July 29, 2005

Vulnerable Severance Arrangements? Morgan Stanley Complaint Posted

Last week, I blogged about the Central Laborers' Pension Fund having Bill Lerach file a derivative lawsuit against the Morgan Stanley board over the recent severance packages received by outgoing CEO Phillip Purcell and Co-President Stephen Crawford. We have posted a copy of the 92-page complaint in the "Compensation Litigation Portal" on CompensationStandards.com.

Yesterday, the NY Times ran an interesting article on Marty Lipton, which included some commentary on his role in the Morgan Stanley severance arrangements.

You may want to take this opportunity to review your own severance provisions and contracts because many companies may be sitting on potentially vulnerable arrangements. Check out the excellent guidance (and red flags) provided in the "Severance Arrangements" Practice Area on CompensationStandards.com - and you will not want to miss the latest on severance arrangements that will be imparted at the "2nd Annual Executive Compensation Conference."

Protection of Your Company’s Premises and Data

With terrorist bombings filling the airwaves, many companies are rethinking how their buildings and properties are protected. In this podcast, Tom LeKan, Senior Vice President and Chief Security Officer of Key Bank, provides an in-house perspective on what companies should consider in protecting their premises, including:

- Do you believe a higher standard of premises protection is necessary as a result of 9/11 and now because of the recent London bombings?
- Do you believe that companies (and state and local governments) have assimilated the mindset of continued premise protection as a result of the recent events?
- Are boards of directors paying sufficient attention to premise protection issues?
- What types of processes and documentation should companies implement to help defend themselves in litigation over inadequate security protection?
- Do you think that companies have sufficient protection against fraud these days?

Property protection also intersects with data security and privacy issues - we have a host of materials on those topics in our "Privacy Rights" Practice Area.

SOX's 3rd Anniversary

Well, tomorrow is the 3rd anniversary of the Sarbanes-Oxley Act and you know what that means - I go to the beach to celebrate the full employment of corporate & securities lawyers! [I know most of you were thinking that means that every company with securities registered with the SEC have now had their '34 Act filings reviewed at least once since the birth of SOX, pursuant to Section 408(c) of SOX.] Julie will be blogging next week - see ya.

July 28, 2005

ADP's New Competitor?

On Friday, Corp Fin posted this no-action response to a request from Swingvote about the ability of brokers and banks to hire more than one agent to fulfill their delivery obligations to beneficial owners under Rules 14b-1 and 14b-2.

Glancing at the request, it appears that Swingvote has built a system that allows institutional investors to vote and receive proxy materials electronically (at no cost to the institutional investors) - as well as allow companies to communicate directly with beneficial owners, while still protecting investor's confidentiality through a "one-way mirror."

This no-action position allows, for the first time, institutional investors to select a proxy material provider. Historically, this selection could only be made by banks and brokerage firms. While I believe that the banks and brokers still would not be required to name Swingvote as the agent for those investors, those who wish to be responsive to the institutional investors' requests for an alternative to ADP now appear to have to a legal ability to do so.

It appears that Swingvote intends to seek reimbursement from companies on behalf of the investors that appoint them to service the Swingvote accounts - based upon rates established by the NYSE - and will also seek direct reimbursement for fees it will be entitled to as an intermediary for multiple nominees. I will flesh out more information about this new service soon as I am a little unclear about how this interesting new service works.

New Survey on Earning Releases and Audit Committees

Following up on last fall's survey regarding 10-Qs and earnings releases, we have posted a new survey on how the audit committee interacts with the earnings release (egs. does the audit committee review them before release; how soon do they get a draft, etc.). Go to our home page to participate!

And here are the final results of our survey on how internal auditors interact with the board.

Ally McBeal's "Fish" Takes a Swipe at Chris Cox

According to all media reports, the Senate Banking Committee confirmation hearings went swimmingly for Chris Cox (and Roel Campos and Annette Nazareth) and the Committee should be voting soon to approve the nominees and then send the matter to the full Senate. [Cox testified that he wouldn't meddle with the FASB's 123R and option expensing.]

Reading this blog claiming that Chris Cox only faced light questioning, I came across this wacky Web movie attacking Chris Cox on StopCox.org (which now claims Cox perjured himself during his testimony), featuring one of the main characters - Richard Fish - from the Ally McBeal TV series. I guess "Fish" is what passes for a spokesperson for the legal profession these days...and I guess "Fish" is hurting for work to be doing these Web commercials...

July 27, 2005

PCAOB Adopts New Material Weakness Standard

Yesterday, the PCAOB adopted Auditing Standard No. 4 (the Standard and Briefing Paper are here) regarding reporting on whether a previously reported material weakness continues to exist. This standard establishes requirements and provides direction that applies when an auditor is engaged to report on whether a previously reported material weakness in internal controls continues to exist as of a date specified by management.

The PCAOB also adopted certain ethics and independence rules addressing tax services, contingent fees, and certain related general ethics and independence standards. The SEC still has to bless both before they are effective.

Meeting the New Compliance Standards

We have posted the transcript of our recent webcast: "Meeting the New Compliance Standards."

Memo to Board: No More Board Meetings!

Check out this recent Form 8-K filed by Torvec, which discloses that the Torvec Board formed an Executive Committee that decided to cancel all future board meetings "in order to provide greater efficiency and streamline the corporate decision making process." As a result of this action, the 8-K discloses that one director decided to resign - a guy who just joined the Board in April.

In this subsequent Form 8-K, the resigning director further explains his reasons for resigning in a letter - and the Torvec President rebuts some of the director's statements, including an explanation that the cancellation of future board meetings is temporary (and a few personal attacks on the director to boot).

As I read both 8-Ks, the practical effect of creating the Executive Committee and cancelling board meetings was to freeze out two members of management who serve on the Board - who also happen to be the Chair, CEO and CFO - out of board participation and relieve them of all management authority. Seems like a coup by controlling shareholders. As Kramer once said, "Ca-Ca-Ca-Catfight!" I won't even get into the governance aspects of this mess; it's pure comic relief (unless you are a Torvec shareholder).

July 26, 2005

The Risks of Loans Being Considered Securities

One of the more academic of the tasks encountered working in Corp Fin's Office of Chief Counsel is delving into the quagmire of what are the limits of the definition of a "security," an issue that is raised in a fair number of no-action requests. This issue rears its ugly head all too commonly these days in the loan context.

In this podcast, Greg Woods of Debevoise Plimpton explains the circumstances under which loans can be considered securities, including

- In what way are syndicated loans related to the securities laws?
- Why is this issue relevant today?
- What would the implications be if syndicated loans were treated as securities?
- What are the factors that the courts examine to determine if a loan is a security?
- What should industry participants do to address this issue?

