December 30, 2005

Executive Pay to be New Year's Hot Topic; Investors' Outrage Over Excessive Pay Packages Has Reached Boiling Point

Happy New Year! I close the year with yesterday's Financial Times front page article:

"Investors plan to make executive pay the number one issue at companies' annual meetings this spring. New evidence suggesting that executive pay growth is accelerating, coupled with outrage at big severance packages for some bosses, has pushed the issue to the top of investors' concerns.

The AFSCME union, whose pension fund is worth Dollars 800m, is calling for UK-style votes by shareholders on executive pay at the 2006 annual meetings of US Bancorp, Merrill Lynch, Bank of America, Home Depot and Countrywide Financial.

The union claims to have identified excessive compensation at these companies and warns it might try to oust directors on their compensation committees if they do not take steps to align bosses' pay with company performance.

Alyssa Ellsworth, managing director of the Councilof Institutional Investors, whose members are pension funds with assets worth more than Dollars 3,000bn, said executive compensation would be the "headline issue" in 2006.

The median total compensation of chief executives grew by 30 per cent in 2004, according to a survey of 1,522 CEOs by the Corporate Library, a corporate governance watchdog. That increase compares with a median rise of 15 per cent in 2003 and 10 per cent in 2002.

The library concluded that of the 10 CEOs who enjoyed the biggest pay growth in 2004, only five could justify their increases based on the companies' performance. Total compensation includes restricted stock awards and profits from exercising share options, which drove the 30 per cent increase.

Investors' anger about executive pay boiled over this year at Morgan Stanley, the investment bank. Shareholders were angry that Phillip Purcell, the former chief executive who resigned in June, secured a 45 per cent pay rise in 2004, even though the firm's net income increased by only 18 per cent. Anger turned to outrage when he departed with a Dollars 44m severance deal plus Dollars 62m in equity compensation and pension benefits.

William McDonough, former president of the New York Federal Reserve Bank, said last month "the American people are still very unhappy about the level of executive compensation" and warned of the risk that lawmakers would feel obliged to intervene. He said the one thing the public did not understand was "paying for failure".

The Securities and Ex-change Commission, meanwhile, has been clamping down on breaches of its disclosure rules on executive pay. Last year the chief US financial regulator accused GE of failing from 1997 to 2002 to accurately outline the benefits the company would provide Jack Welch, its chief executive, after his retirement in 2001.

The SEC found that Mr Welch received benefits worth Dollars 2.5m in 2002, including use of the GE aircraft, an Dollars 11m New York apartment, a limousine, a Mercedes Benz car, offices and a personal assistant.

GE reached a post-retirement consulting agreement with Mr Welch in 1996, but it only became public during divorce proceedings with his second wife in 2002.

The SEC said GE had previously limited its description of Mr Welch's retirement benefits to statements that he would have "lifetime access to company facilities and services comparable to those currently made available to him by the company".

But while the SEC has stepped up enforcement of its disclosure rules on executive pay, they have not kept pace with changing forms of compensation.

A proposal to overhaul the rules will be the first big test for Christopher Cox, who became SEC chairman last August after pledging to stay true to the regulator's mission to protect investors' interests. But he risks incurring the wrath of chief executives by insisting on better disclosure of compensation.

Bosses are likely to be nervous about comments he made shortly after becoming SEC chairman that investors had to have sufficient information about executive pay to be able to "discipline" cases of "apparent excess".

In a speech to business leaders in New York this month, he sought to reassure people the SEC did not want to "interfere in salary decisions" or to "cap salaries".

The SEC has instead been studying what additional information should be provided to investors about executive pay. It is considering requiring companies to make valuations of bosses' defined benefit pensions and stock options, potentially huge sources of compensation.

William Donaldson, Mr Cox's predecessor, hoped that better disclosure of executive pay would help curb examples of big compensation packages at troubled or failing companies.

Mr Cox told the FT it was the job of boards of directors to align "executive pay with executive performance", and that the SEC proposal "would not directly help with that aspect".

However, he said the proposal would "assist in providing industry-wide competitive information about executive compensation levels with greater detail than is presently the case."

December 29, 2005

Do the SEC's Decisions Trump Sanctions Imposed by SROs?

Recently, I blogged about the battle between Delaware law and the federal securities law. Now, a development on when the NASD clashes with the SEC. [Perhaps next - what if the Mighty Thor met Conan the Barbarian!]

Here is an excerpt from a Registered Rep article regarding a December 13th opinion from the DC federal court of appeals:

"For the first time in its 68 years as a self-regulatory organization, the National Association of Securities Dealers sued the Securities and Exchange Commission over a right it was never granted. Guess what? It lost.

