September 30, 2005

Deferred Comp – Section 409A Proposed Regulations Issued

Yesterday, the Treasury Department and IRS issued proposed regulations on deferred compensation under Section 409A of the American Jobs Creation Act. Section 409A governs plans and arrangements that provide nonqualified deferred compensation to employees, directors or other service providers and the proposed regulations provide a framework for implementing those.

The proposed regulations (which are 238 pages) identify which plans and arrangements are covered under Section 409A, outline operational requirements for deferral elections and permissible timing for deferred compensation payments made under the rules. The rules also extend the deadline for documentary compliance with the new rules for one year, to December 31, 2006.

In his Compensation Blog, Mike Melbinger will be providing his analysis on the proposed regulations in the days to come. His initial thoughts on the regs are:

“One of the areas of most interest to many readers will be the discussion of SARs. Recall that SARs issued by private companies and SARs that could be settled in cash came in for harsh treatment under the initial guidance on 409A.

Here the newly released proposed regulations bring good news. The regulations treat stock appreciation rights similarly to stock options, regardless of whether the stock appreciation right is settled in cash and regardless of whether the stock appreciation right is based upon service recipient stock that is not readily tradable on an established securities market. However, because the IRS remains concerned that manipulation of stock valuations, and manipulation of the characteristics of the underlying stock, may lead to abuses with respect to stock options and stock appreciation rights (collectively referred to as stock rights), the regulations contain more detailed provisions with respect to the identification of service recipient stock that may be used to determine the amount payable under stock rights excluded from the application of section 409A, and the valuation of such stock.”

Another great place to learn more about the proposed regs is at the upcoming NASPP Conference in Chicago November 1 - 3.

SEC Not so Free with Information for FOIA Requests

This article by Bloomberg discusses a recent report by the Coalition of Journalists for Open Government that found the SEC turns down more FOIA requests for non-public information than almost every other government agency, including the CIA and the Pentagon. Of the 25 U.S. departments and agencies in the report, only the Small Business Administration and the National Archives turned down more requests.

According to the report, the SEC granted only 34% of the 3,830 FOIA petitions it processed during the 2004 fiscal year and almost 20% of those denials that were appealed were overturned.

And the SEC’s backlog of 8,635 requests (at its 2004 year-end) was bigger than all but four agencies surveyed. The public filed 9,325 requests with the SEC from October 2003 to October 2004. All but 690 of the 3,830 FOIA petitions the SEC ruled on that year were holdovers from fiscal 2003, so when the SEC closed the books on 2004, it still faced 8,635 pending requests.

Find out more about the SEC’s FOIA program in our “Confidential Treatment” Practice Area.

September 29, 2005

Recent Developments in Delaware Entity Law

Like he has done over the past several years, in this text interview, Lou Hering of Morris Nichols covers how the Delaware legislature recently enacted a number of amendments to three of Delaware’s four “alternative entity” statutes in its latest legislative session.

Senator Frist and Insider Trading

Bound to be gobs and gobs of media coverage - some of it with questionable legal analysis - regarding the SEC's probe into trades conducted by Senator Frist through some blind trusts. An article in today's WSJ reported that the matter is now a formal investigation. Professor Bainbridge in his blog provides his own insights into the viability of a possible violation.

Survey Results from Shearman & Sterling

Recently, Shearman & Sterling released its annual survey on corporate governance practices of the 100 largest U.S. public companies (the survey is posted on Among the trends revealed by the survey:

- Poison pills and staggered boards are in decline. The number of companies with poison pills fell by 19%, and the number of companies with a staggered board fell by nearly 30%.

- A majority of companies continue to exceed the minimum independent director requirements of the NYSE and Nasdaq.

- Despite substantial attention to the issue, there has been little change in the number of companies at which different individuals serve as chairman of the board and chief executive officer (19%, up from 14% in 2003).

- Grants of stock options as a component of director compensation decreased to 55% from 70% in 2003.

- The number of shareholder proposals for majority voting in director elections has seen the largest increase, from no such proposals included in the proxy statements of the Top 100 companies in 2003 to 15 such proposals in 2005, fueled primarily by the demise of the SEC’s proxy access proposed rule.

September 28, 2005

It's That Time of the Year Again - End of the SEC's Fiscal Year

When fiscal year 2006 starts on October 1st, the SEC will likely be operating under a continuing resolution as it normally does (under which fees remain at their current rates) - see last year's blog as to why this is an annual rite. Once Congress approves the SEC's '06 budget, registration fees will go down to $107.00 per million from $117.70 per million.

Director Recruitment Developments

In this podcast, Dick McCallister, Managing Director of Boyden Global Executive Search, describes the latest trends in director search and recruitment, including:

- What is driving the need for international experience on boards?
- What industries are at the forefront of this movement?
- Where are companies finding directors with global experience?
- What other skills are most in demand on boards today?
- How are searches for financial experts faring these days?

For Accounting Purposes, Katrina Considered "Ordinary"

According to this article, the EITF of the FASB has reportedly determined that - for financial reporting purposes - the devastation wrought by Katrina does not meet these two criteria: “infrequent in occurrence” and “unusual in nature.”

Compare that to the musings a few weeks back in the blog about MAC clauses...

September 27, 2005

Director Resignations: Disclosure About Disagreements

Looks like Gretchen Morgenson of the NY Times and I have some of the same sources - she beat me to writing about the intriguing Form 8-K filed recently by Corinthian Colleges. This 8-K includes a 4-page letter from a resigning director that outlines the multiple problems he has witnessed during his tenure on the Corinthian board.

Rather than rehash the essence of Gretchen's fine article, I thought I would provide some analysis as to the lay of the land regarding 8-Ks filed under new Item 5.02 when directors resign:

1. If there are no disagreements, disclose that fact. Most 8-Ks filed due to a director resigning disclose that there were no disagreements between the director and the company left behind. Many of these helpful 8-Ks go on to disclose the reason for the departure (egs. pursue other opportunities; health or age limitations; personal reasons).

