March 31, 2003

The SEC has issued technical corrections in an adopting release to clarify that companies can provide their audit committee financial expert disclosure in its proxy or information statement and incorporate that disclosure into its annual report (if it complies with applicable rules for incorporation by reference). The original rule had stated that the disclosure was only permitted in annual reports. See

Mark Borges in the SEC's Office of Rulemaking soon will be moving on to a new job at Mercer Consulting. Mark handled many of the staff's executive compensation disclosure issues over the past few years and will be missed.

March 27, 2003

Because Edgar is not yet configured to handle the new 8-K items, the SEC issued a statement providing interim guidance regarding how to file new Item 11 (regarding notice of a pension fund blackout period) - and new Item 12 (regarding earnings releases).

For "would-be" Item 11 filings, companies should continue to disclose the information under Item 5 (Other Information) of Form 10-Q or 10-QSB in the first quarterly report filed by the company after commencement of the blackout period.

For "would-be" Item 12 filings, companies should furnish the information under Item 9 (Regulation FD Disclosure) of Form 8-K. A company must furnish the information within 5 business days after the occurrence of an event specified in Item 12. Information provided under Item 12 also may be required to be provided under the requirements of Regulation FD; in this case, any earlier deadline for Item 9 under Regulation FD would apply.

This interim guidance will remain in effect until the SEC announces otherwise. The SEC's statement is at

March 27, 2003

Regarding CEO/CFO certifications for asset-backed issuers, the SEC staff now intends to issue no-action responses in the very near future - and will allow issuers with similar asset classes to rely on these letters (rather than require each issuer to seek relief). Asset-backed issuers with novel asset classes (i.e. not previously addressed in these upcoming staff responses) will have to seek their own no-action letters.

As for modified reporting relief, asset-backed issuers may rely on previously issued no-action letters just as they always have for years.

In the wake of Sandy Weill (whose firm was recently fined $300 million in the analyst research case) recently taking himself out of the running to serve on the NYSE board, SEC Chair Donaldson has given the exchanges until mid-May to propose reforms to their own corporate governance structures. See the Washington Post article at

March 26, 2003

On April 1, the SEC is holding an open meeting to adopt the audit committee of exchange-listed companies rules. This comes a day after the PCAOB holds a roundtable at the SEC's HQ in Washington to discuss registration of foreign audit firms (and for which the SEC issued a press release making a big deal of the fact that the SEC Commissioners would also attend the roundtable).

The SEC's test website for Section 16 filings is up and running - don't get confused if you play around on the site and it issues warnings that you are about to make a "live" filing. It really doesn't mean it. The test site is at

For subscribers, we have posted an interview with Ken Winer on SEC enforcement and 3rd party liability at

We have also posted sample disclosure committee charters and D&O questionnaires under "Special Features" on the home page - as well as a more recent edition of the SEC Telephone Directory (Sept. 2002 version) at

March 25, 2003

In his second speech, SEC Chair Donaldson talked about corporate governance and going slow in mandating specific governance structures - but also railed about excessive executive compensation - see

We have posted the April issue of E-Minders at In addition, we have announced two timely webcast programs - one on April 8th for subscribers on "Comparing the Section 16 Filers - What You Need to Know Now." This features key SEC staffers discussing the new test site - and nine service providers explaining how their products add value to what the SEC's site will do. See

The other program is for subscribers - "Regulation G Unplugged" - on April 30th. See

March 24, 2003

Late Friday, the SEC proposed amendments that would require certifications provided under Sections 302 and 906 of Sarbanes-Oxley be included as exhibits to the reports to which they relate. The purpose of the proposal is to make it easier for investors and regulators to locate the certifications.

The current rules require 302 certifications to be included at the end of the report immediately following the signature block. Companies have more flexibility for their 906 certifications, using one of the following methods: including them after the signature block, filing them as exhibits to the related reports or submitting them as paper or electronic correspondence, or “furnishing” them under Item 9 of Form 8-K.