The right in question was to seek judicial review of an SEC decision reversing disciplinary action taken by the NASD and in barely concealed astonishment, the presiding Senior Circuit Judge Edwards said, “No court has ever suggested that such a review was possible.” Moreover, he continued, “we can find no case” where the NASD had ever asked for a review and “no reason to allow it do so now.”

'Simply put,' the judge said later on in his analysis, 'the NASD appears before this court as a disgruntled first-level tribunal, complaining because it has been reversed by a higher tribunal.'"

By the way, contrary to the article, the NASD has previously appealed an SEC decision. That appeal related to Instinet - see NASD v SEC, 801 F.2d 1415 (DC Cir. 1986).

Nasdaq's Public Reprimand Letters

The SEC recently approved a rule filing from Nasdaq - on an immediately effective basis - that allows Nasdaq to issue a public reprimand letter if it has determined that a listed company has violated a corporate governance or notification listing standard (other than one required by Rule 10A-3 of the '34 Act). This is a much lower level sanction compared to delisting. A company that receives a public reprimand letter is required to publicly disclose it within 4 business days.

In determining whether to issue a public reprimand letter, Nasdaq will consider these factors:

- whether the violation was inadvertent,
- whether the violation materially adversely affected shareholders’ interests,
- whether the violation has been cured,
- whether the issuer reasonably relied on an independent advisor, and
- whether the issuer has demonstrated a pattern of violations.

Footnote 8 of the SEC's release provides examples of circumstances under which Nasdaq might determine to issue a public reprimand letter, including:

- a company engaged in a pattern of failing to provide advance notice of press releases to the Nasdaq StockWatch department;

- a company with a December 31 fiscal year end has not held an annual meeting for the prior year as of early January, but the company has filed a proxy to hold the meeting in the next few weeks; or

- an independent director resigned from the company and was replaced with another independent director, but the company did not provide prior notice to Nasdaq.

More on Auditor Liability Caps

A number of members weighed in on my recent blog on auditor liability caps. For more commentary, check out Jack Ciesielski's AAO Weblog (see the posts from Jack on December 5th and earlier) and this Bloomberg article. It will be interesting to see if this issue has "legs" and grabs the attention of the PCAOB and the SEC.

December 28, 2005

And Even More on the Internal Affairs Doctrine

Following up on several recent blogs, here is another recent internal affairs doctrine case: Grosset v. Wenaas. This October opinion was issued by the same division of the California Court of Appeal that issued the opinion in Friese v. Superior Court. However, only one of the three justices (McDonald) was involved in both opinions.

The Grosset decision tackles the question of: whether Delaware or California law applies to the question of standing to maintain a derivative suit by a stockholder of a Delaware corporation that was headquartered in California. The Court applied Delaware law, citing with approval the Delaware Supreme Court's decision in VantagePoint v. Examen. The losing plaintiff has petitioned for a review by the California Supreme Court.

If the Supreme Court does grant the review, the opinion of the Court of Appeal will not be considered published (per Rule 976(d)(1), Cal. Rules of Court). Generally, the Supreme Court has 60 days to decide whether to grant review. Thanks to Keith Bishop once again!

Happy Holidays - and One More Thing on 409A

From Mike Melbinger's Compensation Blog: "On December 21, President Bush signed The Gulf Opportunity Zone Act (H.R. 4440). Although primarily a package of tax incentives and relief measures for individuals and businesses in the gulf region affected by hurricanes Rita and Wilma, the bill also contains revisions to the Code Section 409A rules pertaining to foreign rabbi trusts.

Section 409A(b) imposes immediate taxation, the 20% penalty and interest if deferred compensation accrues in a "foreign-situs" trust or other arrangement that the IRS deems equivalent to such a trust, even if the assets are subject to the claims of the employer's creditors (with an exception if all employees perform "substantially all" services related to such deferred compensation in the jurisdiction of the trust). Even if the underlying plan terms otherwise conform to the requirements of Section 409A, holding assets in a foreign trust results in immediate taxation and penalties unless the exception applies.

The effect of this change is to eliminate any grandfather relief for amounts accrued prior to December 31, 2004. If you have a foreign situs trust for non-qualified plan asets, you need to act ASAP to avoid taxation. Ho, ho , ho.

Five Gap Executives to Exchange Stock Options

Speaking of 409A, it looks like The Gap recently made an option exchange in reaction to its application. Here is an excerpt from Saturday's LA Times" "Gap Inc. said Friday that Chief Executive Paul Pressler and four other executives had accepted the retailer's offer to exchange their stock options for ones that will result in lower taxes for the employees. As part of the swap, Gap will pay the five as much as $10.1 million.