2. Don't raise questions in investors' minds by not addressing the reason for departure (as required by Item 5.02(a)(1)(iii)) - such as "the resigning director did not give a reason for his decision in his letter" as noted in this Form 8-K filed by Monmouth REIT.

3. Train directors in the art of drafting resignation letters - providing reasons for the departure in the letter as well as the 8-K, including noting there were no disagreements that led to the departure, immensely help. Letters that raise questions by being silent as to "why" - such as this vague letter from a LitFunding director - don't help, particularly if the 8-K itself doesn't address the reasons for departure.

4. For me, the worst are 8-Ks that merely state that a director has resigned via a written communication - but the company fails to file the written communication as an exhibit to the 8-K as required by Item 5.02(a)(2) (and fails to disclose whether there were any disagreements). See the Form 8-Ks filed by Scan Optics and Power2Ship. Perhaps these companies had nothing to hide, but we don't know from their scant disclosures.

5. The bottom line is that if there are disagreements between a resigning director and the rest of the board or management, don't try to hide the disagreement - face it and explain it if you wish. So far, I have found about 10 8-Ks that fall in this category, including the Corinthian Colleges' 8-K noted above and this one from Torvec that I blogged about a few months ago. I have posted a list of the 8-Ks that disclose disagreements in our "Director Recruitment" Practice Area.

"Stock Splits" Practice Area

We have created a new "Stock Split" Practice Area that includes a number of sample checklists that cover a timeline of required actions.

September 26, 2005

PCAOB Chair to Step Down

On Friday, PCAOB Chair William McDonough announced that he will resign his position November 30 or when his successor is in place, whichever is sooner. Here is the related press release. Even though I only heard him speak once, Chairman McDonough was one of the more charismatic speakers I have heard.

SEC Chair Cox has big shoes to fill when he selects a new PCAOB Chair. Here is Chairman Cox's statement about Chairman McDonough's departure. The process of selecting new PCAOB Board members is something quite new - it will be interesting to see if Chairman Cox renominates Kayla Gillan for another term, as I hear that she is more than willing to serve again.

SEC Posts 404 Adopting Release/Accelerated Filer Proposing Release

On Friday, the SEC posted the adopting release related to delaying the 404 deadline for smaller companies - as well as the proposing release related to the new accelerated filer definitions and deadlines for such companies.

Go Figure! HealthSouth Whistleblower Receives Longest Sentence of Them All

Last Thursday, the primary whistleblower in the HealthSouth fraud case got a longer sentence than all the other HealthSouth executives that have been dragged through the criminal process so far. US District Judge Robert Propst sentenced former finance chief Weston Smith to 27 months in prison, ordered him to pay $1.5 million in forfeited assets and spend one year on probation after his release - the Judge acknowledged the disparate range of sentences that have been imposed and essentially invited Mr. Smith to appeal his sentence to the 11th US Circuit Court of Appeals.

Meanwhile, former HealthSouth CEO and Chair Richard Scrushy - acquitted for his role in the fraud and who still sits as a HealthSouth director - is angling to get back on the management team (and the company's Chair recently resigned). Here is the company's press release responding to Scrushy's recent criticism of management over the company's poor earnings. The SEC's civil lawsuit against Scrushy has yet to come - and odds are he will be barred from serving as an officer or director of a public company once that lawsuit is finalized.

September 23, 2005

More Thoughts on the SEC's Proposed 404 Delay

From a member regarding the SEC's 404 delay: "I read your entry today and have a small point that makes a big difference for at least one client. When you refer to the extension for non-accelerated filers, you indicate that an issuer who is not an accelerated filer will benefit from the extension. I think the extension will only apply to issuers who are not accelerated filers now and don't exceed the $75 million public float test at the end of their next second quarter.

I have a client whose public float has been hovering around $75 million for the past year. When the SEC last extended the 404 deadline for nonaccelerated filers, the client had to wait until the end of its second quarter to see whether they qualified for the extension or would have only 6 months to comply with 404. After listening to yesterday's meeting, it doesn't seem that the SEC is taking a different approach with this extension - in other words, they won't grandfather issuers who aren't accelerated filers at the time the extension was granted. I realize this affects a very small number of issuers and our client intends to publicly comment on the latest extension."

Read: Just like the last time 404 was delayed, if you become an accelerated filer during the extension period, you get no relief - unless the SEC changes something when it adopts new final rules.

We have posted our own notes from Wednesday's open Commission meeting as well as a number of law firm memos regarding the meeting. In addition, I answered a query in the Q&A Forum yesterday (#1195) that fleshes out the proposed definition of "accelerated filer."

Transcript for IPO Webcast Posted!

We have posted the transcript from last week's webcast: "Drilling Down: Doing an IPO After the ’33 Act Reform."

AICPA's 2nd Exposure Draft re: Communication of Internal Control Matters

On September 1st, the AICPA's Auditing Standards Board issued a 2nd exposure draft on "Communication of Internal Control Related Matters Noted in an Audit," which is posted in our "Internal Controls" Practice Area.

The exposure draft contains guidance beyond what the PCAOB has provided on control deficiency assessment - and in certain areas, the draft is not consistent with the direction of the SEC and PCAOB from their May 16th statements. Not sure why the ASB is providing guidance on the same topics as PCAOB, especially without indicating it only applies to non-issuers. The comment period for the revised exposure draft ends on October 31, 2005.

How to Frame Arguments in Post-Acquisition Disputes

In this podcast, in light of the fact that more and more accountants are being used to serve as independent arbitrators in post-acquisition disputes, Jeffrey Katz, a director in the BDO Seidman Litigation and Fraud Investigation Practice, provides guidance on how attorneys might pose their arguments based on the accounting principles underlying a transaction, including:

- Why are generally accepted accounting principles (GAAP) so often at the center of post-acquisition disputes?
- What is the key to presenting persuasive evidence to an accounting arbitrator?
- What is the distinction between an arguable position and a position that is compelling to accounting principles?
- How can changes in GAAP be used to plant doubt in the mind of the arbitrator?

September 22, 2005

SEC Acts on 404/Proposes New Accelerated Filer Definitions & Deadlines

In the "Hot Box" on the home page of, we promptly posted notes shortly after yesterday's SEC's open Commission meeting (Chair Cox's 1st meeting - a 3 hour doozy) - these notes are more extensive than the following bullet points:

- Smaller Companies - A company that is not an "accelerated filer" can now wait to comply with the internal control over financial reporting requirements until their first fiscal year ending on or after July 15, 2007.

- Foreign Private Issuers - The delay above includes foreign private issuers that don't meet the definition of "accelerated filer." Note that a foreign private issuer that is an "accelerated filer - a concept never before applied to FPIs - will stay on its current course to comply with 404 for fiscal years after July 15, 2006.

- Large Accelerated Filers - A new category of issuers was proposed: “Large Accelerated Filers,” who would be issuers that meet the current definition of "accelerated filer," except that their public float is $700 million or more. As proposed, Large Accelerated Filers would need to file their 10-Ks within 60 days after fiscal year-end and their 10-Qs within 40 days after quarter end, for year-ends after December 15, 2005. See the notes for a discussion of the overlap between WKSIs and LAFs.

- Accelerated Filers - Companies that meet the traditional definition of "accelerated filer" will still need to comply with 404, but it is proposed to give them 75 days as the deadline for their 10-Ks and 40 days for their 10-Qs (and to modify exiting of accelerated filer status by permitting an accelerated filer whose public float has dropped below $25 million to file an annual report on a non-accelerated basis for the same fiscal year that the determination of public float is made).

Here is the SEC's press release regarding its actions. There is a short 30-day comment period for the proposals.

Correction About the NASD's "New Issue" Rule Amendments

Last Thursday, I blogged that the amendments to Rule 2790 would become effective Monday, September 19th - I was wrong! I forgot about the SEC's Release No. 34-52209A issued August 22nd that made the Rule 2790 amendments effective upon announcement by the NASD in a Notice to Members to be published no later than 60 days following SEC approval. The effective date will be not more than 30 days following publication of the Notice to Members according to the amended order. It doesn't appear that a Notice to Members has yet been issued, which means the old rule is still in effect at this time. Thanks to Eric Graham of Goodwin Procter for the heads up!

Fraud Prevention and Management

In this podcast, Jim Persing, a former lawyer who is now a life coach, delves into how to deal with an employee engaged in fraudulent conduct, including:

- Are companies seeing more cases of fraud and questionable ethics?
- When discovered, how do companies typically deal with the employee and the related issues, particularly if the employee is valued and productive?
- What are the pros and cons to these actions from the company’s perspective?
- Could the company turn to an unbiased outsider to help? How?
- What monitoring would be needed? What if it doesn't work - then what?

September 21, 2005

New SEC Chairman Vows To Lift Lid On Fat-Cat Pay Deals

Today's WSJ tackles a topic dear to our hearts with this article - "New SEC Chief Tackles A Big One: CEO Pay." Here is how that article kicks off: "Chris Cox isn't starting out as the capitalists' tool his critics made him out to be. The new head of the Securities and Exchange Commission is smart. He's got good political instincts. And those instincts have led him to the biggest piece of unfinished business on the corporate reform agenda: CEO pay."

In addition, the title above and the following excerpt is from yesterday's Times of London: "Christopher Cox, the new chairman of the Securities and Exchange Commission, has declared war against excessive executive pay amid claims that many American companies try to hide big remuneration deals from investors.

Mr Cox, who has been in the job for little more than a month, has set a specialist team of SEC investigators to the task of discovering how American companies disguise executive pay or special bonuses. "This is one of the first things he (Cox) has prioritised," a spokesman for the SEC said. "Executive compensation can be opaque and this is what the commission aims to find out about."

> Learn how to stay out of the SEC's crosshairs by checking out Ron Mueller and Mark Borges during their panel - "What Now Needs to Be Disclosed in the Proxy Statement" - during the "2nd Annual Executive Compensation Conference."

The September-October Issue of The Corporate Counsel

In our effort to encourage more responsible behavior in the area of executive compensation, we have made the Sept-Oct 2005 issue of The Corporate Counsel freely available on This issue follows up on our 12-Step Roadmap to Responsible Pay Practices, laid out in two issues from last year (those two issues are also freely available on at the right side of the home page).

Webcast on ’33 Act Reform Transitional Guidance

Don’t forget tomorrow’s webcast - "Drilling Down: Seasoned/Unseasoned Issuers and Voluntary Filers Doing Offerings After the ’33 Act Reform" - featuring Brian Lane of Gibson Dunn & Crutcher; Richard Langan of Nixon Peabody; and David Miller of Faegre & Benson. This panel also will explore the SEC’s new transitional guidance and help you understand what you now need to do with your existing shelfs!

Hurricane Katrina Delays Guidance on Deferred Compensation Plans

From a recent Mullin Consulting alert: "Speaking to the Bureau of National Affairs on September 14, IRS Chief Counsel Donald Korb stated that the agency's effort to provide hurricane relief has further delayed guidance on deferred compensation plans.

While there was speculation that guidance would be released in time for the mid-September meeting of the American Bar Association Section of Taxation, the devastation caused by Katrina put the agency's release on hold. Immediate tax relief to Katrina victims has included lifting restrictions on low-income housing nationwide and extending tax-filing deadlines along the Gulf Coast. Korb said additional tax relief for hurricane victims will be forthcoming.

In a telephone call, Daniel Hogans, an Attorney-Advisor in the Office of Benefits Tax Counsel, told Mullin that Section 409A guidance "is in the clearance process right now. It comes down to when the people who sign off will have time to look at it. I'm hoping we'll see it in the next few weeks, but something like Katrina takes a lot more time than people realize.”

September 20, 2005

Executive Compensation as a Political Football

Last week, California State Treasurer Phil Angelides called for the state's two big pension funds - CalPERS and CalSTRS - to oppose the proposed acquisition of Pacificare by UnitedHealth Group unless certain payments to executives were rescinded. Angelides (who recently announced he is running for California Governor) claims that $315 million in payouts to the top tier of management is excessive. I agree that it sounds excessive - but some of this amount reflects acceleration of vesting of stock options (in which case perhaps the option grants were excessive but not the severance arrangements - without knowing more, my hunch is that both were more than enough as I intimated in this article).

