USA: adoption of IFRS - roadmap to be published

The SEC has announced that it will shortly publish for consultation a proposed roadmap for the adoption of International Financial Reporting Standards (IFRS) by US issuers beginning in 2014. The SEC notes in its press release:

Currently, U.S. issuers use U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers in their filings with the Commission. The increasing integration of the world's capital markets, which has resulted in two-thirds of U.S. investors owning securities issued by foreign companies that report their financial information using IFRS, has made the establishment of a single set of high quality accounting standards a matter of growing importance. A common accounting language around the world could give investors greater comparability and greater confidence in the transparency of financial reporting worldwide".

To watch a statement by SEC Chairman Cox, outlining the above, click here (for QuickTime) or here (for Windows Media Player). The roadmap has not yet been published on the SEC website but further information is available in this report in the Wall Street Journal. 

Note:

[a] A useful map, indicating those countries where IFRSs have been adopted, is available on the IASB website here. 

USA: improving financial reporting for investors

The SEC's Advisory Committee on Improvements to Financial Reporting has published its final report. The report makes recommendations within the following five areas:

• Increasing the usefulness of information in SEC filings
  
• Enhancing the accounting standards-setting process
  
• Improving the substantive design of new standards
  
• Delineating authoritative interpretive guidance
  
• Clarifying guidance on financial restatements and accounting judgments
  

For further information, including a video commentary provided by SEC Chairman Cox and Advisory Committee Chairman Pozen, click here.

USA: the SEC and corporate governance

The chairman of the Securities and Exchange Commission, Mary L. Schapiro, delivered a speech earlier this month at the National Conference of the Society of Corporate Secretaries and Governance Professionals: see here. One part of her speech concentrated on effective corporate governance and in this regard the chairman observed:

... we believe investors' interests are served when they can participate productively in the governance of the companies they own. Let me be clear: the SEC's job is not to define for the market what constitutes 'good' or 'bad' governance, in a one-size-fits-all approach. Rather, the Commission's job is to ensure that our rules support effective communication and accountability among the triad of governance participants: shareholders, as the owners of the company; directors, whom the owners elect to oversee management; and executives, who manage the company day-to-day.

But meaningful communication means the spectrum of viewpoints is represented, and all of the company's owners have access to the information they need to persuade, or to be persuaded. Investors should have detailed information about directors' and nominees' qualifications; about compensation consultants' fees and conflicts; and about the relationship between a company's overall compensation policies and its risk profile. Rules requiring greater disclosure resulted—with some exceptions—in filings that were significantly more informative this year. They gave investors not only greater insight into the qualifications of board candidates, but a better understanding of how candidates' skills and experience suit the needs of their companies".

USA: Delaware - Supreme Court opinion in CA Inc v AFSCME

The Delaware Supreme Court has given its opinion in CA Inc. v AFSCME Employees Pension Plan (No. 329, 2008). The opinion has been keenly anticipated because of the issues it raises about the management of companies and the role of the directors and shareholders.  AFSCME, a stockholder in CA Inc. ("the company"), submitted a bylaw for inclusion in the company's proxy materials for its 2008 annual stockholder meeting. The bylaw, if accepted, would require the board of directors to reimburse a stockholder (or group of stockholders) the reasonable expenses incurred in nominating one or more candidates in a contested election of the board of directors. 

The company's board decided to exclude the proposed bylaw from the proxy materials. The SEC was informed and a request was made for a "no action" letter (one indicating that enforcement action would not be taken against the company for its exclusion of the proposed bylaw). The company argued that the proposed bylaw was not a proper subject for a stockholder action and if implemented would breach Delaware General Corporation Law (DGCL). The AFSCME obtained legal advice taking the opposition position. The SEC decided to ask the Delaware Supreme Court for its opinion - the first time it has done so under new clarification rules in the Delaware Constitution (Article IV, §11(8), about which see here) - and posed two questions.

The first question was whether the AFSCME proposal was a proper subject for action by shareholders under Delaware law. The court held that it was and observed:

The shareholders of a Delaware corporation have the right “to participate in selecting the contestants” for election to the board. The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election. The Bylaw would accomplish that by committing the corporation to reimburse the election expenses of shareholders whose candidates are successfully elected. That the implementation of that proposal would require the expenditure of corporate funds will not, in and of itself, make such a bylaw an improper subject matter for shareholder action".

