The RR Donnelley Securities Newsletter contains the latest developments and practical guidance for corporate & securities law practitioners. The content is provided by TheCorporateCounsel.net.

The features in this issue include:

From Cleary Gottlieb: In mid-October, the Federal Reserve released for comment proposed guidance on incentive compensation applicable to all banking organizations under its supervision. The proposal includes two supervisory initiatives. The first, applicable to 28 "large, complex banking organizations," will involve a review each organization's policies and practices to determine their consistency with the guidance described below. The organization-specific policies will be assessed by supervisors in a special coordinated "horizontal review."

The press release issued with the proposed guidance states that "[t]he policies and implementing practices adopted by these firms in response to the final supervisory principles will become a part of the supervisory expectations for each firm and will be monitored for compliance." The second initiative will involve a review of compensation practices at regional, community, and other banking organizations not classified as large and complex, as part of the regular, risk-focused examination process. These reviews will be tailored to take account of the size, complexity, and other characteristics of the banking organization.

The guidance is designed to apply to the compensation of: (1) senior executives and others responsible for oversight of an organization's firm-wide activities or material business lines; (2) individual employees, including non-executive employees, whose activities may expose the organization to material amounts of risk; and (3) groups of employees who are subject to the same or similar incentive compensation arrangements and who, in the aggregate, may expose the organization to material amounts of risk.

Alongside the proposed guidance, the Fed released six Q&As. The Q&As state that the Fed has issued the proposed guidance under its authority to monitor the "safety and soundness" of institutions subject to its oversight. The Q&As also note that the proposed guidance is "consistent with" the Financial Stability Board's Implementation Standards for its Principles for Sound Compensation Practices, which were released in September in conjunction with the G-20 Summit in Pittsburgh.

The FSB was organized at the direction of the G-20 in order to address vulnerabilities and develop and implement strong regulatory policies in the interest of financial stability. The United States is the first G-20 nation to issue detailed guidance on compensation practices since the FSB's Implementation Standards were released. The Q&As provide that comments on the proposed guidance will be accepted for 30 days.

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In mid-October, Special Master Kenneth Feinberg revealed the details of the long and contentious negotiations over the pay levels for the top 25 paid executives at five financial institutions and two automakers that received TARP money.

As described in the Treasury Department's press release, the Special Master's determinations:

• reform the compensation practices at the subject companies for the top 25 employees by requiring annual bonuses to be paid in stock, rather than in cash, and restructuring "guaranteed" cash payments into stock awards that have to be held for several years;
• reduce both cash and total compensation for the subject employees, on average by more than 90% in the case of cash compensation, limiting base salaries to $500,000 for more than 90% of the relevant employees, and decreasing total compensation, on average, by more than 50%;
• require the majority of base salaries to be paid in shares of company stock that must be held at least two years before it can be sold and then only in one-third installments;
• require any incentive compensation to be subject to objective performance goals agreed to by the Special Master and paid only in shares of company stock that must be held for at least three years from the date of award and until all TARP funds have been repaid; and
• require that the company comply with caps on executive perquisites, limit "golden parachute" arrangements for the top 20 most highly-compensated executives, and freeze accruals on supplemental executive retirement plans.

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Following a trend commenced last year by Schering-Plough, industry rivals Lockheed Martin and Northrop Grumman recently posted shareholder surveys regarding executive pay on their websites. The principal idea behind these surveys is to provide a better avenue than say-on-pay for shareholders to weigh in on compensation (egs. shareholders can provide specific comments and the questions are more narrowly focused).

You may recall that Broc recently conducted a podcast with Susan Wolf of Schering-Plough regarding how the experience worked out for them this past proxy season. Schering-Plough intends to announce the results of its survey sometime during the next few months. Amgen also canvassed shareholders this past proxy season. We have compiled all these surveys in our "Say-on-Pay" Practice Area.

