Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Yesterday the CFTC and a group of “prudential regulators”[1] proposed rules regarding capital and margin requirements for uncleared swaps entered into by swap dealers (SDs) and major swap participants (MSPs) (see discussion of proposed rule on SD and MSP definitions here). The CFTC’s rules applies to non-bank SDs and MSPs, while the prudential regulators’ rules apply to bank SDs and MSPs. While the governing bodies purportedly attempted to make their respective proposals comparable to the maximum extent practicable, notable differences between the two sets of rules exist. In particular, under the prudential regulators’ rules, end users are only partially exempt from the requirement of posting margin, a fact that could drive trading activity in derivatives markets towards non-bank SDs and MSPs and away from the banks.

CFTC Rule–Margin Requirements for Non-Bank SDs and MSPs

End Users Exempt

Comments from the CFTC indicate that its proposed rules (the text of which has not been released) does not impose margin requirements on commercial end users. The margin requirements under the proposed rule distinguish between financial entities (which includes all SD/MSPs) and end users as follows:

 Trades between SD/MSPs and other SD/MSPs – Both SD/MSPs must pay and collect initial and variation margin for each trade;
 Trades between SD/MSPs and non-SD/MSP financial entities – The SD/MSP must collect, but not pay, initial and variation margin for each trade, subject in certain circumstances to permissible thresholds;
 Trades between SD/MSPs and end users – SD/MSPs are not required to pay or collect initial or variation margin, but must enter into credit support arrangements (e.g., ISDA credit support annex) with their end user counterparties.

Margin Calculation

Initial margin must cover 99% of 10-day price moves and can be calculated using a model that is approved by the Commission and is:

(i) used by a derivatives clearing organization for clearing swaps;
(ii) used by an entity subject to oversight by a prudential regulator; or
(iii) made available for licensing to any market participant by a vendor.

If no such model is available, initial margin would be calculated by selecting a comparable cleared swap or futures contract and applying a multiplier set forth in the proposed rule.

Variation margin must cover the current exposure arising from changes in the market value of the swap since the trade was executed or since the previous time the position was marked to market. Under previously proposed CFTC rules for SDs and MSPs, documentation would be required with respect to agreement on the methods, procedures, rules, and inputs for determining the value of each swap at any time from execution to the termination, maturity, or expiration of the swap.

Form and Location of Margin

Form of Margin – SD/MSPs would be required to accept only certain specified assets as initial or variation margin from other SD/MSPs or from financial entities. Appropriate haircuts are specified in the proposed rule.

Location of Margin – Collateral for trades between SD/MSPs and other SD/MSP would be required to be held at third-party custodians and could not be rehypothecated. SDs and MSPs would be required to offer non-SD/MSPs the opportunity to have any initial margin segregated.

Notable Differences In Prudential Regulators’ Rules—Margin & Capital Requirements for Bank SDs and MSPs

End Users Not Completely Exempt

Commercial end-users would be required to pay initial and variation margin in their swaps with a bank SD/MSP if their margin exposure exceeded an appropriate credit exposure limit established by the SD/MSP.

Capital Requirements

While the CFTC has not yet addressed the capital requirements for SD/MSPs with respect to uncleared swaps, the prudential regulators did address them in their proposed rules. The proposed rules would simply require the SD/MSPs to comply with the existing capital standards that already apply to those entities as part of their prudential regulation with respect to uncleared swaps.

Commissioner O’Malia’s Criticisms of the CFTC Proposed Rule

Commissioner Scott O’Malia voted against the CFTC’s proposed rule, leveling pointed criticism in his opening statement regarding the following aspects of the rule:

 Lack of harmonization with respect to the prudential regulator’s proposed rule;
 Failure to simultaneously propose a rule on capital requirements;
 Failure to prevent indirect price increases on swaps for end users due to the capital charges dealers will incur simply for providing liquidity to end users; and
 Failure to provide a robust cost benefit analysis;

In particular, Commissioner O’Malia encouraged the public to identify the cost-burden associated with the rulemaking in the comments they submit on the proposed rules.

Comments on the Proposed Rules

Comments on the prudential regulators’ rules should be received on or before June 24, 2011. Comments on the CFTC’s rule will likely be due within 60 days of the rule’s publication in the Federal Register, though Commissioner comments suggest it may run simultaneously with the comment period on the CFTC’s proposed rule on capital requirements (expected to be released within a couple of weeks).

[1] The prudential regulators are the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Farm Credit Administration, and Federal Housing Finance Agency.