As proposed, the 302 certification exhibits would be considered "filed" – but the 906 exhibits would merely be considered "furnished" (and thus not subject to Section 18 liability and not incorporated in registration statements unless the company took steps to include the certification in a registration statement). Both the new 302 and the 906 certification exhibits would be subject to Rule 302 of Regulation S-T - so companies would be required to retain originals of manually signed certifications.

Until the proposals become final, as interim guidance, the SEC is encouraging companies to submit the 906 certifications as exhibits to the periodic reports to which they relate. The guidance states how this should be handled in electronic filings, including a specific legend that should be inserted with the certification -and asking that companies retain a manual signature page or other authenticating document for each certification. A 906 certification submitted in the manner specified in the interim guidance will be treated as "accompanying" the periodic report to which it relates rather than being "filed."

The comment period is 45 days. The proposing release and interim guidance is at

For subscribers, we have posted an interview with David Lynn on this new certification proposal at

March 21, 2003

Yesterday, the SEC announced that it will soon have a new website for making test filings of Forms 3, 4 and 5 (the test site likely will be up and operational on Monday or Tuesday next week). The new filing system will allow filers to create and file a report directly on the SEC's website - or to make filings through the new website using third-party software that has been adapted to conform to the new reduced content format.

We expect the test period to last for approximately one month, during which time the existing EDGARlink system will exist side-by-side with the new system. After the test period expires, the SEC will convert to the new system as the exclusive means for filing Forms 3, 4 and 5.

Electronic filing will remain voluntary for a period of time thereafter, but it is likely that by June (well ahead of the July 30 deadline imposed by Section 403 of the Sarbanes-Oxley) the SEC will make electronic filing mandatory for all Section 16 filers. The SEC's announcement is at

For subscribers, there is a webcast program on "Comparing the Section 16 Filers" on April 8th. Learn how to best use the SEC's test site from key SEC staffers and hear the pros and cons of nine different third party web filers. More information is at who are not yet subscribers can access the webcast (or the transcript) by taking advantage of the no-risk trial at

March 20, 2003

The SEC staff is expected to provide FAQs on Regulation G issues before the March 28th effective date. Here are some conversations we have heard that have taken place with the staff regarding transition issues (although don't rely on them unless you speak with the staff or the FAQs are issued):

- so long as annual report is mailed before 3/28, providing other copies after 3/28 does not mean the report must comply with Reg G
- if 10-K is filed before 3/28, the fact that its posted and on a website after 3/28 does not mean the 10-K must comply with Reg G (however, if the 10-K is posted after 3/28, it must comply)
- if 10-K filed before 3/28 and annual report is delivered after 3/28 that repeats information from 10-K, the repeated information does not need to comply with Reg G
- shelf registrations filed after 3/28 that incorporate information from a 10-K that does not comply with Reg G would then need to comply with Reg G - this can be done by amending the 10-K or by filing a 8-K or 10-Q that is incorporated by reference and complies with Reg G (note that shelfs filed before 3/28 are not impacted by Reg G)

Yesterday, the SEC took enforcement action against HealthSouth for alleged accounting fraud that included a 2 day trading suspension - that is a fairly stiff sanction by itself for the company and rare for the SEC to impose such a sanction on a large cap company. See

For subscribers, we have posted an interview with Bob Juceam on D&O insurance at

March 19, 2003

In its newly posted proposing release, the Public Company Accounting Oversight Board has released its estimates of the levels of fees that companies would pay to fund the Board. As proposed, fees would be based on the relative average monthly market capitalization for the 12 months preceding the fiscal year.

The allocation of the fees is top-heavy. The Board estimates that the largest companies would be allocated $260,000 for every $10 million of accounting support fees. The 1,500th largest issuer would be allocated $500 for each $10 million of fees. To understand the order of magnitude, based on market capitaliztions at the end of 2001, the 5th largest company would pay about 63% of the fee paid by the largest market cap company, the 25th largest company would pay about 22%, and the 50th largest company would pay about 11%. The proposing release is at

For subscribers, we have posted an interview with Mark Bergman of Paul Weiss regarding the impact of the new SEC rules on non-US companies at

March 18, 2003

At the 75 day mark for 12/31 companies - which will be next year's 10-K deadline - over 1000 companies have already filed their 10-Ks. Considering that there are slightly less than 10,000 companies with 12/31 year-ends, this is a sizable percentage.

