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IR Weekly - February 1, 2011


President’s Note

Two Must Knows: Social Media and the CD&A

Many of you know that I believe IR professionals must become skilled at using social media. While this evokes groans of angst and protests regarding lack of time from some members, I believe it is critical that you are at least monitoring social media channels for information about your company. A recent incident highlights the importance of this awareness. Last week, Microsoft’s earnings release was pre-posted to their website 70 minutes prior to the planned public release time of just after the 4 pm market close. Selerity Inc., a market data firm, found the release and published the information on their website. Microsoft ultimately moved up their public release to a few minutes before the 4 pm close, but traders who saw the news had about an hour to trade on the information before it was publicly available. Selerity makes information like this available as part of their feeds to social media outlets like StockTwits. More information about this instance is available here. Important IR takeaways include:

• Review your web posting process. Several companies (including Disney and Microsoft) have now both been bitten by inadvertent, unsecured material information website leaks. Ensure your earnings release information and other undisclosed information is secure.
• You can’t ignore social media. Ensure your company has a strategy for monitoring and using social media. IR may just be once piece of a social media strategy for your organization, but take action now to understand this evolving medium. Consider re-publishing information to increase your IR communication channels with minimal effort. Engagement via social media means harnessing its full power to ensure your company’s message gets the attention it deserves using all available communication avenues.
• Pass along this NIRI IR Weekly within your company. Share IR Weekly with your C-Suite. Lead your internal discussion about this situation and why website security and social media monitoring is critical for your company.
• NIRI can help. Use all of NIRI’s resources including, webinars, NIRI’s June Annual Conference, chapter programs and eGroup conversations to get up to speed on social media.

In other IR news, the CFA Institute, with the assistance NIRI and other related organizations, released a “Compensation Discussion and Analysis Template” this week to help companies prepare their CD&A. IR professionals should become conversant in the CD&A and part of the internal strategy discussion for developing and improving this disclosure. The CD&A needs to be a cornerstone of your compensation-related shareholder outreach, so important in the wake of Dodd-Frank mandated say-on-pay. This is an opportunity to show the value of IR within your company – take advantage of it.

Until next week,

Jeff Morgan, CAE
President & CEO

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University of Michigan Research – 10K Readability and Analyst Behavior - February 3 at your location
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The Buzz
"SEC Approves Investor Say on CEO Pay"
"Shareholder Access and the Advocacy Role of Delaware in the Corporate Governance Debate (Part 1)"
"How Companies Can Use Social Media for Better Investor Relations"
"Trading Venues, Companies Want Exception to 1982 SEC Guideline"
"Regulating Secondary Markets in the Facebook Era"
"NYSE Trading Halts Adjusted to Trim Disruptions"
"In the Minority on Majority Voting"
"SEC Plans to Enhance the Authority of Stock Exchanges"
"Whistleblower Rule Sets Alarm Bells Ringing"
"Blue-Ribbon Panel: Just Tweak GAAP for Now"
"Interview With Stanford Law Professor Joseph Grundfest About the State of Securities Class Action Litigation"
"Weeden Looks for Research Edge"

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Professional Development

University of Michigan Research – 10K Readability and Analyst Behavior - February 3 at your location

Get the latest trends from the University of Michigan’s Reuven Lehavy, Ph.D., as he explores the relationship between corporate 10-K filings and analyst behavior.

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The Buzz

SEC Approves Investor Say on CEO Pay
MarketWatch (01/25/11) Orol, Ronald D.

The Securities and Exchange Commission (SEC) on Jan. 25 approved "say on pay" for U.S. companies. Under the rule, which was approved over the objections of Republican SEC commissioners who said that it should not have been applied to smaller publicly traded companies, institutional investors will be able to vote on the pay packages of top executives beginning this year; however, smaller companies will not have to comply until after Jan. 21, 2013. Shareholders will also be able to vote on the golden parachute deals that are sometimes given to executives following mergers, acquisitions, or going-private deals. In addition, shareholders will be allowed to determine every six years how often they want to have say-on-pay votes, either once every year, once every two years, or once every three years. Although the votes on executive compensation will be non-binding, companies may opt to go along with the results of the votes, because failing to do so could result in embarrassment for them, particularly if investors steadfastly oppose their executive compensation packages. Companies that choose to ignore say-on-pay votes will be required to state in their annual reports why they decided to do so.

