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

The SEC’s rule proposal for say-on-pay makes it sound like it should be easy to draft.  The proposal states that issuers are not required to use any specific language or form of resolutions.  So we decided to put pen to paper to test the thesis.  The result is set forth below with some commentary in brackets.

PROPOSAL [X]—ADVISORY VOTE ON EXECUTIVE COMPENSATION

The Company is presenting the following proposal, which gives you as a shareholder the opportunity to endorse or not endorse our pay program for named executive officers by voting for or against the following resolution.  This resolution is required pursuant to Section 14A of the Securities Exchange Act.  While our Board of Directors intends to carefully consider the shareholder vote resulting from the proposal, the final vote will not be binding on us and is advisory in nature. 

“RESOLVED, that the shareholders approve the compensation of the Company’s named executive officers, as disclosed in the Compensation Discussion and Analysis, the compensation tables, and the related disclosure contained in the proxy statement set forth under the caption [insert appropriate reference] of this proxy statement.”

The Board of Directors recommends that you vote FOR approval of the compensation of our named executive officers as disclosed in the Compensation Discussion and Analysis, the compensation tables, and the related disclosure contained in the proxy statement set forth under the caption [insert appropriate reference] of this proxy statement. Proxies will be voted FOR approval of the proposal unless otherwise specified. [Include a discussion of the favorable aspects of the issuer’s compensation programs as disclosed.]

PROPOSAL [Y]—ADVISORY VOTE ON FREQUENCY OF EXECUTIVE COMPENSATION VOTE

The Company is presenting the following proposal, which gives you as a shareholder the opportunity to inform the Company as to how often you wish the Company to include a proposal, similar to Proposal [X], in our proxy statement.  This resolution is required pursuant to Section 14A of the Securities Exchange Act.  While our Board of Directors intends to carefully consider the shareholder vote resulting from the proposal, the final vote will not be binding on us and is advisory in nature.  However, the Company has adopted a policy that it will include an advisory vote on executive compensation similar to Proposal [X] consistent with the plurality of votes cast in its most recent advisory vote on executive compensation.  [The last sentence is not required.  However, the proposed change to Rule 14a-8 permits issuers to exclude certain shareholder proposals related to executive compensation if the issuer has such a policy.  Note also that there is no requirement that the policy be included in the proxy statement.]

“RESOLVED, that the shareholders wish the company to include an advisory vote on the compensation of the Company’s named executive officers pursuant to Section 14A of the Securities Exchange Act every:

  • year
  • two years; or
  • three years.”

The Board of Directors recommends that you vote to hold an advisory vote on executive compensation every [insert recommendation and reasons for recommendation.]  [Currently we believe there is no consensus on what investors want or how they are likely to vote.  There are also advantages and disadvantages for issuers on more frequent versus less frequent votes.  We believe many will recommend the three year option as investor feedback would be more useful if the success of a compensation program is judged over a period of time.  That being said, a disadvantage to the three year option is if investors are unhappy with compensation, one way they may express their dissatisfaction is by withholding votes from director nominees.]

OTHER CHANGES TO PROXY STATEMENT

For the purposes of Proposal [Y], which provides for an advisory vote on compensation of our named executive officers every one, two, or three years, the Company will treat the option selected by the affirmative vote of a majority of shares present and entitled to vote as the option approved by the shareholders.  [The foregoing would be inserted where other approvals are discussed.  It may need to be tailored to standards imposed by the issuer’s state of incorporation, articles and by-laws.  The issue is since there are more than two matters to choose from, none may receive a majority of the votes cast.  Item 21 of Schedule 14A requires disclosure of the vote required for approval so the question cannot be avoided.  In footnotes 62 and 65 of the proposing release, the SEC stated that since the vote is advisory in nature it did not see the need to prescribe a standard to determine when the shareholders have adopted the matter.  Instead, the SEC offered relief by allowing an issuer to exclude certain other shareholder proposals related to executive compensation under Rule 14a-8 if the issuer has a policy to include an advisory vote consistent with the frequency approved by a plurality of the votes cast.]

