• Wall Street Reform Legislation to Affect Public Companies
  • August 11, 2010 | Authors: Michael M. Froy; Ira I. Roxland
  • Law Firms: SNR Denton - Chicago Office ; SNR Denton - New York Office
  • The Wall Street Reform and Consumer Protection Act (the “Act”), was enacted on July 21, 2010.  The Act includes various changes which will affect public companies and companies hoping to access the securities markets.  Among other things, it imposes new executive compensation, disclosure and corporate governance requirements on public companies.  Some of these requirements codify standards that the national securities exchanges already impose on listed companies, while others change the structure of compensation programs, increase proxy disclosure and empower shareholders of public companies in general and financial institutions in particular.  Many of these requirements are expected to take effect in time for the 2011 proxy season.

    The Act is intended to give public company shareholders a greater voice in executive compensation as well as to strengthen the corporate governance and accountability standards through the following requirements, most of which will be implemented by rules promulgated by the Securities and Exchange Commission (the “SEC”):

    New Powers for Public Company Shareholders:

    • A nonbinding shareholder say-on-pay vote at least once every three years.  The Act requires public companies with securities registered under the Securities Exchange Act of 1934 (the “Exchange Act”), to give their shareholders a “say-on-pay” at least once every three years, beginning with the first meeting of shareholders that will occur after January, 2011.  While many of the specifics of what must be included in a “say-on-pay” proposal will be left to SEC rulemaking, the Act requires that shareholders vote on matters disclosed under Item 402 of Regulation S-K, which includes, among other things, executive compensation and the calculation of golden parachute payouts in the event of a change in control of an issuer.  The SEC may exempt smaller companies from compliance with these voting requirements.

    • A nonbinding shareholder vote on golden parachutes in change of control transactions, separate from the vote approving the transaction.  The Act requires that every proxy statement seeking a shareholder vote to approve a change of control include disclosure regarding any agreements or understandings with named executive officers of the seller concerning any type of compensation (whether present, deferred or contingent) that is based on or otherwise relates to the transaction and the aggregate total of such compensation.  The proxy statement must include a separate shareholder resolution with respect to any such agreements or understandings, as disclosed, unless they have been the subject of a prior annual, biennial or triennial “say-on-pay” vote.

    • Shareholder access to issuer proxy materials for the purpose of nominating director candidates.  The Act specifically authorizes, but does not require, the SEC to issue rules requiring issuers to include nominees submitted by shareholders in their proxy materials for the election of directors, in accordance with a to-be-prescribed procedure. An SEC rule proposal in this regard has been pending since June 10, 2009 (see http://www.sec.gov/rules/proposed&under;2009/33-9046.pdf).

    • Prohibition against broker voting of securities in the election of directors without  instruction from the beneficial owner.  The Act requires the SEC to require each national securities exchange to prohibit brokers and others who are not beneficial owners from granting a proxy to vote shares if it has not received voting instructions from the beneficial owner in the case of a vote on the election of directors, executive compensation or any other “significant matter” (as determined in rules of the SEC).

    New Public Company Disclosure Requirements

    • Independence standards for compensation committees.  Codifying substantially similar rules already in place at each national securities exchange, the Act requires that each national securities exchange require its listed companies to have a compensation committee that consists solely of independent members of its board of directors.  The Act further requires the SEC to identify factors that affect the independence of a compensation committee’s consultants, legal counsel or other advisors and provides that a compensation committee may only select a consultant, legal counsel or other advisor after taking these factors into account. Each proxy statement for an annual meeting of shareholders occurring more than one year after the date of enactment must disclose whether the compensation committee has retained or obtained the advice of a compensation consultant and whether the work of the compensation consultant has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.

    • Disclosure of employee and director hedging policies in proxy materials.  The Act requires the SEC to amend its proxy disclosure rules for annual meetings of shareholders to require disclosure regarding whether any employees or directors, or their designees, are permitted to purchase financial instruments (such as prepaid variable forward contracts, equity swaps, collars and exchange funds) to hedge against decreases in the value of such companies’ equity securities granted as compensation to, or held directly or indirectly by such employees or directors.

    • Disclosure of institutional investors’ say-on-pay votes.  The Act requires institutional investment managers to report at least annually how they voted on any shareholder say-on-pay or golden parachute proposal, unless their vote is otherwise required to be publicly reported.

    Additional Corporate Governance Changes

    • Smaller reporting companies exempt from Sarbanes-Oxley internal control requirements.  In a change long sought by smaller public companies, the Act exempts smaller public companies that are not “accelerated filers” or “large accelerated filers” from compliance with internal control auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.  The Act also directs the SEC to study ways of reducing the burden of Section 404(b) compliance on companies with market capitalizations between $75 million and $250 million.

    • Disqualification from using Regulation D private placement safe harbor.  Section 4(2) of the Securities Act allows an issuer to conduct a private offering of securities without registering the offering with the SEC if certain conditions are satisfied.  An issuer who meets the requirements of Rule 506 of Regulation D is deemed to not have engaged in a “public offering”, and securities sold thereunder are deemed “covered securities.”  Rule 506 of Regulation D is considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act and is particularly useful as there is currently no minimum or maximum limit placed on the aggregate offering price of offerings conducted in reliance on it.  The Act requires that the SEC promulgate new rules making certain issuers ineligible to rely on Rule 506.  Such ineligible persons include any person who (1) is subject to certain final orders by a state securities, banking or insurance authority, a federal banking agency or the National Credit Administration or (2) has been convicted of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of a false filing with the SEC.

    • Repeal of exception provided by SEC Rule 436(g).  The Act repeals SEC Rule 436(g), which currently allows for the inclusion of ratings of the nationally recognized statistical rating organizations (“NRSROs”) in public offering registration statements without obtaining the consent of the NRSRO issuing the rating.  Such repeal potentially exposes the NRSROs to “expert” liability under the Securities Act if they provide consent for ratings to be included in registration statements.  To date, each of Moodys, Standard and Poors and Fitch have indicated they do not believe they are experts within the meaning of Section 11 of the Securities Act.  The repeal of Rule 436(g) raises certain questions regarding the continued use of ratings information given the position of certain NRSROs that they are currently unwilling to consent to be treated as an "expert" in relation to such disclosures, and other rating agencies are expected to take a similar position.

    After consultation with the Staff of the SEC, certain law firms issued a white paper, dated July 21, 2010 (“White Paper”), discussing what disclosure of ratings information for non-asset backed securities offerings are appropriate based on the application of the Commission’s current rules and regulations.  The White Paper asserts that, among other things, that (i) no consent should be required where an issuer includes disclosure about its credit rating in a filing with the SEC in the context of a discussion of changes to a credit rating, the liquidity of the registrant, the cost of funds for a registrant or the terms of agreements that refer to credit rating; (ii) generally, a consent must be filed as part of the registration statement prior to filing a prospectus or prospectus supplement that is first filed on or after July 22, 2010 that includes ratings information; and (iii) while Rule 436 does not apply to “free writing prospectuses”, if a free writing prospectus is filed with the SEC not only as a free writing prospectus but also as a prospectus pursuant to Rule 424, the free writing prospectus would constitute a “prospectus” for the purposes of Rule 436, and, accordingly, the requirements for prospectuses first filed on or after July 22, 2010 would apply.

    Congress left the implementation of many of these new requirements, including exemptions from some or all of the requirements, to future rulemaking by the SEC or other federal regulators.  Affected companies will want to assess the likely effects of the Act on their operations and investor disclosure practices, and monitor regulatory developments.