Even though no Form S-4 has yet been filed, a regulatory hearing was held last week by the Department of Managed Health Care - but the Department doesn't have the authority to regulate executive compensation levels. The transaction will also require approvals from the U.S. and California Departments of Justice, the California Department of Insurance and nine other states, including Texas, Nevada and Colorado.

The Treasurer's move does illustrate the fact that executive pay can become a political football - particularly when it involves a controversial industry such as health care. The transaction will have an effect on about 3.5 million California enrollees. Thanks to Keith Bishop for helping to sort this one out!

At our "2nd Annual Executive Compensation Conference," you will hear what investors are feeling - and planning - regarding compensation practices from Pat McGurn of ISS, Greg Taxin of Glass Lewis and Paul Hodgson of The Corporate Library during the panel, "The Institutional Investors' New Focus on Executive Compensation: What It Means For You."

WKSI Transcript is Posted!

We have posted the transcript of our popular webcast: "Drilling Down: Doing a WKSI Offering After the ’33 Act Reform."

Winning Strategies in Auctions

Don't forget tomorrow's webcast on - "Winning Strategies in Auctions" - featuring Mark Gordon of Wachtell Lipton, Eileen Nugent of Skadden Arps, John Grossbauer of Potter Anderson – and for the banker’s perspective, Jill Goodman of Lazard. Learn steps to reduce the impact of the "Winner's Curse" and more, including analysis of the recent Toys ‘R Us decision.

More on the Most Bizarre Registration Statement of All-Time

Following up on last week's blog about the bogus Apollo Publication Corp. registration statement, one member asked how EDGAR accepted the filing if there wasn't a filing fee? This question presumed the prankster wasn't willing to pay something for the publicity the scheme has generated.

I believe that a fee - albeit a small one - was paid through Mellon for this filing. David Copenhafer of Bowne explains that the SEC Staff double checks to ensure that the system-approved fee is what was actually due, and that was one of the things that triggered the SEC's identification of a problem in this case.

David notes this "filer" went to a lot of trouble to light up EDGAR functions. He took a quick look at the HTML of the filing and thinks the fraudster made an effort to see what was possible and how things work within the EDGAR system. So this might be the handicraft of a fraudster with "skills." [Finally saw Napoleon Dynamite - my favorite scene is where Pedro and Napoleon are conspiring to blend their "skills" in Pedro's pursuit of the class presidency.]

September 19, 2005

Disclosure Controls and Disclosure Committees: Quick Survey

We have posted a new quick survey on disclosure controls and disclosure committees. Please take a moment and fill out the 4 questions. This new survey supplements last year's quick survey on disclosure committees.

Survey Results: Audit Committees and Earnings Releases

Here are the results from last month's quick survey on audit committees and earnings releases:

1. Does your Audit Committee review your company’s earnings releases prior to their release to the media? Yes - 90%; No - 10%

2. If the answer to #1 is “Yes,” how many days prior to public issuance of the earnings release is a draft typically sent to the Audit Committee?

- One day or less - 15%
- Two days - 31%
- Three days - 25%
- Four days or more - 29%

3. If the answer to #1 is “Yes,” does the Audit Committee hold a meeting for the purpose of discussing each earnings release?

- Yes, and mostly (or all) by telephone meetings - 81%
- Yes, and mostly (or all) by face-to-face meetings - 13%
- No - 6%

4. If the answer to #3 is “No,” is the Audit Committee informed about issues that will be discussed in the related earnings release?

- Yes, in writing - 7%
- Yes, at a meeting - 72%
- No - 21%

5. Does your Audit Committee hold a separate meeting to review draft Forms 10-Q and 10-K (and at the same meeting, review the CEO’s and CFO’s certification of the Forms 10-Q and 10-K)? Yes - 68%; No - 32%

The Executive Compensation Revolution

Below is an interesting excerpt from my interview with Paul Hodgson of The Corporate Library. Paul says: "In the U.K. there was a real groundswell of protest against excessive executive pay during the early 1990s. This was primarily caused by the government privatizing utilities at a price well below their market value. Stock prices for these utilities exploded once they hit the market, and the executives – who had all been awarded substantial stock option awards in line with typical practice – were millionaires overnight. And these were people who had been public servants up until this point.

Well, the press just had a field day. There were pictures of pigs dressed up in pin striped suits, headlines like “Snouts in the trough”. You know what the British press is like. Anyway, it was a disaster for corporate Britain.

In response to the protest, there was a corporate governance revolution. The government set up a series of corporate governance committees, and put them in charge of solving the crisis in executive compensation. These committees did not look to the institutions or to the regulators for what should be done. They looked to those companies which they felt had already introduced best practices.

More important, they looked to those companies that had already introduced best practice compensation policies without any negative impact on their ability to recruit talented executives or any negative impact on the performance and commitment of their existing executives. These best practices were then enshrined in a series of corporate governance codes. But the inspiration for these codes came from business, not regulators."

Paul is part of the panel - "The Institutional Investors' New Focus on Executive Compensation: What It Means For You" - during the "2nd Annual Executive Compensation Conference."

S&P Exits Governance Rating Field in US

As expected, the shakeout in the governance rating industry continues as S&P has dropped out. S&P's "pay-to-play" model never made sense (ie. companies had to pay in order for S&P to rate them) and it didn't help that S&P's marketing efforts centered on its voluntary rating of Fannie Mae (to which it gave a high rating before Fannie's bottom fell out).

S&P remains active in providing ratings in other markets around the world -primarily emerging markets - where governance concerns remain strong and where stand alone governance analysis continues to have merit.

In the US (and elsewhere), S&P also remains focused on applying corporate governance analytics in the context of their credit ratings. Specific feedback from investors was that S&P needs to continue to monitor corporate governance as a risk factor, but investor preference is to factor this into credit ratings rather than provide it as a separate service. This is what Moody's does also.