CHANGES TO PROXY CARD

The Directors recommends a vote FOR Proposal X.

Proposal [X]—Advisory vote on compensation of named executive officers              []  For     []  Against     []  Abstain   

The Directors recommend that an advisory vote on the compensation of named executive officers be held every [insert recommendation.]

Proposal [Y]–Frequency of advisory vote on the compensation of named executive officers:

One year     []     Two years     []   Three years   []     [Abstain    [] ]

SIGNED PROXIES RETURNED WITHOUT SPECIFIC VOTING DIRECTIONS WILL BE VOTED IN ACCORDANCE WITH THE BOARD OF DIRECTORS’ RECOMMENDATIONS [, EXCEPT NO VOTE WILL BE CAST ON PROPOSAL [Y]].  [The SEC has indicated that proxy service providers may not, in the short term, be able to tabulate a vote with four choices as set forth in Proposal [Y].  If that is the case, then the SEC has indicated language similar to the foregoing bracketed language should be inserted and the “Abstain” choice should be removed.  In such event, similar language included in the proxy statement should be revised accordingly as well.]

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

Section 723(a)(3) of the Dodd-Frank Act amends the Commodity Exchange Act (“CEA”) to provide that “it shall be unlawful for any person to engage in a swap unless that person submits such swap for clearing to a derivatives clearing organization, or DCO, that is registered under the CEA or a DCO that is exempt from registration under the CEA if the swap is required to be cleared.” Section 723(a)(3) requires the CFTC to adopt rules for the review of a swap, or group, category, type, or class of swaps (collectively, “swaps”) to make a determination as to whether the swaps should be required to be cleared. Section 745(b) of the Dodd-Frank Act directs the CFTC to prescribe criteria, conditions, or rules under which the CFTC will determine the initial eligibility or the continuing qualification of a DCO to clear swaps.  The CFTC has published a rule proposal to implement those terms of the Dodd-Frank Act.

 Eligibility of a DCO to Clear Swaps

 Under the proposed rule, a DCO would be presumed eligible to accept for clearing any swap that is within a group, category, type, or class of swaps that the DCO already clears.  A DCO that plans to accept for clearing any swap that is not within a group, category, type, or class of swaps that the DCO already clears also would be required to request a determination by the CFTC of its eligibility to clear the swap.

 To receive a determination of eligibility to clear a swap, a DCO would have to file a written request with the CFTC that addresses its ability to maintain compliance with the DCO core principles if it accepts the swap for clearing, specifically: 1) the sufficiency of its financial resources; and 2) its ability to manage the risks associated with clearing the swap, especially if the CFTC determines that the swap is required to be cleared.

 Submission of Swaps to CFTC for Review

 The Dodd-Frank Act requires a DCO that plans to accept swaps for clearing to submit the swaps to the CFTC for a determination as to whether the swaps are required to be cleared.  The proposed rule sets out the process for DCOs to follow when submitting swaps to the CFTC.

 The DCO would have to provide a statement that would assist the CFTC in the assessment of five specific factors that the Dodd-Frank Act requires the CFTC to take into account when reviewing a swap submission:

  • The existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data;
  • The availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is then traded;
  • The effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the DCO available to clear the contract;
  • The effect on competition, including appropriate fees and charges applied to clearing; and
  • The existence of reasonable legal certainty in the event of the insolvency of the relevant DCO or one or more of its clearing members with regard to the treatment of customer and swap counterparty positions, funds, and property.

 CFTC-initiated Review of Swaps

 The Dodd-Frank Act requires the CFTC on an ongoing basis to review swaps that have not been accepted for clearing by a DCO to make a determination as to whether the swaps should be required to be cleared.  If no DCO has accepted for clearing swaps that the CFTC finds would otherwise be subject to a clearing requirement, the CFTC would investigate the relevant facts and circumstances and, within 30 days of the completion of its investigation, issue a public report containing the results of the investigation.  The CFTC would take such actions as it determines to be necessary and in the public interest, which may include establishing margin or capital requirements for parties to the swaps.

