Commission Enhances Proxy Disclosure, Adviser Custody Rules

The SEC adopted rule and form changes intended to enhance the information provided in proxy solicitations and in other forms filed with the SEC. Beginning in the upcoming annual reporting and proxy season, the new rules will improve corporate disclosure regarding risk, compensation and corporate governance matters when voting decisions are made. In addition, the SEC adopted rule changes designed to substantially increase the protections for investors who turn their money and securities over to investment advisers.

Proxy Disclosures

The rulemaking requires disclosures in proxy and information statements about:

1. The relationship of a company's compensation policies and practices to risk management. Smaller reporting companies will not be required to provide the new disclosure;
2. The background and qualifications of directors and nominees;
3. Legal actions involving a company's executive officers, directors and nominees;
4. The consideration of diversity in the process by which candidates for director are considered for nomination;
5. Board leadership structure and the board's role in risk oversight;.
6. Stock and option awards to company executives and directors. The amended rule requires companies to report the value of options when they are awarded to executives (the aggregate grant date fair value), instead of the current requirement to report the annual accounting charge; and
7. Potential conflicts of interests of compensation consultants.

The new rules, which will be effective February 28, 2010, also require quicker reporting of shareholder voting results. Amendments to Form 8-K will require companies to disclose the results of a shareholder vote within four business days after the end of the meeting at which the vote was held. This replaces the requirement to disclose voting results in Forms 10-K and 10-Q, which often were filed months after the relevant meeting.

Adviser Custody Rule

The amended custody rule is intended to promote independent custody and require the use of independent public accountants as third-party monitors. Depending on the investment adviser’s custody arrangement, the rules would require the adviser to be subject to a surprise exam and custody controls review that are generally not required under existing rules. Advisers will be required to engage an independent public accountant to conduct an annual “surprise exam” to verify that client assets exist. In addition, when the adviser or an affiliate serves as custodian of client assets, the adviser will be required to obtain a written report from a PCAOB-registered accountant that, among other things, describes the controls in place at the custodian, tests the operating effectiveness of those controls and provides the results of those tests.

The rule changes also will impose a new control on advisers to hedge funds and other private funds that comply with the custody rule by obtaining an audit of the fund and delivering the fund's financial statements to fund investors. The rule will require that the auditor of such a private fund be registered with and subject to regular inspection by the PCAOB.

The amended rules also will require that the adviser reasonably believe that the client’s custodian delivers the account statements directly to the client, to provide greater assurance of the integrity of these account statements. It also will enable clients to compare the account statement they receive from their adviser to determine that the account transactions are proper.

The rule amendments are effective 60 days after publication in the Federal Register. We will provide a link to the adopting release in this space when it becomes available.

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