INSIDE THIS ISSUE
Bill Gives Shareholders Say On Executive Pay
The U.S. House of Representatives and the Senate announced on June 25, 2010, that the two chambers had finalized H.R. 4173, known as the Wall Street Reform and Consumer Protection Act or the Dodd-Frank Bill, sending the bill back for a final vote. The bill, which was passed in response to the most recent financial crisis, aims to overhaul the United States financial regulatory system by, among other things, expanding investor and consumer protection, regulating the over-the-counter derivate market, increasing the scrutiny and liability of credit rating agencies and large financial institutions, and allowing regulators to seize and wind down large, failing firms.
Among the numerous provisions included in the bill that seek to increase accountability are provisions that address executive compensation. In the final version of the bill, shareholders have been given a “say on pay” through an advisory vote on executive compensation packages. Under the bill, companies will only be required to hold a shareholder advisory vote every two or three years, instead of the annual vote shareholder advocates called for. According to the bill, a shareholder vote will decide the frequency of the vote — two or three years. Furthermore, the legislation requires a company’s compensation committee to be independent, and requires companies to implement “clawback” policies that take back executive compensation if the company issues inaccurate financial statements. Clawback provisions should benefit shareholders by helping shift officers’ and directors’ focus from short-term profits to long-term growth and stability. The bill also mandates public disclosure of the median of the annual total compensation of all employees, except the CEO, the annual total compensation of the CEO, and the ratio of the two.
In addition to these provisions addressing executive compensation, the Dodd-Frank Bill includes a plethora of significant changes, such as:
+ The Volcker Rule: Named after former Federal Reserve chairman Paul Volcker, this measure would forbid banks from trading with their own money, a practice known as proprietary trading. In reaching this deal, negotiators adopted a provision that would ban certain forms of proprietary trading and forbid firms from betting against securities they sell to clients – a practice the SEC has recently alleged that Goldman Sachs used to defraud investors of approximately $1 billion.
+ Consumer Financial Protection Bureau: The bill will create a Consumer Financial Protection Bureau, which will be tasked with writing and enforcing rules to root out fraud in consumer financial products such as mortgages and credit cards. It will have an independent director and budget, but will be housed in the Federal Reserve.
+ Credit Rating Agencies Oversight: In response to widespread allegations against credit rating agencies for helping cause the recent financial crisis, the legislation provides the Securities and Exchange Commission (“SEC”) with a new office of credit ratings to regulate and promote accuracy in ratings. The bill also requires rating agency boards to be independent and rating analysts to be separated from those who sell the firm’s services to prevent conflicts of interest.
+ Financial Stability Oversight Council: Under the bill, this council, chaired by the Treasury Secretary and comprised of key regulators such as the Federal Reserve, SEC and U.S. Commodity Futures Trading Commission (“CFTC”), will monitor emerging risks to U.S. financial stability, recommend heightened standards for large, interconnected financial companies and require nonbank financial companies to heightened supervision by the Federal Reserve if their failure would pose a risk to U.S. financial stability. Also, the bill allows the Federal Deposit Insurance Corporation (“FDIC”) to unwind a failing nonbank financial firm or bank holding company. This authority was not an option that was available to the FDIC during the financial crisis.
+ Derivative Regulations: The legislation will provide for the first-ever regulation for the $600 trillion over-the-counter derivatives market. It will mandate the federal regulation of derivatives under the SEC and CFTC that emphasizes transparency. The CFTC will regulate swaps and the SEC will regulate security-based swaps. The bill requires central clearing and exchange trading for derivatives that can be cleared and provides a role for both regulators and clearing houses
+ Broker-Dealers Oversight: In response to the Bernard Madoff fraud, the bill now places broker-dealers under Public Company Accounting Oversight Board oversight.
+ Reform of Securitization: The final bill requires companies that sell products such as mortgage-backed securities to retain a portion of the risk to ensure that they will not sell toxic securities to investors.