 Stay of Clearing Requirement

 After making a determination that a swap (or group, category, type, or class of swaps) is required to be cleared, the CFTC, on application of a counterparty to a swap or on its own initiative, may stay the clearing requirement until it completes a review of the terms of the swap and the clearing arrangement.

 The proposed rule would require a counterparty to a swap that wants to apply for a stay of the clearing requirement to submit a written request that includes: the identity and contact information of the counterparty; the terms of the swap subject to the clearing requirement; the name of the DCO that clears the swap; a description of the clearing arrangement; and a statement explaining why the swap should not be subject to a clearing requirement.

 The CFTC would complete its review of the clearing of the swap not later than 90 days after issuance of the stay, unless the DCO that clears the swap agrees to an extension.  Upon completion of its review, the CFTC could determine, subject to any terms and conditions as the CFTC determines to be appropriate, that the swap must be cleared, or that the clearing requirement will not apply but clearing may continue on a non-mandatory basis.

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

The SEC will hold an open meeting to consider the following items on November 3, 2010:

  •  whether to propose rules and forms to implement Section 21F of the Securities Exchange Act of 1934 (“Exchange Act”) entitled “Securities Whistleblower Incentives and Protection.” Section 21F, as added by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, provides that the SEC shall pay awards, under regulations prescribed by the SEC and subject to certain limitations, to eligible whistleblowers who voluntarily provide the Commission with original information about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action, or a related action.
  • whether to propose a new rule under Section 763(g) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, to prohibit fraud, manipulation, and deception in connection with security-based swaps.
  • whether to adopt new Rule 15c3-5, Risk Management Controls for Brokers or Dealers with Market Access, under the Securities Exchange Act of 1934. The new rule would require brokers or dealers with access to trading directly on an exchange or alternative trading system (“ATS”), including those providing sponsored or direct market access to customers or other persons, to implement risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks of this business activity. Among other things, new Rule 15c3-5 would effectively prohibit broker-dealers from providing “unfiltered” or “naked” sponsored access to any exchange or ATS.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

There is no doubt  there are a lot of  moving pieces for the upcoming year end SEC reporting cycle.  Unfortunately, planning cannot wait until everything comes to rest.  The rule proposals are likely to affect not only proxy statements, but Forms 10-K, 10-Q and 8–K as well.  We have set forth a checklist below to aid in that process.

 Issuers must consider a number of important decisions while rule proposals are pending, and plan for the eventuality that rule proposals might not be finalized.  Items to consider at this time include:

  •  Whether to include an optional advisory vote on golden parachutes.  Our thoughts are until the SEC finalizes the rules any such effort may be fruitless if final rules are different than what is proposed.  Longer term, the benefits appear minimal because if disclosure items change, the new items must be put to a vote in the event of a change of control under the SEC’s proposed rules.
  • Issuers should begin to consider what frequency they will recommend to shareholders for the advisory vote on how often a say-on-pay vote should be held.
  • Under the SEC say-on-pay proposal, the next Form 10-K or 10-Q, as applicable, will require disclosure on how frequently the company will include a shareholder vote on the compensation of executives.  As a result, a quick decision may need to be made.
  • Issuers will be able to exclude certain shareholder proposals on further advisory votes on executive compensation matters if they adopt a policy that is consistent with the plurality of votes cast in the most recent say-on-pay frequency vote.  Thus issuers should consider whether to adopt such a policy.

 Our preliminary checklist is as follows: 

Item Status
   
Currently Effective Rules or Suggested Actions  
   

1.   Consider general Dodd-Frank disclosures

        –Forward-looking statements

        –Risk factors

        –Business and regulatory disclosures

        –Internal controls (for non-accelerated filers)

N/A-no direct rule
   

2.  Say-on-pay vote and related “frequency of vote” required pursuant to Section 951 of the Dodd-Frank Act.  Items to be considered

–Form of resolutions

–Board recommendation on frequency of vote

–Changes to proxy card

Required for any meeting held on or after January 21 2011.
   
