March 8, 2010 (Skip to list)

This was the week of the sequel, with a number of topics re-appearing as the result of further guidance/litigation.

1.     Further FinCEN/IRS Guidance on Report of Foreign Bank & Financial Accounts (FBAR).

Popping up again like a bad (and possibly reportable) bad penny was FBAR, the fairly unanimous choice as this year's best tragicomedy. Reviews were fairly mixed as to the utility of the new guidance as a number of issues continue to remain unresolved. One of the most consternating issues, however, has now come full circle with the new IRS guidance stating that interests in foreign commingled funds (other than mutual funds) are not “foreign financial accounts” for purposes of the FBAR form.

You may recall that the whole furore was kicked off last summer when, to everyone's surprise, an IRS representative stated informally that an interest in a foreign hedge fund would be considered a “foreign financial account” for purposes of the FBAR form. When the IRS chose not to correct this statement, a near panic ensued as lawyers and accountants threw considerable resources (and client funds) into a race to meet a looming and an apparently fixed IRS reporting deadline. Deadlines and guidance maddeningly kept shifting at the eleventh hour, however, making it useful only to those parties that either couldn't (or wouldn't) comply with the presumptive rules. So although relief has been given (for now), there will be many parties who will have disclosed account information to the IRS un-necessarily when peers have not had to ...

February 15, 2010 (Skip to list)

The volume of Alerts was roughly halved last week as the U.S. east coast reeled under the weight of an historic series of snowstorms. Monday the 15th was also a US federal holiday, so we expect to see an active and "compressed" flow of news as this week progresses, with regulators undoubtedly intent on catching up with schedules mangled by the weather. There were only three new stories in our Top 10, and we will kick-off with them.

On February 5th, the DOJ and the UK's Serious Fraud Office ("SFO"), announced a "global" settlement with the UK's BAE Systems ("BAE") whereby BAE agreed to pay a $400 million fine to the U.S. and plead guilty to a single charge of conspiring to make false payments in connection with regulatory filings. On the U.K. side, BAE has agreed to pay a £30 million fine for illegal conduct which occurred in Tanzania. In exchange, BAE apparently gets a global clean slate from the U.S./U.K. in respect of past sins, including in respect of the "Al Yamamah" ("the dove") deal. Our hunch is that BAE will be feeling pretty good about the settlement. Wrapping up the Al Yamamah deal, rife as it is with national security concerns, in a "global" deal with any number of garden variety bribery charges will probably prove a clever strategy.

The fines are actually relatively small in the context of things; $450 million being less than one quarter of what was allegedly paid by BAE to Saudi Arabia's then ...

February 8, 2010 (Skip to list)

Historically, workaholic Washingtonians have secretly welcomed mother-nature's compelled closing of the federal government by the lightest dusting of snow. We doubt that was the case last Friday as Washington D.C. faced "Snowmageddon," one of the largest snowfalls in the capital's history. Friday will have been an excellent opportunity for regulators to prove their commitment and we sympathize with those truly stuck at home, trying desperately to utilize secure servers and appear busy online in an effort not to be outdone by colleagues able to get to their desks. The sad fact for those at home is that their colleagues will have bragging rights for years. Equally true is that the blizzard of regulatory action will not have missed a beat and the Administration will be keen to show that not even an irresistable force of nature slows it down.

It would be interesting to know how SEC Chairman Mary Schapiro got to work, probably in some enormous tracked vehicle, but on Friday the SEC presented as scheduled (come hell, high-water or Snowmageddon) its annual "SEC Speaks" event, where the Chairman, after reviewing an enormously active year, concluded that "I don't see us letting up anytime soon."

Unsurprisingly, SEC actions again loomed large in our Top 10. Moving to the top of the list was the SEC's guidance on climate change risk disclosure. Having noted the SEC's many caveats as to what the guidance isn't, Cleary Gottlieb summed things up quite neatly with the reminder that "[I]t would, however, be naïve to think that Commission statements of this sort do ...