+ Hedging Disclosure Rules: Under the bill, the SEC will now require companies to disclose whether any employee or director is permitted to purchase financial instruments designed to hedge the market value of equity securities granted to the employee or director as part of their compensation. These hedging instruments previously protected insiders from significant losses and concealed potential insider transactions.
These are just a few of the provisions in the Dodd-Frank Bill designed to protect investors, and increase transparency and accountability. President Obama expects to sign the Dodd-Frank Bill into law by the end of July.
On June 28, 2010, a divided U.S. Supreme Court eased restrictions on removing members of the Public Company Accounting Oversight Board (“PCAOB”), a private regulatory body charged with inspecting and disciplining public-company accountants. To the relief of PCAOB supporters, the Court rejected a constitutional bid to entirely do away with the PCAOB. In the high court’s decision in Free Enterprise Fund et al. v. Public Company Accounting Oversight Board et al., the Court, in a 5-4 decision, ruled that the PCAOB's removal restrictions—which allow board members to be removed only for good cause—violate the separation of powers doctrine.
In the wake of the Enron and WorldCom scandals, Congress enacted the Sarbanes-Oxley Act of 2002. Among other measures, Sarbanes-Oxley introduced tighter regulation of the accounting industry under the new PCAOB. The PCAOB is composed of five members appointed by the U.S. Securities and Exchange Commission (“SEC”). Created to oversee the auditors of public companies, the PCAOB was modeled on private self-regulatory organizations in the securities industry — such as the New York Stock Exchange—that investigate and discipline their own members subject to SEC oversight. The PCAOB provides essential protections to the more than half of American households that invest savings in securities.
Part of the PCAOB's power to set rules for the auditing industry includes the power to regulate the non-audit services that audit firms may offer their audit clients, such as consulting or tax services. This power was given to the PCAOB as a result of allegations of conflicts of interests found in cases such as those against Enron and World-Com. Specifically, those cases alleged that auditors’ independence from their clients’ managers had been compromised because of the large fees that audit firms were earning from these ancillary services. In addition, as part of the PCAOB’s investigative powers, the PCAOB is empowered to require that audit firms, or any person associated with an audit firm, provide testimony or documents in its (or his or her) possession. The PCAOB may also seek the SEC's assistance in issuing subpoenas for testimony or documents from individuals or entities not registered with the PCAOB.
The Free Enterprise Fund, a non-profit, 501 c(4) group dedicated to advocating against Sarbanes-Oxley, argued that Congress vested the PCAOB with widespread and unsupervised government power that could not be checked by the president or the head of a government department.
In a 5-4 opinion by Chief Justice John Roberts, the Court’s majority found fault with some parts of the PCAOB in ruling that the SEC may remove the PCAOB's board members at will. Previously, the SEC could only remove members for good cause. The Court held that Sarbanes-Oxley unconstitutionally restricted the ability of the executive branch to remove a principal government officer. The Court held that without the ability to oversee the PCAOB, or to attribute the PCAOB's failings to those whom he can oversee, the president is no longer the judge of the PCAOB's conduct, in violation of constitutional separation-of-powers principles. "The president cannot take care that the laws be faithfully executed if he cannot oversee the faithfulness of the officers who execute them," Chief Justice Roberts wrote.
The Court, however, refused to strike down the accounting board in its entirety, saying the PCAOB’s mere existence did not violate the Constitution. As a result, the PCAOB will continue to function as before. In response to the decision, PCAOB Acting Chairman Daniel L. Goelzer stated, “We are pleased that the decision allows the PCAOB to continue without interruption to carry out its important mission of overseeing public company audits.” Former Sen. Paul Sarbanes (D-MD) and Rep. Michael Oxley (R-OH), issued a statement saying, “The decision from the Supreme Court adjusts the law in a way that allows the PCAOB to continue to ensure the integrity of public company audits.”