3.   Revisit CD&A in light of say-on-pay N/A-no direct rule
   

3.   Update D&O Questionnaires

       –Elicit information to determine if compensation committee members are independent pursuant to rules expected to be adopted under Section 952 of the Dodd-Frank Act

N/A-no direct rule
   

4.   Guidance on Presentation of Liquidity and Capital Resources Disclosure in MD&A (Release 33-9144).  This guidance is applicable to both Forms 10-K and 10-Q.

          –Liquidity disclosure

          –Leverage Ratio Disclosures

          –Contractual Obligations Table Disclosures

Effective
   

5.    Proxy Access and Rule 14a-11  (Release 33-9136)

        –Cover page to Schedule 14A

        –Rule 14a-4—Form of proxy

        –Rule 14a-5—Deadline for 14a-11 proposals

        –Item 7—Inclusion of nominee

         –Consider appropriate disclosures as a result of the stay

Implementation stayed pursuant to SEC order; “smaller reporting companies” are not subject to Rule 14a-11 for three years after the effective date (November 15, 2010)
   

6.    Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers (Release 33-9142)

         –Provides Sarbanes-Oxley Section 404(b) does not apply to non-accelerated filers

         –No disclosure requirements imposed by SEC rule unless an auditor’s attestation report is included

Effective
   
7.  Prepare to make XBRL filings Effective
   
8.  Operators of mines are required to make certain disclosures regarding mine safety under Section 1503 of the Dodd-Frank Act Effective.  Further proposed rules expected April to July 2011.
   
Pending Rule Proposals  
   
Proxy Statements  
   

1.   Say-on-Pay and frequency vote (Release No. 33-9143)

      –Rule 14a-21(a):  Resolution for an advisory vote on compensation of named executive officers as disclosed pursuant to the CD&A (or other required disclosures for smaller reporting companies)

      –Rule 14a-21(b): Resolution on advisory vote as to whether say-on-pay vote shall be held every one, two or three years

      –Item 5 of Schedule 14A:  Required disclosure that advisory votes under 14A-21 are included pursuant to Section 14A of the Exchange Act and the general effect of each such vote

      –S-K 402(b):  Disclose in CD&A the extent to which previous shareholder say-on-pay votes has been considered (would not seem applicable to 2011 proxy season)

      –Rule 14a-4:  Form of proxy

      –Rule 14a-8:  Board should consider adopting a policy on frequency of say-on-pay votes to prevent shareholder proposals

Pending rule proposal
   

2.  Optional vote on golden parachutes

      –S-K 402(t) provides required disclosure

      –Item 5 of Schedule 14A:  Required disclosure that advisory votes under 14A-21 are included pursuant to Section 14A of the Exchange Act and the general effect of each such vote

Pending rule proposal
   
Form 10-K  
   
1.   Short-Term Borrowings Disclosure (Release No. 33-9143) Pending rule proposal
   

2.   Say-on-Pay and frequency vote (Release No. 33-9143)

      –Item 9B:  If a frequency vote on say-on-pay was held during the fourth quarter, disclose the company’s decision as to how frequently the company will include a shareholder vote on executive compensation

Pending rule proposal
   
Form 10-Q  
   
1.   Short-Term Borrowings Disclosure (Release No. 33-9143) Pending rule proposal
   

2.   Say-on-Pay and frequency vote (Release No. 33-9143)

–Item 5(c):  If a frequency vote on say-on-pay was held during the period covered by the report, disclose the company’s decision as to how frequently the company will include a shareholder vote on executive compensation

Pending rule proposal
   
Awaiting SEC Action  
   

1.   Compensation committees, consultants and advisers  (Section 952 of the Dodd-Frank Act)

       –Independent compensation committee (deadline – July 16, 2011)

       –Authority of committee to retain consultants and advisers

       –Compensation consultants conflict of interest (for meetings held on or after July 21, 2011)

Proposed rules expected November-December 2010; Final rules expected April to July 2011
   

2.   Pay for performance disclosures (Section 953 of the Dodd-Frank Act)

       –Demonstrate relationship between compensation actually paid and the financial performance of the issuer

Proposed rules expected April to July 2011
   

3.   Pay disparity ratio (Section 953 of the Dodd-Frank Act)

      –Annual compensation of CEO

      –Median total compensation of all employees other than the CEO

      –Ratio of median total compensation to CEO compensation

Proposed rules expected April to July 2011
   

4.   Clawback requirements  (Section 954 of the Dodd-Frank Act)

      –Disclosure of policy on incentive-based compensation based on financial information

      –Clawback in the event of an accounting restatement

Proposed rules expected April to July 2011
   

5.   Disclosure of hedging policy (Section 955 of the Dodd-Frank Act)

      –Disclose whether directors or employees are permitted to hedge company securities

Proposed rules expected April to July 2011
   

6.   Disclosures regarding Chairman/CEO Structure (Section 972 of the Dodd-Frank Act)

      –Disclose why the issuer has chosen the same or different  persons as chairman of the board or CEO (Deadline–January 11, 2011)

SEC has not indicated a timeline
   
7.   Conflict mineral disclosure (Section 1502 of the Dodd-Frank Act) (Deadline—April 15, 2011) Proposed rules expected April to July 2011
   
8.   Disclosures of payments made by resource extraction issuers (Section 1504 of the Dodd-Frank Act) (Deadline—April 15, 2011) Proposed rules expected April to July 2011
   
Other reminders  
   

Form 8-K

1.  Proxy Access and Rule 14a-11  (Release 33-9136)

–Item 5.08 Form 8-K reporting obligation if no annual meeting is held in the previous year of if date changed by more than calendar days.

Implementation stayed pursuant to SEC order
   
   
Derivatives  
1.  Public companies will need special board approvals to enter into uncleared swaps N/A
   
2.  Information related to pre-enactment swaps must be preserved. N/A
   

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

On January 30, 2009, the SEC adopted rules which require public companies to publish their financial statements in an interactive format using the eXtensible Business Reporting Language, or XBRL.  Large accelerated filers were transitioned to XBRL in 2009 and 2010.  All other issuers must begin providing interactive data with Form 10-Q for a fiscal period ending on or after June 15, 2011. 

Certainly with proxy access, say-on-pay and other new Dodd-Frank items on the way, public companies have had a lot to digest.  However we urge public companies to plan appropriately for transition to the XBRL regime when implementing their 2011 compliance plans.

The XBRL data will be provided as an exhibit to periodic and current reports and registration statements.  In addition, a filer required to provide financial statements in XBRL format to the SEC also will be required to post those financial statements in XBRL format on its corporate website (if it has one) not later than the end of the calendar day it filed or was required to file the related registration statement or report with the SEC, whichever is earlier.  The interactive data should be accessible through the filer’s website address normally used by the filer to disseminate information to investors.  The interactive data is required to be posted for at least 12 months.  Filers may not comply with the web posting requirement by including a hyperlink to the SEC website.

Once subject to the XBRL rules, issuers should begin checking the box on the cover page of Forms 10-K and 10-Q regarding whether all XBRL filings have been made.

When adopting the new rules, the SEC amended Rules 13a-14 and 15d-15 to explicitly state the CEO and CFO certifications do not apply to the interactive data required to be submitted as an exhibit.

Filers that do not provide or post required interactive data on the date required:

  • Will be deemed not current with their Exchange Act reports and, as a result, will not be eligible to use the short Form S-3 or S-8, or elect under Form S-4 to provide information at a level prescribed by Form S-3.
  • Will not be deemed to have available adequate current public information for purposes of the resale exemption safe harbor provided by Rule 144.

A filer that is deemed not current solely as a result of not providing or posting an interactive data exhibit when required will be deemed current upon providing or posting the interactive data. Therefore, it will regain current status for purposes of short form registration statement eligibility, and determining adequate current public information under Rule 144. As such, it will not lose its status as having “timely” filed its Exchange Act reports solely as a result of the delay in providing interactive data.

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

As required by Section 941(c) of the Dodd–Frank Wall Street Reform and Consumer Protection Act, the Board of Governors of the Federal Reserve System  has conducted a study and issued a report on the effect of the new risk retention requirements to be developed and implemented by the federal agencies, and of Statements of Financial Accounting Standards Nos. 166 and 167 (FAS 166 and 167).

 The report provides information and analysis on the impact of various risk retention and incentive alignment practices for individual classes of asset-backed securities both before and after the recent financial crisis. The study defines and focuses on eight loan categories and on asset-backed commercial paper (ABCP).   ABCP can be backed by a variety of collateral types but represents a sufficiently distinct structure that it warrants separate consideration.

 The study defines and examines by asset class a number of mechanisms that may improve the alignment of incentives, mitigate credit risk, or both.   These mechanisms include retention of securities or underlying loans, overcollateralization, subordination, third-party credit enhancement, representations and warranties, and conditional cash flows.   All of these mechanisms involve the securitizer, the originator, or some other party to the securitization process retaining an economic exposure to a securitization.

 Performance during the crisis varied among asset classes, providing useful evidence on the relative impact of risk retention practices and incentive alignment mechanisms that were in place before the crisis.  All asset classes suffered mark-to-market losses during the crisis as investors, and thus liquidity, fled asset-backed securities (ABS).  Widespread defaults, in which contractual payments were not made to bondholders, were largely concentrated in ABS backed by real estate.  According to the study, these losses appear to be driven primarily by the large drop in nominal house prices and its effect on loans made to borrowers with weak credit histories, unverified income, or with nontraditional amortization structures.  The study states in other cases, such as ABS backed by government student loans, losses were driven by certain problems with the prevalent structures—namely, their reliance on short-term funding markets that were disrupted during the crisis.

 Overall, the study documents considerable heterogeneity across asset classes in securitization chains, deal structure, and incentive alignment mechanisms in place before or after the financial crisis. Thus, this study concludes that simple credit risk retention rules, applied uniformly across assets of all types, are unlikely to achieve the stated objective of the Dodd-Frank Act—namely, to improve the asset-backed securitization process and protect investors from losses associated with poorly underwritten loans.

 Thus, consistent with the flexibility provided in the statute, the Board  of Governors of the Federal Reserve System recommends that rule makers consider crafting credit risk retention requirements that are tailored to each major class of securitized assets. Such an approach could recognize differences in market practices and conventions, which in many instances exist for sound reasons related to the inherent nature of the type of asset being securitized. Asset class–specific requirements could also more directly address differences in the fundamental incentive problems characteristic of securitizations of each asset type, some of which became evident only during the crisis.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

The Federal Reserve Board has published for public comment an interim final rule amending Regulation Z (Truth in Lending).  The interim rule implements Section 129E of the Truth in Lending Act (TILA), which was enacted on July 21, 2010, as Section 1472 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  TILA Section 129E establishes new requirements for appraisal independence for consumer credit transactions secured by the consumer’s principal dwelling. The amendments are intended to ensure that real estate appraisals used to support creditors’ underwriting decisions are based on the appraiser’s independent professional judgment, free of any influence or pressure that may be exerted by parties that have an interest in the transaction. The amendments also intend to ensure that creditors and their agents pay customary and reasonable fees to appraisers.  To allow time for any necessary operational changes, compliance with this interim final rule is optional until April 1, 2011.

