Say-On-Pay Legislation; Nasdaq Rules; J-SOX

The push to give investors a say on executive compensation has lurched forward again in Washington, D.C., with a bill introduced in the Senate to allow say-on-pay advisory votes, already endorsed by the House last month.

Obama

Senate Bill 1181, which would amend the Securities Exchange Act of 1934 to give shareholders an advisory vote on executive compensation, was introduced April 20 by Sen. Barack Obama, D-Ill. It was referred to the Senate Committee on Banking, Housing, and Urban Affairs.

Like its companion Bill H.R.1257, which passed the House by a vote of 269-134, the bill would require companies to include in their annual proxies a nonbinding advisory shareholder vote on their executive-pay plans and includes a separate advisory vote if a company gives a new, not-yet-disclosed “golden parachute” while negotiating to buy or sell a company.

Advisory votes on pay are generally supported by Democrats, unions, and shareholder advocates, who say legislation is necessary to give shareholders a way to respond to the information made available under the Securities and Exchange Commission's expanded executive compensation disclosure rules. Critics, however, including many Republicans and business groups, say companies, not Congress, ought to decide whether to have an advisory vote and that the SEC rules need a chance to work.

Regardless of the bill’s fate, companies have been bombarded this proxy season with shareholder proposals calling for say-on-pay votes by institutional investors. As of last week, Verizon Communications may have been the first company where shareholders approved a say-on-pay proposal—advocates claim success, but Verizon says the vote was too close to call. Other companies have seen say-on-pay proposals win 40 percent or more of shareholder support. In February, insurance giant Aflac became the first U.S. company to adopt an advisory vote voluntarily in response to a proposal from Boston Common Asset Management.

SEC Approves Nasdaq Change To ‘Blue Sky’ Requirements

The SEC has amended its rules to exempt securities listed on the Nasdaq Capital Market from state “blue sky” registration requirements.

The amendment to a rule under Section 18 of the Securities Act of 1933 designates securities listed on the Nasdaq Capital Market tier as “covered” securities for purposes of Section 18 of the Securities Act. Covered securities are subject to federal regulation only.

The SEC adopted the exemption in response to a petition filed by Nasdaq in February 2006. The change takes effect May 24, 2007.

In a press release, Nasdaq said the action “is an important milestone in the evolution of the Capital Market and will reduce the cost of raising capital for Capital Market companies and their investors.”

In its petition seeking covered status for the securities of Capital Market listed companies, Nasdaq noted that some issuers qualified to list on the Capital Market chose to list on other venues solely because of their ability offer a blue-sky exemption, while others sought to list dually on one of the exempt markets for the same reason.

The SEC also clarified the language in Rule 146(b), which lists the national securities exchanges on which securities are deemed to be covered, to conform it to the language of Section 18(b)(1)(B) of the Securities Act. That change came in response to a comment letter from an American Bar Association committee and the North American Securities Administrators Association.

Japan Unveils English Translation Of J-SOX

An English translation of Japan’s new rules governing internal controls over financial reporting is now available.

The rules, modeled after the Sarbanes-Oxley Act in the United States, were first published by the Japan Financial Services Authority Business Accounting Council on Feb. 15. The English translation is provisional, however, and the FSA stresses that for all questions about the practical application of the rules, users should refer to the original Japanese texts.

Japan’s framework emphasizes a top-down, risk-based approach to internal controls. Unlike the U.S. rules, J-SOX does not require direct reporting on internal controls from the external auditors to the public.

Under the Financial Instruments and Exchange Law, enacted in June 2006, the management of listed companies must implement assessments of internal controls over financial reporting, and that assessment must be audited by certified public accountants. The rules go into effect for fiscal years starting on or after April 1, 2008.