Regions Financial may face SEC charges. The U.S. Securities and Exchange Commission may launch a civil proceeding against the Morgan Keegan & Co. brokerage unit of Regions Financial Corp. In its quarterly report filed with the SEC, Regions said the...
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The SEC (Securities and Exchange Commission) has censured Royal Alliance Associates, Inc. and fined it $500,000 due to its failure to supervise one of its former advisers, David McMillan. From at least January 1999 until December 2004, McMillan was able...
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Recently, securities regulators proposed to revise the Suitability and Know Your Customer obligations. In Regulatory Notice 09-25, FINRA is proposing to add a great deal more to Suitability and Know Your Customer obligations. Specifically, under the revised Rules: A member...
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A past NAPFA President has been charged in a kickback scheme. A former president of the National Association of Personal Financial Advisors has been charged with taking kickbacks from unregistered investment pools in which his Wisconsin advisory firm placed $102...
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Recently I had the pleasure of participating in a panel discussion before an audience of financial planners to address customer complaint issues. One of my co-panelists, Michael P. Shaw, CFP Board?s Managing Director of Professional Review and Legal, discussed CFP...
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The New Hampshire Bureau of Securities Regulation has filed a Cease and Desist order against UBS Financial Services alleging unfair sales practices and unsatisfactory supervisory procedures and for recommending unsuitable investments to more than 40 New Hampshire investors. The action...
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The CtW Investment Group has called on the board at Pulte Homes to reverse its decision to seat three directors--Debra J. Kelly-Ennis, Bernard W. Reznicek, and Richard G. Wolford--who received majority opposition.

?By failing to accept the resignations tendered by these directors, each of whom failed to receive a majority of votes cast in the company?s May 14 director election, the board violated the most fundamental corporate governance principle and reinforced investor concerns with the board at a sensitive moment,? William Patterson, executive director of CtW, wrote in a June 9 letter to David McCammon, Pulte?s lead independent director.

CtW, the investment arm of the Change to Win labor federation, said the vote was, ?an extraordinary rebuke? given the company?s high inside ownership. (Executives and directors owned a 19.5 percent stake as of March 17.) The labor investment group estimates (based on past turnout and without counting uninstructed ?broker? votes) that at least 76 percent of outside investors voted against the three directors. The Laborers? International Union of North America, in a June 2 letter, also has called on Pulte?s board to reconsider its decision.

In a June 2 filing, the Michigan-based homebuilder said the governance committee considered the issue at a May 29 meeting and that the full board (with the three directors recusing themselves) voted unanimously not to accept the resignations. Pulte, which has a resignation policy in its governance guidelines, maintains a plurality voting standard. The board concluded that the resignations were a reflection of the company?s classified board structure and its adoption of a ?poison pill? plan in March. Shareholders gave majority support to declassification proposals this year, in 2008, and in 2007.

The board said it recommended allowing shareholders to vote in 2010 on the pill as well as a charter amendment to start phasing out its classified board in 2011. The board delayed a final decision on these governance matters until it completes a merger with Centex.

CtW said it was not satisfied by the board?s recent actions. ?Rather than address shareholders? objection to weak and unresponsive directors, the board is belatedly taking up specific governance failures that are themselves symptoms of an entrenched board,? Patterson wrote in his letter.

It?s extremely rare for a director at an S&P 500 firm like Pulte to receive majority opposition in an uncontested board election. That happened at two S&P 500 companies (Cameron International and Boston Properties) in 2008, according to RiskMetrics Group data.

So far this year, directors at four smaller companies--Zoll Medical, NBTY, Digi International, and Plexus--have encountered majority opposition, according to RiskMetrics data. It is likely that directors at other smaller issuers also failed to receive majority support this season, but that information won?t be public until August when many companies with second-quarter meeting dates file their 10-Q reports with final vote results. Most Russell 3,000 companies don?t have director resignation policies or majority vote bylaws, so they are not likely to disclose a majority withhold vote until their 10-Q filing.

On June 12, U.S. Rep. Gary Peters of Michigan introduced a far-ranging governance bill that also addresses ?broker? votes, disclosure of performance targets, and compensation consultants.

Other provisions of Peters? bill, ?The Shareholder Empowerment Act of 2009,? are similar to those in legislation introduced in late May by a fellow Democrat, Senator Charles Schumer of New York. Both Peters and Schumer call for U.S. public companies to hold annual advisory votes on executive pay, allow shareholders to nominate board candidates to appear on management proxy statements, adopt a majority vote standard in uncontested director elections, and appoint an independent chairman.

?As an investment advisor for over 20 years, shareholder rights issues have always been very important to me,? Peters said in a press release. ?This bill empowers shareholders, a company?s true owners. Wall Street executives who pursued reckless investment strategies were a major contributing factor to the recent financial meltdown. Ensuring that executives act in investors? long-term interest rather than for their own short-term gain is critical to prevent a similar economic collapse in the future.?

Peters? bill, H.R. 2861, goes farther than Schumer?s by calling for the elimination of uninstructed ?broker? votes in board elections. The SEC is considering a New York Stock Exchange rule change on this topic, but it?s not known when the commission will act.

In addition, Peters? bill would prohibit advisors to compensation committees from also performing work for management. This would be a significant change. Companies now must disclose whether their compensation panel uses a consultant, but issuers do not have to provide details on the fees paid to the advisor or the fees earned for doing other more-lucrative work for management, such as human resources consulting.

Seeking to ?curb excessive risk-taking,? Peters? legislation also would require companies to inform shareholders about the performance targets used to determine bonuses and other incentives. While some U.S. companies are providing better disclosure of performance targets, others have resisted, citing competitive reasons.

His bill also would require companies to adopt ?claw-back? policies and prohibit severance payments to executives who are terminated for ?poor? performance.

It?s unclear whether his bill has a realistic chance of passage. Peters is serving in his first-term in the House of Representatives, where legislative agendas are controlled by senior Democrats. So far, six other representatives--including two veteran Democratic lawmakers, Reps. John Dingell of Michigan and Maxine Waters of California--have signed up as co-sponsors.

Peters? district includes parts of suburban Detroit and is home to Chrysler?s headquarters and three General Motors plants. He is a member of the House Financial Services Committee, which oversees the SEC and investor issues. Before joining Congress in January, he served as a state lawmaker, Michigan?s lottery commissioner, and a city councilman.

Chairman Mary Schapiro recently testified before the Senate Subcommittee on Financial Services and General Government on the ways in which the Securities and Exchange Commission (SEC) is seeking to restore investor confidence. Her remarks come at a time when both...
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RiskMetrics Group today kicked off its annual global policy formulation process by inviting its institutional investor clients along with a broad range of industry constituents to participate in its 2010 proxy voting policy survey. This year?s policy formulation process will include more outreach to investment industry groups as well as expanded outreach to the global corporate issuer community.

RiskMetrics undertakes an extensive policy formulation process each year that includes a broad-based global survey, issue and market-specific roundtables and an open comment period. During the process, clients and various industry constituents are encouraged to offer their views on leading governance issues likely to dominate the upcoming proxy season. RiskMetrics then formulates its proxy voting policies to reflect the collective thinking of its institutional investor clients, enriched by its own knowledge and expertise.

The survey period is open through July 31 and will be followed in October by an open comment period after RiskMetrics publishes its draft policies. The open comment period is designed to elicit objective, specific feedback from investors, corporate issuers and industry constituents on the practical implementation of proposed policies. Feedback received during the open comment period will be made available via RiskMetrics? online Policy Gateway.

To learn more about RiskMetrics Group?s policy formulation process, please visit here..

President Barack Obama today unveiled a series of proposals as part of a ?sweeping overhaul? of the U.S. financial regulatory system.

While the administration did not go far as some market observers had expected, the president?s proposals would significantly expand the authority of the Securities and Exchange Commission and other regulators.

The proposals, many of which require Congressional approval, include giving the Federal Reserve more authority to oversee bank holding companies and non-bank firms, the creation of a new Financial Services Oversight Council to identify emerging systemic risks, and the establishment of a new Consumer Financial Protection Agency to regulate mortgages and other financial products.

To reduce risks to the financial system, ?large, interconnected? financial firms identified as ?Tier 1 financial holding companies? would be subject ?to more stringent capital, activities, and liquidity standards, and more exacting prudential supervision,? according to a White House summary of the proposals.

The president also called for requiring hedge fund advisers to register with the SEC and for ?comprehensive regulation? of all over-the-counter derivatives, including credit default swaps. Originators of securitized products would be required to retain a 5 percent stake.

The White House also said the SEC should ?continue its efforts to tighten the regulation of credit rating agencies? and ?ensure that firms have robust policies and procedures that manage and disclose conflicts of interest.?

The administration did not propose to combine the SEC and the Commodity Futures Trading Commission (CFTC), as some agency officials had endorsed. However, the administration did direct the two agencies to prepare a report by Sept. 30 with their recommendations to Congress on harmonizing their regulation of similar financial instruments.

Recalling the role that short-term incentives and other compensation practices played in causing the global financial crisis, the White House highlighted several principles and reforms that were announced by the Treasury Department on June 10. ?Executive compensation--unmoored from long-term performance or even reality--rewarded recklessness rather than responsibility,? the president said in his speech today.

?Federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value and to prevent compensation practices from providing incentives that could threaten the safety and soundness of supervised institutions,? the White House said in its regulatory reform report.

The administration reiterated its support for ?say on pay? legislation to require public companies to offer an annual non-binding vote on the compensation for senior executives. ?While such votes are non-binding, they provide a strong message to management and boards and serve to support a culture of performance, transparency, and accountability in executive compensation,? the White House noted.

The Obama administration again said it would support legislation to enhance the independence and authority of compensation committees.

The Securities and Exchange Commission plans to address the long-awaited New York Stock Exchange?s ?broker vote? rule at an open meeting on July 1.

The NYSE has proposed to amend exchange Rule 452 to remove uncontested director elections from the list of routine matters where brokers can vote client shares if they don?t receive voting instructions within 10 days before an annual meeting. Most activist investors support the rule change and argue that these discretionary broker votes, which typically are cast for management nominees, can dampen the impact of ?vote no? campaigns. For instance, labor investors contend that two Citigroup directors would not have received majority support at the company?s April 21 meeting without the help of broker votes.

