Randomly Noted

Score one for the California Public Employees’ Retirement System. The country’s largest public pension fund won in its scrimmage with Apple Inc. about how Apple directors get to stay on board.

Apple shareholders voting at the company’s annual meeting today backed a CalPERS-offered proposal that asks the board of directors to jump on the majority voting bandwagon.

“An election where you can be voted in without a majority is unworthy of a great company like Apple,” said Anne Simpson, CalPERS’ senior portfolio manager who heads its corporate governance program, in a press release. “We strongly urge Apple to make the change that its owners are requesting.”

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There are facts. There is political reality. As those two clash, it won’t come out well for the Securities and Exchange Commission.

The SEC’s chairman, Mary L. Schapiro, marshalled facts in a speech today, hitting hard that the watchdog agency needs more money to modernize to fulfill its role, especially in light of the additional responsibilities handed the SEC by the Dodd-Frank Act.

The reality is the SEC had better review all its operations, set its priorities and stop some things so it can do others well. The top priorities should be enforcement and watching ever-more-sophisticated stock market patterns.  Other functions, such as investor education, will have to fall by the wayside.

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It was just about a full year ago that the President of the U.S. stood in front of television cameras and referred to the “tall guy behind me.”

The tall guy was Paul Volcker, that day near the crest of a remarkable political renaissance that saw the “Volcker rule” go from Volcker’s seemingly singular quest to official Obama administration policy. Eventually, it became a still controversial part of financial regulatory reform.

The “Volcker rule” bars commercial banks from engaging in certain types of proprietary trading. Volcker’s simple point: banks shouldn’t be taking big risks when their deposits carry government insurance. If they want to trade for their own accounts, they should stop being banks or spin off the units that do the trading.

The news today is that Volcker, now 83, is going to leave his role as head of the President’s Economic Recovery Advisory Board.

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We are now living through the reason the leader of Securities and Exchange Commission earlier this year called for the right for the agency to fund itself.

We are now living through the reason the Congress won’t honor that request.

It’s about power and control. It’s about the opportunity to take a second whack at signed legislation through a tight grip on the purse.

Let us summarize. SEC Chairman Mary L. Schapiro has asked for the right, granted other U.S. financial regulators, for the SEC to fund itself through the fees it collects from the companies under its purview. That would allow the agency to better meet enforcement and other duties.

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A socialist U.S. senator and a central banker issued very separate critiques of the U.S. banking system, but in their own ways they both question the interconnectedness of the big-time, global financial system.

The seemingly odd couple consists of Sen. Bernie Sanders, the independent from Vermont, who was much in media demand on Wednesday, since he was key to forcing the Federal Reserve to reveal the names of the recipients of the Fed’s loan largesse during the dark days of the financial crisis. The other is Thomas M. Hoenig, the president of the Federal Reserve Bank of Kansas City and a lone, serial dissenter from the super-easy monetary policies of the U.S. central bank.

Both implicitly were praising a bygone time, when national politics and policies were not so out of sync with the fully global and totally tangled nature of the financial services world. It’s an open question whether U.S. decisions alone can challenge that structure and leave a vibrant financial services industry in its wake.

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Next time career day comes around to local grade schools, don’t be surprised if some ambitious third grader raises his hand and announces he wants to grow up to be a whistleblower.

College courses and a new major are sure to follow. Maybe whistleblowing can be housed under criminal justice study, or, perhaps, sociology.

Who could blame the apocryphal youngster cited above, especially after recent news that a former employee of GlaxoSmithKline PLC picked up a cool $96 million for information that helped lead to a $750 million settlement between the comany and the Department of Justice.

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Today’s regulatory battles about U.S. corporate governance focus on shareholder power: how much direct influence holders of a company should have to nominate directors or vote on the pay packages of top executives.

In the case of nominating directors, already approved by the Securities and Exchange Commission and now subject to a court challenge, it is the big instiutional shareholders who will get additional power.

A decade ago, the regulatory rage was over more basic things, such as disclosing important information,  and the beneficiaries of a controversial new regulation were the small guys, the seemingly shrinking pool of individual investors.

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A lot has happened in the past few years to discourage individual investors in U.S. stocks.

Credit crunch, recession, weak economic recovery, still-slumping house prices and more have taken their toll on small investors’ psyches.

More fundamental is the sense that the stock market, as even knowledgable investors used to know it, no longer exists. Not in a  world of high-frequency traders, drak pools that make up significant amounts of daily trading liquidity and all the rest.

So it’s not necessary a causal relationship, but worthy of note, that since the “flash crash” of  May 6 every single week has seen an outflow of money from stock-based mutual funds.

Securities and Exchange Commission Chairman Mary Schapiro made that point in a speech today. “Retail broker-dealers have told us that their customers – individual investors – have pulled back from participating in the equity markets since May 6,” Schapiro added.

It’s hard to find fault with that inaction given the still hard-to-understand nature of that wild spring afternoon aptly named the “flash crash,” when stock prices took an amazing free fall only to recoup much of those losses minutes later.

Though Schapiro employs a lot of question marks in her prepared remarks for the Economic Club of New York speech, you get the sense from the speech that the status quo of stock market structure in the U.S. will not last.

 One essential notion raissed by Schapiro is compelling. In days of yore, market specialists had obligations that in the SEC chairman’s words supported the “stability and fairness of the markets.”

