42

42

In Douglas Adams’ The Hitchhiker’s Guide to the Galaxy, 42 is the number from which all meaning  could be derived.

A group of hyper-intelligent pan-dimensional beings demand to learn the answer to the Ultimate Question of Life, the Universe, and Everything from the supercomputer, Deep Thought. It takes Deep Thought 7.5 million years to compute and check the answer. The answer turns out to be 42. Unfortunately, The Ultimate Question itself is unknown.

Wolfram Alpha gives you that answer. Google gives you that answer. Bing does not give you that answer.

Are you asking the right questions? Do you know what to do with the answer?

Radical Transparency

air-new-zealand

The current buzzword in the markets is “transparency.” Companies want to be more transparent so investors, customers and partners can better understand the company. Some of this came from Enron, whose operations and financial statements were often called “opaque.”

With the growing Web 2.0 it is harder to get secrets as anyone with an internet connection can become a publisher. There are armies of “reporters” looking for the truth. Or at least saying what they believe, regardless of the factual basis.

Some companies are taking it further by making their operations and plans more open to the public. They are embracing web 2.0 to stay connected with their stakeholders. They are becoming more transparent. The Naked Corporation by Don Tapscott and David Ticoll offers an interesting perspective on this

Nobody sane strips down naked in front of their peers. Or maybe you do?

Air New Zealand’s current ad campaign is that they have “Nothing to Hide.” Maybe they took radical transparency too far?

Thanks to Mary Abraham of Above and Beyond KM for pointing out the Air Zealand videos: Why Are You Hiding?

References:

Social Media Risk & Rewards

social-media_580x1501

On September 21, 2009, in New York City I will be a speaker at Social Media: Risks & Rewards.

This comprehensive, dynamic event will explore the inherent challenges of social media and will arm you with the specific tools necessary to protect your company, your intellectual property and your reputation in today’s virtual world.  Find out how to safeguard yourself and your business through insightful sessions focused on:

  • The Social Media Sensation: Pressure to Keep up in the Digital Age
  • Exposure, Liability and Consequences of Your Business and Social Media
  • Develop your Company’s Corporate Policy for Social Media
  • Protecting your Company’s Identity in a Virtual World
  • Risks from Employees Past, Present and Future
  • Safeguarding your Company’s Intellectual Property
  • Best Practices for Social Media

Challenges from Social Media are only one inappropriate “tweet” away.  Register for this timely program today and ensure you understand the inherent perils of the market and construct the proper policies to protect your company and ensure future growth.

I will be on two panels: Develop your Company’s Corporate Policy for Social Media and Best Practices for Social Media.

There is a discount for friends and family (and blog readers). If you want to attend,  just visit the conference website at www.corpcounsel.com/socialmedia and use the code SPK for $100.00 off.

Executive Compensation, Where Everyone is Above Average

lake-wobegon

It seems like executive compensation consultants come from Lake Wobegon, where “all the women are strong, all the men are good looking, and all the children are above average.”

I think executives should be compensated for out-performing their peers. They shouldn’t be punished for a negative performance due to external forces if they still out-performed their peers. Further, they shouldn’t be rewarded for a positive performance, if they under-performed their peers.

The magic is in picking the peer group to compare. Ideally, a peer group should include companies that are similar along several characteristics (e.g., industry, size, diversification, and financial constraints). Of course matching all of those characteristics would lead to a very small group for comparison.

In an article in the Wall Street Journal, Cari Tuna points out that Tootsie Roll Industries used Kraft Foods as a peer for deciding how much to pay its executives. Tootsie had $496 million in sales and Kraft had $42.2 billion in sales.

A study by Ana Albuquerque of Boston University examined what needs to go into selecting the peer groups. She found that having the the same industry and size quartile shows the best evidence for creating a relative peer group for executive compensation. In a second study, she found that companies tend to choose peers that pay their CEOs more, which in turn translates into firms paying their CEOs more.

In their study, Michael Faulkender of the University of Maryland and Jun Yang of Indiana University came to the conclusion that “compensation committees seem to be endorsing compensation peer groups that include companies with higher CEO compensation, everything else equal, possibly because such peer companies enable justification of the high level of their CEO pay.”

You can also add into the mix that the company may not want to seen as having a CEO who is below average. If your CEO is below average, then your company may be below average.

If you’re a CEO of a public company, it’s getting harder and harder to be below average.

References:

A Flurry of Stories on Mutual Fund Fees

oakmark_logo_new

Over the last few days there has been renewed interest in the upcoming Supreme Court case that will should rule on the fees charged by mutual funds. Back in May, I published Supreme Court to Decide on Investment Company Act Case after they agreed to hear Jones v. Harris Associates, L.P. I didn’t expect much mainstream press coverage of the case until the decision comes out next winter.

