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On Wednesday of next week the Securities and Exchange Commission will hold an open meeting to finally consider:

  • adopting the amendments (first proposed in May 2011) to disqualify securities offerings involving certain “felons and other ‘bad actors’” from reliance on Rule 506 of Regulation D, as required by Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Commission also plans to propose new amendments to Regulation D, Form D and Rule 156 under the Securities Act which are intended to enhance its ability to evaluate changes in the market and address the development of practices in Rule 506 offerings

It looks like Wednesday’s going to be a busy day …

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The New Director of Division of Corporation Finance

Yesterday the Securities and Exchange Commission announced the naming of Keith F. Higgins as director of the Commission’s Division of Corporation Finance.

Higgins was a partner in the Boston office of Ropes & Gray LLP, where he advised public companies regarding securities offerings, mergers and acquisitions, compliance and corporate governance, and underwriters regarding initial and other public offerings.

Higgins will replace Lona Nallengara, who has served as acting director since Meredith Cross’ departure in December 2012. Nallengara will assume the role of the Commission’s chief of staff.

Pressure Continues to Implement the JOBS Act 

Also yesterday, the House Financial Services Committee announced that the House of Representatives passed of a bill by a vote of 416 to 6 that directs the Commission to finalize rules implementing the provisions of the JOBS Act related to “Regulation A+” by October 31, 2013.

Of course, the bill would still have to make its way through the Senate and be signed into law before the deadline were to take effect (for what it’s worth, govtrack.us currently gives the bill a 15% chance of being enacted).

The Washington Post has a nice short piece summing up some of the current regulatory tensions facing Mary Jo White, who is scheduled to testify before the Financial Services Committee for a second time this morning on the subject of the Commission’s 2014 budget request (the Commission is seeking a 27% budgetary increase for fiscal year 2014, which would be funded entirely out of fees collected by the Commission on securities transactions).

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Mary Jo White’s Senate Confirmation Hearing Set for Today

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At 10:00 AM the Senate Banking Committee will hold a hearing (which you can watch here) to consider the nominations of Richard Cordray as Director of the Consumer Financial Protection Bureau and Mary Jo White as Chairman of the Securities and Exchange Commission.

It’s generally excepted that Mary Jo While will be confirmed later this month. Below is a roundup of some of the more recent coverage regarding her nomination and prepared testimony for today’s hearing:

SEC nominee White to tackle questions on her work for NFL, banks (Reuters)

SEC nominee White promises “unrelenting” enforcement (Reuters)

SEC nominee Mary Jo White to take hard line on Wall Street (WaPo)

Nominee for S.E.C. Chief Pledges to Keep Focus on Enforcement (Dealbook)

SEC nominee Mary Jo White unlikely to face much resistance from Senate (WaPo)

US SEC nominee White pledges to complete rulemaking if confirmed (Reuters)

Mary Jo White to Focus on Fiduciary Issue at SEC (AdvisorOne)

Meanwhile, as reported by ReutersDealbook and InvestmentNews yesterday, former SEC Chairman Mary Shapiro has been nominated to the serve on the board of directors of General Electric Co. The shareholder vote on director nominees, among other things, will take place at GE’s annual meeting to be held on April 24, 2013.

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The New Nasdaq and NYSE Compensation Committee Listing Standards

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Over the next week or so I’ll hopefully be catching up on a few things that I haven’t been able to get to from the last several weeks, the first being the new Nasdaq and NYSE compensation committee listing standards:

By way of background, Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Securities Exchange Act of 1934 by adding new Section 10C which requires that the Securities and Exchange Commission adopt rules directing the national securities exchanges to prohibit the listing of a company’s equity securities if that company does not comply with certain compensation committee and compensation adviser requirements. To implement Section 10C, the Commission adopted new Rule 10C-1 and amended Item 407 of Regulation S-K. Rule 10C-1 requires that the national securities exchanges adopt listing rules to effectuate the requirements of Section 10C. Each of the NYSE and Nasdaq filed proposed rule changes on September 25, 2012, and thereafter filed amendments to their proposed rule changes.

Last month, on January 11, 2013, the Commission issued orders approving the NYSE and Nasdaq rule changes, as amended, on an accelerated basis. Below is a comparative summary of the rules:

   

NYSE

 

Nasdaq

General Requirements Listed companies must have a compensation committee composed entirely of independent directors.

