Earlier this week, Corp Fin reversed an earlier decision and is now allowing Disney to exclude a shareholder proposal regarding shareholder access. Disney had appealed Corp Fin’s earlier decision to the full Commission – but Corp Fin reversed its position upon reconsideration before the Commission got a chance to act on the appeal. According to today’s Washington Post, the proponents will still appeal this reversal to the full Commission (to learn more about the appeals process, see this chapter I wrote).
As I blogged about on December 20th, Corp Fin’s original Disney decision was not consistent with positions the SEC staff took last year on proposals submitted to Qwest Communications and Verizon Communications. But Corp Fin appeared justified in their original Disney decision based on a footnote in the proposing release regarding Rule 14a-11.
I’m not sure what tipped the scale to cause the reversal – but I believe that the proponents didn’t qualify under the parameters set forth in footnote 74 of the access proposing release (perhaps the 1% ownership threshold).
Sample Insider Trading Policies
We have tripled the number of sample insider trading policies – now nearly 80 samples! – in our “Insider Trading Policies” Practice Area, including indicating the date on which each policy was last amended.
Here is the SEC proposing release putting out for comment the separate proposals of the NYSE and NASD regarding the allocation and distribution of shares in IPOs. Comments are due 21 days from publication in the Federal Register.
The proposed rule changes respond to several of the recommendations of the NYSE/NASD IPO Advisory Committee, which issued a report with 20 recommendations in May 2003. Topics covered include: Quid Pro Quo Allocations; Spinning; Flipping; and IPO Pricing and Trading Practices – book-running lead manager reports to the issuer’s pricing committee; lock-up agreements; application of returned shares to offset the existing syndicate short position or if no short position exists, to unfilled customer’s orders at the public offering price; and Market Orders.
The NYSE and NASD proposals generally appear to be substantively consistent, with some language and format differences and differences in the Definitions Sections – and they should be read in conjunction with the SEC’s proposed amendments to Regulation M regarding IPOs and other public offerings. The SEC has specifically asked for comments on any differences between its Regulation M proposals and the NYSE and NASD proposals, particularly regarding penalty bids and quid pro quo allocations, which may present compliance or interpretive issues. Thanks to Mike Holliday for all of this analysis!
We have created a new Environmental Disclosure Practice Area, an area that is likely to become increasingly important as the recent success of social shareholder proposals illustrates how this is becoming a more crucial agenda item for investors – and other entities like the GAO push the SEC to upgrade its disclosure requirements in this area.
In this article, Bloomberg reported just before Christmas Eve that the Commission originally was pursuing a claim against Disney CEO Michael Eisner as part of the settlement the company reached with the SEC earlier in that week over disclosure violations. Apparently, Eisner and the Enforcement staff had reached an accord in which he took blame for not disclosing the company had business ties to some directors as well as omitting disclosure of certain compensation.
But the SEC commissioners split on that aspect of the settlement, ending the
case against Eisner and leaving just the case against the company; marking the second time this month the Commission balked at approving a staff recommendation to penalize a company official. On December 9th, SEC Chair William Donaldson and two commissioners rejected a Enforcement settlement with former Global Crossing Chair Gary Winnick. Must be some pretty interesting closed Commission meetings these days…
SEC Posts Adopting Release for Regulation AB
Thacher Proffitt has this analysis of the adopting release for the new asset-backed framework (warning: 495-page PDF!), that was posted late last week: The securitization industry has received a very important benefit under Regulation AB relating to market-making. In the proposing release, the SEC had taken the position that a current prospectus was required in market-making transactions (that is secondary sales by dealers who are affiliated with the depositor). Moreover, the SEC proposed that all pool information in the original prospectus would have to be updated in the market-making prospectus.
A number of comment letters (including letters from The Bond Market Association, the American Securitization Forum and the ABA) argued that the policy reasons for requiring a market-making prospectus did not reasonably apply to ABS. Comments also stated that there were adequate protections under federal securities laws to prevent misuse of information by dealers in these transactions.
In the adopting release for the final Regulation AB, the SEC stated that “we are sufficiently persuaded by these comments such that we will no longer require registration and delivery of a prospectus for market-making transactions” for ABS (see footnote 192).
In other words, there is no longer any requirement in secondary transactions to update the prospectus – or to maintain 1934 Act reporting after it is allowed to be suspended as a means of updating the prospectus – merely because the depositor is affiliated with the dealer. This position applies regardless of whether the dealer is affiliated with the servicer. This position does not apply to registered remarketing transactions, resecuritizations where information must be provided on the underlying ABS, or a delayed or continuous selling shareholder offering. However, these exclusions would not apply to typical market-making transactions.
On Monday, the IRS and Treasury Department issued the first of what they said will be a series of “guidance” notices under Section 409A. Section 885 of the recently enacted American Jobs Creation Act of 2004 added section 409A to the Internal Revenue Code, providing new rules for nonqualified deferred compensation plans.
In Notice 2005-1, the agencies designated all of 2005 as a transition period during which companies and executives will not be penalized if their plans follow a good-faith interpretation of Section 409A. The Notice also provides guidance regarding the termination and amendment of certain nonqualified deferred compensation arrangements and defines a change in ownership or control. In addition, this guidance defines the arrangements that will be considered deferred compensation subject to the new rules – as well as outlines the new reporting and employment tax obligations of employers in connection with section 409A.
The guidance also gave relief to companies that grant stock appreciation rights to employees in ways that “do not present potential for abuse or intentional circumvention.” The NASPP was heavily involved in lobbying to spare stock SARs the death sentence.
Section 409A applies to amounts deferred on or after January 1, 2005, subject to several special effective date rules. Copies of this lengthy guidance are up in the NASPP’s Deferred Compensation Legislation portal. More to come from the NASPP on what this all means in the near future.
The Priorities of What The SEC Posts
Not sure what the purpose of this priority list really is – as most items appear to get posted pretty quickly on the SEC’s site – but the SEC maintains an explanation of why they post particular items on a quicker basis than other items.
Strangely, FAQs and Staff Guidance fall into the lowest priority bucket – below items like Appellate Briefs and the Mutual Fund Fee Calculator. Not addressed in the priority list is the upcoming comment letter/responses database (fyi, the SEC still is working out the kinks of the mechanics of how that database will work).
Yesterday, the SEC settled enforcement proceedings against The Walt Disney Company for failing to disclose certain related party transactions between Disney and its directors, and for failing to disclose certain compensation paid to a Disney director.
In particular, Disney failed to disclose that the company employed three children of its directors, who received annual compensation ranging from $60k to more than $150k. In addition, Disney did not disclose that the spouse of another director was employed by a subsidiary 50% owned by Disney and received compensation in excess of one million dollars annually. Further, Disney failed to disclose that it made regular payments to a corporation owned by a Disney director that provided air transportation to that director for Disney-related business purposes. Finally, Disney failed to disclose that it provided office space, secretarial services, a leased car, and a driver to another Disney director, services valued by the company at over $200k annually.
A number of media reports state that the Justice Department is investigating a member of the SEC’s Office of Compliance, Inspections and Examinations for a bribery allegation. Apparently, this was disclosed in a report by the SEC’s inspector general: “An office investigation developed evidence that a staff member had solicited a gratuity from an officer of a firm registered with the commission, after the staff member had conducted an examination of the firm and closed the examination without any findings.” OCIE conducts on-site investigations of brokers, investment companies and investment advisors.
My burning question is how much could a SEC staffer possibly ask for in a bribe(that is worth burning a career)?
Last week, it was widely reported that Disney submitted an appeal to the Commissioners seeking an overturn of Corp Fin’s decision to not exclude a shareholder proposal. The shareholder proposal – co-filed AFSCME, Calpers, Illinois State Board of Investment and the New York State Common Retirement Fund – requests that Disney essentially becomes subject to proposed Rule 14a-11, which could allow shareholder groups that have held more than 5% of Disney’s outstanding common shares for more than two years to nominate up to a specified number of candidates who are independent from both the nominating shareholder and from Disney for election to the board.
Among its arguments, Disney notes that Corp Fin allowed the exclusion of similar proposals at Qwest Communications and Verizon Communications based on the exclusion basis in Rule 14a-8(i)(8) (that basis permits the exclusion of shareholder proposals if they “relate to the an election for membership on the company’s board of directors or analogous governing body”).
However, the Commissioners might be able to distinguish those no-action responses from last year – because the proponents in those instances did not closely mirror the procedures set forth in proposed Rule 14a-11. As proponents in later years typically do based on experience, the proponents in Disney could have made the necessary tweaks to the procedures in their proposal to avoid exclusion – particularly in light of footnote 74 in the shareholder access proposing release (which states that the Commission intends to amend Rule 14a-8(i)(8) so that proposals that make companies subject to the Rule 14a-11 framework are specifically non-excludable).
SEC Forms Advisory Committee on Smaller Public Companies
Late last week, the SEC formed an Advisory Committee on Smaller Public Companies to examine the impact of Sarbanes-Oxley and other aspects of the federal securities laws on smaller public companies. Heading this committee up will be Katten Muchin partner Herb Wander and Jim Thyen, CEO of Kimball International, with between 11 and 21 members to be named soon (representing the varied interests affected by the range of issues to be considered).
Trivia – Here is the process by which the SEC can form such a committee – an advisory committee can be established 15 days after publication of a notice in the Federal Register by then filing a committee charter complying with the Federal Advisory Committee Act with Congress. I learned something today!
Waxing Nostolgic About 450 5th Street
After Friday morning’s ASCS Securities Law meeting with the Corp Fin staff, I decided to hang around for the annual SEC holiday party. As I chatted in Room 1C30, I couldn’t help but reflect on all the good times at 450 5th Street as the SEC prepares to move into its new quarters sometime next year.
When I was a SEC Staff, I recall old-timers talking about the locations where the SEC used to reside – and me not caring all that much. I’m sure that’s how it will be for the hundreds of new staffers that now grace the SEC’s halls.
The effective dates and transition requirements are quite complex. There is a section on these matters up front in the Summary – but there are more detailed provisions in the body of the Statement beginning with Paragraph 69.
Read about how ISS will recommend proxy voting in 2005 with this interview with Pat McGurn on Changes for ISS’s 2005 Voting Guidelines. There still are some open issues with these new guidelines – so ISS intends to issue some FAQs on their policy changes in the future, particularly regarding compensation issues.
404 Fees: Where Do They Go In “Audit Fees/Non-Audit Fees” Table?
Our Q&A Forum has been quite busy as the proxy season heats up. Here is a recent question that was answered last week:
“Under which category of the proxy statement audit fee table should fees paid to an auditor in connection with a SOX 404 internal control review and attestation be reported?”
For the answer, go to the Q&A Forum and look at #656.
Yesterday, Tyson Foods filed its 10-K and made this disclosure in the “Legal Proceedings” section regarding a proposed settlement with the SEC by the company and former chairman Don Tyson, under which they would pay a combined $1.7 million in civil penalties to settle a SEC complaint that they didn’t fully disclose benefits Mr. Tyson received while serving as chairman:
“In March 2004, the Company was advised that the SEC had commenced a formal, non-public investigation concerning the Company’s disclosures of executive perquisites. In August 2004, the Company announced that it had received notice that the staff of the SEC intended to recommend that the SEC bring a civil enforcement action against the Company and that it was considering seeking a monetary penalty. The notice alleged that the Company’s proxy statements for fiscal years 1997 through 2003 had failed to comply with SEC regulations with respect to the disclosure and description of perquisites totaling approximately $1.7 million provided to Don Tyson, former Senior Chairman of the Company, and that the Company had failed to maintain an adequate system of internal controls regarding the personal use of Company assets and the disclosure of perquisites and personal benefits. The SEC staff also advised the Company it was considering recommending that the SEC bring administrative cease-and-desist actions against two Company non-executive employees for allegedly causing these failures. In addition, Don Tyson received notice the staff intended to recommend that the SEC bring a similar civil enforcement action against him. The Company was subsequently advised that the SEC staff had withdrawn its proposed recommendations with respect to the two employees, and that it intended to recommend that the SEC seek monetary penalties against the Company and Don Tyson.
In December 2004, following discussions with the staff regarding resolution of this matter, the Company and Don Tyson proposed that the Company, without admitting or denying wrongdoing, would pay a civil penalty of $1.5 million and
consent to the entry of an administrative cease and desist order and that Don Tyson, also without admitting or denying wrongdoing, would pay a civil penalty of $200,000 and consent to the entry of an administrative cease and desist order. These settlement proposals are subject to mutual agreement on the language of the order. The SEC staff has agreed to recommend both of these offers of settlement to the SEC. The proposed settlements and the proposed order are subject to final approval by the SEC.”
Inside the Beltway, there has been a lot of conjecture about the remaining length of SEC Chairman Donaldson’s tenure. Today, the Washington Post notes: “The White House publicly stated its support for Securities and Exchange Commission Chairman William H. Donaldson, whose ouster has been sought by business groups seeking less enforcement of corporate governance rules. The Wall Street Journal reported that the U.S. Chamber of Commerce, the Business Roundtable and the National Association of Wholesalers-Distributors have been lobbying against Donaldson. But White House spokesman Scott McClellan told reporters that “the president appreciates the job Chairman Donaldson is doing.” McClellan added, “He has been someone who has worked hard to help us crack down on corporate wrongdoing.”
In another Washington Post story today, Chairman Donaldson settles a lawsuit: “Securities and Exchange Commission Chairman William H. Donaldson has reached a settlement of a lawsuit accusing him, Aetna and current Aetna Chairman John Rowe of hiding accounting misstatements when Donaldson led the company from February 2000 to April 2001, court records indicate. A lawyer for Donaldson, Rowe and Aetna, investor lawyers and an Aetna spokesman did not return telephone calls seeking comment. An SEC spokesman had no immediate comment.”
SEC Approves New Asset-Backed Regulations
Here are some notes from Thatcher Profitt on yesterday’s SEC approval of the new asset-backed securities registration framework: “On Wednesday, December 15th, the SEC at its open meeting approved the final version of the long anticipated Regulation AB, which for the first time will provide a comprehensive set of federal securities regulations for ABS. The full text of the final release is not yet available, but should be posted on the SEC’s website within a few days. It is said to be about 500 pages long.
In a live webcast of the open meeting, a number of important statements were made about the final rule by SEC Commissioners and staff members. Generally, the final rule incorporates all of the principal components of the proposal in the areas of registration, Exchange Act reporting, assessment of compliance, disclosure, and offering period communications. The comments made at the open meeting and the length of the final version indicate that much of the detailed provisions of the proposal were retained in the final version.
Based solely on the webcast, there have been a number of important changes made to the final version of Regulation AB in response to comment letters, which are summarized below.
Assessment of compliance with the minimum servicing criteria contained in the rule may be provided by multiple parties. In other words, instead of a single assessment of compliance by the responsible party covering all servicing functions (including loan level servicing, cash flows and bond administration), the responsible party may obtain and file separate assessments of compliance from unrelated companies that performed parts of the servicing functions. The responsible party would have to certify that it obtained assessments of compliance from all relevant parties. Furthermore, the SEC indicated that the final rules will lessen the need to obtain information from third parties for reporting purposes.
In addition, significant relief will be provided on the issue of compliance with Exchange Act reporting as it affects eligibility for the use of Form S-3. Eligibility will be linked to compliance with required Exchange Act reporting by all trusts formed by the depositor, or by affiliated depositors, and backed by the same asset class. The SEC does not want to link eligibility to the performance of trusts formed by non-affiliated sponsors.
Regarding transition rules, there will be a 12-month delayed effective date for all purposes. In addition, there will be more detailed phase-in rules for existing and future shelf registration statements, which were not described. Moreover, all existing ABS transactions will be permanently grandfathered so that they can continue to report under the old rules, even after the 12 month delayed effective date. However, the question of on or prior to what date an “existing” transaction must have been issued in order to get the benefit of this grandfathering provision, was not addressed.
Another very important change is that the SEC will permit required static pool data to be disclosed on a website. Static pool data so disclosed will be deemed to be part of the registration statement and will have Section 11 liability, but will not have to be filed on EDGAR or included in the prospectus. The website must be unrestricted and meet certain record-keeping requirements. This is a very important change conceptually for the SEC, which never before has permitted information required to be included in the registration statement to be incorporated from a website. The SEC was willing to make this concession in light of the substantial benefits of website delivery for this type of information. It was also indicated that relief would be granted during a transition period with respect to historic static pool data that cannot be provided without unreasonable effort or expense. Other details of the required static pool content were not discussed. The SEC also mentioned that it ultimately wants issuers to be able to file this data on EDGAR after required modifications to EDGAR have been made (and for that reason included a sunset provision), but that this should not dissuade the market from pursuing technological innovations in the area of data delivery.
Other important changes were made in the disclosure area. The thresholds for required disclosure about unaffiliated servicers and significant obligors were raised from 10% to 20%. Also, for derivatives that may be used in ABS transactions (including interest rate caps and swaps), for purposes of determining whether the derivatives counterparties reach the disclosure threshold, the derivative will be valued based upon the “maximum probable exposure” of the counterparty, rather than the maximum amount that could be payable under the terms of the contract.
It was also indicated that a number of revisions were made at the detail level in response to comments regarding required disclosure items and reportable events. There will also be some further clarification that the specified disclosure items are not required to be included where they would not be material.
It did not appear that there were any significant changes to the definition of “asset backed securities”. Synthetic, credit linked, index linked and managed structures will still fall outside Regulation AB, but the SEC hopes to address those types of transactions initially on a case-by-case basis, and perhaps in future rulemaking. The final release asks for comments on these matters.
The final Regulation AB will not make any change in liability for the information provided to the investor at the time of the investment decision. That issue is covered more generally in the Securities Offering Reform proposal. If the latter proposal does not go forward, this issue may be revisited in the ABS context at a future date.”
Yesterday, the PCAOB proposed rules that would (see pages 43-44 for how the PCAOB would apply the new rules to existing services and arrangements):
- treat a registered public accounting firm as not independent of an audit client if the firm provided any service for a contingent fee, directly or indirectly; or the firm provided assistance in planning certain types of potentially abusive tax transactions (or provided such services to certain senior officers of an audit client)
- require independent auditors to provide certain information to the audit committee of a client in connection with seeking pre-approval to provide non-prohibited tax services to the client
- require auditors to be independent of their clients throughout the audit and professional engagement period
- require associated persons not to cause independent auditors to violate Sarbanes-Oxley, the PCAOB rules, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants, including the SEC’s rules
Also yesterday, the SEC updated their FAQs about auditor independence, which were originally issued in 2003. Some FAQs indicate they were updated in 2004, which I believe means they were just revised yesterday – while others indicate that they were newly issued on December 13, 2004.
Don’t forget to check out the final results on our survey on codes of ethics for directors.
Nov-Dec Issue of The Corporate Executive
For the many of you that just received the Nov-Dec issue of The Corporate Executive in the mail, we have posted the two excellent Mercer memos – that are referred to on page 8 – regarding the impact of the JOBS Act on traditional deferred plans, such as SERPs, and on equity plans in the Nov-Dec 2004 section of “Materials Referred To” (which link is listed in left column on TheCorporateCounsel.net home page).