In a regulatory filing, Gap said it was making the payments and replacing the old stock options because of tax rules adopted since the San Francisco-based company negotiated compensation packages for Pressler and the other executives. Stock options give the holder the right to buy or sell shares at a specified price by a set date.

To lure Pressler from his position as head of the theme park division at Walt Disney Co. in 2002, Gap gave him 1.1 million stock options priced at $5.92 a share, well below the stock's market value at that time. Under the new tax rules, the executives would have incurred an immediate tax liability on the difference between the exercise price and market price, plus an additional 20% tax on that unrealized income.

To reduce the tax hit, Pressler's stock options will be replaced with another batch of 1.1 million options carrying an exercise price of $11.83 a share — a price at or above Gap's market value on the day of his hiring, the company said.

Gap compensated Pressler for the loss of the lower-priced options by paying him $2.36 million this year and as much as $4.14 million in the future.

The total payment of $6.5 million translates into $5.91 a share, the difference between the exercise prices of Pressler's old and new options."

On the NASPP's website, there are hordes of memos regarding what you should be thinking about now to deal with 409A consequences, including option strategies.

Holiday Hijinks

My wife sent me this short video that spoofs "The Chronicles of Narnia." It didn't quite send me over the edge - but reminded me of my recent 15 seconds of fame when I was on the local news for a "man on the street" piece when Narnia opened. I was asked to comment on the religious undertones of the movie - before I even went in to watch it with my kids. I said there might be some, but that wasn't why I went to see the movie. Apparently that was sophisticated enough for the network news...

December 27, 2005

Coke Adopts "Shareholder Approval of Severance Arrangements" Policy

Late last week, it was reported that Coca-Cola has adopted a policy of obtaining shareholder approval for its severance arrangements with senior executives if the payout exceeds 2.99 times the sum of the executive's annual base salary and bonus. The topic of excessive severance pay angers investors more than any other compensation issue - and the recent House bill would require shareholder approval of all severance arrangements for officers.

According to this WSJ article, "Coke spokesman Charlie Sutlive said the company's board approved the policy in October. It was first publicized yesterday by the International Brotherhood of Teamsters General Fund, which, as a Coke shareholder, unsuccessfully proposed a similar policy at Coke's annual meeting in April.

Coke's board opposed the proposal at the time. However, the measure earned support of roughly 41% of shares cast, indicating strong interest among investors.

"We believe this new policy both responds to and is in the best interests of shareowners," Mr. Sutlive said. He said the board and its compensation committee adopted the policy after noting "the sentiment of many shareowners," including the Teamsters.

Mr. Sutlive said the new policy reflects the board's practice of reviewing corporate-governance policies and improving them where warranted. In this case, he said, the board's compensation committee recommended the policy as a way to add controls while continuing to allow the board to render "prudent judgments."

The move by Coke comes amid some criticism of executive pay. Steven Hall, a New York-based compensation consultant, said measures such as the one Coke adopted could serve to limit severance deals going forward.

Coke was criticized for the $17.7 million separation package it awarded to former Chief Executive M. Douglas Ivester, who stepped aside in early 2000 after about two years in the job. Steven J. Heyer, who left as Coke's No. 2 executive in 2004, received a severance package of at least $24 million after three years on the job.

Douglas Daft, who stepped down as Coke chairman and CEO in June 2004, received 200,000 restricted shares of Coke, valued at $8.8 million at the time."

In Sunday's NY Times, Gretchen Morgenson wrote about this development in her column, including quotes from NASPP Chair Jesse Brill and Mike Kesner of Deloitte Consulting, who have spoken on this topic at our annual compensation conferences. Learn more about how to handle severance pay in our "Severance Arrangements" Practice Area on CompensationStandards.com.

SEC Posts Proposing Release for Non-US Company Deregistration

On Friday, the SEC posted the proposing release, under which it would be easier for foreign private issuers to deregister and terminate their SEC reporting obligations. European organizations have been urging this response to a perceived “Hotel California” problem for several years.

However, it is predicted that only a few dozen companies would take advantage of the new rules if adopted. On the other hand, these rules could curtail this problem: many companies have decided to list on the London Stock Exchange rather than a US exchange over the past year. So the rule changes might entice non-US companies to list on the NYSE and Nasdaq again.

Under the proposal, a foreign company that is listed in its home country would be able to terminate the SEC registration of its shares if it has been registered for two years, has filed all required SEC reports, has not offered its securities in the U.S. market for a year (including in a Rule 144A transaction or other private placement) and meets one of two quantitative tests:

• The first test, which is available to all companies, requires a deregistering company to have 5% or less of its public float held by U.S. residents.

