New Curbs on The Street? 2010 Winston & Strawn LLP

Transcription

1 The Dodd-Frank Act: New Curbs on The Street? 2010 Winston & Strawn LLP

2 The Dodd-Frank Act: New Curbs on The Street? Dodd Frank FrankAct SessionIV: Executive Compensation and Corporate Governance Brought to you by Winston & Strawn s Corporate and Employee Benefits and Executive Compensation Practice Groups 2010 Winston & Strawn LLP

3 Today s Presenters Christine Edwards James Junewicz Michael Melbinger Marvin Miller Corporate Chicago CEdwards@winston.com Corporate Chicago New York JJunewicz@winston.com Employee Benefits and Executive Compensation Chicago MMelbinger@winston.com Corporate New York MMiller@winston.com 2010 Winston & Strawn LLP 3

4 The Winston & Strawn Dodd Frank Webinars July 9 General Overview, Financial Stability, Orderly Liquidation Authority, Improvements to Bank Regulation, and Bureau of Consumer Financial Protection July 21 Regulation of Markets and Market Participants: Derivatives, Securities, Hedge Funds, Investment Advisers, and Broker Dealers August 6 The New Enforcement Environment; International Regulatory Perspectives August 20 Executive Compensation and Corporate Governance 2010 Winston & Strawn LLP 4

5 Washington, D.C. Update FRB: Mortgage Regulations FDIC Developments US U.S. Treasury: Mortgage Finance 2010 Winston & Strawn LLP 5

6 Corporate Governance Implications of Dodd Frank General Overview Some call the Corporate Governance changes in Dodd Frank modest. Others believe Dodd Frank will produce major new board practices, at a minimum, for financial services companies. But the TARP experience was that many changes imposed on financial institutions were either broadened to apply to all public companies by legislation or regulations or became adopted best practices in mid to larger cap public companies of all types Winston & Strawn LLP 6

7 Corporate Governance Implications of Dodd Frank Further Federalization Fd of Board dpractices Dodd Frank is federal legislation that impacts corporate governance an issue historically governed at the state level. Sarbanes Oxley established federal certification guidelines and other responsibilities for public company audit committees. Dodd Frank empowers the SEC to pass regulations impacting board governance and responsibilities. Dodd Frank empowers the new Financial Stability Oversight Council to recommend prudential supervision standards which Nonbank Financial Companies supervised by the FRB, and large interconnected BHCs, would implement Winston & Strawn LLP 7

8 Corporate Governance Implications of Dodd Frank kact: Categories of New Responsibilities i Categories of new responsibilities for Public Company and Financial Institution Boards of Directors: Board Oversight: board governance reviews should consider new, higher, conflicting, or changing standards Board Oversight of Management: heightened due to change environment and new regulatory climate New Committees: to be established Existing Committees: heightened duties Shareholder and Investor Constituencies: review communication protocol 2010 Winston & Strawn LLP 8

9 Corporate Governance Implications of Dodd Frank: Board Oversight Board Oversight Traditionally board oversight has envisioned that management will conduct and the board will oversee. Oversight dictated by the level of information necessary for boards and committees to be able to make informed decisions. Dodd Frank provides numerous instances where boards and committees will be required to review more aggressively management initiatives with new policies, practices, and risks associated with them Winston & Strawn LLP 9

10 Corporate Governance Implications of Dodd Frank: Board Oversight Potential Conflicts Dodd Frank corporate governance implications are not exclusively housed in the governance sections of the bill [sections and ] For example, bank and bank holding company directors must approve management developed living wills [section 165(d)] Directors will have to review the separate contingent resolution plans for the holding company and the bank. As each institution has its own stakeholders and distinct responsibilities, directors will need to sort through potential conflicts in the plans Winston & Strawn LLP 10

11 Corporate Governance Implications of Dodd Frank: Board Oversight Potential Conflicts Bank Contingency Plan: focus on depositors, the FDIC fund, the safety and soundness of the bank with the holding company serving as the source of strength BankHolding Company Contingency Plan: focus on adequate capitalization, public shareholders/debt holders, as well as serving as source of strength to the subsidiary bank Query: The plans are developed for the bank regulators. Butwhat happens whenthebank becomes seriously under collateralized to the rights of shareholders of the holding company versus the depositors of the bank? 2010 Winston & Strawn LLP 11

