June 30, 2005

Securities Act Reform

At Chairman Donaldson's last open meeting yesterday, the Commission unanimously adopted rules to reform the Securites Act, substantially as proposed last October. The actual final rules won't be posted for awhile, but based on comments at the meeting, deviations from the proposed rules appear to include:

Electronic Road Shows - a live road show that is simultaneously transmitted by electronic means to live recipients will still be treated as an oral communication. However, as proposed, a live road show that is recorded and retransmitted on a delayed basis will be treated as a graphic communication, but would be permitted as a free writing prospectus. However, those road show presentations would not be required to be filed as proposed, except in the case of road shows for an initial public offering of equity securities.

Liability - the final rules will provide that prospectus supplements are included in shelf registration statements for disclosure liability purposes, but would establish a new registration statement effective date for Section 11 liability purposes only for issuers and underwriters, but not for directors, officers and named experts, as originally proposed. And cross liability provision will be clarified. One underwriter will generally not be liable for statements made by another unrelated offering participant.

Tweaks on the WKSI Definition - The $700 million public float test for WKSI status will be based on worldwide public float; an issuer will qualify as a “debt-only” WKSI only if it has issued $1 billion or more of non-convertible debt in registered offerings for cash, not exchange. In addition, the final rules provide that a “debt only” WKSI will be permitted to register its equity securities in an automatic shelf registration statement if it otherwise meets the Form S-3 $75 million public equity float requirement.

We are posting law firm memos on the final Securities Act Reform rules here.

Other Open Meeting Items

The Commission voted for a second time yesterday (3-2) to adopt a rule requiring greater independence on mutual fund boards. The Chamber of Commerce is expected to sue the SEC again, accusing it of violating the appeal court's order. A New York Times article quotes Stephen Bokat, Executive Vice President of the National Chamber Litigation Center as saying "We are going to file a petition to review the SEC's action today as soon as we can complete the technicalities necessary."

Additionally, the Commission unanimously voted to approve the shell company rules.

Posted by Julie Hoffman

June 29, 2005

Today at the OK Corral…

First up at today’s SEC Open Meeting is the much anticipated Securities Offering Reform project, where the Commission will consider rules that would significantly revise and update the registration, communications, and offering processes under the Securities Act.

Second on the agenda is the shell company rulemaking project, where the Commission will consider adopting rules amending Forms S-8, 8-K, and 20-F, as well as defining the term "shell company" and amending the definition of the term "succession."

Third, the Commission will consider issues remanded by the D.C. District Court, in the Chamber of Commerce v. SEC decision. The remanded issues relate to (1) the costs of complying with the 75% independent director condition and the independent chairman condition and (2) disclosure alternatives to the independent chairman condition.

Chairman Donaldson’s decision to schedule the last matter has caused considerable controversy. A USAToday article quoted former SEC Commissioner Joseph Grundfest as saying "The long-run implications of such conduct can only be corrosive and unfortunate" and former Commissioner Bevis Longstreth as saying "Such a course of action could easily be construed as an expression of contempt for the rule of law and the judicial process."

The gunfight starts at 10 am eastern today and will be available by webcast.

Staff Legal Bulletin 14C Posted

Based on their experience with shareholder proposals in the last proxy season, the Staff issued additional 14a-8 guidance yesterday in the form of SLB 14C. The SLB covers issues that arose commonly in the last season, including:

- the application of Rule 14a-8(i)(6) to proposals calling for director independence;

- the application of Rule 14a-8(i)(7) to proposals referencing environmental or public health issues;

- the application of Rule 14a-8(l); and

- the withdrawal of a proposal submitted by multiple shareholder proponents.

Posted by Julie Hoffman

June 28, 2005

Attention: NYSE-Listed Companies

At last week's Society of Corporate Secretaries & Governance Professionals conference, Annemarie Tierney of the NYSE's Office of the General Counsel discussed the director independence determination per NYSE Rule 303A.02.

First, she reminded the audience that the independence determination is a two-part test. Even if a director meets all the bright line criteria set out in Section 303A.02(b), the board is still required under Section 303A.02(a) to make an affirmative determination, based on all relevant facts and circumstances, that the director has no material relationship with the listed company.

Second, she discussed Rule 303A.02’s requirement to identify the independent directors and the basis for such independence determination in the company’s proxy statement. A board is permitted to adopt and disclose categorical standards to assist it in making determinations of independence and may make a general disclosure if a director meets these standards. However, Annemarie said that many companies are not disclosing their independence determination standards or are using the NYSE's bright line tests as their sole categorical standards. Or, where a director who does not fit within the disclosed standards is determined to be independent, companies are disclosing relationships that exist between the director and the company that are not covered by categorical standards but are not disclosing the basis for its determination that a director is independent despite this relationship.

As a result, the NYSE is looking at all NYSE companies’ most recent proxy statements and will be issuing a comment letter to those companies whose disclosures are deficient. Annemarie indicated that the comments will be in the nature of a “futures” comment from the SEC, and no re-filing of proxies will be required. In addition, companies that receive a comment letter will not need to qualify their NYSE CEO certifications or annual written affirmations. Comment letters are expected as early as this week, and will be running through approximately six months from now.

New Perk Policy at GE

As Mark Borges blogged last week, General Electric has a new policy concerning the personal use of company aircraft by the company's three Vice-Chairmen. Under the policy, these executives must lease the company's aircraft for any personal travel once their GE-paid flight expenses for the year exceed $200,000. (GE requires its Chairman and Vice-Chairmen to use corporate aircraft for both business and personal travel for security purposes.)

GE filed a Form 8-K last week detailing the policy. One of the company's Vice-Chairman has already entered into a time-sharing agreement, where he can lease certain planes from GE for his personal use. A copy of the time-sharing agreement is included in the filing.

-Posted by Julie Hoffman

June 27, 2005

Making Its List…

When the Commission adopted Exchange Act Rule 12g3-2(b) relating to foreign securities, it indicated that from time to time it would publish lists of foreign issuers that have claimed exemptions from the registration provisions of Section 12(g) of the Act. Last week, the SEC published such a list to “make brokers, dealers, and investors aware” that some form of relatively current information concerning the foreign issuers included in this list is available in the SEC’s public files.

Foreign private issuers with total assets in excess of $10 million and a class of equity securities held of record by 500 or more persons, of which 300 or more reside in the United States, are subject to registration under Section 12(g) of the Exchange Act. Rule 12g3-2(b) provides an exemption from registration under Section 12(g) with respect to a foreign private issuer that submits to the SEC, on a current basis, the material required by the rule.

Amended Circular 230 In Effect

In an effort to “improve ethical standards for tax professionals and to curb abusive tax avoidance transactions,” the Treasury Department and the IRS revised their Circular 230, which took effect on June 21. Circular 230 is applicable to attorneys, accountants and other tax professionals who practice before the IRS. The revisions to Circular 230 provide standards of practice for written advice that reflect current best practices and are intended to restore and maintain public confidence in tax professionals. As a result of the new regulations, expect to see tax practitioners including a disclaimer in most written communications (including email!) to clients to the effect that any tax advice provided in such communication may not be relied on by a taxpayer to avoid penalties.

See law firm memos on this topic here.

Most Recent Monthly Columns on DealLawyers.com

Steve Glover has posted his monthly column on DealLawyers.com on the how’s and why’s of spin-offs and related transactions. This month’s submission covers split-up transactions.