• The second test, available only to well known seasoned issuers (generally companies with a market capitalization of at least $700 million) would increase this threshold to 10% for companies that have 5% or less of their worldwide trading volume in the United States.

SEC Finally Issues PCAOB Proposal re: Reporting on Previous Material Weaknesses

Late last week, the SEC finally issued the PCAOB's proposed Auditing Standard No. 4 regarding reporting on whether a previously reported material weakness continues to exist. Comments are due to the SEC 21 days from publication in the Federal Register. The PCAOB originally issued AS-4 way back in July - AS-4 will not become effective until approved by the SEC.

Here is a recap of AS-4 from Mike Holliday: "AS-4 would be for a voluntary engagement at the request of the company, to enable the auditor to express an opinion on whether a previously reported material weakness in internal control has been eliminated. It would apply only where the material weakness has been identified in an auditor's previous report on internal control issued pursuant to Auditing Standard No. 2. AS-4 would permit reporting on the elimination before the next AS-2 audit assessment of internal control, which is normally as of the fiscal year-end. (Additional requirements would apply to a successor auditor.)

Because the audit of financial statements and AS-2 audit of Internal Control normally occur only as of fiscal year-end, in the usual case AS-4 normally would be limited to material weaknesses identified in the annual assessment process. NOTE that in the usual case where the audit of financial statements occurs only at fiscal year-end, AS-4 would not apply to a weakness discovered during an interim period and eliminated in an interim period prior to the next annual assessment -- for example, a weakness identified in the second quarter and eliminated during the third quarter would not be covered.

One of the main comments of investors to the PCAOB, in response to the March 31, 2005 request for comments, was to allow auditor reporting on material weaknesses identified subsequent to the company's most recent annual assessment of internal control over financial reporting. The PCAOB did not accept that comment and retained the limitation to material weaknesses previously reported by an auditor in an AS-2 audit of internal control in conjunction with an audit of the financial statements.

December 22, 2005

SEC Posts Adopting Release for Accelerated Filer Definitions and Deadlines

Yesterday, the SEC posted the adopting release relating to the new accelerated filer definitions and deadlines.

The SEC found good cause to forego the normal 30-day waiting period for these new rules - and thus accelerated the effectiveness of them. If I understand Section III.D of the release correctly, all calendar year-end 10-Ks will need to include the check box to indicate whether the company is - or is not - a large accelerated filer (ie. LAF), even though the deadline for LAFs is the same 75-day period as it is for accelerated filers during '06.

In addition, the SEC applied the new exit test retroactively so that accelerated filers can exit this year based on their Q2 '05 float. This is noteworthy for some issuers that can take advantage and exit now, since I believe they can then skip the hassle of obtaining a 404 attestation until '07 (even if they filed their 404 attestation for their last fiscal year).

Going Dark and Going Private Transcript is Up!

We have posted the transcript for the popular DealLawyers.com webcast: "Going Private and Going Dark."

Contest Winner for Unclassified Category of Issuers!

Regarding my earlier blog on the lack of classification for a narrow group of issuers - the winner is "INECs," which stands for "issuers, not elsewhere classified." The winning member is now driving around town in a '73 Beetle with our logo on the car doors...

Ode To A Fraud: A Humorous Take On SOX

From Scott Cohen of Compliance Week:

'Twas the night before Christmas and most of the hires
were back in their houses, in front of their fires.
All toasty inside as Northeasterlies blew,
naïve of my plan, yes, they hadn’t a clue.

And as the lights sparkled and as their kids knelt
to open their toys (or their Hanukkah gelt)
and gifts were exchanged—here a train, there a jewel—
and meals were devoured with dribble and drool,
I sat in my office, cast under a pall,
and patiently waited and watched the snow fall.
The lights had been dimmed and computers were down,
the hallways were barren—there wasn’t a sound.

Except for old Jasperhams, typically juiced,
who handled recycling the reams we produced,
had chosen that moment to tidy about.
I gently persuaded him: Get the hell out.

So through empty hallways as I did maraud,
I knew that the time had arrived for my fraud!
How perfect an eve of deceiving, I beamed,
a night for my swindle, my racket, my scheme!

Constructed in summer and fostered in fall,
‘Twas daring, audacious ... the nerve and the gall!
A plan based on timing, by my own admission,
advanced by the exodus from the Commission.

Yes, SEC veterans, bailing, they flew,
On Goldschmid! On Cutler! On Donaldson, too!
With turnover rampant, and chaos set in,
at last my deception, my scam, could begin!