ISS' 2005 Preliminary Post-Season Report

Yesterday, ISS released a preliminary report that indicates that companies and investors are further embracing the concept of constructive dialogue which played out in a less confrontational 2005 proxy season.

ISS states that "However, all was not calm on the annual meeting front as hedge fund managers emerged as major players on the governance scene this season by shaking up numerous boardrooms via hostile offers, proxy contests for board seats and "vote no" campaigns. And, despite increasing scrutiny to provide more transparent and meaningful disclosure on executive compensation, this is still not standard practice across all companies. In fact, ISS suggested "withhold" votes from compensation committee members at 56 companies with pay practices out of alignment with performance."

Negotiating Tactics

Today, the next installment of DealLawyers.com "M&A Boot Camp" is available. This segment is brought to life by Wilson Chu of The Deal Guys' Blog fame, doing his bit on negotiating tactics, such as:

- Gentleman Dealmaking
- Win-Win Does Not Mean: I Win Twice
- Negotiating Reps and Warranties
- Schedules Really Matter
- LOIs as Upfront Ego Management
- Take a Seventh Inning Stretch
- Use of Undermining Words and Phrases
- The Longer You Sit on a Problem, the More You’ll Own it
- Limitations of Emails and Conference Calls
- Educating Your Client to Support Your Position
- Go Deep - Be Prepared for Multiple Levels of Arguments
- Driving the Deal
- Always, Always be Prepared

If you are not a DealLawyers.com member, try a no-risk trial as 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!

Face Change for the PCAOB

The PCAOB has changed the "look and feel" of its home page. I fully understand that the PCAOB considers Sarbanes-Oxley important since that legislation is the action from whence the PCAOB sprang, but it's a little odd that the PCAOB now prominently displays a link to the entire Act smack dab in the middle of the home page. Like pouring salt in a wound...

July 25, 2005

The Challenges of Option Valuation for Expensing Purposes

As we move closer towards en masse adoption of option expensing, some members are finding valuation issues under 123R that surprise them. Many of these surprises have been covered on the NASPP website, either through webcasts or materials.

The surprises typically involve an auditing firm taking a position that because an option has a particular feature, it will be assigned a higher value under 123R or have a shorter expensing period (and thus have a higher current and near period expense). Some members are frustrated because these positions seem based on dubious - or at least unsubstantiated - reasoning.

For example, because an option becomes fully exercisable upon retirement (eg. above age 55) and the optionee is already over age 55, the general view appears that it should be assumed that the optionee will retire immediately and the option will fully vest and have a short life - and therefore the current period charge should be high.

Some members point out that the SEC's guidance states that the best basis for determining option valuation is historic experience, unless there is some reason to view past experience as not representative of the future. If that's right, these members argue that companies should be able to refute the higher valuation by showing that its insiders have not historically exercised as soon as an option became exercisable - and that optionees have not retired as soon as they were eligible to do so. So far, it doesn't appear that those arguments are persuasive.

Among its 40+ panels at the "13th Annual NASPP Conference," a total of seven panels will address different option expensing topics - and there is a horde of option expensing materials available on the NASPP site right now (including archives of a number of webcasts that include FASB members/staff and plenty of Q&A in the popular NASPP "Q&A Forum").

Vicarious Liability for Global Firms

On July 14th, Judge Lewis Kaplan of the US District Court of the Southern District of New York ruled that a class-action suit brought by Parmalat investors can proceed against Deloitte Touche Tohmastu and Grant Thornton International, the international umbrella organizations, so that these umbrella organizations could be held liable for the actions of their Italian member firms.

While finding an agency relationship between the umbrella organizations and the Italian member firms, the judge declined to find a similar relationship between the Italian member firms and their United States counterparts.

The audit firms had argued that they should not be held responsible for the actions of their international affiliates, which are set up as legally separate and independent partnerships. In his ruling, Judge Kaplan said that the plaintiffs had proven that both Deloitte Touche Tohmastu and Grant Thornton International had acted as principals for their Italian affiliates, both of which had, at different times, audited Parmalat's books.

The judge specifically noted that the firms market themselves as global organizations - despite disclaimers on their websites that each firm is a "separate and independent legal entity." So this ruling means the use of independent affiliates as a means of limiting vicarious liability might have limited effectiveness going forward.

SEC Chair and Commissioners Hearings Set for Tomorrow

On Friday, the White House announced that President Bush intends to re-nominate Commissioner Roel Campos as SEC Commissioner for the remainder of a 5-year term expiring June 5, 2010 - and nominate SEC Market Reg Director Annette Nazareth for the remainder of a 5-year term expiring June 5, 2007. As I blogged last week, the US Senate Banking Committee previously scheduled hearings for Tuesday on "Pending Nominations," which includes the previously nominated Chris Cox as SEC Chair.

July 22, 2005

Morgan Stanley Board Sued Over Severance Packages

On Tuesday, the Central Laborers' Pension Fund filed a derivative lawsuit in the U.S. District Court of the Southern District of New York against the Morgan Stanley board over the recent severance packages received by outgoing CEO Phillip Purcell and Co-President Stephen Crawford (as well as claims related to other lawsuits that Morgan Stanley recently lost). Heads up - Bill Lerach represents the fund!

Not too surprising this lawsuit was brought given what was noted in this blog last week. And after receiving a letter from AFSCME, Morgan Stanley's lead director has scheduled a meeting with the union to discuss pay-for-performance and other issues.

Learn more about why severance arrangements are so vulnerable today - and under attack from institutional investors - and how to protect your company from exposure in our "Severance Arrangements" Practice Area on CompensationStandards.com. This also will be an area of focus at the "2nd Annual Executive Compensation Conference."

Last Call for Paper Stock Certificates

Effective August 1st, due to recent amendments to Section 158 of the Delaware General Corporation Law, companies incorporated in Delaware will no longer be required to make a paper certificate available to shareholders. Outstanding paper certificates are not affected until they are submitted for transfer or other re-issue, or are reported lost. Companies can then convert those shares to uncertificated shares. Of course, Delaware companies are free to continue issuing paper certificates.

Another Stat for the Auditing "Too Big to Fail" Debate

Following up on an earlier blog on KPMG's troubles, in this article, J.D. Power and Associates reports that last year, almost one in every eight public companies employed three or more Big Four firms for audit and non-audit work - as the larger companies might use auditing firms for all different types of work, including auditing, internal financial control testing, acquisition analysis, software work, and tax and valuation work.

July 21, 2005

US Senate to Consider Confirmation of Cox and Others

According to this Washington Post article, the Senate will hold confirmation hearings next Tuesday for Chris Cox as SEC Chair and Roel Campos and Annette Nazareth as SEC Commissioners.