12 Corporate Governance Implications of Dodd Frank: Board Oversight Standards Board Oversight Standards: How HIGH is high? Standards address whether boards are being aggressive and active enough in oversight of management and understanding their responsibilities New requirements are intended to address concerns Leadership: SEC rules require companies to disclose why they have combined or separated the roles of Chairman and CEO Executive compensation versus financial performance ("pay versus performance") [section 953(a), amending section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n)] "Say on Pay" rules will become reality [section 951, amending the Securities and Exchange Act of 1934 (15 U.S.C. 78a et seq.)] Broker discretionary voting eliminated for election of directors, compensation, and other material matters [section 957, amending section 6(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78f(b))] Proxy Access: SEC will soon issue rules permitting shareholders to use the company's proxy solicitation materials to nominate director candidates [section 971(a), amending section 14(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78n(a))] 2010 Winston & Strawn LLP 12

13 Corporate Governance Implications of Dodd Frank: Board Oversight of Management Board Oversight of Management New requirements will increase the frequency and detail of management reporting to the board and board committees How should boards request information from management in an environment of unprecedented change? Heightened scrutiny: Focus on the director question, What does this mean? Business implications Regulatory/legal/risk implications Investor/Shareholder implications Is this being driven by compensation factors or long term value to the company? Independent Counsel/Advisors to Boards likelyto increase 2010 Winston & Strawn LLP 13

14 Corporate Governance Implications of Dodd Frank: New and Existing Board Committees NEW Risk Committees of Public Companies [section 165(i)] Risk Committees: must be established by publicly traded bank holding companies with assets of $10 billion or more or systemically important publicly traded nonbank financial companies Oversee enterprise wide risk management practices Identify, evaluate, and manage risk exposures of these large, complex firms FRB has authority to require establishment of risk committees for publicly traded BHCs of less than $10b if needed to promote sound risk management practices Make up of Committee independence standards; includes one independent risk management expert to be established by FRB rules Other public company boards may want to review formally their riskmanagement review processes to ensure they are adequate 2010 Winston & Strawn LLP 14

15 Corporate Governance Implications of Dodd Frank: New and Existing Committees Existing committees with new responsibilities: Compensation: risk in executive compensation plans, review of committee member independence, pay and performance considerations, i clawbacks, hedging hdi the value of employee/executive/director stock ownership, etc. Nominating and Governance: consider make up of board; how diversity of members is derived; proxy access considerations for director candidates; chairman and CEO roles Audit: expanded risk management if no separate risk committee, greater care regarding risks for restatement 2010 Winston & Strawn LLP 15

16 Corporate Governance Implications of Dodd Frank: Communications with Shareholders and Investors Transparency: How do company disclosures answer shareholder and investor questions, and do the answers address the need for increased transparency of public companies and their boards? Why do you organize the board and its duties this way? Why do you compensate management and employees this way? What does that say about pay equity of the company? How do you oversee the business of the company? What is the risk appetite of the board? 2010 Winston & Strawn LLP 16

17 Corporate Governance Implications of Dodd Frank: Communications with Shareholders and Investors Public company boards should be aware of SEC's new Office of Investor Advocate. Key focus will be on whether the policies, rules and enforcement actions of the SEC are appropriately oriented to investor protection. Public company boards should be aware of changes to rating agency methods and compliance. Public company boards should review communications with key investor constituencies. Likely increase in investor activism. Shareholderconstituencies will include concernsofretailof retail investors. Possibility of SEC approved proxy access heightens these issues. Board should engage in pre planning for contingency of what to do if company is not successful on "Say on Pay" vote Winston & Strawn LLP 17

18 Dodd Frank Wall Street Reform and Consumer Protection Act 2010 Winston & Strawn LLP 18

19 Dodd Frank Wall Street Reform and Consumer Protection Act President Obama signed on July 21, Title IX Investor Protections and Improvements to the Regulation of Securities Subtitle E, Accountability and Executive Compensation Subtitle G, Strengthening Corporate Governance 2010 Winston & Strawn LLP 19

20 The Dodd Frank Act Became effective on July 21, Most provisions are not self executing: Require SEC to modify its requirements for maintaining an effective registration under the Securities Exchange Act of 1934 (the Exchange Act ) and/or Require the national securities exchanges to modify their listing standards. Expect the SEC to act quickly to promulgate these rules so that all provisions are effective for calendaryear companies' 2011 proxy season Winston & Strawn LLP 20