My goal was pure evil, a dastardly deed,
a scandalous racket inspired by greed.
‘Twas really quite simple, but one that still shocks:
to undermine every provision of SOX.

Yes Sarbanes and Oxley, so feeble and dense,
who doled legislation that lacked common sense;
the thoughtless decrees that you morons inscribed
would soon in their whole be defaced and defiled!

I started out slowly, with SOX 301:
by snipping the lines on the phones, oh, what fun!
Thus blowers of whistles had no tool to sort
our audit committee their whining report.

I then took my pen to our corporate code
of suitable conduct (good God, what a load!),
deleted decrees that the board said: “Obey,”
and wrote down, “Just do what you want, it’s okay!”

Then freed of restrictions I rolled up my sleeves
and tackled more regulatory pet peeves.
For certification of SOX 302,
I crossed out my named and signed, “Winnie the Pooh.”

Pro forma financials all settled with GAAP,
I quickly unwound and made tricky to map.
For “plain English” filings (which I cannot speak)
I crafted disclosures in Yiddish and Greek.

“Good God, this is simple!” I cried of my prank
(I guess that it’s my MBA I should thank!).
So SOX 404, let us dent you as well:
I’ll simply erase key controls from Excel.

I then found some insider rules to evade:
A pension fund blackout within which to trade.
The “two-business day” rule was next to ignore:
I waited a fortnight to file my Form 4.

For bookkeeping rules that are overly stringent,
(off-balance sheet deals and arrangements contingent)
I structured some entities, all of them fake,
ensuring transparency now was opaque.

And measures impacting resources and risk
were moved from my hard drive to some floppy disk
unreadable by any modern machine:
derivative instruments ... ne’er to be seen!

Now SOX 407 was easy to shirk,
I breached that directive without any work:
Our “financial expert” knows nothing, dear Cox,
his audit skills can’t fill a cereal box!

And then my attention did finally turn
to those who created my awful heartburn:
My trusted accountants, my partners, my friends,
whose counsel and leadership gave me the bends.

So SOX 303: You be damned, I decreed!
and swiftly began to coerce and mislead,
manipulate, obfuscate (hey, it’s a waltz!)
let’s bribe, threat, and document things rude and false!

To frame my dear auditor, this was quite grand:
I gave him some non-audit work that was banned.
‘Cause, hey, how much profit must they really earn?
Why, I oughtta give them a “going concern.”

And wanting my auditor’s fall guaranteed,
the rules of the dreaded PCAOB
must be disobeyed (they are way too damn stringent):
more tax shelters, please, and commissions contingent!

And last on my list: Why my lawyers, I’ll call!
Confess everything, force a noisy withdrawal,
then phone all our analysts, give them a plea
of non-public facts that defy Reg. FD.

And looking back over the rules I had breached,
I smiled to myself ... I had finally reached
the goal to which my Christmas Eve had aspired:
Defying the rules that old Sarbox required.

Oh relish this moment, ye governance punks,
Like feisty Nell Minow and Bob A.G. Monks,
and Yerger and those who prod corporates with wit,
like Lally, Anne Simpson and Millstein and Pitt.

And governance “raters” who think you’re so blessed,
like proxy advisors (that’s you, ISS),
Glass Lewis and Moody’s, get back in your den,
I’ve just undermined the whole ICGN!

And as I strolled, grinning, outside in the lot,
I never did grasp the one thing I’d forgot:
That back in the office, and this was quite sloppy,
I’d dropped on the floor my diskette that was floppy.

And Jasperhams, damn you, old man! How you dare
conspired to capture my disk unaware,
and transfer to counsel a thorough report
that caused all the lawsuits that led to the court.

And though I claimed innocence (how I did plead!)
the jury said, “guilty,” the judge then agreed,
and though I had fainted and mustered some tears,
the sentencing judge gave me two hundred years.

And that’s why this winter—this cold, cold wet day—
I’m not on my yacht with my Klee and Monet,
but stuck in a cell wearing dirty striped shorts,
with Ebbers, Kozlowsi, Lay, Rigas and Swartz.

And thus, my dear friends, lies a lesson of risk:
That bastards like Jasperhams may find your disk.
So trust me: the law is a thing you can’t duck.
So Sarbanes and Oxley: I guess I’m the schmuck.

December 21, 2005

Overhaul Begins? Corp Fin's Telephone Interpretation Manual

Yesterday, Corp Fin added some phone interps on Regulation AB to its Telephone Interpretation Manual - as well as added a new index page. The Manual is now split into discrete PDF sections coded, rather than posted as a single file - although the five Manual supplements are still separate and not integrated yet.

The new look is nice, but I am bummed that the sections are no longer alpha-numbered so that a particular interp can be easily referenced (eg. "I.84" instead of now having to say "#84 in the 'Regulation S-K' section" like I just did in answering a query in our Q&A Forum). Other members have complained that they wish a PDF of the entire Manual was still available so that it could easily be word-searched or printed out. Maybe Santa will hear us?

[Of course, we still have our searchable, HTML version of the Manual posted - but it will be difficult to maintain this version if the Staff makes piecemeal changes to the Manual going forward.]

This is an encouraging sign and perhaps means that Corp Fin's long-standing project to update the Manual will be in full swing during '06. Quite a challenge for the Staff to undertake as the last comprehensive update was in 1997 - and things sure have changed a bit since then!

Scrushy's Latest Maneuver: The Shareholder Proposal Angle

Everytime I hear the dude's name, I roll my eyes. Now Richard Scrushy has been rejected by Corp Fin in his attempt to use 14a-8 to amend the HealthSouth bylaws so that a majority of shareholders could fill board vacancies and set the number of directors on the board. Note that the former HealthSouth CEO submitted his proposal before he was indicted again - this time for political corruption - and before he sued HealthSouth for $70 million in back pay. This guy has some gall, eh?

On December 9th, the SEC Staff agreed with Healthsouth that Scrushy's proposal could be excluded after the company argued that the proposal would result in a "pro rata" vote that deviates from the "one share, one vote" rule under Delaware law.

S&P 500 Governance Survey

This new Spencer Stuart survey regarding the S&P 500's corporate governance practices shows considerable progress having been made in recent years. At the same time, it highlights a number of shortcomings. Here are some of those shortcomings, as noted by former SEC Chief Accountant Lynn Turner:

1. 12% of boards still have no women; 43% of these companies are in the high technology industry, often in California.

2. Lead directors are commonplace with 94% of the boards with them, compared to only 36% in 2003. Directors as a whole are more "independent" than before SOX as defined by the listing rules.

3. However, the CEO still chairs most boards, and where they don't, the chair is usually not independent. As a result, the leader of the vast majority of the boards is not independent. However, the number of boards with a truly independent board chair, something almost unheard of just 5-6 years ago, is now up to 9%.

4. Audit committees appear to have changed little, most likely due to the SEC "watering down" the requirement for a "financial expert" over the objections of investors. As a result, it appears there probably are a lot of people who are not real experts in the field of financial reporting who are still designated as financial experts. As noted in the attached survey, audit committees still often do not have a board member who has been a CFO, controller or CPA. The number of audit committ members with CFO and accounting backgrounds remains at only 9% in 2005, the same as in 2004.

Accordingly, board oversight of the financial reporting process is probably still not what it should be. Often these so-called "experts" are probably challenged at best - if not fully unable - to deal with many typical issues, such as financial reporting questions; discussions of what are the necessary internal controls over accounting and disclosure; and auditor independence issues.

December 20, 2005

Does Delaware Law Trump the Federal Securities Laws?

Some analysis from Keith Bishop: "Here is an opinion - from Newcastle Partners v. Vesta - from Vice Chancellor Lamb last month that is interesting for two reasons. First, there is an interesting historical discussion of Section 14(c) under the Exchange Act.

Second, he reaches the conclusion that state law, specifically Section 211 of the Delaware General Corporation Law, trumps the federal proxy rules. He reaches this conclusion based on the internal affairs doctrine (citing VantagePoint v. Examen, the subject of several recent blogs). Despite what the Vice Chancellor states in the opinion, I do think that there is a clear conflict between the proxy rules and Section 211.

As an aside, I wonder how Corp Fin feels about there telephone responses making it into the record (see page 4 of the opinion)?" I have posted a copy of the opinion in our new "Internal Affairs Doctrine" Practice Area.

SEC Chairman Roundtable

Today, the SEC is hosting another interesting roundtable, this one featuring a slew of former chairmen.

Recently, the SEC Historical Society has added some cool content to its site, including information regarding the first chairman, Joseph Kennedy.

What's Doing Under the New SEC Chair

Yesterday's WSJ ran an article about the new SEC Chair's course of action so far, with a particular focus on Chairman Cox's attention to detail and the numerous vacancies of top staffer jobs. Here is a snippet from the article:

"One result of his approach is longer meetings. Private commission meetings where enforcement staff present cases last for several hours, with Mr. Cox peppering lawyers with questions, debating the merits of each case and asking for detailed descriptions -- rather than summations -- of each case.