I blogged last week about how some Democratic Senators had urged that all three be confirmed together to maintain a full complement of SEC Commissioners. However, as far as I know, the White House has not yet formally submitted the names of the two Democrats. I guess we will know soon enough whether this article's prediction is accurate.

Think SERPs Make Sense? Look at Sandy Weill’s Excessive SERP

Citgroup's Sandy Weill is in the news about how the Citigroup board is negotiating hard to try to recoup some of the lucrative perks that would be given to Mr. Weill post-retirement in exchange for him being allowed to run a private equity fund and leave as Chair earlier than contracted (if you can believe it, one sticking point is that Weill would have unlimited private plane use on Citigroup's dime while he works for the fund - does the guy not have enough money already? Or why can't the fund pay for the travel of its employees? Is using a plane for another business considered "personal use"? Are these stupid questions?).

Anyways, a reporter from the major media called me yesterday to learn more about one of our practice pointers posted on CompensationStandards.com. I repeat this pointer below; it was posted a year ago by an anonymous Task Force member (don't forget, there are plenty of other pointers in our "SERPs and Other Retirement Benefits" Practice Area) and it analyzes the consulting agreement that was then entered - and for which the Citigroup board now appears to have "buyer's remorse":

"You could add much about Sandy Weill’s most recent redo of his employment agreement which will continue until his contemplated retirement in the year 2006. How mightily Weill has prospered during his reign at Citigroup and its corporate predecessors is well known. On the 2003 Forbes "500" list of most highly compensated executives, Weill ranked No. 27, and on its "400" lists of richest people, he cracked the world list at No. 377 and made No. 162 in the U.S., with an estimated net worth of more than $1.5 billion.

Does it really serve any valid corporate purpose, after extending his employment contract, to enhance his already earned retirement benefits with a rich consulting agreement – and more? Okay, the consulting agreement is probably worth it to Citigroup because of agreement provisions in the nature of non-compete, anti-piracy, confidentiality protections, etc.

But so long as Weill does not "opt out" of those provisions, then after his retirement he will be entitled to a supplemental pension benefit equal to a $711,000 lifetime annuity, plus certain other benefits and perquisites which, to sum them up, would remain on a par with those still commonly awarded to imperial CEOs. This will be all on top of other hitherto fully earned pension benefits under other Citigroup programs under which Weill’s estimated annual benefit, expressed in the form of a single life annuity, is $350,000.

The "old" plus the "new" annuities look as though designed to keep Sandy on at roughly equivalent of a $1-million-a-year income, notwithstanding all his accumulated non-pension wealth guaranteed to keep him off the public dole during retirement. Another aspect to this is that those pension numbers are expressed in terms of periodic benefits which, when disclosed in the 2004 Proxy Statement, have -or had - a single-sum present-value, which was not disclosed.

As I look at the deal as a whole, if before 2006, Weill sees something worth his while (which will likely give him more than $700,000 a year in a combination of earned income, entrepreneurial wages and post-reemployment benefits), he could bow out of the all the constraints on him that Citigroup supposedly put a value on and leave the extra pension deal on the table. That would not really serve Citigroup’s interests."

To drive this point home, did you read yesterday's WSJ article describing notes taken from interviews with nine of the former NYSE comp committee members who confessed they had no idea how large the Grasso SERP would be under the amounts they blessed...

Analysis of Citigroup's Retirement Disclosure

So how does Citigroup's disclosure regarding Sandy Weill's retirement package stack up? Our comp disclosure guru, Ron Mueller of Gibson Dunn, states:

"Reading the Wall Street Journal article, my first thought of course was to see whether Citigroup had described in its proxy the perks that Mr. Weill is entitled to for life.

I've copied their proxy disclosure below, but bottom line is that they did do that, specifically calling out his lifetime entitlement to aircraft use, car and driver and security, among others. This shows to me the value of good comprehensive disclosure. Companies are often concerned about "causing a commotion" with a detailed description of an agreement, even when that agreement is on file. But you never know when other factors will "cause a commotion" to arise, and when that happens, it's certainly better to have had good disclosure in the first place, instead of regretting in hindsight an earlier effort at short-hand disclosure."

Here is the Citigroup proxy disclosure excerpt noted above:

"Mr. Weill and Mr. Rubin have entered into employment agreements with Citigroup, which are described in detail below. Messrs. Prince, Druskin, and Willumstad do not have any individual employment or severance agreements. Covered executives do not receive any perquisites following retirement other than those to be provided to Sanford Weill under his employment agreement, which is described below.

In 1986, Citigroup’s predecessor entered into an agreement with Sanford Weill (amended in 1987, 2001 and 2003). Under the agreement, as amended, Mr. Weill has agreed to serve as the Chairman of the Board of Citigroup until the 2006 annual meeting of stockholders, unless his employment is terminated earlier in accordance with the agreement. The agreement provides that Mr. Weill will receive an annual salary, incentive awards, and employee benefits as determined from time to time by the board. If Mr. Weill’s employment is terminated as a result of illness, disability or otherwise without cause by Citigroup, or following Mr. Weill’s retirement from Citigroup, all of his stock options will vest and remain exercisable for their full respective terms. In the event Mr. Weill’s employment is terminated as a result of his death, illness, physical or mental disability or other incapacity, he (or his estate as the case may be) will receive the annual salary and employee benefits in effect immediately prior to such termination through the end of the year during which such termination occurs or for six months following such termination, whichever is greater, and such additional payments relating to incentive, death, retirement, or other matters as may be determined by the board or a committee. In the event his employment is terminated by Citigroup, upon at least 120 days notice, without cause, or by Mr. Weill upon at least 30 days notice in the event of a breach by Citigroup of any of its obligations under the agreement, he will receive a lump sum amount in cash equal to the sum of his annual salary in effect prior to his termination through the effective date of his termination and the amount paid as his annual bonus for the prior fiscal year, prorated for the period of his employment during the fiscal year in which the termination occurs. Following such termination or retirement, Mr. Weill shall be subject to certain non-competition, non-hire, and other provisions in favor of Citigroup. These provisions shall be applicable for the remainder of his life, subject to his ability to opt out after a minimum period of ten years following such termination or retirement. So long as he does not opt out of such provisions, he shall be entitled to receive a supplemental pension benefit equal to a $350,000 annual lifetime annuity and access to Citigroup facilities and services comparable to those currently made available to him by Citigroup consisting of the use of corporate aircraft, car and driver, office, secretary and security arrangements. In addition, pursuant to the agreement by Citigroup’s predecessor in 1986 to match Mr. Weill’s previous employer’s health care benefits, Citigroup will continue to pay, for Mr. Weill’s lifetime and his spouse’s lifetime should she survive him, the premiums and out-of-pocket expenses associated with receipt of health and dental care benefits by Mr. and Mrs. Weill, and life and accidental death and dismemberment as well as disability insurance for Mr. Weill. Mr. Weill will also continue to receive a tax gross-up with respect to the imputed income arising from these benefits. Because neither the future cost of these facilities and services nor Mr. Weill’s usage of them can be predicted, the projected costs cannot be quantified. In addition, for a period of at least ten years following such retirement, Mr. Weill is required under the agreement to provide consulting services and advice to Citigroup for up to 45 days per year for which he will be paid a daily fee for such services equal to his salary rate at the time of his retirement."

July 20, 2005

Get Ready to Rumble! '33 Act Reform Adopting Release & Webcast Series

Yesterday, the SEC posted the 468-page adopting release for its '33 Act reform; the text of the rules and amendments begin on page 306. The SEC's site ran slow yesterday as everyone rushed to print it off. I guarantee that I will not receive a gold star for being the first one to read it all.

Just announced! As promised, here is our special series of webcasts that will drill down into how the new '33 Act reform will change how we do deals. The overall series is designed to separately analyze how each specific type of deal will change, rather than provide a broad overview of the reform. Here is what the series looks like at this point:

- "Drilling Down: Doing a WKSI Deal After the ’33 Act Reform"; on September 8th featuring Jack Bostelman of Sullivan & Cromwell; John Huber of Latham & Watkins; David Martin of Covington & Burling

- "Drilling Down: Doing an IPO After the ’33 Act Reform"; on September 14th featuring Justin Bastian of Morrison & Foerster; Steve Bochner of Wilson Sonsini, Goodrich & Rosati; and Michael Wishart of Goldman Sachs

- "Drilling Down: Seasoned/Unseasoned Issuers and Voluntary Filers Doing Deals After the ’33 Act Reform"; on September 22nd featuring Brian Lane of Gibson Dunn & Crutcher; Richard Langan of Nixon Peabody; and David Miller of Faegre & Benson

A Look Back at the 2005 Proxy Season

Here is an interesting article from ISS about the recent proxy season. Fewer shareholder proposals and proxy contests, so maybe we already hit the activist high water mark? Or is activism coming in more flavors these days...

It's Not How You Disclose It, It's How You Fold It!

With all of the attention being placed on what must be disclosed, one member shared a recent decision by the National Credit Union Administration to deny conversion of a credit union (Community Credit Union of Plano, Texas) to a mutual savings bank - one reason for the NCUA's denial was that the credit union had failed to properly fold the disclosure materials in their envelopes.

From what I hear, the NCUA is doing whatever it can to prevent credit unions from converting to mutual savings banks (in essence, a regulatory turf war - the NCUA doesn't want to lose constituents). Recently, I hear the NCUA has been more stringently applying its limited disclosure rules (see Part 708a of the NCUA Regulations for those rules) and has used its review process to place more obstacles in the path of credit unions seeking converting, such as this "folding the disclosure materials" deal killer.

Sadly enough, folding disclosure materials isn't too far off what many of us agonize over on a regular basis - who hasn't debated at length about the relative placement of disclosures, such as the order of risk factors? One old-timer reminds us that before EDGAR, we used to have serious arguments about how to staple SEC filings! Them were da days!

July 19, 2005

How to Track Compliance with Stock Ownership Guidelines

A growing number of companies are imposing stock ownership guidelines on their officers and directors. One practical question is: "how does the company track compliance with the new guidelines?" Often that compliance matter is tasked to the Board's Compensation or Corporate Governance Committee - of course with the assistance of the corporate secretary or legal department.

One way to go about this is to regularly update a D&O ownership chart that is then included in the materials that go to the appropriate board committee. This chart can be updated for each committee meeting and re-circulated.

Along these lines, I have posted a sample "Stock Ownership Guidelines Monitoring Chart" in our "Stock Ownership Guidelines" Practice Area and in the "Sample Document Library."

Check Out the DealLawyers.com Blog

Come check out the new DealLawyers.com blog. This blog consists of all the entries from "The Deal Guys Blog," "Moloney's M&A Scoop Blog" and "Trust and Anti-Trust - the Antitrust Blog." Tell your friends - and I look forward to hearing from all of you on M&A matters to keep that blog relevant for M&A practitioners, much as so many of you keep me posted on issues for this blog!

Fraudsters Speaking Out on Fraud

In this podcast, Gary Zeune, Founder of “The Pros & The Cons,” provides a look at the interesting things he is doing (he runs the only speakers bureau for white collar criminals), including:

- What is your speaker's bureau and what is its purpose?

- How do you go about procuring speakers who have committed frauds?

- Can you give us a little bit of background on your “SAS 99 in 10 Easy Steps” program?

- How about your "Fraud: 10 Scariest Cases" program?

Cisco, SEC Face Pressure to Hold Public Hearings on Exchange-Traded Employee Options

I blogged a few months back about Cisco's concept of creating exchange-traded employee options - and that Cisco was in discussions with the SEC Staff about this plan's viability. Now, Bloomberg reports in this article that the Council of Institutional Investors and Ohio and Florida state pension funds want public hearings on this concept before the SEC gives a "green light." This request could be moot as we don't know whether the SEC is intending to allow this concept to fly anyways.

July 18, 2005

Section 162(m) Disclosure Developments: The Shaev Case

On Friday, Mike Melbinger blogged this disturbing news in his "Melbinger's Compensation Blog" on CompensationStandards.com: "Apparently some plaintiffs class action lawyers are suing companies for their 162(m) disclosures based on the Shaev v. Datascope Corp. (3d Cir. 2003), case. In Shaev, the court found a potential violation of federal securities laws where the corporation allegedly did not fully disclose the material terms of an executive's incentive compensation program.

The court held that the material terms of the company's incentive plan and the performance goals on which the chief executive's compensation was based were “material” within the meaning of Code Sec. 162(m)(4)(C)(ii), even though the specific business criteria, discussed in Reg. §1.162-27(e)(4), were not. Thus, the company's failure to disclose those terms could be a material omission under SEC Rule 14a-9.

In other cases, lawyers are alleging that the Compensation Committee report promised pay-for-performance - but then adopted a plan that paid significant amounts no matter what. Although these claims seem legally unsupportable, companies should pay more attention to both the Compensation Committee Report discussion of Internal Revenue Code Section 162(m), and the description of the plan in the shareholder approval section of the proxy statement. So let's be careful out there."

In our "Section 162(m) Policies" and "Section 162(m) Compliance" Practice Areas on CompensationStandards.com, we have numerous practice pointers about how you - and your compensation committee - can reduce liability for your 162(m) disclosures, including this handy "Section 162(m) Compliance Checklist" from Tim Sparks.

