On Friday, April 30, 2010, the Securities and Exchange Commission announced that it is increasing the fee rate paid by public companies and issuers to register securities with the Commission in fiscal year 2011. The new fee to register securities with the Commission will be $116.10 per million dollars, an increase from the current fee of $71.30 per million dollars. The fee increase will become effective on the later of October 1, 2010, or five days after the date on which the Commission receives its fiscal year 2011 regular appropriation.

More information on the SEC’s fee rate increases is available at http://sec.gov/news/press/2010/2010-66.htm.

On Friday, March 5, 2010, the SEC approved a proposed rule change by Nasdaq to increase the application, entry and annual fees charged to issuers listed on the Nasdaq Global and Nasdaq Global Select Markets, as well as the fee for requesting written interpretations of the Nasdaq listing rules. 

             Under the approved rule change, the fee for a company to apply to list on the Nasdaq Global Market or the Nasdaq Global Select Market increased from $5,000 to $25,000. 

             The changes to the entry fees for Nasdaq Global and Nasdaq Global Select listings are as follows: 

                __________________________________

                      (1)  See Nasdaq Rule 5910(a).

                      (2)  Under the previous rule, the entry fee was $150,000 for all listings with over 50 million shares

                             outstanding.

             The changes to the annual fees for Nasdaq Global and Nasdaq Global Select domestic and foreign companies are as follows: 

                    __________________________________

                      (1)  See Nasdaq Rule 5910(c).

                      (2)  The annual fee did not increase for companies with 25 million to 50 million shares outstanding.

            Annual fees for American Depository Receipts (ADRs) listed on the Nasdaq Global Market or the Nasdaq Global Select Market also increased by $8,775 to $20,000 depending on the number of ADRs outstanding. 

             Finally, under the approved changes, Nasdaq eliminated the different fees for regular versus expedited requests for written interpretations of Nasdaq listing rules.  Previously, Nasdaq required a non-refundable fee of $5,000 for regular requests for written interpretations and $15,000 for expedited requests.  Under the revised Nasdaq Rule 5602, Nasdaq generally will require a $15,000 fee for all written interpretation requests and will respond within four weeks, although it will attempt to respond sooner if the company so requests.  Nasdaq will continue to provide oral interpretations of its rules at no charge. 

             The revised annual fees are effective as of January 1, 2010.  The revised application and entry fees are effective for listing applications submitted after March 5, 2010 (e.g., companies that applied before SEC approval of the rule change would pay the entry fee in effect at the time of its application).  The change to the interpretive fee is effective as of March 5, 2010.

Changes to the SEC’s proxy rules that will require publicly registered TARP recipients to permit an advisory shareholder vote on executive compensation are set to take effect on February 18, 2010.  The rule changes, which were adopted by the SEC last month, help implement and clarify how recipients should comply with the requirements of Section 111(e) of the Emergency Economic Stabilization Act of 2008.

            In addition to the vote itself, the amended proxy rules require TARP companies to disclose in their proxy statements that they are providing the separate shareholder vote on executive compensation, as disclosed pursuant to the compensation disclosure rules, and to briefly explain the general effect of the vote, such as, for example, whether the vote is non-binding.  The rules do not require the use of any specific language or form of resolution.  The SEC has also clarified that smaller reporting companies will not be required to provide a compensation discussion and analysis in order to comply with these requirements.

            For companies who received TARP funds prior to their last annual meeting, the new requirements are likely to be similar to what these companies prepared in connection with their proxy materials for last year’s meeting.  TARP companies may be pleased to know that the new SEC rules provide that TARP recipients will not have to file a preliminary proxy statement in advance of the definitive proxy statement due to the required “say-on-pay” vote. 

            To view the SEC release of the final rule, click here.

            http://www.sec.gov/rules/final/2010/34-61335.pdf

Last week, President Obama announced a proposed rule aimed at separating banks from certain securities activities.  He dubbed the proposal the “Volcker Rule” after Paul Volcker, the Economic Recovery Advisory Board Chairman and former Federal Reserve Chairman who endorses the rule.  The proposal would prevent commercial banks from owning or investing in hedge funds and private equity funds.  The rule would also limit banks from trading for their own accounts, a practice referred to as “proprietary trading.”  Basically, the proposal would restrict a bank’s ability to engage in speculative investing for its own personal gain.

Here’s the full quote from Obama’s announcement:

It’s for these reasons that I’m proposing a simple and common-sense reform, which we’re calling the “Volcker Rule” — after this tall guy behind me.  Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.  If financial firms want to trade for profit, that’s something they’re free to do.  Indeed, doing so – responsibly – is a good thing for the markets and the economy.  But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.