21 The Dodd Frank Act 1. Compensation Committee Member Independence 2. Independence of Compensation Consultant, Legal Counsel and Other Advisers 3. Policy on Recovery of Erroneously Awarded Compensation 4. Disclosure of Hedging by Employees and Directors 5. Disclosure of Pay Versus Performance 6. Pay Ratio Disclosure 7. Disclosure Regarding Chairman and CEO Structures 8. Say on Pay 9. Shareholder Approval of Golden Parachute Compensation 10. Elimination of Discretionary Voting by Brokers on Executive Compensation Proposals 11. Enhanced Disclosure and Reporting of Compensation Arrangements 2010 Winston & Strawn LLP 21

22 The Dodd Frank Act New provisions apply to all publicly traded companies (except for item 11, which only applies to covered financial institutions) 2010 Winston & Strawn LLP 22

23 1. Compensation Committee Member Independence Section 952 of Dodd Frank adds a new Section 10C to the Exchange At Act, which h requires the SEC to promulgate rules that t direct the NYSE, NASDAQ, and other national securities exchanges and associations to prohibit the listing of any equity security of a company that does not have an independent compensation committee. In determining the definition of the term independence, the national securities exchanges and associations must consider relevant tfactors, to be dt determined dand published by the SEC, including: A. The source of compensation of a member of the company's board of directors, including any consulting, advisory, or other compensatory fee paid by the company to such member; and B. Whether a member of the company's board is affiliated with the company, or a subsidiary or affiliate of the company. Dodd Frank requires the SEC to promulgate these new independence rules not later than July 16, Winston & Strawn LLP 23

24 Compensation Committee Member Independence The SEC's rules must provide a procedure for a listed company to cure any "independence defects before it is de listed. The new Compensation Committee Member independence requirement will not apply to a controlled company, a limited partnership, an open ended management investment company that is registered under the Investment Company Act of 1940, a foreign private issuer that provides annual disclosures to shareholders of the reasons that the foreign private issuer does not have an independent compensation committee, or a company that is in bankruptcy proceedings Winston & Strawn LLP 24

25 2. Independence of Compensation Consultants, Legal Counsel, and Other Advisers New Exchange Act Section 10C, added by Dodd Frank Act Section 952, also adds a subsection (b), Independence of Compensation Consultants and Other Compensation Committee Advisers, which provides that: The compensation committee may only select a compensation consultant, legal counsel, or other adviser after taking into consideration factorsidentified by the SEC (see below); The Committee, in its sole discretion, may retain and obtain the advice of independent legal counsel and other advisers; The company must provide for appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to independent legal counsel or any other adviser Winston & Strawn LLP 25

26 Independence of Compensation Consultants, Legal Counsel, and Other Advisers Does not require a compensation committee to hire its own independent compensation consultant, legal counsel, orotheradvisersother advisers. However, it seems to require the compensation committee to consider the possibility. Requires the SEC to identify factors that affect the independence of legal counsel to a compensation committee, but specifies that these factors shall hllinclude at least: The provision of other services to the company by the firm that employs the compensation consultant, legal counsel, or other adviser; The amount of fees received from the company by the firm that employs the compensation consultant, legal counsel, or other adviser, as a percentage of the total revenue of that firm; The policies and procedures of the firm that employs the compensation consultant, legal counsel, or other adviser, which 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 company owned by the compensation consultant, legal counsel, or other adviser Winston & Strawn LLP 26

27 Independence of Compensation Consultants, Legal Counsel, and Other Advisers Beginning with the proxy statement for the annual meeting occurring on or after July 16, 2011, Dodd Frank requires disclosure of whether the compensation committee retained or obtained the advice of an independent d compensation consultant and whether h the consultant's work raised any conflict of interest issues (and, if so, the nature of the conflict and how the conflict is being bi addressed), d) but no disclosure on those issues with respect to legal counsel or other advisers. Companies and compensation committee should plan on discussing these issues in the 2011 proxy statement to address shareholders' now heightened disclosure expectations Winston & Strawn LLP 27

