Securities & Financial News to Note

Transcription

1 Securities & Financial News to Note A Bi-Weekly Bulletin SEC/Corporate NASDAQ Suspends Bid Price and Market Value Requirements Effective October 16, 2008, The NASDAQ Stock Market LLC temporarily suspended the enforcement of its rules requiring a minimum $1 closing bid price and minimum market value of publicly-held shares. The suspension will remain in effect until January 16, As a result of tumbling investor confidence and concerns about the proper functioning of the securities markets, the number of securities trading below $1 has increased dramatically. For example, on September 30, 2007, there were 64 securities listed on NASDAQ trading below $1, but, by October 9, 2008, that number had jumped to 344 securities. During the suspension period, NASDAQ will not take any action to delist securities for failure to meet the bid price or market value of publicly-held shares requirements. In its proposed rule change submitted to the SEC, NASDAQ reasoned that the temporary suspension of the requirements will allow companies to focus on running their businesses and not on satisfying market-based requirements that are largely beyond their control. Director White Addresses Compensation Disclosure Challenges At the Third Annual Proxy Disclosure Conference held on October 21, 2008, John White, director of the SEC s Division of Corporation Finance, discussed new compensation disclosure challenges resulting from the recently created Troubled Asset Relief Program (TARP). The TARP requires financial institutions to meet prescribed standards for executive compensation if they participate in the capital purchase program created under the TARP or if they sell troubled assets to the U.S. Treasury. These standards include requiring the compensation committee to certify in the CD&A that it has met with senior risk officers to ensure that compensation arrangements do not encourage unnecessary risks that threaten the institution s value. If it is determined that such arrangements encourage excessive risks, the compensation committee will be required to limit the compensation arrangements. White advises that while these new limitations technically apply only to participants of the TARP, the rules may have broader implications and it may be prudent for compensation committees to consider whether its compensation arrangements encourage risk taking to meet a target. Also, as a general matter, White expects that current market events are already affecting compensation decisions and therefore, should be affecting the drafting of CD&As. White also discussed the Division of Corporation Finance s 2008 review of executive compensation disclosure and noted that most comments related to the need for more analysis, disclosure of performance targets and disclosure of benchmarking. There was a lack of analysis throughout the CD&A, and, in the future, filers should focus on an informative analytical discussion of the material elements of compensation, how companies arrived at the varying levels of compensation, and why they believe their compensation practices and decisions fit within their overall objectives and philosophy. As to performance targets, White emphasized that companies must return to a principles-based analysis. Additionally, companies must give thought to whether there is a sufficient legal basis for excluding a disclosure. Regarding benchmarking, White stated that companies should identify the companies that comprise the peer group used for benchmarking, clearly disclose benchmarking methodologies, and describe the relationship between actual compensation and the data collected from their analysis of peer groups. White noted that in 2009, the Division of Corporation Finance intends to review the annual reports of the largest financial institutions that are public companies. The review will focus on the financial statements and executive compensation disclosures of those companies.

2 Council of Institutional Investors Adopts New Corporate Governance Standards On October 7, 2008, the Council of Institutional Investors (CII) adopted new corporate governance policies, including the following: Gross-ups to senior executives should not be more than those provided to all employees. Executives should not receive severance payments upon termination for poor performance, resignation under pressure, or failure to renew an employment contract. Payments awarded upon death or disability should be limited to compensation already earned or vested. Advance notice bylaws, holding requirements, and disclosure rules should not be so onerous as to deny sufficient time or make it impractical for shareowners to submit nominations or proposals and distribute supporting proxy materials. Executives should be required to sell stock through pre-announced 10b5-1 program sales or by providing a minimum 30-day advance notice of any stock sales. 10b5-1 program adoptions, amendments, terminations and transactions should be disclosed immediately. Companies should timely disclose the voting results at annual and special meetings. Shareholders should have the right to call special meetings. Certain criteria must be met before U.S. accounting/auditing standards and standard setters are replaced with international accounting/auditing standards and standard setters. New%20Policies%20-%20Fall% pdf Shelf Registration Statements May Expire Soon Under the Securities Offering Reform Rules, which became effective December 1, 2005, certain shelf registration statements expire after three years. Pursuant to Rule 415(a)(5), the following registration statements are subject to the three-year expiration: automatic shelf registration statements (ASRs) filed by well-known seasoned issuers (WKSIs) registration statements covering continuous and delayed primary offerings by issuers registration statements covering mortgage-related securities Registration statements that became effective before December 1, 2005, will expire on December 1, 2008, regardless of their original effective date. Registration statements that became effective on or after December 1, 2005, will expire three years after their effective date. Subject to certain transition rules, in order to continue selling securities registered on an expired registration statement, issuers will need to file a replacement registration statement covering the securities with the SEC. The three-year expiration does not apply to registration statements covering: resales by selling shareholders, except those registered on ASRs securities issued under dividend reinvestment plans or employee benefit plans (Form S-8) securities issued upon exercise or conversion of warrants, options and other convertible securities securities issued in business combination transactions SEC Brings Second-Highest Number of Enforcement Actions in Its History In fiscal 2008, the SEC brought 671 enforcement actions, the second highest number of enforcement actions in the agency s history. Repeating last year s total Fair Fund distributions, the SEC again returned more than $1 billion to harmed investors. Insider trading and market manipulation cases rose 25 percent and 45 percent, respectively. Additionally, the SEC has more than 50 ongoing investigations related to the subprime market. The Division of Enforcement negotiated with six of the largest firms in the auction rate securities market to reach preliminary settlements in principle that would return more than $50 billion to investors. The SEC has also targeted fraud, by charging eight public companies and 27 executives with providing false information to investors based on illegal stock option backdating as well as bribery of foreign officials, by filing 15 Foreign Corrupt Practices Act cases. Director of the SEC s Division of Enforcement Linda Chatman Thompson stated that the SEC would continue its mission of investor protection in the upcoming year. 2

