Sunday November 23, 2014

SEC Decisions That Bear Watching

Compensation, conflict minerals and whistleblowing are the hot topics of the new year in Washington.

With the calendar turning a new page, the Securities and Exchange Commission is drawing attention from directors as it wraps up nine Dodd-Frank rules—six on pay and three on social issues. The agency is not working in a vacuum: members of Congress also are making their views known on SEC matters, and the courts and the SEC are checking each other’s powers.

Alexandra R. Lajoux (photo by Peter Krogh)

Pay Rules Pending
To finish up its implementation of Dodd-Frank, the SEC must produce final rules on investment manager pay votes, compensation committee and advisor independence (proposed but not yet final), pay for performance, CEO-to-median employee pay ratios, executive compensation clawbacks, and disclosure of hedging by employees and directors. Any one of these could create compliance challenges for boards—a truth admitted even by board critics.

At a Dec. 12 conference hosted by the Americans for Financial Reform at the headquarters of the AFL-CIO, investors, academics and advisors expressed hope that the pending rules would thwart excessive CEO pay—and thus help directors to do so. In a keynote address, Rep. Elijah Cummings (D-MD) advised that the SEC should continue what Dodd-Frank started. In response to charges throughout the day that directors “failed” to prevent runaway pay, Professor Robert J. Jackson Jr., associate professor at Columbia Law School, argued that directors are far more vigilant than ever about pay—a point reinforced by Anne Sheehan, director of corporate governance with the California State Teachers’ Retirement System (CalSTRS). Jackson wants to see more disclosures about trader-level compensation in financial firms.

Social Rules Ahead
The three social rules pending at the SEC involve disclosures about conflict minerals, mine safety and resource extraction. The conflict minerals rule, which affects not only products but also packaging and potentially equipment and machinery, has a broad impact (see “Keeping Count,” December 2011). Comments are still being received for this rule.

In one recent comment letter, Sen. Olympia Snowe (R-ME), ranking member of the U.S. Senate Committee on Small Business and Entrepreneurship, urged the SEC to consider a principles-based approach drawn from the guidelines given by the Organisation for Economic Co-operation and Development: Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. The OECD report provides “guidance regarding due diligence rather than a bright-line approach to compliance, as proposed,” according to the Snowe letter.

Whistleblower Redux
Meanwhile, congressional review may curb a rule already signed, sealed and delivered. In mid-December, the Capital Markets and Government Sponsored Enterprises subcommittee, chaired by Rep. Scott Garrett (R-NJ) began marking up the proposed Whistleblower Improvement Act of 2011 (H.R. 2483), sponsored by subcommittee member Michael Grimm (R-NY), and aimed at improving the whistleblower provisions of Dodd-Frank. The bill, to be approved and fine-tuned by the committee, would amend securities laws to require would-be whistleblowers to report the alleged misconduct first to the company, as long as the company has an anonymous reporting system and anti-retaliation policy. Under the bill, awards would be discretionary, not mandatory, and they cannot go to wrongdoers or to front-line compliance personnel—compliance staff and advisors can’t be rewarded for simply doing their jobs. Finally, the bill would require the SEC to notify a company of its investigation, unless notice would compromise it.

Clearly, the SEC is having a major impact these days. Corporate directors would be wise to keep their eyes on the agency’s unfolding agenda.

Checks and Balances
Nor are the courts out of the SEC’s loop. Courts may review SEC decisions, and the SEC may review court decisions.

In November, Judge Jed S. Rakoff of the United States District Court for the Southern District of New York rejected a proposed settlement agreement between the SEC and Citigroup. Under the agreement, Citigroup would have paid a $285 million fine to the agency without admitting guilt. Judge Rakoff claimed that the agreement, lacking sufficient details on the allegations against Citigroup, was “not in the public interest.” The matter will now go to trial, which is set for July 16.

Still to come is an SEC review of a key court decision. As directed under Dodd-Frank, the SEC in January will tell the world what it thinks of Morrison v. National Australia Bank Ltd, a 2010 U.S. Supreme Court decision that upheld current restrictions against U.S. investors from filing securities lawsuits against foreign-listed companies operating in the U.S. If the SEC finds the decision unfair to U.S. issuers, it could make foreign companies a lightning rod for securities suits.

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