TheCorporateCounsel.net

Last Wednesday, I attended PLI’s 1st Annual “PCAOB Speaks” held in Washington DC. I was surprised that live attendees numbered over 200 (although a significant percentage of that were PCAOB and SEC staffers)- because the “SEC Speaks” audience always consists of a handsome number of SEC alumni and the PCAOB doesn’t yet have alumni.

One point brought home during the conference is that, under Auditing Standard No. 2 (which is awaiting final SEC approval), audit committees must pre-approve all services related to internal controls if these services are performed by the same firm that conducts the company’s audit. Audit committees cannot pre-approve these services by categorical standards. As a result, in this area, Auditing Standard No. 2 effectively trumps the SEC’s auditor independence rules adopted in January 2003 to implement Section 201 of Sarbanes-Oxley.

The rationale is that auditor independence is not viewed as a simple compliance matter; it is much more important than that. So audit committees are required to scrutinize each possible internal controls engagement to ensure that the auditor can be impartial and objective. By the way, the grandfathering of some non-audit services ended last Thursday.

We have posted more PCAOB Speaks notes on our home page and in Section F of our Sarbanes-Oxley Law Firm Memos portal.

Late Breaking 703 Developments

In case you missed this blog that I posted Friday afternoon: I understand that the SEC staff has reached an agreement on the treatment of restricted stock that is forfeited for purposes of the 703 stock repurchase table. The key determinant here is whether the company pays any consideration when the stock is returned – even a de minimis amount is sufficient consideration so that the returned stock must be included in the table. If there is no consideration given for the forfeited stock at all – it need not be included in the table.

By the way, at the ABA-JCEB meeting this week, the SEC staff apparently stated that stock repurchases by a 401(k) plan or other employee benefit plan may be required to be reported when the plan is an “affiliated purchaser” within the meaning of Rule 10b-18(a)(3). This could be a real problem in cases where a benefit plan is administered in-house, instead of being handled by a brokerage firm, transfer agent or other outside party. I would wait until the staff has a position in writing on this one before taking any drastic actions, such as hiring a third-party administrator.

Under Rule 10b-18, an “affiliated purchaser” is:

(i) A person acting, directly or indirectly, in concert with the issuer for the purpose of acquiring the issuer’s securities; or
(ii) An affiliate who, directly or indirectly, controls the issuer’s purchases of such securities, whose purchases are controlled by the issuer, or whose purchases are under common control with those of the issuer; Provided, however, that “affiliated purchaser “shall not include a broker, dealer, or other person solely by reason of such broker, dealer, or other person effecting Rule 10b-18 purchases on behalf of the issuer or for its account, and shall not include an officer or director of the issuer solely by reason of that officer or director’s participation in the decision to authorize Rule 10b-18 purchases by or on behalf of the issuer.