The Volcker Rule presents President Obama an opportunity to show Main Street that he is toughening his stance on Wall Street.  He argues that risky investing by investment banks such as Goldman Sachs and Morgan Stanley played a significant role in the recent financial crisis.  The rule attempts to punish these institutions by eliminating revenues derived from speculative investing.  Austan Goolsbee, a White House economist, put it more succinctly in a Wall Street Journal article when he stated, “the key issue is that institutions that are getting a backstop from the taxpayer shouldn’t be able to make a profit off their own investing.”

Clearly, some action needs to be taken to ensure that we do not face another financial meltdown.  But the problem with the Volcker Rule is its unintended consequences.  In his address to the Senate Banking Committee on February 2, 2010, Mr. Volcker argued for complete separation of commercial banks from financial markets.  A rule like this that would not allow a commercial bank to speculate in capital markets would immediately affect bank profits, at least in the short run.  Recently, investment banks have tended to make less money at banking and more money at investing.  Suddenly illegalizing investing at institutions that also own banks would eliminate this main source of revenue, which could have a domino effect on the rest of the economy.  Once revenues in this area are lost, banks would actually take less risk on the banking side by tightening lending practices.  If companies can’t borrow, they don’t spend.  If companies don’t spend, then they don’t hire.  If people don’t get hired, then they don’t spend either.  Of course, less spending halts the economy, which leads directly to worldwide chaos.

Now maybe that’s an exaggeration.

But not really.

So what should the Volcker Rule actually do to achieve the President’s goals?  First, I agree with the part of the proposal that would separate hedge funds from banks.  As a former hedge fund manager, I can tell you that combining a hedge fund and a bank is a bad idea.  Hedge fund managers are paid to take risks.  The more risks they take, the more fees they generate.  Taking risks is not necessarily a bad thing.  However, in this context, it could lead to an unfortunate outcome. 

For example, consider a stand-alone hedge fund, completely detached from a bank or other large institution.  That manager would be more reluctant to take extraordinary risks because once the money is gone, both the manager and the fund itself soon follow. 

Now consider the hedge fund bankrolled (literally) by a large bank, such as Wells Fargo or Bank of America.  This manager has an incentive to take extraordinary risks and may even be encouraged to do so.  If these extraordinary risks do not pay off, the fund has an entire bank’s assets at its disposal to replace the blown investment.  In normal economic times, this would not necessarily be a problem either.  Except these are not normal economic times and our hypothetical bank’s assets in this case have been subsidized by taxpayer dollars.  (See any one of the eight million articles written about the “Bank Bailout” on Google.)  Separating hedge funds from banks ensures that the entire risk of any speculative investing is borne solely by the hedge fund itself and not by banks and, subsequently, by taxpayers.  Mr. Volcker agreed with this sentiment in his Senate testimony stating:  “Hedge funds, private equity funds, and trading activities unrelated to customer needs and continuing banking relationships should stand on their own, without the subsidies implied by public support for depositary institutions.”

Once the hedge funds are removed, the question becomes how far should proprietary trading be curbed in banks.  Again, this type of investing, if profitable, may give banks more cash to lend to customers, which reverses the domino effect discussed above.  However, if the speculation that can occur by proprietary traders is not checked in some meaningful way, then we are right back to where we started.  But cutting off this entire revenue stream would go too far.  Instead of wholly eliminating this practice in banks, the President would be better served by merely regulating the activity.  One solution would be to limit the amount of assets that a bank can invest.  This solution would allow banks to maintain this stream of revenue while ensuring that their speculation does not get out of hand.  Treasury Secretary Timothy Geithner backs this solution despite his vocal support for the Volcker Rule.  In his testimony before Congress, Mr. Geithner stated that banks “should be subjected to a set of constraints on capital, on leverage and how you are funded that limit the amount of risks you take.” 

A second solution would be to require banks investing in speculative assets to increase their capital reserve to cover any potential losses.  This solution would also effectively lower the total assets that the bank has to invest in speculative ventures.  A bank that has a limited amount of assets to invest will invest those assets more wisely. 

With these solutions, everyone wins.  The President gets to appear tough on Wall Street.  Banks get to continue receiving this revenue stream.  And bank customers are free to borrow and spend, resurrecting the economy, which leads directly to worldwide harmony.

Now maybe that’s an exaggeration. 

But not really.