 The interim final rule applies to a person who extends credit or provides services in connection with a consumer credit transaction secured by a consumer’s principal dwelling.  Although TILA and Regulation Z generally apply only to persons to whom the obligation is initially made payable and that regularly engage in extending consumer credit, TILA Section 129E and the interim final rule apply to persons that provide services without regard to whether they also extend consumer credit by originating mortgage loans.  Thus, the interim final rule applies to creditors, appraisal management companies, appraisers, mortgage brokers, realtors, title insurers and other firms that provide settlement services.

 The interim final rule applies to appraisals for any consumer credit transaction secured by the consumer’s principal dwelling. In addition, with a few exceptions, the interim final rule applies to any person who performs valuation services, performs valuation management functions, and to any valuation of the consumer’s principal dwelling, not just to a licensed or certified “appraiser,” an “appraisal management company,” or to a formal “appraisal.” This approach implements the statutory provisions, and is designed to ensure that consumers are protected regardless of the valuation method chosen by the creditor, and to prevent circumvention of the appraisal independence rules.

 The interim final rule prohibits covered persons from engaging in coercion, bribery, and other similar actions designed to cause anyone who prepares a valuation to base the value of the property on factors other than the person’s independent judgment.  The interim final rule adds examples from the Dodd-Frank Act of actions that do and do not constitute unlawful coercion.  The interim final rule also prohibits a creditor from extending credit based on a valuation if the creditor knows, at or before consummation, that (a) coercion or other similar conduct has occurred, or (b) that the person who prepares a valuation or who performs valuation management services has a prohibited interest in the property or the transaction as discussed below, unless the creditor uses reasonable diligence to determine that the valuation does not materially misstate the value of the property.

 The interim final rule provides that a person who prepares a valuation or who performs valuation management services may not have an interest, financial or otherwise, in the property or the transaction. The Dodd-Frank Act does not expressly ban the use of in-house appraisers or affiliates.  However, because the Act prohibits appraisers from having an “indirect financial interest” in the transaction, it is possible to interpret the Act to prohibit creditors from using in-house staff appraisers and affiliated appraisal management companies.  The interim final rule clarifies that an employment relationship or affiliation does not, by itself, violate the prohibition. The interim final rule also establishes a safe harbor and specific criteria for establishing firewalls between the appraisal function and the loan production function, to prevent conflicts of interest.  Special guidance on firewalls is provided for small institutions, because they likely cannot completely separate appraisal and loan production staff.  Small institutions are those with assets of $250 million or less.

 The interim final rule provides that a creditor or settlement service provider involved in the transaction who has a reasonable basis to believe that an appraiser has not complied with ethical or professional requirements for appraisers under applicable federal or state law, or the Uniform Standards of Appraisal Practice must report the failure to comply to the appropriate state licensing agency.  The interim final rule limits the duty to report compliance failures to those that are likely to affect the value assigned to the property.  The interim final rule also provides that a person has a “reasonable basis” to believe an appraiser has not complied with the law or applicable standards, only if the person has knowledge or evidence that would lead a reasonable person under the circumstances to believe that a material failure to comply has occurred.

 Under the interim final rule, a creditor and its agent must pay a fee appraiser at a rate that is reasonable and customary in the geographic market where the property is located.  The rule provides two presumptions of compliance.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

The Securities and Exchange Commission today announced enforcement actions against Office Depot, Inc. and two executives for violating or causing violations of fair disclosure regulations when selectively conveying to analysts and institutional investors that the company would not meet analysts’ earnings estimates.

Regulation FD requires that when issuers disclose material nonpublic information, they must make broad public disclosure of that information. The SEC’s orders find that as they neared the end of Office Depot’s second quarter for 2007, CEO Stephen A. Odland and then-CFO Patricia A. McKay discussed how to encourage analysts to revisit their analysis of the company. Office Depot then made a series of one-on-one calls to analysts. The company did not directly state that it would not meet analysts’ expectations, but rather this message was signaled with references to recent public statements of comparable companies about the impact of the slowing economy on their earnings. The analysts also were reminded of Office Depot’s prior cautionary public statements. Analysts promptly lowered their estimates for the period in response to the calls. Office Depot did not regularly initiate these types of calls to all analysts covering the company.

