December 30, 2004

Reversal By Corp Fin on Disney Access Shareholder Proposal

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.

December 29, 2004

SEC Proposes Changes to IPO Allocations and Distributions

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!

Environmental Disclosure

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.

December 28, 2004

Updated Corp Fin Current Accounting and Disclosure Issues Outline

Maybe the holidays are taking their toll on me - but I believe this updated Current Accounting and Disclosure Issues Outline was just posted by the SEC even though its dated November 2004. The old one was from 2001.

The False Claims Act and the Beauty Queen

From someone that reads too many law firm memos, I appreciate Fried Frank's annual gag memo. This year's memo is about a Beauty Queen - and as always - is based on a true story.

NYSE Forms for Non-US Issuers

The NYSE has posted Section 303A Annual Affirmation Forms customized for non-US issuers, including an Exhibit B. These are different than the US forms, because the requirements are different for Foreign Private Issuers.

December 27, 2004

Disney's Eisner Was Originally Included in SEC Disclosure Case

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.

December 22, 2004

IRS and Treasury Issue Guidance on Deferred Comp

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).

December 21, 2004

Enforcement Brings Another Comp Disclosure Case

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.

Learn what you need to know about director comp disclosures - including 8-K disclosures - during the January 13th webcast on - "What NOW Needs to Be Disclosed in the Proxy Statement."

SEC Staffer Implicated in DOJ Bribing Probe

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)?

December 20, 2004

Disney Appeals Corp Fin Decision To Not Exclude Access-Type Proposal

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.

December 17, 2004

FASB Publishes Option Expensing Standard

Yesterday, the FASB posted a revised Statement of Financial Accounting Standards No. 123 on expensing stock options and other share-based payments. It is a 295 page PDF document.

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.

Coming soon, the NASPP's webcast: The Final Standard: Option Expensing is Here – Are You Ready? with the FASB Board Member and FASB Staffer who shepparded this challenging project through...

ISS Updates Proxy Voting Guidelines for 2005

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.

December 16, 2004

Tyson Proposes to Settle SEC Complaint on Perks Disclosure for $1.7 Mil

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."

Learn what you need to know about perk disclosures - including 8-K disclosures - during the January 13th webcast on - "What NOW Needs to Be Disclosed in the Proxy Statement."

Deadline Extended Until December 31st!

Our HQ has been getting a lot of frantic calls from members wanting to take advantage of the Romeo & Dye Section 16 Treatise special offer that ended yesterday (probably because a flyer was included with the just-mailed issue of The Corporate Executive). So we have extended the special offer until the end of the year! We have also extended the special "Catch-Up" offer for!

SEC Chair Donaldson in the News

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."

December 15, 2004

Auditor Independence - Both the SEC and PCAOB Act!

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.

Timing of Option Grants Survey

We have posted a new Quick Survey on Timing of Option Grants. Note that we have highlighted an excellent practice pointer from a Task Force member regarding how to handle option grant timing on the home page of in our new "Hot Topics" box.

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 home page).

December 14, 2004

Institutional Investors: What Do They Want? New Tactics and New Agendas

A few weeks back, I attended a very informative ALI-ABA conference devoted to corporate governance - here are some notes from a great panel on investor expectations. These notes are posted in Section F of our Sarbanes-Oxley Law Firm Memos.

One tale worth repeating relates to how a few companies still are willing to waive their code of ethics. Apparently, one particular company's CEO conducted a related party transaction without bothering to get board approval. When the company's independent auditor found this out and brought it to the board's attention, the company waived its code of ethics and the independent auditor was fired. At least, that is the story that I heard - when I went to verify it, none of the company's SEC disclosure stream matched up with the story. Scary!

Late 10-Q Filings

Perhaps the most fascinating anecdote in this Business Week article about late 10-Q filings - which theorizes that 404 is causing the delays - is that the number of late filings was so high last year, even without 404! The article states: "In just one week in early November, 61 companies with a market cap of $100 million or more announced they would be late with their filings, including info-tech giant Electronic Data Systems, General Motors, and Suntrust Banks. That was up 25% from the same period a year ago, according to Glass, Lewis & Co., an independent researcher."