A Comparison of the Surveys:

1. Posting Surveys Online - The two newest surveys are posted online - but Schering-Plough mailed their survey as part of their proxy materials (as noted in this press release). Amgen also posted its survey online. It will be interesting to see whether posting surveys increases - or decreases - shareholder participation. Our guess is "increase" - but you never know (for example, note how e-proxy has resulted in a decrease in retail votes).
   
2. Evaluation of CD&A Transparency - To some degree, all of the surveys piggyback on TIAA-CREF's list of ten questions for evaluating CD&As that was released back in August '07 (in fact, Amgen's survey is identical to TIAA-CREF's survey). All of the surveys ask whether shareholders found their CD&As clear and useful and allow for five types of answers.
   
3. Tying Pay to Performance - The surveys ask whether shareholders think pay is tied to performance in slightly different ways. Lockheed Martin's survey asks whether its executive pay as disclosed ties pay to performance and is aligned with shareholder value. Northrop Grumman's survey asks whether its compensation play is aligned with the long-term creation of shareholder value. Schering-Plough asks whether its executive pay program is tied to performance and then also drills down with questions about specific performance metrics.
4. Does Pay Matter? - Northrop Grumman asks two interesting questions that the others do not: whether the shareholder analyzed the company's pay policies and practices before becoming a shareholder and whether the company's compensation plan was a material consideration in becoming a shareholder.
5. Retention and Mix of Equity - Schering-Plough was the only company to ask whether shareholders thought that the company's pay plan allows it to attract and retain well-qualified executives, as well as ask questions about the mix of equity in both its executive's and director's pay.
6. Whether Shareholders Support Pay - Both of the newest surveys - Lockheed Martin and Northrop Grumman - cut to the chase and ask the $64,000 question: whether shareholders support the company's compensation plan as described in the CD&A.
7. Additional Comments - All of the surveys allow for shareholders to submit their own comments, a smart move since the use of multiple choice answers can be limiting. Amgen's survey doesn't even provide an opportunity to select from a multiple choice menu - each question has a text box below it. We think providing multiple choice selections will increase the likelihood of obtaining more responses - as some potential respondents may be daunted by the burden of spending too much time on a survey.

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• How does the US Supreme Court's decision to hear Jones have potential implications in the executive compensation area?<
• What is the importance of Judge Posner's dissent from the 7th Circuit's denial of rehearing en banc?
• When should we expect the US Supreme Court to deliver an opinion in this case?

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In late October, Corp Fin issued Staff Legal Bulletin No. 14E, which changes how the Rule 14a-8(i)(7) exclusion for ordinary business operations applies so that proposals relating to CEO succession planning generally are no longer excludable and that risk-related proposals will be analyzed under a new framework: "rather than focusing on whether a proposal and supporting statement relate to the company engaging in an evaluation of risk, we will instead focus on the subject matter to which the risk pertains or that gives rise to the risk." The SLB also reminds companies and proponents how to notify the Staff when they intend to submit correspondence in connection with a no-action request.

Unlike last year's Staff Legal Bulletin regarding 14a-8, this one is bound to cause a stir because it essentially includes two reversals of prior Staff decisions - with the likely result of more proposals being included in proxies during the upcoming proxy season.

In his blog, Sanford Lewis describes the changed positions as a victory for shareholders and gives some background of the press for this change, including the shareholder proposal meeting with the Corp Fin Staff last month. And the RiskMetrics' "Risk & Governance" Blog includes quotes from a number of activists giving their praise for the SEC's actions, as well as a description of how these two positions have changed over time.

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Well, it's not really a surprise since we've been waiting a few years for this release to amend Notice & Access, which the SEC finally issued in mid-October. The surprise is that it wasn't a product of an open Commission meeting. The SEC smartly issued this set of proposals without the fanfare of an open meeting, which is not required if all of the Commissioners sign an order (i.e., seriatim). Since these e-proxy proposals are not likely to be controversial - at least compared to the outstanding proposals the SEC has out there - the SEC went with what used to be the traditional route of getting a proposal out of the SEC (more recently, nearly all proposals are the product of open Commission meetings; it wasn't that way a decade ago).