 Office Depot agreed to settle the SEC’s charges without admitting or denying the findings and allegations, and will pay a $1 million penalty. Odland and McKay also agreed to settle the Regulation FD charges against them without admitting or denying the findings, and will pay $50,000 each.

 The SEC’s administrative orders find that Odland, in an attempt to get analysts to lower their estimates, proposed to McKay that the company talk to the analysts and refer them to recent public announcements by two comparable companies about their financial results being impacted by the slowing economy. Odland further suggested that Office Depot point out on its calls what the company had said in prior public conference calls in April and May 2007. McKay then assisted Office Depot’s investor relations personnel in preparing talking points for the calls.

 According to the SEC’s orders, Odland and McKay were not present during the calls but were aware of the analysts’ declining estimates while the company made the calls. They encouraged the calls to be completed. Office Depot continued to make the calls despite McKay being notified of some analysts’ concerns about the lack of public disclosure among other things. Six days after the calls began, Office Depot filed a Form 8-K announcing that its sales and earnings would be negatively impacted due to a continued soft economy. Before that Form 8-K was filed, Office Depot’s share price had significantly dropped on increased trading volume.

 Check our web site frequently for updates on the Dodd-Frank Act and other important securities law developments.

Companies, like athletes, show business types, and your teenage kids, have been flocking to twitter.  Be careful, says Michele N. Anderson, Chief of the Office of Mergers and Acquisitions of the SEC’s Corporation Finance Division.  The 140 character limit means there may be no room for required SEC legends, which must accompany certain types of disclosure.  Could you hyperlink to the SEC legends?  No one knows, but Anderson was not enthusiastic about the idea.  Also, Anderson noted that the risk of making a material misstatement or an omission in a tweet could be quite high.  So if you’re using Twitter as a means of corporate communication, tread carefully and get your counsel involved.

Yesterday, Mary L. Schapiro, Chairperson of the SEC, addressed the National Association of Corporate Directors. She reviewed several recent SEC proxy rules which pre-date Dodd-Frank and gave a timetable regarding future Dodd-Frank rulemaking.

Ms. Schapiro called out in particular the new proxy rules requiring disclosure of the factors in a director’s background and skill set that led the Board to select that person. She strongly suggested that vague generalizations, such as “our directors each have integrity, sound business judgement and honesty” do not hit the mark. Instead, the Commission is looking for detailed descriptions of how each individual director’s background enhances a Board and the Company.

She also noted the SEC’s new disclosure requirement that boards explain how they oversee risk. Again, sweeping generalities such as “risk is overseen by the board as a whole” did not find favor in her eyes.

Regarding Dodd-Frank rulemaking, Ms. Schapiro stated that the next proposal would concern rules that stock exchanges mandate new standards of independence for compensation committees. This disclosure would apply to all shareholder meetings taking place on or after July 21, 2011 and she expected the proposal would be published before the end of 2010.

Next summer, the Commission will be proposing rules on the disclosure on the median compensation of all employees of a company, and the ratio of CEO compensation to the median.

The Summer of 2011 will also see proposals to require disclosure of the relationship between senior executives’ compensation and the company’s financial performance; whether employees or directors can hedge against a decline in stock price; and standards for clawback policies (reclaiming executive compensation in the event of a financial restatement).

As to the rulemaking process, the Chairperson stated that SEC staff have been instructed to make every effort to accept requests for face-to-face meetings with paerties affected by the rules. Memoranda and materials regarding these meetings will be posed on line.

Finally, Ms. Schapiro reminded those present at the meeting that the SEC’s proxy voting infrastructure project, referred to as “proxy plumbing,” is ongoing. Major areas of concern are the role of proxy advisory firms; whether the OBO/NOBO system enhances or hinders communication with shareholders; and whether voting totals are being accurately tallied, which involves inquiries into over- and under-voting, and empty voting. If you would like to know more about these proxy plumbing matters, please contact the author.