3 Accounting/Tax PCAOB Proposes New Auditing Standards Related to Auditor s Assessment of Risk On October 21, 2008, the Public Company Accounting Oversight Board (PCAOB) voted to propose for public comment seven new auditing standards related to the auditor s assessment of audit risk, which is the risk that the auditor would state that the financial statements are materially misstated. Limiting audit risk allows the auditor to state with reasonable assurance that the financial statements fairly reflect the company s financial position. The proposed risk assessment standards, which would supersede the PCAOB s interim auditing standards related to audit risk and materiality, are: Audit Risk in Audit and Financial Statements, which describes the components of audit risk and an auditor s responsibilities for reducing audit risk Audit Planning and Supervision, which describes the auditor s responsibilities in planning an audit Identifying and Assessing Risks of Material Misstatement, which describes information gathering procedures to identify risks The Auditor s Responses to the Risks of Material Misstatement, which describes an auditor s responsibilities and procedures for responding to the risk of a material misstatement Evaluating Audit Results, which describes how auditors should evaluate an audit in order to form an opinion for the auditor s report Consideration of Materiality in Planning and Performing an Audit, which describes how an auditor should apply the concept of materiality in an audit Audit Evidence, which includes a discussion of the appropriateness and sufficiency of audit evidence to support an opinion in the auditor s report The comment period on the proposed standards ends on February 18, Litigation Second Circuit Applies Balancing Test to Foreign Cubed Securities Case In Morrison v. National Australia Bank Ltd., the U.S. Court of Appeals for the Second Circuit declined to adopt a bright line rule precluding foreign cubed securities class actions, a name which refers to the mix of a foreign plaintiff, a foreign issuer and foreign securities transactions. Instead, the Second Circuit opted for an analysis that balanced the anti-fraud policies of U.S. securities laws and the potentially conflicting policies of foreign countries in regulating their own securities markets. The Morrison case involved an asset write-down and restatement of financial statements by a foreign issuer that was caused by inappropriate accounting practices by its U.S. subsidiary that resulted in a cumulative $2 billion asset write-down. The foreign issuer s SEC filings and press releases contained the consolidated financial statements that included the subsidiary s overstated financials and also separately presented certain financial information of the subsidiary. Although the foreign issuer s ordinary shares were not traded on any U.S. exchange, its American Depositary Receipts (representing the right to a share of the foreign stock) were traded on the New York Stock Exchange and reacted to the asset write-down and restatement by falling 5% and 13% after two separate write-downs. The Second Circuit found that it was without subject matter jurisdiction even though the fraud emanated from a U.S. subsidiary. The Second Circuit concluded that the heart of the fraud occurred abroad where the officers of the foreign issuer oversaw operations and were primarily responsible for the company s public filings. The activities of the U.S. subsidiary were found to be insufficient to satisfy the conduct test, which states that subject matter jurisdiction only exists if the defendant s conduct in the U.S. was more than merely preparatory to a fraud and culpable acts or omissions within the U.S. directly caused losses to investors abroad. The Second Circuit also relied heavily on the lack of effects in the U.S. because plaintiffs purchased on foreign exchanges. Morrison v. National Australia Bank Ltd., 2008 WL (2d Cir. Oct. 23, 2008) 3