Canadian Law

As the number of Canadian companies registered with the SEC is far higher than any other country (other than the US obviously), we have created a "Canadian Law Practice Area." For those practicing in this area, please let me know if you have any content to contribute!

December 13, 2004

SEC Reportedly Threatens Lawyer Conducting Internal Investigation

Recently, there have been several news accounts about how the SEC is threatening a first-ever lawsuit against a lawyer hired to help with a company's internal accounting probe. Below is some paraphrasing from a Bloomberg article on this topic:

Exactly what the lawyer did to provoke the SEC isn't clear. The company issued a press release last year saying the probe the lawyer conducted found no "intentional wrongdoing by management.'' About a month later, Endocare said it was under investigation by the Justice Department and the SEC, which has since threatened to sue the company and its former managers.

The SEC has encouraged corporate boards to hire outside legal advisers, saying their findings help the agency root out fraud quickly. If the SEC brings a suit against the lawyer in question, it may define how far lawyers have to go to police a company after assuming the role of investigator, according to former SEC officials, who said the agency has never sued a lawyer for mishandling a corporate probe.

If the SEC proceeds against the lawyer in this case, other lawyers may balk at taking on company investigations. "This looks like an expansion of the government's crackdown on gatekeepers, particularly accountants or lawyers who bless a company's prior conduct,'' said William McLucas, a former SEC enforcement chief, who conducted the internal investigation at Enron. "It ratchets up the risk for lawyers doing inquiries that are held out to the public as independent.''

Guidance for Proxy Compensation Tables

We have posted an updated version of the popular chapter regarding the proxy comp tables written by Alan Kailer of Jenkens & Gilchrist in Section II.C.3 of our 2005 Proxy Season Resource Center (and also posted on

Of course, for the "full monty" on what you need to know this year, you will want to tune in to the January 13th webcast - "What NOW Needs to Be Disclosed in the Proxy Statement" - on Here are Questions to Ask NOW When Drafting Proxy Disclosures!

Happy Festivus!

I know that you wouldn't forget about Festivus - my kids still whine about the aluminum pole by our hearth - but this is just a reminder in case you are Seinfeld-challenged (you know, the tradition of Festivus begins with the airing of grievances). Send a loved one an e-card reminding them of the Festivus holiday - and if you want to amp up your celebration this year, check out this Festivus Blog!

Of course, I am still mad at Ben & Jerry for their renaming their Festivus ice cream. Now I just add an asterik to "Gingerbread Cookie*" to indicate that its the flavor formally known as "Festivus."

December 10, 2004

(Slight) Silver Lining in Merck's Change-of-Control Arrangements

Laura Thatcher of Alston & Bird - a Task Force member - notes a silver lining in Merck's broad-based (and in my mind, not very responsibile) COC arrangements announced a few weeks back. Laura notes that the arrangements follow the movement towards tightening up of the definition of "Good Reason" in the sense that Merck limits the more hair-trigger change-in-status provision to Management Committee members and provides a somewhat harder Good Reason trigger for others.

For example, for Management Committee members, Good Reason includes the typical "significant adverse change" in the executive's authority, duties, responsibilities or position (including title, reporting level and status as a Section 16 officer). For others, Good Reason does not include a change in the person's title or status as a Section 16 officer, or a change of less than two levels in the position to which the person reports.

Laura also notes that Merck moves in the right direction by providing less stringent procedural hurdles for a finding of “Cause” for executives other than Management Committee members (i.e. no need to get Board action to fire such a person for Cause). Finally, the excise tax gross-up is limited to the Management Committee members, with a modified cut-back approach for others.

However, these are small favors in Merck's scheme - particularly given that there will likely be a diminution of duty in any deal that Merck doesn't lead, so these might as well be single triggers. I tried to be positive. Learn more about responsible provisions in executive contracts in the Employment Agreements Practice Area.