Over the weekend, Wall Street Journal columnist Jason Zweig published Can the Supreme Court Undress High Fund Fees? which pointed out that this case will “hit you right in the pocket.” Then The New York Times ran Supreme Court to Hear Case on Executive Pay which portrayed the as one focused on out of control executive pay. It sounds like the press has figured out that the case could have some broad implications on the way mutual funds decide what fees to charge.

Under §36(b) of the Investment Company Act of 1940 the “the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company.”

The traditional standard was that a breach of fiduciary duty occurs when the adviser charges a fee that is “so disproportionately large” or “excessive” that it “bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.” Gartenberg v. Merrill Lynch, 694 F.2d 923 (2nd Cir. 1982)

The Jones v. Harris case starts with the claim that the fees are excessive because they far exceed those charged to independent clients. Like many investment advisers, Harris charges less for institutional clients that invest in funds similar to its Oakmark funds. The plaintiffs take the position that a fiduciary should not charge a different price to its controlled clients than it does to its independent clients.

Certainly, mutual funds rarely fire their advisers. But investors do fire the advisers by moving their money to different mutual funds and investments.The decision is likely to focus more on the procedure for setting fees than the absolute value of the fees.

It sounds like this case is getting tarted up as a blast against executive compensation. But really, its about the dense language in the Investment Company Act, fiduciary duty and compliance. Since the decision could have a broad impact on lots of peoples’ investments, it will likely get lots of coverage at the oral arguments on November 2, 2009 and whenever the decision comes out.

References:

150 Years or the Firing Squad

The Third of May by Francisco Goya
The Third of May by Francisco Goya

What is the right punishment for financial fraud?

Bernie Madoff received the maximum sentence for his charges. 150 years. His lieutenant, DiPascali, was denied bail by the judge at his hearing last week, despite an agreement between his lawyer and the prosecutors. He has a maximum sentence of 120 years. They stole billions.

Marc Dreier committed securities fraud, stealing $380 million. He got 20 years.

Du Yimin, conned more than $100 million from investors. She promised them monthly returns of up to 10 percent from investments in beauty parlors, real estate and mining businesses owned by her company. She was put in front of the firing squad.

Si Chaxian conned people out of $24 million. He said they could receive interest of up to 108%.  He got the firing squad.

You can probably guess which two fraudsters are from China. The Chinese government puts to death more people than any other country. (Although Iran and Singapore have a higher per capita rate of execution.)

Though usually reserved for violent crimes, death sentences are also applied for nonviolent offenses that involve large sums of money or are seen to threaten social order.  China’s highest court said the two frauds had “seriously damaged the country’s financial regulatory order and social stability.”

I guess this is China’s way of  instituting reform in the financial markets and preventing fraud. But is it effective? Will be talented people just avoid the financial sector for fear of death?

References:

New Compliance and Disclosure Intepretations for Regulation FD

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As part of the Updates to Compliance and Disclosure Interpretations, the SEC has published new compliance and disclosure intepretations for Regulation FD.

I found these CD&I’s particularly interesting in light of the SEC’s loss in the Cuban case. The SEC seems to be providing a better roadmap for disclosure of information.

Here are a few questions that caught my eye, with a snapshot of the answer. Go to the compliance and disclosure interpretations for Regulation FD for the full answer.

Question 101.03: Can an issuer ever review and comment on an analyst’s model privately without triggering Regulation FD’s disclosure requirements?

Answer: Yes. . .

Question 101.04: May an issuer provide material nonpublic information to analysts as long as the analysts expressly agree to maintain confidentiality until the information is public?

Answer: Yes.

Question 101.05: If an issuer gets an agreement to maintain material nonpublic information in confidence, must it also get the additional statement that the recipient agrees not to trade on the information in order to rely on the exclusion in Rule 100(b)(2)(ii) of Regulation FD?

Answer: No. An express agreement to maintain the information in confidence is sufficient. If a recipient of material nonpublic information subject to such a confidentiality agreement trades or advises others to trade, he or she could face insider trading liability.

Question 101.06: If an issuer wishes to rely on the confidentiality agreement exclusion of Regulation FD, is it sufficient to get an acknowledgment that the recipient of the material nonpublic information will not use the information in violation of the federal securities laws?

Answer: No. The recipient must expressly agree to keep the information confidential.

Question 101.09: Can an issuer disclose material nonpublic information to its employees (who may also be shareholders) without making public disclosure of the information?

Answer: Yes. Rule 100(b)(1) states that Regulation FD applies to disclosures made to “any person outside the issuer.” Regulation FD does not apply to communications of confidential information to employees of the issuer. An issuer’s officers, directors, and other employees are subject to duties of trust and confidence and face insider trading liability if they trade or tip.

Question 101.10: If an issuer has a policy that limits which senior officials are authorized to speak to persons enumerated in Rule 100(b)(1)(i) – (b)(1)(iv), will disclosures by senior officials not authorized to speak under the policy be subject to Regulation FD?