According to the agenda for the SEC meeting, the commission also will discuss whether to propose new disclosure rules on corporate governance and compensation matters. SEC Chairman Mary Schapiro has called for companies to provide more disclosure on director qualifications and the firm?s reasons for selecting its board leadership structure.

The agenda also includes a discussion of proposed rules for advisory votes on compensation at federally supported financial institutions.

A shareholder proposal seeking an annual advisory vote on executive compensation won more than 50 percent support at Supervalu, a Minnesota-based grocery chain, according to news reports.

The vote at the company?s June 25 annual meeting is the 19th majority result for a ?say on pay? proposal at a U.S. company this year, according to RiskMetrics Group data. Pay vote resolutions have averaged 46.7 percent support so far this season, up from 42 percent in 2008.

The proposal was filed by Denver-based shareholder activist Gerald Armstrong. Supervalu did not release detailed preliminary vote results, according to news reports.

Pay vote proponents say they hope that the greater support received by advisory vote resolutions this year will spur Congress to mandate pay votes at all U.S. companies.

SEC charges Massachusetts-based money manager in multi-million dollar Ponzi scheme. The SEC alleges that Michael Regan and his firm Regan & Company fraudulently obtained at least $15.9 million from dozens of investors nationwide by selling securities in his now defunct...
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By a 3-2 vote, the SEC today approved a long-anticipated New York Stock Exchange proposal to bar brokers from casting uninstructed client shares in uncontested director elections.

Also today, the SEC unanimously voted to propose new rules that seek more information on compensation risks, director qualifications, and board leadership structures. In a pleasant surprise for investor activists, the disclosure proposals also include a new mandate that companies disclose proxy vote results in an 8-K filing within four business days of an annual meeting, instead of several months later in a quarterly filing. The commission also voted to issue draft rules that codify the annual advisory vote on pay requirement that now applies to federally supported financial firms. Both rule proposals will be subject to a 60-day comment period.

The ?broker vote? rule change, which takes affect on Jan. 1, 2010, will apply to all NYSE-listed issuers, except for registered investment companies. The rule change, which was backed by many institutional investors, may lead to a significant increase in the number of directors who fail to win majority support in the face of shareholder ?vote no? campaigns.

Commissioners Troy Paredes and Kathleen Casey voted against the rule change. They warned that the amendment to NYSE Rule 452 could diminish the influence of retail investors while increasing the power of institutional shareholders. They also said that the SEC should have moved first to address other ?proxy plumbing? issues, such as the shareholder communication rules and the problems of ?empty? and ?over voting.?

While noting the concerns raised by issuers and the commissioners who urged delay of the rule change, SEC chair Mary Schapiro recalled that the rule was first drafted three years ago by a NYSE proxy working group with a ?widely diverse? membership. ?Keeping hard decisions on hold for many years doesn?t solve any problems. It?s time to move forward,? Schapiro said.

Schapiro called on the SEC staff to start work on developing regulatory proposals to address other proxy voting issues. However, any such rules won?t be proposed and finalized in time for the 2010 proxy season. SEC staff members said the commission may hold a roundtable on these issues in October or November.

Schapiro also urged the agency staff to work with the NYSE and issuers on new efforts to educate investors about proxy voting in the absence of broker votes.

For more details on today?s agenda items, click here.

State Street Corp. disclosed on Monday in a regulatory filing that the Securities and Exchange Commission could bring civil charges against its main subsidiary for possible securities violations tied to past investments in subprime mortgages. State Street Bank and Trust...
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July 1 was a momentous day at the U.S. Securities and Exchange Commission as the commissioners approved a long-awaited board election reform and proposed a series of wide-ranging disclosure rules.

By a 3-2 vote, the SEC gave final approval to a New York Stock Exchange rule change to bar brokers from casting uninstructed client shares in uncontested director elections starting in 2010.

The rule approval was praised by advocates for institutional investors, which have lobbied for a ban on ?broker votes? for more than a decade. However, the SEC?s two Republican commissioners warned that the new rule could diminish the influence of retail shareholders, increase the number of directors who lose their seats each their year, and impose additional costs on issuers.

Also on July 1, the SEC unanimously voted to propose new rules that seek more information on compensation risks, other services performed by pay consultants, director qualifications, and board leadership structures. The disclosure proposals also include a new mandate that companies disclose proxy vote results in an 8-K filing within four business days of an annual meeting, instead of up to several months later in a quarterly filing. The commission also voted to issue draft rules that address the annual advisory vote on pay requirement that now applies to financial firms that receive support under the Troubled Asset Relief Program (TARP). Both rule proposals will be subject to a 60-day comment period, and SEC officials hope to have final rules in place before the 2010 proxy season.

The U.S. government intends to take a neutral stance on non-binding shareholder proposals at Citigroup, General Motors, and other companies where it has a voting stake, according to Bloomberg News.

Although the Treasury Department won?t release its voting policies until later this month, department officials say they likely will use ?proportional? or ?mirror? voting on shareholder proposals to replicate the votes of other investors, Bloomberg News reported on July 6.

It appears that the government?s voting policies will be similar to those in place at Citigroup. In a June 9 share exchange agreement with the financial giant, the Treasury Department said the government would vote in the ?same proportion? as other common stockholders on all agenda items except six ?designated? matters: the election or removal of directors; the approval of any business combination; the sale of all or substantially all of the company?s assets; dissolution of the company; the issuance of new securities; and any charter or bylaw amendments. In a June 1 press release on its stake in General Motors, the Obama administration said it would vote only on ?core governance? matters and ?intends to be extremely disciplined as to how it intends to use even these limited rights.?

Andrew Williams, a Treasury spokesman, told Bloomberg News that the Citigroup and General Motors policies are ?a good gauge of where we are going on this.?

While the U.S. government arguably has a fiduciary duty as a responsible shareowner and as a representative of taxpayer investments to review the merits of shareholder proposals, it appears that the Treasury Department is trying to avoid making policy decisions on governance, social, and environmental issues that are regulated by other federal agencies. At the same time, the government will still have an active role in overseeing compensation. The Treasury Department has appointed a ?special master? to review executive pay at Citigroup, Bank of America, Chrysler, General Motors, and American International Group, all of which have received more than one federal capital infusion.

While some activists may be disappointed that the government won?t be supporting their proposals, other investors point out that a neutral stance is better than following management recommendations. At AIG?s June 30 annual meeting, the three Federal Reserve-appointed trustees voted against investor proposals seeking a retention period for executive equity grants, reincorporation to North Dakota, and the right of investors to call special meetings. With the AIG trust holding a 79.8 percent stake, all three proposals received less than 5 percent support.

However, John Keenan of the American Federation of State, County, and Municipal Employees noted that the union?s ?hold through retirement? retention proposal, which posted a 3.7 percent vote at AIG, actually received 54 percent majority support if the trustees? 10.64 billion shares are excluded.

SNSFE attorneys are investigating Provident Royalties, LLC after the Securities and Exchange Commission obtained an emergency asset freeze. The SEC alleges a $485 million offering fraud and Ponzi scheme orchestrated by three Dallas businessmen through Provident Royalties. The SEC alleges...
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Details of the Administration?s Financial Reform Plans Released While the official announcement of the Administration?s proposals for financial reform is slated for later today, copies of a near-final draft of the white paper outlining the proposals have already been circulating...

The Final White Paper: Treasury's and Obama's Vision for the Future Yesterday, the Treasury Department released the final version of the White Paper that Dave blogged about yesterday. In addition, this executive summary was posted. We already have started posting...

Going to Print: The Popular "Romeo & Dye Forms & Filings Handbook" Good news. Peter and Alan just completed the 2009 edition of their popular ?Section 16 Forms & Filings Handbook,? with numerous new ? and critical ? samples included...

A Preliminary Postseason Report Whew, the proxy season is over. And it's now fair to ask: just how wild and crazy was this proxy season? Given all the coming reforms, probably not as crazy as next year's proxy season will...

More Congressional Reform Activity: The Peters and Durbin Bills Senator Charles Schumer's "Shareholder Bill of Rights" is not the only legislation floating around the Hills these days seeking to reform corporate governance. Here are three others: 1. "Shareholder Empowerment Act"...

More on Reading Corp Fin's No-Action "Tea Leaves" I received quite a bit of member feedback on my recent blog regarding how Corp Fin has a challenging job analyzing the circumstances of each shareholder proposal before making an exclusion/inclusion determination....

Barriers to Entry: A "No-No" for IR Web Pages As I've spoken at a number of conferences over the past year regarding last year's "corporate use of website" guidance from the SEC, I thought a few words about creating barriers...

Reuters - Found Jul. 9, 2009 ... and securities law firm Goldstein & DiGioia, LLP, the New York City office of Becker & Poliakoff specializes in corporate, securities, and... Becker & Poliakoff Expands New York City Metro Area Presence With ... - Marketwire via Yahoo! Becker & Poliakoff Expands New York City Metro Area Presence With ... - Interest!ALERT Becker & Poliakoff Expands New York City Metro Area Presence With ... - Earthtimes.org Explore All

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How to Monitor Shareholder Activism in a Changing World We just posted the "Summer '09 Issue" of InvestorRelationships.com (we are maintaining this publication as complimentary thru ?09 as a ?Thank You? to our loyal members in a down economy). The...

It's "Go Time": SEC to Propose Executive Compensation Disclosure Changes, Approve Elimination of Broker Non-Votes and More As promised by Chair Schapiro earlier this month, the SEC has calendared an open Commission meeting for next Wednesday, July 1st, where it...

Random Thoughts (and Worries) about Proxy Access As we continue to post hordes of memos analyzing the SEC's proxy access proposal in our "Proxy Access" Practice Area, we're also are keeping an eye on the comment letters being submitted to...

Trading California IOUs on the Web This recent story about trading of California's registered warrants on eBay caught my eye. My understanding is that the warrants are IOUs issued by the state and have a maturity date of October 2,...

A Recap of Thoughts on Apple and Illness Disclosures With the latest news from this Bloomberg article that the lack of disclosure over Apple's CEO Steve Jobs illness is being investigated by the SEC, it seems appropriate to recap some...

In another blow to the Antitrust Division’s criminal section, two scrap metal dealers were acquitted of price-fixing on June 25, 2009.? The jury returned its verdict in less than four hours.? As reported in the November 16 and March 15, 2008 Posts, the Antitrust Division has lost a number of high profile price-fixing trials including in the magazine paper, DRAM and marine hose cartels.? The trials involving the magazine paper and marine hose cartels likewise resulted in quick acquittals with the jury returning not guilty verdicts in both cases in less than two hours.? It should be noted, however, that the class action on behalf of victims of the scrap metal cartel resulted in a $20 million damages verdict, which was affirmed on appeal.? (See May 16, 2008 Post).

Reuters - Found 14 hours ago ... complex corporate transactions; federal and state securities matters; intellectual property, entertainment and internet law; appellate law; Greenberg Traurig Attorneys Recognized in 2009 edition of Mountain ... - Houston Chronicle Greenberg Traurig Attorneys Recognized in 2009 edition of Mountain ... - Globe Investor Greenberg Traurig Attorneys Recognized in 2009 edition of Mountain ... - Forbes.com Greenberg Traurig Attorneys Recognized in 2009 edition of Mountain ... - Earthtimes.org Explore All

Business Wire - Found 12 hours ago KANSAS CITY, Mo.--(BUSINESS WIRE)--The law firm of ... rate securities. Auction rate securities are either municipal or corporate debt securities ...

Reuters - Found 11 hours ago KANSAS CITY, Mo.--(Business Wire)-- The law firm of ... rate securities. Auction rate securities are either municipal or corporate debt securities ... Stueve Siegel Hanson LLP Announces Class Action Lawsuit Filed ... - DiGiTAL50 Stueve Siegel Hanson LLP Announces Class Action Lawsuit Filed ... - Forbes.com Stueve Siegel Hanson LLP Announces Class Action Lawsuit Filed ... - PR inside Stueve Siegel Hanson LLP Announces Class Action Lawsuit Filed ... - Earthtimes.org Explore All

The SEC announced an enforcement action against Minneapolis-based broker-dealer Ameriprise Financial Services, for receiving millions of dollars in undisclosed compensation as a condition for offering and selling certain real estate investment trusts (REITs) to its brokerage customers. Ameriprise has agreed...
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DiGiTAL50 - Found Jul. 13, 2009 - The law firm of Stueve Siegel Hanson LLP (http ... rate securities. Auction rate securities are either municipal or corporate debt securities or Stueve Siegel Hanson LLP Announces Class Action Lawsuit Filed ... - Forbes.com Explore All

Liquidating GM Entity Receives Reporting Relief

The corporate entity formerly known as GM has been granted relief from its Exchange Act reporting requirements on Forms 10-K and 10-Q. During the pendency of its reorganization, the company, described as "Old GM" in the request and staff reply, must file any financial reports required to be filed with the bankruptcy court and make disclosures regarding material events relating to the liquidation under cover of Form 8-K.

Old GM must also continue to satisfy all other provisions of the Exchange Act, including filing the current reports required by Form 8-K. This requirement does not include, however, the financial information required by Item 9.01 of each Form 8-K that is filed upon a purchase or sale of assets by Old GM.

The letter also details the filing obligations of the new operating company, referred to as "New GM," after completion of its acquisition of the specified GM assets.

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The U.S. Treasury Department has released a draft bill, the ?Investor Protection Act of 2009,? which would increase the authority of the Securities and Exchange Commission to protect retail investors.

The new powers outlined for the SEC were part of the regulatory reform proposals released by the Obama administration in mid-June. The Treasury bill would authorize the commission to:

* Promulgate rules to harmonize the fiduciary duty standards for broker, dealers, and investment advisers and to clarify that any investment advice should in the interests of the investor, rather than the broker, dealer, or investment adviser.

* Prohibit sales practices and compensation schemes by brokers, dealers and investment advisers that are contrary to investors? interests.

* Restrict investor agreements with brokers, dealers, investment advisers, and municipal securities dealers that mandate arbitration of future disputes.

* Require investment funds to provide a summary prospectus (with disclosure of costs) to investors before completion of a sale.

* Provide payments to whistleblowers who assist the SEC in fraud cases that result in penalties that exceed $1 million. The SEC now only has the authority to compensate whistleblowers in insider trading cases.

* Bar regulated persons who engage in misconduct from serving in any part of the securities industry, rather than just one market segment.

The legislation also would make permanent the SEC?s new Investor Advisory Committee. The bill states that the group should meet at least twice a year.

While the Obama administration has said supports legislation to mandate ?say on pay? votes at all public companies, the Treasury Department?s bill does not address that matter or other contentious governance issues, such as proxy access, that are included in bills offered by Democratic lawmakers.

Senator Charles Schumer of New York and Rep. Gary Peters of Michigan have introduced separate bills that would require companies to hold an annual advisory vote, to allow shareholders to nominate board candidates to appear on management proxy statements, to adopt a majority vote standard in uncontested director elections, and to appoint an independent board chair.

In addition, Senator Richard Durbin of Illinois has introduced legislation, the ?Excessive Pay Shareholder Approval Act,? that calls for supermajority shareholder approval of ?excessive? executive pay. His bill, S. 1006, would require public companies to obtain 60 percent investor approval before paying total compensation to an executive that exceeds 100 times the average compensation paid to all employees.

In April, Rep. Peter DeFazio of Oregon introduced an amendment to require binding (instead of advisory) compensation votes at financial firms that receive government assistance, but the House rejected his proposal.

The SEC announced fraud charges and an asset freeze against a Highland Park, IL-based hedge fund manager and his firm for facilitating a multi-billion dollar Ponzi scheme operated by Minnesota businessman Thomas Petters. The SEC's complaint, filed in U.S. District...
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Obama/Treasury Propose New Regulatory Reform Legislation: A Few Oddities On Friday, the White House and the Treasury Department released proposed legislation - the "Investor Protection Act of 2009" - to effectuate some of the regulatory reforms that had been mentioned...

Securities Docket will host a webcast on Tuesday, July 21 at 11 a.m. EDT on the securities litigation issues facing institutional investors. The webcast will include securities litigation experts and academics who will examine the fiduciary duties of institutional investors.

Significant topics to be covered, include:

-Monitoring the portfolio: When and why you would want to be a lead plaintiff

-Don?t leave money on the table: Filing claim forms in settled cases to recover losses

-Opting in: Navigating the waters of non-US securities litigation

-Opting out: When does it make sense to leave the safety of the class action and pursue an individual case

Bruce Carton of Securities Docket will moderate the webcast, and panelists include Adam Savett, Director of RiskMetrics' Securities Class Action Services; Salvatore J Graziano, Partner, Berstein Litowitz Berger & Grossmann, LLP; and Wayne Schneider, General Counsel of the New York State Teachers? Retirement System.

To register for the webcast, please visit here.

NASAA Urges Extension of Treasury's Fiduciary Duty Proposal

The North American Securities Administrators Association (NASAA) has joined several other public interest organizations in expressing strong support for the proposal in the Obama Administration's White Paper on financial regulatory reform to subject all those who provide investment advice to a fiduciary duty to act in their clients' best interests. NASAA joined the Certified Financial Planner Board of Standards, the Consumer Federation of America, the Financial Planning Association, Fund Democracy, the Investment Adviser Association, and the National Association of Personal Financial Advisors in submitting comments on the proposal in a letter today to the leadership of the House Financial Services Committee. The organizations also expressed pleasure at the speed with which the Treasury Department has moved to adopt these reforms in its proposed "Investor Protection Act of 2009," draft legislation released last week to Congress that would incorporate several of the investor protection priorities reflected in the White Paper.

Although noting that they represent diverse interests and constituencies, the organizations stated that a fiduciary duty should apply to all who give financial advice to clients. Accordingly, the organizations believe that the White Paper's call for the imposition of a universal fiduciary duty on both broker-dealers and investment advisers proposes an appropriate solution to the problem of brokers who have been allowed to offer extensive advisory services without having to comply with the Investment Advisers Act of 1940.

The organizations fear that Section 913 of the Treasury Department's proposed legislation, however, may fall short of that goal. Section 913 authorizes, but does not require, the U.S. Securities and Exchange Commission to issue rules that would that "in substance" provide that the "standards of conduct for all brokers, dealers, and investment advisers, in providing investment advice about securities to retail customers or clients . . . shall be to act solely in the interest of the customer or client without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice."

Although applauding the provision's intent, the organizations believe that revisions will be needed. Specifically, the organizations believe that the legislation should be revised to "unambiguously provide for the extension of the overarching fiduciary duty that investment advisers owe their clients under the Advisers Act to brokers and others who provide investment advice, that this fiduciary duty is explicitly recognized in law, and that the legislation does not in any way undermine the fiduciary duty that already exists under the Advisers Act."

During a House of Representatives hearing on Tuesday, SEC chair Mary Schapiro said she would support legislation that would confirm the authority of the commission to issue a proxy access rule.

Schapiro was asked by Rep. Gary Peters of Michigan if she agreed with Commissioner Elisse Walter?s recent comments that access legislation ?would remove the distraction of challenges to [the SEC?s] authority? to issue a rule to permit investors to nominate board candidates to appear on corporate proxy statements. Peters and Senator Charles Schumer have introduced separate bills that call for proxy access and other governance reforms.

Schapiro told Peters that a ?legislative backstop? would be ?helpful? and said she expected that the SEC?s proposed proxy access rule would face a court challenge. A divided commission voted 3-2 in May to issue an access rule; comments on the proposal are due Aug. 17. SEC officials say they hope to finalize an access rule before the 2010 proxy season.

Business groups and the SEC?s two Republican commissioners have questioned whether the agency?s authority to regulate proxy disclosures would also allow it to impose a marketwide access rule that would impact board elections, which are governed by state law. Earlier this decade, federal appeals courts ruled that the SEC lacked the authority to impose independence rules on mutual fund boards and to require hedge fund registration.

Schapiro also said she would welcome legislation that would allow investors to sue credit rating firms, such as Moody?s and Standard & Poor?s, which have been criticized by investors over the high ratings that they gave to mortgage-backed securities before the credit crisis. Senator Jack Reed of Rhode Island has sponsored a bill that would allow lawsuits against credit rating firms if they knowingly fail to review key information in developing ratings. In the past, courts have ruled that rating companies have First Amendment protection from lawsuits by investors who rely on their ratings.

Schapiro said legislation allowing investor lawsuits may help improve the quality of ratings. ?It may make a big difference. You have to be careful in crafting it. You want credit rating agencies to work,? she said, according to the Reuters news service.

Rep. Paul Kanjorski, chairman of the House?s capital markets subcommittee, agreed and noted: ?Anything we can do to get rating agencies more responsive to quality analysis is vitally important,? according to Reuters.

In her prepared remarks to the subcommittee, Schapiro said the SEC was looking at possible regulations to address ?rating shopping.? The agency may require issuers to disclose the preliminary ratings they receive from credit agencies before selecting a firm to issue a public rating. She also said the SEC would establish a group of examiners to conduct routine compliance reviews of credit firms.

Throughout Tuesday?s hearing, Schapiro generally received a warm reception from lawmakers, including from several Republicans on the subcommittee. Several Democrats promised to give the SEC more resources to hire staff, while Republican Rep. Jeb Hensarling of Texas called for ?smarter regulation and smarter regulators.?

Early Problems for XBRL? A Mismatch with FASB's GAAP Codification With mandatory XBRL now upon us for larger companies, it's troublesome that - as noted in this recent CFO.com article - the FASB's new codification of accounting standards that was...

2nd Circuit: Adviser Not to Blame for Alleged Ponzi Scheme Losses

Investors who claimed that they were defrauded by a hedge fund that was operating as a Ponzi scheme could not recover against the advisory firm that directed them to the funds in question, held the 2nd Circuit in South Cherry Street, LLC v. Hennessee Group LLC. (Click here for the opinion.) The court rejected claims that the advisory firm's statements about its due diligence activities were fraudulent, and held that there were not sufficient credible allegations to indicate that the firm knowingly or recklessly misled its investors. On the question of whether an inference of scienter was as credible as competing non-culpable inferences, the court stated that

It is far less plausible to infer that an industry leader that prides itself on having expertise that is called upon by Congress, that emphasizes its thorough due diligence process, that values and advertises its credibility in the industry-and evaluates 550 funds-would deliberately jeopardize its standing and reliability, and the viability of its business, by recommending to a large segment of its clientele a fund as to which it had made, according to South Cherry, little or no inquiry at all.
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Obama Administration Introduces Legislation Regulating Hedge Fund Advisers

Following up on its plan for overhauling US financial regulation, the Obama Administration has proposed specific legislation requiring advisers to hedge funds and other private investment funds with more than $30 million under management to register with the SEC and be subject to significant disclosure and other requirements. Current law generally does not require private fund advisers to register with any federal financial regulator.

Once registered with the SEC, investment advisers to private funds will be subject to important requirements such as substantial regulatory reporting requirements with respect to the assets, leverage, and off-balance sheet exposure of their advised private funds. There will also be disclosure requirements to investors, creditors, and counterparties of their advised private funds. The legislation contains strong conflict-of-interest and anti-fraud prohibitions. Moreover, hedge funds and other private funds will be required to establish a comprehensive compliance program.

Specifically, the Private Fund Investment Advisers Registration Act would include confidential reporting of amount of assets under management, borrowings, off-balance sheet exposures, counterparty credit risk exposures, trading and investment positions, and other important information relevant to determining potential systemic risk and potential threats to our overall financial stability. The legislation would require the SEC to conduct regular examinations of such funds to monitor compliance with these requirements and assess potential risk. In addition, the SEC would share the disclosure reports received from funds with the Federal Reserve Board and the Financial Services Oversight Council.

This information would help determine whether systemic risk is building up among hedge funds and other private pools of capital, and could be used if any of the funds or fund families are so large, highly leveraged, and interconnected that they pose a threat to our overall financial stability and should therefore be supervised and regulated as what the Administration calls Tier 1 financial holding companies, which would be subject to oversight by the new federal systemic risk regulator.

The Administration?s proposed legislation dovetails with legislation recently introduced by Senator Jack Reed requiring advisers to hedge funds, private equity funds, and venture capital funds with $30 million under management to register as investment advisers with the SEC. The Private Fund Transparency Act, S 1276, sponsored by the Securities Subcommittee Chair would also authorize the SEC to collect information from the hedge fund industry and other investment pools, including the risks they may pose to the financial system. The legislation incorporates a confidentiality requirement. The SEC would also be authorized to require hedge funds and other investment pools to maintain and share with other federal agencies any information necessary for the calculation of systemic risk.

Hedge funds and other private funds are not currently subject to the same set of standards and regulations as banks and mutual funds, reflecting the traditional view that their investors are more sophisticated and therefore require less protection. According to Sen. Reed, this has enabled private funds to operate largely outside the framework of the financial regulatory system even as they have become increasingly interwoven with the financial markets. As a result, there is no data on the number and nature of these firms or ability to calculate the risks they pose to the broader markets and the economy.

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On Thursday, the U.S. Treasury Department delivered draft legislation to Congress that would require all public companies to hold an annual advisory vote on compensation. The bill also calls for separate votes on ?golden parachute? payments when shareholders vote on mergers or other transactions.

The annual vote would include pay packages for a company?s senior executive officers, including the tables summarizing their salaries, bonuses, stock and option awards and total compensation, as well as summaries of golden parachute and pension compensation and the narrative explanation of the board's compensation decisions.

The press release announcing the legislation cited the perceived success of advisory votes in the United Kingdom in increasing dialogue and engagement that have led to pay modifications, as well as the ?restraint? shown by investors in that market and the London Stock Exchange?s touting of these votes as a competitive edge in attracting capital. While some U.S. companies have agreed to conduct annual pay votes, most have not, the Treasury noted, despite increasing support for the idea from investors.

In related draft legislation, the Treasury called for Congress to take steps to ensure that compensation committees are ?independent in fact, not just in name.? If enacted, this bill would implement three requirements to that end. First, it requires that members of the compensation committee meet new standards for independence, just as Sarbanes-Oxley did for audit committee members. Second, to ensure that committees are receiving objective advice, any compensation consultants and legal counsel the committee hires would have to be independent from company management. Finally, the legislation requires that compensation committees be given the authority and funding to hire such independent compensation consultants, outside counsel, and other advisers who can help ensure that the committee bargains for pay packages in the best interests of shareholders. At the same time, if the committee decides not to use its own compensation consultant, it would have to explain that decision to shareholders.

Citing academic studies, as well as recommendations from the National Association of Corporate Directors and the Business Roundtable, the Treasury said, ?Providing compensation committees with access to independent consultants can level the playing field in a way that protects shareholder interests.?

The House of Representatives, which passed advisory vote legislation in 2007, likely will act on the Treasury's legislative proposals soon. Rep. Barney Frank, chair of the House Financial Services Committee, told reporters on Thursday that his panel plans to consider advisory vote legislation in late July, according to the Reuters news service.

While it's unclear when the Senate will address the issue, Senator Christopher Dodd, who chairs the Senate Banking Committee, was the main proponent of requiring federally supported financial firms to hold advisory votes this year.

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Rep. Barney Frank, chairman of the House Financial Services Committee, today released a ?discussion draft? of legislation that would require shareholder advisory votes and address other executive compensation concerns.

His bill would require annual ?say on pay? votes at all U.S. companies after Dec. 15, 2009; mandate separate investor votes on ?golden parachute? payments; impose stricter independence standards on compensation committees; and authorize pay panels to retain their own independent consultants. The bill also directs the Securities and Exchange Commission to prepare a study on pay consultant independence within two years.

In a press release, Frank, a Democrat from Massachusetts, said his committee would mark up the bill next week. The advisory vote provisions are similar to those in legislation that the House of Representatives approved in 2007. The Treasury Department released its own version of advisory vote legislation on Thursday. Currently, only companies that have received (and not paid back) federal assistance from the Troubled Asset Relief Program (TARP) are required to hold annual votes on pay.

?With the SEC?s unanimous support for ?say on pay? for TARP companies, the Treasury declaration for an advisory vote, and Congressman Frank?s indication that he will move forward on legislation this month, there is a virtually inevitable movement toward institutionalizing the advisory vote,? noted Tim Smith, senior vice president at Walden Asset Management, which is part of an investor coalition of pay vote proponents. ?The next challenge is finding other new and creative ways to limit compensation spiraling out of control.?

Frank?s draft bill, the ?Corporate and Financial Institution Compensation Fairness Act of 2009,? also directs the SEC, the Federal Reserve, and other financial regulators to jointly prepare regulations to ?reduce perverse incentives.? Within 270 days of the enactment of the legislation, regulators would issue rules that direct firms to disclose information on their incentive-based pay arrangements so regulators can determine if their compensation structures ?properly? measure and reward performance, are ?structured to account for the time horizon of risks,? are ?aligned with sound risk management,? and meet other criteria set by regulators. The bill also calls for rules within 270 days that prohibit compensation structures that financial regulators conclude would encourage ?inappropriate risks by financial institutions or officers or employees [of those firms] that could have serious adverse effects on economic conditions or financial stability;? or ?could threaten the safety and soundness? of the firm.

Under Frank?s bill, these regulations would not be limited to TARP firms and would apply to all banks, bank holding companies, broker-dealers, credit unions, investment advisers, and other financial institutions designated by regulators.

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House Committee Will Mark Up Corporate Governance Legislation with Say-on-Pay Mandate

The House Financial Services Committee plans to mark up legislation mandating shareholder advisory votes on executive compensation as part of the overall reform of financial regulation. The legislation builds on the SEC?s executive pay disclosure rules to require that public companies include in their annual proxy to investors the opportunity to vote on the company's executive pay plans. The Corporate and Financial Institution Compensation Fairness Act would also require independent board compensation committees and independent compensation consultants. The legislation further requires all financial institutions, including brokers, dealers and investment advisers, to disclose compensation structures that include any incentive based elements. The measure also requires federal financial regulators to proscribe inappropriate or imprudently risky compensation practices as part of solvency regulation.

The measure would not set any limits on pay, but will ensure that shareholders have a non-binding and advisory vote on their company's executive pay practices without micromanaging the company. Knowing that they will be subject to some collective shareholder action should give boards pause before approving a questionable compensation plan. The legislation also contains a separate advisory vote if a company gives a new, not yet disclosed, golden parachute while simultaneously negotiating to buy or sell a company.

The non-binding advisory vote approach has been used in the United Kingdom since 2003; and is now used in Australia as well. The policy change is credited with improving management-shareholder dialogue on executive compensation matters and increasing the use of long-term performance targets in incentive compensation.

The draft legislation comes against the backdrop of a growing global consensus that executive compensation must be reformed because it favors excessive risk taking and contributed to the financial crisis. President Obama and the G-20 leaders pledged to pass legislation reforming the financial regulatory system. As part of that legislation, the leaders called for the comprehensive reform of executive compensation to base pay on performance not on excessive risk taking.

According to the G-20, regulations must ensure that compensation structures are consistent with firms? long-term goals and prudent risk taking.

Specifically, the say-on-pay provisions of the House legislation direct the SEC to adopt rules, within one year, requiring that proxies for annual meetings provide for a shareholder advisory vote on the compensation of executives. Similarly, a proxy involving a merger, acquisition or sale of the company must provide for a shareholder advisory vote on any golden parachute agreements. The proxy must disclose the aggregate total of compensation to be paid pursuant to the golden parachute agreement.

The legislation also adds a new Section 10B to the Exchange Act mandating that listed companies have independent compensation committees. The SEC would be authorized to exempt smaller reporting companies from the mandate.

In order to be considered independent, a compensation committee member may not accept any consulting, advisory, or other compensatory fee from the company and cannot be an affiliated person of the company or any of its subsidiaries. The SEC would be authorized to exempt a particular relationship with a compensation committee member from these independence standards.

The legislation gives the compensation committee sole discretion to retain compensation consultants meeting independence standards to be promulgated by the SEC. The compensation committee would be directly responsible for the appointment, compensation, and oversight of the work of the compensation consultant. However, there is no requirement that the compensation committee implement or act consistently with the advice or recommendations of the compensation consultant. In addition, the hiring of a compensation consultant would not affect the committee?s ability or obligation to exercise its own judgment in carrying out its duties.

A year after enactment, companies must disclose in their annual proxies if the compensation committee retained an independent compensation consultant and, if it did not do so, explain why retaining such a consultant was not in the interests of company shareholders.

The compensation committee would also be authorized to retain independent counsel and other advisers meeting SEC independence standards. As with compensation consultants, the compensation committee would be directly responsible for the appointment, compensation, and oversight of the work of such independent counsel and other advisers. But the compensation committee would not be required to implement or act consistently with the advice or recommendations of such independent counsel and other advisers, and the retention would in no way affect the committee?s ability or obligation to exercise its own judgment.

The legislation orders companies to provide funding, as determined by the compensation committee, to pay compensation consultants and independent counsel and advisers hired by the committee.

The SEC is directed to conduct a study of the use of compensation consultants hired under this Act and submit a report to Congress within two years.

Finally, the legislation directs federal financial regulators, including the SEC and Fed, to jointly prescribe regulations to require banks, brokers and investment advisers to disclose the structures of the incentive-based compensation arrangements for officers and employees of such institution sufficient to determine whether the compensation structure properly measures and rewards performance; is structured to account for the time horizon of risks; is aligned with sound risk management; and meets other criteria as the agencies may determine to be appropriate to reduce unreasonable incentives for officers and employees to take undue risks that could have serious adverse effects.


The federal financial regulators mist also jointly prescribe regulations prohibiting compensation structures or bonuses or other incentive-based payment arrangements that encourage inappropriate risks that could have serious adverse effects on economic conditions or financial stability; or could threaten the safety and soundness of the financial institution.

The provisions of this section would be enforced under section 505 of the Gramm-Leach-Bliley Act, which provides for the strong enforcement of GLB?s privacy provisions. Section 505 provides that each functional regulator will enforce the provisions of GLB for the entities they regulate. Thus, by analogy, under the draft legislation, the SEC will enforce the provisions against brokers, dealers, and investment advisers. The SEC and other regulators are also authorized to use the full range of their enforcement powers in case of violations of the draft provisions..

Securities Industry Supports Legislation Imposing Federal Fiduciary Standard on Brokers

The securities industry supports Obama Administration legislation imposing a new federal fiduciary standard for broker-dealers and investment advisers and essentially harmonizing the regulation of brokers and advisers. The Securities Industry and Financial Markets Association (SIFMA) said that the proposed uniform set of regulatory standards is designed to strengthen safeguards for investors. Under the new fiduciary standard it won?t matter who is giving the advice, broker or adviser, noted SIFMA, since investors will be protected by the exact same federal fiduciary standard when receiving the same services.

Currently, the standard of care provided to individual investors by broker-dealers and investment advisers can be different because the two groups are regulated by different legislation. Studies show this has created confusion for investors. The draft legislation states these two groups should act solely in the interest of the customer without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice.

After nearly 70 years of confusion, with separate broker and adviser regulations, we have an opportunity to start anew, said John Taft, chair of SIFMA?s Private Client Group, with a new fiduciary standard that will provide clarity to consumers while expanding investor protection to a broader range of personalized investment advice.

SIFMA believes that the SEC is best positioned to ensure that a federal fiduciary standard is clearly and equally applied so that all individual investors receive the same protections when receiving the same kinds of personalized investment advice. The term "personalized investment advice" was described by SEC Chair Mary Schapiro in a June 18, 2009 speech to define the circumstances under which a fiduciary duty should apply to both brokers and advisers. This view is consistent with the Administration?s plan to overhaul the nation?s financial regulation.

Investment advisers, however, do not offer the same broad range of services as broker-dealers, such as raising capital for business or mergers and acquisition activity. Therefore, when broker-dealers operate in business areas where advisers do not, and where personalized advice is not involved, SIFMA believes the current standards and rules should apply.

Currently, investment advisers and broker-dealers are regulated under different statutory and regulatory frameworks, even though the services they provide often are virtually identical from a retail investor's perspective.

Retail investors are often confused about the differences between investment advisers and
broker-dealers. Meanwhile, the distinction is no longer meaningful between a disinterested investment advisor and a broker who acts as an agent for an investor. Current regulations are based on antiquated distinctions between the two types of financial professionals that date back to the early 20th century. Brokers are allowed to give incidental advice in the course of their business pursuant to an exemption in the Investment Advisers Act, and yet retail investors rely on a trusted relationship that is often not matched by the legal responsibility of the securities broker. In general, a broker-dealer's relationship with a customer is not legally a fiduciary relationship, while an investment adviser is legally its customer's fiduciary.

From the vantage point of the retail customer, however, an investment adviser and a broker-dealer providing incidental advice appear in all respects identical. In the retail context, the legal distinction between the two is no longer meaningful. Retail customers repose the same degree of trust in their brokers as they do in investment advisers, but the legal responsibilities of the intermediaries may not be the same.

Thus, the Administration proposes legislation allowing the SEC to align duties for intermediaries across financial products. Standards of care for all broker-dealers when providing investment advice about securities to retail investors should be raised to the fiduciary standard to align the legal framework with investment advisers. In addition, the SEC should be empowered to examine and ban forms of compensation that encourage intermediaries to put investors into products that are profitable to the intermediary, but are not in the investors' best interest.

The Investor Protection Act of 2009 would direct the SEC to facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with investment professionals, including consultation with other financial regulators on best practices for consumer disclosures and to adopt rules prohibiting sales practices, conflicts of interest, and compensation schemes for financial intermediaries, including brokers, dealers, and investment advisers, that it deems contrary to the public interest and the interests of investors.
As the worlds of brokers and investment advisers increasingly converge, the SEC has been attempting to calibrate the regulation of these securities professionals in a flexible and innovative manner consistent with investor protection. More practically, the SEC has been trying to accommodate a regulatory regime erected in the 1930s with the realities of 2009.

The draft legislation comes against the backdrop of the SEC-commissioned Rand Report on investor and industry perspectives on investment advisers and broker-dealers. The report, entitled Investor and Industry Perspectives on Investment Advisers and Broker-Dealers, was released in December 2007.

The Rand Report took on a sense of urgency after a federal appeals court struck down SEC Rule 202(a)(11)-1, permitting non-adviser broker-dealers to charge fees to investors based on account size without registering as investment advisers. Financial Planning Association v. SEC, (CA DofC 2007), CCH Fed. Sec. L. Rep. ?94,185. Rule 202(a)(11)-represented the new reality of fee-based brokerage accounts.

The SEC believes that the Rand Report provides useful data about the ways in which broker-dealers and investment advisers market, sell, and deliver financial products, accounts, programs, and services to individual investors. The Report?s essential conclusion was that the regulatory environment for broker-dealers and investment advisers is eroding along with the distinctions between the two types of financial professionals on which it is based, which after all date back to the early 20th century.

More broadly, the Report found that the current regulatory regime treats brokers and advisers differently when, in practice, their role is essentially the same, especially from the viewpoint of the investor. This regime was essentially erected during the New Deal and, while amended many times over the years, is still organically rooted in the last century.

The Report found that the bright line between brokers and investment advisers that may have existed in the 1930s has become increasingly blurred. Indeed, the Report found that whether a financial services professional is a broker or an investment advisers is indistinguishable to most investors. Many investors think that brokers and advisers offer the same products and services. Moreover, they do not know the differences between a broker and an investment adviser, nor do they know that their regulatory burdens may be different.

