials.[7]

…continue reading: E-Proxy Rules Take Effect for All Public Companies

This post has been prepared by my partner John H. Sturc.

The SEC’s Division of Enforcement recently issued its first-ever manual. Intended as a reference for Enforcement Division staff, the Manual provides important insight into SEC decision-making and processes on such key matters as evaluating possible investigations, opening and closing matters, issuing Wells letters, communicating with senior SEC officials, responding to document subpoenas, “witness assurance” letters, contacting current and former employees, and respecting the attorney-client privilege during an investigation. It will be an essential guide for anyone with a matter before the Division of Enforcement.

The Manual memorializes in one place staff policies that have developed over decades but which were applied principally on the basis of oral tradition or internal, unpublished memoranda. A few highlights of the Manual follow. The full text is available on the SEC website here.

Purpose and Scope

The Enforcement Manual is designed as a reference for Division of Enforcement staff. The Manual states that it is “not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal.” Nevertheless, the Manual serves two very useful purposes. First, it informs persons requested to provide information to the SEC staff of the staff’s expectations. Second, it also provides boundaries that, for the first time, publicly define normative behavior for the SEC staff itself and that potential reviewing courts can use to determine whether agency action is appropriate, whether under an “arbitrary and capricious” or other standard of legal review.

…continue reading: SEC Adopts Enforcement Manual

Several noteworthy developments recently occurred regarding director independence. First, on August 8, 2008, the Securities and Exchange Commission (the SEC) approved amendments to the definition of “independent director” under the NASDAQ Stock Market Rules, which have gone into effect. Second, on August 12, 2008, the New York Stock Exchange (the NYSE) filed rule changes with the SEC to amend two of its director independence tests; these rules do not require SEC approval and apply beginning September 11, 2008. Finally, on August 5, 2008, the SEC announced the settlement of an enforcement action involving a former director who failed to disclose a business relationship with the auditor of three companies on whose boards he served, thereby causing the companies to violate the federal securities laws.

NASDAQ Amendments

The SEC approved an amendment to NASDAQ Rule 4200(a)(15), which sets forth several tests to determine whether a director of a listed company is independent.[1] Prior to the amendment, Rule 4200(a)(15)(B) provided that a director would not be considered independent if the director or an immediate family member accepted any compensation from the listed company in excess of $100,000 during any period of 12 consecutive months within the three years preceding the determination of independence (excluding compensation for board or board committee service, compensation paid to an immediate family member as a non-executive employee, benefits paid under a tax-qualified retirement plan and non-discretionary compensation). The amendment increased the dollar threshold from $100,000 to $120,000. This amendment was adopted in response to the SEC’s 2006 amendment to Item 404 of Regulation S-K, which increased to $120,000 the dollar threshold applicable to disclosure of related party transactions. The NASDAQ rule change has gone into effect.

New York Stock Exchange Amendments

The NYSE amendments modify the bright line independence tests set forth in Section 303A.02(b) of the NYSE Listed Company Manual in two respects.[2] The first amendment modifies Section 303A.02(b)(ii) to increase from $100,000 to $120,000 the amount of direct compensation (other than director or committee fees and pension or other forms of deferred compensation for prior service), that a director or members of a director’s immediate family may receive from a listed company in a 12-month period within the prior three years and still be considered an independent director. As with the similar NASDAQ amendment, the NYSE’s amendment was adopted to align the NYSE rules with the disclosure requirements set forth in Item 404 of Regulation S-K.

…continue reading: Recent Developments Regarding Director Independence