4 About This Bulletin Securities & Financial News to Note Co-Editors: Kara L. MacCullough Fort Lauderdale Esther L. Moreno Miami Holland & Knight LLP Information contained in this newsletter is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different, and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel. To ensure compliance with Treasury Regulations (31 CFR Part 10, 10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code. Holland & Knight lawyers are available to make presentations on a wide variety of securities and financial law issues. For further information about any of these issues, please contact the Holland & Knight attorney who regularly works with you or one of the following attorneys: James E. McDermott, Business Section Leader james.mcdermott@hklaw.com Atlanta: Donald Kennicott don.kennicott@hklaw.com Boston: Richard Yanofsky richard.yanofsky@hklaw.com Chicago: Michael J. Boland michael.boland@hklaw.com Fort Lauderdale: Kara L. MacCullough kara.maccullough@hklaw.com Jacksonville: Ivan A. Colao ivan.colao@hklaw.com Los Angeles: Francis W. Costello francis.costello@hklaw.com Miami: Rodney H. Bell rodney.bell@hklaw.com Bob Grammig, Practice Group Leader bob.grammig@hklaw.com Orlando: Tom McAleavey tom.mcaleavey@hklaw.com Portland: Mark A. von Bergen mark.vonbergen@hklaw.com San Francisco: Thomas A. Zimmer tom.zimmer@hklaw.com Tallahassee: Morris Miller morris.miller@hklaw.com Tampa: Chet Bacheller chet.bacheller@hklaw.com Washington, D.C./ Northern Virginia: William J. Mutryn william.mutryn@hklaw.com West Palm Beach: David Perry david.perry@hklaw.com New York: Frode Jensen frode.jensen@hklaw.com Holland & Knight s Business Law lawyers advise businesses and financial institutions of every size. With over 300 business law lawyers totally committed to providing legal solutions to achieve your business objectives, we are attuned to the difficult problems and opportunities in business and finance. Our mission is to deliver comprehensive, interdisciplinary and integrated legal resources one firm service to address your legal matters, no matter how complex. Holland & Knight lawyers are available to make presentations on a wide variety of securities and corporate governance issues. 4

5 Holland & Knight s Financial Recovery Team Holland & Knight s Financial Recovery Team assists clients with the dramatic and unprecedented developments in the global financial markets. This interdisciplinary group of lawyers and professionals from around the country has significant experience in banking regulations, government contracts, finance, government relations, real estate, business issues and litigation. They will counsel clients on the issues and opportunities facing them during this uncertain time. The team includes: Government, Public Policy and Regulatory Practice lawyers and professionals who are well acquainted with the Senate Banking and House Financial Services Committees, the Congressional leadership, Treasury Department, Federal Reserve, FDIC, Senate Finance, House Ways & Means and related agencies and institutions. Our team works with key officials on a bipartisan basis and includes former members of Congress, former Congressional staff and former senior administration officials. The team also includes a number of bank and bank holding company regulatory lawyers with vast experience dealing with state and federal bank regulators. Real Estate, Finance, Securities, and Restructuring, Bankruptcy and Loan Workout lawyers and professionals who understand the structure and complexity of securitization transactions, including the underlying assets and the securities issued in connection with such transactions, and who are experienced in public/private transactions, as well as the disposition of distressed real estate and real estate-related assets as single assets and in portfolios, and loan workouts and restructurings. Our lawyers advise clients dealing with the issuance of asset-backed securities, government agencies in real estate-related transactions nationwide, in public/private partnerships and in the disposition of loan and real estate assets. Our team includes lawyers who held senior positions in government during the financial crisis of the early 1990s and many lawyers who interfaced with the government in resolving that crisis which included moving real estate loan assets back to the private sector. Corporate Compliance and Governance and White Collar Defense lawyers and professionals who regularly advise companies on the design and implementation of compliance and ethics programs, including anti-corruption components, which can be used to protect both companies and management in the event of a government investigation. The Department of Justice and the SEC have already opened more than 30 investigations into potential legal and regulatory violations. Holland & Knight has numerous former federal prosecutors and SEC enforcement lawyers who understand how to protect companies and individuals who face what are frequently parallel civil, regulatory and criminal investigations. Government Contracts lawyers and professionals who regularly operate in the intersection of public agencies and private companies. They have been scrutinizing the Act s description of the intended legal relationship between the Treasury Department and the financial and managerial firms that are being approached to provide services in asset management, auctions, accounting and other areas, and are familiar with applicable conflict of interest laws and principles. Our lawyers have noted that notwithstanding the Act s intention to streamline and expedite the recovery process, Treasury s actions are expressly made subject to the remedies available under the Administrative Procedure Act. Feel free to contact your Holland & Knight lawyer or reach out to the initial primary contacts on Holland & Knight s Financial Recovery Team for advice and assistance. They are: Jose Sirven, Financial Services jose.sirven@hklaw.com Lawrence Wolk, Real Estate lawrence.wolk@hklaw.com Suzanne Gilbert, Litigation suzanne.gilbert@hklaw.com Steven Nesmith, Government Relations steven.nesmith@hklaw.com Kerry Kehoe, Business kerry.kehoe@hklaw.com Holland & Knight LLP Copyright 2008 Holland & Knight LLP All Rights Reserved 5