28 Independence of Compensation Consultants, Legal Counsel, and Other Advisers Exchange Act Section 10C states that it should not be construed (i) to require the compensation committee to implement or act consistently with the advice or recommendations of the compensation consultant; or (ii) to affect the ability or obligation of a compensation committee to exercise its own judgment in fulfillment of the duties of the compensation committee Winston & Strawn LLP 28

29 3. Policy on Recovery of Erroneously Awarded Compensation Clawback Section 954 of Dodd Frank adds new Section 10D, entitled Recovery of Erroneously Awarded Compensation Policy, to the Exchange Act. Requires SEC to direct the national securities exchanges to prohibit the listing of any security of an issuer that does not develop and implement a clawback policy Winston & Strawn LLP 29

30 Policy on Recovery of Erroneously Awarded Compensation Clawback The policy must provide that, In the event that the issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws, the issuer will recover from any current or former executive officer of the issuer who received incentive based compensation (including stock options awarded as compensation) during the 3 year period preceding the date on which the issuer is required to prepare an accounting restatement, based on the erroneous data, in excess of what would have been paid to the executive officer under the accounting restatement Winston & Strawn LLP 30

31 Policy on Recovery of Erroneously Awarded Compensation Clawback Individuals Covered: A company's compensation clawback policy must apply at least to the individuals who are subject to Section 16 of the Exchange Act and individuals who formerly were Section 16 officers. Compensation Covered: All annual and long term incentive compensation plans and arrangements, and stock options. Whether the SECattempts to extend the policy requirements to stock based awards other than options remains to be seen Winston & Strawn LLP 31

32 Policy on Recovery of Erroneously Awarded Compensation Clawback Clawback Period: The clawback policy must provide for a potential recovery period of three years, measured from the date the company is required to prepare the accounting restatement. In comparison, SOX Section 304 requires a look back period of 12 months. TARP clawback requirements apply to any payment made during the period that the financial institution is a TARP participant Winston & Strawn LLP 32

33 Policy on Recovery of Erroneously Awarded Compensation Clawback Triggering Event: In the event that the company is required to restate its financial statements as the result of material noncompliance with applicable accounting principles and the original financial statements resulted in an erroneous payment to a current or former executive officer. The policy must apply regardless of whether (i) the noncompliance was accidental or intentional, and (ii) the executive was at fault (unlike SOX 304). Companies mustdisclose their policy on incentive based compensation that is based on erroneous financial information, presumably in the proxy statement, if not before then Winston & Strawn LLP 33

34 4. Disclosure of Hedging by Employees and Directors Dodd Frank Section 955 adds a new subsection 14(j) to the Exchange Act, Disclosure of Hedging by Employees and Directors. Requires the SEC to require companies to disclose in their annual proxy statement whether the company permits any employee or director (or any designee of such employee or director) to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) that are designed to hedge or offset any decrease in the market value of equity securities (1) granted to the employee or director by the company as part of the compensation; or (2) held, directly or indirectly, by the employee ordirector Winston & Strawn LLP 34

35 5. Disclosure of Pay Versus Performance Dodd Frank Section 953(a) adds a new 14(i) to the Exchange Act, Disclosure of Pay Versus Performance. Requires each public company to disclose in its annual proxy statement information f that shows the relationship between executive compensation actually paid and the financial performance of the issuer. The company's financial performance must take into account any change in the value of the company's stock and dividends or other distributions. Presumably, this is to be calculated in the same manner as the Performance Graph required in the proxy statement, based on cumulative total shareholder return Winston & Strawn LLP 35

36 Disclosure of Pay Versus Performance Open questions that the SEC will need to answer in its rulemaking include: The definition of the new term compensation actually paid. Does this include gains actually recognized in the year on equity awards from prior years? Does it include a bonus actually paid in the year but attributable to a prior year? Whether this disclosure applies to the compensation of the named executive officers only, all of those in the Section 16 group, orsomeother other group. Whether this new disclosure requirement applies to the same five year period as the existing Performance Graph and, if so, how to show fluctuating annual bonuses Winston & Strawn LLP 36

37 Disclosure of Pay Versus Performance The Act allows, but does not require, this disclosure to include a graphic representation of the information required to be disclosed. Presumably, this would be an enhancement to the Performance Graph. Section 953 directs the SEC to adopt rules implementing this disclosure requirement, but does not give it a deadline for doing so Winston & Strawn LLP 37