Gary Lawrence’s monthly column on DealLawyers.com covers the practical aspects of conducting due diligence for business transactions. This month, he addresses due diligence and Section 11 issues.

-Posted by Julie Hoffman

June 24, 2005

Pfizer's Novel Approach to Majority Voting

This morning at the Society's National Conference, Peggy Foran discussed how Pfizer just announced how their company amended their corporate governance guidelines so that any director who receives a majority withheld vote is required to tender their resignation. The company's board can then choose whether to accept the tender - which allows for the board's judgement to be exercised.

This is akin to the similar provision that exists in many corporate governance guidelines regarding change in job responsibility for a director. When I get back from vacation, in a podcast, Peggy will explain why they did it, the issues involved in the form of a written tender, etc.

Letter from Council of Institutional Investors on Majority Voting

This query was recently posted in the "Q&A Forum": "We received a letter from CII asking us to adopt a policy regarding majority voting for directors. According to CII's web site, they sent the letter to 1,500 of the largest US companies. I am interested in how others who received this letter plan to respond."

Here was my response: "Just listened to a discussion on this at the Society's National Conference - must folks seem to be taking a "wait n' see" approach to what others do (and then likely will respond with a letter that says their board is closely studying the issue as there a lot of groups currently deliberating the issues and presenting their findings in the near future)." Note that the CII's letter notes that any responses will be posted on their website!

June 23, 2005

Mark it Down - '33 Act Reform on June 29th

As soon as I blogged yesterday that the rumor about the SEC adopting '33 Act reform on June 29th might no longer hold water, the SEC announced that the Commission indeed will consider adopting the reform on the 29th. Besides '33 Act reform, the Commission will consider its outstanding shell company proposal - as well as the cost-benefit analysis and alternatives of the already adopted mutual fund board independence rules (as required by the DC Circuit Court decision that I discussed in yesterday's blog). Look for sparks to fly on this last agenda item at the open Commission meeting!

Do you know what else happens on June 29th? As reported Tuesday in the WSJ, 60% of the companies listed on the Toyoko Stock Exchange hold their annual stockholders meetings! Talk about bad governance - this practice ensures that investors are not able to attend many of these meetings.

ABA Discussion Paper on Majority Voting

The ABA Committee of Corporate Laws has issued a 32-page discussion paper on majority voting - and now seeks reactions to its objective analysis, as noted on the last page of the paper. A copy of this paper is posted in our "Majority Vote Movement" Practice Area.

Ten Reasons Why You Should Hear What Fred Cook Said!

Fred Cook truly gave a seminal speech – “Fred Cook Speaks to Directors” – on Tuesday during which he imparted wisdom from his 40 years serving as a compensation consultant. Here are 10 Good Reasons why all your directors, staff and advisors should hear what was said during this critical event (the text and video archive now are available on CompensationStandards.com):

1. Fred starts off in “The Cycle of Executive Compensation” by explaining how we got here – which is important to understand in order to reverse course. Fred notes “Executive compensation is not "out of control" as some alarmist critics hold. The start point is totally under the control of the compensation committee….”

2. Fred explains how surveys are a major cause of the escalation of CEO pay in “The Problem with Surveys,” by providing a series of candid observations, such as “Why are we so dependent on surveys to set the start point of executive compensation? The answer is that we do not know how to value the job of management.” Fred’s pointers are set forth in an important supplemental two-page paper for directors on the use – and misuse - of surveys.

3. In “How Did Stock Options Come to Dominate Executive Compensation?,” Fred explains the important concept of "equity carried interest" – which is essential for boards and advisors to understand. Fred also provides ten reasons why option and equity grants have grown to such high levels that may not be in a company’s best interests.

4. Noting that many boards are looking for equity alternatives in the face of option expensing, in “A Warning About Restricted Stock,” Fred explains why using survey values to convert options into other grant forms on a dollar-for-dollar basis is a fundamental mistake

5. Perhaps Fred’s most practical and innovative guidance comes during “What's Another Approach to Equity Grant Guidelines?” as he provides a framework for determining how much equity is appropriate to motivate executives to provide value.

6. This framework is further explained in a supplemental paper, “A Different Approach to Stock Option Grants - Stock Option/Pay Multiple Formula.” Fresh thinking that is a must for all compensation committees!

7. In “Internal Pay Equity,” we expect that Fred’s story about implementing internal pay equity methodology at a leading company should encourage many more of us to ask our HR heads or consultants to implement this important alternative to external peer benchmarking.

8. Fred outlines six common traps during “What Are Some Traps Compensation Committees Should Avoid?”

9. In “What Are Evolving Best Practices in Executive Compensation Governance?,” Fred delves into six practices that are emerging as best practices today.

10. In addition to this seminal speech, much more of Fred’s wisdom – as well as practice pointers from our 75 Task Force members – are available on CompensationStandards.com today. And our “2nd Annual Executive Compensation Conference” – live in Chicago or by video webcast - will feature important practical guidance from luminaries like Fred, John Reed and other notable directors and expert advisors.

June 22, 2005

More on Failure to File 10-K as a Credit Default

Following up on last week's blog regarding not filing a 10-K as a credit default, Tom White of Wilmer Cutler Pickering Hale & Dorr notes that Saks is not the first company to deal with this issue. In fact, Tom points out that bondholders might not necessarily agree that this is merely a "technical" default, as Professor Coffee implies. Without current reported financial information, it becomes more difficult for holders to trade the bonds.

The countervailing consideration is that sending the notice can itself cause a downgrade, sell-off or other bad repercussions (that assumes this is "bad" from the bondholders' perspective - some bondholders might view a sell-off as an opportunity to acquire more bonds) .

Starting the 60-day clock gives the bondholders leverage (note how Saks is now offering to buy back $1.2 billion of its debt in exchange for waiver of the requirement to timely file its 10-K). Besides putting pressure on the company to get the reports done, it enables the bondholders to bargain for consent fees and other concessions (e.g. public disclosure of certain selected current operating and balance sheet data) in exchange for a waiver in case the company can't file the 10-K within 60 days (which typically is the cure period provided for in the indenture before repayment is accelerated).

Whether bondholders would play it out and actually threaten to accelerate would be an interesting question. If they thought the company had the financial capacity to refinance the bonds, it might be a gambit to get them paid at par. The collateral consequences, however, are so dire that it is likely that bondholders would be hesitant to pull the trigger absent a payment default.

One interesting legal issue is whether receipt of the notice of default is an 8-K Item 2.04 or Item 8.01 disclosure. Tom believes it's an 8.01 disclosure.

SEC (Partially) Rebuked Over Fund Board Independence

Yesterday, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ordered the SEC to reconsider recently adopted rules requiring mutual funds to be overseen by independent chairmen and that fund boards be comprised of 75% independent directors. Today, about 80% of fund companies, including the two biggies (Fidelity and Vanguard), have boards run by insiders. Here is the 19-page court opinion in Chamber of Commerce of the United States of America v. U.S. Securities and Exchange Commission.

The Chamber of Commerce had argued that the Investment Company Act of 1940 didn't provide authority for the SEC to regulate "corporate governance" and, in any event, that the SEC had adopted the rules without adhering to the requirements of the almighty Administrative Procedure Act.