Recently, the CFTC filed and simultaneously settled charges for $550,0000 against Bunge Global Markets, Inc. (“Bunge”) regarding allegations that Bunge employees had engaged in “spoofing” in the soybeans futures market.  While “spoofing” (bidding or offering with the intent to cancel such bid or offer before execution) will be explicitly illegal under provisions of the Dodd-Frank Act that become effective on July 16, 2011, the CFTC issued its order in the Bunge case based on its existing authority under the Commodity Exchange Act.  The Bunge Order, and the CFTC’s recently proposed interpretive order regarding spoofing and other disruptive market practices under the Dodd-Frank Act, indicate that the CFTC will be actively enforcing the new prohibitions in the derivatives markets when they become effective.

The Bunge Case

In March 2009, two employees of Bunge entered electronic orders for Chicago Board of Trade soybean futures contracts on Globex, the CME Group Inc.’s (“CME”) electronic trading platform.  They entered those orders during Globex’s pre-opening session, where the price at which the market will open for the day trading session is determined.  

During the pre-opening session, two important things happen.  First, traders enter into transactions but can also cancel transactions.  Unless the transactions are cancelled prior to the open, the transactions are executable when the market opens.  Second, periodically during the pre-opening session, using the transactions entered into and cancelled, a CME Globex computer algorithm calculates the Indicative Opening Price (“IOP”), i.e., the price at which a CME product is expected to open.  The IOP is widely available to the market; it is broadcast to all CME Globex users and publishers of financial data.   

During a thirteen minute period of the pre-opening session, the first Bunge employee entered 101 orders for 500 contracts each at prices above the prevailing bid.  This trading caused the IOP to move “limit up.”  But upon being contacted by CME’s Department of Market Regulation, the employee then cancelled all of the orders, causing the IOP to move lower.  The employee later admitted that when he placed the orders, he had no intention of executing them at opening; the sole purpose of his activities was to determine the depth of support at specific price levels by causing the IOP to move up.

During a twenty-five minute period, the second Bunge employee entered into, and then cancelled, a series of 500 contract orders.  The buy orders were above the prevailing bid, causing the IOP to increase, and the cancellations all caused the IOP to move to move lower.  Like the first trader, the second did not intend to execute the orders but entered into them for the sole purpose of probing the market.

The CFTC alleged that these trading activities violated two sections of the Commodity Exchange Act (CEA).  By knowingly placing orders that they did not intend to execute, the traders violated Section 4c(a)2(B) of the CEA by causing the IOP to reflect prices that were not true and bona fide, and these prices were reported to the market.  The trading activities also violated Section 9(a)(2) of the CEA by knowingly delivering (i) market reports or market information through interstate commerce, (ii) that were false and misleading, and (iii) that affected or tended to affect the price of the a commodity in interstate commerce.  In this case, the orders were false and misleading because the employees did not intend to execute the orders, and they affected the price because they were included in the IOP which was published to entities that used the data to make pricing decisions for a commodity in interstate commerce.       

The Bunge case has relevance to traders in CFTC jurisdictional markets.  In imposing the $550,000 penalty, the CFTC stressed that “conduct intentionally designed to disrupt fair and equitable trading, whether at the pre-opening, during the trading day or at the close will not be tolerated.”  

Additional Relevance to FERC-Regulated Energy Markets

To the extent that the same factors as in Bunge could occur in trading FERC regulated electric and gas products, the case could also have relevance under FERC’s anti-manipulation rules.  The relevant factors in Bunge were:

(i)         Employees entering into transactions with the ability to cancel those transaction prior to execution;

(ii)        At the time of the transactions, the employees had no intent to execute those transactions;

(iii)       The sole purpose of entering into the transactions was to probe the market; and

(iv)       The transactions could move the price. 

FERC has never publicly addressed a “spoofing” case, but if faced with these factors, FERC would likely investigate.  In general, FERC’s anti-manipulation rules prevent the (i) making of any untrue statement of material fact or (ii) engaging in any act, practice or course of business that operates or would operate as a fraud or deceit.  More specifically, in Amaranth Advisors, LLC, 120 FERC ¶ 61,085 at P 45 (2007) the Commission said “energy market participants may be deceived or defrauded where one market participant trades with the intent to artificially affect the price of a physical or financial energy product and has the ability to do so,” thereby preventing the price from being “set solely by the legitimate forces of supply and demand.”

