Access Denied

November 28, 2007

The Associated Press reports that the SEC has approved the new proxy rules denying shareholders access to the management proxy for the nomination of corporate directors.  The so-called no-access rule was adopted by a 3-1 vote, with Annette Nazareth, the sole remaining Democratic Commissioner voting against it. Here is the New York Times story: S.E.C Allows Firms to Deny Investors Access to Ballots.

My guess is that the struggle over proxy access will continue for some time.  Some shareholder groups threatened litigation if the proposed rule was adopted.  In addition, Congressional Democrats are opposed to the rule adopted, and are likely to be perturbed that the SEC acted without a full complement of Commissioners.  Despite their dismay, it seems unlikely that Democrats in Congress will muster the initiative to legislatively overrule the Commission


New Commissioners Proposed for the SEC

November 19, 2007

BNA is reporting that Senate Majority Leader Harry Reid has sent forward the names of two individuals to be considered as Democratic representatives to the Securities and Exchange Commission.  According to the report, Reid has proposed Atlanta lawyer, Luis Aguilar and FINRA official, Elisse Walter to serve as new members of the Commission.  The Commission has been down one Commissioner since August when Democrat Roel Campos resigned.  Democrat Ann Nazareth has also announced her resignation, but continues to serve as a Commissioner.  By law, no more than three Commissioners can be members of the same political party.  The resignations, when effective, would leave the Commission with three Republican Commissioners and no Democrats.

The current vacancies on the Commission are a sore spot between Chairman Christopher Cox and the SEC’s Congressional overseeers, as Cox maintains that the Commission will move forward on controversial proxy access proposals despite the absence of a full complement of Commissioners.  Congressional leaders on the other hand have urged Cox to postpone action on proxy access until the existing and prospective vacancies are filled.

Here is the BNA story (subscription required): Securities Regulation & Law Rpt – FINRA Official, Atlanta Lawyer Said Dems Picks for Slots on SEC


Steven Ramirez, The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top

November 9, 2007

Steven Ramirez has posted the The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top , 24 Yale Journal on Regulation (2007) on SSRN.  The article calls for the creation of a new federal agency modeled after the Federal Reserve Board to oversee corporate governance rules for corporations.  Ramirez envisions the new federal regime as an “opt in” regime that that shareholders could choose as an alternative to state corporate law.  He argues that his alternative regime would offer benefits when compared to current federal law and state law, because the agency he envisions would be more impartial and politically independent than the agencies and officials who contribute to the current hodgepodge of corporate governance rules. 

Ramirez’s analysis seems sensible, but his prescription leaves me with two queries:  (1) In what way would the Fed-modeled structure he proposes be superior to the SEC which is ostensibly an independent, bipartisan commission; (2) How could shareholders meaningfully be empowered to opt in to the regulatory scheme he proposes?

Here is the abstract:

The pernicious influence of politics continues to pollute corporate governance applicable to public corporations in the United States. In particular, the political process has yielded a corporate governance regime that simultaneously imposes excessive regulatory costs and impairs investor confidence. CEOs continue to enjoy too much autonomy over the public corporation. Increasingly, empirical evidence shows that corporate governance standards in the U.S. are sub-optimal. This Article proposes to change the legal structure by which corporate governance standards are articulated. Using the Federal Reserve Board as a model, this Article urges the creation of a depoliticized federal agency with authority over an optional federal regime selected by shareholders. As such, corporate governance would be based upon market verdicts and the best corporate governance science rather than institutions (legislatures, courts, and the SEC), which are poorly equipped to impose standards based upon science instead of political caprice.


SEC Roundtable to Debate Policy on Shareholder Suits

October 3, 2007

BNAs Corporate Counsel Weekly (subscription required) reports that the SEC has planned a roundtable discussion on the status of shareholder securities litigation to be held in January 2008.  According to the BNA report, the roundtable was prompted by a letter from six law professors, including Professor Donald Langevoort of Georgetown, raising concerns that the current system does not work as well it could.  Among the concerns the professors raised in their letter are:

  •  securities fraud settlements typically are funded by the shareholders, directly or indirectly;
  • compensation to defrauded investors comes at a “relatively high cost” in lawyers’ fees and related expenses; and
  •  “the current system does a bad job at deterrence because … settlements almost never come out of the pockets of the managers who allegedly executed the fraud.”