Now the firms that are the most active don’t bear the titles or responsibilities of those specialist firms, whose role became “obsolete.”

And this quote sums it up. “The issue, however, is whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways in tough times,” Schapiro said.

Well, it finally happened.

After years of debate (the chairman of the Securities and Exchange Commission estimates 30 years), false steps and legal action, the SEC today approved the right of large shareholders who have held their stakes a good while to nominate directors at U.S. public companies. The names of those candidates, along with the people chosen by boards with whom they will compete for directorships, will be carried on proxy materials paid for and distributed by the companies.

It’s called “proxy access,” and it provides a reasonably free ride to the big public pension funds and some other sizable institutions to put up their own nominees to sit on companies’ boards of directors.

The vote, as expected, was three to two, with the two Republicans dissenting. The recently passed Dodd-Frank financial reform law gives the SEC power to do this, though some opponents still may lodge legal challenges.

As with any long-debated rule or law, the potential consequences of the action tends to grow with the length of the debate. In a couple of months or so, the rule will be in place, at least for larger companies. Then we’ll see whether this is a stampede or a trickle. Whether it fundamentally changes how boards work and interact, or whether it only comes into play at companies where there already is great discord or known issues.

I have, over the years, been clear on my view. This isn’t needed. What is needed is mandatory ‘majority rules’ voting for directors. An increasing number of companies are adopting it. That means shareholders, large and small, dissatisfied with directors’ actions, can vote them out.

With proxy access you do a few things. You give more power to large institutional shareholders, who have shown themselves in recent years quite capable of making a ruckus about top management when they feel the need, even without proxy access.

Some of those large institutions, such as large public pension funds, or union-associated funds, may well have agendas that go beyond the long-term maximization of profits for all shareholders. Political or labor oriented agendas, pushed by one or more shareholder-nominated directors, can be disruptive to companies’ health, make each director election a campaign and generally be distracting to all.

Also, you are giving more power to one class of shareholders (large) over another (small).

 The details are important. They are reasonable. To nominate a director you have to own 3% of the shares for three years. Holders can get together to reach the 3% threshhold. You can’t nominate more than one-quarter of the board. The smallest companies are exempt for three years.

The era of proxy access is finally upon us. The only thing you can count on is that there will be consequences that right now no one foresees, as is usually the case.

Call him the stock market senator. The fix-the-plumbing stock market senator, to be more precise.

Sen. Edward “Ted” Kaufman, the Democrat from Delaware who is filling out the term of Joe Biden after Biden ascended to the vice presidency, has distinguished himself with his knowledge, concern and vigor about the inner workings of U.S. stock trading. He’s now getting some media attention because of it.

There likely are some in the high-frequency trading community and other pockets of Wall Street pleased with the prospect that Kaufman’s term is winding down and that he won’t run for election when his Senate seat comes up in November of this year. He’s keeping the heat on them, as he is on the Securities and Exchange Commission.

Kaufman’s year-long interest in the current state of stock trading reached a high-point with an early August letter to SEC Chairman Mary Schapiro in which Kaufman makes a series of reform recommendations.

Usually, when legislators send letters to regulators, they are looking for answers because something is affecting their constituents or a media report has shed light on a problem in an area where they have an interest because of committee membership or otherwise.

The Aug. 5 Kaufman letter to the SEC bears no resemblance to such documents. Besides showing an acute understanding of the myriad and obscure workings of today’s stock trading - dark pools, high-frequency trading, excessive messaging and the like – Kaufman has eight pages of proposals.

The “flash crash” of May 6, when stocks gyrated wildly and breathtakingly dropped at warp speed in a few minutes of an otherwise uneventual Spring mid-afternoon, has to a degree borne out Kaufman’s pre-dated concerns. He’s questioning the whole thrust of market developments of recent years.

“The proliferation of exchanges and other market centers that has increased fragmentation, the substantial rise in volume executed internally by broker-dealers in dark pools, excessive messaging traffic, the dissemination of proprietary market data catering to high frequency traders, and order-routing inducements all may be combining in ways that cast doubts on the depth of liquidity, stability, transparency and fairness of our equity markets,” he wrote to Schapiro.

Among Kaufman’s specific suggestions: register high-volume, high-frequency traders with the SEC; raise the standards for becoming a market center (there are more than 50); examine whether too much order flow is being hidden from ‘lit’ markets in dark pools; and essentially rethink the whole structure to emphasize truly liquid markets.

The SEC, of course, has quite a bit on its plate. The Dodd-Frank financial reform bill handed over some important new powers. Indeed, just today, the SEC is expected to vote for a controversial plan to make it easier for large shareholders to nominate directors whose candidacy must be carried in company distributed materials.

Kaufman, who earned a master’s of business adminsitration from the Wharton School at the University of Pennsylvania, told the SEC it is at a historic juncture.

Will it be a “regulator by consensus,” which Kaufman described as one that only moves “when it finds solutions favored by large constituencies on Wall Street?” Or, in his view, something more.

You can agree or disagree with Kaufman’s recommendations. It’s hard to disagree with the notion that what we call the stock market has morphed into a complex web of interactions that few truly understand. And it’s good to see a legislator who knows his stuff before he speaks his mind.