While some viewed Mr. Donaldson as too detached, there are concerns that Mr. Cox's desire to be involved in every decision is grinding the agency to a halt. Perhaps the biggest complaint centers on Mr. Cox's failure to select directors for either the investment-management or market-regulation divisions. SEC lawyers said the two offices are essentially paralyzed, since there is no liaison to the chairman's office and no one to float staff ideas upstairs or transmit marching orders from above."

Celebrities and the SEC

Nothing works better for the SEC's Enforcement mission than cases that attract a lot of media attention. That is because the SEC's limited resources can only do so much against the high volume of fraud out there.

So there should be some real bang for the buck from yesterday's announcement that former Sirius Satellite Radio executives engaged in insider trading before the news of Howard Stern's hiring became public. [Driving back from a speaking gig in Philly last Friday, I came across Howard's last show on FM radio. Maybe I am too sensitive a guy, but Howard just doesn't do anything for me. In fact, I do eat quiche.]

And the poker world is riled because it has been disclosed that the SEC is investigating poker legend, Doyle Brunson, over his $700 million takeover bid for the World Poker Tournament (run by WPT Enterprises). The SEC said the formal investigation is focusing on the legalities of Brunson's offer and the subsequent decision to publicize it. Learn more about this development from this poker blog.

December 19, 2005

Gov. Jeb Bush Fed Up with Lack of Pay-for-Performance

Here is an interesting article describing a trustees' meeting during which Florida Governor Jeb Bush and two other state leaders ordered Florida's public pension fund Tuesday to take a leading role nationally to push for corporate governance reform. They specifically want to target "outrageous" executive compensation and "undemocratic" proxy voting at public companies. The two other state leaders are Republicans hoping to secure the governor nomination when Bush's term expires.

Told ya that executive compensation was gonna be a political football. First, the Democrats grabbed onto the mantle with it's recent proposed legislation - now the Republicans are taking a turn...

More on Exec Comp Practices

Here are three more recent newsworthy articles on executive compensation:

- USA Today ran this article on a letter sent to the SEC from a worldwide group of institutional investors regarding compensation disclosure practices

- Yesterday's NY Times had this column on a CEO who refused a pay raise (and sent this letter to his own compensation committee)

- Yesterday's NY Times had this column on Delphi's employees being asked to take huge pay cuts, while upper management implemented a bonus plan for itself

Update on the "Pink Sheets"

If you missed it, Saturday's WSJ carried an informative article on the recent overhaul of the pink sheets. Here are some interesting points from the article:

- Starting this spring, there will be an elite list of issuers that report more information than legally required

- The changes of the Pink Sheets are so dramatic that an SEC official says the agency is monitoring its progress to make sure it doesn't accidentally become a stock market.

- As it stands, the Pink Sheets is essentially a publishing company as large investors known as "market makers" pay Pink Sheets to list their bids and offers for their inventory of "over the counter" stocks.

- Pink Sheets issuers aren't required to file documents with the SEC, though the market makers and brokers that provide quotes are regulated by the National Association of Securities Dealers.

- Pink Sheets now exclusively quotes 4,800 issuers, including several giants that filed for bankruptcy-law protection

Companies Without a Home?

Some thoughts from an introspective and anonymous member: "My wife's late grandmother belonged to a religious sect that did not believe in formalities, including having a name for the sect. Consequently, some people referred to them as the "no-names."

The SEC seems to have also created a no-name category. It seems we now have small business issuers, accelerated filers, large accelerated filers and well-known seasoned issuers. However, what is the name for the category of issuer that doesn't fall within any of these four categories? I think calling them "non-small business issuers, non-accelerated filers, non-large accelerated filers, non-WKSIs" is a a little cumbersome. Also, it is a little strange to be defined by what you are not. Perhaps the SEC should have a name that category contest?"

December 16, 2005

Tips for 10-Ks and Proxy Statements

Getting quite a few questions from members seeking law firm memos about the upcoming proxy season. In addition to our own checklist, these proxy season checklists from law firms are in the "Proxy Season" Practice Area, near the top.

And I recently posted the latest annual update of Alan Kailer's popular chapter regarding preparation of the executive compensation tables.

For the most recent guidance - ie. after the SEC proposes new comp disclosure rules in early January, as indicated in this recent Chicago Tribune article - check out this upcoming webcast series on CompensationStandards.com: "Your Upcoming Proxy Disclosures—What You Need to Do Now!" and "Real Life Examples (and Explanations) to Meet the SEC's New Expectations."

And we just announced a third webcast for the series: "Related Party Transactions: What Disclosures You Need to Make Now!" Come listen to the experts as they explain what you need to know for this proxy season!