The Court held that the SEC didn't exceed its statutory authority in adopting the rules and that the SEC's rationales for the rules satisfied the APA. The Court, however, also found that the SEC did violate the APA by failing adequately to consider the costs mutual funds would incur to comply with the rules - and by
failing to adequately consider proposed alternatives (such as mandatory disclosure by funds regarding the level of independence of their board), the Court remanded the rulemaking to the SEC so it can address the deficiencies identifed in the opinion.

It's a little unclear if the Commission will need to take another vote on the fund rules once the cost-benefit analysis is complete, alternatives are considered and public comments are received (my guess is "yes"). The discussion of "Consideration of Alternatives" on pages 17-19 is particularly significant. In fact, the entire opinion is worth reading.

It will be interesting to see if any last-minute rule adoptions come out of the SEC before Chairman Donaldson's departure on June 30th. Now, we might not see the '33 Act reform calendared on June 29th - as Reuters reported a few weeks back - because this court decision understandably might lead the Chairman to be gun shy (Note: a few hours after I originally posted this, the SEC announced a meeting on the 29th). Isn't it remarkable that Commissioners Glassman and Atkins will get "another bite at the apple" on fund board independence - they were vehemently opposed to the new rules - without incoming Chairman Chris Cox having to intervene? Of course, we don't know Mr. Cox's views on these fund issues yet.

M&A Bootcamp - Delaware Law Considerations

On DealLawyers.com, you can now listen to Delaware law experts John Grossbauer and Mark Morton of Potter Anderson during their 45-minute session on Delaware Law Considerations. These guys do a great job covering the waterfront in such a short period of time. It's not too late to take in the Bootcamp - with reduced membership rates for the "Rest of 2005" now available - only $100 for a single user license!

I'm (Nearly) Going to Disneyland!

I'm heading to Los Angeles tomorrow for the Society of Corporate Secretaries annual conference - always an informative and fun event. I'm excited to serve on the Society Board's Executive Committee during the last year of my term in office; also did so during my first year on the Board. I love working with such knowledgeable and dedicated colleagues.

Then off on vacation next week as we drive up the California coast. Giant Forest, hear we come! I will blog remotely for a few days and then Julie Hoffman will be blogging for your pleasure next week. Have a great 4th!

June 21, 2005

The SEC's Latest Take on Qualitative Materiality

A few weeks back, the SEC settled a civil enforcement action alleging that Huntington Bancshares (and its CEO, former CFO and former controller) engaged in financial reporting fraud in connection with the company's 2001 and 2002 financial statements. The complaint also alleges failure to maintain accurate books and records and adequate internal controls, and the filing of materially false CEO and CFO certifications.

As noted in this Sullivan & Cromwell memo (posted in TheCorporateCounsel.net's "Hot Topics Box" on the home page), the following points are of particular interest from this action:

- In assessing the materiality of the alleged accounting improprieties, the SEC focused on qualitative materiality factors. In particular, the SEC stressed that, while the increases in reported operating earnings resulting from the improper accounting methods may have been quantitatively fairly small (3% in 2001 and 5% in 2002), they were material because they enabled Huntington to meet or exceed Wall Street analysts' earnings per share estimates and to meet internal EPS targets that determined management bonuses.

- The alleged improper accounting occurred despite Huntington and its management team having a due diligence and disclosure process in place, involving meetings at which senior management discussed the accounting treatment with, among others, external auditors and legal advisors. The SEC alleged that, in some cases, the defendants acknowledged in these meetings that the accounting was improper, but concluded it need not be changed because the errors were not material.

- In several cases, the alleged improper accounting was a continuation of accounting practices that were established years earlier - before the individual defendants were at the company - and were approved by outside auditors at the time of establishment and on an ongoing basis.

The bottom line is that qualitative materiality analyses are alive and well at the SEC. This case is a reminder that even very small percentage amounts can still be material under the circumstances.

Bona Fide CEO Succession & Selection Processes

With CEO succession in the news, there is much food for thought in this lengthy interview with Mark Van Clieaf on Bona Fide CEO Succession & Selection Processes. Mark is a key session leader for an upcoming August 8th symposium about the 5 Levels of Corporate Governance and related director strategic duties and liabilities to be held in Toronto.

Task Force Report on Private Placement Broker-Dealers

During last week's meeting of the SEC Advisory Committee on Smaller Public Companies, some members noted a reference to an ABA Task Force Report on Finders that was recently published. This 71-page Report on private placement broker-dealers is quite interesting and comprehensive - and covers a wide range of issues, from M&A to litigation. It is posted under "Alerts" on the DealLawyers.com home page and in TheCorporateCounsel.net "Hot Topics Box."

June 20, 2005

Egads! The Big Three?

Lots of news about KPMG pleading for its life due to the tax shelters it sold in the 1990s and its subsequent alleged obstruction of justice activities (see these court opinions that illustrate how aggressive KPMG was in the lawsuits filed against them over the tax shelters, much to the judiciary's chagrin, and last week's apology from KPMG for this aggressive posture). In my mind, it's pretty clear that the corporate world cannot live with only three major audit firms, as the independence rules often forces companies to hire at least two - if not three - of the Big 4 to perform the various audit and non-audit services they need.

In this blog, a venture capitalist notes how he testified last Friday before the SEC's Small Business Advisory Committee that "the formation of a fifth or sixth major national auditing firm would provide small companies with a better alternative that what exists today while helping to restore the balance of negotiation between auditing firms and their clients."

Of course, creating additional national audit firms is no easy feat. To see how far the auditing profession would have to change to create them, read this recent article that indicates that the 5th largest firm presently has no Fortune 500 clients - and only two of the Fortune 500 companies use an auditor other than the Big 4.

The problem with relying on smaller audit firms to conduct public company audits is reflected in a recent Glass Lewis study. The June 2nd study reveals that smaller audit firms have an error rate of about three times that of the larger audit firms - and small public companies have a much higher restatement rate than that of large companies. Overall, the restatement (i.e. error) rate in financial statements audited by smaller audit firms is high - and thus commands a higher price for capital. So I believe we are just plain stuck with the Big 4 for the time being.

So the question remains: how does the market (or regulators) ensure that these "too big to fail" entities don't cross the criminal line? One thought is for audit firms to have a board of directors, with independent directors to oversee management and ensure that the appropriate culture and behavior is instilled. The use of an oversight body should help protect audit firms from these "death penalty" type of situations - and ultimately protect investors as well as clients.

Probably a crazy notion if you thought of this governance framework in the law firm context. But one crucial difference between a law firm and an audit firm: a lawyer's role is to serve as an advocate for clients; an auditor's role is more about getting clients to conform with applicable regulations. Let me know your reactions to this dilemma.

Fred Cook Speaks from Stanford Directors' College

Hopefully, each of you will be able to watch to Fred Cook's groundbreaking video webcast tomorrow on CompensationStandards.com: "Fred Cook Speaks to Directors." Fred's speech should have a major impact and keep our momentum going in the area of responsible compensation - and we urge that all directors should view this video live or by archive.

I have seen a draft of Fred's presentation (we call Fred the "Dean" of compensation consultants) - and you will not be disappointed as it contains some fresh thinking. Plus, this video event enables you to get a taste of what it is like to attend Stanford Directors' College, which is quite pricey to attend live since it caters to directors.