The Consumer Financial Protection Bureau, or CFPB, and the Presidential Initiative Working Group of the National Association of Attorneys General announced agreement on a Joint Statement of Principles, the first step in forging a new partnership between federal and state officials to protect consumers of financial products and services.  In the Joint Statement, the parties agree to:

  • Develop joint training programs and share information about developments in federal consumer financial law and state consumer protection laws that apply to consumer financial products or services;
  • Share information, data, and analysis about conduct and practices in the markets for consumer financial products or services to inform enforcement policies and priorities;
  • Engage in regular consultation to identify mutual enforcement priorities that will ensure effective and consistent enforcement of the laws that protect consumers of financial products or services;
  • Support each other, to the fullest extent permitted by law as warranted by the circumstances, in the enforcement of the laws that protect consumers of financial products or services, including by joint or coordinated investigations of wrongdoing and coordinated enforcement actions;
  • Pursue legal remedies to foster transparency, competition, and fairness in the markets for consumer financial products or services across state lines and without regard to corporate forms or charter choice for those providers who compete directly with one another in the same markets;
  • Develop a consistent and enduring framework to share investigatory information and to coordinate enforcement activities to the extent practicable and consistent with governing law;
  • Share, refer, and route complaints and consumer complaint information between the CFPB and the state attorneys general;
  • Analyze and leverage the input they receive from consumers and the public in order to advance their mutual goal of protecting consumers of financial products or services; and
  • Create and support technologies to enable data sharing and procedures that will support complaint cooperation.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The CFTC and the SEC have delivered to Congress a joint staff study on “the feasibility of requiring the derivatives industry to adopt standardized computer-readable algorithmic descriptions that may be used to describe complex and standardized financial derivatives” (see Title VII, Sec. 719(b) of Dodd-Frank). Based on the public input, staff investigation and analysis, the joint study concludes that current technology is capable of representing derivatives using a common set of computer-readable descriptions. These descriptions are precise enough to be used both for the calculation of net exposures and to serve as part or all of a binding legal contract. 

The study also concludes that before mandating the use of standardized descriptions for all derivatives, the following are needed: a universal entity identifier and product or instrument identifiers, a further analysis of the costs and benefits of having all aspects of legal documents related to derivatives represented electronically and a uniform way to represent financial terms not covered by existing definitions.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

Robert Plaze, Associate Director of the SEC’s Division of Investment Management, recently sent a letter to the Deputy Securities Administrator, North Carolina Securities Division and the President, North American Securities Administrators Association, Inc. signaling a potential delay in registration requirements for private equity groups, hedge funds and investment advisers related to the Dodd-Frank Act.  Specifically Mr. Plaze’s letter addressed the following: 

  • Section 403 of the Dodd-Frank Act also repeals, as of July 21,2011, the private adviser exemption in section 203(b)(3) of the Advisers Act and will require advisers relying on that exemption (including advisers to many hedge funds and other private funds) to register with the SEC.  In addition, the Dodd-Frank Act provides some new exemptions, such as for advisers to venture capital funds and advisers to private funds with less than $150 million in assets under management in the United States.  Those new exemptions require SEC rulemaking. As noted above, we anticipate that the SEC will issue those final. rules in advance of July 21.  However, given the time needed for advisers to register and come fully into compliance with the obligations applicable to them once they are registered, it is expected that the SEC will consider extending the date by which these advisers must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012.
  • In accordance with section 410 of the Dodd-Frank Act, “mid-sized advisers” (certain advisers having between $25 million and $100 million of assets under management) will have to withdraw from registration with the SEC and register with one or more states pursuant to state law. Once the SEC adopts the implementing rulemaking, the Investment Adviser Registration Depository system (lARD) will require re-programming to accept advisers’ transition filings. The SEC understands that the re-programming process will take until the end of the year to complete. Accordingly, we expect that the SEC will consider extending the date by which mid-sized advisers must transition to state regulation such that all SEC-registered advisers would be required to report their eligibility for registration with the SEC in the first quarter of 2012.  Those no longer eligible for SEC registration (i.e., mid-sized advisers) would have a grace period providing them time to register with the appropriate state regulators and come into compliance with state law before withdrawing their SEC registration.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

Both GE and Northern Trust have filed additional soliciting materials reacting to ISS’s “No” recommendations on their non-binding say-on-pay proposals.

General Electric

GE notes a “significant disagreement” with ISS.  GE’s materials directly confront ISS.  GE’s points are:

  • ISS’s analysis fails to consider actions that aligned pay with performance during the recession.
  • Mr. Immelt’s pay increased a modest 6.4% since 2007, the last year he received a bonus.
  • ISS’s valuation of Mr. Immelt’s option grant significantly overstates his total compensation.
  • ISS’s model to value options differs from GE’s model and is inconsistent with applicable accounting guidance.

Northern Trust

ISS claims Northern Trust has a pay-for-performance disconnect.  Northern Trust’s materials reemphasize components of compensation related to equity-based incentive pay, cash incentives and business results.  Northern Trust also claims that ISS’s calculations of comparative financial performance are flawed because  the index includes several companies engaged in entirely different and unrelated businesses.  Its also worth noting that Glass Lewis & Co. recommended shareholders approve executive compensation.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Federal Reserve Board has published a proposed rule to repeal the Board’s Regulation Q, which prohibits the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System.

The proposed rule would implement Section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which repeals Section 19(i) of the Federal Reserve Act in its entirety effective July 21, 2011. The repeal of that section of the Federal Reserve Act on that date eliminates the statutory authority under which the Board established Regulation Q.

