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Chair White Intends to Seek Admissions of Guilt in Enforcement Actions

In a speech on Tuesday, as reported by The Wall Street Journal, SEC Chair Mary Jo White said she intends to seek admissions of guilt on a case by case basis where "it's very important to have that public acknowledgment [of wrongdoing] and accountability."

As a result of the financial crisis, some have criticized the agency for not seeking admissions of guilt. Of particular note, Judge Jed Rakoff of the Southern District of New York has more than once questioned settlements without it. However, given the threat of civil litigation, companies will in most cases litigate an enforcement action rather than admit guilt. This could be a burden on the SEC Enforcement division resources. 

Hear more about this at the Society's National Conference at the panel on "SEC Enforcement: Where is it Headed Now?" with former SEC Enforcement Regional head Marc Fagel, now at Gibson Dunn, and Chris Martin at Morrison & Foerster, and Matt Lepore of Pfizer. 

SEC Announces Second Whistleblower Award

Last week, the SEC announced its second whistleblower award to three individuals. The award would be 15 percent of what the SEC ultimately collects from an action in which a default judgment has been entered for $7.5 million against a "sham" hedge fund Locust Offshore Management LLC and its CEO, Andrey C. Hicks. No money has been collected to date, and consequently no payments have been made to the whistleblowers. The press release describes the whistleblowers' action as follows:

This order does not identify the whistleblowers but stated that two of them provided information that prompted the SEC to open an investigation and stop the scheme before more investors were harmed. The third whistleblower confirmed much of the information the others had provided and identified key witnesses. A fourth application for an award was denied because the information provided did not lead to or significantly contribute to its enforcement action, as required by law.

House Financial Services Committee Marks Up Pay Ratio and Audit Firm Rotation Bills

Today the Financial Services Committee passed four bills to relieve certain federal regulatory burdens. Two of the bills were the subject of a subcommittee hearing on May 23 at which the Society's Bob Smith testified: 

• H.R. 1135, the Burdensome Data Collection Relief Act, which would eliminate the pay-ratio provision from Dodd-Frank (passed 36-21); and 
• H.R. 1564, the Audit Integrity and Job Protection Act, which would prevent the PCAOB from requiring mandatory audit firm rotation (passed 52-0). 

The House Financial Services Committee blog contains a video of Representative Huizenga (R-MI) describing his pay ratio repeal bill.  

Other bills of interest we are tracking relate to shareholder approval of corporate political spending. See H.R. 1626: Focusing the SEC on Its Mission Act, sponsored by House Republicans, which would prevent the SEC from enacting rules to require the disclosure of an issuer's expenditures for political activities; and identical bills in the House (H.R. 1734) and Senate (S. 824: the Shareholder Protection Act of 2013), sponsored by Democrats, which would require shareholder authorization of certain political expenditures, and board approval and public disclosure of same, among other things.

SEC is Now "Wired" with MIDAS

Gregg Berman, Associate Director, Office of Analytics and Research at the SEC's Division of Trading and Markets, gave a speech yesterday and explained MIDAS, the office's new cloud-based data collection system for trading data. Berman spoke at the SIFMA TECH Conference on "Transformational Technologies, Market Structure, and the SEC."

MIDAS -- the Market Information Data Analytics System -- gives the SEC data from each of the 13 exchange proprietary feeds. This enables his SEC office to perform "full depth-of-book analyses" and will lead to a full understanding of market structure which will lead to better-informed policy decisions. He said that MIDAS provides data on each individual order:

Answering these basic factual questions must be the starting point for any serious dialogue about market speed, and I'm very glad we now have the tools and technology to be able to do so.

European Securities and Markets Authority (ESMA) Issues Report on Prospectus Liability Regimes in European Economic Area States

Late last month, ESMA issued a report providing factual information on the liability schemes in the European Economic Area states, and to provide some clarity to the market participants about the different regimes in place. Thanks to Davis Polk for bringing it to our attention. See a Davis Polk memo for a more complete description of the findings, which relate to civil and administrative liability, and specifically, what triggers liability, the type of sanctions that can be applied, and whether class action suits are allowed, among other things.

Management Proposals on Proxy Access, Other Matters Fail at Chesapeake

Three management proposals failed to win required support from two-thirds of shares outstanding at Chesapeake's June 14 annual meeting.  These included a much-publicized proposal to create proxy access, along the lines of the rule proposed by the SEC a few years ago.  Chesapeake said that each of the proposals (including a proposal to declassify the board and one to eliminate supermajority vote requirements) received about 60% of shares outstanding.  We understand Chesapeake has a larger retail base than some companies, which may have been a factor in vote turnout.

Other interesting annual meeting news: Facebook's annual meeting results give Facebook a triennial say on pay frequency vote, not surprising given the dual class structure. As CFOJ's Emily Chasan noted in April, 80% of companies in the Russell 3000-stock index are holding annual votes, while 19% have chosen every three years, and just 1% have opted for every two years, according to an analysis by Towers Watson. It is worthy of note that the three-year frequency companies will be up next year, along with the consequent burden on proxy advisory firms, and institutional Investors.  

Supplemental Filings Slow to a Trickle

Company supplemental filings relating to annual meetings have slowed considerably. However we continue to see companies amend their compensation plans to satisfy ISS: see, e.g.,  MFRI, which limited the number of shares to be issued under its equity compensation plan to satisfy ISS's share value transfer metric and added provision to prohibit repricing. See also ICG which agreed to change its options pricing in order to get support from Fidelity.

SEC Charges Revlon with Misleading Shareholders in Going Private Transaction

On June 13, the SEC issued an order charging Revlon for misleading its directors and minority shareholders under Exchange Act Section 13(e) in a going private transaction. Revlon was charged with keeping from its independent directors a third party financial adviser opinion that the consideration offered to participants in Revlon's 401(k) plan was not "adequate" under the Employee Retirement Income Security Act of 1974 ("ERISA").

The SEC order found that Revlon engaged in acts "to avoid receiving" the third party opinion described as "ring fencing":   

Revlon proposed and entered into an amendment to the trust agreement it had with the trustee to ensure that the trustee would not share the adequate consideration determination with it; ensured that it was not a party to any engagement letter concerning the adequate consideration determination; and directed the trustee to inform Revlon of its decision whether to allow 401(k) members to tender their shares without any reference to the adequate consideration determination.

Revlon agreed to pay $850,000 and did not admit or deny the findings.

Google Settles Suit on New Non-Voting Shares

Google on Monday announced it had reached a settlement with shareholders on a class action suit concerning issuance last year of a new class of non-voting stock. The agreement is subject to approval by the Delaware Court of Chancery.

Google intends the new class of shares (Class C) to be used for equity compensation plans and other purposes. Under the settlement, if Google wishes to use more than 10 million Class C shares as consideration in an acquisition, independent members of the board "will consider the effects" on Class A shareholders and the company. Class A shares are widely held and carry one vote per share. Class B shares carry 10 votes per share, and are the main source of the 56% total voting power of co-founders Larry Page and Sergey Brin.

The settlement would give Class C holders compensation if the value of the stock differs by more than 1% from the value of Class A shares. The agreement also would require unanimous board approval to amend a "transfer restriction agreement" that requires Page and Brin sell Class B shares when they sell Class C shares. Google also stipulated in the agreement that it would not object "to any judicial review being evaluated pursuant to the entire-fairness doctrine standard under Delaware law."

On This Week in the Boardroom (TWIB), TK Kerstetter, Chairman, Corporate Board Member interviews Leslie Murphy, Audit Chair, Kelly Services Inc. 

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