SEC Posts New Periodic Report Forms

To add in the new shell company disclosure items, the SEC posted this new Form 8-K, Form 10-K and Form 10-Q on its website last week. Besides shell company changes, the Form 8-K changes relate to Item 6 for extensive asset-backed issuer disclosure provisions (previously Item 6 was "reserved").

You can tell they are new by the date in the lower left corner of the first page - check those against the forms you might be using.

September 16, 2005

SEC to Consider Pushing Back 404 Deadline for Non-Accelerated Filers

At next Wednesday's open Commission meeting, the SEC will consider pushing back the 404 deadline so that companies that are not accelerated filers then can wait to comply with the internal control over financial reporting requirements until their first fiscal year ending on or after July 15, 2007. Not sure how I missed that item for yesterday's blog. Must be working too hard...

During our October 3rd webcast - "Internal Controls Update: The Big 4 Speak" - there will be discussion about what non-accelerated filers should still be doing in the 404 area despite the pushback of the internal controls deadline.

FASB to Issue Guidance on Option Grant Date Issue

On Wednesday, the FASB met to discuss providing further guidance on the determination of grant dates under FAS 123(R). The FASB decided to treat the date the board approves an award as the grant date, provided that:

• employees are not able to negotiate the terms of their grants after the board has approved them, and

• the terms of the grants are communicated to employees within a reasonable period of time. The determination of what is considered a reasonable period of time depends on the circumstances of the grant (e.g., the size of the company, number of grant recipients, and other considerations)

The FASB staff has proposed a FASB Staff Position, subject to a 15-day comment period. The FASB’s intention is to issue the final FSP in time for companies that are required to adopt FAS 123(R) on July 1, 2005 to rely on it in their first quarter financial statements.

Listen to the audio archive of the FASB meeting (see agenda item #4) and read the Board Meeting Handout (see pages 12-13). More information on this issue, along the NASPP comment letter and memos from leading practitioners, is included in the NASPP's full analysis of this development.

Evelyn Y. Davis Update: Fourth Time A Charm?

According to this article, Evelyn Y. Davis, 76, recently got married to someone 26 years her junior. For those of us that have dealt with Evelyn, here's wishing her the best on her fourth marriage (and maybe now she will be too busy to push her shareholder proponent agenda).

Here is an excerpt from the article: "He sent me three fan letters," said Davis in a phone interview Thursday from her home in Washington's Watergate building. "I was very reluctant to meet him at first, because I get so many fan letters from all over the country, and I never answer them. But what caught my eye was that he was in my neighborhood." For more on Evelyn, here is an interview with her from a few years back.

SEC Formalizes Hurricane Relief

Yesterday, the SEC issued an exemptive order that provides an array of relief for companies directly impacted by Hurricane Katrina, including relief related to periodic reporting deadlines, proxy delivery obligations and S-3 eligibility, among other items.

What's In Your Press Release?

From Lyle Robert's "The 10b-5 Daily Blog": The content of the disclosure that led to a stock price drop continues to be the focal point of post-Dura loss causation analyses. In Sekuk Global Enterprises v. KVH Industries, Inc., 2005 WL 1924202 (D.R.I. Aug. 11, 2005), the plaintiffs claimed that the company engaged in improper accounting practices related to the sales of a key product. The plaintiffs' alleged losses occurred after the company issued a press release announcing reduced quarterly revenue based on lower than expected sales.

In their motion to dismiss, the defendants argued that "the press release and the resulting drop in the price of KVH common stock fails to establish loss caustion because the press release does not attribute the declining revenue to the sales of the [key product]." The court found, however, that the key product was a possible contributor to the lower than expected sales, even if it was not expressly discussed in the press release. Accordingly, the plaintiffs adequately plead loss causation.

Holding: Motion to dismiss denied (except for the claims based on a limited number of inactionable statements).

September 15, 2005

SEC to Propose Changes to "Accelerated Filer" Definition and Phase-In Dates

New SEC Chair Chris Cox has his first open Commission meeting scheduled for next Wednesday, September 21st at 10 am eastern. It's always interesting to observe the style of how a new Chair presides over Commission meetings.

Among the items on the agenda is a proposal to narrow the definition of "accelerated filer" to include reporting companies with a public float of $700 million or more and a proposal to ease some of the current restrictions on the exit of companies from accelerated filer status.

In addition, the Commission will consider amending the final phase-in of the Form 10-K and Form 10-Q accelerated filing deadlines that are scheduled to take effect next year. As of now, accelerated filers are scheduled to become subject to a 60-day filing deadline for their Form 10-K filed for fiscal years ending on or after December 15, 2005, and a 35-day deadline for the three subsequently filed Form 10-Qs - that will be proposed to be changed, but their is no indication yet what that proposal will be.

The SEC: Cracks the Top Five!

According to this press release, the SEC is now in the Top Five of federal agencies to work for (I guess FEMA has dropped a few notches). The ranking of federal agencies is based on a scoring system explained on this "Best Places to Work" site.

I loved working on the SEC Staff - only thing holding me back from a third tour of duty is the lack of a cafeteria - but I have to admit the competition isn't too strong for the SEC. Ever been in the ancient building that houses the Department of Agriculture? It's spooky; you can hear a pin drop - no phones ringing anywhere.

Amendments to the NASD's "New Issue" Rule

As noted on yesterday's webcast, the SEC approved a NASD rule filing on August 4th that amends the “new issue” rule, Rule 2790. The adoption of these amendments follows the 2004 implementation of the New Issue Rule, which itself was a successor to the “Hot Issue” interpretation.

The amendments to Rule 2790 become effective this Monday, September 19th. Here is a Shearman & Sterling memo that describes the amended rule in more detail.

The Most Bizarre Registration Statement of All-Time?

Tearing a page from "Ripley's Believe It or Not," the SEC has scheduled an administrative law judge hearing under Section 8(d) to take action regarding this fraudulent registration statement filed by Apollo Publication Corp.

The only reason this isn't an immediate emergency injunctive action in federal court is because the person who filed the registration statement appears to be insane - no one could possibly take it seriously. As noted in this article, Apollo's board allegedly includes former Presidents Bush and Jimmy Carter, along with numerous other past and present world leaders. Overall, it reads like a pro se complaint from an insane prisoner.

If I were to file a bogus registration statement, I would go with a little more humor - by including Captain Kangaroo, George Costanza, Wonder Woman and Colonel Klink on my board. One member emailed me about how easy it must be to procure a set of EDGAR codes to perpetuate a scheme like this - but note that there will be some very real consequences for this tomfoolery. So please don't try this at home...

September 14, 2005

SEC Issues 14 FAQs on Transitional '33 Act Reform Issues

As I blogged yesterday, the SEC has issued the much-anticipated transitional guidance about '33 Act reform in the form of 14 FAQs.

So What Should You Do Now With Your Outstanding Shelfs?

Transitional issues for all types of companies - such as "what you should do now with your outstanding shelfs" - will be covered during next Thursday's webcast. For example, according to FAQ 5, WKSI companies can't convert their outstanding shelfs to an automatic shelf via post-effective amendment (but they can carry over unused filing fees to a new shelf). So what should WKSIs do now? Tune in next Thursday to find out.

Hurricane Katrina: Sample Disclosures About the Impact and Thoughts on MAC Clauses

In the "Hot Box" on the home page of, we have posted a compilation of excerpts from recent SEC filings regarding the impact of Hurricane Katrina. The Hurricane's impact will extend well beyond the Gulf Coast as indicated by many of the samples.

On the blog, Cliff Neimeth of Greenberg Traurig provides some interesting thoughts about the "material adverse change" clause and other aspects of the pending Capital One/Hibernia merger.

Understanding Cooperative Conversions

Recently, a number of cooperative associations have converted into publicly-traded companies. Having worked on similar types of deals many moons ago myself (eg. conversion of mutual savings banks into public companies), I recognize that it takes special expertise to get these complicated deals done.

Learn more about cooperative association conversions - including potential pitfalls to avoid - in this text interview with Scott Ortwein and Harvey Hill of Alston & Bird LLP.

September 13, 2005

Doing an IPO After the ’33 Act Reform and in Today's Market

Join us for tomorrow's webcast - "Drilling Down: Doing an IPO After the ’33 Act Reform" - featuring Justin Bastian of Morrison & Foerster; Steve Bochner of Wilson Sonsini, Goodrich & Rosati; and Michael Wishart of Goldman Sachs. With the help of a banker on this panel, there will be a discussion on recent developments in the IPO market beyond just the impact of the ’33 Act Reform.

SEC Posts '33 Act Reform Q&A

Today, the SEC Staff posted the much-anticipated transitional Q&A guidance on the '33 Act reform.

Fidelity Votes Against Board Over Executive Pay

As an indication that executive pay will play a prominent role in the majority vote movement, Fidelity Investments opposed the reelection of the board at Clear Channel Communications after the company renewed about $90 million in severance arrangements for the Chair, CEO and CFO.

This action came to light when Fidelity recently disclosed in one of its many Form N-PXs that its mutual funds withheld their votes for all 10 directors at the company's annual meeting in April (starting last year, mutual funds are required to annually disclose their voting records). Fidelity ranked as the largest shareholder at the time with a 15.5% stake. This resulted in at least 18% of the total votes being withheld for each director.

Many of you will recall that it was not too long ago that Fidelity traditionally sided with management when casting ballots - here they opposed management even though ISS had recommended votes in favor of 9 of the 10 Clear Channel directors!

Fidelity withheld its support for the Clear Channel board after the company renewed employment agreements in March with the founder (who is the board chair) and his sons (who serve as the CEO and CFO). The new agreements retained provisions from their former contracts that provide each officer with a cash severance payment of 7 times their base salary and highest annual bonus during the prior three years, as well as 1 million options. Under its voting policy, Fidelity casts its ballots against directors who permit severance payments exceeding three times annual salary and bonus without obtaining a shareholder vote.

Fidelity also administers Clear Channel's 401(k) retirement plan - at least three of the funds offered in the Clear Channel 401(k) plan withheld votes for the company's board. In other words, Clear Channel employees who invested in these funds ended up siding against their own company's board. The company was not aware of Fidelity's vote until published reports came out last week.

Besides this obvious lack of communcation between the company and its largest shareholder, there are enough lessons learned in this story to fill up my blog for a week. I will save it for the many experts, who are better qualified than me, who will speak at the "2nd Annual Executive Compensation Conference." For those of you planning to attend live in Chicago - rather than by video webcast - I understand that the hotel is nearly sold out, so you might want to reserve rooms now.

September 12, 2005

SEC's First Thoughts on Option Valuation Through Market Instruments

On Friday, the SEC issued a press release with a statement by Chairman Cox regarding the use of market instruments to value employee stock options, along with a Statement from the SEC's Chief Accountant and an Office of Economic Analysis Memo.

According to this NY Times article on Saturday, the SEC rejected Cisco’s proposal to issue exchange-traded employee options - but stated that it was open to other ideas about how market instruments could be used to value employee options (and the SEC's OEA even suggested two alternatives, albeit the SEC's Chief Accountant expressed skepticism about whether companies would quickly embrace them).

In the article, the Cisco CFO is quoted as saying that the company would continue to explore ways of using market instruments to value its options. Cisco's dead proposal received investor backlash because it was seen as an attempt to avoid disclosing the true value of options in its financials.

At the NASPP's "13th Annual Conference," there will be eight panels - plus an address by the FASB Chair Bob Herz - that will deal with option expensing. Plus the NASPP just announced that it has enhanced its "Option Expensing Portal" to include a FAS 123(R) Q&A Forum that is manned by a special 123(R) Task Force.

Disney Case Appealed

Last week, Milberg Weiss Bershad & Schulman filed a notice of appeal with the Delaware Supreme Court over the August 9th opinion by Delaware Chancery Chancellor William Chandler that the Disney board did not breach its fiduciary duties over the firing of Ovitz and paying a severance package of $130 for the "non-cause" termination.