The proposed rule would also repeal the Board’s published interpretation of Regulation Q and would remove references to Regulation Q found in the Board’s other regulations, interpretations, and commentary.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Dodd-Frank Act provides an exemption for registration as an investment adviser for private equity groups and hedge funds that have assets under management of less than $150 million.  Investment advisers to funds which exceed that threshold will be required to register with the SEC as an investment adviser.

 

Registration with the SEC is initially accomplished by filing Form ADV with the SEC.  Form ADV is filed on the IARD system that is managed by FINRA.  To file the form, hedge funds and private equity groups will need to open an IARD user account by completing an IARD Entitlement Packet.  The SEC will review the Form ADV for completeness and take other steps.  The SEC must approve the registration or begin proceedings to deny the registration in 45 days. 

Filing the Form ADV is just one step.   Extensive preparation must be made before filing the Form ADV to comply with the Investment Advisers Act of 1940.   

Compliance Manual.  SEC Rule 206(4)-7 requires investment advisers to adopt policies and procedures to comply with the Investment Advisers Act.   When the SEC adopted the rules, it set forth a laundry list of matters it expected would be covered.  The enumerated items suggested by the SEC include:

  • Portfolio management processes, including allocation of investment opportunities among clients and consistency of portfolios with clients’ investment objectives, disclosures by the adviser, and applicable regulatory restrictions;
  • Trading practices, including procedures by which the adviser satisfies its best execution obligation, uses client brokerage to obtain research and other services (“soft dollar arrangements”), and allocates aggregated trades among clients;
  • Proprietary trading of the adviser and personal trading activities of supervised persons;
  • The accuracy of disclosures made to investors, clients, and regulators, including account statements and advertisements;
  • Safeguarding of client assets from conversion or inappropriate use by advisory personnel;
  • The accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction;
  • Marketing advisory services, including the use of solicitors;
  • Processes to value client holdings and assess fees based on those valuations;
  • Safeguards for the privacy protection of client records and information; and
  • Business continuity plans. 

Many of the above areas may not be applicable to private equity groups and hedge funds.  The compliance manual should be narrowly tailored to impose those obligations which are reasonably necessary.

 

The SEC requires that policies and procedures be reviewed annually for adequacy.  The review should consider any compliance matters that arose during the previous year, any changes in the business activities of the adviser or its affiliates, and any changes in the Investment Advisers Act or applicable regulations that might suggest a need to revise the policies or procedures.  Although the rule requires only annual reviews, advisers should consider the need for interim reviews in response to significant compliance events, changes in business arrangements, and regulatory developments. 

Chief Compliance Officer.  Rule 206(4)-7 also requires an investment adviser to designate an “individual” as Chief Compliance Officer to be responsible for administering the policies and procedures developed by the investment adviser.  There is no requirement that the Chief Compliance Officer be an employee and outsourcing is a common practice.

 

Code of Ethics. Investment advisers must establish, maintain and enforce a written code of ethics that, at a minimum, includes:

  • A standard (or standards) of business conduct that is required of supervised persons, which standard must reflect the fiduciary obligations of the investment adviser and those of its supervised persons;
  • Provisions requiring supervised persons to comply with applicable Federal securities laws;
  • Provisions that require all “access persons” to report, and the investment adviser to review, their personal securities transactions and holdings periodically;
  • Provisions requiring supervised persons to report any violations of the code of ethics promptly to the chief compliance officer or, provided the chief compliance officer also receives reports of all violations, to other persons designated in the code of ethics; and
  • Provisions requiring the investment adviser to provide each of its supervised persons with a copy of the code of ethics and any amendments, and requiring the supervised persons to provide the investment adviser with a written acknowledgment of their receipt of the code and any amendments 

An “access person” is any supervised person:

  • Who has access to nonpublic information regarding any clients’ purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any reportable fund, or
  • Who is involved in making securities recommendations to clients, or who has access to such recommendations that are nonpublic.
  • If providing investment advice is the primary business, all of the investment advisers directors, officers and partners are presumed to be access persons.

 

Insider Trading.  The code of ethics also needs to be reasonably designed to prevent insider trading.  Some private equity groups may believe this to be inapplicable because they do not trade in the public markets.  However, consideration should be given to the possibility of engaging in an M&A transaction with a public company. 

Brochure.  Registered investment advisers are required to provide their advisory clients and prospective clients with a written disclosure document.  Advisers comply with this requirement by providing advisory clients and prospective clients with Part 2 of their Form ADV.   Each year, a registered investment adviser must deliver Part 2 or summary of material changes to each client, without charge.  The adviser is required to maintain a copy of each disclosure document and each amendment or revision to it that was given or sent to clients or prospective clients, along with a record reflecting the dates on which such disclosure was given or offered to be given to any client or prospective client who subsequently became a client.

