‘It will be old-time investor relations – but on the Internet: constantly providing information, posting notices, responding to e-mail inquiries, creating chat-room forums for shareholders to talk directly to management. And the companies that don’t do it will never stack up to the companies that do.’
That doesn’t sound much like your usual government bureaucrat. In 1980, a young man from Kansas City came to Washington DC with a dream of studying international law. He never left. Entranced instead by securities law, Brian Lane today presides over the 330-person division of corporation finance at the SEC. As one of the leading architects of America’s capital market overhaul, and point guard in the battle against abuses by public companies, Lane personifies a revivified SEC.
Lane’s rise to the upper echelons of Washington bureaucracy in many ways mirrors the increasing importance of the SEC over the last 15 years. Through the go-go years of the 1980s and into the bull market of the 1990s, protecting investors while oiling the wheels of corporate finance has become more crucial than ever. Ever since he spent his third year at the Washington College of Law of American University interning at the SEC, Lane has known where he wants to be. ‘I got a view from the inside, and knew right away it was a great place to work,’ he says.
Turning Point
So an enthusiastic young Lane joined the SEC’s division of market regulation in 1983 and moved over to the division of corporation finance in 1986. Following a six year stint of rule-making – notably revising the corporate insider trading rule – Lane was drafted to the position of legal counsel to Commissioner Richard Roberts. Then, in 1995, he got the nod to join the staff of the SEC’s powerhouse chairman, Arthur Levitt, as legal counsel. When Linda Quinn resigned in February 1996, Lane stepped in to fill some sizeable shoes as director of the division of corporation finance. It seems they’re a perfect fit and Lane’s enthusiasm has, if anything, grown.
What a crossroads in the SEC’s history for Lane to take the reins. A few months previously, Congress had passed the Private Securities Litigation Reform Act giving companies a safe harbor for forward-looking information. And an internal task force had just released a report calling for a modernization of corporate finance regulation and disclosure by means of trashing or changing one-quarter of rules and half of all related forms.
‘It’s been an exciting time – a year of change for the division,’ avows Lane, an apt candidate to lead the change having led the task force from the chairman’s office.
The scope of Lane’s division was transformed again when Congress passed a sweeping securities market improvement act last October, giving exemptive authority from the 1933 securities act for the first time. ‘In the past, our hands were tied,’ Lane explains. ‘Now if something stands in the way of aiding capital formation or protecting investors, we can amend the rules. We’re more dynamic in responding to changes in the marketplace, whether they’re technology driven or market driven.’
Techno Take
A major coup for Lane was luring a senior Intel software engineer to the Commission. Bill Combs migrated from the West Coast last July, snagged by a special two-year contract that goes above and beyond government wages: ‘All too often government loses talent to the private sector; for once it’s the other way around,’ Lane remarks.
Technology, of course, is helping drive the SEC’s rapid evolution. ‘The laws on capital formation were written when the flow of information was by mail,’ Lane points out. ‘Now we’re bombarded by information from many sources: conference calls, news wires, the media, and the Internet – the most dramatic agent of change.’
Lane says the Internet is causing a sea change in investor relations. ‘It makes IR all the more important because issuers now have the ability to talk directly to a multitude of investors at the same time,’ he muses. ‘What does that mean for proxy solicitors, mass mailers, broker dealers and underwriters? How is the Internet changing the value of their franchises? Broker dealers aren’t going the way of the stage coach, but they will have to adapt to the market’s challenges and protect their franchises, and not just ask for rules to protect them.’
Indeed, technology’s distribution clout and the enhanced disclosure it enables helped prompt safe harbor reform. ‘But companies aren’t yet providing the forward looking information we’ve been hoping for,’ Lane complains. ‘They’re timid after so many years of being sued. Part of my job has been going around to speak to lawyers and companies and encouraging them to improve their disclosure.’
Another by-product of last fall’s legislation is a survey to improve the proxy proposal process, launched by Lane in February with a comment period that finished at the end of March. At last count, 400 responses to the SEC’s questionnaire were recorded, which Lane says is a ‘good response’, although he would have liked around 1,000.