February 1,2010

One thing for sure: These are uncertain times. The lack of certainty in our evolving regulatory landscape loomed large this week, explicitly and implicitly, with agencies seemingly taking a "we will worry about the details later" approach to otherwise radical regulatory initiatives. The IRS is so sure of uncertainty that it wants companies to report on their "uncertain" tax positions. The SEC, although explicitly dodging the issue as to whether climate change even exists & explicitly stating that it is not changing its rules, bothered to put out a highly publicized "interpretive release" with guidelines as to reporting climate change risk. The DOJ is using stings to catch payments to foreign officials, but the Supreme Court has just reaffirmed corporate America's First Amendment rights to underwrite the political process to advance business goals (Citizens United v. Federal Election Commission). The Obama Administration wants to cleave the entire US banking system in two with size and scope limitations and the three enormous sectors (health, insurance, pharma) facing fundamental change as a result of health care reform, now see that initiative stopped indefinitely in its tracks based on the historically serendipitous change in a single Senate seat. Is the system being over-loaded by change? Are we seeing qualitative declines in regulatory initiatives as a result of quantitative increases? One month after a burned-out Senate just decided to go home instead of tackling estate-tax legislation (several Senators ...

January 25, 2010

On January 21, 2010, the Supreme Court issued its much-anticipated decision in Citizens United v. Federal Election Commission ("FEC"), overturning decades-old precedent (ie its own 1990 decision in Austin v. Michigan Chamber of Commerce and parts of its 2003 decision in McConnell v. FEC) and striking down as unconstitutional prohibitions contained in the Bipartisan Campaign Reform Act (ie "BCRA" or "McCain-Feingold") on the use of corporate and union treasury (ie non-PAC) funds to pay for communications expressly advocating the election or defeat of federal candidates.  Most notably, this opinion removes the legal prohibitions on “independent expenditures” (no "coordination" with other corporations or candidates allowed) and “electioneering communications” by US corporations. The decision, although based on facts relating to federal level political participation, also effectively makes unconstitutional statutes in 24 states relating to participation at the state and local level. Given the watershed nature of the changes, corporate boards will have much to think about. Having the right to influence the political process is one thing, exercising that right astutely in light of commercial and shareholder concerns is an entirely different kettle of fish.

First Amendment fight shifts from the court room to the board room

Before we look at the new set of rules left in the wake of Citizens United, it is worth noting the bitter divide that this decision highlights/exacerbates on the issue of corporate participation in politics; both because it suggests further battles/uncertainty on the issue and because corporate boards may find it indicative of shareholder reactions should their companies decide to exercise their new rights. Our excerpts from the majority & dissenting opinions below ...

January 20, 2010

On January 13th, Robert Khuzami, the SEC's Director of Enforcement made good on a promise made last August and unveiled a series of measures intended to "foster cooperation" between individuals who might otherwise face an enforcement action and the SEC; the SEC's expectation being that it will receive "invaluable and early assistance in identifying the scope, participants, victims and ill-gotten gains associated with fraudulent schemes." In his announcement, the gamekeeper--turned poacher--turned gamekeeper (prosecutor--big bank general counsel--SEC enforcer) unveiled a list of "tools" borrowed from his eleven years prosecuting terrorists and white-collar criminals to encourage cooperation and a dizzying list of criteria for judging the merits of that cooperation. Will they work?

December 28, 2009

On December 22, 2009, the SEC published proposed amendments to Securities Act Rule 163 which should (if adopted) make it easier for certain large companies to gauge investor interest in an offering of their securities before a registration statement is filed.