 

Performance Based Fees.  The Investment Advisers Act places limitations on charging performance based fees unless the clients are “qualified clients.”  A “qualified client” is:

  • A natural person who or a company that immediately after entering into the contract has at least $750,000 under the management of the investment adviser;
  • A natural person who or a company that the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, either:
    • Has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $1,500,000 at the time the contract is entered into; or
    • Is a qualified purchaser under the Investment Company Act of 1940 at the time the contract is entered into; or
  • Certain officers, directors and employees of the investment adviser. 

The requirements regarding performance based fees may be a significant impediment to private equity groups and hedge funds that have previously sold securities to investors based only on an accredited investor representation since the accredited investor standard under the Securities Act reflects a lower threshold.

 

Advertising.  To protect investors, the SEC prohibits certain types of advertising practices by advisers. An “advertisement” includes any communication addressed to more than one person that offers any investment advisory service with regard to securities. An advertisement could include both a written publication (such as a website, newsletter or marketing brochure) as well as oral communications (such as an announcement made on radio or television). 

The SEC staff has said that, if an adviser advertises its past investment performance record, it should disclose all material facts necessary to avoid any unwarranted inference.  For example, SEC staff has indicated that it may view performance data to be misleading if it:

  • does not disclose prominently that the results portrayed relate only to a select group of the adviser’s clients, the basis on which the selection was made, and the effect of this practice on the results portrayed, if material;
  •  does not disclose the effect of material market or economic conditions on the results portrayed (e.g., an advertisement stating that the accounts of the adviser’s clients appreciated in value 25% without disclosing that the market generally appreciated 40% during the same period);
  • does not reflect the deduction of advisory fees, brokerage or other commissions, and any other expenses that accounts would have or actually paid;
  • does not disclose whether and to what extent the results portrayed reflect the reinvestment of dividends and other earnings;
  • suggests or makes claims about the potential for profit without also disclosing the possibility of loss;
  • compares model or actual results to an index without disclosing all material facts relevant to the comparison (e.g., an advertisement that compares model results to an index without disclosing that the volatility of the index is materially different from that of the model portfolio); and
  • does not disclose any material conditions, objectives, or investment strategies used to obtain the results portrayed (e.g., the model portfolio contains equity stocks that are managed with a view towards capital appreciation).

 

Record Keeping  Registered advisers must make and keep true, accurate and current certain books and records relating to their investment advisory business. Some of the more important books and records are:

  • Advisory business financial and accounting records, including: cash receipts and disbursements journals; income and expense account ledgers; checkbooks; bank account statements; advisory business bills; and financial statements.
  • Records that pertain to providing investment advice and transactions in client accounts with respect to such advice, including: orders to trade in client accounts (referred to as “order memoranda”); trade confirmation statements received from broker-dealers; documentation of proxy vote decisions; written requests for withdrawals or documentation of deposits received from clients; and written correspondence sent to or received from clients or potential clients discussing the advisers recommendations or suggestions.
  • Records that document the advisers authority to conduct business in client accounts, including: a list of accounts in which it has discretionary authority; documentation granting discretionary authority; and written agreements with clients, such as advisory contracts.
  • Advertising and performance records, including: newsletters; articles; and computational worksheets demonstrating performance returns.
  • Records related to the code of ethics, including those addressing personal securities transaction reporting by access persons.
  • Records regarding the maintenance and delivery of written disclosure documents and disclosure documents provided by certain solicitors who seek clients on the advisers behalf.
  • Policies and procedures adopted and implemented under the compliance manual, including any documentation prepared in the course of the annual review.

 

Privacy Policy.  An investment adviser must adopt a privacy policy that complies with Regulation S-P.

 

Other.  Other specific SEC rules to be considered include:

  • Rules regarding payments to finders for referring new clients to investment advisers.
  • Rules regarding custody of assets.
  • “Pay-to-play” rules that are implicated when political contributions are made or persons are paid to solicit government entities.

 

State Registration.  While registering with the SEC generally preempts state investment adviser registration, states can still impose notice filings and charge a fee if you have investment advisers in that state.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.  

New Item 5.07(d) to Form 8-K requires issuers to disclose the company’s decision as to how frequently the company will include a shareholder vote on the compensation of executives in the issuer’s proxy materials until the next required vote on the frequency of shareholder votes on the compensation of executives.  The disclosures must be made no later than 150 calendar days after the end of the annual or other meeting of shareholders at which shareholders voted on the frequency of shareholder votes on the compensation of executives, but in no event later than 60 calendar days prior to the deadline for submission of shareholder proposals under Rule14a-8, as disclosed in the issuer’s most recent proxy statement.

The required Form 8-K/As are beginning to be filed by issuers who did not report the determination in connection with the Form 8-K filed to disclose the voting results.  Examples are as follows:

 Citizens Community Bancorp Inc.

 In accordance with the stockholder voting results, in which every “Three Years” received the highest number of votes cast on the frequency proposal, and the Board of Directors’ recommendation in the Proxy Statement for the 2011 Annual Meeting, the Company’s Board of Directors has determined that future stockholder advisory (non-binding) votes on executive compensation will occur every three years.  Accordingly, the next stockholder advisory (non-binding) vote on executive compensation will be held at the Company’s 2014 Annual Meeting of Stockholders.  The next required stockholder advisory (non-binding) vote regarding the frequency interval will be held in six years at the Company’s 2017 Annual Meeting of Stockholders.

Laclede Group Inc.

In light of the voting results with respect to the interval at which to seek shareholders’ approval of the compensation of the named executive officers, the Company’s Board of Directors determined at its March 31, 2011 meeting that the Company will submit the advisory vote on the compensation of named executive officers every three years until the next required advisory vote on the interval of shareholder votes on compensation of executives.  The next required vote on the interval will be in six years.

Johnson Controls Inc.

As previously reported, in an advisory vote on the frequency of the advisory vote on the compensation of our named executive officers held at the Annual Meeting of Shareholders of the Company on January 26, 2011, 314,207,536 shares voted for one year, 10,009,602 shares voted for two years, 211,952,191 shares voted for three years, and there were 62,828,788 broker non-votes.

SEC regulations state that the Company must hold these votes on frequency at least once every six years. In light of these voting results and other factors, the Company’s Board of Directors, at its March 23, 2011 meeting, decided that the Company will hold an annual advisory vote on the compensation of our named executive officers. The Company will continue to hold annual advisory votes until the Company’s Board of Directors decides to hold the next shareholder advisory vote on the frequency of advisory votes.

Mueller Water Products, Inc.

In light of the voting results concerning the frequency with which stockholders will be provided an advisory vote on executive compensation that were delivered at the Company’s 2011 annual meeting of stockholders, the Company’s board of directors has determined that the Company will hold an annual advisory vote on executive compensation until the next required vote on the frequency of stockholder votes on executive compensation. The Company is required to hold votes on frequency every six years.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The SEC has proposed new rules to implement the provisions of Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which adds Section 10C to the Securities Exchange Act of 1934, or the Exchange Act. Section 10C requires the SEC to direct the national securities exchanges and national securities associations to prohibit the listing of any equity security of an issuer, with certain exemptions, that does not comply with Section 10C’s compensation committee and compensation adviser requirements.

The proposed rules of the SEC and those to be adopted by the exchanges are unlikely to impose significant additional burdens on issuers since many topics are already addressed by listing standards. However, care must be taken to identify a compensation consultant’s conflicts of interest. Given the nuances between the rules of the various exchanges, there will probably be greater confusion as to what one exchange requires versus another. Drawing an analogy to listing requirements established to approve equity compensation plans in the wake of Sarbanes-Oxley, we expect the SEC will push the exchanges to adopt similar rules. That process is likely to take some time.

The SEC ducked a significant hot button question regarding whether it would establish rules regarding compensation consultants that are “competitively neutral.” The SEC left it to the exchanges to sort this one out, if they want to.

The proposed rules do not require a compensation committee to retain independent legal counsel or preclude a compensation committee from retaining non-independent legal counsel or obtaining advice from in-house counsel or outside counsel retained by the issuer or management. However, certain enumerated items must be considered before the compensation committee engages legal counsel.

Other highlights include:

• The rules only apply to issuers with listed equity securities.

• The SEC left it to the exchanges as to whether they should exempt smaller reporting issuers.

• Incremental disclosure requirements are modest.

It is important to recognize the two prongs of the proposed rule. One requires the exchanges to implement certain governance matters. That has one timeline. The second is additional disclosure about compensation consultants and conflicts of interest. That is not dependent on exchange rulemaking and implementation will be set by the SEC.

The SEC is proposing that the exchanges have final rules in place no later than one year after publication of the final SEC rules. As to disclosure regarding whether the issuer’s compensation committee retained or obtained the advice of a compensation consultant and conflict of interest matters, disclosure is not required before the SEC determines its final rules should take effect. The Dodd-Frank Act alludes to a July 21, 2011 deadline for disclosure implementation, but the SEC believes it can extend this deadline by rule.

More specifics are included below.

Compensation Committees

Neither the Dodd-Frank Act nor the Exchange Act defines the term “compensation committee.” The SEC rules do not currently require, and the proposed rules would not mandate, that an issuer establish a compensation committee. However, current exchange listing standards generally require listed issuers either to have a compensation committee or to have independent directors determine, recommend or oversee specified executive compensation matters. Proposed Rule 10C-1(b) would direct the exchanges to adopt listing standards that would be applicable to any committee of the board that oversees executive compensation, whether or not the committee performs multiple functions and/or is formally designated as a “compensation committee.”