Best Practice Guidelines Governing Analyst/Corporate Issuer Relations

This week, a joint CFA Institute and NIRI task force released final Best Practice Guidelines Governing Analyst/Corporate Issuer Relations. Among the issues covered by the Guidelines are:

- Information Flow between Analysts and Corporate Issuers
- Analyst Conduct
- Corporate Communication and Providing Analysts with Access to Management
- Reviewing Sell-Side Analyst Reports by Corporate Issuers
- Issuer Paid Research

New SEC Filing Fees

As noted in the SEC's 6th Fee Advisory, President Bush finally signed the omnibus appropriations bill that includes the SEC's funding for fiscal year 2005. Accordingly, effective this upcoming Monday - the 13th - the Section 6(b) fee rate applicable to the registration of securities and the Section 14(g) fee rate applicable to proxy solicitations and statements in corporate control transactions will decrease to $117.70 per million.

SEC's Asset-Backed Proposal to Be Considered

Next Wednesday, the SEC is holding an open Commission meeting to consider adopting the far-reaching asset-backed proposal.

December 9, 2004

Three New Bloggers Are Born!

On, I am excited to announce that three new bloggers are slaving away. As blogging is the highlight of my day (ain't that sick!), I am always glad to see others express themselves. Former SEC Staffer Jim Moloney and Rob Bujarski of Gibson Dunn are manning "Moloney's M&A Scoop" - and Scott Sher of Wilson Sonsini is running with "Trust & Antitrust - The Antitrust Blog."

Here is a recent blog from Jim and Rob:

The SEC Speaks at the ABA Fall Meeting

On Friday, November 19th the ABA Subcommittee on Proxy Statements and Business Combinations chaired by Dennis Garris (partner at Alston & Bird), met in Washington DC. At this meeting senior members of the SEC staff, including Brian Breheny, Chief of the Office of Mergers & Acquisitions (OM&A), and Nick Panos, Special Counsel in OM&A, addressed several topics of interest to M&A practitioners.

One issue that may come as a surprise to many is the staff's position that materials prepared by an investment bank as "pitch materials" and provided to a company that is considering a potential transaction may be deemed a "report, opinion or appraisal" under Item 1015 of Reg MA (formerly known as Item 9 reports), that must be summarized in the company's SEC filings relating to such transaction, even where the investment bank is not retained by the company to advise on the transaction and does not receive any fees or other compensation in connection with the transaction.

The key to the staff's decision rests with the degree to which the materials contain substantive analysis and the extent to which the Company's Board considers and relies upon the materials in its deliberations with respect to the proposed transaction. In the situation discussed by the staff, although the bankers argued that the materials were "pitch materials," the staff deemed the materials a report since the materials consisted of multiple presentations to the Board over an extended period of time and included specific analyses and recommendations that contributed valuable information used to structure the transaction presented to security holders. The staff also reminded the audience that when there are material differences between preliminary and final versions of an Item 1015 report, each version will be viewed as a separate report that must be summarized in the company's SEC filings.

Also of interest is the staff's continued position that insurgents who solicit proxies by sending management's proxy card to security holders and request that such cards be returned to management may continue to rely on the exemption in Rule 14a-2(b)(1) under the Securities Exchange Act despite the Second Circuit's recent decision to the contrary in MONY Group, Inc. v. Highfields Capital Management, 368 F.3rd 138 (2nd Cir. 2004). While staff is adhering to its long-standing position that such activities are exempt solicitations and insurgents need not file their own proxy statements, they are advising callers who seek guidance on this issue that the Second Circuit takes a different view.

Lastly, it was noted that Mara Ransom, Special Counsel in OM&A, is currently working on a rulemaking project that will hopefully resolve some of the conflicting case law on the "best-price" provisions in Rule 14d-10 under the Securities Exchange Act. As many of you know the Seventh and Ninth Circuits have split, with each adopting different tests as to when severance payments, golden parachutes and similar compensation arrangements in business combination transactions run afoul of the best-price rule. Brian Breheny expects to have something published by early next year. We are hopeful!

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My Chinese Delegation Experience

It's my b-day today, so I thought I would take liberties with another personal anecdote. A few weeks back, I was asked to address a delegation from China - consisting of legislative and regulatory members - on how they can develop their own version of Sarbanes-Oxley. Having spoken to other international groups in the past - such as IOSCO - I thought I knew what to expect.

But I was wrong. There were separate translators for what I said - and what members of the delegation replied - and it took an hour just to cover the basics of independent boards. It will be interesting (and perhaps scary) to see what they come up with if they adopt something. Proud to say that a translation of my joke about my baldness went through just fine. For my b-day party, I gotta try that 6th Annual Santa Stumble, put together by some former SEC Staffers.

404 Trends Emerging for Next Year

Here is some interesting info from last week's newsletter: "As public companies strive to meet compliance deadlines for Section 404 of the Sarbanes-Oxley Act, trends related to how companies will implement an efficient and effective process beyond the initial year of compliance are beginning to emerge, according to the results of a new survey released by Ernst & Young.

The survey, the third in a series (and oddly enough, not yet posted in E&Y's Internal Controls Library), is part of an ongoing study from Ernst & Young's Business Risk Services practice entitled "Emerging Trends in Internal Controls." The study takes an in-depth look at emerging trends in Section 404 compliance, and polls nearly 100 large, public companies
representing a diverse cross-section of industries. This survey provides an update on the progress large public companies are making in 404 compliance and addresses key issues such as the level of effort involved; the amount of testing being done; key areas of remediation; and the extent and frequency of executive and audit committee oversight and communications.

The survey shows a sharp increase in the urgency of public company first-year efforts to meet compliance deadlines, with 46 percent of companies expecting largely to complete evaluation and testing of 404-related controls only one to two months before their fiscal year end, compared to only 13 percent in the previous survey. In addition, 30 percent of companies reported the time they expect to spend complying with Section 404 has increased by nearly 50 percent, due in large part to the increased number of controls identified for testing.

With 404-related controls testing comprising the largest portion of ongoing effort beyond the first year of compliance, trends for addressing this important area are beginning to emerge. In Year 2, companies anticipate that their testing resources will continue to be primarily those dedicated to 404 testing, as well as resources supplied by Internal Audit functions. In many cases, third-party resources are expected to be used to support these functions, in addressing the unique skills and cyclical demands for testing.

Some companies are also using or exploring the potential to use control self assessment (80 percent), continuous controls monitoring and analytics (48 percent), and, to a lesser extent, management self testing to support their Year 2 efforts.

"After dedicating an extraordinary level of effort to meet 404 compliance deadlines, companies are starting to look ahead in towards 404 sustainability while containing costs and finding value in the process," said Tom Bussa, Global Director of Ernst & Young's Business Risk Services.

"Although most are still primarily focused upon first-year compliance, there is increasing recognition that a long-term view and plan are required."

In fact, most companies are now beginning to build the infrastructures and embed the technologies needed to sustain 404 compliance for the long term. In addition, many are also recognizing additional benefits from investments. For example, nearly two-thirds of companies expect to benefit from improved financial processes. Approximately 40 percent expect to extend risk coverage beyond financial reporting, and more than one-third are anticipating benefits stemming from systems enhancements."

December 8, 2004

Sample Disclosures: Warning Letters Received from Outside Auditors

In our "Internal Controls" Practice Area, I have posted samples from companies that have disclosed the fact that they have received "red letters" and "yellow letters" from their independent auditors, courtesy of Mark Adams of Cleary Gottlieb.

At an ALI-ABA corporate governance conference last week, I heard Lynn Turner, former SEC Chief Accountant, state his belief that companies should get "dinged" by investors if they receive this type of letter - but don't timely disclose their existence.

Relaunch of

Now that is more than just "course materials," we have uploaded much more content - and built two special sections in the left column of the home page: one for those involved with proxy disclosure and one for those involved with setting pay levels.

Speaking of proxy disclosures, we have posted "12 Questions to Ask NOW When Drafting Proxy Disclosures!" to give you a sense of the importance of the January 13th webcast. Take advantage of our special renewal rates and special catch-up rates that expire next week!

Early and Full Cooperation Often Best When Dealing with SEC

In this interview, catch up with Larry Byrne on Early and Full Cooperation Often Best When Dealing with SEC to learn how he succeeded in getting his client a settlement with Enforcement with no fine!

December 7, 2004

Here Comes Those Executive Compensation Lawsuits

Last week, I blogged about the new lawsuit filed against the CEO, President, CFO and General Counsel - as well against each director - of Fairchild Corp. Following on the heels of an executive compenation lawsuit against Nortel, the WSJ correctly called this "one of the first of a new wave of Delaware lawsuits challenging excessive pay for corporate leaders." Both the Fairchild and Nortel complaints are posted in's "Executive Compensation Litigation Portal."