SEC Posts Shell Company Adopting Release

On Friday, the SEC posted the adopting release that provides guidance on how shell companies can - and can't - use Forms S-8, 8-K and 20-F.

Settlement Pipeline Soars Past $15 Billion

Bruce Carton reports on his blog that the ISS Settlement Pipeline, which reflects the sum of all pending or tentatively announced securities class action settlements for which the claim deadline has not passed, has soared to an amazing $15.006 billion. Introduced in July 2004 at a then-impressive $5.5 billion, the ISS Settlement Pipeline has been boosted significantly by the historic settlements in the WorldCom and Enron cases. The top 10 settlements currently in the pipeline are as follows:

1. WorldCom (combined): $6.12 billion
2. Enron (combined): $4.7 billion
3. IPO Securities Litigation: $1 billion
4. McKesson HBOC: $960 million
5. Dynegy: $473 million
6. Broadcom Corp.: $150 million
7. TXU Corp.: $149.75 million
8. BankOne Corp (First Chicago): $120 million
9. Deutsche Telecom AG: $120 million
10. CVS Corp.: $110 million

July 15, 2005

Ann Yerger on CII’s Majority Vote Policy

I have received a fair number of member questions on "what are companies doing to respond to the letter from the Council of Institutional Investors relating to the majority vote movement?"

So yesterday I conducted this podcast with Ann Yerger, Executive Director of CII, who addressed:

- What is CII's policy on majority voting for directors?
- What is CII's approach to implementing that policy right now?
- Regarding the 1500 majority vote letters that CII sent to the largest companies, what type of response is CII looking for?
- How many responses has CII received so far? What do they say?
- What will CII do if it doesn’t get the response from a company that it was hoping for?

It's Nice Work If You Can Get the Money When You Leave

This Wednesday WSJ "Long & Short" column was "spot on" regarding Morgan Stanley paying $32 million in severance to someone who served as co-President for a very short period of time, a golden parachute equal to 2x annual salary.

This excerpt from the column says it all: "Mr. Crawford was put into his job, by Mr. Purcell, 3½ months ago after years in essentially administrative jobs. For this he deserves a golden parachute of $32 million in cash compensation? The board guaranteed him $16 million a year for two years -- but said he could just walk away with the whole shebang if he left by Aug. 3. Decisions, decisions."

It's just confusing to me how these contracts get drawn up. If you ran your own business, would you contract with an employee in a way that would encourage her/him to leave a few months later and take away tens of millions? I suppose you might if you were dealing with Monopoly money, er, shareholders' money.

Just Announced! Learn how to implement responsible practices from the thought leaders at the CompensationStandard.com's "2nd Annual Compensation Conference," as we have just announced the agenda for this blockbuster program. Even more than last year, there will be a heavy concentration on providing practical guidance about what you need to do now.

President Bush on Verge of Nominating Two Democrats as SEC Commissioners

A number of recent news reports, including this article, state that President Bush is near accepting the Senate Democratic leadership's preferred candidates to fill the party's two seats on the Commission: current Market Reg Director Annette Nazareth and current Commissioner Roel Campos, whose term expired last month.

The Senate Democrats desire these two candidates be nominated at the same time that Chris Cox is confirmed as SEC Chair. Since Congress' summer recess commences in a few weeks, it's possible this might not happen until the fall.

July 14, 2005

ISS to Acquire IRRC

Perhaps a foreboding sign that a shake-out in the governance ratings space is not far off, Institutional Shareholder Services announced yesterday it was acquiring Investor Responsibility Research Center, a proxy research firm. According to this article, ISS will pay more than $10 million to buy IRRC, which has been struggling since becoming a for-profit entity four years ago.

ISS and IRRC were often painted as bitter rivals. Until Glass Lewis opened its doors a few years ago - and then Proxy Governance late last year - institutional investors only had two choices for proxy research: ISS and IRRC. However, IRRC never provided opinions as to how to vote - it just offered research to assist investors in making their own decisions. In comparison, Glass Lewis and Proxy Governance offer voting opinions ala ISS. Now, ISS will continue to grow at a fast pace - and investor alternatives dwindle back to three.

Interestingly, many folks involved in the proxy research/ratings industry started their careers at IRRC (egs. Pat McGurn, Howard Sherman).

The Conference Board's New Governance Handbook

This recent ISS article summarizes the new 140-page study by The Conference Board entitled: "Corporate Governance Handbook 2005: Developments in Best Practices, Compliance and Legal Standards." As I haven't seen it yet (it costs $495 - $125 for associates), I asked the co-authors - Carolyn Brancato and Chris Blath - to provide us with the skinny:

"We developed the first version of this Handbook after the Enron situation when we had forums across the country on what boards and companies needed to do in the wake of Enron. This Handbook represents the updated version incorporating all the SOX, NYSE and best practices governance provisions enacted since the first version was printed two years ago.

We have organized it according to how boards function, bringing together all materials for each function area, e.g. comp committees, audit committees. Many companies have purchased copies for each board member as a quick "reference" as to each director's basic duties.

Also, we believe that, as "good faith" becomes more of a focus for directors, they need to know "best practices" in general, not just case by case law. We intend the handbook to be as 'best practices" reference for directors coping with their new responsibilities.

We have an updated and expanded section on Strategy and ERM since we believe this is the newest "hot" topic boards need to focus on. Since boards have
been focusing on regulatory details such as 404 and compliance, many directors are now saying they want to get back to the reason they are on the board in the first place, e.g. to oversee and monitor the strategy the management devises. Strategy needs to be looked at in a new era of risk and risk needs to be located more at the full board level and not just in the audit committee. We are also starting a working group on enterprise risk management (for a description of the working group/agenda for 1st meeting on 9/15, contact yulia.dorzhyeav@conference-board.org)."

SEC Chair Nominee Cox Discloses His Assets

According to various news reports yesterday, Rep. Chris Cox (R-Cal.) has disclosed stock, mutual fund and other assets valued at between about $2.7 million to about $5.85 million. The disclosure is required for Mr. Cox's confirmation as SEC Chair. The report provides a range in value for each holding, making it impossible to determine a precise value for each asset. Apparently, the future Chair has a penchant for gold stocks. And me? I am a terrible stock-picker - got a tin can buried in the backyard...

US Chamber of Commerce Sues SEC Again

As could be expected, the US Chamber of Commerce filed a petition last week with the D.C. Circuit Court seeking review of the new SEC rules on investment company governance (i.e. requiring 75% independent directors and an independent chairs), following the June 29th SEC Commission meeting when the rules were essentially re-affirmed (technically it was a "response to remand by Court of Appeals"). The SEC's re-affirmation was much to the chagrin of Commissioners Glassman (see dissent) and Atkins (see dissent). Here is the Court of Appeal's original decision from June 21st.

July 13, 2005

Vice Chancellor Strine Sticks Up For State Rights

Last week at the European Policy Forum in London, Delaware Vice Chancellor Leo Strine criticized the Sarbanes-Oxley Act by calling it a "strange stew," noting the "creeping intrusion" of regulatory oversight, and suggesting that the federal government should stay "in its traditional lane" on matters of corporate governance. More information on VC Strine's speech is provided in this CFO.com blog - interestingly, the Financial Times ran three different articles covering this speech. Note that the speech itself is available only by request from the European Policy Forum.

More on Blackout Periods

Below are the results from our most recent survey about blackout and window periods (here are results from last year's blackout survey):

1. Does your company ever impose a "blanket blackout period" for all or a large group of employees?
- 70% - Regularly before, at, and right after the end of each quarter
- 13% - Only in rare circumstances
- 17% - Never

2. Our company’s insider trading policy defines those employees subject to a blackout period by roughly:
- 3% - Stating that all Section 16 officers are subject to blackout
- 12% - Stating that all Section 16 officers “and those employees privy to financial information” are subject to blackout
- 28% - Stating that all Section 16 officers “and others as designated by the company” are subject to blackout
- 35% - Stating that all Section 16 officers “and those employees privy to financial information and others as designated by the company” are subject to blackout
- 12% - All employees
- 12% - Some other definition
- 0% - Our company doesn’t have an insider trading policy

3. Does your company allow employees (that are subject to blackout) to gift stock to a charitable, educational or similar institution during a blackout period?
- 28% - Yes, but they must preclear the gift first
- 9% - Yes, and they don’t need to preclear the gift
- 26% - No
- 38% - Not sure, it hasn’t come up and it’s not addressed in our insider trading policy

4. Does your company allow employees (that are subject to blackout) to gift stock to a family member during a blackout period?
- 33% - Yes, but they must preclear the gift first
- 9% - Yes, and they don’t need to preclear the gift
- 19% - No
- 40% - Not sure, it hasn’t come up and it’s not addressed in our insider trading policy

5. Are your company’s outside directors covered by blackout or window periods and preclearance requirements?
- 99% - Yes
- 1% - No

It needed a kick in the pants when I blogged about it last Friday, but now it's fixed and you can participate in the new quick survey on how the head of internal audit interfaces with the board of directors (and who he/she reports to). Take a moment to participate in the survey near the top of our home page.

Rep. Oxley and Aircraft Use

It's amazing how many items I could be blogging about every day. For example, I kept putting off commenting on this April article on how Rep. Michael Oxley (R-Ohio) is the most frequent user of company jets among all 535 members of Congress, with at least 41 flights provided by corporations during the past two years. Odd for the co-father of SOX?

Congress is required to reimburse companies from their campaign accounts or political action committees at the cost of a first-class airline ticket, but there is a big difference between the cost of ticket and the cost of a private jet, some of which are equipped with showers and exercise bikes. Sound familiar? Learn more about executive use of aircraft in the "Airplane Use" Practice Area on CompensationStandards.com.

July 12, 2005

Truce in the Disney Boardroom: But Is Having a Director Emeritus Good Governance?

As noted in this article, the Walt Disney Company and former directors Roy Disney and Stanley Gold have reached a truce in their ongoing battles. Roy and Stan have agreed not to run a slate of directors or submit shareholder resolutions for the next five years, as well as drop the CEO succession lawsuit that the Delaware Chancellor Chandler recently refused to dismiss. The two also pledged to back the leadership of new CEO Robert Iger.

In exchange, Roy Disney has been named a director emeritus and a consultant to the company. In addition, the company reaffirmed to rotate members of the board's committees, as currently required by the company's corporate governance guidelines.

From a governance perspective, the problem with this arrangement is that serving as a director emeritus is not necessarily good for other shareholders. Even though Roy will be a presence in the boardroom - and may impact decisionmaking there - he will not owe any fiduciary duties to shareholders nor will shareholders have an opportunity to withhold votes against him (i.e. the equivalent of voting against) if they don't believe he is performing or the right person for the job. Perhaps this is why so few companies have honorary directors serving on their boards.

According to an article in Corporate Board Member a few months back, The Corporate Library reports that 107 former board members currently hold the title of emeritus or honorary director, compared with 60 in 2003...but that's just those companies disclosing the existence of emeritus directors (as the SEC's regulations don't require disclosure of these non-voting positions in proxy statements or otherwise). This illustrates a growing trend - but the number is still quite small considering that there are over 15,000 reporting companies.

How You Should Respond to the Latest Whistleblower Developments

In this podcast, Tom White and Carrie Wofford analyze the latest developments in the whistleblower area and provide some practice pointers on what you should now be doing, including:

- What types of action has the Department of Labor's Occupational Safety and Health Administration been taking?
- How can companies challenge the preliminary order of reinstatement?
- What has been the DOL's reaction to these challenges?
- What should companies be doing to review existing non-retaliation policies?
- How can they plan to handle any future employee complaints of corporate wrongdoing? Or handle a current complaint by an alleged whistleblower?

Meeting the New Compliance Standards

Today, join us for a webcast – “Meeting the New Compliance Standards” – during which a panel of compliance experts provide practice pointers on how to best develop a compliance program to meet the new US Sentencing Guidelines, with a focus on the challenging cultural requirement in the Guidelines.

If you do a lot of compliance, you know these panelists are leaders in the compliance field: Jeff Kaplan of Stier Anderson; Steve Priest of the Ethical Leadership Group and Tom McCormick of The Dow Chemical Company.

July 11, 2005

Driving Home Why Audit Committees Should Be Aware of PCAOB Inspections

One of my pet peeves is that I believe companies should be demanding that their independent auditors inform audit committees when the PCAOB is reviewing a company's file during a PCAOB inspection of the auditor (the PCAOB doesn't require that auditors share inspection reports with their clients, but also doesn't prohibit them either - the reports are confidential merely in the hands of the PCAOB and SEC). My point is driven home in this recent Bloomberg article.

According to the article, the SEC inadvertently disclosed the fact that the PCAOB is investigating Deloitte & Touche LLP's 2003 audit of Navistar International Corp. (this would be the PCAOB's first known formal probe of a Big Four firm). Wouldn't the Navistar audit committee want to know of this probe before reading about it in the newspapers? Some might argue that a board might even have a duty to be at least asking for this type of information as part of its duty of care, as it should be aware if a regulator is questioning its application of the auditing standards.

Also according to the article, the SEC received a copy of the investigative order from the PCAOB on May 25 and accidentally made the document available in its reference room during the week of June 20, adding that the order was marked "non-public."

Here is some sample language that companies can seek to include in their engagement letter with their auditor:

"We will promptly notify the Chairman of the Audit Committee and management if we or the Company are selected for inspection by the PCAOB or the SEC and will promptly communicate to the Chairman of the Audit Committee and management any information that we receive about such inspection that has a probability of having a material effect on the company's financial statements previously reported on by us or that could result in a modification to an audit report issued by us to the company. We will also, at the next regularly scheduled audit committee meeting subsequent to the review, update the audit committee on any significant comments or matters relating to the company stemming from the PCAOB’s or SEC’s review. We will promptly provide the Chairman of the Audit Committee and management with copies of all requests for production of documents or information relating to the company that we receive from the SEC or the PCAOB other than requests for our workpapers. Upon your request, we will provide the Audit Committee and the Company with a copy of any publicly available inspection reports on us issued by the PCAOB, but we will not provide any confidential inspection reports issued by the PCAOB to us, the confidentiality of which is provided for in the Sarbanes-Oxley Act of 2002 and the PCAOB’s inspection rules."

M&A Boot Camp: Disclosure Issues

On DealLawyers.com, check out the latest installment of the "M&A Boot Camp" - this one relates to "Disclosure Issues" and features the former Chief of SEC’s Office of Mergers & Acquisitions, Dennis Garris, who is now a Partner of Alston & Bird LLP.

If you are not a DealLawyers.com member, try a no-risk trial as 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!

Nasdaq Issues FAQ on Disclaimed 404 Opinions

On Friday, the Nasdaq posted this new FAQ, which is repeated below in its entirety:

Q: Does a Form 10-K satisfy NASDAQ's filing requirements if management has not completed its assessment of internal control over financial reporting or the auditor's attestation report contains an opinion that is disclaimed because the auditor did not have time to complete its internal control work?

A: A Form 10-K does not satisfy NASDAQ's filing requirements if management has not completed its assessment of internal control over financial reporting or the auditor's attestation report contains an opinion that is disclaimed because the auditor did not have time to complete its internal control work. Thus, any company filing without a completed assessment by management or with such a disclaimed opinion would ordinarily be subject to being delisted. However, NASDAQ acknowledges that during this first year of implementation of Section 404 it has proven difficult for certain companies to complete their assessment of internal control over financial reporting and file their Forms 10-K without disclaimed opinions.

As a result, NASDAQ, after consultation with the Staff of the Securities and Exchange Commission ("SEC"), has determined that during 2005, management's failure to complete its assessment of internal control over financial reporting or an auditor's opinion that is disclaimed based on a lack of time to complete internal control work will not result in delisting of the company, provided the company is taking all steps required by the Staff of the SEC to address these issues. A company in this circumstance should promptly contact NASDAQ's Listing Qualifications Department. Please keep in mind, however, that no company will be eligible for this relief unless the Form 10-K contains an unqualified audit opinion on the company's financial statements.

Adopting Release for Penny Stock Rules Amendments Now Available

Way back in April, the SEC adopted amendments to the definition of “penny stock” in Rule 3a51-1 as well amendments to the procedural requirements of Rules 15g-2 and 15g-9. On Friday, the SEC finally posted the related adopting release.

July 8, 2005

New Quick Survey: Internal Audit and the Board

We have posted a new quick survey on how the head of internal audit interfaces with the board of directors (and who he/she reports to). Take a moment to participate in the survey near the top of our home page.

How to Navigate Tricky Confidential Treatment Requests

We have posted the transcript for the webcast - "How to Navigate Tricky Confidential Treatment Requests" - which includes commentary from the SEC Staff about its comment letter database.

More Companies Reveal Social Policies

Last month, General Electric issued its 78-page "2005 Citizenship Report," the first of its kind for GE. Below is a Financial Times articled dated June 15th notes how more companies are revealing their social policies:

"More than half of the world's biggest companies reveal details of their environmental and social performance, according to a KPMG survey that provides fresh evidence of business leaders' support for corporate social responsibility.

The survey, published every three years, found that CSR reports for 2005 now cover a much wider range of issues, and that many companies also provide CSR information in their annual financial reports. Fifty-two per cent of the top 250 companies in the Fortune 500 list published separate reports on corporate social responsibility, up from 45 per cent three years ago.

George Molenkamp, chairman of KPMG's sustainability services, said the growth of CSR reporting had proved the sceptics wrong. "When we started observing these issues, many people argued this was just a fashion that would disappear as soon as the economic situation got worse. But the economic situation has deteriorated, and still more and more companies are doing this."

Companies have also become more generous in the information they provide. While previously most businesses disclosed only their environmental record, most now cover issues such as labour standards, working conditions and community involvement as well.

The survey, due to be released today, states: "A growing number of companies (and their stakeholders) believe that long-term business success depends not only on a healthy balance sheet but also on social and environmental performance."

That belief has now spread to sectors that traditionally saw little reason in issuing CSR reports. Most strikingly, 86 financial services companies issued CSR reports, up from only 40 three years ago. CSR reporting rose particularly strongly in Italy, Spain, Canada and France, where the number of companies issuing such reports almost doubled. But Japan and Britain remain the countries most strongly wedded to the concept.

Businesses cited a variety of reasons for their involvement in CSR, though by far the greatest number pointed to economic considerations. "The economic reasons were either directly linked to increased shareholder value or market share, or indirectly linked through increased business opportunities, innovation, reputation and reduced risk," the survey notes. Ethical considerations came in second place, and were cited by more than one in two companies.

A desire to motivate employees and attract new recruits was a further strong incentive, the survey said. The KPMG report is based on an analysis of the 250 top companies in the Fortune 500, as well as the 100 biggest companies in 16 countries. It was written jointly with researchers from the University of Amsterdam."

July 7, 2005

Brian Lane on First Reactions to ’33 Act Reform

In this podcast, Brian Lane - a Partner of Gibson Dunn and former Corp Fin Director - provides his first reactions to the ’33 Act reform based on the limited information provided at last week’s open Commission meeting by addressing:

-How do you feel to see the ‘33 act finally get overhauled after spending a few years of your life on that project?

- Generally, how big of a change does this mean for deals?

- Based on what little information we have so far - given that the adopting release is not yet available - were you disappointed by any aspects by what was adopted?

- For in-house counsel, how dramatic a change does this mean for their daily practice?

New Standard of Judicial Review for Going Private Transactions

Last month, Delaware Vice Chancellor Strine delivered this 85-page opinion urging a new standard of review for going private transactions involving controlling shareholders - as well as possibly signaling a more balanced and reasoned approach toward director and shareholder conduct in many types of transactions.

VC Strine also provides the first opinion since Sarbanes-Oxley that chastises the plaintiffs' bar for how they handle such cases, all in the context of a fee application by a plaintiffs' firm in the case.

Learn more about this noteworthy case in this DealLawyers.com interview with David Berger and John Stigi on the Cox Communications Litigation.

What Non-US NYSE Listed Companies Need to Do Soon

In this interview, Mark Bergman of Paul Weiss explains what foreign private issuers that are listed on the NYSE need to do soon to comply with obligations that many of their domestic counterparts have already undertaken.

SEC Donaldson's Farewell Speech

Yesterday, the SEC posted this farewell speech to the SEC Staff from Chairman Donaldson. I didn't know the SEC was HQ'ed in Philly during WWII...

July 6, 2005

Nasdaq's View on Impact of 404 on Smaller Companies - and Member Rebuttal

As noted in this press release, Nasdaq GC Ed Knight provided the following testimony on the impact of 404 on smaller companies before the SEC's Advisory Committee of Smaller Public Companies. Here are some highlights:

- Based upon a survey of Nasdaq companies, as a percent of revenue, smaller issuers appear to have spent approximately 11 times more than larger companies on 404 compliance

- Since auditor resources are stretched thin, the set of smaller companies that do retain national auditors often receive less attention and are put on a lower priority track than larger companies; Nasdaq issued 60 delisting letters to issuers that failed to file on time, while last year only 14 companies were late

- In the first quarter of this year, 22 Nasdaq issuers voluntarily delisted compared to only seven in the same period in 2004; in each of these cases, the companies explained their decisions by citing the increasing regulatory costs associated with being public

Some members noted the fact that Nasdaq has 60 companies in delisting proceedings due to late filings is frightening - and that maybe the SEC should consider a different process to be used for those types of late SEC filings that are not caused by an "Enron type" of fraud (i.e. one does not require auto-delisting, but allows Nasdaq staff discretion to monitor the company). As noted in this earlier blog, it's not too late to provide comments to the Nasdaq regarding its delisting procedures.

Disclosure Trends on Late SEC Filings

Sheldon Krause provides this interesting insight into how companies tend to announce that they will be late making their SEC filings: Late Nasdaq filers mainly wind up filing an 8-K under Item 3.01 to disclose noncompliance; whereas NYSE companies seem to rarely do so (although he has noticed a recent trend of more 3.01 8-Ks by NYSE companies).

Of particular interest to Sheldon is Saks filing a Form 8-K under Item 3.01 on June 3rd to disclose the late filing after having already filed a Form 8-K under Item 8.01 on May 17th reflecting that the company had received a May 3rd letter from the NYSE stating that they would have the dreaded "LF" indicator displayed aside its trading symbol.

The Art of Private Equity M&A

On DealLawyers.com, the long-awaited transcript from the popular webcast - "The Art of Private Equity M&A" - is now available.

July Issue of E-minders is Posted

We have posted the July issue of E-minders. Sign up for this free newsletter by inputting your email in this form.

July 5, 2005

SEC's Acting Chair - Cynthia Glassman

Last Thursday, President Bush designated Commissioner Glassman to be Acting Chair while the appointment of Christopher Cox as permanent Chair is pending Senate confirmation. I presume the President made the selection based on seniority - as Commissioner Atkins was rumored to be among the candidates for the Chair position, but Glassman never was. Glassman joined the Commission six months before Atkins. Here is a recent speech from Commissioner Glassman regarding what she thinks is ahead for the SEC during this time of transition.

I doubt Commissioner Glassman will move her office down the hall into the Chair's nicer office - unlike my former boss Laura Unger who moved into the head honcho suite when she served as Acting Chair. Unlike the present circumstances, Unger was hoping to be tapped as a permanent Chair when she moved down the hall - and she served as Acting Chair for seven months before Harvey Pitt was finally appointed.

I don't think it will be too long before Cox is confirmed, unless the battle over the open US Supreme Court slot pushes aside all other confirmations in the Senate. [Note that serving as an Acting Chair doesn't even get you recognized as serving as a Chair in the SEC's Commissioner/Chair Chart.]

As could be expected, a bunch of former Chairman Donaldson's Staff left the Commission last week along with Donaldson, including the head of Public Affairs - see the bevy of June 30 press releases regarding departures.

NYSE to Issue Comments on Director Independence

Geez, I go away for a week and Julie's blog on the NYSE's independence standards gets picked up in Friday's WSJ for this article. Let me know if you get one of these "futures" comment letters. Teaches me to take a vacation - glad to be back!

Former Enforcement Director Cutler Rejoins Wilmer Cutler

Last week, Wilmer Cutler Pickering Hale and Dorr announced that former SEC Enforcement Director Stephen Cutler will rejoin the firm as co-chair of its Securities Department in the firm's DC office sometime in "the fall of 2005. " Prior to joining the SEC, Cutler had been a partner at Wilmer. With former Enforcement Director Bill McLucas also in the stable, Wilmer now has created quite an Enforcement practice juggernaut.

July 1, 2005

NASD Fairness Opinion Proposals

The NASD has proposed new Rule 2290, which requires certain disclosures and procedures for the issuance of fairness opinions by NASD member firms. This proposal follows up on the request-for-comment issued by the NASD in November 2004.

The disclosure requirements would require opinions to be included in a proxy statement to disclose certain information, including: (1) any payment or compensation that the member will receive that is contingent upon the successful completion of the transaction; and (2) whether the fairness opinion was approved or issued by a fairness committee following the procedures required by the proposed NASD rules.

The procedural requirements would require that any member issuing a fairness opinion have procedures regarding the approval of fairness opinions, including: (1) the process to determine whether the valuation analyses used in the fairness opinion are appropriate for the type of companies that are involved in the transaction; and (2) the process to evaluate the degree to which the amount and nature of the compensation from the transaction benefits any individual or class of officers, directors or employees relative to the benefits to shareholders of the company, is a factor in reaching a fairness determination.

Check out our Fairness Opinion Practice Area on DealLawyers.com for more information on this.

SEC Tidbits

The SEC recently published its Performance Budget for 2006, which aligns the goals and measures developed for the SEC’s Strategic Plan for Fiscal 2004-2009 with the SEC’s budget request. It contains interesting data points, such as:

- In 2004, 84% of responses to exemptive, no-action letter, and interpretive requests are issued within six (!) months.

- The number of new foreign private issuers registering under the 1933 and 1934 Acts decreased from 130 in 2001 (with $267 billion securities registered) to 63 in 2004 (with $146 billion securities registered).

- The agency turnover rate has decreased from 9.1% in 2001 to 6.3% in 2004.

Submitted by Julie Hoffman