Answer: No. Selective disclosures of material nonpublic information by senior officials not authorized to speak to enumerated persons are made in breach of a duty of trust or confidence to the issuer and are not covered by Regulation FD. Such disclosures may, however, trigger liability under existing insider trading law.

Updates to Compliance and Disclosure Interpretations

sec-seal

The staff of the Securities and Exchange Commission’s Division of Corporation Finance has updated a bunch of Compliance and Disclosure Interpretations.

Here are a few questions that caught my eye, with a snapshot of the answer. Follow the question’s link for the complete answer.

There are many more new and revised questions under the Securities Act Sections, Rules and Forms, Regulation S-K, Exchange Act Sections, Section 16 and Regulation FD.

Securities Act Sections

Question 103.04: Where the offer and sale of convertible securities or warrants are being registered under the Securities Act, and such securities are convertible or exercisable within one year, must the underlying securities be registered at that time?

Answer: Yes. . . .

Question 139.28: Must offers and sales be suspended during the waiting period of a post-effective amendment to an effective registration statement?

Answer: Offers and sales must be suspended if the post-effective amendment is filed for the purpose of a Section 10(a)(3) amendment and the prospectus is already stale for Section 10(a)(3) purposes. . . .

Securities Act Rules

Question 212.05: Can a registration statement under Rule 415 be declared effective without an opinion of counsel as to the legality of the securities being issued when no immediate sales are contemplated?

Answer: No. However, . . .

Securities Act Forms

Question 130.14: The Item-by-Item instructions for Item 7 of Form D indicate that an issuer must enter the date of the first sale of securities in the offering if the issuer is filing a “new notice.” If an issuer is filing an amendment to a Form D filing, must the issuer provide current information about the date of first sale in the amendment?

Answer: Yes. Rule 503(a)(4) provides that an issuer that files an amendment must provide current information in response to all requirements of the form, regardless of why the amendment is filed. For example, if, in the original Form D, the issuer indicated that the first sale has “Yet to Occur” and if, by the time of the amendment, the date of first sale is known, then the issuer must disclose the actual date of first sale in the amendment.

Regulation FD

This is an all new collection of CD&’s for Regulation FD.

References:

Massachusetts Amends Strict Data Privacy Law (Again)

Massachusetts-State-House

UPDATE: Another revision was published on November 5, 2009. See: Massachusetts Amends Its Strict Data Privacy Law (Yet, Again)

The Massachusetts’ Office of Consumer Affairs and Business Regulation has decided to amend the strict data privacy law and extend the deadline for compliance. This is yet another amendment to the regulations. The last amendment had extended the compliance deadline to January 1, 2010.

In keeping with Governor Deval Patrick’s commitment to balancing consumer protection with the needs of small business owners, the adjustments to Massachusetts’ identity theft regulations allow some flexibility in compliance by small businesses. The regulations now have a risk-based approach that may make it easier on small businesses that may not handle a lot of personal information about customers. Under a risk-based approach, a business, in developing a written security program, can take into account its size, nature of its business, the kinds of records it maintains, and the risk of identity theft posed by its operations.

Key amendments to 201 CMR 17.00 include:

Section 17.01 (1) Purpose of the regulation was amended to include language from M.G.L. 93H.

Section 17.01 (2) Scope of the regulations was revised to cover “persons who own or license personal information”. Section removes previous regulatory language related to those that “store or maintain personal information”.

Section 17.02 Encryption definition was amended to be technology neutral. A definition for the term “owns and licenses” was added to focus the protection of personal information in “connection with the provision of goods or services or in connection with employment”. A new definition for the term “service provider” was added.

Section 17.03 (1) Duty to protect rules look to address size and scope of a firm within the development and implementation of a written information security plan. (2) Amends and removes some requirements for the written information security plan. (f) Amends third party vendor rules and provides a two year window relative to contracts and requirements for compliance.

Section 17.04 Amends computer requirements for persons that own or license personal information to develop a written information security plan “that at a minimum, and to extent technologically feasible, shall have the following elements”.

Section 17.05 Amends the effective date of the regulations to March 1, 2010.

There will be a hearing on the revised regulations commencing at 10:00 a.m. on Tuesday September 22, 2009, in Room No. 5-6, Second Floor of the Transportation Building, Ten Park Plaza Boston, Massachusetts 02116. Interested parties will be afforded a reasonable opportunity at the hearing to present oral or written testimony. Written comments will be accepted up to the close of business on September 25, 2009. Such written comments may be mailed to: Office of Consumer Affairs and Business Regulation, 10 Park Plaza, Suite 5170, Boston, MA 02116, Attention: Jason Egan, Deputy General Counsel, or e-mailed to [email protected].

References: