October 28, 2004

Hedge Fund Adviser Registration

In a controversial 3-2 vote on Tuesday, the SEC adopted new Rule 230(b)(3)-2 of the Advisers Act, which will require hedge fund advisers to register with the SEC. Such registration will permit the SEC to conduct examinations of advisers, require compliance controls, regulate disclosure to investors and prevent certain individuals (such as felons) from managing hedge funds.

The rule eliminates the ability of advisers to rely on an exemption from adviser registration designed for advisers providing advice only to a small number of clients. The new rule also contains provisions for advisers located outside the United States to limit the extraterritorial application. Hedge fund advisers must register with the SEC by February 1, 2006.

More on Changes to the Form 10-Q

Following up on the interview that was blogged about yesterday, the SEC release adopting the new Form 8-K rules also included revisions to Form 10-Q. In our Form 10-Q Practice Area, we have posted a redlined version of the changes to Part II of Form 10-Q.

-Posted by Julie Hoffman

October 27, 2004

Proposed '33 Act Reform

Yesterday, the SEC proposed its long-awaited '33 Act reform at an open Commission meeting. "Well-Known Seasoned Issuer" (“WKSI,” pronounced “WICK-SEE”?) is a new term of art to define a category of issuers to which the most significant proposed revisions apply. A WKSI is an S-3 eligible issuer that has $700M in float, or in limited circumstances, has issued $1B of registered debt in the last three years.

The reform proposal can loosely be grouped into the following 5 categories (which are all summaries based on meeting notes and subject to certain conditions):

1. Easier Communications Around Registered Offerings
• WKSIs would be permitted to communicate orally or in writing at any time
• All issuers/offering participants would be permitted to use a free writing prospectus after filing the registration statement
• Communications more than 30 days prior to filing a registration statement would not be an offer (so long as they don’t mention an offering)
• Definition of “prospectus” would be narrowed
• Exemptions for research reports would be expanded

2. Liability Issues
• Would interpret 12(a)(2) and 17(a)(2) disclosure liability to be assessed against the information conveyed to an investor at the time of its investment decision
• Would provide that the application of Section 11 liability in shelf offerings would be similar to non-shelf offerings

3. Registration Procedures
• WKSIs would be permitted to use “automatic shelf registration,” which would involve automatic effectiveness, pay-as-you-go fees and maximum flexibility in the offering process
• The shelf system would be modernized to: include a single rule detailing the information permitted to be omitted from a base prospectus; require a new registration statement every three years; permit immediate takedowns; permit at-the-market offerings and permit material changes to plan of distribution in a prospectus supplement
• S-3 eligible companies would be permitted to identify selling security holders in the prospectus supplement where the securities are outstanding at the time the registration statement is filed
• Form S-1/F-1 would permit incorporation by reference, and therefore, S-2/F-2 would be eliminated

4. Prospectus Delivery Reform
• Would move to an “access equals delivery” model for final prospectuses, but would require notification to investors that they purchased securities in a registered offering

5. Changes to Exchange Act Reports
• Risk factors would be required in 10-Ks
• Voluntary filers would be required to disclose their filing status as such
• Accelerated Filers would be required to disclose material, unresolved Staff comments

Deferred Compensation Legislation Become Law

Last Friday, President Bush signed the tax overhaul legislation that includes the deferred compensation provisions - so the Treasury Department now has 60 days to adopt regulations under the law to flush out how the deferred compensation provisions work. (Unlike other tax bills, there was no ceremony for this legislation-signing - Bush signed it on Air Force One on his way to a campaign stop.)

However, we understand that the Treasury Department will act well before then to allow for better year-end planning - and such planning is essential. That's why the NASPP is hosting a webcast on November 17th regarding "Deferred Compensation Legislation: Ten Things You Need to Do By Year-End!" Join the NASPP now and get the rest of '04 for free.

Carl's Corner

The October installment for Carl's Corner is on "Purchase Prices in Shareholders' Agreements."

October 26, 2004

Today's "The Rise of IDS Offerings" Webcast

For those of you that will listen to today's webcast on "The Rise of Income Deposit Securities Offerings" - please print out these course materials in advance.

How the New 8-K Rules Impact Your Upcoming 10-Q

You know how I love practical guidance - that is why I love this interview with Bob Hayward, John Jennings and Mike Manos on Form 10-Q Changes for Third Quarter 2004, as it includes a checklist of how the new 8-K rules impact the upcoming 10-Q filings.

For those waiting for the 8-K webcast transcript, thanks for your patience as posting it is beyond my control - hopefully it will be ready soon.

SEC Flushes Out Qualitative Materiality in Enforcement Action

Last week, the SEC settled charges with KPMG LLP, two former partners, and a current partner and senior manager for "improper professional conduct" as auditors for Gemstar-TV Guide International. KPMG was not fined by the SEC - but it did agree to compensate Gemstar shareholders in the amount of $10 million, the largest payment ever made by an accounting firm in an SEC action.

According to a Floyd Norris column in Thursday's NY Times, "The standard is what is important to investors," said Kelley Bowers, an assistant regional director of enforcement in the Los Angeles office of the S.E.C. "A growing part of the business can be important to investors even though it is a small part of the business." Audit firms have long taken the position that they did not need to challenge errors in company accounts if the amounts involved were "immaterial," often defined as being perhaps 5 or 10 percent of a company's revenues or profits.

From 1999 through 2002, Gemstar-TV Guide was promoting to analysts the prospects of its interactive program guide, which customers could navigate through and select television programs. Because the guide provided a small part of the company's total business, the SEC said, the auditors considered the amounts of some questionable transactions involving it to be immaterial, including transactions where advertisers in the print edition were given an equal amount of free advertising in the interactive guide. The revenues were then attributed to the interactive division, helping it to show rapid growth.

The auditors should have considered "qualitative materiality," the SEC said in its administrative order, saying the revenue in question "related to business lines that were closely watched by securities analysts and had a material effect on the valuation of Gemstar stock."

According to the settlement, KPMG has agreed to conduct additional training for its partners and managers on qualitative materiality - and adopt a policy that requires more-effective consultation between audit engagement teams and KPMG's national office in connection with possible restatements.

October 25, 2004

CompensationStandards.com Lives!

If you haven't heard Alan Beller's speech last week - noted in this NY Times article yesterday - it is MUST viewing as it is very significant for those involved with drafting proxy disclosures - and the video contains Q&A following his speech that includes important clarifications to his remarks.

Due to the incredible demand, we have decided to maintain CompensationStandards.com next year - and have posted a special offer for those that renew by December 15th.

In addition, for those that waited and missed the 10/20 conference, you can still subscribe this year and obtain a special rate if you also subscribe for next year at the same time.

More Than a Pet Peeve - It's Theft

True story: As the 10/20 conference is about to commence, frantic call from IT person at a major law firm saying "I have 50 irate lawyers over here that have tried using the ID and password you have provided and it won't work." A quick check of our records reveal that a license for only one user was purchased.

Unfortunately, this is not an isolated incident for any of our online services. I'm not sure why lawyers (of all people) think they are entitled to steal from us - but last time I checked, theft is still a crime in most states. But its the ethics that bothers me, we work hard and I believe we provide full value for the prices we charge. So why cheat us?

By the way, a few years back, Legg Mason was hit with a $20 million dollar judgment because its employees were sharing IDs/passwords for an online service.

A Preview of the Disney Trial?

With lots of attention being paid to the Disney trial, it is probably taking a look at the recent opinion of Vice Chancellor Noble of the Delaware Court of Chauncery in Integrated Health Services v. Elgin.

This opinion was discussed during my videotaped panel with current and former Delaware Supreme Court Chief Justices Steele and Veasey - and it is the first case that interprets the "good faith" standard enunciated in the May 2003 Disney decision arising out of the Ovitz severance payment.

October 21, 2004

Nasdaq Approves Code of Conduct Rules for Foreign Issuers

Today, the SEC approved the Nasdaq amendments that amend Rule 4350 and related interpretative material to provide time frames for foreign issuers and foreign private issuers to disclose certain code of conduct waivers. The amendments provide that:

1. Foreign issuers, other than foreign private issuers, are required to disclose any waivers of the code of conduct by the board of directors for directors and executive officers in the same time frame as domestic issuers, i.e., via a Form 8-K within five business days.

2. Foreign private issuers are required to disclose waivers of the code of conduct by the board of directors for directors and executive officers either on the issuer's next Form 20-F or 40-F, or on a Form 6-K.

How Closely Are Mutual Funds Following Their Voting Guidelines?

Last month, the AFL-CIO issued a report - Behind the Curtain: How the 10 Largest Mutual Fund Families Voted when Presented with 12 Opportunities to Curb CEO Pay Abuse in 2004 - that ranked the 10 largest mutual fund families (based on assets managed in stock funds for retail investors) on how closely they followed the AFL-CIO's guidelines on proxy voting on pay issues.

As you may recall, mutual funds began reporting their voting records at the end of August for the first time. Because mutual funds hold about a quarter of the domestic stockholdings, their votes can be decisive.

The report ranked the 10 funds by the percentage of how often the fund met the AFL-CIO's guidelines - and their was quite a variance as the scores ranged from a high of 100% for American Century to a low of 20% for Putnam. Fidelity, the nation’s largest fund family (and who was very opposed to disclosing its voting record during that debate) ranked 9th with a 25% score.

Charities Get Their Own Sarbanes-Oxley

Sarbanes-Oxley continues to ripple through other areas of the law. A week ago, Governor Schwarzenegger signed a California bill - SB 1262 - which will impose some SOX-like requirements on charities, including requirements that charities with gross revenues of more than $2 million prepare financial statements in accordance with GAAP that are audited by independent auditors.

Corporate charities meeting this threshold will have to have an audit committee with responsibilities similar to those under SOx. The boards of all charities will be required to review and approve the compensation and benefits of the President or CEO and the Treasurer or CFO to assure that it is "just and reasonable."

Keith Bishop notes that there probably are more charities affected by this law than issuers affected by SOX. According the California Attorney General, there were over 80,000 charitable organizations registered in California as of January 2001.

October 20, 2004

Alan Beller's Executive Compensation Speech

At our compensation conference today - its actually is still going on right now - Corp Fin Director Alan Beller gave a memorable 45 minute speech on executive compensation that is bound to raise the eyebrows - and sharpen the pencils - of those of you that are responsible for compensation disclosure. Kudos to Alan for speaking out and doing the responsible thing!

Alan mentioned that his speech will be posted on the SEC site in a day or so - you can review the archived video of it on CompensationStandards.com whenever you wish.

There are an overwhelming number of attendees, both here and on the web - and a palatable buzz in the audience here in San Francisco. Very gratifying for six months of hard work and navigating an experiment in video conferencing. Tonight, I drink heavy...or go right to sleep.

October 19, 2004

SEC's '33 Act Reform Proposal - Ready to Roll!

The SEC is holding an open Commission meeting next Tuesday at 10 am to consider the long-awaited '33 Act proposal. This is the project that was derailed for a while due to the extensive Sarbanes-Oxley rulemaking that got dumped on Corp Fin.

NYSE's New Interactive Tool

The NYSE has developed a pretty neat interactive tool that will facilitate the ability of listed companies to comply with their listing standard obligations. Learn more in my interview with Janice O'Neill, who is Vice President, Corporate Compliance at the New York Stock Exchange.

SEC Enforcement Goes After Audit Committee Member

Last week, in the SEC's enforcement action against Ahold, it is not only notable that the SEC did not seek any fines due to extensive cooperation (the topic of an upcoming interview) - but it is notable that the SEC went after a member of Ahold's audit committee, Roland Fahlin, for causing violations of the reporting, books and records and internal controls provisions of the securities laws.

Here is a quote from the SEC's press release: "This case also reflects the failure of a member of the company's audit committee to perform his duties to oversee the reporting process of a public company," said James Coffman, Assistant Director of the SEC's Division of Enforcement. "The proceeding initiated against Mr. Fahlin today demonstrates the Commission's commitment to bring enforcement actions against those board and audit committee members who fail to perform these important duties."

October 18, 2004

Your Preparation for Wednesday's Compensation Conference

If you are registered for the October 20th compensation conference and intend to participate by webcast, you might want to print off the Speaker Materials before it starts (scroll down beyond testing instructions to access the Speaker Materials) - if you intend to attend in San Francisco, we will have those materials already there for you as a handout. And don't forget, if you are participating by webcast, please test your ability to access streaming video before the 20th - here are instructions on how to test.

If you have not registered yet - but have now decided to do so - you can register by just walking in on the day of the conference in San Francisco - or if you wish to participate by webcast, you can still register online. However, we can no longer process any registrations by phone because all of our staff is already setting up for the conference at the hotel. (Please don't call me either as I also am at the conference location to help set up.)

If you have a question about what a speaker says during the conference, please post it in the CompensationStandards.com Q&A Forum - and the speakers will try to post answers when they get back to their offices.

Remember that the program starts Wednesday at 7:30 am West Coast time - that is 10:30 am Eastern Time and 9:30 am Central Time. And all of the video will be archived - so you can jump in and out to watch segments as your day allows and come back to review anything you missed.

2005 Proxy Season Resource Center is Up!

We have updated our "Proxy Season Resource Center" for 2005 - if you are looking for something that you can't find in there, please let me know and we will try to add it.

Here Come Those Disney Articles...

The significance of Wednesday's Disney trial can't be understated - and the media already is capturing that significance - see today's NY Times and this article from today's USA Today.

First Federal Judge Rules Sentencing Guidelines Entirely Unconstitutional

A week ago Wednesday, a few days after the U.S. Supreme Court heard arguments about the constitutionality of federal sentencing rules, U.S. District Judge Owen Panner in Portland concluded that federal sentencing guidelines are unconstitutional because it violated the seperation-of-powers doctrine in US v. Detwiler.

This is the first opinion to find the guidelines unconstitutional in their entirety under last year's Feeney Amendment, which gave the executive branch far more say in sentencing decisions - but the immediate implications of the ruling are unclear because some of the issues that Judge Panner raised are before the US Supreme Court (and Judge Panner's decision is likely to be appealed to the 9th Circuit Court). The Feeney Amendment, among other things, gives the executive branch power to appoint individuals to the federal sentencing commission, which considers such questions as what sentences are appropriate for certain crimes.

Judge Panner's 31-page decision outlines specific objections to the new law, such as the US President can stack the Sentencing Commission with political allies, effectively taking control of a commission that is supposed to be a part of the judicial branch; law gives federal prosecutors too much power to pressure defendants into pleading guilty (noting even before the amendment, 99% of all federal criminal convictions in Oregon resulted from a plea, not a trial); and the law tries to intimidate judges because it requires that the U.S. House and Senate judiciary committees and the attorney general be notified when a judge departs from the guidelines and hands down a shorter sentence.

October 15, 2004

Law Firm Sued Over Ex-Associate's Golden Parachute

The New York Law Journal reported yesterday that a public company has filed a breach of fiduciary duty suit against a law firm and one of its partners for helping to enrich an associate who jumped from the firm to become general counsel of the company by creating generous golden parachutes (for the associate as well as other company executives).

And the major plaintiff firms are also getting into the executive compensation recovery business - check out this press release from Milberg Weiss about how it recovered $22 million in severance payments from 8 current and former officers at Florida Power & Light.

By the way, the Disney trial has been delayed two days - it now begins on October 20th - the same day as our compensation conference! To glean insight from the former and current Delaware Supreme Court Chief Justices about their thinking on executive compensation and director liability/indemnification - come hear the first panel of that conference. Last chance to register.

Reg FD Strikes the Howard Stern Show

Last week, the big news for loyal Stern listeners (sorry, I am not one) was that he’s going to Sirius radio. As told to me by a member, "it was interesting to hear Stern discussing how he had been walking around with his stomach in knots because he signed the contract a few days earlier - but wasn’t able to tell anyone about it because of “SEC rules.” Love how the SEC was able to do what the FCC couldn’t – keeping Stern quiet.

Sirius filed an 8-K announcing the news - oddly, they filed the 8-K under Item 8.01 (Other Events - which is akin to the former discretionary Item 5) rather than Item 1.01 (Material Agreements) even though they state that their “financial obligations under the agreement are material.” Stern is receiving $500 million over 5 years... maybe I am in the wrong business.

October 14, 2004

FASB Delays Option Expensing By 6 Months

As loosely predicted in Monday's blog, yesterday the FASB voted to delay implementing option expensing by 6 months - so now it will become effective for public companies with fiscal periods beginning after June 15, 2005. The effective date for non-public companies, proposed in the exposure draft to be a year after the date for public companies, remains to be determined. The FASB also agreed to allow for modified retrospective application going back to the beginning of the fiscal year for companies that wish to implement the rule early.

The FASB said that the principal reason for the delay was its awareness of companies struggling to implement internal controls under Section 404 - and the FASB also said it is still on track to issue its final statement by year's end. If you need a crash course in what options expensing means for you - at next week's NASPP Annual Conference, there will be 9 panels covering expensing.

SEC Proposes Reg M Amendments

At an open meeting held yesterday, the SEC proposed amendments to Regulation M that seek to create greater transparency in the syndicate book-building process and syndicate activity in the after-market, by prohibiting several practices that, in the view of the SEC’s staff, “artificially stimulate demand” for IPO stocks.

Most of the proposed changes will affect all distributions of securities, not just IPOs. The SEC is proposing to prohibit quid pro quo and tying agreements by prohibiting underwriters from conditioning an allocation of securities on the investor purchasing the distribution securities in the aftermarket, purchasing securities in another offering, or paying higher-than-usual commissions on other transactions - but the proposal is not intended to interfere with the underwriter's freedom to allocate shares to its best customers and legitimate book-building.

More details are in the SEC's press release on the topic - and in the firm memos that we have begun posting in Section A.16 of of our Sarbanes-Oxley Law Firm Memos.

Deferred Compensation Legislation Memos

We have been posting them in droves - see Section E.29 of our Sarbanes-Oxley Law Firm Memos.

October 13, 2004

SEC Chair Donaldson Speaks Out on Executive Comp!

Got a jolt yesterday when I read the lead article in the Washington Post Business section, during which a reporter interviewed SEC Chair Donaldson about executive pay. Not only did it include some interesting comments about the significance of the GE disclosure settlement and the upcoming Tyson Foods action, but it referred to our conference and dealt with a number of other topics that we have been talking about (eg. tally sheets, "holy cow" moments).

Clearly, there is some momentum for change as reflected by our 1000th registration yesterday - combined webcast and in-person attendance - for the October 20th compensation conference.

How to Disclose Material Weaknesses in Internal Controls

Last week, SEC Chief Accountant Donald Nicolaisen gave a speech during which he urged companies to disclose material weaknesses in a manner that enables investors to carefully evaluate the circumstances underlying the material weakness. He also noted he has met with investors and urged them not to treat all material weaknesses as equally significant and encouraged them to consider issuing timely guidance on what impact the following scenarios may have on their investment decisions:

- Management fails to complete the work necessary to issue its report on a timely basis.
- The auditor fails to complete the work necessary to issue its report on a timely basis.
- The work is completed and the reports are issued timely, but they identify one or more material weaknesses.

The Chief Accountant said he was encouraged to learn during a recent meeting with Moody's that they are considering these issues and are tentatively considering grouping material weaknesses into different categories. One category, for example, might include a material weakness whose effects are limited to a single account balance that an auditor could address by expanding audit procedures. Other categories might include an ineffective control environment, such as the tone at the top, an ineffective audit committee or an ineffective financial reporting process. In these cases it may be more difficult for the auditor to audit around the problem. Moody's tentatively does not expect to take any rating action for some categories of material weaknesses; whereas it may for other categories.

Parsing the New Deferred Compensation Legislation

Parsing the new tax legislation is no easy task - and as with all legislation, there are bound to be some surprises. Consider Section 402 which contains a new SEC reporting requirement to disclose penalities incurred by the the JOBS Act:

(e) PENALTY REPORTED TO SEC- In the case of a person--
(1) which is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 or is required to be consolidated with another person for purposes of such reports, and
(2) which--
(A) is required to pay a penalty under this section with respect to a listed transaction,
(B) is required to pay a penalty under section 6662A with respect to any reportable transaction at a rate prescribed under section 6662A(c), or
(C) is required to pay a penalty under section 6662B with respect to any noneconomic substance transaction, the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which the penalty under subsection (b)(2) applies.

October 12, 2004

Equivalent of Sarbanes-Oxley for Deferred Compensation

Yesterday, the Senate signed off on a massive $137 billion corporate tax overhaul that was passed by the House last Thursday. The legislation repeals the current tax regime that was ruled out of compliance by the World Trade Organization and replaces it with a system that brings the US into compliance - included in the legislation are some pretty dramatic nonqualified deferred compensation provisions that will require modification of virtually every nonqualified plan.

To be clear, this very significant legislation will require every employer in the US with a non-qualified retirement plan or a deferred compensation plan (which is virtually every employer, except small ones) to amend their plans, start a new plan or both.

Learn more about this legislation at next week's upcoming NASPP annual conference, as it will be addressed by a number of the 45+ panels! Or learn more from the recent NASPP webcast - "The Coming Non-Qualified Deferred Compensation Legislation" and the NASPP Deferred Compensation Legislation portal.

More on Internal Checks

Last week, I blogged about the Council of Institutional Investors' updated executive compensation policy. One item I neglected to mention is that CII endorses the internal check method - which we recommended as one way to bring CEO compensation back in line - by stating "The committee should also ensure that the structure of pay at different levels (CEO and others in the oversight group, other executives and non-executive employees) is fair and appropriate in the context of broader company policies and goals and fully justified and explained."

Also notable is that CII not only recommends disclosure of a company's compensation philosophy - but believes that best practices includes shareowner approval of the compensation philosophy. I agree with the recommendation to disclose, but I think that shareholder approval goes a little too far.

Pay for Performance

In addition, CII recommends that compensation of the executive oversight group should be driven predominantly by performance. Of course, the devil is in the details in this area.

To learn more about pay-for-performance - and how the lack of it has led to excessive compensation practices - I recommend the new book by Professors Lucian Bebchuk and Jesse Fried, "Pay without Performance: The Unfulfilled Promise of Executive Compensation." We also will provide practice pointers in this area next week at the October 20th compensation conference.

October 11, 2004

Congress Has a "Holy Cow" Moment

During last week's House hearing on Fannie Mae, Rep. Baker introduced a chart detailing the compensation received by the top 20 executives and also noted that the company awarded nearly $250 million in bonuses - bonuses, not option windfalls! - over the past five years. According to a NY Times article from last Thursday, this "figure stunned even the company's strongest supporters."

In The Corporate Counsel, we have written about how boards might be surprised when they tally up what might be paid out under pay elements that are not well understood. Learn how to understand them at the October 20th compensation conference during the panel on "What is the Appropriate Amount of Compensation for CEOS," which will address:

- What responsible ways (and yardsticks) can be used to structure each component of top executives’ compensation, including cash compensation, bonuses, stock compensation, retirement plans, severance and more
- What types and levels of compensation are now appropriate for CEO pay – and how to identify them
- What should be the role of surveys regarding CEO pay; including how to overcome the problems of defining peer groups
- How to critically evaluate survey data and avoid the pitfalls of benchmarking – red flags and nuggets
- How to implement internal pay equity methodology

Is Chairman Donaldson a Short-Timer?

On Friday, I was in NYC to speak at IRRC's annual proxy conference and didn't think much of it when I heard SEC Commissioner Goldschmid give a speech on the 1st year anniversary of the shareholder access proposal railing against the Commission for not having adopted anything yet - because I already knew Goldschmid's views and the fact that this proposal was still being debated behind closed doors on the 6th floor of the Commission as SEC Chairman Donaldson remains the swing vote.

So, I was a little surprised to read the Saturday NY Times that quoted Donaldson as stating that he was undecided if he would stay on if President Bush is re-elected - and there certainly were signs in the article that he might not stay for too long as Donaldson said that "he never sought the position" and "looked forward to other projects." Perhaps Commissioner Goldschmid was pleading for action now as the future of this proposal could get quite murky once the November election passes.

Delay of Options Expensing?

In the same NY Times article, SEC Chair Donaldson also stated that he was considering a delay in the FASB's option expensing proposal - even before he received a request to delay expensing from 51 US Senators last week (this request came in the form of 4 separate letters). The FASB meets this Wednesday to discuss the proposal's status.

In July, the US House of Representatives voted overwhelmingly to stop the implementation of option expensing by passing a bill requiring instead that only a small portion of stock options - those given to a company's top five executives - be expensed. This House-backed bill has been blocked in the Senate by Banking Committee Chair Richard Shelby - supporters are hoping to bypass his opposition by attaching the legislation as an amendment to a budget bill this week, but most action on the budget probably won't happen until after the November elections.

Importance of Maintaining a Company-Wide Document Retention Policy

For the those of you involved with document retention, you should read this interview with Alan Yudkowsky and Peter Jazayeri on Frank Quattrone, Arthur Andersen, and the Importance of Maintaining a Company-Wide Document Retention Policy.

October 7, 2004

Updated PCAOB and SEC FAQs on Internal Controls

Yesterday, the PCAOB staff added three new FAQs on Auditing Standard No. 2 to the 26 FAQs that were issued in June. These FAQs are now in two separate PDFs on the PCAOB's site.

In addition, the SEC's Corp Fin updated its June FAQs on Section 404 management reports to clarify the answer to Question 3 to describe a Type 2 SAS 70 report and to address five new frequently asked questions (see Questions 19 through 23). The SEC's changes were made to the June FAQs - so that all of their FAQs are in one document.

CII Updates Executive Compensation Policy

The Council of Institutional Investors has just updated its policy regarding executive compensation (the policy is not yet posted on their site) - and it includes many elements that we recommended in our 12 steps to responsible compensation practices (as written in the May-June and Sept-Oct issues of The Corporate Counsel). This is a significant development as CII doesn't adopt or modify its policies without consensus among its 130 pension fund members (whose assets exceed $3 trillion).

The policy calls for quite a number of dramatic changes in compensation practices. Just in the disclosure area alone, consider these points to see how CII seeks to advance the ball well beyond what is required by S-K:

· Overview - Compensation committee is responsible for ensuring that all aspects of executive compensation are clearly, comprehensively and promptly disclosed, in plain English, in the proxy statement - regardless of whether such disclosure is required by current rules and regulations.

· Benchmarking - If benchmarking is used, disclose the peer group companies – and if the peer group is different from that used to compare overall performance, describe the differences between the groups and the rationale for choosing between them. Also disclose targets for each compensation element relative to the peer/benchmarking group and year-to-year changes in companies composing peer/benchmark groups.

· Salary - Disclose rationale for paying salaries above median of the peer group.

· Annual Incentive Compensation – Fully describe qualitative and quantitative performance measures and benchmarks used to determine annual incentive compensation, including the weightings of each measure. At the beginning of a period, disclose the maximum compensation payable if all performance-related targets are met – and at the end of the performance cycle, disclose actual targets and details on the determination of final payouts.

· Long-Term Incentive Compensation – Fully and clearly disclose a well-articulated philosophy and strategy for long-term incentive compensation – including size, distribution, vesting requirements, other performance criteria and grant timing of each type of long-term incentive award granted to the executive oversight group and how each component contributes to the company’s long-term performance objectives. Disclose whether and how long-term incentive compensation may be used to satisfy meaningful stock ownership requirements – and whether the committee imposes post-exercise holding periods or other requirements.

· Dilution - Disclose the philosophy regarding dilution including definitions of dilution, peer group comparisons and specific targets for annual awards and total potential dilution represented by equity compensation programs for the current year and expected for the subsequent four years - including a table detailing the overhang represented by unexercised options and shares available for award and a discussion of the impact of the awards on earnings per share.

· Stock Option Awards - Fully describe the qualitative/quantitative performance measures and benchmarks used and the weightings of each component – and whenever possible, include details of performance targets.

· Perquisites - Total perquisites should be described, disclosed and valued.

· Employment Contracts, Severance and Change-of-Control Payments – Fully and clearly describe the terms and conditions of employment contracts and other agreements/arrangements and reasons why the committee believes the agreements are in the best interests of shareowners – including tabular disclosure of the dollar value payable, including gross-ups and all related taxes payable by the company under each scenario covered by the contracts/agreements/arrangements.

· Retirement Arrangements – Disclose the terms of any deferred compensation, retirement, SERP or other similar plans, along with a description of any additional perquisites or benefits payable to executives after retirement – including a single table that details the expected dollar value payable to each executive under any deferred compensation, retirement, SERP or similar plan, along with a dollar value of any additional perquisites of benefits payable after retirement.

· Stock Ownership - Disclose stock ownership requirements and whether any members of the executive oversight group are not in compliance.

Learn how to handle these new disclosure demands during the panel - "What Now Needs to Be Disclosed in the Proxy Statement" - of our October 20th compensation conference.

October 6, 2004

Former Dupont Chair Jack Krol Talks About Internal Pay Equity

Yesterday, I was pretty excited to be in Delaware to videotape the critical panel for the October 20th executive compensation conference with Delaware Chief Justice Myron Steele, former Chief Justice Norman Veasey and Professor Charles Elson. That panel - "Director Liability and Responsibilities: The Changing Face of Delaware Law" - will be played on a delay basis as the first panel on October 20th.

But the real bonus was having Jack Krol - former Dupont CEO/Chair, who sits on a number of boards today - come in for a brief videotaped session. Jack urgently wanted to participate live on the panel "What Compensation Committees Should Be Doing Now" to urge others to consider the novel methodology implemented under his watch at Dupont - but he has a date conflict.

As we outlined in the Sept-Oct issue of The Corporate Counsel, one corrective approach to rolling back excessive pay is the "the internal check" - checking for "internal pay equity" at various levels within a company to ensure that the CEO’s compensation has not gotten out of line within the company. So now those of you that have registered for the conference - in person or by webcast - will be able to hear Jack explain how he accomplished this at Dupont as part of the panel for which he originally was slotted!