The second question for the court was whether the AFSCME Proposal, if adopted, would cause the company to violate any Delaware law to which it was subject. The court held that it would. In reaching this decision, the court considered the proposed bylaw in the abstract and stated that it had to consider:

... any possible circumstance under which a board of directors might be required to act. Under at least one such hypothetical, the board of directors would breach their fiduciary duties if they complied with the Bylaw. Accordingly, we conclude that the Bylaw, as drafted, would violate the prohibition, which our decisions have derived from Section 141(a), against contractual arrangements that commit the board of directors to a course of action that would preclude them from fully discharging their fiduciary duties to the corporation and its shareholders".

Unsurprisingly commentators have been quick to describe the decision as a further example of the director-centric nature of Delaware law but the court's opinion is rather more nuanced than this description suggests.  For further discussion see:

Harvard Corporate Governance blog | Wall Street Journal article | Professor Bainbridge's blog | Risk & Governance Blog | Delaware Corporate and Commercial Litigation Blog (with links to other blog posts) | 

USA: credit rating agencies - SEC report

Some more on credit rating agencies, following the developments noted in the previous post. The USA's Securities and Exchange Commission has published a "Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies". In the associated press release the SEC noted:

The SEC staff's examinations found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002. The examinations uncovered that none of the rating agencies examined had specific written comprehensive procedures for rating RMBS and CDOs. Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately"

For further information see:
SEC Report | SEC press release | SEC proposals: June 11 and July 1 |

USA: IFRS and US GAAP convergence

Following the publication of a joint statement (here, pdf) by the IASB and FASB in connection with their standards convergence work, the chairmain of the Securities and Exchange Commission, Mary Shiparo, has announced (see here):

I foresee no reason that the adjustment to the targeted timeline for certain joint projects should impact the staff's analyses under the Work Plan issued in February 2010, particularly when that adjustment is designed to enhance the quality of the standards. Indeed, focused efforts on those standards the boards consider highest priority for the improvement of U.S. GAAP and IFRS will facilitate the staff's analyses. Accordingly, I am confident that we continue to be on schedule for a Commission determination in 2011 about whether to incorporate IFRS into the financial reporting system for U.S. issuers".

USA: SEC launches 21st century disclosure initiative

The US Securities and Exchange Commission has launched a review of the way in which it collects and discloses information about regulated entities.  The SEC's Chairman, Christopher Cox, stated:

On the 75th anniversary of the SEC, with so much new technology available to improve the quality of information for investors as well as the way investors acquire it, we're initiating a broad, introspective look at our business model. What hasn't changed in 75 years is the importance of full disclosure — sunlight remains the best disinfectant for problems in our capital markets. We'll be examining how to improve the way disclosure works, including tapping the full potential of today's technology and integrating it seamlessly into our regulatory approach. That could mean fewer confusing forms, and more useful information at investors' fingertips in a form they can really use"

For further information, click here. 

NB: The UK's Financial Services Authority embarked on a similar enquiry last month with the publication of a discussion paper titled Transparency as a Regulatory Tool. The purpose of the discussion paper was to start a debate about the way in which transparency can best be used to meet the FSA's regulatory objectives. For further information, click here.

USA: facilitating shareholder nominated directors - SEC extends consultation

The Securities and Exchange Commission has extended the consultation period in respect of its proposed changes to the federal proxy rules to facilitate shareholder nominated directors. Submissions so far received have been published here.

USA: SEC adopts enhanced disclosure rules

The Securities and Exchange Commission yesterday approved amendments which will require public companies to make greater disclosure regarding: remuneration policies and practices that present material risks to the company; stock and option awards of executives and directors; director and nominee qualifications; board structure; the board’s role in risk oversight; and potential conflicts of interest of remuneration consultants advising companies and their boards.

The amendments will apply to proxy and information statements, annual reports and registration statements under the Securities Exchange Act (1934) and registration statements under the Securities Act (1933) as well as the Investment Company Act (1940). The new rules will be effective from 28 February 2010. See here for a more detailed overview of the new rules.

ECGI research newsletter: winter 2009

The latest edition of the ECGI research newsletter has been published: see here (pdf). The newsletter focuses on 'Government in Corporate Governance' and draws heavily on material from the recent Transatlantic Corporate Governance Dialogue Conference at the Securities and Exchange Commission in Washington DC (video recordings from the conference sessions are available here). 

A lecture with Bob Monks

Robert A.G. Monks - better known as Bob Monks - recently lectured on Harvard Law School's Corporate Governance Program. His subject was corporate governance past, present and future. Mr Monks' lecture (including his answers to questions) can be watched here (.mov format) and the paper accompanying his lecture is available here.