One reason cited in the Report for the blurring of the line between brokers and investment advisers is that much of the marketing by brokers focuses on the ongoing relationship between the broker and the investor as brokers have adopted such titles as financial advisor and financial manager.

In SEC Enforcement Action: Federal Court Rules that Agreement Supporting Misappropriation Theory Must Have a Non-Use Component

In an SEC enforcement action, a federal judge ruled that the agreement required to invoke the misappropriation theory of insider trading liability must include both an obligation to maintain the confidentiality of the inside information and not to trade on or otherwise use the information. Thus, the SEC did not state a duty arising by agreement since the Commission failed to allege that the defendant, the company?s largest shareholder, undertook a duty to refrain from trading on information about an impending PIPE offering. However, the court gave the SEC 30 days to replead if the Commission can allege that the shareholder undertook a duty, expressly or implicitly, not to trade on or otherwise use inside information about the offering. The court also ruled that, because SEC Rule 10b5-2(b)(1) attempts to predicate misappropriation theory liability on a mere confidentiality agreement lacking a non-use component, the SEC could not rely on it to establish the shareholder?s liability under the theory. SEC v. Cuban, USDC, ND Texas.

As part of its opinion, and after examining US Supreme Court precedent, the court concluded that an agreement with the proper components can establish the duty necessary to support liability under the misappropriation theory.

The SEC alleged that, after the shareholder agreed to maintain the confidentiality of inside information concerning the offering, he sold his stock in the company without first disclosing to the company that he intended to trade on this information, thereby avoiding substantial losses when the stock price declined after the PIPE was publicly announced.

As the PIPE offering progressed toward closing, the company decided to inform the shareholder of the offering and to invite him to participate. The CEO prefaced the call by informing the shareholder that he had confidential information to convey to him, and the shareholder agreed that he would keep whatever information the CEO intended to share with him confidential. The CEO, in reliance on this agreement, told the shareholder about the PIPE offering. The shareholder reacted angrily to this news, stating that he did not like PIPE offerings because they dilute the existing shareholders. Several hours after they spoke by telephone, the CEO sent the shareholder a follow-up email in which he provided contact information for the investment bank conducting the offering. The shareholder then contacted the sales representative, who supplied him with additional confidential details about the PIPE. One minute after ending this call, the shareholder telephoned his broker and directed the broker to sell all 600,000 of his shares, thereby avoiding losses in excess of $750,000 by selling prior to the public announcement of the PIPE.

The nature of the duty required to support misappropriation theory liability is at the heart of the present case. Citing the Supreme Court?s O?Hagan ruling, the district judge said that the misappropriation theory holds that a person commits fraud in connection with a securities transaction, and thereby violates Rule 10b-5, when he or she misappropriates confidential
information for securities trading purposes in breach of a duty owed to the source of the information.

The district judge rejected the shareholder?s contention that liability under the misappropriation theory depends on the existence of a preexisting fiduciary or fiduciary-like relationship. The court determined that, under Supreme Court?s precedents, breach of a legal duty arising by agreement can also be the basis for misappropriation theory liability.

For example, the Court?s O?Hagan ruling teaches that the essence of the misappropriation theory is the trader?s undisclosed use of inside information that is the property of the source, in breach of a duty owed to the source to keep the information confidential and not to use it for personal benefit. O?Hagan states unmistakably that deception through nondisclosure is central to this theory. And by providing that a person can avoid misappropriation theory liability by disclosing his intention to use confidential information, noted the court, it confirms that the deception inheres in the undisclosed use of information, in breach of a duty not to do so.

In simple terms, the misappropriator acts deceptively, not merely because he or she uses the source?s inside information for personal benefit, in breach of a duty not to do so, but because he or she does not disclose to the source the intent to trade on or otherwise use the information.

In the context of the misappropriation theory, therefore, said the court, trading on the basis of inside information cannot be deceptive unless the trader is under a legal duty to refrain from trading on or otherwise using it for personal benefit. Where the trader and the information source are in a fiduciary relationship, this obligation arises by operation of law upon the creation of the relationship. Because under O?Hagan the deception that animates the misappropriation theory involves at its core the undisclosed breach of a duty not to use another?s information for personal benefit, reasoned the court, there is no apparent reason why that duty cannot arise by agreement.

There is no indication in O?Hagan that such a fiduciary or fiduciary-like relationship is necessary to impose the requisite duty, or is otherwise an essential element of the misappropriation theory.

That a duty analogous to a fiduciary?s duty of loyalty and confidentiality can be created by agreement also fully comports with the Supreme Court?s Chiarella?s teaching that the duty must arise out of a relationship between specific parties and not the mere possession of confidential information.

The court therefore concluded that a duty sufficient to support liability under the misappropriation theory can arise by agreement absent a preexisting fiduciary or fiduciary-like relationship. Indeed, the court went further and said that the duty arising by agreement can confer a stronger footing for imposing liability for deceptive conduct than does the existence, without more, of a fiduciary or similar relationship of trust and confidence.

In the context of an agreement, the misappropriator has committed to refrain from trading on inside information. The duty is thus created by conduct that captures the person?s obligation with greater acuity than does a duty that flows more generally from the nature of the parties? relationship. The misappropriator is held to terms created by his own agreement rather than to a duty triggered merely by operation of law due to his relationship with the source of the inside information

The agreement, however, must consist of more than an express or implied promise merely to keep information confidential. It must also impose on the party who receives the information the
legal duty to refrain from trading on or otherwise using the information for personal gain.

Where misappropriation theory liability is predicated on an agreement, a person must undertake, either expressly or implicitly, both obligations. He or she must agree to maintain the confidentiality of the information and not to trade on or otherwise use it. Absent a duty not to use the information for personal benefit, there is no deception in doing so.

Although the court therefore agrees with the shareholder that an agreement must contain more than a promise of confidentiality, the court disagrees with his contention that, for a person to be held liable under the misappropriation theory, he must enter into an agreement that creates a relationship bearing all the hallmarks of a traditional fiduciary relationship.

Thus while the SEC adequately pleads that the shareholder entered into a confidentiality agreement, it did not allege that he agreed, expressly or implicitly, to refrain from trading on or otherwise using for his own benefit the information the CEO was about to share.

Having determined that the SEC?s complaint was insufficient to plead a duty arising by agreement, the court turned to the issue of whether the SEC could rely on Rule 10b5-2(b)(1) to impose the required duty. In 2000 the SEC adopted Rule 10b5-2, which delineates certain circumstances that will give rise to a duty of trust or confidence for purposes of the misappropriation theory. Rule 10b5-2(b)(1) provides that a duty of trust or confidence exists whenever a person agrees to maintain information in confidence.

The court concluded that, by its terms, Rule 10b5-2(b)(1) attempts to base misappropriation theory liability on an agreement that lacks an obligation not to trade on or otherwise use confidential information. The agreement specified in the Rule, to maintain information in confidence, relates merely to preserving the confidentiality of the information.

Nothing in Rule 10b5-2(b)(1) requires that the agreement encompass an obligation not to trade on or otherwise use the information. Because Rule 10b5-2(b)(1) attempts to predicate
misappropriation theory liability on a mere confidentiality agreement lacking a non-use component, the SEC cannot rely on it to establish the shareholder?s liability under the misappropriation theory.

To permit liability based on Rule 10b5-2(b)(1) would exceed the SEC?s ? 10(b) authority to proscribe conduct that is deceptive. This is because, explained the court, under the misappropriation theory of liability it is the undisclosed use of confidential information for personal benefit, in breach of a duty not to do so, that constitutes the deception

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New Mexico Sets Forth Electronic Form D Filing Requirements

Beginning March 16, 2009, issuers intending to make a Rule 505 or 506 offering in New Mexico must file an authenticated paper copy of the Form D filed electronically with the SEC, along with a manually signed Form U-2, Uniform Consent to Service of Process, and a $350 fee. The 505 notice must be filed with the New Mexico Securities Division at least 5 days before the first offering in New Mexico; the 506 notice must be filed no later than 15 calendar days after the first sale of the federal covered security in New Mexico or, if the last day for filing falls on a Saturday, Sunday or holiday, then the first business day following.

Late filings. Issuers not timely filing a Rule 505 notice may be subject to rescission liability and administrative penalties. Issuers not timely filing a Rule 506 notice will be subject to a $700 administrative assessment if the notice is filed within 10 days after the due date, or $1,050 if filed later. NOTE also that a Consent Agreement will be required for late filings.

Amendments. Amendments correcting material mistakes of fact or error on a previously filed Form D must be submitted to the Securities Division as soon as practicable after discovering the mistakes or errors. An amendment to a previously filed Form D must provide current information in response to all notice requirements of Form D no matter the reason why the amendment is filed. NOTE: The SEC's amendment filing requirements are in federal Regulation D, Rule 503(a) (1) - (4).

For further information please see here.

For questions, please contact Tom Fuentes at the New Mexico Securities Division at (505) 476-4578 or by This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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SEC Investment Management Director Lauds Hedge Fund Legislation

Against the backdrop of pending legislation to require the SEC registration of hedge fund advisers, Andrew Donohue, the director of the Division of Investment Management, told the Senate Subcommittee on Securities that the Commission strongly believes that legislative action is needed to increase regulation of hedge funds and other private investment pools. These funds play a significant role in the capital markets, he said, but the Commission has limited information about them. The SEC attempted to close the regulatory gap with a rulemaking initiative in 2004, but it was overturned in a court challenge. Mr. Donohue said the SEC supports the approach outlined in the Private Fund Transparency Act of 2009, S. 1276, and there are other approaches that would also close the regulatory gap.

The Private Fund Transparency Act, introduced by subcommittee chair Sen. Jack Reed, would require advisers to private funds to register under the Investment Advisers Act if they have at least $30 million of assets under management. The Act would eliminate Investment Advisers Act Section 203(b)(3) which provides an exemption from registration for advisers with fewer than 15 clients that do not hold themselves out to the public as investment advisers. The Commission believes that Section 203(b)(3) was originally designed for advisers that were too small to warrant federal attention, but it is now used by advisers with billions of dollars under management. These advisers are able to claim the exemption because each fund is counted as a client.