On the SEC's website - under "Regulatory Actions" there is a new section called "PCAOB Rulemaking." So far it only includes proposed Bylaws for the Public Company Accounting Oversight Board - not the proposals the PCAOB has issued which is available on its website. The SEC's PCAOB portal is at The PCAOB's website is at

For subscribers, we have posted model Pre-Approval Policies for Non-Audit Services from Wachtell Lipton and Ernst & Young at

We also have posted sample disclosures from companies that have significant deficiencies and material weaknesses in their internal controls at

March 14, 2003

Finally, there is some movement from the NYSE and Nasdaq on their corporate governance listing standards...

The NYSE filed amendments to its proposed listing standards on director independence with the SEC that excerpt their independence proposals from the broader filing made last summer. This will allow the SEC to address and publish them for comment separately.

As proposed, the NYSE's proposal to require that boards have a majority of independent directors has not been changed. However, the amendments replace the per se independence bar for employees/former employees with a rebuttable presumption. This presumption is that any director who receives more than $100k/yr. in direct compensation from the company (other than director fees or forms of deferred compensation for prior service) is presumed not to be independent for 5 years following the year in which more than $100k was received. Because the presumption is rebuttable, a director may be deemed independent if all the independent directors determine that the compensatory relationship is not material - and this determination is explained in the company's proxy statement.

The NYSE also added a bright-line standard for determining independence when a director is affiliated with another company that has a business relationship with the company - a director would not be independent if the director is an executive officer or employee of another company and: (1) that company accounts for the greater of 2% or $1 million of the company's gross revenues; or (2) the company accounts for the greater of 2% or $1 million of the other company's gross annual revenues. There is a 5-year look-back period. Like the NYSE's initial proposals, the amended independence standards require the board to make an affirmative determination that a director has no material relationship with the listed company and permit the adoption of categorical standards to assist the board in making independence assessments.

In addition, although the NYSE initially proposed allowing companies 24 months from SEC approval of final listing standards to achieve majority independence, the amendments propose shortening that transition period to 18 months (30 months for companies with staggered boards).

The NYSE expects that its remaining corporate governance proposals will be published for comment separately - but that all proposals will be given final SEC approval and made effective as a whole (with appropriate transition periods for different provisions).

Nasdaq two revised proposals relate to the independence of boards/committees and codes of conduct. The amendments withdraw the earlier proposal to require audit committees to have a "financial expert" - thus, reverting to its existing requirement that at least one member of the audit committee have financial experience). The amendments also clarify that the required codes of conduct must have all of the elements required under Section 406 of Sarbanes-Oxley the SEC's related rules.

Regarding board/committee independence, the Nasdaq proposals now establish that where a director has a family member who receives annual compensation in excess of $60k in the current or any of the past three fiscal years, the director is not disqualified from being independent unless the family member is an executive officer - as well as require that the audit committee charter set forth the committee's purpose, which is to oversee the company's accounting and financial reporting processes and audits of the company's financial statements.

For more information, see the client alerts from Gibson Dunn at - and Weil Gotshal at

March 14, 2003

For subscribers, the audio archive of our Internal Controls Attestations is available at

Yesterday, the Public Company Accounting Oversight Board met and proposed rules to allocate, assess and collect annual accounting support fees from issuers in accordance with Section 109 of Sarbanes-Oxley. The allocation formula would be used to cover the expenses of both the Board - and the accounting standard setting body.

Fees will be assessed against issuers registered under Section 12 of the Exchange Act, required to file reports under Section 15(d) of the Exchange Act, or that have filed a registration statment under the Securities Act that has not become effective and that has not been withdrawn. This would include foreign private issuers.

Certain classes of issuers will be exempt from the fees (such as who do not file audited financial statements, employee stock purchase savings and similar plans, asset-backed issuers and issuers in bankruptcy). In addition, operating company issuers with an average market cap less than $25 million will not be assessed fees. There was no discussion of exactly how the average monthly market capitalization will be computed.