All of these are valid and serious concerns.  Hopefully, the SEC and roundtable participants will brainstorm to devise ways to address these problems with a more creative approach than further dismantling the securities fraud liability regime. My view (which I present in this article  in Iowa Law Review) is that the D&O liability insurance system and the issue of personal liability for individual wrongdoing are the areas most deserving of careful attention for reform.


Lisa Nicholson, The Culture of Under-Enforcement: Buried Treasure, Sarbanes-Oxley and the Corporate Pirate

August 30, 2007

Lisa Nicholson of University Louisville (and currently visiting at Boston College Law School) has posted The Culture of Under-Enforcement: Buried Treasure, Sarbanes-Oxley and the Corporate Pirate on SSRN.  The article, which was recently published in DePaul Business & Commercial Law Journal,  argues for the extension of asset forfeiture remedies to apply to criminal violations of the federal securities laws.  According to Nicholson, asset forfeiture is a necessary supplement to the available remedies for criminal securities fruad, which can help to ensure that securities laws provide adequate levels of deterrence.  Here is the abstract:

In its effort to combat rising lawlessness in decades past, Congress enacted enhanced criminal penalties that included not only increased prison sentences and fines, but also asset forfeiture provisions. Asset forfeiture reaches the spoils of the wrongdoer’s illegal conduct, and strikes at the heart of the criminal’s economic motive for misusing his corporate status. The failure to include this additional penalty in the Sarbanes-Oxley Act’s criminal measures effectively allows the corporate fraudster to escape exposure to a tried and true method of punishment.

This article re-introduces the white-collar criminal and highlights the government’s responses to previous instances of wrongdoing by way of background in Part I. The Act’s resulting criminal measures are analyzed in Parts III and IV of the article. Part V examines the proposed asset forfeiture sanction, while Part VI makes the case for the application of the asset forfeiture sanction to these particular white collar criminals. Finally, in Part VII, I explain how asset forfeiture can be obtained should Congress fail to enact specific forfeiture legislation directed towards the newly-enacted securities fraud crime.


Democratic Commissioner to Leave S.E.C.

August 10, 2007

The New York Times reports that Roel Campos, a democratic member of the Securities Exchange Commission has resigned. During his term as a Commissioner, Campos has sparred frequently with his Republican counterparts.  President Bush will name a new Commissioner to replace Campos. Here is the NYT story:  Democratic Commissioner to Leave S.E.C..

A new commissioner could affect the tone and balance of SEC deliberations, as recent 3-2 Commission splits on shareholder voting and other policy issues suggest a level of ideological disagreement that could be reduced significantly if the new Commissioner, who cannot be a Republican, assumes a more deregulatory stance. 


Criminal Conviction in First Option Backdating Trial

August 8, 2007

The New York Times reports today that former Brocade Communications Systems Chief Executive Gregory Reyes was convicted on ten counts of conspiracy and fraud in the first criminal trial connected to the option back-dating scandals.  Here is the story: Ex-Brocade Chief Convicted in Backdating Case.  

Reyes, who did not personally receive any tainted options, faces up to 20 years in prison.  An interesting quote in the New York Times story comes from a human resources employee who testified at trial that Reyes told her the practice was “not illegal if you don’t get caught.” This quote seems to capture the mentality of many corporate employees and executives caught up in misconduct; from market timing to insurance bid-rigging to analyst fraud.  A variation of the view is “if everyone is doing it, it can’t be wrong.”  Such self-serving rationalizations certainly help the individuals engaged in unethical conduct live with themselves, but they seem not to stand up well as a defense in a criminal trial.