38 6. Pay Ratio Disclosure Section 953(b) Executive Compensation Disclosures requires the SEC to amend the proxy statement disclosure rules to require each public company to disclose: A. The median of the annual total compensation of all employees of the company, except the chief executive officer (including employees outside the U.S.); B. The annual total compensation of the chief executive officer (or any equivalent position) of the company; and C. The ratio of the amount described in (A) to the amount described in (B). For purposes of this disclosure, the company must calculate l the annual compensation using the rules for Total Annual Compensation figure in the Summary Compensation Table Winston & Strawn LLP 38

39 7. Disclosures Regarding Chairman and CEO Structure Section 972 of Dodd Frank adds new Section 14B Corporate Governance to the Exchange Act, which requires the SEC to issue rules that require the company to disclose in its annual proxy statement the reasons why it has chosen the same or different persons to serve as chairman hi of the board of directors and chief executive officer (or in equivalent positions) of the company Winston & Strawn LLP 39

40 8. Say on Pay Section 951 of Dodd Frank adds a new Section 14A to the Exchange Act, entitled Shareholder Approval of Executive Compensation. Not less frequently than once every 3 years, a company's annual proxy statement must include a separate resolution subject to shareholder vote to approve the compensation of executives, as disclosed in the company's CD&A, the compensation tables, and any related material. Also requires that, not less frequently than once every 6 years, the proxy statementmustinclude must a separate resolution subject to a non binding shareholder vote to determine whether votes on the resolutions required under the preceding sentence will occur every 1, 2, or 3 years Winston & Strawn LLP 40

41 Say on Pay A company's proxy statement for the first annual meeting occurring after January 21, 2011, must include both the Say on Pay resolution and a separate resolution subjectto to shareholder vote to determine whether future shareholder votes on the Say on Pay resolutions will occur every 1, 2, or 3 years. Section 951 also requires every institutional investment manager subject to Exchange Act section 13(f) to report at least annually how it voted on any shareholder vote as to Say on Pay or golden parachute pay, unless such vote is otherwise required to be reported publicly by SEC rule Winston & Strawn LLP 41

42 9. Shareholder Approval of Golden Parachute Compensation New Exchange Act Section 14A also provides for Shareholder Approval of 'Golden Parachute' Compensation, which requires in any proxy or consent solicitation material for a meeting of the shareholders at which shareholders are asked to approve an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all the assets of thecompany company, thepartysoliciting theproxyorconsent or must disclose in the proxy or consent solicitation material, in accordance with regulations to be promulgated by the SEC, any agreements or understandings that the party soliciting the proxy or consent has with any named executive officers ofthecompany (oroftheacquiring of company) concerning any type of compensation (whether present, deferred, or contingent) that is based on or otherwise relates to the acquisition, merger, consolidation, sale, or other disposition of all or substantially all of the assets of the companyand and the aggregate total ofall such compensation that may (and the conditions upon which it may) be paid or become payable to or on behalf of such executive officer Winston & Strawn LLP 42

43 Shareholder Approval of Golden Parachute Compensation This shareholder vote will not be binding on the company or the company's Board and may not be construed as (1) overruling their decision, (2) creating or implying any addition or change to their fiduciary duties, or (3) restricting or limiting shareholders' ability to make proposals for inclusion in proxy materials related to executive compensation. The proxy statement also must include a separate resolution subject to shareholder vote to approve such agreements or understandings and compensation, as disclosed, unless shareholders already have approved such agreements or understandings in a Say on Pay (under new Exchange Act, subsection 14A(a), described above) Winston & Strawn LLP 43

44 Shareholder Approval of Golden Parachute Compensation Effective for any shareholders meeting that occurs after January 21, Also requires every institutional investment manager subject to section 13(f) of the Exchange Act to report at least annually how it voted on any shareholder vote pursuant to Say on Pay generally and this provision, unless such vote is otherwise required to be reported publicly by rule or regulation of the Commission Winston & Strawn LLP 44

45 10. Elimination of Discretionary Voting by Brokers on Executive Compensation Matters Section 957 of Dodd Frank amends Section 6(b) of the Exchange Act to provide that national securities exchanges must prohibit brokers from voting shares they do not beneficially own in connection with: the election of directors, executive compensation, and any other significant matter, as determined by the SEC, Unless the beneficial owner of the security has instructed the broker to vote the proxy Winston & Strawn LLP 45