Fees will be allocated based on a ratio of the issuer's average monthly equity market capitalization over the 12 months immediately preceding the Board's fiscal year to the total average monthly capitalization of all covered issuers.

The staff of the Board expects that this formula will result in operating companies paying 95% of the fees - and investment companies 5%. However, the staff was not able to give a ballpark figure on what the largest issuers might expect to be charged. That of course depends in part on the budget of the Board and also the budget for the standard setting body. However, the Washington Post reported that larger issuers would pay fees of about $2 million per year.

Under Sarbanes-Oxley, the registration or annual fees received from public accounting firms registered with the Board will be deducted from the budget expenses of the Board that are required to be paid by issuers. As the staff pointed out, since there were no such fees paid last year, the Board's budget expenses for fiscal year 2003 will be funded entirely by fees charged to issuers. Under Sarbanes-Oxley, all of the expenses of the standard setting body are to be covered by fees paid by issuers.

Comments are due by April 4th. After the comment period, the Board has to approve final rules and submit them to the SEC - which then puts the rules out for comment and approves them.

The Board hopes to send notices of the fees due to issuers by late May for this 2003 fiscal year - and then going forward, the notice would be sent in late January or February each year. Apparently, the Board is using a calendar year fiscal year.

Before Congress, SEC Chair Donaldson testified that the SEC needs the entire 18% budget increase proposed by President Bush (i.e. $841.5 million) - to improve its technology, crack down on corporate fraud and hire more staff.

March 13, 2003

Yesterday, the FASB voted 7-0 to draft rules to expense options over the next year - see

It is reported that Schering-Plough is preparing a "Wells notice" in response to a SEC enforcement investigation regarding an alleged Regulation FD violation. This is particularly significant because its a signal that new SEC chairman William Donaldson supports Reg FD (and Donaldson did not support Reg FD when it was initially proposed a few years ago).

We just posted 10 sample Reg FD policies for subscribers at

We also have posted 10 more sample back-up certifications - see

March 12, 2003

Thanks to Julie Hoffman of Squire Sanders & Dempsey for her lengthy and precise notes from the recent SEC Speaks 2003 conference. subscribers can review those at

We have also posted sample audit fee tables for subscribers at

FASB commences its discussion of rulemaking to require expensing options today - by now, a number of accounting firms support the move, including E&Y, PwC, Deloitte, Grant Thornton - and allegedly even KPMG. See a related Washington Post article at

Yesterday, the SEC/NYSE/Nasdaq released a joint study on mutual fund fees, claiming that some funds overcharge investors - see the study at

March 11, 2003

The Public Company Accounting Oversight Board has issued a proposing release with proposed registration rules and a proposed form for public accounting firms to register with the Board. Comments are due by March 31, 2003 - and may be filed electronically or in writing. The Release is available on the Board's website at the following link by clicking on "Proposed Rules" at

The proposed registration rules do not exempt non-US public accounting firms - and would apply to non-US audit firms that play a substantial role (as defined) in the rules in the preparation or furnishing of audit reports (even though they do not issue the report). The Board initially announced plans for a public roundtable on the effect and operation of Board registration and oversight of foreign public accounting firms on March 21st - that date has been changed to March 31st. A list of questions the Board would like addressed by commentators is contained on pages 13-14 of the proposing release.

March 10, 2003

As reflected in an interview with Pat McGurn, as one of its new policies, ISS will recommend voting against ratification of a company's auditors - as well as withholding for a company's audit committee members - if the company does not meet a simple formula regarding the level of the audit and audit-related fees paid to the auditor compared to non-audit fees (ISS separately analyzes the types of fees in the "tax fees" column to determine which side of the equation each fee should go).