In 2005, the SEC adopted Rule 163 which currently allows “well-known seasoned issuers” (“WKSIs”) to engage in unrestricted oral and written offers before a registration statement is filed without violating the “gun-jumping” provisions of the Securities Act. The SEC reasoned in 2005 that because WKSI's are big public companies with an Exchange Act reporting history and a wide market following, "it is appropriate to provide [them with] communications and registration flexibilities ...  beyond that provided to other issuers." The hope at the time was to de-risk the offering process from the issuer perspective (eg allow an issuer to better assess whether an offering would succeed or embarrassingly fail) and thereby encourage issuers to offer securities in registered offerings (registered offerings generally providing more protection to investors than their unregistered counterparts).

This flexibility to "test the waters" as to a securities offering is, however, currently limited to offers “by or on behalf of” of a WKSI itself and specifically excludes "offering participants who are an underwriter or dealer;" underwriters/dealers often exactly who an issuer would turn to for help in identifying suitable investors. Research now shows that without the ability to call on underwriter/dealer help in communicating with investors, issuers have often been too nervous to take advantage of Rule 163. As the SEC puts it with the benefit of hindsight: "we understand that many of these issuers either do not have sufficient knowledge ...

December 21, 2009

On December 16, 2009, the SEC adopted a series of rule amendments intended “to enhance the information provided to shareholders so they are better able to evaluate the leadership of public companies” (ie to help shareholders understand whether boards/senior management are doing their jobs and worthy of their compensation). The rationale for the amendments is painful both in its simplicity and in its indictment of current corporate governance practices, with Chairman Schapiro adopting the scolding tone of a school teacher in reminding corporate America what it means to lead and that transparency is the bedrock of our securities regulatory system: "Good corporate governance is a system in which those who manage a company — that is, officers and directors — are effectively held accountable for their decisions and performance. But accountability is impossible without transparency." The tone, the environment in which the new rules are being adopted (ie one of unprecedented enforcement activity) and the accusatory nature of the rules themselves will undoubtedly leave directors feeling ill at ease and, given that the transparency to be corrected relates to them, perhaps a bit under-dressed.

The new and amended rules will become “effective” on February 28, 2010, ie it should be assumed that they will apply to this proxy season.

The amendments, principally to rules in Regulation S-K, are intended to help an investor understand the abilities of directors and proposed directors to serve on a given board, the nature of their compensation arrangements, especially as to how they impact risk taking or potentially diverge from the interests of a company and its shareholders, and the roles that boards have assigned themselves (or not) in managing company risk. The scrutiny is broader, deeper and more tailored than what boards will be used to; and is ultimately designed to help shareholders get the answer to ...

(Please see also the accompanying table "Social Media Use at The AmLaw 100"

As at publishing, 29 of the “AmLaw” 100 actively use Twitter. A further 53 (at least) have put one or more stakes in the cyberground. Remarkable statistics given that only three firms “tweeted” an aggregated several hundred Tweets during all of 2008 (based on surviving records, Weil Gotshal was first into the water on October 31st, 2008). So is there anything to glean from the just-hatched Twittering efforts of the AmLaw 100? Surprisingly, quite a lot; although not at all what we had expected.

Our initial expectation, as we counted, sorted and sexed the Tweets, was that we would find a relationship between Twitter use and the bottom line at the AmLaw 100. Not quite as bird-brained an idea as it might sound at first blush; lining up our thin Twitter data against the legal industry’s key performance benchmarking tool, the “AmLaw 100 2009.” Twitter is the latest in a series of internet-based media which can be adapted to disseminate legal content (97 of the AmLaw 100 now make some of their work-product publicly available) and the AmLaw 100 is a group of highly competitive businesses that ultimately succeed or fail based in part on their ability to deliver information in a reputation-enhancing way.

We would find, therefore, that Twitter was being rolled into highly-refined, cohesive client communications efforts and that those efforts would be collectively pushing through to the bottom line. The fact of Twitter use (if not yet the data itself) would identify market leaders and would mark a modern, winning attitude towards clients and business that would be discernible.

A funny thing happened on the way to ...

