The SEC filed a motion today seeking approval of a settlement with Bank of America.  The news papers have already reported on the settlement amount.  The SEC is seeking approval of $1 in disgorgement and $150 million in a penalty.  In addition, the SEC is seeking a number of corporate governance reforms in the form of undertakings. 

These include enhanced auditor review of disclosure procedures and expanded certification requirements for the CEO and CFO (now applicable to the proxy statement).  The undertakings require greater involvement of the audit committee of the board in the disclosure process (through the requirement to hire special counsel). 

A series of undertakings are also designed to affect the compensation process.  The independence requirement for members of the compensation committee have been enhanced (subjecting them to the same standards as the audit committee independence requirement that was adopted in SOX), as has the requirement for the compensation consultants.  Shareholders are to receive an advisory vote on compensation (say on pay) and on changes in compensation policies. 

The description of the undertakings below comes from the memorandum filed by the SEC (and which will be posted eventually at the DU Corporate Governance web site).   We'll venture a prediction on what Judge Rakoff will do in the next post.

• Audit of Internal Disclosure Controls.  Under Section 404 of the Sarbanes-Oxley Act, 15 U.S.C. § 7262, Bank of America must establish internal controls and procedures for financial reporting and have its outside auditor attest to, and report, on management’s assessment of their effectiveness. Although Bank of America is also required to establish controls and procedures for disclosure-related matters and evaluate their effectiveness each quarter, see 17 C.F.R. § 240.13a-15, such disclosure controls and procedures are not required to be audited by an external auditor. This undertaking requires Bank of America to retain an independent auditor to perform an annual assessment and attestation of the Bank’s internal disclosure controls, similar to a Section 404 audit, and to include the attestation report in its annual report to shareholders and filings on Form 10-K.

• Certifications of Annual and Merger Proxy Statements.  Pursuant to the Sarbanes-Oxley Act, Bank of America’s Chief Executive Officer and Chief Financial Officer are required to certify the accuracy of the Bank’s quarterly and annual reports under the Exchange Act. See 17 C.F.R. §§ 240.13a-14(a), 240.15d-14(a). No certification is required, however, with respect to proxy statements. This undertaking requires Bank of America’s CEO and CFO to provide certifications of all annual and merger proxy statements similar in form to the certifications required for quarterly and annual reports under theSarbanes-Oxley Act.

• Special Counsel to Audit Committee. This undertaking requires the Audit Committee of the Bank’s Board of Directors to retain special counsel with expertise in disclosure issues who will report to the Committee and review the Bank’s public disclosures. The disclosure counsel is required to confer with members of the Bank’s Audit Committee in executive session at all regularly scheduled meetings, separate and apart from the non-independent Board members, to discuss the adequacy of Bank of America’s public disclosures.

• “Super-Independence” of Compensation Committee.  The members of Bank of America’s Audit Committee are prohibited, under the Sarbanes-Oxley Act, from accepting consulting, advisory or other compensatory fees from the Bank or its affiliates other than routine compensation for serving as a Board member. See 15 U.S.C. §78j-1(m)(3)(B). This standard of independence, commonly referred to as “super-independence,” is not required for compensation committee members. This undertaking requires Bank of America to adopt a super-independence requirement for members of the Compensation Committee of its Board.

• “Super-Independent” Compensation Consultant.   Pursuant to this undertaking, Bank of America will maintain a consultant to advise the  members of its Compensation Committee, who will also be subject to “super-independence” standards.

• “Say on Pay”.  As a former recipient of funds under the Troubled Asset Relief Program (TARP), Bank of America until recently was required to hold a non-binding shareholder vote to approve executive compensation. See 17 C.F.R. § 240.14a-20. Because the Bank has recently repaid the government the TARP funds it had received, it is no longer subject to this requirement. Thisundertaking requires the Bank to continue holding a non-binding shareholder vote on executive compensation for three years from the entry of judgment.

• Disclosure of Compensation Principles and Advisory Shareholder Vote on Any Changes.  Pursuant to this undertaking, Bank of America will implement and maintain incentive compensation principles and procedures and post a description of them in a prominent place on its website at www.bankofamerica.com. Unless a change in the principles is required by law, Bank of America can change them only after first informing its shareholders and placing any proposed change to the shareholders for an advisory vote.