SEC’s proposed rule on disclosure of director nominaations

The Corporate Reform Weekly
Vol II, #29 August 11, 2003

Support the SEC's proposed rule on disclosure of director nominations.
In Washington SEC considers requiring companies to disclose how they nominate directors

In what could be the first step toward opening up the nomination of corporate directors, the SEC voted last week to propose new rules that would require corporations to disclose more information about how directors are nominated.

The information about how board members are nominated would be included in company proxy statements. The statements would also be required to include information about how investors could convey their concerns to the board. Current rules merely require companies to disclose whether or not they have a nominating committee and whether shareholders can nominate directors. The new rules will be open for comment for 30 days.

SEC Commissioner Harvey J. Goldschmid said that the new rules are "a critical step in alleviating the present-day corporate abuses, from excessive managerial power to excessive compensation."

However, they are only a first step and they will be largely meaningless if the SEC also doesn't take the next step and change the nominating process by making it easier for minority shareholders to nominate directors.

On the subject of opening up board nominations, last week SEC chairman William Donaldson suggested that in cases where boards that have a pattern of ignoring shareholder demands or have generated substantial investor dissatisfaction, shareholder access to the board nominating process would be triggered. For more on that, see "Lifting the Lid: Ignoring Shareholders May Cost the Board Seats" by Brendan Intindola of Reuters: http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=3249943


For more on the disclosure rules, see "SEC Votes to Propose Director Rules" by Carrie Johnson of the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A25720-2003Aug6.html .

Also see: "SEC may aid rebels seeking board seats," by Charles Dubigg of the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A21743-2003Aug5.html

For a look at the SEC rule, see: http://www.sec.gov/rules/proposed/34-48301.htm
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New SEC rule for whistle-blower lawyers kicks in amid controversy

New SEC rules for lawyers at public companies that went into effect last week require that lawyers who witness financial fraud alert the company's top management. Additionally, lawyers are permitted and encouraged (but not required) to also notify federal regulators of the fraud.

But this proposal has stirred some controversy, because eight states have strict attorney-client privilege rules that would prevent lawyers from telling regulators if they observe financial fraud. Additionally, the American Bar Association's ethics code tells lawyers not to report their clients' financial fraud. However, the ABA is reportedly considering changing that part of its code at its annual meeting this week.

Though the reporting to regulators is only voluntary, at one point the SEC had considering making this reporting mandatory. However, lawyers who were worried about the idea of having to tell on their law-breaking clients successfully lobbied against this rule.

For more, see: "Corporate attorneys now under report rule," by Terri Somers of the San Diego Union-Tribune: http://www.signonsandiego.com/news/business/20030805-9999_1b5sarbanes.html

Also see: "New Rules Leave Lawyers in a Bind on Whistle-Blowing" by Brooke Masters of the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A21648-2003Aug5.html

For a preview of this week's ABA meeting, see "Corporate Crime high on agenda at conference" by Patti Waldmeir of the Financial Times: http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1059478901552

For a good article on how corporate whistle blowing is on the rise , see "More Workers Blow the Whistle" by Gwendolyn Freed of the Minneapolis Star Tribune:http://www.startribune.com/stories/1405/4028836.html
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New SEC policy will consider companies who settle as having admitted wrongdoing

The SEC has adopted a new policy that will consider companies that settle with the SEC for a fine as having admitted wrongdoing. Typically, firms that settle with the SEC don't admit or deny wrongdoing.

Experts expect that the change will make it easier for the SEC (and other prosecutors) to mete out further disciplinary action in the future.

However, some lawyers worry that the change will result in fewer SEC settlements because defendants prefer to be able to settle without admitting wrongdoing. The SEC simply doesn't have the resources to try the more than 500 enforcement cases it files annually.

For more details, see "SEC Redefines Injunction Policy" by Deborah Solomon of the Washington Post: http://www.smartmoney.com/bn/ON/index.cfm?story=ON-20030804-000020-0055
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For a general overview of how the SEC is becoming more responsive to corporate wrongdoing, see "SEC's Get-Tough Attitude Tests the Limits of Its Power," by Jonathan Peterson of the Los Angeles Times: http://www.latimes.com/news/printedition/la-fi-sec5aug05103418,1,6973280.story