Independence

In order to implement the requirements of Section 10C(a)(1) of the Exchange Act, proposed Rule 10C-1(b)(1)(i) would require each member of a listed issuer’s compensation committee to be a member of the issuer’s board of directors and to be independent. As required by Section 10C(a)(1), proposed Rule 10C-1(b)(1)(ii) would direct the exchanges to develop a definition of independence applicable to compensation committee members after considering relevant factors, including, but not limited to, the source of compensation of a director, including any consulting, advisory or other compensatory fee paid by the issuer to such director, and whether the director is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer. Other than the factors set out in Section 10C(a)(1), the SEC did not propose to specify any additional factors that the exchanges must consider in determining independence requirements for members of compensation committees.

Authority to Engage Compensation Advisers

Section 10C(c)(1) of the Exchange Act provides that the compensation committee of a listed issuer may, in its sole discretion, retain or obtain the advice of a “compensation consultant,” and Section 10C(d)(1) extends this authority to “independent legal counsel and other advisers” (collectively, “compensation advisers”). Both sections also provide that the compensation committee shall be directly responsible for the appointment, compensation, and oversight of the work of compensation advisers. Sections 10C(c)(1)(C) and 10C(d)(3) provide that the compensation committee’s authority to retain, and responsibility for overseeing the work of, compensation advisers may not be construed to require the compensation committee to implement or act consistently with the advice or recommendations of a compensation adviser or to affect the ability or obligation of the compensation committee to exercise its own judgment in fulfillment of its duties. To ensure that the listed issuer’s compensation committee has the necessary funds to pay for such advisers, Section 10C(e) provides that a listed issuer shall provide “appropriate funding,” as determined by the compensation committee, for payment of “reasonable compensation” to compensation consultants, independent legal counsel and other advisers to the compensation committee.

Proposed Rule 10C-1(b)(2) implements Sections 10C(c)(1) and (d)(1) of the Dodd-Frank Act by repeating the provisions set forth in those sections regarding the compensation committee’s authority to retain or obtain a compensation adviser, its direct responsibility for the appointment, compensation and oversight of the work of any compensation adviser, and the related rules of construction. In addition, proposed Rule 10C-1(b)(3) implements Section 10C(e) by repeating the provisions set forth in that section regarding the requirement that listed issuers provide for appropriate funding for payment of reasonable compensation to compensation advisers.

The SEC noted that while the statute provides that compensation committees of listed issuers shall have the express authority to hire “independent legal counsel,” the statute does not require that they do so. Similar to the SEC’s interpretation of Section 10A(m) of the Exchange Act, which gave the audit committee authority to engage “independent legal counsel,” the SEC does not construe the requirements related to independent legal counsel and other advisers as set forth in Section 10C(d)(1) of the Exchange Act as requiring a compensation committee to retain independent legal counsel or as precluding a compensation committee from retaining non-independent legal counsel or obtaining advice from in-house counsel or outside counsel retained by the issuer or management.

Independence Factors

Section 10C(b) of the Exchange Act provides that the compensation committee may select a compensation adviser only after taking into consideration the factors identified by the SEC. In accordance with Section 10C(b), these factors would apply not only to the selection of compensation consultants, but also to the selection of legal counsel and other advisers to the committee. The statute does not require a compensation adviser to be independent, only that the compensation committee consider the enumerated independence factors before selecting a compensation adviser. Section 10C(b) specifies that the independence factors identified by the SEC must be competitively neutral and include, at minimum:

• The provision of other services to the issuer by the person that employs the compensation consultant, legal counsel or other adviser;

• The amount of fees received from the issuer by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel, or other adviser;

• The policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest;

• Any business or personal relationship of the compensation consultant, legal counsel, or other adviser with a member of the compensation committee; and

• Any stock of the issuer owned by the compensation consultant, legal counsel or other adviser.

Because Exchange Act Section 10C does not require compensation advisers to be independent – only that the compensation committee consider factors that may bear upon independence – the SEC does not believe that this provision contemplates that the SEC would necessarily establish materiality or bright-line numerical thresholds that would determine whether or when the factors listed in Section 10C of the Exchange Act, or any other factors added by the SEC or by the exchanges, must be considered germane by a compensation committee. Therefore, proposed Rule 10C-1(b)(4) would require the listing standards developed by the exchanges to include the independence factors set forth in the statute and incorporated into the rule without any materiality or bright-line thresholds or cut-offs.