 

 

Listed companies must have, and certify that they have and will continue to have, a standing compensation committee composed of at least two members each of whom must be independent directors.
Compensation Committee Charter The compensation committee must adopt a written charter that addresses:

(1) the committee’s purpose and responsibilities, which, at a minimum, must be to have direct responsibility to:

(A) review and approve corporate goals and objectives relevant to the chief executive officer’s compensation, evaluate the chief executive officer’s performance in light of those goals and objectives, and, either as a committee or together with the other independent directors (as directed by the board), determine and approve the chief executive officer’s compensation level based on this evaluation;

(B) make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval; and

(C) prepare the compensation committee disclosures required by Regulation S-K;

(2) an annual performance evaluation of the compensation committee;

(3) the committee’s rights and responsibilities related to compensation  advisers, including that:

(A) the committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser;

(B) the committee be directly responsible for the appointment, compensation and oversight of the work of any compensation adviser retained;

(C) the company must provide for appropriate funding, as determined by the committee, for payment of reasonable compensation to a compensation adviser retained by the committee;

(D) the committee may select a compensation adviser only after taking into consideration, all factors relevant to that person’s independence from management, including the
following:

(i) other services provided to the company by the compensation adviser’s employer;

(ii) the fees received from the company by the compensation adviser’s employer as a percentage of such employer’s total revenues;

(iii) the policies and procedures of the compensation adviser’s employer that are designed to prevent conflicts of interest;

(iv) any business or personal relationship of the compensation adviser with a member of the compensation committee;

(v) any stock of the company owned by the compensation adviser; and

(vi) any business or personal relationship of the compensation adviser or the compensation adviser’s employer with an executive officer of the company.

The compensation committee must adopt a written charter and review and assess the adequacy of that charter on an annual basis.

The compensation committee charter must specify:

(1) the scope of the committee’s responsibilities and how it carries those responsibilities out, including structure, processes and membership requirements;

(2) the committee’s responsibility for determining or recommending executive compensation;

(3) that the chief executive officer may not be present during voting or deliberation on his compensation; and

(4) the committee’s specific responsibilities and authorities related to compensation advisers, including that:

(A) the committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser;

(B) the committee be directly responsible for the appointment, compensation and oversight of any compensation consultant, independent legal counsel and other adviser retained by the compensation committee;

(C) the company must provide appropriate funding for payment of reasonable compensation, as determined by the compensation committee;and

(D) the committee may select, or receive advice from, a compensation adviser, other than with respect to in-house legal counsel, only after taking into consideration the following factors:

(i) other services provided to the company by the compensation adviser’s employer;

(ii) the fees received from the company by the compensation adviser’s employer as a percentage of such employer’s total revenues;

(iii) the policies and procedures of the compensation adviser’s employer that are designed to prevent conflicts of interest;

(iv) any business or personal relationship of the compensation adviser with a member of the compensation committee;

(v) any stock of the company owned by the compensation adviser; and

(vi) any business or personal relationship of the compensation adviser or the compensation adviser’s employer with an executive officer of the company.

Director Independence  Compensation committee members must be  independent under the general board independence requirements (Listing Standard 303A.02).

In addition, in affirmatively determining the independence of a director who will serve on the compensation committee, a company’s board must consider all factors specifically relevant to whether the director has a relationship to the company which is material to the director’s ability to be independent from management in connection with the duties of a committee member, including, without limitation:

(1) the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the company; and

(2) whether the director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.

Compensation committee members must be  independent under the general board independence requirements (Listing Rule 5605(a)(2)) and not accept, directly or indirectly, any consulting, advisory or other compensatory fee from the company or a subsidiary of the company.

The prohibition on compensatory fees excludes fees received as a member of the compensation committee itself and fixed fees received under a retirement plan for prior service to the company.

In addition, in determining whether a director is eligible to serve on the compensation committee, a company’s board also must consider the whether the director has affiliate relationships and whether such affiliations would impair the director’s judgment as a member of the compensation committee.

Under exceptional and limited circumstances,  where there are at least three members of a compensation committee, one may be a non-independent director who is not an executive officer, family member of an executive officer or employee, if the board determines that appointment of the non-independent director is in the best interests of the company and its shareholders. A non-independent director appointed under this exception may not serve longer than two years. In addition the company will be required to make certain disclosures either through its website or in its proxy statement related to the appointment.

Adviser Independence It is not necessary that a compensation adviser actually be independent, only that the compensation committee conduct and independence assessment taking into consideration the independence factors enumerated in the committee’s charter, before selecting, or receiving advice from, a compensation adviser.

However, no independence assessment is required in the case of in-house counsel or a compensation adviser who’s role is limited to:

(1) consulting on any broad-based plan that does not discriminate in scope, terms or operation, in favor executive officers or directors and is generally available to all salaried employees; and/or

(2) providing information that either is not customized for the company or that is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice.

It is not necessary that a compensation adviser actually be independent, only that the compensation committee conduct and independence assessment taking into consideration the independence factors enumerated in the committee’s charter, before selecting, or receiving advice from, a compensation adviser.

However, no independence assessment is required in the case of in-house counsel or a compensation adviser who’s role is limited to:

(1) consulting on any broad-based plan that does not discriminate in scope, terms or operation, in favor executive officers or directors and is generally available to all salaried employees; and/or

(2) providing information that either is not customized for the company or that is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice.

Adviser Recommendations The compensation committee will not be required to implement or act consistently with the advice or recommendations of any compensation adviser, but rather shall retain the ability and obligation to exercise its own judgement in fulfillment of its duties.

 

The compensation committee will not be required to implement or act consistently with the advice or recommendations of any compensation adviser, but rather shall retain the ability and obligation to exercise its own judgement in fulfillment of its duties.
Cure Period If a company fails to meet the compensation committee requirements because a member ceases to be independent for reasons outside of that member’s reasonable control, that person, with prompt notice to NYSE and only so long as a majority of the compensation committee continues to be independent, may remain a compensation committee member until the earlier of:

(1) the next annual shareholders’ meeting; or

(2) one year from the occurrence of the event that caused the member to be no longer independent.

If a company fails to meet the compensation committee requirements because of a vacancy on the committee or because a member ceases to be independent for reasons outside of that member’s reasonable control, the company shall regain compliance by the earlier of:

(1) the next annual shareholders’ meeting; or

(2) one year from the occurrence of the event that caused the noncompliance.

However, if the annual shareholders’ meeting occurs no later than 180 days following the event that caused noncompliance, the company will instead have 180 days to regain compliance. A company relying on the cure period must immediately notify Nasdaq upon learning of its noncompliance.

 

Smaller Reporting Companies Smaller reporting companies are required to have a compensation committee composed entirely of independent directors.However, smaller reporting companies are exempt from compliance with the additional independence requirements specific to compensation committee membership, as well as from the requirements that the compensation committee to conduct an independence assessment prior to selecting a compensation adviser. Smaller reporting companies are required to have, and certify that they will continue to have, a compensation committee composed of at least two independent directors and to adopt, and certify that they have adopted, a formal written charter (or board resolution in place of a charter) specifying:

(1) the scope of the committee’s responsibilities and how it carries those responsibilities out, including structure, processes and membership requirements;

(2) the committee’s responsibility for determining or recommending executive compensation; and

(3) that the chief executive officer may not be present during voting or deliberation on his compensation.

Smaller reporting companies are exempt from the remaining compensation committee requirements, including the requirements related to specific compensation committee responsibilities and authority.

Smaller reporting companies may avail themselves of the exception for non-independent directors under exceptional and limited circumstances and the cure period.

 

Foreign Private Issuers Foreign private issuers are permitted to follow home country practice in lieu of NYSE’s compensation committee listing standards but must still disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under NYSE listing standards. Foreign private issuers that follow home country practices in lieu of Nasdaq’s compensation committee listing standards must discloses in their annual report:

(1) the reasons they do not have an independent compensation committee;

(2) the requirements they do not follow; and

(3) the home country practices followed in lieu thereof.

 

Transition Period Companies must comply with the requirements related to compensation committee’s authority to retain and compensate advisers and responsibility to consider certain independence factors prior to selecting advisers beginning on July 1, 2013.

Companies will have until the earlier of:

(1) their first annual meeting after January 15, 2014; or

(2) October 31, 2014,

to comply with the independence requirements specific to compensation committee service.

Companies must comply with the requirements related to compensation committee responsibilities and authority by July 1, 2013.

If a company does not have a standing compensation committee by July 1, 2013, then the independent directors who determine, or recommend to the board for determination, executive compensation must comply with the requirements related to responsibilities and authority.

Companies must comply with the remaining requirements related to compensation committees, including having a written compensation committee charter, by the earlier of:

(1) their first annual meeting after January 15, 2014; or

(2) October 31, 2014.

Companies must certify their compliance with the compensation committee rules to Nasdaq no later than 30 days after the final implementation deadline.

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FINRA Releases Interim Form for Crowdfunding Portals

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Yesterday the Financial Industry Regulatory Authority (FINRA) announced that it would begin accepting information on a voluntary basis from prospective crowdfunding portals. FINRA will use the information to better understand the funding portal community and to develop specific funding portal rules.

Prospective crowdfunding portals are encouraged to submit an Interim Form for Funding Portals (“IFFP”) as well as any additional information or documentation that might be helpful to FINRA at: fundingportals@finra.org. FINRA will treat the information submitted on a confidential basis.

The IFFP covers general business information, ownership structure, sources of funding , information about management, compensation and a prospective crowdfunding portal’s business model.

Once the Securities and Exchange Commission and FINRA adopt final crowdfunding portal rules any prospective funding portals that file an IFFP will still have to file an application to become a FINRA member.

(Download File)

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