Shareholder Access and the Advocacy Role of Delaware in the Corporate Governance Debate (Part 1)
The Race to the Bottom (01/31/2011) Brown, J. Robert

In viewing the five worst shareholder cases decided in Delaware last year, analysts noted that Delaware courts could be viewed as advocates in the corporate governance debate rather than objective arbiters. As if to validate these views, Delaware has submitted an amicus brief in Business Roundtable v. SEC, the suit against the Securities and Exchange Commission (SEC) to invalidate the access rule, Rule 14a-11. The brief was filed by Delaware Solicitor Lawrence W. Lewis, a member of the executive branch and an appointee of the attorney general. The brief does not touch on the administrative law issues. Rather, it is mostly a plea to leave the issue to the states, particularly Delaware, which is described as "the preeminent jurisdiction to which other states look both in drafting their statutes and in formulating their common law." While a party can reasonably argue that a state -- rather than federal -- forum should settle access issues, the matter is no longer up for debate. Congress gave the SEC power to resolve the issue under the Dodd-Frank bill, and it has. But the brief does tip the hand of Delaware's executive branch. The branch wants to retain the corporate governance monopoly exercised by the state. The executive branch also appoints the Chancery Court and Supreme Court judges. Presumably, the same desire to maintain the preeminent role of Delaware in the corporate governance process as seen in the access brief is also a factor in the process of judicial selection.

How Companies Can Use Social Media for Better Investor Relations
San Diego Union Tribune (01/30/11) Wischnia, Abe

There are a number of ways companies can use social media to improve relations with their investors. For instance, companies can add an interactive "ask management" page to their existing investor relations Web sites to allow investors to submit their questions about earnings calls and other topics. Such pages have a number of benefits, including the fact that the answers to investors' questions can be read by other investors, which means that company employees will no longer have to spend hours on the phone answering the same questions again and again. In addition, investors can copy questions and answers from the ask management page onto Internet stock message boards, which allows information to be spread further. Companies may also want to consider creating a blog that the CEO can use to communicate directly with investors about information in news releases or the company's plans and products. Blogs can also allow CEOs to get feedback from investors about what they are saying. If a company decides to create a blog, it should file an 8K along with each posting and should review and vet posts in the same way it would a news release. Finally, companies can use Twitter to alert investors to new blog posts, news releases, Securities and Exchange Commission filings, and Web site updates. Such alerts have been shown to improve bid/ask spreads in company shares.

Trading Venues, Companies Want Exception to 1982 SEC Guideline
Dow Jones Newswires (01/28/11) Yesalavich, Donna Kardos

Executives from UPS, trading venue operator Liquidnet, and money manager Invesco paid a visit to the Securities and Exchange Commission (SEC) in late 2010 to gently remind the regulator that an exception for buying back shares at the midpoint between bids and offers is important to them. In 1982, the SEC adopted Rule 10b-18 to prohibit companies from manipulating their stocks while undergoing share buybacks, and the guidelines say companies can not buy back their stock at above the highest independent published bid at the time or the last transaction price if they want to be protected from accusations of stock manipulation and insider trading. The rule has become more frustrating for companies at a time when share buybacks have been on the rise as U.S. corporations seek to use cash in ways to improve shareholder value. Some trading venue operators guarantee participants anonymity through systems that match orders at the midpoint, but companies say the inability to utilize midpoint pricing through such systems helps others in the market detect that a buyback is going on and front-run them, which could lead to higher transaction costs for the company and shareholders. The SEC issued a proposal last year that would provide safe harbor coverage to companies that conduct buybacks at the midpoint. Although companies expressed support for the proposal in comments to the SEC, the regulator has not made any changes. The proposal "remains pending," says SEC spokesman John Nester, who adds that it "hasn't been determined" when a decision might be made.
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Regulating Secondary Markets in the Facebook Era
Westlaw News & Insight (01/28/11)

