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Our Securities & Corporate Governance Group guides clients through the ever changing maze of rules and regulations that complicate the day-to-day management, structure and direction of their companies. We help clients to meet the challenges of state and federal rules, the Sarbanes-Oxley Act and stock exchange listing standards. We provide counsel to boards of directors and their committees on fiduciary duties, executive compensation, company policies and procedures, insurance, whistleblower complaints, bylaw provisions, clawback policies, risk management, auditor independence, internal control over financial reporting and other compliance issues. With experienced lawyers from multiple departments within the firm, we represent management, boards, audit and other committees, as well as individual executives, employees and directors. We also provide corporate governance counseling for mutual funds and their directors through our Investment Management Group. View our Public Company Compliance Manual (PDF) View Corporate Governance Regulatory Compliance Checklist View Private Company Governance and Recordkeeping Regulatory Compliance Checklist Representative Client Work
News and Updates
Below are the most recent updates from our Corporate Governance Group. 12/22/11: Change to "accredited investor" definitionThe SEC has finally finalized the details of a change to the definition of accredited investor that technically went into effect over a year ago when the Dodd-Frank Act was adopted. Under the amended rule, the value of an individual’s primary residence will not count as an asset when calculating net worth to determine “accredited investor” status. The amendments also clarify the treatment of borrowing secured by a primary residence for purposes of the net worth calculation. Under certain circumstances, they also permit individuals who qualified as accredited investors under the pre-Dodd-Frank Act definition of net worth to use that prior net worth standard for certain follow-on investments. Under the amended net worth calculation, indebtedness secured by the person’s primary residence, up to the estimated fair market value of the primary residence, is not treated as a liability, unless the borrowing occurs in the 60 days preceding the purchase of securities in the exempt offering and is not in connection with the acquisition of the primary residence. In such cases, the debt secured by the primary residence must be treated as a liability in the net worth calculation. This is intended to prevent manipulation of the net worth standard, by eliminating the ability of individuals to artificially inflate net worth under the new definition by borrowing against home equity shortly before participating in an exempt securities offering. In addition, any indebtedness secured by a person’s primary residence in excess of the property’s estimated fair market value is treated as a liability under the new definition. Companies (and counsel) that are verifying accredited investor status in connection with private placements under Regulation D should make sure to reflect this updated definition in their questionnaires or other due diligence materials. The full SEC adopting release can be found here: http://www.sec.gov/rules/final/2011/33-9287.pdf. 12/1/11: SEC to publicly release comment letters earlierThe SEC announced today that to further enhance the transparency of the filing review process, beginning January 1, 2012, its staff will publicly release through the EDGAR system comment letters and response letters relating to disclosure filings reviewed by the Divisions of Corporation Finance and Investment Management no earlier than 20 business days following the completion of a filing review. For the past 5½ years the staff has released the correspondence "no earlier than 45 days after the review of the disclosure filing is complete." 7/22/11: Litigation Alert - D.C. Court of Appeals Vacates Proxy Access RulesThe DC Court of Appeals has sided with the Business Roundtable and US Chamber of Commerce in vacating the SEC's proxy access rule (the rule under the authority in Dodd Frank that would give certain shareholders the right to include their nominees in public company proxy statements). This represents a significant set back for the SEC. 5/25/11: SEC whistleblower rules; Reg D proposalsThe SEC today adopted rules and forms to implement Section 21F of the Exchange Act entitled "Securities Whistleblower Incentives and Protection." The Dodd-Frank Act established a whistleblower program that requires the SEC to pay an award, under regulations prescribed by the SEC and subject to certain limitations, to eligible whistleblowers who voluntarily provide the Commission with original information about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action, or a related action. Dodd-Frank also prohibits retaliation by employers against individuals who provide the Commission with information about possible securities violations. The full rule release can be found at: In addition, the SEC today proposed amendments to Securities Act rules to implement Section 926 of the Dodd-Frank Act. Section 926 requires the SEC to adopt rules that disqualify securities offerings involving certain "felons and other ‘bad actors’" from reliance on the safe harbor from Securities Act registration provided by Rule 506 of Regulation D. The rules must be "substantially similar" to Rule 262, the disqualification provisions of Regulation A under the Securities Act, and must also cover matters enumerated in Section 926 (including certain state regulatory orders and bars). The full proposal release can be found at: http://www.sec.gov/rules/proposed/2011/33-9211.pdf 4/8/11: Government shutdown and the SECThe SEC has issued a statement regarding the possible federal government shutdown: http://www.sec.gov/about/2011_fed_shutdown.htm Essentially, EDGAR filings will still be able to be made (and so far all deadlines for filings will continue to apply). However, the SEC's Divisions will be unable to process filings, provide interpretive advice, issue no-action letters or conduct any other normal activities. As a result, new or pending registration statements or applications for exemptive relief will not be processed regardless of the status of any review of those filings. 4/1/11: SEC Proposes Rules Requiring Listing Standards for Compensation Committees and Compensation ConsultantsThe SEC yesterday proposed rules required by the Dodd-Frank Act that would direct the national securities exchanges (NYSE, Nasdaq et al) to adopt certain listing standards related to the compensation committee of a company’s board of directors as well as its compensation advisers. The SEC’s proposal also would require new disclosures from companies concerning their use of compensation consultants and conflicts of interest. The full text of the proposal can be found here. As with all listing standards, exchanges would need to seek the approval of the SEC before adopting them. That means even though the SEC proposals will need to be finalized by July, the exchanges themselves would then need to propose and have approved the actual new listing standards, which could take several more months.