USA: Restoring American Financial Stability - discussion draft published by Senate Banking Committee

The United States Senate Committee on Banking, Housing and Urban Affairs has published a discussion draft titled Restoring American Financial Stability. The Committee advocates, inter alia, the creation of a single, federal bank regulator and providing shareholders with a non-binding vote over executive pay. Some of what the Committee proposes is already being pursued by the SEC, including making it easier for shareholders to nominate directors. A summary of the discussion draft is available here (pdf) and the Committee's press release is available here.

UK & US: Financial Services Regulatory Reform

Reform of the regulatory framework for financial services is being considered in the UK and USA. In the UK, the Financial Services Authority has published the results of its internal review concerning the manner in which it regulated Northern Rock. This makes many recommendations for improving the way in which the FSA supervises firms. These recommendations are in addition to those being considered as part of the review of the way in which the tripartite authorities - the Bank of England, the FSA and Bank of England - cooperate to ensure financial stability.

In the US, SEC Chairman Cox has stated (in press release 2008-53, March 29):

"Recent events have provided further evidence, if more were needed, that financial services regulation in the United States needs to be better integrated among fewer agencies, with clearer lines of responsibility. Just as systemic risk cannot be neatly parceled along outdated regulatory lines, the overarching objective of investor protection can't be fully achieved if it fails to encompass derivatives, insurance, and new instruments that straddle today's regulatory divides. The proposed consolidation of responsibility for investor protection and the regulation of financial products deserves serious consideration as a way to better address the realities of today's markets".

Postscript (25 April 2008): The US Treasury's "Blueprint for a modernised financial regulatory structure" is available here.

Postscript (28 April 2008): The FSA has now published its internal report titled "The supervision of Northern Rock: A lessons learned review".

USA: shareholder voting - SEC chairman speech

The SEC chairman, Mary Schapiro, delivered a speech yesterday at the Practising Law Institute's 41st Annual Institute on Securities Regulation. Her focus was shareholder voting and she provided a review of recent and proposed SEC action in this regard. She began her overview of proposed action with the following observations: 

The proxy statement is crucial to our system of corporate governance. It is the only communication a company makes that is specifically addressed to, and intended for, shareholders. It is where shareholders discover who the nominees are for board elections. It is where shareholders can submit proposals on important company matters, including governance, for consideration by their fellow shareholders. In other words, it is where shareholders can formally and regularly participate in the governance of the corporation they own.

With over 800 billion shares being voted every year at over 7,000 company meetings, it is imperative that our proxy voting process work — starting with the quality of proxy disclosure and continuing through to the accuracy of the annual meeting voting results. That is why we are undertaking a series of initiatives related to the fundamental goal of enhancing the system through which shareholders exercise their franchise. Many of these are admittedly controversial. In fact, they raise difficult legal, philosophical and logistical issues that have derailed previous efforts at reform. But, time has not made these issues go away, and the failure to reform the shareholder voting process in the past has, in my view, affected company and board responsiveness to shareholder concerns".

USA: Section 404 of the Sarbanes-Oxley Act 2002 and small public companies

The Securities and Exchange Commission has announced the extension of Section 404 of the Sarbanes-Oxley Act (2002) to small public companies in respect of annual reports ending on or after June 15, 2010. Such companies and their auditors will therefore be required to report on the effectiveness of internal controls. Further information is available here.

US: SEC News

The SEC has launched “Financial Explorer”, which, according to SEC Chairman Cox, will “help investors quickly and easily analyze financial results of public companies. Financial Explorer paints the picture of corporate financial performance with diagrams and charts, using financial information provided to the SEC as “interactive data” in eXtensible Business Reporting Language (XBRL)”. For further information click here.

SEC has voted to bring forward amendments to modernize foreign company disclosure requirements, including the elimination of paper submissions. Chairman Cox observed: “The proposed amendments would bring our foreign company disclosure requirements into the 21st Century by eliminating any requirement for paper, and by giving investors instant access to foreign company disclosure documents electronically, in English, on the Internet”. For further information, click here.

SEC Commissioner Kathleen Casey delivered the opening speech at the ALI-ABA Conference on "Corporate Governance: The Changing Environment" (Washington, D.C., February 21). Commissioner Casey spoke about those areas of corporate governance on which the SEC is focusing: internal controls, proxy rules and executive compensation. The speech is available here.