Is CEO Pay Really Changing?

Read this interesting interview with Josh Lurie on Whether CEO Pay Is Really Changing to read the interesting results of a CEO pay survey of 2400 companies over a three-year period.

8-K Webcast Transcript Coming Soon

Due to its length, it has taken the September 23rd panel a little longer than usual to clean up the webcast transcript - it will be up soon. Sorry for the delay! The audio archive is available now.

October 5, 2004

October E-Minders is Up!

Here is our October E-Minders - tomorrow, it will be emailed to all that signed up for it.

Enforcement Director Speaks on Gatekeepers

In probably his most significant speech to date, Enforcement Director Steve Cutler gave this riveting speech about gatekeeper responsibilities at UCLA a few weeks back. The speech is entitled "The Themes of Sarbanes-Oxley as Reflected in the Commission's Enforcement Program." The three themes identified were: fundamental significance of gatekeepers in maintaining fair and honest markets; importance of maintaining integrity in the investigative process aimed at ferreting out securities law violations; and need for greater personal accountability and deterrence at the top of the corporate world.

Here are some notable snippets that might be close to home for the lawyers out there:

- we named lawyers as respondents or defendants in more than 30 of our enforcement actions in the past two years

- close to half the Commission's actions against lawyers during the past two years involved outside counsel

- we are also considering actions against lawyers, both in-house and outside counsel, who assisted their companies or clients in covering up evidence of fraud, or prepared, or signed off on, misleading disclosures regarding the company's condition

- one area of particular focus for us is the role of lawyers in internal investigations of their clients or companies, as we are concerned that, in some instances, lawyers may have conducted investigations in such a manner as to help hide ongoing fraud, or may have taken actions to actively obstruct such investigations

- but what we want to do is focus their [gatekeepers'] minds, to have them think, when they wake up in the morning, if I fail to live up to my legal and fiduciary obligations, if I don't hold the line with my corporate client and resist pressure to acquiesce in wrongdoing, the consequences will be swift and severe.

October 4, 2004

SEC Brings First “Up-The-Ladder” Case

Without much fanfare, the SEC Enforcement Division recently brought what could be considered the first "up-the-ladder" case, a settlement with John Isselmann.

As proof that Enforcement Director Steve Cutler was serious in his recent gatekeeper speech that the SEC is setting a high bar for attorneys that represent public companies - and expects to be bringing more actions against lawyers - this case was brought against a general counsel, even though he was the one that blew the whistle against wrongdoing within the company! However, the Staff believed he didn't blow it soon enough.

Also notable is that the conduct in question occurred in December 2002 - before Part 205 was adopted - so it is a more traditional "causing" violation and not really a true "reporting up" case. This is important because it shows that - with respect in-house counsel who have a direct role in preparing and approving public statements and filings - that the SEC believes that the pre-SOX securities laws have the practical effect of requiring "reporting up." (I imagine that when - and if - the SEC sues an associate at a company's outside law firm under Part 205, there'll be some commotion!)

The bottom line is that this case indicates that the SEC is prepared to seek additional penalties against counsel who do not promptly notify the audit committee upon learning that their client is about to violate the federal securities laws. Thanks to Ken Winer and Tom Kuczajda for the heads-up!

Dilbert Enters Into Excessive Compensation Fray!

During the past few days, Scott Adams has challenged excessive compensation practices through his famous Dilbert comic strips. Here are two from the weekend:


dilbert 2.bmp

October 1, 2004

E-Communications in California

A few weeks back, I blogged about several states that had amended their laws to allow for electronic-only shareholder meetings. Now, California has changed its laws to be more e-communications friendly. Join Keith Bishop, a former California Commissioner of Corporations, who dissects this development in this interview on Taking Care of Business Using Electronic Communications in California.

Filing Fees - It's That Time of Year Again...

Yesterday, the SEC released Fee Advisory #3 stating that the SEC will operate under a continuing resolution that will extend through November 20th - meaning filing fees remain at their current rates until that time (and at that time, there likely will be another extension). Today is the first day of the SEC's fiscal year - and it has become an annual tradition for Congress to drag their feet passing the federal budget, which forces the SEC to issue multiple fee advisories to reflect its "continuing resolution" status.

Five days from whenever Congress passes the budget, the SEC will lower registration fees from the current rate of $126.70 per million to $117.70 per million, a 7% decrease. We have experienced lower rates each year for quite a while now.