THE VIEW FROM THE BOARD IN THE WAKE OF DODD-FRANK

Dodd-Frank has been described as the most comprehensive overhaul of the financial regulatory system since the great depression. Since it was crafted to address the most significant market crisis since the one which spawned the Federal Securities Laws, many may find that more than appropriate.

In the wake of this new legislation which many claim constitutes over-regulation which will hinder business, PWC conducted its annual survey of corporate directors on a range of topics from risk management to executive compensation and FCPA compliance. Risk management is in many ways a centerpiece of Dodd-Frank, while executive compensation has been a much discussed topic and FCPA compliance a key focus of the Department of Justice and the SEC. The results of the survey provide interesting insights into these issues. Those results include:

Board in general

• Over half of the directors indicated that more time and focus should be spent on risk management.

• Over 70% of the directors stated that they do not believe their board should have a separate risk committee, while 67% concluded that the board is very effective at monitoring risk management to mitigate corporate exposures.

• Over half of the directors stated that the board does not receive general and/or specific customer satisfaction research.

• Most directors stated that during the last 12 months the board had discussed an action plan that would outline steps the company would take if faced with a major crisis.

• Almost 80% of directors indicated that sustainability/climate change is already a major focus and no additional time on the question is required.

• Almost 90% of directors surveyed stated that no additional time is required on social responsibility issues because it is already a major focus.

Regulatory and compliance

• Almost 75% of the directors stated that compliance and regulatory issues are already a major focus and do not require more time.

• The top five items identified as “red flags” in signaling a director to step up his/her board involvement are: (1) a restatement of the financial statements; (2) charges or investigations; (3) management missing strategic performance goals; (4) an adverse 404 opinion; and (5) multiple whistle-blower incidents.

• Almost 25% of the companies involved in the survey do not have an FCPA compliance program.

• Significantly less than half of companies in the survey have an FCPA program which covers employees and agents, while almost 20% have a program limited to employees.

Management

• 90% of the directors surveyed concluded that the board is very effective at standing up and challenging management when appropriate.

• 58% of directors stated that U.S. company boards are experiencing difficulty controlling the size of CEO compensation.

Effectiveness of board

• Only about 30% of directors concluded that the company had an effective board evaluation process.

• Over 81% of directors stated that the most important technique in ensuring that directors continue to be effective on the board is an effective evaluation process.

The survey results are available from PWC at www.pwcglobal.com.

SEC ACTION TO HALT FRAUDULENT OFFERING

The Commission brought an action against the two principals of Brewer Investment Group, LLC (“BIG”), a financial services holding company, and its related entities centered on an alleged fraudulent offering. Specifically, the complaint claims that a fraudulent sale of unregistered securities issued by an Isle of Man entity was made by the defendants and that the proceeds were used to try an prop up financially struggling BIG. SEC v. Brewer, Case 10-cv-09832 (N.D. Ill. Filed Oct. 29, 2010).

Defendant Steve Brewer is a 25% owner, CEO and chairman of BIG. Defendant Adam Erickson also owns a stake in BIG and serves as its COO. Following its creation in late 2000, BIG and its operating subsidiaries, including a registered investment adviser and a registered broker dealer, were profitable. Its financial condition changed. By January 2009, the firm and its subsidiaries were struggling financially. In 2008, BIG suffered a $3 million operating loss. In January 2009, the firm received a default notice on a $2.5 million loan.

Beginning in June 2009, a PPM was prepared to sell notes issued by FPA Limited, an Isle of Man Company. From June 2009 through September 2010, FPA made two offerings of notes based on the PPM. One was for $15 million of three-year asset-backed promissory notes paying 8%. An additional $15 million offering of one-year asset-backed notes which paid 5% was also made. Over a period of several months, 74 investors purchased $5.6 million in notes through entities related to BIG.

The PPM was materially false and misleading, according to the complaint, in that:

• Use of proceeds: It made misrepresentations regarding the use of the proceeds by failing to tell investors that over 90% of the funds would be transferred to BIG;

• Financial condition: Investors were not told the financial condition of BIG;

• Risk of investment: The PPM implicitly and explicitly represented that the proceeds of the offering would be used to procure collateral which would secure the notes ; and

• Defaults: The defaults of BIG on its obligations were omitted from the materials provided to investors.

The complaint alleges violations of Securities Act Sections 5 and 17(a), Exchange Act Sections 10(b) and 15(c)(1) and Advisers Act Section 206. The case is in litigation. See also Litig. Rel 21715 (Oct. 29, 2010).