Independence of Compensation Committee Members Under the SEC’s proposal, the exchanges would be required to adopt listing standards that require each member of a company’s compensation committee to be independent. In developing a definition of independence, the exchanges would be required to consider such factors as:
Authority and Funding of the Compensation Committee The proposed rules would require the exchanges to adopt listing standards providing that the compensation committee of a listed company:
Compensation Adviser Selection The proposed rules also would require the exchanges to adopt listing standards providing that a compensation committee may select a compensation consultant, legal counsel or other adviser only after considering the following five independence factors:
The exchanges themselves could impose additional considerations. Exemptions As directed by Dodd-Frank, the proposed rules would require the exchanges to exempt from these rules controlled companies, limited partnerships, companies in bankruptcy proceedings, open-end management investment companies registered under the Investment Company Act of 1940 and any foreign private issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee. The proposed rules would authorize the exchanges to make certain further exemptions. Compensation Consultant Conflicts of Interest Disclosure Exchange Act registrants subject to the federal proxy rules are already required to disclose information about their use of compensation consultants, including specific information about fees paid to consultants that the SEC added in late 2009. The proposed rules would modify existing rules to require disclosure about whether:
The proposed rules also would eliminate the current disclosure exception for services that are limited to consulting on broad-based plans and the provision of non-customized benchmark data, but would retain the fee disclosure requirements, including the exemptions from those requirements. 2/18/11: FINRA proposal re: private placementsThe Financial Industry Regulatory Authority (FINRA) has proposed disclosure rules for private placements in which FINRA-member firms participate (this will pick up most broker dealers that act as placement agents and finders). The new rules would, if adopted, require disclosure about the member firms' fees among other new disclosure requirements and, significantly, require the offering documents to be submitted for review for FINRA on or prior to commencement of the offering. Offerings would not be contingent upon any FINRA approval of the offering documents, but FINRA may express comments or concerns if the documents present investor protection issues. The rules would also require that at least 85% of the private placement proceeds go to the business purposes disclosed and not to pay for offering costs and compensation. The new rules would not apply to 144A, Reg S offerings, offerings of unregistered investment grade rated debt and preferred securities and offerings sold solely to institutional investors, qualified purchasers under the 40 Act or to QIBs under 144A and banks. The proposal (found at: http://www.finra.org/Industry/Regulation/Notices/2011/P122788 is open for comments until March 14, 2011. Final rules would need to be approved by the SEC. 2/10/11: SEC Proposes First in Series of Rule Amendments to Remove References to Credit RatingsThe SEC today proposed amendments to its rules that would remove credit ratings as one of the conditions for companies seeking to use short-form registration (i.e., Forms S-3 and F-3) when registering securities for public sale. Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires federal agencies to review how existing regulations rely on credit ratings and remove such references from their rules as appropriate. This marks the first in a series of upcoming SEC proposals in accordance with Dodd-Frank to remove references to credit ratings contained within existing SEC rules and replace them with alternative criteria. The SEC’s proposed rule amendments would remove the nationally recognized statistical rating organization (NRSRO) investment grade ratings condition included in Forms S-3 and F-3 for offerings of non-convertible securities, such as debt securities. Instead of ratings, the new short-form test for shelf-offering eligibility of companies would be tied to the amount of debt and other non-convertible securities they have sold in the past three years. Companies relying on this test would need to have issued over $1 billion of non-convertible securities for cash in registered, primary offerings within the previous three years. (Other S-3 and F-3 eligibility tests are unchanged and are still available if the revised test is not met.) Related rule changes proposed (to Rule 134 under the '33 Act) would eliminate the ability to include references to NRSRO ratings in "tombstone" press releases announcing securities offerings and still qualify for a "safe harbor" that would deem such press release not to be a prospectus. This will not mean that a communication that includes a rating will automatically be considered a prospectus. Instead, if the safe harbor is not available, the parties will need to consider whether the communication is a prospectus under a facts and circumstances analysis. The full proposal can be found at: http://www.sec.gov/rules/proposed/2011/33-9186.pdf. Public comments are due by March 28th. Useful ResourcesBelow are some third party resources that you may find useful. Sullivan & Worcester did not prepare the items linked to below and is not responsible for their content. The updates, publications and resources above primarily relate to public companies and mature private companies. These materials generally relate to U.S. federal securities laws and rules and regulations of U.S. agencies, such as the SEC and the Public Company Accounting Oversight Board, and self-regulatory organizations, such as the New York Stock Exchange, American Stock Exchange and Nasdaq. Sullivan & Worcester also advises smaller private companies on all matters relating to corporate governance. In addition, our Corporate Governance Group assists clients in complying with corporate governance requirements and other rules and regulations under state law, including in Delaware, Massachusetts and New York, among others.
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