One problem is the late date of this proposing release. The comment period is 30 days from the proposals being published in the Federal Register, which doesn't give the SEC much breathing room to adopt changes to the e-proxy rules ahead of the upcoming proxy season.

Then again, the impact of the loss of broker nonvotes for director elections may cause many companies - ones that have used e-proxy during the past few proxy seasons - to go back to mailing paper. So these proposals may be a day late and dollar short (sort of like NIRI's newly released "Standards of Practices for Notice & Access, Volume II").

The proposing release is pretty short (the "meat" is 21 pages) and there are three main items proposed:

1. More flexibility for the form of Notice that companies use (which will catch the rules up to what the SEC already has informally blessed for the revised Notice that Broadridge has been using recently)
2. Enabling companies (and others who use e-proxy) to enclose explanatory materials with the Notice
3. Tweak timeframe when someone other than an issuer relies on e-proxy to make it more feasible to do (changing to a later of (i) 40 days before the shareholder meeting or (ii) file preliminary proxy within 10 days of issuer filing a definitive proxy and send Notice no later than date on which it files its definitive proxy with the SEC)

Note that the SEC didn't propose reducing the 40-day timeframe for issuers - but did ask this question on page 17 as to whether to reduce it to 30 days. By at least asking the question, the SEC arguably could adopt something like this if it so desired. In comparison, the SEC didn't propose nor ask the question about whether issuers could just send the notice with a proxy card from the "get go." So this type of framework couldn't be adopted unless the SEC re-proposed it.

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In late October, HealthSouth announced that its board plans to adopt a by-law amendment relating to shareholder nominations for directors that would reimburse activist shareholders, subject to certain conditions, where the candidate gets at least 40% of the votes cast. Here is Joann Lublin's WSJ article.

The proxy access alternative of reimbursement bylaws - first permitted under Delaware law back on August 1st - has been promoted by AFSCME, who submitted two shareholder proposals on this topic this past proxy season and plans to submit it to ten companies next year. It also has been highlighted as a reasonable solution during the proxy access debate by Professor Charles Elson, who just happens to be Chair of HealthSouth's Governance Committee. So Charles is putting his money where his mouth is...

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In early October, this Bloomberg article confirmed a rumor we had been hearing: the SEC is taking more time to consider the comment letters it has received on proxy access. This WSJ article notes that the SEC's new goal is to consider access rulemaking in January or February.

According to this AP article, Senator Schumer issued a statement expressing disappointment - so there still is considerable pressure on the SEC to do something on access and this rulemaking is far from dead in the water. The Commission still seems to have a 3-2 vote in favor of access when they do consider final rules.

Our guess is that in addition to analyzing the comment letters, the SEC may be waiting for Congress to pass a bill that gives the SEC clearer authority to conduct this rulemaking - in anticipation of a likely lawsuit - and that the SEC still needs to figure out how to handle the mechanics of proposed Rule 14a-11 since there are numerous open issues on how access would work in practice. Much work remains on getting a handle on the "proxy plumbing" and the SEC continues down that path, holding a two-day roundtable on securities lending in late September.

This Simpson Thacher memo notes a speech from Commission Elise Walter in early October, noting that she would give "careful consideration" to an opt-out" provision, but that she was less receptive to directors having an "unfettered choice" to have this discretion.

Simpson's memo notes that there is no indication about whether the SEC may still act before the upcoming proxy season on its Rule 14a-8(i)(8) proposal to end the practice of allowing companies to exclude shareholder proposals relating to director elections. Our guess is that the SEC will not act on this proposal separate from the 14a-11 proposal for fear of enraging those in favor of a-11 since that might look like that is all the SEC is willing to do in the access area.

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In early October, the SEC issued a press release announcing that it's giving smaller companies (i.e., nonaccelerated filers) an additional six-month deferral to produce the long-awaited auditor attestations under Section 404(b) of Sarbanes-Oxley. So this latest extension pushes back the deadline from years ending after December 15, 2009 to years ending after June 15, 2010. (Remember that smaller companies have already been required to include a Section 404(a) management's report on internal control in their annual reports.)

In mid-October, we polled members as to whether they thought that the SEC's 6th - and claimed "final" - delay in having smaller companies provide auditor attestations would stick. The poll results were:

• 50% said SEC would not further delay the deadline
• 22% said the SEC would further delay it without being forced to
• 12% said Congress would force the SEC to delay it
• 16% said "what me worry?"

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As noted in this NY Times article, Rep. Paul Kanjorski, Chair of the House of Representatives' Capital Markets Subcommittee, released a series of three draft bills in early October. The Investor Protection Act would overhaul the SEC's Division of Enforcement (much of the bill falls in line with what the Obama Administration proposed over the summer, with a few exceptions). The Private Fund Investment Advisers Registration Act would require the registration of all hedge fund and private equity managers and mandate certain recordkeeping and disclosure requirements. The Federal Insurance Office Act deals with insurance company issues.

Regarding the SEC's enforcement program, the bill would:

• Establish a whistleblower fund
• Dramatically increase SEC budget nearly two-fold over five years
• Close various statutory enforcement gaps (e.g., penalties in c&d proceedings, nationwide service of process, etc.)
• Expand access by SEC to grand jury materials
• Impose a deadline on SEC to complete exams and investigations within 6 months (or 1 year for "complex" matters)

Other types of provisions include:

• Give the SEC authority to reduce the disclosure time frame for beneficial ownership and short swing profits reporting to less than 10 days
• Impose fees on registered investment advisers
• Establish consistent duties for brokers, dealers and investments advisers in connection with retail investors
• Require pre-sale disclosure regarding investment company shares

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In late September, the WSJ ran an article about how some boards were rejecting resignations by directors after they failed to achieve a majority vote "for" at an annual shareholders meeting.

A day later, Delaware Vice Chancellor Noble held - in City of Westland Police v. Axcelis Technologies - that, among other things, if a company adopts a plurality-plus voting policy (i.e., Pfizer-style) and several directors do not receive a majority of the vote in the election, the board's subsequent rejection of the directors' resignation letters is not, by itself, enough to serve as a credible basis of wrongdoing in a books and records request brought under Section 220 of the Delaware General Corporation Law. We imagine this type of issue will become more common as withhold vote campaigns continue to gain traction. Fyi, Professor Jay Brown blogged about this case in "The Race to the Bottom" Blog.

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In early October, Broadridge filed their proxy statement, which reveals the company's intention to hold an electronic-only shareholders' meeting on November 18th. Just a few weeks ago, Broc blogged about Herman Miller's similar plans, as well as covered traditional objections to foregoing a physical meeting.

Unlike Herman Miller though (which will allow voting during the meeting via fax only), Broadridge will allow live voting online during the annual meeting (like Intel recently did, as Broc blogged about in this first-hand report).

As noted on page 8 of its proxy statement, Herman Miller will allow shareholders the ability to ask questions by downloading audio software (after they have submitted their 12-digit control number from their proxy statement) if the question is deemed appropriate. Broadridge's proxy statement says that shareholders may submit questions while attending the meeting on page 7 of its proxy statement, but it's unclear how that work at this early date. The proxy statement says that instructions on how to do so are posted on its IR web page - and Broadridge's IR web page links to a "stockholder forum" and these instructions about how to participate at the meeting.

It will be interesting to see if there are any shareholder complaints over Broadridge's virtual meeting. Broc tends to doubt it considering how well its stock has performed. For companies performing well, the virtual meeting can be a real time-and-money saver - but companies need to ensure that they don't disenfranchise shareholders and allow real opportunities for them to participate and not get shut out by either a rigorous screening process or a confusing set of hurdles just to get in. As part of this "inclusive" process, Broc think companies need to post a set of FAQs and other information about how to attend and participate online.

Remember how Broc has been touting the use of an "Annual Meeting Home Page" to better campaign during meetings. This goes double for virtual meetings as part of the effort to explain to shareholders what is going on...

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• What's the background on the New York Power of Attorney law?
• What are the biggest problems from a corporate perspective?
• Are there any efforts to fix these problems?
• What should companies do in the meantime?

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•  Reid Pearson on Option Exchange Programs (10/26/09)
•  David Drake and Rhonda Brauer on More on Broker Nonvote Math (10/19/09)
•  Tom Ball on Basics of Calculating Impact of Loss of Broker Nonvotes (10/12/09)
•  Scott Winter on Split Voting (10/5/09)

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Recently, Broc blogged about the strong likelihood that Corp Fin would act on refining disclosure requirements related to environmental and climate change issues. That blog included statistics from the past proxy season regarding the growing support for ESG shareholder proposals, courtesy of RiskMetrics.

On top of this movement, the news recently has been filled with companies leaving the US Chamber of Commerce due to the Chamber's position on climate change (egs. Apple, Exelon, PG&E, PNM Resources, Duke Energy and Nike). We may soon see more of these departures - or at least companies publicly distancing themselves from the Chamber which is now in attack mode on climate, health care reform and financial reforms.

As noted in this press release, letters were just sent to 14 large companies from a group of 43 investors and investment-focused organizations - representing over $16 billion in assets under management - urging the companies to "end the 'glaring contradiction' between their own policies and the U.S. Chamber of Commerce's and National Association of Manufacturers' positions on pending climate legislation. Each of the companies has publicly stated that it supports action on climate change, which the Chamber and NAM strongly oppose." And Change-to-Win released a scathing report recently about how the Chamber's leader, Tom Donohue, has hijacked the Chamber's agenda.

Recently, a bunch of the mass media outlets were tricked into reporting that the Chamber had reversed its climate change stance. And the Washington Post reports how President Obama has reduced the clout that the Chamber has in DC.

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• How to Respond to a Stocklist Demand
• How to Scrub Your Bylaws Ahead of Proxy Access: Considerations for Delaware Corporations
• A Practical Primer: How to Tabulate and Report Voting Results
• "Practice Points" on Reporting Voting Results
• An Insider's Perspective: How to Avoid a Yahoo-Like Tabulation Nightmare
• The Growing Importance of "Just Vote No" Campaigns: Analysis and Takeaways

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• More Meltdown Fallout--Going Concern and Other Out-of-the-Ordinary Audit Reports in SEC Filings
• Omitting Schedules from a Filed Merger Agreement--The Merrill Lynch Bonuses
• Filing an Acquired Company's Post-§15(d) Suspension 10-K--EDGAR Technicalities
• Discussion at ABA of Risdall's Reg D Integration Holding
• A Few Thoughts on FASB's Recent Codification of Accounting Principles
• FAS 5 Now Subtopic 450-20--Impact on Audit Letters?
• Expert Consent Required For Reference to Consultant, Etc.?--New CDI
• New/Revised CDIs Provide More Flexibility for Selling Security Holder Registration

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• Secular Trusts, Distributions and Other Compensation Planning Opportunities in Anticipation of Potential Tax Increases
• Deferral vs. Acceleration of Income
• Common Acceleration Strategies
• Termination of Non-Qualified Deferred Compensation Plans
• Current Employer Funding Using a Secular Trust
• Roth IRA Conversions and Rollovers in 2010
• 3121(v) Employment Tax Election for SERPs
• Preparing Now For IFRS 2
• Option Pricing Model
• Awards with Graded Vesting
• More Granular Option Valuations
• Accounting for Payroll Taxes
• Share Withholding

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At the SEC, Lori Schock was named Director of the Office of Investor Education and Advocacy. Barry Walters was named Chief Freedom of Information Act and Privacy Act Officer.

In mid-October, the SEC announced that Adam Storch had been lured out of Goldman Sachs to fill the newly-created position of Managing Executive in the SEC's Division of Enforcement. As noted in the SEC's press release:

Mr. Storch will be responsible for project management and workflow for various infrastructure and operational aspects of the Division, including budget, information technology, and administrative services. In addition, he will oversee the workflow and process associated with the collection and distribution of Fair Funds to harmed investors. Along with Lorin Reisner, the Deputy Director of the Division of Enforcement, Mr. Storch will supervise the Office of Market Intelligence, improving the collection, analysis, risk-weighing, triage, referral, and monitoring of the hundreds of thousands of tips, complaints and referrals that the agency receives each year.

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• NASPP's "17th Annual NASPP Conference" - San Francisco (11/10-12)
• TheCorporateCounsel.net and CompensationStandards.com's "4th Annual Proxy Disclosure Conference" & "6th Annual Executive Compensation Conference" - San Francisco and Video Webcast (11/9-10)
• TheCorporateCounsel.net's webcast - "Ask the Experts: Prepping for a Wild Proxy Season" (11/18)
• DealLawyers.com's webcast - "Ask the Experts: Schedule 13D and Schedule 13G Issues" (12/8)
• NASPP.com's webcast - "Ask the Experts: Tax Reporting for Stock Compensation"(12/19)
• TheCorporateCounsel.net's webcast - "ESG Disclosures: Environmental, Climate Change, Social Responsibilities" (1/14)
• TheCorporateCounsel.net's webcast - "Pat McGurn's Forecast for 2010 Proxy Season: Wild and Woolly" (1/21)
• CompensationStandards.com's webcast - "The Latest Developments: Your Upcoming Proxy Disclosures - What You Need to Do Now!" (1/27)
• Section16.net and >Naspp.com's webcast - "Alan Dye on the Latest Section 16 Developments" (1/28)
• TheCorporateCounsel.net's webcast - "How to Implement E-Proxy in Year Three" (2/2)
• DealLawyers.com<'s webcast - "The Latest on Fairness Opinions" (2/3)
• Northwestern Law's "48th Annual Corporate Counsel Institute" - December 3-4 (San Francisco)
• SEC Institute's "25th Annual National SEC Reporting Conference ," November 16-17 (Washington, DC); November 19-20 (San Diego); December 14-15 (San Francisco); December 17-18 (New York City)
• ABA's "Federal Regulation of Securities Committee's Fall Meeting," (11/20-21) in DC

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Among other new additions, during the last month we have:
·  Held the webcast - "The NYSE Speaks '09: Latest Developments and Interpretations" (10/7) for TheCorporateCounsel.net members.
·  Interviewed a number of experts for Inside Track on TheCorporateCounsel.net and DealLawyers.com, including:

• Reid Pearson on Option Exchange Programs (10/26/09)
• Maureen Sladek on Handling New York's New Power of Attorney (10/23/09)
• David Drake and Rhonda Brauer on More on Broker Nonvote Math (10/19/09)
• Steven Davidoff on Private Equity and Dealmaking (10/15/09)
• Abe Wischnia and Jnyaneshwar Prabhu on Starting a Corporate E-Forum (10/13/09)
• Tom Ball on Basics of Calculating Impact of Loss of Broker Nonvotes (10/12/09)
• Scott Winter on Split Voting (10/5/09)
• Larry Bard on Impact of FASB's Codification on SEC Disclosures (10/1/09)

·  Posted new survey results on Board Committees Interacting with Full Board
·  Posted tons of law firm memos on:

• SEC's Proposals to Amend Mandatory E-Proxy
• SEC's Credit Ratings Disclosure Proposals
• Federal Reserve's Proposed Sound Compensation Guidelines

·  Posted the following:

• Cleary Gottlieb's "Communication with Financial Analysts and Related Disclosure"
• Cahill Gordon's "Fair Value Accounting Developments"
• Gibson Dunn's "Considerations for Directors in Current Environment"

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Please let us know what you like - and don't like - so we can tailor TheCorporateCounsel.net to be more of a hands-on resource for you and your colleagues.

Because we view TheCorporateCounsel.net as a "community" site, let us know if you would like to contribute content to our site. E-mail comments, suggestions and other input to broc.romanek@thecorporatecounsel.net.


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