46 Elimination of Discretionary Voting The most immediate effect of this provision will be the elimination of broker voting of uninstructed shares in the new votes required by Section 951 of Dodd Frank, including: The advisory vote on executive compensation ( Say on Pay ), The vote on the frequency of the advisory vote, and The advisory vote on golden parachutes Winston & Strawn LLP 46

47 11. Enhanced Disclosure and Reporting of Compensation Arrangements Section 956, Enhanced Compensation Structure Reporting, only applies to financial institutions with assets of less than $1 billion. Requires the Federal regulators to jointly prescribe regulations or guidelines by March 22, 2011, which require each covered financial institution to disclose to the appropriate federal regulator the structures of allincentive based compensation arrangements offered by the institution, sufficient to determine whether the compensation structure (A) provides anexecutive officer, employee, director, or principal shareholder of the covered financial institution with excessive compensation, fees, or benefits; or (B) could lead to material financial loss to the covered financial institution Winston & Strawn LLP 47

48 Enhanced Disclosure and Reporting of Compensation Arrangements The regulations must prohibit any such incentivebased payment arrangement or features. This provision would not require a financial institution that does not have an incentive based payment arrangement to make any disclosures, or the reporting of the actual compensation of particular individuals Winston & Strawn LLP 48

49 Action Items Boards and compensation committees should expect that most of the Dodd Frank provisions will be effective for the 2011 proxy season. Companies, boards, and compensation committees need to act fast although the actions they take may not need to be dramatic. Companies and compensation committees should plan on discussing the issues introduced by Dodd Frank in their 2011 proxy statements to address shareholders' now heightened disclosure expectations Winston & Strawn LLP 49

50 Action Items Boards and compensation committees need to hear a detailed presentation on the technical provisions of Dodd Frank. Other affected company parties should be present, including human resources, executive compensation, legal, and investorrelations relations functions. Each ofthese functions willbe affected by, and have an important role in responding to, Dodd Frank, and the response should be coordinated from the start Winston & Strawn LLP 50

51 Action Items Boards and compensation committees should evaluate new policies and procedures and formulate a response to each of the provisions of Dodd Frank that apply to executive compensation. Because the SEC (and stock exchange) rules may turn out different than we expect, the policies, procedures, and response of the Boards and compensation committee should be flexible and principles based, rather than written in stone. Even if the SCdoes SEC not promulgate rules in time for the 2011 proxy statement, the compensation committee at least should consider disclosing that it has discussed and is working toward a response to these matters Winston & Strawn LLP 51

52 Action Items For many Boards and compensation committees one of the first subjects to be discussed should be the need for independent directors, legal counsel, and compensation consultants (although most haveaddressed addressed theissue of independent directors and consultants). Dodd Frank does not mandate that the Committee retain independent d legal lcounsel or compensation consultants, but this certainly will become a best practice. The compensation committee at least should be able to disclose that it has discussed the independence issue Winston & Strawn LLP 52

53 Action Items Each compensation committee should review its compliance with the independence requirements of Dodd Frank. The compensation committee and the company should consider adding clawback provisions to all future plans, awards, and agreements Winston & Strawn LLP 53

54 Whistleblower Rewards and Protections Rewards Previously, SEC could pay bounties to informant for insider trading violations Dodd Frank directs the SEC to pay awards to whistleblowers in any successful enforcement proceeding resulting in the payment of monetary sanctions exceeding $1 million Award would be between 10% and 30% of total monetary sanctions, defined as monies, including penalties, disgorgement and interest Employees can make claims directly to SEC Applies only to original information, not known to SEC from another source Similar award provisions for whistleblowers who provide information to the Commodity Futures Trading Commission Could have profound governance implications, as employees may have incentive to report issues first to SEC Companies should be aware that SEC complaints may increase substantially due to significant financial incentives SEC must pass implementing rules by April 2011; will be interesting to see how new rules address governance issues 2010 Winston & Strawn LLP 54

55 Whistleblower Rewards and Protections Protections Creates a new private action for reinstatement, two times back pay, and other relief for whistleblowers who suffer retaliation i Action must be brought within 10 years of a violation Expands coverage of existing Sarbanes Oxley whistleblower protections Extends protections to employees of consolidated subsidiaries Increases statute of limitations i i Grants right to a jury trial Companies should review internal policies for responding to whistleblowers 2010 Winston & Strawn LLP 55