On, we continue to post oodles of memos analyzing the Disney decision - one of my favorites is this Davis Polk memo.

More on the Meaning of the Federal Court Dismissing the SEC’s Reg FD Lawsuit Against Siebel

In this podcast, Stan Keller, Partner of Palmer & Dodge, explains the implications of the federal court dismissing the SEC's Regulation FD lawsuit against Siebel Systems and two of its officers, including:

- What is the background of the Siebel case?
- What did Judge Daniels decide in dismissing the SEC’s lawsuit?
- What is the meaning of this case for company spokespersons?
- Do you think the SEC will appeal the case?

September 9, 2005

Corp Fin's '33 Act Reform Hotline

Many thanks to Robyn Manos and Heather Maples - the dynamic duo in Corp Fin's Office of Chief Counsel that will be handling interpretive questions on the '33 Act reform - for joining yesterday's webcast: "Drilling Down: Doing a WKSI Offering After the ’33 Act Reform." Of course, Jack Bostleman, John Huber and David Martin did a great job of trying to predict and analyze what WKSI deals will look like after the December 1st effective date. The audio archive of the webcast is available now - a transcript won't be ready until late next week at the earliest.

You can direct any interpretive questions to Robyn and Heather via the special '33 Act reform hotline that Corp Fin has established at 202.551.3200.

More on SEC v. Smyth

Following up on Jay Dubow's "Future of the SEC's Civil Injunction Authority" podcast, a member had this question: Are "obey the laws" injunctions issued by the SEC for companies residing in the 11th circuit still enforceable?

Jay responds: "Yes, injunctions within the 11th Circuit are enforceable until a court orders them otherwise. Even if the court in Georgia, on remand, issues an order that the specific injunction is not enforceable - until the 11th Circuit issues an order that is not dicta to the contrary - one should assume that other such injunctions are still enforceable."

Changes to ISS' CGQ Rating Criteria

Effective Monday, the most recent changes to ISS's CGQ rating criteria will be used to calculate a company's CGQ governance rating. These changes were announced in July.

We have updated our "Corporate Governance Ratings Comparison" chart for these changes - and our "Governance Ratings" Practice Area includes this 11-page memo and 21-page PowerPoint presentation from ISS that explains the changes (also, ISS held a webcast on its changes a few months back and a transcript is available of that webcast - you must register to receive it, but it's free).

Thoughts About Hurricane Katrina

I have endlessly debated in my head whether it was appropriate for me to blog about this terrible tragedy that has impacted all of us; some more than most of course. Even though I will continue to focus on our professional life, I just wanted you to know that I have been affected too and thanks to those members who have shared personal stories and urged me to help (here is a basic list of links). We have donated to the Red Cross as well as more directly to others in need that we know personally or through friends.

I do hope the Administration and the applicable governments now get their act together and spend time helping those that need it rather than wasting resources avoiding blame. The recent stories about how the media is being kept at arms' length from reporting on what is happening in New Orleans is disturbing to me. The First Amendment is the bedrock of our society.

There are many blogs and other resources to help us understand what has happened and what is happening. I enjoy NBC anchor Brian William's blog for unbiased coverage and the Technorati blog search tool is useful to find other voices.

September 8, 2005

Developing Delegations of Authority

Check out our new "Delegations of Authority" Practice Area, complete with several sample delegations of authority to enter into new contracts/arrangements and this new podcast with Kay Bradley, Assistant General Counsel of Sabre Holdings Corporation, who explains how to develop and implement standing delegations of authority, including:

- Are there "best practices" for standing delegations of authority? If not, what factors impact the type of delegations a company should adopt?
- How does Section 404 of Sarbanes-Oxley regarding internal controls impact delegation practices?
- How do the standing delegations look like at your company?
- What issues should companies consider as they develop their own standing delegations?

SEC Chief Accountant to Leave

Yesterday, SEC Chief Accountant Don Nicolaisen announced he will leave the Commission in October to return to the private sector after two years in the job. Here is the press release. Not surprising given that Don has a new boss; more of these senior staff positions likely to become open soon.

Closure for the Disclosure Document Folding Controversy

Following up on my blog from July, as noted in this press release, it appears that the National Credit Union Administration has settled its dispute over the folding of disclosure documents. From what I hear, this settlement came after a magistrate determined that the NCUA had acted arbitrarily and capriciously in refusing to certify a vote of the credit union members regarding a mutual-to-stock conversion.

September 7, 2005

Drilling Down: Doing a WKSI Offering After the ’33 Act Reform

Join us tomorrow for the webcast - "Drilling Down: Doing a WKSI Offering After the ’33 Act Reform" - featuring Jack Bostelman of Sullivan & Cromwell; John Huber of Latham & Watkins; David Martin of Covington & Burling.

Prepare by reviewing the vast amount of materials available in "Securities Act Reform Memos" - in particular, look at the memos provided by the panelists' firms:

- Sullivan & Cromwell's 110-page memo (with some fabulous charts at the back) - or this shorter S&C memo
- Latham & Watkins' memo (nice creative title - Christmas in July)
- Covington & Burling's memo (like the usable Q&A boxes)

The Future of the SEC’s Civil Injunction Authority

Lots of talk still about the recent SEC v. Smyth case I blogged about last week. In this podcast, Jay Dubow, a Partner with Wolf, Block, Schorr and Solis-Cohen and former SEC Enforcement Staffer, analyzes the importance and ramifications of this 11th circuit decision, including:

- What happened in the recent 11th Circuit decision in SEC v. Smyth?
- How does the decision question the enforceability of the SEC's civil injunctions?
- How is this decision different from decisions in other courts?
- What do you think the SEC will do in response to SEC v. Smyth?

September E-Minders is Up!

We have posted the September E-Minders for your reading pleasure. It's amazing how much change still occurs on a monthly basis. That's gotta end at some point, right?

Comment Letters on Option Expensing

The NASPP has submitted a comment letter to the FASB regarding grant dates (see this blog regarding why). I understand that the Society of Corporate Secretaries & Governance Professionals and other organizations will also be submitting letters on this topic soon.