SEC Proxy Access Rule Taking Shape

June 13, 2007

BNA’s Corporate Counsel Weekly has an interesting report that provides insight into the likely contours of the Securities and Exchange Commission’s (SEC) anticipated new rule on Shareholder Access.  The article, SEC Proxy Access Rule Taking Shape ‘Practically Meaningless’ (subscription required), reports on the proceedings of a recent Compliance Week Conference in Washington. 

Participants predicted that the SEC would take steps to eliminate shareholders’ ability to make “precatory” non-binding proposals of the sort that currently dominate the SEC’s Rule 14a-8 shareholder proposal regime.  In “exchange,” the SEC would expand shareholders’ rights to submit binding shareholder proposals and provide a limited right to nominate board candidates on the management proxy statement. 

From the comments quoted in the article, it seems that representatives of corporate management are happy with the proposed “bargain,” while representatives of institutional investors are not.  Patrick McGurn of Institutional Shareholder Services is quoted as describing the SEC’s anticipated proxy access rule as “practically meaningless.”

Interestingly, the SEC and corporate counsel seem to favor creating “virtual annual meeting” chat rooms as a venue for shareholders to air greivances and opinions currently channeled through the Rule 14a-8 shareholder proposal process.  It is unclear to me why such a process would be appealing to corporations.  A legally mandated venue available 24/7 for any shareholder to anonymously express any opinion, view, or gripe seems problematic on a number of levels.  This seems to be a system that would defy efforts to impose order and control, which could be being more damaging to a corporation’s interests than the shareholder proposal process which has strict limitations on who can make proposals, how often and on what topics. 

Increasing shareholder power to bind management through shareholder proposals while providing shareholder activists an unfettered venue for expression of dissenting viewpoints, in “exchange” for scrapping the essentially toothless Rule 14a-8 precatory proposal regime, may indeed be a case where corporate management should be careful what it wishes for.


Interactive Federalism and the Proxy Access Debate

May 25, 2007

The latest academic salvos in the proxy access debate are now available online in the Virginia Law Review.  The May issue features an essay by Lucian Bebchuck, The Myth of the Shareholder Franchise, along with responses from Lynn Stout, Jonathan Macey and others disputing Bebchuk’s analysis and recommendations.

This important debate highlights the phenomenon of interactive federalism.  The various interations of policy proposals designed to “fix” perceived problems in the director election process play off of one another in an interesting and somewhat predictable fashion.   Corporate governance “activists” press their case with Congress or the SEC for reforms to federal regulatory scheme.  Business interests (represented in this instance by the corporate bar and Delaware judges) take note of the activists’ agitation and the SEC’s perceived responsiveness and advocate for more mild reforms at the state level.

Majority voting amendments to the Delaware Code and the Model Business Corporation Act reflect this pattern and succeeded in sidetracking the SEC’s 2003 shareholder access proposal.  However, the state-led majority vote movement may have helped spur another activist tactic: binding bylaw amendments, which has kept shareholder access on the federal agenda despite the apparent inclination by current Commissioners to sweep it aside.

This interactive pattern shows that states respond to federal reform proposals even when federal reform efforts languish.  It also shows that the state approach to shareholder voting reform will not be the final word, and that reform proponents will continue to seek alternative avenues of reform when their efforts are thwarted either at the state or federal level.


SEC Approves New Interpretive Guidance for Compliance with Section 404 of Sarbanes-Oxley

May 24, 2007

The Securities and Exchange Commission has approved new interpretive guidance on compliance with Section 404 of the Sarbanes-Oxley Act. Here is the SEC’s Press Release.

Section 404 is perhaps the most maligned provision of the Sarbanes-Oxley Act.  Critics argue that the costs of 404 compliance are excessive and are disproportionately burdensome for smaller public companies.  According this New York Times article the guidance provides a relaxed set of compliance guidelines for smaller companies (with a market capitalization of less than $75 million).  The Public Company Accounting Oversight Board (PCAOB) is expected to adopt compatible auditing standards.


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