Even before the survey, Lane had already spoken out about liberalizing the proxy process. Shareholder groups like the Council of Institutional Investors last summer called for guidance on how much they can talk among themselves without becoming a ’13D group.’ ‘On the flip side, companies have had their hands tied, and can hardly talk to shareholders about plans without filing with the SEC,’ Lane describes. ‘My idea is to open up the process for both companies and investors, letting them talk privately with each other as long as they don’t have a proxy card in hand. They could ‘test the waters’ to determine if there is enough support to launch a proxy solicitation.’
Crack Down
With proxy rule changes, as with most everything he does, Lane’s driving motivation is simplification. ‘I’m trying for an enlightened, Chairman Levitt-style of common sense government,’ he says. ‘It’s like cleaning out a closet: most people look at old clothes and say, Gee, I might wear this again. I really hate to get rid of it. But if you’re not using it, if it’s not needed for the purpose it was intended for, or if the benefits are marginal, then get rid of it.’
Lane has already helped dispatch 44 rules and four forms, but he’s proposing to do away with more. For example, Rule 144 – one of the foundations of corporate finance – has already been changed to shorten the holding period for insider owned restricted stock from two years to one. Now Lane has recommended the SEC go further and eliminate the requirement that insiders sell their stock through a broker, along with an alternative way to measure the maximum sale according to daily trading volume – an option which is almost never used.
‘Whenever we open up a rule for revisiting, we should try to simplify it as much as possible and get rid of all the unnecessary clutter,’ Lane says.
There is one area where rule-busting Lane is leaning in the opposite direction, however. He has been working to toughen up Regulation S, which governs the overseas issuance of securities by US companies. As he points out, a crack down was necessary in response to abuses: ‘A few cowboys were spoiling it for the rest.’
Plain Speaking
As Lane was tearing down the cobwebs in the SEC’s rule books, corporate America was invited to join in the house cleaning operation by using ‘plain English’ in disclosure documents. ‘Investor protection depends on disclosure, but they’re not protected if they don’t understand what they read,’ says Lane. ‘Over the years, disclosure has become so complicated and jargon-filled that we questioned whether people even read these documents.’
So the SEC started out with plain English in mutual fund documents. Then Lane launched an initiative for corporate filing documents with a pilot program, a plain English handbook and proposed rules for plain English prospectuses and proxy statements. Some 50 companies have already taken advantage of the speedy SEC review under the pilot, and Lane reports that the first plain English IPO filing is currently in the works.
‘The war has only begun,’ Lane says. ‘We have won some battles, but it’s going to be a long process to change cultures and mind set – even in my own division.’ For example, Lane reports that his division’s staff performance appraisal forms were transformed into plain English this year.
In fact, Lane has been shaking up the SEC as much as he’s been rocking America’s public companies. His division was recently reorganized along more harmonious industry lines so the same staff members are reviewing all the filings from, say, energy companies, instead of everyone looking at unrelated sectors. And Lane is putting a unique new emphasis on training, inviting analysts from investment banks, brokers and fund managers to instruct corporation finance staff on the industries they specialize in. ‘I want them to come in and tell my staff what’s really going on,’ he says. ‘Then we can look at these documents with a much better trained eye.’
Lane also implemented a ‘staff legal bulletin’ in response to the lack of ‘black letter’ corporate finance law. Two bulletins have been posted on the SEC’s Web site already, concentrating on specific aspects of SEC policy. So instead of poring over hundreds of interpretative letters to determine a course of action, securities lawyers can just ‘browse the bulletins and get all the answers.’ And since February, lawyers have been encouraged to e-mail requests for interpretative letters so the important ones can be posted on the Web along with the Commission’s responses.
It may seem like Lane was born to the SEC. But is this his life’s work? ‘There will be a time when it will be my time to go,’ he demurs. ‘The director should be somebody who is excited about the work; somebody with their own ideas about exactly how it should be done. One day I will pass the baton to somebody who is as excited about this work as I am. But I would like to stay until my job is done.’