The complaint focuses on six areas:

- related-party transactions
- triggered change-of-control payments, without executives losing their jobs
- excessive salary and bonus - and huge advances on SERP payments
- reimbursement of legal fees
- interest-free loans
- nepotism

Interestingly, this complaint appears to be cobbled together from disclosures in SEC filings (can't imagine what they might find that wasn't disclosed) - which is a departure from the Cendant and Disney complaints that were replete with details taken from board minutes and other records that are not readily available.

Obviously, putting together the Fairchild complaint was easy to do in comparison. Given that the Wall Street Journal reported last year that three-quarters of the S&P 500 companies disclosed at least one related party transaction - the pool of potential defendants for this new breed of lawsuit appears to be quite large.

SEC Inquires Into How Much is Too Much

Further reflecting the SEC's interest in executive compensation, check out this speech by the SEC's Chief Economist into whether overall CEO pay is excessive - and not a proper allocation of resources. Some of Chester's comments are too "economist" in nature for my tastes - but just the fact that the SEC's Chief Economist is putting this issue out on the table is quite noteworthy.

NASD's Shelf Offering Proposal

Yesterday, the SEC issued a proposing release seeking comment on the NASD proposed rule changes to its rules regarding the filing requirements and regulation of shelf offerings by NASD members - offerings of securities registered by issuers with the SEC pursuant to SEC Rule 415.

December 6, 2004

Updating Nasdaq D&O Questionnaires

Thanks to Jonathan Wolfman of Wilmer, Cutler, Pickering, Hale and Dorr LLP for correcting my mistaken blurb that D&O Questionnaires for Nasdaq companies don't need to be updated, as I forgot about the technical amendments that Nasdaq made to its listing standards over the summer.

To incorporate these changes, I have posted an updated Nasdaq D&O Questionnaire, courtesy of Baker & McKenzie! (And Baker & McKenzie also has contributed a stand-alone Director Independence Questionnaire for NYSE companies, that can be used in conjunction with a Sample D&O Questionnaire.)

As originally approved by the SEC in November 2003, Rule 4200(a)(15)(B) provided that a person cannot be an independent director if the person or a family member accepted any payments from the company (or any parent or subsidiary of the company) in excess of $60,000 during the current or any of the past three fiscal years. Under the revised rule - which took effect this summer - the look-back period is any period of twelve consecutive months within the three years preceding the date independence is to be determined. This change conforms to the approach used in the NYSE's version of this rule (although the dollar thresholds and scope of included payments remain different between the Nasdaq and NYSE rules).

The exact wording of the new Nasdaq rule is as follows (underlining indicates new text; brackets indicate deleted text):

"(15) "Independent director" means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent:

(B) a director who accepted or who has a Family Member who accepted any payments from the company or any parent or subsidiary of the company in excess of $60,000 during any period of twelve consecutive months within the three years preceding the determination of independence [deleted text: the current or any of the past three fiscal years], other than the following:"

Because the new definition implements a rolling 12 month testing period, rather than annual periods based on the company's fiscal year, companies will need to re-examine the independence of directors who received any payments during the past three years.

Please note that a number of other minor changes have been made to the Nasdaq's definition of independence, including (1) clarifications of the transition rules for companies emerging from bankruptcy, ceasing to be a controlled company or conducting an IPO and (2) an exclusion from the $60,000 test discussed above of certain standard, non-preferential transactions by financial institutions (such as banks) with their customers.

Glimpse into Congressional Mindset on Comp?

From yesterday's Boston Globe (and NY Times ran a simliar blurb): "File this one under: Uh, thanks for coming, we think. In what attendees described as a fiery and lively keynote speech in New York City on Wednesday night, Congressman Barney Frank lit into a group of bankers on the subject of executive pay. "At the level of pay that those of you who run banks get, why the hell do you need bonuses to do the right thing? Most people in the world don't get bonuses to do the right thing," Frank told the 250 bank executives, regulators, and politicos gathered for the trade publication American Banker's annual Banker of the Year Awards.