December 8, 2009

On December 1, 2009, the Lisbon Treaty came into effect, amending the current Treaty on European Union (the 1992 "Maastricht Treaty") and the Treaty establishing the European Community (signed in Rome in 1957). Together, the two amended Treaties (the former retains its title while the latter becomes the "Treaty on the Functioning of the European Union" or "TFEU") establish the European Union and govern its operation. So what does the Lisbon Treaty do and why is it hailed as one of the most momentous steps in European integration over the last 60 years? And if it is so important, why is it being greeted with a "If its Lisbon, it must be Thursday" level of disinterest/ennui?

First and foremost, the Lisbon Treaty brings the institutional and legal framework underpinning Europe relatively up-to-date. Regardless of where one stood on the merits of a unified Europe, the framework was acknowledged as unwieldy and almost incomprehensibly fragmented when discussions began on a new treaty. That was 8 long years and 12 new members ago. This is not entirely a criticism, slow progress has been made as and when it has been permitted by an evolving perception as to what Europe should or could be, at both the popular and national levels. Arguably, much greater progress would have occurred much earlier if today's sentiments had existed decades ago. The fact remains, however, that the multi-headed, multi-layered manifestation of the stops and starts allowed by political expediency has resulted in a mind-numbing and un-understood (much less mis-understood) system; perhaps summed up by then Secretary of State Henry Kissinger's famous (and rhetorical) question as to whom he should call up in Europe if the world caught fire. NB the Lisbon Treaty answers that question, for Hillary Clinton if not President Obama (he still has a confusing choice if he wants to speak to a counterpart) with the creation of the role of High ...

December 7, 2009

On November 27th, European Commission President Barroso appointed fellow Iberian and close political ally Joaquín Almunia as the next EU Commissioner for Competition, shifting Mr. Almunia (currently Commissioner for Economic and Monetary Affairs) from one hot seat into an even hotter one. So who is this economist turned politician from Madrid (born Bilbao), why is his nomination getting such universal approval despite an apparent lack of competition experience and what can we expect from him? The answer to the all important third question is maddeningly elusive for someone who has been at the top levels of European politics for 25 years, but we are beginning to get a clearer picture about who he is and how he will approach his new role. 

Almunia certainly has the CV of the prototypical modern European, with degrees from Deusto, The Sorbonne and Harvard (law, economics & government) under his belt before taking a job with the Spanish chamber of Commerce in Brussels in 1972. In 1976, at the age of 28, Almunia became the chief economist of the Unión General de Trabajadores, the Spanish trade union affiliated with the Spanish Socialist Workers' Party ("PSOE"); and in 1979 he completed the transition from economist to politician, becoming a member of the Cortes Generales, representing Madrid. From there a steady climb to the top of Spanish politics (he was in 1982, at the age of 34, the youngest minister in Felipe Gonzalez's cabinet) culminating in leading the PSOE for three years in the late '90s and then his disastrous loss to encumbent Prime Minister Jose Maria Aznar in which the PSOE lost 16 seats and 7% of the popular vote. Resignation as party leader followed (it actually occurred on election day) as did a period of  semi-political exile during which he founded "progressive" think tank "Laboratorio de Alternativas."

Politics in ...

November 16, 2009

On November 13, 2009, the SEC continued its review of equity market structures with a rules release proposing amendments to Exchange Act rules relating to non-public trading in National Market System stocks, including trading that occurs in so-called “dark pools.” The SEC is concerned that non-public trading (ie trading that does not occur on a national securities exchange like the NYSE) has the propensity to create a two-tiered system, to the detriment of those who cannot trade non-publicly. At the center of this rules initiative are "dark pools" where traders can anonymously look to buy or sell large blocks of stock in alternative trading systems (or ATSs) by coyly signalling other ATS participants with "indications of interest" (or IOI). The goal is simple, minimize the market impact of a large transaction by limiting information on the participant and the trade. But is it fair that (i) a large investor with access to an ATS can sell 1,000,000 shares of Inc. without driving down the value of his shares while individual investors publicly trading those same shares would be punished by the laws of supply and demand (especially if non-public trades were simultaneously sucking liquidity from the public-market) or (ii) that dark pool participants can treat information sharing as a one way street, using the prices displayed in publicly displayed markets without supplying pricing information of their own? Then again, isn't it preferable that a large trade can occur without sending out confusing signals about the relative worth of Inc.'s stock?