The Securities and Exchange Commission (SEC) has indicated that it is interested in scrutinizing two kinds of secondary market deals in the technology sector, the first being large special purpose vehicles like the ones that were used in a deal involving Goldman Sachs and Facebook. In addition, the SEC has shown that it is interested in scrutinizing marketplaces for smaller chunks of private stock owned by employees, consultants, and investors of the issuer. There are a number of reasons why the SEC may want to look at the secondary market more closely, including the fact that it may consider these markets to be too risky even for buyers who are accredited and sophisticated. There are at least two ways in which the SEC could address its concerns with secondary markets, the most effective of which may be a rule-making approach. Under Section 12(g)(5) of the Exchange Act, the SEC has the authority to redefine the term "held of record" as it feels is necessary or appropriate to protect the public's interests or to protect investors from the effects of the provisions of this subsection being broken. Under a rule-making approach, the SEC would be able to answer questions such as whether the phrase "knows or has reason to know" from Rule 12g5-1(b)(3) includes an objective or subjective standard, as well as whether the form of holding securities of record was chosen mainly to bypass section 12(g) of the Exchange Act. This in turn will enable the SEC to allow only those secondary market transactions that are conducted in the spirit of the laws to move forward.

NYSE Trading Halts Adjusted to Trim Disruptions
Reuters (01/27/11) Spicer, Jonathan

The New York Stock Exchange has adopted new thresholds for the circuit breakers it implemented in the wake of last May's flash crash. Under the changes, trading on a particular stock will be halted for five minutes when three trades move by more than 10 percent in five minutes. The circuit breaker was previously activated when just one trade moved by 10 percent or more in a five-minute period. The all-electronic exchange NYSE Arca and Nasdaq OMX Group's main Nasdaq Stock Market made similar changes to their circuit breakers in late 2010. The changes are designed to stop one erroneous trade from triggering the circuit breakers. Since the circuit breakers were adopted, they have been tripped by more than 12 erroneous trades.

In the Minority on Majority Voting
CFO (01/11) Johnson, Sarah

Apple is the most prominent holdout of the 30 businesses that have rebuffed a request last spring by the California Public Employees' Retirement System to commit to majority voting for directors. In all, Calpers approached 58 companies, including Costco, MasterCard, and UPS, and the giant pension fund says it plans to target midsize and smaller companies in the near future. In recent years, companies have begun to adopt majority voting in uncontested elections due to investor pressure and fear of publicity that would make them appear unfriendly to investors. The plurality system allows a director to be reelected even if a few shareholders give the director approval, but majority voting would give shareholders the choice to vote "against" a candidate. "It basically enables shareholders to have a say on who the directors are and to reject a board or board member who they believe is not thinking in the interest of the shareholders," explains Peter Clapman, chairman of Governance for Owners USA, a corporate-governance advisory firm. Apple says majority voting would subject its directorships to the vagaries of whether or not shareholders show up to vote, and could prevent it from quickly filling an empty seat if a director does not receive a majority of shareholder votes. About 70 percent of S&P 500 companies have a majority-voting standard, according to Institutional Shareholder Services.

SEC Plans to Enhance the Authority of Stock Exchanges
Courthouse News Service (01/27/11)

The Securities and Exchange Commission (SEC) has issued a proposal that shortens the amount of time in which it must approve or disprove of formal rule changes proposed by Self Regulatory Organizations (SROs), such as the stock exchanges and futures trading boards. The SEC has 45 days to approve or disprove proposed rules. Also, the regulation, which implements provisions of the Dodd-Frank Act to more clearly define the role of the SEC, does not allow the SEC to stop orders issued by SROs for immediate implementation. Although the SEC will be able to temporarily suspend an immediate implementation order, doing so will automatically initiate an expedited review process. The SEC says the changes will constrain its resources because SROs are initiating more rule changes every year.