According to remarks provided from the evening, Frank said: "I mean, do we really have to bribe you to do your jobs? I'm serious. I don't get it. I don't get a bonus. Cops don't get bonuses. . . . And the problem is not just the bonuses. Think what you're telling the average worker, that you who are the most important people in the system and at the top, that your salary isn't enough, that you need to be given an extra incentive to do your job."

December 3, 2004

SEC Enforcement Division Challenging Fishy Timing of Option Grants

In the "Legal Proceedings" section of its 10-K filed Tuesday, Analog Devices disclosed that the SEC's Enforcement Division was conducting an investigation into the timing of certain option grants: "We have received notice that the SEC is conducting an inquiry into our granting of stock options over the last five years to officers and directors. We believe that other companies have received similar inquiries. Each year, we grant stock options to a broad base of employees (including officers and directors), and in some years those grants have occurred shortly before our issuance of favorable annual financial results."

Back in March, the Wall Street Journal reported that the SEC was looking into the practice at a number of companies, especially those in technology industry, of granting options shortly before announced positive news.

Combining the SEC's interest in excessive comp with the recent lawsuit against Fairchild Corp. - in which not only the CEO, but the GC was named in the suit, and which the WSJ called "one of the first of a new wave of Delaware lawsuits challenging excessive pay for corporate leaders" (I will blog more on this suit next week) - you can see why so many are still taking advantage of our "Catch Up" offer to hear all the practical guidance from the video webcast archive of our October 20th conference and all the other practice pointers on It is refreshing to see so many companies signing up their comp committees - catch up today!

Critical Issues for Controlled Companies

If you are at - or do work for - controlled companies, here is a comprehensive interview with Lois Herzeca on Critical Issues for Controlled Companies.

SEC Cleaning House of '34 Act Filers: Part II

On Wednesday, the SEC instituted public administrative proceedings against 15 companies to determine whether to revoke the registration of their securities under the '34 Act (the SEC also temporarily suspended trading in the securities of 26 companies). This is the second time the SEC has done this - last time was back in June, so perhaps its a semi-annual housecleaning.

California Department of Corporations Wants Comments

On Wednesday, the California Department of Corporations announced that it is requesting public comment for a study on the effectiveness of the California Corporate Disclosure Act aimed at providing investor protection. In September, Governor Arnold Schwarzenegger directed that the Department to review the efficacy of the Act and make recommendations to eliminate duplicative reporting requirements and further align its provisions with federal reporting requirements.

Comments can be sent to Kathy Womak, Office of Law at Thanks to Keith Bishop for the heads up!

December 2, 2004

More on SEC's Internal Controls Exemptive Order and Selling From Shelfs

Yesterday's blog on this topic resulted in a flood of emails - so here is another attempt to make sense of it all. If you look at Telephone Interp A.78, it states: "For purposes of Rule 401(b), the updating of a Form S-3 registration statement through the incorporation of a Form 10-K is the equivalent of filing a post-effective amendment pursuant to Section 10(a)(3). This means that if the registrant were not eligible to use Form S-3 at the time of such updating, it would be required to file a post-effective amendment on whatever other Form would be available at the time."

As I understand it, since accelerated filers that rely on the SEC's exemptive order will not be S-3 eligible until they file their 10-K amendment (per the terms of the SEC's order), they are not able to draw down off a shelf under this Telephone Interp. This is because companies would remeasure their eligibility to use their shelf at the time of their 10(a)(3) update - which is the date of filing the 10-K - and the SEC's order operates to render the company S-3 ineligible until the date of filing the 10-K amendment, at which time the order operates to restore the company's S-3 eligibility.

As a practical matter, information regarding management's assessment of the company's internal controls and the auditor's ability to give a "clean" attestation might be material anyways - effectively precluding a takedown since this information would be non-public until the 10-K amendment is filed. Similarly, a company's auditor isn't likely to allow incorporation of its opinion into a takedown until a 10-K amendment is filed that includes the management report and attestation. Thanks to Mark McElreath of Alston & Bird for these two nuggets!

Also note that the use of Rule 144 and Form S-8 are fine before the 10-K amendment is filed by an accelerated filer that relies on the SEC's order - their use is not impacted like S-3/S-2 eligibility by the SEC's order.