56 Securities Ratings Ratings by rating agencies have been key part of securities offering process, particularly l in ABS deals Previously, Securities Act Rule 436(g) carved out ratings from being part of a registration statement, sparing rating agencies from liability Dodd Franknullified nullified Rule 436(g) and was effective immediatelyupon enactment Now ratings may not be used without the consent of the agency. Agencies that consent would face same Securities Act liability as accounting firms if their rating doesn t accurately reflect a company s true condition As a result, rating agencies are not consenting to inclusion of ratings information in registration statements, and companies currently are not includingthemin new registration statementsor incorporateddocuments documents Rating agencies are now considering what they need by way of caveats and backup to consent to inclusion of ratings in registration statements Companies may still disclose ratings orally, in a FWP, or in term sheets or press releases that comply with Securities Act Rule Winston & Strawn LLP 56

57 Securities Ratings SEC has said that Rule 436(g) still applies to ratings in pending registration statements and in previously filed 34 Act reports Regulation FD: Companies will no longer be able to provide material non public information to rating agencies unless confidentiality agreements are signed New SEC rules on Regulation FD due 90 days after passage of Act Companies should watch for SEC rules and review their policies Dodd Frank directs SEC to eliminate rules relying on credit ratings within 12 months, e.g., g, Form S 3 uses ratings to determine eligibility SEC is establishing Office of Credit Rating to regulate and review rating agencies 2010 Winston & Strawn LLP 57

58 Proxy Access Proxy access is a regulatory initiative that would give shareholders h the right to include director nominees in proxy statements distributed by the company SEC has considered issue for years, using criteria such as the number of shares hld held and the duration of holdings as a basis for inclusion Critics have questioned the SEC s authority to become so involved in the proxy process, which historically hasbeen the domain of state law Dodd Frank expressly affirms the SEC s rule making power SEC expected to adopt rules bf before 2011 proxy season Majority voting and de staggering of boards were not included in Dodd Frank 2010 Winston & Strawn LLP 58

59 Internal Controls Reporting For Small Issuers Reduces regulation, unlike much of the rest of the Act Section 404(b) of Sarbanes Oxley requires management to prepare report on internal controls and outside accounting firm to audit management s report Long thought to be an onerous burden on small companies, implementation deadline for smaller companies has been extended many times Dodd Frank permanently exempts from Section 404(b) non accelerated filers and smaller reporting companies with a public float of $75 million or less Smaller companies must still provide management s assessment of internal controls, but no audit is required During three year period following enactment, the Government Accounting Office will study issue to determine if small company exemption would pose an excessive risk to investors Dodd Frank requires SEC to report by April 2011 on reducing Sarbanes Oxley compliance for companies whose market capitalization is between $75 million and $250 million and determine if reducing compliance burden would increase U.S. IPOs 2010 Winston & Strawn LLP 59

60 Regulation D Regulation D provides safe harbor for private offerings to accredited d investors Previously, Regulation D provided that persons with net worth of more than $1 million, including value of primary residence, qualified as accredited d investors Dodd Frank amended Regulation D to exclude value of primary residence from $1 million net worth threshold; effective e immediately upon enactment Companies using Reg D should be sure to revise investor questionnaires Dodd Frank kact also directs SEC to adjust $1 million networth threshold for inflation SEC directed to add bad boy provisions to Reg D eligibility 2010 Winston & Strawn LLP 60

61 Voting By Brokers Current rules allow brokers to vote shares on behalf of beneficial lholders with respect to certain matters when the broker has not received voting instructions Earlier this year, amendments to NYSE Rule 452 eliminated broker discretionary voting in director elections (contested t or not) Dodd Frank further prohibits broker discretionary on executive ec e compensation matters, including in connection with new Say on Pay and say on severance advisory votes, and other significant matters as determined by SEC rules 2010 Winston & Strawn LLP 61

62 2010 Winston & Strawn LLP 62 Questions?

63 2010 Winston & Strawn LLP 63 Thank You.

64 Contact Information Christine Edwards Corporate Chicago (312) James Junewicz Corporate Chicago New York (312) Michael Melbinger Employee Benefits & Executive Compensation Chicago (312) Marvin Miller Corporate New York (212) Winston & Strawn LLP 64