Managing D&O Departures and Arrivals

We have posted the transcript from the webcast, "Managing D&O Departures and Arrivals." This was one of my favorites, as I tend to like the governance stuff the most.

SEC Commissioner Goldschmid to Hang Around

Urged by Democratic Senators, who reportedly are scared what Commissioners Atkins and Glassman would do if he left without a replacement, Commissioner Goldschmid (a Democratic appointee) has agreed to stay at the SEC, at least through the end of the summer. Goldschmid's tenure arrangements at Columbia University requires that he rejoin the faculty soon.

Some Senators are trying to get the Bush Administration to name a replacement for Goldschmid - as well as re-up Commissioner Campos, the other Democratic appointee whose term expires soon - as part of a package deal with Chris Cox's Chair confirmation. No word yet as to what President Bush intends to do.

June 17, 2005

Zero Tolerance for Tandy Language Modifications

A number of members have asked whether they are permitted to modify the Tandy Letter language in their responses to comments from the SEC Staff. As you might recall, the Staff began requiring Tandy Letter language in all response letters last August, as part of the project to post all comment and response letters on the SEC's website. The required language is an acknowledgement that "the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any persons under the federal securities laws of the United States."

Objections to broadly requiring this acknowledgement have been made by the ABA Committee on Federal Regulation of Securities and two committees of the New York City Bar Association. Desired tweaks include such matters as being able to assert the SEC effectiveness order as a defense in an action alleging unregistered sales of securities or the absence of scienter. Another issue is what does the phrase "as a defense" mean, exactly? Would it prohibit using a staff comment 'to explain' why certain things were done?

Before last August, the SEC Staff only required this language when the Staff had an open Enforcement inquiry related to a particular company - but this selective approach became unworkable when response letters became universally available.

The SEC Staff's position continues to be that the Tandy Letter language must be included in the initial response letter and that none of the Tandy Letter language can may be modified - similar to the Staff's "no changes allowed" position on Section 302 certifications - and the Staff will not tolerate any changes whatsoever. I touched a little more on this topic during yesterday's webcast" "How to Navigate Tricky Confidential Treatment Requests."

Delayed 10-K as Credit Default

Yesterday, the NY Times ran this article about how a hedge fund has sent Saks a notice of default on some convertible notes due to a delayed 10-K. In the article, Professor Coffee comments on how novel and aggressive this is as its a "highly technical default", not an economic one (i.e. about whether the company can pay on its convertible debt) - and he also notes how it might not be just the best strategy, but perhaps the start of a trend.

1K! Broke My Maiden!

After two and a half years in this job, we just crossed the magic "1000" (aka "one large") mark for questions posted in the Q&A Forum, available from the top tool bar on our home page (can't link directly to the Forum because oddly the URL changes each time a new question or answer is posted).

Quite a body of knowledge has built up there - and the pace of questions has really picked up this year. Scared to see size of the thing 10 years from now. The Q&A Forum is intended to be an interactive community forum, so feel free to reply any time to a question - and you can also reply to a reply if ya want. [fyi - "broke my maiden" is a horse racing term used to describe when a horse wins its first race.]

June 16, 2005

Use of In-House Opinions in Financings

Recently, I posed a question to TheCorporateCounsel.net advisory board: In your practice, do you find that your clients are comfortable with an opinion of only inside counsel for debt and equity financings? Or do they always feel the need to seek outside counsel opinions also?

The following interview is comprised of reasoned responses to these questions from eight board members. Thanks to the advisory board for all their help over the years!

SEC Delivers Off-Balance Sheet Report to Congress

Yesterday, the SEC issued one of its last deliverables under Sarbanes-Oxley, this 119-page Report on off-balance sheet arrangements. As required by Section 401(c) of SOX, the Report address two primary questions: the extent of off-balance sheet arrangements, including the use of special purpose entities, and whether current financial statements transparently reflect the economics of off-balance sheet arrangements.

In the Report, the SEC took an expansive approach to the scope and meaning of the term "off-balance sheet." The SEC believes that significant progress has been made in the past few years - but that more can still be done for financial reporting of several types of off-balance sheet arrangements (and just like in the SEC Chief Accountant speech that I blogged about a few weeks ago, reduced complexity and more transparency is the mantra of the Report).

Here are several initiatives identified in the Report that would improve transparency:

- Discourage transactions and transaction structures primarily motivated by accounting and reporting concerns, rather than economics

- Expand the use of objectives-oriented standards, which would have the desirable effect of reducing complexity in accounting standards

- Improve the consistency and relevance of disclosures that supplement the basic financial statements

- Improve communication focus in financial reporting

A big part of this would be the FASB undertaking rulemaking for lease and pension accounting, because much of the liabilities from these hot button topics only make it into the footnotes of financial statements. In the Report, the SEC reviewed 200 filings and found 77% of them had operating leases, totaling $1.25 trillion, that resulted in footnote disclosure - and these same filings revealed another $535 billion in defined benefit plan liabilities that escaped the balance sheet.

SEC Database of Non-US Reporting Companies

On Tuesday, Corp Fin posted this useful list of companies registered and reporting in the US. The list can be spliced and diced four ways: alphabetical by name; by home country; by market; and by summary info. The SEC always compiles and posts this list, but this is the first time that archival data is available too - four years worth.

Save Elmo!

Congress has a bill gaining momentum that would eliminate funding for NPR and PBS, starting with "Sesame Street," "Reading Rainbow," and other commercial-free children's shows. If approved, this would be the most severe cut in the history of public broadcasting. Please sign this petition to Congress to save NPR and PBS.

June 15, 2005

Disclaimers in the Wake of the SEC's Titan Section 21(a) Report

Buried in a recent Proskauer Rose memo on the SEC's Titan Report is a reference to a filing that included a disclaimer about whether investors should rely on the reps and warranties in the attached agreement. The memo didn't identify the filing - but it led me to conduct some sleuthing and I found this recent Form 8-K filed by Shopping.com with the following disclaimer:

"The description of the proposed Merger described in this report does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit 2.1 to this report and incorporated herein by reference. The Merger Agreement has been included to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about Shopping.com. The Merger Agreement contains representations and warranties the parties thereto made to and solely for the benefit of each other. The assertions embodied in those representations and warranties are qualified by information in confidential disclosure schedules that the parties have exchanged in connection with signing the Merger Agreement. Accordingly, investors and security holders should not rely on the representations and warranties as characterizations of the actual state of facts, since they were only made as of the date of the Merger Agreement and are modified in important part by the underlying disclosure schedules. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in Shopping.com’s public disclosures."

And here is a disclaimer from the cover of a merger agreement filed as an appendix to the proxy statement/prospectus in this Form S-4 filed by Renaissance Learning:

"The merger agreement contains representations and warranties Renaissance and AlphaSmart made to each other. The assertions embodied in those representations and warranties are qualified by information in confidential disclosure schedules that Renaissance and AlphaSmart have exchanged in connection with signing the merger agreement. While neither Renaissance nor AlphaSmart believe that the disclosure schedules contain information that the securities laws require to be publicly disclosed, the disclosure schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached merger agreement. Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts, since they are modified by the underlying disclosure schedules. These disclosure schedules contain information that has been included in Renaissance or AlphaSmart’s prior public disclosures, as well as potential additional non-public information. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the merger agreement, which subsequent information may or may not be fully reflected in each of Renaissance or AlphaSmart’s public disclosures."

Not sure if either of these are from the filing that Proskauer found as there likely other disclaimers out there, but there probably are not too many yet as Corp Fin Director Alan Beller and other Staffers have warned the bar not to include disclaimers in their SEC filings that are too broad or general - and practitioners are just starting to feel their way around in this area (see my April 5th guest entry on The Deal Guys' Blog and OMA Chief Brian Breheny in the March webcast on DealLawyers.com). Note that the Shopping.com disclaimer was included on an 8-K - and therefore it probably has not been reviewed by the SEC Staff.

NYSE's Roundtable Recommendations on 404

In late May, the NYSE hosted a roundtable discussion for CFOs of its listed companies to develop practical recommendations that will better align the costs and benefits of Section 404. From the roundtable, four central themes emerged: allowance for use of management judgment, efficiency in the audit approach, recommendation for PCAOB process and procedure improvements, and timing of SEC reporting - as well as these specific recommendations that were ranked by the participants and sent to the PCAOB and SEC.

Hand-Deliveries and Pick-Ups for New SEC HQ

The SEC has posted instructions on how to make hand-deliveries to - and pick-ups from - the SEC's HQ.

How to Navigate Tricky Confidential Treatment Requests

Don't forget to tune in for tomorrow's webcast - “How to Navigate Tricky Confidential Treatment Requests” – during which a pair of SEC Staffers, Corp Fin Deputy Director Shelley Parratt and Branch Chief Suzanne Hayes, and a group of practitioners that specialize in confidential treatment requests will deconstruct how to best prepare CT requests – which is an art more important than ever now that SEC comment letters and responses are posted on the SEC’s website.

June 14, 2005

Parsing the SEC's Semi-Annual Regulatory Agenda

Published in the Federal Register in mid-May, it is always interesting to peruse the SEC's semi-annual regulatory agenda. This agenda lays out what the SEC expects to produce in the way of rulemaking in the coming months.

Even though whether - and the date on which - the SEC actually follows through on the regulatory agenda is never certain, it is still worth reviewing what the SEC discloses. And of course, this particular agenda might be more fluid than normal due to the fact that an incoming new SEC Chair could change course on any number of these items.

Here are the Corp Fin related items listed on this agenda:

- Revisions to Accelerated Filer Definition - proposal (May 2005)
- Rule 14d-10 - proposal (June 2005)
- Securities Offering Reform - final action (July 2005)
- Proxy Disclosure Regarding Executive Compensation and Related Party Transactions - proposal (Sept 2005)
- Securities Holder Director Nominations - final action (Sept 2005)
- MD&A - Critical Accounting Policies - final action (Dec 2005)
- Registration of Securities Issued in Lock-Up Agreements - proposal (April 2006)
- Streamling Rule 144 - 2nd proposal (April 2006)

Thanks to Howard Dicker of Weil Gotshal for the reminder and his insight!

GAO Asks SEC to Better Monitor Staff Turnover for Conflicts

Last week, GAO released a mutual fund report that found that the SEC followed a consistent process for determining penalties and that it coordinated penalties and other sanctions with interested states - but also that the SEC could have better procedures for making referrals to criminal law enforcers, focusing on the fact that the Staff doesn't document whether a criminal referral was made or why. [Nothing about referrals to the FDA, the subject of some criticism in this recent Boston Globe article.]

The report also was concerned with SEC Staff independence and that the SEC does not require departing staff to report where they plan to work when they leave (which apparently is the type of information gathered by other financial regulators to assess their staff compliance with federal laws regarding employment with regulated entities).

Carl Schneider on Shareholder Rights’ Agreements

The June installment of Carl's Corner is posted - the last in a long series of monthly analyses on shareholder rights' agreements from expert Carl Schneider (over a year's worth!). Check them all out!

June 13, 2005

Analysis: Disney Case is About More Than CEO Succession

Last week, I blogged about how Chancellor Chandler denied Disney's motion to dismiss in a lawsuit - Shamrock v. Iger - that challenges the company's CEO succession process. Now, a trial is slated for August in the Delaware Chancery Court. In our "Disney's CEO Succession Lawsuit" section, I have posted the novel opinion in this case, as well as the complaint and the motion to expedite the trial.

As this article notes, Stanley Gold and Roy Disney sued the company - seeking invalidation of this year's board election - because they allege they would have run a competing slate, but for the fact that the company had previously disclosed that it would conduct a CEO search and consider external candidates. The board ultimately selected COO Robert Iger to succeed CEO Michael Eisner when he steps down later this year.

Here are some things to consider about this lawsuit and the court opinion:

1. How Did This Case Get Beyond Dismissal? - Based on the 20-page opinion, it looks like this was just a standard motion to dismiss decision - where Chancellor Chandler was reviewing the pleadings only, taking it all in the light most favorable to plaintiffs, as noted on page 10 of the court opinion.

The expedition of the case can be explained by the fact that validity of an election of directors is at issue. The court will almost always expedite this type of case, because it puts in question the authority of the sitting directors. So the expedited schedule is not unusual, and does not necessarily signal that the court has made a judgment that the case is significant or that the claims have merit beyond the motion to dismiss standard.

2. What is the Duty of Disclosure?- However, as John Olson recently noted to the ABA Corporate Governance Subcommittee, the opinion is quite interesting for its discussion of the "duty of disclosure" under Delaware law which, Chancellor Chandler notes, is not an independent fiduciary duty but rather "stems from, and is an application of, the general fiduciary duties of care and loyalty." See note 30 on page 11 of the court opinion. There has been an ongoing debate as to whether the duty to disclose is a separate duty in Delaware - and the Chancellor indicates that it is not.

3. What's Behind Curtain #3? - The Chancellor applied generic disclosure law in his opinion, but I am not aware of any precedent for this result. This theoretically could have broad ramifications for boards, as they could now be saddled with even greater responsibility to oversee what their companies disclose. As the SEC becomes more involved with regulating governance in the wake of Sarbanes-Oxley, some might view this as the Delaware judiciary inching its way into the SEC's province of disclosure regulation (but I think this probably is a stretch).

4. How the Case Highlights CEO Succession Practices - This case also does implicate what constitutes good CEO succession practices (listen to last week's webcast for some nice pointers in this area). Basically, the Chancellor has given plaintiffs the chance to show the company's succession process was a sham intended to keep Roy Disney and Stanley Gold from running a competing slate. For starters, having an outgoing CEO involved in the interviews of the successor candidates in not a hot idea- see the "troubling seven facts" alleged by the plaintiffs, noted on page 8 of the court opinion.

5. Possible Intersection of the Duty to Update - Perhaps the most interesting item in the opinion is how far Chancellor Chandler seems willing to take the concept of a "duty to update" statements that were truthful when made. This could be chilling in terms of voluntary disclosures - why say anything not required if that gives you a duty to update?And who can even remember or track all statements made - and constantly evaluate whether need to be updated? This hopefully is an overstatement of concern about the opinion, but still something to keep an eye on.

