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Yesterday, the SEC announced that it has settled its two actions against Bank of America regarding alleged disclosure deficiencies in connection with BofA’s acquisition of Merrill Lynch (one action regarding bonus amounts; the other over operating losses). Not only will BofA pay $150 million to the SEC (to be distributed to harmed shareholders), it will adopt seven governance reforms – if Judge Rakoff approves the settlement (he rejected a $33 million settlement last September). The settlement doesn’t levy any penalties on current or former executives. Here’s the SEC’s litigation release – and here is the SEC’s brief supporting the settlement and notice of motion (with Exhibit A to that).

Here are the seven governance reforms that BofA would be required to implement for a period of three years:

– Provide shareholders with an annual non-binding “say on pay” on executive compensation
– Retain an independent auditor to perform an audit of the company’s internal disclosure controls
– Have the CEO and CFO certify they have reviewed all proxy statements
– Retain disclosure counsel who will report to the audit committee on the company’s disclosures
– Adopt a “super-independence” standard for the compensation committee that prohibits them from accepting other compensation
– Hire a “super-independent” consultant for the compensation committee
– Implement incentive compensation principles & procedures and prominently post them on the company’s site

While BofA’s problems with the SEC may be coming to a close, it’s problems with NY Attorney General Andrew Cuomo may just be starting over these alleged disclosure deficiencies. Yesterday, Cuomo announced that he had filed a civil suit against Bank of America, Lewis and former CFO Joe Price.

The SEC Enforcement Division’s Use of Governance Reforms: Something New?

I know there have been a number of “governance by gunpoint” settlements driven by judges over the past decade, where institutional investor plaintiffs obtained governance reforms from companies whom they had sued and then settled. But is this something new for the SEC?

Going back in time a little bit, it’s fair to say the SEC has somewhat engaged in this type of practice, but I had trouble digging up examples from the past few years. And there certainly hasn’t been a prior instance of the SEC requiring an advisory say-on-pay vote or imposing “”super-independent” criteria as part of a settlement. It’s certainly an interesting way to remediate what was essentially a disclosure issue (how about the one where an outside law firm will report to the audit committee on disclosure!).

Here are the few precedents I could think of where the SEC has used the settlement process to obtain some type of quasi-governance reform from a company: requiring the company to hire an independent consultant to review and recommend improved policies on things like accounting (e.g., Xerox and others) and FCPA compliance (many FCPA settlements in the 2002-2006 time frame), etc. Can any of you Enforcement gurus out there think of others?

It will be interesting to see if this is a one-off type of settlement or a new Enforcement trend. Come hear a panel of former SEC Enforcement Staffers discuss this topic during our upcoming webcast: “Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now.”

A huge snowfall is expected in DC today. Remember that EDGAR remains open as usual as it does not shut down even if the government closes.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Delaware Court of Chancery Addresses Critical Advancement/Indemnification Question
– SEC v. Cuban: SEC Files Appeals Brief
– Travel Tips: DOT Now Helping Those with Airline Beefs
– Corp Fin’s “Common Financial Reporting Issues for Smaller Companies”
– Lessons Learned: Initial Submissions of XBRL Filings

A lot of folks are talking about this cool “Palindrome” video…

– Broc Romanek