The Director also noted that the Reed legislation includes some important amendments to the Advisers Act that are critical to the SEC?s ability to collect information from advisers about private funds, including amendments to Section 204 of the Act permitting the Commission to keep information collected confidential, and amendments to Section 210 preventing advisers from keeping the identity of private fund clients from SEC examiners

The SEC's 2004 rulemaking initiative required hedge fund advisers to look through each fund to count the number of investors in the fund as clients in determining whether the adviser met the Section 203(b)(3) exemption. When the rule was overturned by a federal appeals court (Goldstein v. SEC (D.C.Cir. 2006)), about 800 hedge fund advisers which had registered with the SEC withdrew their registration.

The registration of hedge fund advisers would be beneficial to investors in many ways, in the SEC's view. Registered advisers would have to provide complete information to the Commission. The staff could conduct on-site examinations to ensure that these advisers are fulfilling their fiduciary duties and are either avoiding or fully disclosing any conflicts of interest. The staff could oversee the advisers' trading activities to prevent market abuses such as insider trading and market manipulation.

Registered advisers must develop internal compliance programs administered by a chief compliance officer. Compliance officers serve as the front-line in watching for violations of securities laws and conflicts of interest. The SEC believes that investment adviser registration is appropriate for those managing $30 million in assets regardless of the type of client or the securities in which the advisers invest.

One alternative to adviser registration is to also register private funds under the Investment Company Act, or the Commission could be given the authority to impose requirements on unregistered funds. Another option is, in conjunction with adviser registration, to provide the SEC with flexible regulatory authority to respond to industry developments. This flexibility is needed, reasoned the Director, because it is difficult to predict today what rules will be required in the future to protect investors and obtain sufficient transparency, especially in an industry as dynamic and creative as private funds.

This could be done by providing rulemaking authority to condition the use by a private fund of the exceptions provided by sections 3(c)(1) and 3(c)(7) of the Investment Company Act. These conditions could impose those requirements that the Commission believes are necessary or appropriate to protect investors and enhance transparency For example, private funds might be required to provide information directly to the Commission. These conditions could be included in an amendment to the Investment Company Act or could be in a separate statute.

The Director acknowledged that any new responsibilities would require additional resources in order to be effective. Sen. Jim Bunning (R-KY) questioned the SEC's ability to hire personnel with the level of knowledge necessary to regulate the highly complex industry. While acknowledging that it is a challenge, the Director said that the SEC is reaching out to people with the right skill sets. Sen. Bunning was skeptical about the SEC's ability to hire people with the necessary expertise for $150,000, but Mr. Donohue said the SEC has had some success.

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FINRA (the Financial Industry Regulatory Authority) has warned financial services firms that non-traditional exchange-traded funds (ETFs) are unsuitable for retail investors who plan to hold them for more than one day (a trading session), particularly in volatile markets. Let's examine...
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Global Governance Group Supports SEC Shareholder Access Proposal

A global corporate governance consortium broadly supports the SEC?s recent proposal to facilitate shareholder director nominations, which the group believes will spur boards and shareholders to engage more actively with one another on board composition and effectiveness. In its comment letter, the International Corporate Governance Network encouraged the SEC to keep the rules as simple as possible with as few impediments to proxy access as the Commission strikes the proper balance between ease of access and minimization of frivolous nominations. In that spirit, the group said that the proposed ownership threshold should be the only qualifying requirement. The group also encouraged the SEC to promote the cause of mandatory majority voting, which it said goes hand-in-hand with proxy access. It provides a meaningful warning signal to boards that shareholders are concerned about performance, reasoned the group, which can in turn prompt change from within.

Proposed SEC Rule 14a-11 would allow shareholders to include their nominees for director in the company's proxy materials if they have been shareholders of the company for at least one year and satisfy a minimum holdings test based on the company's market value. Shareholders would be eligible to have their nominee included in the proxy materials if they own at least 1 percent of the voting securities of a large accelerated filer, which is a company with a worldwide market value of $700 million or more or of a registered investment company with net assets of $700 million or more. Shareholders of an accelerated filer with market value of $75 million to $700 million would need to own at least 3 percent of the voting securities in order to be eligible. For a non-accelerated filer with less than $75 million, the ownership requirement is 5 percent. Shareholders would be able to aggregate holdings to meet the thresholds. The comment deadline on the shareholder access proposal is August 17, 2009.

In its comment letter, the ICGN noted that shareholders collectively or individually with the requisite levels of ownership have sufficient economic interest in the company to justify the expense and time involved in putting forward a director nominee. However, the network believes that all shareholders with the necessary threshold interest should be able to participate, regardless of how long they have been shareholders. In the ICGN?s view, the ultimate protection from weak or biased director nominees, should they get on the ballot, is that they still need to get at least 50 per cent plus one vote to be elected to the board. The group reasoned that shareholders are not going to act against the interests of the companies in which they invest very large sums of capital.

The ICGN supports the premise that normally the board should identify and
nominate directors who have the appropriate skills and experience to achieve a fit with the existing group. The ICGN pointed to an interesting paradox in that having director nomination and other shareholder rights can sometimes lessen the need to use them. For example, in many British Commonwealth countries, shareholders representing five per cent of the issued capital can propose resolutions and with ten per cent can call extraordinary general meetings, yet it is very rare for shareholders to use these rights to remove directors. Directors aware that they have lost shareholder support tend to resign of their own volition. Similarly, in the Continental European markets, where even one share entitles a shareholder to file a resolution or a counter motion, spurious proposals are spurned by mainstream, responsible shareholders.

It is even rarer for shareholders to use their rights to nominate their own candidates to the board. Experience in markets where shareholders have the power to nominate and remove directors suggests that it is rarely used because it acts as a powerful incentive for consultation between companies and their shareholders. Boards that wish to maintain good relations with shareholders make real efforts to engage on issues that might otherwise lead to shareholder dissent or shareholder proposed resolutions. The strong preference is to ensure that there is a board nomination process on which shareholders can rely and that may, if circumstances dictate, facilitates some shareholder input at an early stage.

Law Professors' Amicus Brief in Cuban Case Stressed that Confidentiality Agreement Not Enough

An amicus brief filed by a consortium of law professors in an SEC enforcement action emphasized that a confidentiality agreement alone is not enough to create a fiduciary or similar relationship of trust and confidence that could support the misappropriation theory of insider trading liability. Under both state and federal common law, reasoned the professors, a confidentiality agreement alone creates only an obligation to maintain the secrecy of the information, not a fiduciary or fiduciary-like duty to act loyally to the source of information. In the absence of any other facts, indicating the existence of a fiduciary or similar relationship of trust and confidence, said amici, there can be no insider trading liability based on the misappropriation theory pursuant to the securities antifraud provision. SEC v. Cuban, USDC, ND TX.

Similarly, the professors argued that, if SEC Rule 10b5-2(b)(1) creates potential liability based solely on the existence of a confidentiality agreement, the rule is an invalid exercise of the Commission?s rulemaking authority. Interpreted in this manner, continued amici, the rule contradicts Supreme Court rulings on the scope of Section 10(b) liability for insider trading because it would create liability without the existence of a fiduciary or similar relationship of trust and confidence.

In the SEC enforcement action, a federal judge ruled that the agreement required to invoke the misappropriation theory of insider trading liability must include both an obligation to maintain the confidentiality of the inside information and not to trade on or otherwise use the information. Thus, the SEC did not state a duty arising by agreement since the Commission failed to allege that the defendant, the company?s largest shareholder, undertook a duty to refrain from trading on information about an impending PIPE offering. However, the court gave the SEC 30 days to replead if the Commission can allege that the shareholder undertook a duty, expressly or implicitly, not to trade on or otherwise use inside information about the offering. The court also ruled that, because SEC Rule 10b5-2(b)(1) attempts to predicate misappropriation theory liability on a mere confidentiality agreement lacking a non-use component, the SEC could not rely on it to establish the shareholder?s liability under the theory.

Business Consortium Asks SEC to Extend Comment Period on Shareholder Access Proposal

A consortium of business groups, including the Chamber of Commerce and the Business Roundtable, has asked the SEC to extend the comment period on the shareholder access proposal beyond the current deadline of August 17, 2009. The parties want at least another 30 days in addition to the 60 days the SEC granted. The Commission has been evaluating the proxy access issue periodically for more than 60 years, noted the business consortium, and thus there would be no harm in allowing the public at least another 30 days to respond to its current proposal.

Proposed SEC Rule 14a-11 would allow shareholders to include their nominees for director in the company's proxy materials if they have been shareholders of the company for at least one year and satisfy a minimum holdings test based on the company's market value. Shareholders would be eligible to have their nominee included in the proxy materials if they own at least 1 percent of the voting securities of a large accelerated filer, which is a company with a worldwide market value of $700 million or more or of a registered investment company with net assets of $700 million or more. Shareholders of an accelerated filer with market value of $75 million to $700 million would need to own at least 3 percent of the voting securities in order to be eligible. For a non-accelerated filer with less than $75 million, the ownership requirement is 5 percent. Shareholders would be able to aggregate holdings to meet the thresholds.

In their joint comment letter, the business groups argued that the 60-day period does not provide sufficient opportunity for the many companies, organizations and other stakeholders that would be impacted by the proposal to adequately assess and provide thoughtful commentary on the many significant, complex issues raised, including the more than 500 questions and requests for data and information. In their view, the complexity of the proposal is demonstrated by the fact that the proposal was not published in the Federal Register until almost one month after the open meeting in which the SEC approved it.

The groups also pleaded that the Commission?s requests for comments, data and information will necessitate considerable effort by commenters. For example, the Commission requests comments on proposed eligibility thresholds and possible triggers, the mechanics of proposed Rule 14a-11 and how often shareholders satisfying the proposed thresholds would invoke the rule, as well as quantitative data on the benefits and costs of enhanced shareholder access to company proxy materials and the costs to companies if the shareholder proposal rule was amended as proposed.