On an unrelated note, the Council of Institutional Investors has submitted a letter to Thomson Financial regarding the use of option expenses in consensus estimates. Apparently, Thomson Financial is considering providing two consensus estimates, one including and one excluding option expense - and the CII wishes that Thomson Financial only provide consensus estimates including option expense (after an initial transition period) as part of Thomson's widely-followed First Call estimates.

September 6, 2005

Federal Court Finds Siebel Did Not Violate Regulation FD

Last Thursday, on a summary judgment motion, Judge Daniels of the United States District Court for the Southern District of New York dismissed the SEC's Regulation FD lawsuit against Siebel Systems and two of its officers. This is the first federal court to interpret Regulation FD. Here is a copy of the court opinion.

Back in July 2004, the SEC filed charged Siebel Systems with its second violation of Regulation FD. The SEC also charged Siebel Systems' CFO and IR Director with criminally aiding and abetting the company's violation due to their role in disclosing "material, nonpublic information" about the sales pipeline during two separate private meetings with members of the investment community.

The disclosures were alleged to be materially different from prior public statements made by the company in analyst conference calls and at a conference. In his opinion, Judge Daniels disagreed with the SEC's conclusion that the CFO's private statements were either material or non-public, a narrow conclusion that is limited to the facts alleged in this case - and the Judge was not happy with the way that the SEC parsed "every particular word used in the statement, including the tense of verbs and the general syntax of each sentence. No support for such an approach can be found in Regulation FD itself, or in the Proposing and Adopting Releases. Such an approach places an unreasonable burden on a company's management and spokespersons to become linguistic experts, or otherwise live in fear of violating Regulation FD should the words they use later be interpreted by the SEC as connoting even the slightest variance from the company's public statements."

The Judge refused to address some broader challenges to Regulation FD, such as whether it violated the First Amendment - and he dismissed the SEC's allegation regarding inadequate disclosure controls and procedures saying that the complaint had not cited sufficient facts to support this cause of action (other than the claimed violation of Regulation FD). It is not yet known whether the SEC will appeal the case.

What Does the Siebel Case Mean?

First of all, it's important to remember that Regulation FD remains a valid rule - and the SEC likely will continue to look for instances of selective disclosure. The best way to avoid a Regulation FD problem is to limit private discussions of material information and to keep any such discussions entirely consistent with what was already said publicly. Judge Daniels even acknowledged that Regulation FD could be violated by non-verbal communications. For example, tacit communications such as a wink, nod, or a thumbs-up or -down gesture can trigger a violation.

On the other hand, Judge Daniels strongly suggests that courts are not going to use Regulation FD as a trap for the unwary. In particular, it is unlikely that the courts are not going to second-guess close calls about the materiality of oral disclosure. The Judge noted that the SEC itself has publicly commented that in order for an incorrect assessment of materiality to violate Regulation FD, the conclusion must represent an extreme departure from standards of reasonable care - note that the standard of care may be higher for written disclosure or for prepared remarks compared to spontaneous speech, such as in a Q&A session.

Stan Keller notes that this is an important decision that brings Regulation FD back to where it was supposed to be - and holds the SEC to the promises that were made as to its application. In his opinion, Judge Daniels sends a clear message that enforcement of Regulation FD should occur only in clear cases, as the SEC signaled when the rule was adopted. We will hear more from Stan on this topic soon - and we have posted some law firm memos analyzing the case in our "Regulation FD" Practice Area.

SEC Provides Hurricane Katrina Relief

To help those in need, the SEC has established both telephone and e-mail hotlines to provide immediate responses to questions or to hear from those that want to advise the SEC of their needs, such as relief from the SEC's reporting and delivery mandates. In fact, the SEC plans to consult with public companies based in the disaster area, to ensure that its mandates do not interfere with any response and recovery.

If you have such a need, telephone calls should be directed to (202) 551-3300 - and e-mail should be directed to

September 1, 2005

More on Reg FD at the Movies

Regarding my apology yesterday for a perceived gaffe, my alter ego here - Keith Bishop - thinks that I have been too hard on myself. Keith says, "I had understood that the issue was screenings to analysts and that is what you wrote in your blog. If the pre-screening was available exclusively to analysts, then that element of Regulation FD would seem to have been met. (In fact, I was inferring, perhaps incorrectly, that the investigation involved pre-screenings given to analysts exclusively.) If others were invited to pre-screen the movie with the analysts, then wouldn't the issue be whether the presence of the non-FD people resulted in simultaneous public disclosure?"

Keith goes on to note that "even if one gets past the issues of whether there has been (1) disclosure of information to Ref FD listed people; and (2) no simultaneous public disclosure, then one still must deal with the question of whether the pre-screening resulted in disclosure of material, non-public information about the issuer or its securities. I doubt that the SEC could reasonably take the position that it is the movie concept, my guess is that this has been broadly disseminated in trailers and other promotions. Thus, it would hardly fit within the meaning of nonpublic. If it is the actual quality of the movie as revealed by the screening - isn't this a judgment formed by the analyst and not the disclosure of non-public information? How can the issuer disclose to the analyst what the analyst thinks about how a movie will do?"

The NYSE CEO "Agenda"

Recently, the NYSE released its first annual NYSE CEO Agenda. This "agenda" is based on a survey of the CEOs serving at 100 large companies - and states that 42% of the respondent CEOs said overregulation tops the list of challenges over the next five years.

Liability Issues for Directors of Insurance/Financial Companies Today

In this podcast, Jim Brown, President of Risk Consultants, LLC and former Louisiana Insurance Commissioner, explains how directors of insurance and financial-oriented companies face increasing liability exposure today, including:

- Explain your controversial career in Louisiana as Insurance Commissioner, including the problems you faced and the number of companies you had to shut down.
- What kind of responsibility and exposure do directors of financial institutions, insurance, banking and the like, have under new state and federal laws?
- How do you find the insurance business climate in the U. S. today? Are there numerous foreign investors? How does this climate affect the cost of insurance to business in the US?

I taped this podcast with Jim late last week before the hurricane hit and we all hope he is alright.