USA: "The Race for the Bottom in Corporate Law" - Frank Easterbrook

The Virginia Law Review recently held a symposium to mark the 75th anniversary of the Securities and Exchange Commission (SEC). The keynote address, titled "The Race for the Bottom in Corporate Law", was delivered by Chief Judge Frank H. Easterbrook of the United States Court of Appeals for the Seventh Circuit. Within corporate law scholarship, Judge Easterbrook is perhaps most well known for his book The Economic Structure of Corporate Law, co-authored with Daniel Fischel (considered here).  The following outline of Judge Easterbrook's speech is taken from Virginia Law Weekly (the Virginia Law School newspaper):

The primary focus of Easterbrook’s talk was the application of Judge Ralph Winter’s hypothesis regarding broad state regulation of corporations, particularly of corporate governance. Winter had argued that increased discretion in the hands of corporate managers would, in the end, enable them to design the governance measures that investors want the most. Easterbrook pointed out that economic event studies in the last 20 years or so had confirmed this: securities prices would rise and fall depending on different structures of governance, and investors could indeed move to those forms which they found most attractive.

The national government, however, has been “hampering the market of corporate control” in recent years. Easterbrook singled out the Sarbanes-Oxley Act passed in the wake of the Enron and WorldCom scandals as the major culprit, although he also targeted the recently imposed limits on short sales and changes to the tax code. Sarbanes-Oxley, Easterbrook argued, mandated corporate governance structures that often set up an “adversarial mode of corporate governance” that made little sense for the companies forced to adopt them and were, ironically, not at all what investors wanted.

Worse, Easterbrook argued, the “national government could win a race to the bottom in a way that the states cannot,” since in “moving toward a national system of corporate governance,” corporations could not simply change to another jurisdiction’s corporate law if dissatisfied with federal requirements. Easterbrook argued that in theory there are four basic models of corporate governance, and that any one could be appropriate for a corporation at a given time. “A reduction in [this] opportunity set,” the judge concluded forcefully, “makes everyone worse off, all the time—and that’s what the Sarbannes-Oxley Act has done.” As further evidence, he noted that event studies indicated that the Act actually depressed stock prices, and that Enron was, in fact, a model corporation under the governance terms of the Act.

Easterbrook had some suggestions on what might happen as a result of the “Race to the Bottom.” He noted that many firms are “opting out” of the system by becoming private and thereby removing themselves from regulation. He also argued that the international market could supply a response to Sarbanes-Oxley, the ultimate result of which may be the flow of capital to other countries with more desirable governance regulations.

US Supreme Court rules on third party liability towards company investors

On January 25, the American Supreme Court delivered its decision in Stoneridge Investment Partners LLC v Scientific-Atlanta Inc. et al., described by the UK's Financial Times as "the most important securities case in more than a decade". The issues and the finding of the majority (5 to 3) of the Court are well described in Justice Kennedy's opening remarks:

"We consider the reach of the private right of action the Court has found implied in §10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended, 15 U. S. C. §78j(b), and SEC Rule 10b–5, 17 CFR §240.10b–5 (2007). In this suit investors alleged losses after purchasing common stock. They sought to impose liability on entities who, acting both as customers and suppliers, agreed to arrangements that allowed the investors’ company to mislead its auditor and issue a misleading financial statement affecting the stock price. We conclude the implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations. We affirm the judgment of the Court of Appeals."

The decision is available here.

For further discussion, click here and here.

USA: SEC introduces new rules and amendments governing credit rating agencies

The Securities and Exchange Commission has voted unanimously to introduce amendments designed to strengthen the regulatory framework governing credit rating agencies. For further information see: SEC factsheet | SEC press release | Amendments | SEC Chairman speech (wmv) | SEC Chairman speech (quicktime) |

UK: FSA bans short-selling of the shares of quoted financial institutions

In an attempt to promote more orderly markets, the UK's Financial Services Authority has introduced, with effect from midnight tonight, a ban on the short-selling of shares in quoted financial institutions. In addition, and with effect from 23 September, daily disclosure will be required of all net short positions in excess of 0.25% of the ordinary share capital of such companies on the previous working day. These rules are being introduced in the FSA's Code of Market Conduct and will remain in force until 16 January 2009 (although they will be reviewed in 30 days' time).  A comprehensive review on short selling will be published in January 2009. 

According to the FSA's chief executive, Hector Sants:

While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector".

Note: in the USA, the SEC has introduced further rules governing naked short-selling - click here for the SEC press release. These rules introduce a permanent ban on the abusive naked short selling of all listed stocks, described by the SEC as:

In an ordinary short sale, the short seller borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn't actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions".

Update (19 September 2008): the FSA has published the list of institutions to which the rules apply - see here.  The amendments to the Code of Market Conduct have been published here.

Update 2 (19 September 2008): the Australian Securities Exchange has announced that naked short selling will be prohibited from the opening of trading on 22 September. 

Update 3 (26 September 2008): the FSA has published FAQs here.