6. A Slippery Slope Revealed? - Along the same lines, this lawsuit might encourage the plaintiffs' bar to flyspeck proxies for statements that later turned out differently than what the proxy disclosed. For example, compensation committee reports could be fodder if the committee says it is committed to pay-for-performance, but the CEO nonetheless gets a raise after a down year (which happens more than it should!). But bear in mind that Disney is a relatively unique situation in which the plaintiffs had threatened a proxy fight and backed off in reliance on statements they now allege were intentionally false when made.

7. Potential Ramifications for Majority Vote Movement - The invalidation of a board election would be an overwhelming consequence (but possible for misleading proxy disclosure, as noted in footnote 37 of the court opinion). I personally think it very unlikely that the election would be invalidated based on these claims - and the Chancellor's statements on pages 15-16 of the court opinion - but that is at least nominally what the plaintiffs are seeking. But just the spectre of this type of relief has to play some role in the ongoing debate over majority vote elections and shareholder access.

The Art of Private Equity M&A

On DealLawyers.com, tune in for tomorrow’s webcast, Tuesday, June 14th - “The Art of the Private Equity Deal” - to learn from leading outside counsel and a top private equity manager how these deal practices are evolving and how they differ from other public and private deals. This program will cover:

- Why are private equity funds engaged in so many deals? What type of edge do they have over public company acquirors?

- What do private equity funds look for in a potential target? How should targets react when a private equity fund approaches?

- What fundamentals of the M&A process are different when a private equity fund is the acquiror? How do negotiations differ?

- How to handle multiple LBO firms that are in the same deal (and analysis of the shareholder agreement issues that arise)?

Special Deal Now Available! No registration is necessary - and there is no cost - for DealLawyers.com members. So try a no-risk trial to DealLawyers.com today! And we just launched our half-price “Rest of 2005” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!

Last Congressman to Serve as a SEC Commissioner?

In Friday's Washington Post, this article noted that the last Congressman to serve as a SEC Commissioner was 40 years ago. In the 1960s, President Lyndon Johnson appointed former Rep. Hamer Budge (R-Idaho) at the urging of the Republican House leader after Budge lost a congressional race. A few years later, President Nixon promoted Budge as SEC Chair.

M&A Boot Camp Begins Today!

Also on DealLawyers.com, starting today, we are providing the first of these five programs over the summer as part of our “M&A Boot Camp”:

- Starts Today! The Basics of M&A – Diligence, Structure and Beyond (6/13)
- Delaware Law Considerations (6/20)
- Disclosure Issues (7/11)
- Accounting Issues (7/18)
- Negotiating Tactics (7/25)

The DealLawyers.com "M&A Boot Camp" is for anyone new to M&A, as well as anyone that seeks a refresher on one or more of the areas that are integral to getting a deal done - perfect for summer associates, young associates or paralegals. Catch any of the following valuable programs either the day they are posted - or afterwards! Each program will run between a half hour and an hour – and is in a podcast format (in other words, there is no specific time for you to listen-in; just check it out anytime on the date indicated above).

Special Deal Now Available! No registration is necessary - and there is no cost - for DealLawyers.com members. So try a no-risk trial to DealLawyers.com today! And we just launched our half-price “Rest of 2005” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!

June 10, 2005

More on Nasdaq Delisting Companies for Disclaimed 404 Attestations

A month ago, I blogged about Nasdaq seeking to delist companies that had filed disclaimed internal control attestations. Recently, Cray Supercomputers announced that the Nasdaq Listing Qualifications Department had reversed a prior determination that its 10-K was deficient and concluded that Cray was in compliance with all Nasdaq listing requirements. So Cray's appeal was dismissed as moot.

As I understand it, the determination by the SEC and Nasdaq as to whether any particular company's 10-K is deficient is very dependent on that company's facts and circumstances - so it is difficult to draw guidance from the disposition of any particular situation. For the limited number of companies with disclaimed attestations that still face delisting procedures, the SEC and Nasdaq must have looked at their particular facts and circumstances to come to the conclusion that their 10-Ks were deficient.

After reviewing Cray's Item 9A disclosures and the disclaimed attestation, I can see why the SEC and Nasdaq found no cause to delist Cray. Cray identifies eight material weaknesses -but notes the clean opinion on its financial statements. The disclaimed audit opinion resulted because, as Cray discloses, "management performed an incomplete review of financial applications and general computer controls and tax controls and did not perform a formalized entity-level risk assessment."

Cray noted that several financial managers left during the 4th quarter of 2004 and 1st quarter of 2005: the CFO, financial reporting manager and head of the IT department. Although Cray hired an Operations Controller and Director of Internal Audit/Sarbanes-Oxley Compliance during those periods, I assume that the personnel transition made it difficult for Cray to perform the 404 testing procedures timely.

Here is a list of companies facing delisting by Nasdaq - for disclaimed attestation reasons as well as many others. The list describes the delisting rationale for each company - but note that for the companies with rationales described as a 404 problem, many of those companies didn't file a 404 attestation at all. So this list doesn't enable you to know how many - and which - companies have disclaimed attestation problems. Read the next item for more about the Nasdaq delisting procedures.

NYSE's Codified Delisting Procedures for Delinquent SEC Filings (And a Battle Over Differing Procedures)

Last week, the SEC approved a NYSE rule change that codifies existing procedures for companies that fail to timely file their annual reports. Under these rules, a company that fails to timely file an annual report will receive a written notice from the NYSE - then, the company has five days to contact the NYSE and issue a press release disclosing the status of the filing.

If a company fails to file its annual report within 9 months, the NYSE can decide to suspend trading and commence delisting procedures (which the NYSE can decide to do at anytime, even before the 9 months have lapsed) - or allow the company's securities to be traded for up to an additional 3 months. These new rules apply immediately.

Of particular interest are pages 5-6 of the SEC's adopting release, which describe how these codified NYSE procedures differ from an outstanding Nasdaq proposal that would impose more stringent hearing procedures on Nasdaq-listed companies than those faced by NYSE companies. And pages 6-7 describe a NYSE rebuttal to a February 4th Nasdaq comment letter submitted on the NYSE's procedures.

To understand more about this battle over the SRO's potentially differing delisting procedures, here are some comment letters submitted on the Nasdaq proposal - in particular, you should note David Donohoe's letter, who is former Chief Counsel of Nasdaq's Office of Listing Qualification Hearings. Since the deadline for this proposal has been extended, it's not too late for you to weigh in!

Adopting Release for Regulation NMS Posted

Yesterday, two months from the time that the Commission approved it (see my April 11th blog), the SEC finally posted the 523-page adopting release for Regulation NMS rules, as well as two amendments to the joint industry plans for disseminating market information. In addition to redesignating the national market system rules previously adopted under Section 11A of the '34 Act, Regulation NMS includes new substantive rules that are designed to modernize and strengthen the regulatory structure of the US equity markets.

Interestingly, the release includes a lengthy "Response to Dissent" (see Section XII, pages 403-433 of the release) to respond to a 44-page dissent from Commissioners Glassman and Atkins. The effective date is 60 days after publication of the release in the Federal Register - but the compliance date for some aspects of the rules are delayed, as spelled out in Section VII of the release (see pages 305-307).

June 9, 2005

Analysis of Quarterly Internal Controls Disclosures

Item 308(c) of Regulation S-K requires disclosure of any change in the registrant's internal control over financial reporting that occurred during the registrant's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. One aspect of the 308(c) requirement that often is overlooked is that positive - as well as negative - changes should be disclosed.