The bottom line is that companies should voluntarily comply with the SEC's new audit fee table (which is adopted but not yet effective) to enable ISS to conduct its analysis. Otherwise, the company faces the prospect of numerous votes against ratification of auditors and withholding for audit committee members - ISS already has recommended this adversarial stance in the first instances it has arisen since ISS' new policies took effect early last week. subscribers can learn more about all of ISS' new policies in the Pat McGurn interview posted at

Warren Buffett's annual letter to shareholders always is interesting reading - this year's letter criticizes derivatives (page 13), corporate governance, executive compensation and the accounting profession (page 16). You can read it at

March 6, 2003

The SEC has pronounced that the new listing standards on shareholder approval of equity compensation plans and broker voting will not go into effect for this proxy season. The current rules will be extended through June.

For subscribers, we have posted an interview with Erin Sweeney of Latham & Watkins on option dilution disclosure at

March 5, 2003

Yesterday, FASB chief Bob Herz testified before Congress on expensing options - and expressed his view that he would resist political pressure in his efforts towards mandating expensing. See the related Washington Post article at

For subscribers, we have posted an interview with Jeff Shulte of Morris, Manning & Martin on Attorney Responsibility Standards at

March 4, 2003

Thanks to Mike Holliday - our roving friend and reporter - the following are some of the actions taken by the Public Company Accounting Oversight Board at its meeting today:

1. Approved putting out for comment proposed registration rules and forms for public auditing firms to register. Comments due by 5 p.m. on March 31st. After the comment period, the PCAOB has to approve the rules and forms and submit to the SEC, which will put out the rules for comment. The PCAOB time schedule is to send the rules and forms to the SEC by mid-April, with applications from auditing firms due to be filed by early September and firms registered by the end of October.

2. The PCAOB plans to put out proposals for allocation, assessment and collection of fees from issuers next week, with final rules to the SEC by mid-April. They plan to be able to send bills to issuers in mid-to-late spring.

3. The PCAOB plans to adopt transitional standards on auditing, quality control and independence in mid-April, and to announce standard setting procedures in April.

4. Non-US auditing firms - including non-US firms that play a substantial part in preparing audit reports even if the firm does not issue the report - are not exempt from the registration process.

5. The PCAOB plans to hold a roundtable the week of March 17, they mentioned Friday, March 21, to consider registration of non-US auditing firms and how the PCAOB should exercise its authority over non-US firms. They want to invite participation by US and non- US auditing firms, investors and financial regulatory authorities. There will be a separate release on this with a list of questions attached.

Although most of this regulation directly affects the auditing firms and not public companies, there are a few issues for companies to follow - in addition to the fees public companies will have to pay. The PCAOB will be collecting data, particularly in audit firm investigations, that may include some public company client information.

Also, SOX 105 specifically authorizes the Board to establish rules to request testimony of, and production of any document in the possession of, any other person including any client of an auditing firm, and to seek issuance by the SEC of a subpoena to require the testimony of or production of any document in the possession of any person including any client, with relevancy and materiality standards. Public companies will have an interest in how their confidential and proprietary information will be protected.

The SEC also announced the details of its selection process for head of the PCAOB - it's at

March 4, 2003

More than 100 companies with 12/31 year-ends filed their Form 10-Ks (and some 10-KSBs) within 60 days - meeting what will be the new deadline two years hence.

From these and other filings, for subscribers, we have excerpted sample disclosures related to loans under Section 402 and changes in accountants. We also have sample disclosures regarding audit committee financial experts. These are posted at

The Public Company Accounting Oversight Board hired away George Diacont from the Nasdaq to be head of registration and inspections. George used to work at the SEC. The Oversight Board has a much anticipated meeting today at 12:30 est - tackling registration of foreign auditng firms among other issues. You can hear the webcast at

March 3, 2003

At "SEC Speaks," no real bombshells were dropped. However, the SEC staff did note that there is some possibility that the upcoming final rules on broker uninstructed votes could still be applied to this proxy season. But the staff did not indicate when the final rules would be adopted - so the likelihood of this appears relatively limited to us. Notes from SEC Speaks will be posted on within a few days.

The Sunday edition of the NY Times included an article on a recent Indiana University study on the impact of CEO Certifications on corporate earnings - we have posted a copy of that survey at