The SEC Has Been Busy – Take 12-16-09 For Instance

On December 16, 2009 the Securities and Exchange Commission issued not one but two press releases announcing significant measures it had approved affecting corporations and investors:  one dealing with enhanced disclosure requirements in proxy statements, and the other increasing protections for investors who place money and securities with SEC-registered investment advisers.

In the process the SEC helped reach its 2009 total of 275 press releases, equating to more than one every single business day during the year, compared to an average of less than 180 annual press releases in the seven years preceding 2006.   The agency is obviously on a mission to bolster its image post-“Great Recession” and Bernie Madoff, and that spells change – and more change.

Public companies as of 2-28-10 will have to include in their proxy statements.

  • Disclosure on how compensation policies and practices create risks that are “reasonably likely” to have a material adverse effect on the company
  • Detail about director experience, qualifications, other directorships in the past 5 years and any legal proceedings against directors in the past 10 years (versus the current five years)
  • Disclosure of whether and how the nominating committee considers “diversity” in identifying candidates for director
  • How the board is actually led, including why the Chairperson and CEO are not separated
  • The extent of the board’s role in “risk oversight” of the company
  • The value of options when they are awarded to executives instead of the current simple annual accounting charge, to better reflect compensation committee decisions with regard to these awards
  • Fees paid to compensation consultants in certain circumstances

Moreover, public companies will have to report shareholder votes a lot faster, within four days of a shareholder meeting on Form 8-K, instead of what has typically been on Form 10-Q… and often months after the meeting.

This is a pretty significant “memo” to the C-Suite and Boardrooms of Corporate America.

Regarding investor protections, the SEC pointed out that some investment advisers having access to client assets held by a regulated bank or broker-dealer have misused those assets, often covering up the crime by distributing false account statements to clients reflecting assets that do not really exist.   New rules from the SEC, effective 60 days after their publication in the Federal Register, will promote more “independent custody” and require the use of independent public accountants as third-party monitors.   Moreover, the advisor will now be subject to surprise exams and a “custody controls review” that are not required today.   The review will include a SAS-70 report describing appropriate controls in place at the custodian, tests of the operating effectiveness of those controls and the test results themselves.

The new rules also affect advisors to hedge funds and certain private funds by requiring audits and delivering applicable financial statements to fund investors.   The rules mandate that the auditor of the private fund be registered with, and be subject to regular inspection by, the Public Company Accounting Oversight Board.   All in all, the new rules should go a long way toward eliminating the shenanigans that devastated so many innocent investors in the past 18 months.

Is there more for the SEC to do?   You bet.   And some of it is urgent business.   But we like the energy and focus we have seen out of Chairperson Mary Schapiro and the Commission of late, and believe they have their priorities straight as they enter this critical new year, and decade.