However, a cursory review of recent 10-Qs reveals that there don't appear to be many of these positive disclosures. So far, we have found six examples that are as close to positive as we could find: the first two relate to new software programs (Intuit and Barnes & Noble); the third is the result of a merger (Sears); the fourth appears to be corrections of weaknesses that were not identified as material weaknesses (Sbarro - they had the same disclosure in their 10-K); the fifth is not a material change, but a change that the company thought should be mentioned anyway (Newport); and the sixth is a result of a restatement, but the company didn't disclose whether it was a material weakness problem (Origen Financial).

Learn more about the challenges of 308(c) disclosures in this interview with David Miller and Amy Seidel on Evaluating Internal Controls on a Quarterly Basis.

SEC Chair Donaldson's Last Hurrah?

Reuters reports that the SEC will consider the adoption of '33 Act reform on June 29th - one day before Chairman Donaldson departs the SEC. The SEC has not yet announced whether - or when - an open Commission meeting is scheduled for consideration of this blockbuster reform.

A Development for “Existing Directors” Change-in-Control Triggers

In late April, Vice Chancellor Noble of the Delaware Court of Chancery rejected a fiduciary breach lawsuit in California Public Employees’ Retirement System v. Coulter, which alleged that an existing director change of control trigger impermissibly granted unauthorized distinctive voting powers to the directors who approved the change-in-control agreements. Learn more about the meaning of this case in this DealLawyers.com interview with Eric Keller on “Existing Directors” Change-in-Control Triggers - and you can read the court opinion too.

9/11 and the Securities Industry

Today is the SEC Historical Society's Annual Meeting and they are hosting a webcast featuring Harvey Pitt and others for "Crisis and Resolve: The SEC and the Securities Industry Remember September 11, 2001." You can also share your own remembrances of 9/11 and its aftermath with the Society. These remembrances will be kept in their "Papers" section. A noble effort and cause!

June 8, 2005

More on Blackout Periods

As evident from our blackout/window period survey last year, blackout periods is a topic that folks love to benchmark (see last year's results). So I just posted another survey on these periods with five questions - please go to the top of TheCorporateCounsel.net home page and take this new survey, which addresses:

- Does your company ever impose a "blanket blackout period" for all or a large group of employees?

- How does your company’s insider trading policy define those employees subject to a blackout period?

- Does your company allow employees (that are subject to blackout) to gift stock to a charitable, educational or similar institution during a blackout period?

- Does your company allow employees (that are subject to blackout) to gift stock to a family member during a blackout period?

- Are your company’s outside directors covered by blackout or window periods and preclearance requirements?

How to Search the SEC Comment Letter Database

The SEC has posted these instructions on how to search the comment letter database. I think the instructions are likely to be tweaked as the database is honed - and don't forget to listen to next Thursday's webcast - "How to Navigate Tricky Confidential Treatment Requests" - to hear SEC Corp Fin Deputy Director Shelley Parratt speak about searching the database and related issues.

Award-Winning Blog?

Okay, as we head into the waning days of a close contest, my blog is tied for first place in the "Favorite Practice Area Blog" category. If ya like reading this thing, go ahead and do me a "solid" and vote for the blog. To do so, you will have to first join (at no cost) TechnoLawyer - and then you should send an email to tlballot@peerviews.com (cut and paste this addressee) with this message in the body: "For #5 Favorite Practice Area Blog - I vote for TheCorporateCounsel.net Blog."

If you can't bear the thought of joining another free site, send the email anyways and perhaps they will count the vote out of the kindness of their heart. [Note that I have belonged to TechnoLawyer for quite a while and very rarely receive emails from them - so joining shouldn't hurt your inbox.] Voting ends at the end of this Friday!

Q&A on Option Expensing

FAS 123(R) requires companies to recognize compensation expense for all forms of stock compensation, including stock options. Even with the SEC’s delay, the effective date will be here before you know it, yet many practice-related questions remain unanswered.

To help prepare for the transition, here is a panel of experienced practitioners to answer your questions on the standard on tomorrow's NASPP webcast: "Q&A on FAS 123(R)." You can submit questions in advance for Paula Todd of Towers Perrin and Reginald Oakley of the FASB to answer.

June 7, 2005

Internal Controls? Nay, Disclosure Controls...

Regarding my blog last week on 404 disclosure examples, a member of our advisory board weighed in to note that the RCN Corp. disclosure technically was not an internal controls issue, but rather a "disclosure controls" issue. This member noted a concern that some companies have gotten so absorbed with 404/internal controls that they have forgotten about disclosure controls.

She noted that it was particularly interesting that RCN's inability to obtain financial data was listed as a failure of their "disclosure controls", but it actually doesn't appear to be classified as a "material weakness" in internal controls. RCN did disclose two material weaknesses in internal controls (i.e. lease accounting and general ledger reconciliation), but they were not related to their inability to get timely financial data for equity investments.

This conclusion is interesting because there have been a lot of questions about how disclosure controls and internal controls differ - and whether a disclosure control failure suggests a per se deficiency in internal controls. It is possible that this was identified a "significant deficiency" in internal controls, which wouldn't have required disclosure or resulted in an adverse 404 opinion.

Impact of the Arthur Andersen Decision

Many experts are saying the recent US Supreme Court decision regarding the Arthur Andersen indictment should be a real bellringer that echos far beyond the case itself. In this podcast, John Savarese, a Partner of Wachtell, Lipton, analyzes the importance of this decision, including:

- Why did the Supreme Court reverse the Andersen decision?

- What does this mean for document retention practices?

- How should companies fine tune their retention programs in light of this decision?

- Will auditors and other professional service providers continue to be "deep pockets" in the wake of the decision?

Disney CEO Succession Case Headed Towards Trial

Don't forget tomorrow’s webcast, Wednesday, June 8th - "Managing D&O Departures and Arrivals" – with an added 15 minutes because there is so much ground to cover. This could be the most practical webcast of the year, dealing with a wide range of issues for you to consider each time a officer/director joins or departs the company.

And in light of the fact that the Delaware Chancery Court just allowed the lawsuit filed by Roy Disney over The Disney Company's CEO succession process to proceed to trial - as noted in this article - it seems like a good time to learn about the nuances of CEO succession! That topic will be covered during the webcast by panelists that have been through many successions.

June 6, 2005

Last Word on SEC HQ's New Address (I Hope)

Astute members were quick to comment on my blog from Friday by noting that the SEC's Public Reference Room has moved to Station Place (and that all other parts of the SEC relevant to the public have indeed moved). These members were told to use the new address for all purposes - and that is indeed the case, even though the Filing Desk's address is purportedly the old address according to this web page - that page just hasn't been updated yet. But this other web page has been updated, as it indicates that the Public Reference Room has moved to the new building.

At this point, it does make sense to disclose the new address in prospectuses and other filings - despite the existing Item 101(e) language that includes the old HQ address - since the Public Reference Room and Filing Desk have moved.

Impact of Flowserve on Investor Relations’ Officers

In this podcast, Mary Beth Kissane, a lawyer who is a long-time investor relations' advisor and head of NIRI's NY chapter, analyzes how the IRO profession is reacting to the SEC’s Regulation FD enforcement action against Flowserve, including:

- Were she surprised by the SEC's censure of the IRO in Flowserve?

- What is the overall reaction of IROs to Flowserve?