The depth of the job Lane has already done belies the short 14 months he has headed up the division. But to hear him tell it, he has only scratched the surface. It may be a long while yet before all his goals for the SEC are achieved.
Compass points
Brazilian Makeover
A whole lot has changed in five years. It may be but a blip in the history of the world, but in that short time Latin America has seen its capital markets boom, bust and bounce back.
From the vantage point of Aracruz Celulose, things certainly look different now than they did in 1992. That was the year Aracruz launched the first Brazilian ADR on the New York Stock Exchange. It had little international exposure and no IR department, so it leaned heavily on its US bankers and advisors.
Today Aracruz is still just one of two Brazilian companies listed on the Big Board, along with Telebras. But the proportion of Aracruz shares in ADR form is at 23 percent and rising. And down in Rio de Janeiro, Mauricio Werneck heads up a thriving new investor relations department.
‘Our IR ability has increased over the years,’ Werneck affirms. ‘Now we are able to answer investor inquiries by ourselves and, by our evaluation, we have a mature in-house IR department.’
So with a new sense of its own maturity, Aracruz recently took a close look at the services it was getting from its US advisors. ‘To start with, we realized that ADR depositaries are adding much more value to their core services than they did in the past,’ Werneck says.
As a result of this re-evaluation, Aracruz staged a depositary beauty pageant and switched to JP Morgan. It also took the opportunity to update its 1992 deal with Dewe Rogerson, the New York IR counsel: ‘Now we are taking full advantage of our own IR practices, while using Dewe as a consultant to add value and perform activities that they are better positioned to do.
With these new arrangements, Werneck says Aracruz is working in a more focused way to target new investors: ‘Our objective was and is to keep investor communities worldwide interested in our company.’
‘Clearly large Latin American companies are realizing the benefits of IR modeled along US lines,’ adds Eduard van Raay , vice president of Latin American DRs at JP Morgan, which also handles Brazilian clients like Acesita, Bombril, Eletrobras, CST, CVRD and VCP. ‘Today 95 percent of the foreign issuers we deal with have an IR function in-house.’
What is also clear is that this is an opportune time for Aracruz to gear up its US IR effort. As the world’s largest producer of eucalyptus kraft market pulp, which is used to make things like tissue and paper, Aracruz is an apt ambassador for Brazil at a time when the demand for Latin American equity is heating up.
‘With inflation at lower levels but still wavering, the Brazilian economy has offered enormous opportunity for arbitrage gains over the last two years,’ Werneck explains. ‘Aracruz took full advantage of such arbitrage by borrowing money at extremely low rates compared to other Brazilian companies and investing the proceeds in domestic markets at very high interest rates.’
But now, says Werneck, opportunities for arbitrage are not as abundant as they once were, so Aracruz has decided to not take the risks that it has been taking in the previous two years.
Another sign of increasing interest in Aracruz stock is recently launched coverage by analysts at SBC Warburg and Goldman Sachs. ‘We are in contact with Wall Street on a daily basis,’ says Werneck. ‘Our efforts are devoted towards keeping interest at the highest level possible.’
Werneck notes that even though there are more Aracruz shares listed in Brazil than in New York, Big Board trading volume often overtakes the volume of trading in Brazil. ‘With the ADR program, we are very much recognized as an international company,’ he says. ‘Over time, our shares have begun to have more correlation with our international peers than with Brazilian ones, tracking the world paper products index rather than the Sao Paulo exchange.’
Aracruz is in an industry especially suited for long-term returns, says Werneck, which makes it an ideal vehicle for long- term oriented US investors. And Werneck is ideally suited to explain the company to investors. Before taking over IR at the end of last year, he managed a comprehensive redesign of all of Aracruz’s business processes. So few people know the new look of Aracruz better than Werneck.
What advice does he have to offer the raft of Brazilian companies vying for new Big Board listings? ‘Any listing decision should be closely linked with a strategic plan,’ Werneck concludes. ‘It’s not enough just to list on the exchange; international investors are very concerned about return on investment, and must be shown a clear strategy for achieving it.’