Whistleblower Rule Sets Alarm Bells Ringing
Inside Investor Relations (01/26/11) Human, Tim

Many companies are concerned that the Securities and Exchange Commission's (SEC's) whistleblower rule will damage their internal compliance structures because it will create a powerful incentive for people to come forward rather than report issues internally. Part of the Dodd-Frank Act, the new provision allows the SEC to compensate whistleblowers with a portion of the fine it imposes on firms as a result of the information provided. "We believe the commission's proposals will have the impact of thwarting internal compliance and reporting programs in a manner inconsistent with the intent of the Dodd-Frank legislation that authorized them," dozens of companies wrote in a letter to the SEC during the public comment period. Norman Blears, a partner at law firm Hogan Lovells, says it is now more important than ever to foster a culture of internal reporting, regardless of the impact of the new rule. For IROs, the whistleblower rule may offer some benefits, and some believe it will empower IR professionals. "From an individual standpoint, I think this new provision creates an opportunity for IROs to get themselves more closely integrated into their organization's risk management and corporate governance functions," says Rob Berick, senior managing director at communications consultancy Dix & Eaton. The whistleblower rule will take effect in the first half of 2011.
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Blue-Ribbon Panel: Just Tweak GAAP for Now
CFO (01/11) Stuart, Alix

GAAP should be modified for private companies, rather than radically overhauled, according to the blue-ribbon panel charged with addressing U.S. GAAP. In its new report on GAAP, the panel says the best way to implement change quickly is to have the Financial Accounting Foundation (FAF) create a separate board to modify existing GAAP for "differences, where warranted, in measurement, recognition, and presentation, and not just disclosure" between public and private companies. The report continues: "At least in the near term, the system should focus on making exceptions and modifications to U.S. GAAP, rather than move toward a separate, self-contained GAAP for private companies or a wholesale reorganization of GAAP." FAF should supervise the board, conduct a review for possible changes to its structure or mission in three to five years, and come up with a criteria for when GAAP modification is warranted. Many private-company finance executives welcome the approach recommended by the panel. Chris Rogers, vice president of finance and administration for Infragistics, says private company executives want standards related to options valuation, derivatives, consolidation rules, and uncertain tax positions modified or eliminated. However, money could be a problem when it comes to implementing the recommendations. FAF is expected to consider the report at its next meeting in February.

Interview With Stanford Law Professor Joseph Grundfest About the State of Securities Class Action Litigation
The D & O Diary (01/25/11) LaCroix, Kevin

There were a number of important trends in securities class action litigation last year, including the significant increase in the number of lawsuits involving merger-related federal class securities fraud, according to Stanford Law Professor Joseph Grundfest. This increase may have been spurred by a decline in traditional securities fraud litigation, which could have prompted the securities fraud plaintiff bar to find new cases to litigate, Grundfest said. Grundfest also touched on what he thought were the most important judicial trends related to securities litigation in 2010, including the ramifications of the Supreme Court's Morrison decision. Grundfest noted that the implications of the decision in Morrison are continuing to be felt in the lower courts, which are dismissing actions related to activity in foreign markets; they are not narrowly interpreting the decision. Finally, Grundfest discussed the effect that the Dodd-Frank financial reform law will have on securities legislation. Grundfest said that if the inclusion of a reward in the law's whistleblower provisions results in a material increase in the number of enforcement actions by the Securities and Exchange Commission, there will likely be an increase in parallel private actions as well.

Weeden Looks for Research Edge
Traders Magazine (01/11) Scotti, Michael

Weeden & Co., a reputable equity trader that has structured its business around working with difficult small- and mid-cap names, has added three fundamental analysts and four desk analysts in the past 12 months. One buyside trader observed that Weeden has expanded its business with the firm by garnering more research votes. "I think they are looking for a way to move the needle," he said, "and at a firm like ours, if they can get a few research votes from somebody who has a following with some of our analysts, it's additive." Weeden is in good company. Driven by the commission downturn in 2010, execution-only companies have flocked to research by either enlarging their offerings or launching research to attract more order flow from clients. Weeden & Co. co-President Lance Lonergan cautioned that the firm has been choosy in its expansion, because providing research is a major commitment financially and strategically. It has no set roadmap to hire a certain number of analysts this year. Nor has it hired personnel to sell research. Analysts manage their accounts, and the firm's 50 sales traders can distribute research calls, he noted.
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February 1, 2011

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