Further, the proposal does not include important data or provide a detailed analysis of many issues implicated by the proposed rules. Instead, the Commission has shifted the burden of data collection and analysis to the public in many respects. For example, in order to determine some of the costs of adopting the rules, the Commission explicitly relies on survey data collected by the Business Roundtable and the Society of Corporate Secretaries and Governance Professionals and submitted in comment letters on the Commission?s 2003 proposed proxy access rules.

In order to update this data, said the group, commenters will need to once again engage in detailed survey research that takes some time to complete. Similarly, the proposal contains extensive references to the analysis and commentary submitted in response to the 2003 proposing release, observed the consortium, but does not address how the value of this material has been affected by the sea change in corporate governance that has occurred in the last six years.

Finally, while noting that they are particularly well-suited to gather the data requested in the proposal and to consider thoroughly the myriad of questions raised, the organizations emphasized that it is more difficult to do so over the summer months given member travel schedules and vacation plans. For example, many of the organizations do not meet during July and August, and the responsiveness of their members to surveys and data requests during these months is likely to be lower.

SEC Chair Endorses Administration Legislative Proposals

SEC Chair Mary Schapiro has strongly endorsed Obama Administration legislative proposals to reform the regulation of the US financial markets, including SEC regulation of securities-related OTC derivatives, SEC registration of hedge fund advisers, and bestowing additional enforcement powers on the Commission, such as the imposition of collateral bars.. In testimony before the House Financial Services Committee, she also said that the SEC and CFTC are working on the harmonization of regulation as directed by the Administration.

Regarding OTC derivatives, the SEC recommends a straightforward and principled approach to help the Administration achieve its policy objectives. Under this approach, primary responsibility for all securities-related OTC derivatives would be retained by the SEC, which is already responsible for the oversight of markets affected by this subset of OTC derivatives. Primary responsibility for all other OTC derivatives, including derivatives related to interest rates, foreign exchange, commodities, energy, and metals, would rest with the CFTC.

Under what the SEC Chair called a functional and sensible approach to regulation, OTC derivatives markets interconnected with the regulated securities markets would be incorporated within a unified securities regulatory regime. The direct link between securities-related OTC derivatives and securities is such that SEC regulation of the former is essential to the effectiveness of the SEC?s statutory mission with respect to the securities markets.

Over the years, she noted, Congress has fashioned a broad and flexible regulatory regime for securities accommodating a wide range of products and trading venues, including equities, debt, options, exchange-traded funds and many other types of derivative contracts on securities. In addition, securities products trade in many different ways in a wide variety of venues, including 11 national securities exchanges with self-regulatory responsibilities, more than 70 alternative trading systems that execute OTC transactions, and hundreds of broker-dealers that execute OTC transactions.

In the SEC Chair?s view, the current securities laws are broad and flexible enough to regulate all of these varied securities products and trading venues. Thus, under the SEC?s proposal, securities-related OTC derivatives would be brought under the same umbrella of oversight as the related, underlying securities markets in a relatively straightforward manner with little need to ?reinvent the wheel.? Specifically, Congress could make a limited number of discrete amendments to the statutory definition of a security and certain other provisions to cover securities-related OTC derivatives. With these changes, securities-related OTC derivatives could be incorporated within an existing regulatory framework that is appropriate for these products.

The SEC also would have authority to establish business conduct standards and recordkeeping and reporting requirements, including an audit trail, for all securities-related OTC derivatives dealers and other firms with large counterparty exposures in securities-related OTC derivatives, so called major OTC participants. This umbrella authority would help ensure that the SEC has the tools it needs to oversee the entire market for securities-related OTC derivatives. Major OTC participants also would be required to meet appropriate standards for the segregation of customer funds and securities. In addition, under the approach being set forth by the Commission, clearinghouses for securities-related OTC derivatives would be subject to oversight as clearing agencies by the SEC and trading markets would be subject to oversight by the SEC.

As noted in the Administration?s white paper, securities regulation and futures regulation share many of the same public policy objectives. In this regard, said the Chair, the SEC appreciates the benefits that could be achieved through greater coordination and harmonization between the SEC and the CFTC for regulation and oversight of economically equivalent instruments. According to Ms. Schapiro, more efficient oversight consistent with the protection of investors could be achieved by filling regulatory gaps and fostering harmonization between the SEC and the CFTC with respect to similar financial instruments.

To advance this initiative, the SEC staff has undertaken a coordinated effort to identify and explain significant differences in oversight and regulation of similar types of financial instruments such as options and futures in light of the underlying public policy objectives. The SEC staff is also working with the CFTC staff in developing a coordinated approach to this task.

With regard to hedge fund regulation, the SEC strongly endorses the Administration?s Private Fund Investment Advisers Registration Act of 2009, which Ms. Schapiro believes will close a significant regulatory gap by requiring advisers to hedge funds and other private pools of capital to register with the SEC under the Investment Advisers Act. She look forward to working with Congress on issues regarding the level of additional resources that would be necessary if private fund managers were required to register with the SEC, as well as ensuring that any law passed would provide the Commission with sufficient time to establish and make effective any necessary recordkeeping requirements.

Separately, the SEC Chair believes that all financial service providers, brokers and advisers alike, providing personalized investment advice about securities should owe a fiduciary duty to their customers and be subject to equivalent regulation. As such, she supports the standard contained in the Administration?s proposed Investor Protection Act of 2009, which would enable the Commission to promulgate rules to provide that all broker-dealers and investment advisers providing investment advice to retail customers act solely in the interest of their customers without regard to the financial or other interests of the financial service professional. The Chair emphasized that the establishment of this investor-focused approach as a consistent standard for all broker-dealers and investment advisers providing investment advice would represent a significant step forward in the protection of retail investors.

Finally, the SEC official supports the expanded arsenal of sanctions that the proposed legislation would give the Commission. Currently, a securities professional barred from being an investment adviser for serious misconduct could still participate in the industry as a broker-dealer. The Chair believes that the SEC should be permitted to impose collateral bars against such regulated persons. The Administration?s proposal would authorize the SEC to bar a regulated person who violates the securities laws in one part of the industry, for example a broker-dealer who misappropriates customer funds, from access to customer funds in another part of the securities industry, such as an investment adviser. By expressly empowering the SEC to impose broad prophylactic relief in one action in the first instance, reasoned Ms. Schapiro, the proposal would enable the SEC to more effectively protect investors and the markets while more efficiently using SEC resources.

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UK Walker Report Urges Limits on Variable Compensation and Stronger Board Oversight

A blue ribbon committee empanelled by the UK Treasury has recommended sweeping and fundamental changes in executive compensation at financial institutions. While falling short of capping executive pay, the eagerly awaited report of Sir David Walker recommended the significant deferral of bonus schemes and increased public disclosure about the compensation of highly-paid executives. As a matter of sound corporate governance, the Walker report also urged remuneration committees to oversee the pay of highly-paid executives not on the board and, more broadly, conduct an intense scrutiny of firm-wide pay. The report also called for a code for institutional shareholders. The report calls for enforcing the proposed standards through inclusion in the Combined Code on Corporate Governance, which operates on a comply or explain basis.

According to Sir David Walker, a former Assistant Treasury Secretary, failures in corporate governance at financial institutions made the financial crisis much worse. Many boards inadequately understood the type and scale of risks they were running and failed to hold the executives to high standards of sustainable performance. In addition, bonus schemes contributed to excessive risk-taking by rewarding short-term performance. He believes that the recommendations are as tough or tougher than anything to be found elsewhere in the world. An important and urgent challenge is to promote adoption of similar approaches internationally.

Going hand-in-hand with compensation reform is the enhancement of risk management. Given that a core function of a financial entity is the successful arbitrage of risk, said the report, board-level engagement in the high-level risk process must be materially increased with particular attention to the monitoring of risk and discussion leading to decisions on the entity?s risk appetite and tolerance. This will call for a dedicated focus on risk issues in addition to and separately from the executive risk committee process and there should be full independence in the group risk management function. Companies should employ a chief risk officer with enterprise-wide authority and independence, with tenure and remuneration determined by the board.

Companies should set up board risk committees, separately from the audit committee, with oversight of risk exposures of the entity and future risk strategy. The board risk committee should file a separate report within the annual report describing the strategy of the firm?s risk management, including information on the key exposures inherent in the strategy and the associated risk tolerance of the firm. In addition, the report should provide at least high level information on the scope and outcome of the stress-testing program. Also, there should be disclosure of the membership of the committee, the frequency of its meetings, and whether external advice was taken and, if so, its source.

The remuneration committee should be authorized to cover all aspects of remuneration policy on a firm-wide basis with particular emphasis on the risk dimension. Specifically, committee oversight should be extended to remuneration policy and remuneration packages of all executives for whom total pay exceeds the median compensation of executive board members on the same basis. The remuneration committee report should confirm that the committee is satisfied with the way in which performance objectives are linked to the related compensation structures for this group and explain the principles underlying the performance objectives and the related compensation structure if not in line with those for executive board members.

Deferral of incentive payments should provide the primary risk adjustment mechanism to align rewards with sustainable performance for executive board members and executives whose remuneration exceeds the median for executive board members. Incentives should be balanced so that at least one-half of variable remuneration offered in respect of a financial year is in the form of a long-term incentive scheme with vesting subject to a performance condition with half of the award vesting after not less than three years and of the remainder after five years. Short-term bonus awards should be paid over a three year period with not more than one-third in the first year. Clawback should be used as the means to reclaim amounts in limited circumstances of misstatement and misconduct.

The Walker report did not recommend a move from the unitary model to a two-tier board stricture with separate executive and supervisory boards, such as found in Germany and the Netherlands. The two-tier board model is already an optional alternative in the UK since company law does not exclude it, noted the report, but UK firms have not moved to a two-tier approach and shareholders do not appear to have pressed for it.

The two-tier approach is not a panacea, the report concludes, since it does not assure members of the supervisory access to the quality and timeliness of management information flow that would generally be regarded as essential for non-executives on a unitary board. Moreover, since in a two-tier structure members of the supervisory and executive boards meet separately and do not share the same responsibilities, the two-tier model would not provide opportunity for the interactive exchange of views between executives and non-executive directors.