Disclosure

Section 10C(c)(2) of the Exchange Act requires that, in any proxy or consent solicitation material for an annual meeting (or a special meeting in lieu of the annual meeting), each issuer must disclose, in accordance with regulations of the SEC, whether:

• the compensation committee has retained or obtained the advice of a compensation consultant; and

• the work of the compensation consultant has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.

Given the similarities between the disclosure required by Section 10C(c)(2) and the disclosure required by Item 407 of Regulation S-K for registrants subject to SEC proxy rules, the SEC proposes to integrate Section 10C(c)(2)’s disclosure requirements with the existing disclosure rule, rather than simply “tacking on” the new requirements to the existing ones.

The trigger for disclosure about compensation consultants under Section 10C(c)(2) of the Exchange Act is worded differently from the trigger for disclosure under the amendments to Item 407 that the SEC adopted in 2009. Specifically, Section 10C(c)(2) states that the issuer must disclose whether the “compensation committee retained or obtained the advice of a compensation consultant.” By contrast, the current rule refers to whether compensation consultants played “any role” in the registrant’s process for determining or recommending the amount or form of executive or director compensation. Once disclosure is required, the specifics of what must be disclosed are also different. With regard to conflicts of interest, the current rule requires detailed disclosure about fees in certain circumstances in which there may be a conflict of interest, whereas Section 10C(c)(2) is more open-ended and requires disclosure of any conflict of interest, the nature of the conflict and how the conflict is being addressed, which existing rules do not require.

As proposed, revised Item 407(e)(3)(iii) would have a disclosure trigger that is consistent with the statutory language and would, therefore, require the registrant to disclose whether the compensation committee has “retained or obtained” the advice of a compensation consultant during the registrant’s last completed fiscal year. The practical effect of the proposed change is minimal.

Consistent with Section 10C(c)(2) of the Exchange Act, disclosure of whether the compensation committee obtained or retained the advice of a compensation consultant during the registrant’s last completed fiscal year and whether the consultant’s work raised any conflict of interest and, if so, the nature of the conflict and how it is being addressed, would be required without regard to the existing exceptions in Item 407(e)(3). For example, disclosure about the compensation consultant would be required even if the consultant provides only advice on broad-based plans or provides only non-customized benchmark data. In this regard, the proposed rules broaden the scope of disclosure currently required by Item 407(e)(3)(iii).

The other existing disclosure requirements of Item 407(e)(3) would remain the same, aside from amending the fee disclosure requirements to link the disclosure of fees to the compensation committee “retaining or obtaining the advice of a compensation consultant” and to management “retaining or obtaining the advice of a compensation consultant.”

To provide guidance to issuers as to whether the compensation committee or management has “obtained the advice” of a compensation consultant, the SEC is proposing an instruction to clarify the statutory language. This instruction would provide that the phrase “obtained the advice” relates to whether a compensation committee or management has requested or received advice from a compensation consultant, regardless of whether there is a formal engagement of the consultant or a client relationship between the compensation consultant and the compensation committee or management or any payment of fees to the consultant for its advice.

Conflicts of Interest

Currently, Item 407(e)(3) focuses on the conflicts of interest that may arise from a compensation consultant also providing other non-executive compensation consulting services to an issuer, which may lead the consultant to provide executive compensation advice favored by management in order to obtain or retain such other assignments. Section 10C(c)(2) of the Exchange Act is more open-ended about conflicts of interest in that it requires issuers to disclose whether the work of a compensation consultant raised “any conflict of interest” and, if so, the nature of the conflict and how the conflict is being addressed. The term “conflict of interest” is not defined in Section 10C(c)(2), and the proposed rules do not supply a definition.

In light of the link between the requirement that the compensation committees of listed issuers consider independence factors before retaining compensation advisers and the disclosure requirements about compensation consultants and their conflicts of interest, the SEC believes it would be appropriate to provide some guidance to issuers as to the factors that should be considered in determining whether there is a conflict of interest that would trigger disclosure under the proposed amendments. Therefore, the SEC proposes to include an instruction that identifies the factors set forth in proposed Rule 10C-1(b)(4)(i) through (v) as among the factors that issuers should consider in determining whether there is a conflict of interest that may need to be disclosed in response to proposed amendments to Item 407(e)(3)(iii).

The SEC has not concluded that the presence or absence of any of these individual factors indicates that a compensation consultant has a conflict of interest that would require disclosure under the proposed amendments, nor has the SEC concluded that there are no other circumstances or factors that might present a conflict of interest for a compensation consultant retained by a compensation committee.

If a compensation committee determines that there is a conflict of interest with the compensation consultant based on the relevant facts and circumstances, the issuer would be required to provide a clear, concise and understandable description of the specific conflict and how the issuer has addressed it. A general description of an issuer’s policies and procedures to address conflicts of interest or the appearance of conflicts of interest would not suffice.

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