- What role should IROs play during private one-on-ones? During investor conferences?

- What role should IROs play on disclosure committees?

- Does she see a trend towards greater empowerment/change in duties of IROs coming in the wake of Flowserve?

Software Licensing Issues in M&A

In this DealLawyers.com podcast, Dan Bricklin schooled me in software licensing issues in M&A, something that I didn't know much about. It was quite interesting as Dan explains:

- What are the new software licensing copyright issues that companies should be aware of?
- Why is Open Source an issue? Is this new?
- What is GPL? Who determines the meanings of the terms of the GPL?
- What should be in a corporate software license policy?
- How do you get developers to follow these policies?
- How should the legal department work with developers?

The SEC's Chief Accountant Speaks

Last Wednesday, SEC Chief Accountant Don Nicolaisen gave this speech on reducing complexity in financials, during which he indicated that a study in the off-balance-sheet area is coming soon (as required by Sarbanes-Oxley) - and provided his views on the latest 404 guidance the Staff provided a few weeks back.

June 3, 2005

Chris Cox Nominated to be Next SEC Chair

Yesterday, President Bush nominated Congressman Christopher Cox - a former securities lawyer at Latham & Watkins - to be the new Chairman of the SEC. Senate confirmation is still required. Here is the White House press release with the remarks of President Bush and Representative Cox.

A number of members asked me yesterday if Chairman Donaldson was asked to resign by President Bush, as Donaldson consistently sided with the two Democratic Commissioners in 3-2 Commission votes and there has been widespread criticism by many over the costs of implementing internal controls (plus the recent SEC budget crisis didn't help). Your guess is as good as mine - but the Commission is supposed to be an independent agency and I would hope the President wouldn't meddle in the SEC's affairs.

As far as I can tell, this is the first appointment of a sitting member of Congress to the Commission. Here is a Forbes article painting the incoming Chair as pro-business; here is an article from Bloomberg that provides a number of differing opinions on the appointment. The front pages of the NY Times and WSJ also have detailed profiles of the incoming Chair and much commentary about what others think.

More on the SEC's New HQ Address

Earlier this week, I blogged about the SEC's new address - but this was for purposes of sending courtesy copies to the SEC Staff. Pursuant to Item 101(e)(2), it is still a specific disclosure item that companies must include the following in various SEC periodic reports and registration statements:

"That the public may read and copy any materials you file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549. State that the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. If you are an electronic filer, state that the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC and state the address of that site (http://www.sec.gov)."

Since the rule still refers to the old address and the SEC hasn't issued an alert or changed the rule formally, I believe issuers should go ahead and keep using the old address for this and other purposes. There are several examples of companies (at least 40 filings) that have included the new address in filings made in the last couple weeks, but a quick and random review of twenty S-3 filings made yesterday showed that only 1 out of 20 used the new address, while 19 still listed the old address (thanks to Amy Seidel for this data!).

Even though Corp Fin has moved to the new building, other offices still haven't moved - although the move is now being accelerated in an effort to save money in light of the SEC's budget crisis.

SEC and DOL Jointly Issue "Tips" for Plan Fiduciaries

The Department of Labor and SEC have jointly published tips to assist fiduciaries of employee benefit plans in reviewing conflicts of interest of pension consultants: "Selecting and Monitoring Pension Consultants: Tips for Plan Fiduciaries." The tips are questions for plan fiduciaries to ask pension consultants, developed by the DOL and SEC "to assist plan fiduciaries in evaluating the objectivity of the recommendations provided, or to be provided, by a pension consultant." Also, some guidance is provided following each question.

Bob Woodward on "Deep Throat"

Maybe it's my "inside-the-beltway" outlook on life, but I was fascinated with this four-page article in the Washington Post yesterday by Bob Woodward, in which he explains - in nitty-gritty detail - how he came to know Mark Felt and the events that led to the series of Washington Post articles that brought down President Nixon.

June 2, 2005

SEC Chairman Donaldson: Short-Timer At Last!

Last October, I blogged about how Chairman Donaldson was showing all the signs of a being a short-timer. But he hung in there until yesterday, when he announced he was resigning effective June 30th. I believe his legacy will hold up quite well as an incredible amount of rulemaking - impacting all facets of the market - was adopted during his two and a half year tenure. Not bad for a man who never really wanted the job.

Of course, now the rumor-mill begins about his successor, who will step into a tenuous situation as the Commission has been divided over numerous crucial rulemakings in recent months? According to numerous media reports, the answer is Congressman Chris Cox (R-Cal.) and that the President will announce the appointment this morning. So much for suspense! This Washington Post article talks about how some of Donaldson's reforms might be revisited by a Chairman who is more in line with President Bush's themes.

Analysis of Delaware Court Decision re: Reach of California Law

More podcasts on the way, including this new podcast with Keith Bishop who analyzes - and provides insight into the ramifications of - the recent Delaware Supreme Court VantagePoint Venture Partners decision, including:

- Why is the Delaware Supreme Court interpreting the California Corporations Code?

- In what situations does California Corporations Code Section 2115 purport to apply?

- Is this a problem for all public companies?

- Now that the Delaware Supreme Court has spoken, can counsel safely forget about California's reach-out statute?

- Should we expect any other fall-out from the Delaware Supreme Court's decision?

Get Ready to Understand the SEC's Comment Letter Database (and How to Best Couch Confidential Treatment Requests)

I am excited that a pair of key SEC Staffers, Corp Fin Deputy Director Shelley Parratt and Branch Chief Suzanne Hayes, has joined the panel for the June 16th webcast: "How to Navigate Tricky Confidential Treatment Requests." Shelley will open the program to discuss the new SEC comment letter database - and Suzanne will join a group of practitioners that specialize in confidential treatment requests to deconstruct how to best prepare CT requests – which is an art more important than ever now that SEC comment letters and responses are posted on the SEC’s website.

This blog is the first evidence I have seen that members of the general public will be picking apart comment letters.

June 1, 2005

More Provocative 404 Disclosures

Looking for more water-cooler fodder? From Bob Dow of Arnall Golden, here are a few more interesting 404 disclosures:

- RCN Corp. has a weakness because it has equity investment for which it cannot obtain financial data

- Kelly Services did a restatement (related to lease accounting) but satisfied itself that this was not a material weakness

- Foster Wheeler also had a restatement, decided the restatement was not a material weakness, but had other material weaknesses leading to an adverse opinion (this one has one of the better set of control-related risk factors (2 of them) because they have some specific content; not just the usual boilerplate)

- Brightpoint initially gave a plain vanilla "clean" SOX 404 report; but after it filed its 10-K, it discovered errors and material weaknesses in its overseas operations - and in this 10-K/A it gave an updated, adverse SOX 404 report

Corp Fin's New Address

For packages and other hard copies going to Corp Fin Staff, they can now be sent to Station Place, located at 100 F St. NE, Washington DC 20549.

June Eminders is Up!

We have posted the June Issue of Eminders, our free email newsletter. Sign up to receive it today by simply inputting your email address!

Arthur Andersen Case Reversed

Yesterday, the US Supreme Court unanimously reversed the conviction of Arthur Andersen and remanded the case, concluding that the jury instructions were flawed in important respects. Here is the Supreme Court list of slip opinions. Click on the Arthur Andersen LLP v. United States case to access the opinion.