With its recent ruling in the case American Needle v. NFL, the United States Supreme Court made antitrust law both a top news story and a top sports story. In its decision, a unanimous Supreme Court ruled that the NFL cannot operate as a single entity when entering licensing contracts for apparel like jerseys and hats. Although this ruling may not seem as impacting as a recent trade or draft pick, its consequences will be long lasting and will likely be felt in areas beyond the sporting realm. Antitrust law has had a big impact on sports in this country and cases involving sports have also helped to shape antitrust law into what it is today.
The goal of the antitrust laws in the United States is to promote competition. Although healthy competition is the essence of most sporting contests, ensuring a proper level of competition in professional sports has proven difficult. In order to compete successfully, there must be some level of cooperation. Indeed, no one wins when a football team plays itself. Other industries too, have a need to cooperate in order to compete, and drawing a line between necessary cooperation and illegal anticompetitive behavior has become exceedingly difficult for lawmakers and judges.
It was not always so difficult for courts to administer the antitrust laws within the sports world. In 1922, in the case Federal Baseball Club v. National League, a unanimous Supreme Court ruled that Major League Baseball was exempt from the provisions of the Sherman Antitrust Act. This ruling was later affirmed in 1953 and 1972. The blanket exemption has since been partially removed legislatively, but these cases have firmly established the notion that professional sports enjoy a special status that is granted to few other industries.
American Needle v. NFL gained considerable publicity, some of it unwanted from the NFL’s perspective. In the days leading up to Super Bowl XVIV, soon-to-be Super Bowl MVP Drew Brees wrote an OP-ED piece in The Washington Post that focused on antitrust law and the American Needle case. Brees argued that if the NFL is granted antitrust immunity in its licensing agreements, that immunity would be wrongly expanded to collective bargaining, free agency, and other areas where competition between teams is essential. Brees’ sentiments were echoed by many organizations in professional sports. Organizations such as the NFL players association, the NFL coaches association, the NBA players association, MLB players association, and the NHL players association, all filed briefs with the Court urging that the Justices reject the NFL’s contentions.
The NFL has been on the losing end of antitrust rulings before. The upstart United States Football League (USFL) sued the NFL in the 1980s in an attempt to keep the fledgling league afloat. Famous investor Donald Trump had purchased a USFL franchise seemingly for the sole purpose of filing an antitrust lawsuit against the NFL. In a sensational 1986 trial, a six person jury ruled that the NFL was a “duly adjudicated illegal monopoly.” Even though the NFL lost the case on the merits, however, the court ruled that the USFL was only entitled to $1.00 of actual damages.
Antitrust cases in professional sports have helped to shape free agency systems, how college football is broadcast on TV, whether high school graduates can declare for the draft, the movement of team franchises, and the rise of collective bargaining. Current pending antitrust lawsuits involving sports include suits against the NCAA for profiting off of the images and likenesses of former athletes in everything from video games, memorabilia, and television rebroadcasts. One such suit was filed by former UCLA basketball star Ed O’Bannon, another by former Nebraska Quarterback Sam Keller.
Possibilities for future cases include challenges to other exclusive licenses signed by pro sports leagues, similar to the claims at issue in American Needle. Other possibilities include challenges to the NBA’s “one year out of high school” draft rule, and challenges to the NCAA’s college football Bowl Championship Series, which several U.S. Senators have criticized as anticompetitive.
+ July 6 - 9, 2010
IBEW Progress Meeting Conference
Baltimore Harborplace Hotel
The outline of events for this conference includes industrial and construction workshops as well as an exhibit hall arrangement for vendor opportunities.
+ July 21 - 23, 2010
Public Funds Summit East
Hyatt Regency Newport
Opal Financial Group’s annual public funds conference will address issues that are most critical to the investment success of pension fund officers and trustees.
+ July 25 -29, 2010
PSACC—Pennsylvania State Association of County Controllers
Omni William Penn Hotel
This annual continuing educational conference offers credits to Controllers, Deputies and Solicitors alike.
Government Finance Officers Association Conferences
+ July 15 - 18, 2010
Municipal Association of South Carolina
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