The SEC's proposed rules release notes that "the proposals are intended to promote the Exchange Act goals of transparency, fairness, and efficiency." As you will probably note, however, the proposed rules deal principally with transparency. Are the more subjective issues of fairness and efficiency derivative of transparency? Or are we a long ...

October 15, 2009

On October 14th, the SEC proposed changes to Exchange Act proxy rules that are intended to improve the "notice and access model" for furnishing proxy materials to shareholders. In 2007, the SEC amended the proxy rules by adopting a notice and access model that required all issuers and other soliciting persons to post their proxy materials on an Internet Web site and to furnish notice of the materials’ availability to shareholders. The hope at the time was that the Internet could provide a reliable and cost-efficient means of making proxy materials available to shareholders.

Under the notice and access model, an issuer or other soliciting person can choose between providing proxy materials to shareholders using either a “notice-only option” (whereby only a "Notice of Internet Availability of Proxy Materials" (the "Notice") is sent to shareholders) or a “full set delivery option” (whereby the traditional full set of paper proxy materials is sent to shareholders accompanied by the Notice). Issuers/other soliciting persons can effectively mix and match the two methods but must regardless of the method used make the proxy materials available on an Internet Web site.

Recent research, however, suggests that although the notice and access rules have in fact been economical for issuers/other soliciting persons, significantly lower shareholder response rates are achieved when notice-only  proxy solicitations are used, particularly amongst retail shareholders.

The proposed rules would remove regulatory impediments that may be reducing shareholder response rates to proxy solicitations, but clearly there remains a lack certainty as to why response rates are so much lower with the notice-only option. As such, the SEC is also soliciting comment as to why the notice-only response rate is lower (especially as to individual shareholders) and how to best advance its regulatory interest in informed shareholder participation.

October 14, 2009 

On October 13, 2009, the SEC published final rules which delay for six months (until June 15, 2010) the point from which a non-accelerated filer must include in its annual report an "attestation" from its independent auditor as to the quality of that filer's internal control over financial reporting included in that annual report.

Rules implemented under Section 404(b) of Sarbanes-Oxley require companies to include in their Exchange Act annual reports (ie 10-K) a report from management as to the effectiveness of their internal control over financial reporting. As back-up, these reports have to be accompanied by an auditor’s attestation report. Debate/discussion between accountants, lawyers and the SEC as to how exactly this latter requirement could be safely and uniformly met has resulted in a number of delays to the roll-out of the 404(b) rules (this is the 6th for the appropriately labeled "non-accelerated filers") since the relevant rule amendments were introduced in June 2003. (NB: "non-acclerated filers" are relatively smaller companies and as  arule have a worldwide public float of less than $75 million, ie are not either an “accelerated filer” or a“large accelerated filer” as those are defined under Exchange Act Rule 12b-2).

The final rule is significant in a second respect in that it also extends for six months the dates from which non-accelerated filers will be deemed to have “filed” rather than “furnished” the underlying management report on internal control. This rather subtle distinction is very important in that reports “furnished” rather than “filed” are not subject to liability under Section 18 of the Exchange Act.

November 6, 2009

On November 5, 2009, the SEC extended the compliance date for Regulation S-AM from January 1, 2010 to June 1, 2010. NB: The effective date for Regulation S-AM remains the same, ie September 10, 2009.

Regulation S-AM will generally require that broker dealers, investement advisers, transfer agents & investment companies provide consumers a chance to “opt out” before “eligibility information” is shared with an affiliated company for the purposes of marketing financial products or services.

Please see our Hot Topics for more on this subject.