Here are some open issues identified in a Weil Gotshal memo that came out last night:

· Under what circumstances may an auditor provide an unqualified audit report on a company’s financial statements if it has concluded that the company’s internal control over financial reporting is ineffective as of the 10-K filing date?

· What are the consequences to a company relying on the Order if its auditor determines that it is unable to provide an audit report on the financial statements until it concludes the internal control audit, despite the latitude afforded by the SEC and PCAOB?

· What should management do about the SOXA Section 906 certifications under the bifurcated filing procedure contemplated by the Order? Can appropriate qualifying language be added to the body of the 10-K (e.g., in the Item 9A disclosure)?

8-K Trends: Part II

I have seen a lot of 1.01 and 2.03 8-K filings accompanied by exhibit filings - including material definitive agreements, even though this is not required by the items. In some cases, I hear that companies have filed the exhibits to get them out of the way (and not worry about forgetting to file them in the next Q or K) - but in other cases, I hear that companies have filed them because they were concerned about whether the summary description (particularly in the 2.03 context) was sufficient, so they wanted to file it and incorporate them by reference.

SOX Upheld in Court

On Monday, former HealthSouth CEO Richard Scrushy's claims that Sarbanes-Oxley is unconstitutionally vague were rejected by a federal judge in Birmingham, Ala. In the first court test of the Sarbanes-Oxley's constitutionality, U.S. District Judge Karon Bowdre said jurors, not a judge, should decide key questions raised in Scrushy's fraud case. No big surprise here...

December 1, 2004

Today's Securities Act Reform Webcast

I'm pretty excited to hear today's webcast - "The Overhaul: '33 Act Reform" - featuring SEC Staffer Amy Starr, who wrote much of the proposing release and three lawyers that I admire much from my days working with them on the Staff: Abbie Arms of Shearman & Sterling; Meredith Cross of Wilmer, Cutler, Pickering, Hale and Dorr; and our own Julie Hoffman. Spend an hour learning from the best rather than try to wade thru 350+ pages.

We continue to post law firm memos on the '33 Act reform in Section A.17 of our "Sarbanes-Oxley Law Firm Memos" - including a 75-page gem from Sullivan & Cromwell that has some nifty charts at the back.

Updated D&O Questionnaire for NYSE Companies

In our "Sample D&O Questionnaires," we have posted an updated D&O Questionnaire for NYSE companies in a Word file - it's updated for the NYSE's recent amendments to its governance listing standards.

The Nasdaq D&O Questionnaire that is posted doesn't appear to need updating - and contributors are busy updating the Independence Questionnaires that are posted on that page.

Flushing Out the Internal Controls Delay for Certain Accelerated Filers

One interesting aspect of the SEC's exemption order that I blogged about yesterday - which delays the internal controls deadline by 45 days for certain accelerated filers - is that it doesn't delay the requirements of Item 307 of Regulation S-K because the exemptive order states that it applies to 308(a) and (b). So the remainder of Item 9A of 10-K must be provided, which means you must still disclose management’s conclusions about disclosure controls and procedures as required by Item 307 of Reg S-K as of the year end.

So even though some accelerated filers get more time to conduct testing, management's assessment must still be conducted as of the same time as applied before the order. Thanks to Will Anderson of Bracewell Paterson for being the first to point out this tidbit!

Another interesting aspect of the SEC's order is that for purposes of the Form S-3/S-2 eligibility requirements, a company that relies on this special exemption will not be considered to have timely filed its 10-K until it has filed an amendment that contains the internal controls information that had been omitted per the order.

In other words, a company that relies on the 45-day exemption can't sell securities that already are registered on a shelf until the company files an amendment to complete its 10-K by including the management report and auditor's attestation. And once the 10-K amendment is filed, it can continue drawing off the shelf.

Today's NY Times quotes SEC Chief Accountant Donald Nicolaisen as saying that one open issue is "whether auditors would be allowed to certify that material weaknesses identified in this year's audit were fixed after the audit is completed - or whether certification would not be possible until a new audit was conducted a year later."

December E-Minders is Up!

We have posted the December issue of our free monthly email newsletter. Sign up for it by merely inputting your email address.