Mutual Fund Compliance Rule Developments

Lord knows that the scope of this site is already too broad and I am not looking for more work. But I thought I would check in on the mutual fund world via this interview with Victor Siclari of Reed Smith on mutual fund compliance developments.

The Narrowing GAAP

This CFO.com article provides a good update on the convergence of US and non-US accounting rules and how it is happening quicker than most expected. As things are moving so fast, it probably is time to update our "Globalization of Accounting Standards" Practice Area...

December 15, 2005

SEC Revises Accelerated Filer Filing Deadlines and Definitions

At yesterday's open Commission meeting - as noted in this press release - the SEC adopted some changes to the accelerated filing deadlines and definition of "accelerated filer"; established the new category of "large accelerated filer"; and changed the provisions to exit accelerated filer status (as well as adopted separate exit hoops for the new large accelerated filer category).

The SEC made a few tweaks to what it had originally proposed so that the framework now looks like this:

- The new definition of accelerated filer has a public float requirement of at least $75 million - but less than $700 million.

- Exiting accelerated filer status requires a public float of less than $50 million. This is a change from the proposal which had a threshold of less than $25 million.

- The new category of large accelerated filer has a public float requirement of $700 million or more

- Exiting large accelerated filer status has a public float threshold requirement of less than $500 million. This is a change from the proposal which had a threshold of less than $75 million.

- As proposed, the redefined accelerated filers will continue to have a 75-day filing deadline for Form 10-K and 40-day deadline for Form 10-Q.

The SEC deferred its proposal that the new large accelerated filers have a 60-day deadline for filing 10-K for fiscal years ending on or after December 15, 2005 for one year - so that large accelerated filers will continue to have a 75-day deadline for 10-K at this time, but will have a 60 day deadline for filing 10-K beginning with fiscal years ending on or after December 15, 2006. Large accelerated filers will continue to have a 40-day deadline for 10-Q, the same as for redefined accelerated filers.

The SEC also proposed amended rules to allow foreign private issuers to exit the '34 Act reporting system - as well as proposed to amend the best-price rule (as I blogged about yesterday on DealLawyers.com).

Underwriting Agreements and Legal Opinions After the ’33 Act Reform

We have just announced our fourth webcast in a series on the '33 Act rules - "Underwriting Agreements and Legal Opinions After the ’33 Act Reform" - featuring these experts who will analyze the latest trends:

- Jack Bostelman, Partner, Sullivan & Cromwell LLP
- Fred Knecht, Managing Director and Head of Investment Banking Legal for the Americas, Goldman Sachs
- Mike McAlevey, Chief Corporate and Securities Counsel, General Electric Company
- John White, Partner, Cravath Swaine & Moore LLP

And we continue to update our list of underwriting agreements that have been filed since the new rules became effective.

Fortune: In-Depth Article on SEC Chairman Cox

From Bruce Carton's Securities Litigation Watch: Fortune has an excellent, in-depth article on SEC Chairman Christopher Cox entitled "The Stock Cop." The article provides a detailed view of Chairman Cox and his life experiences, and includes the following description of a framed check that Cox keeps on the wall of his office at the SEC:

"That's the message on the wall of his tenth-floor office in the SEC's sun-washed new Washington headquarters, where Cox has assembled a makeshift shrine. It consists of a framed check made out to his grandfather alongside a plaque depicting the notorious Samuel Insull, whose empire of utility companies collapsed in 1929, taking with it the money of countless investors, including Cox's grandfather. Insull's chicanery helped inspire the creation of the federal regulatory apparatus, including the SEC, that sprang up during the Depression. But the lesson here isn't historical as much as it is personal. Cox's grandfather lost $6,000—or $70,000 in today's dollars—and the check was intended to compensate for the loss. It's for $3.36." Cox's message: Investors, I'm on your side.

December 14, 2005

Survey Results on Director Retirement Ages

Here are the results from our most recent Quick Survey, this one regarding director retirement ages:

1. Does your company have a mandatory retirement age for directors?

- Yes - 72%
- No - 28%

2. If answer to #1 is "yes," does the retirement age differ for inside directors compared to outside directors?

- Yes - 26%
- No - 74%

3. If answer to #1 is "yes," what is that retirement age for outside directors?

- Age 70 - 32%
- Age 71 - 0%
- Age 72 - 45%
- Older than Age 72 - 23%

4. If answer to #1 is “yes,” is that retirement age stated:

- In the corporate governance guidelines - 74%
- In the bylaws - 13%
- Both of the above - 11%
- Other - 2%

5. If answer to #1 is “yes,” directors must retire:

- At the next board meeting after reaching the retirement age - 7%
- At the next annual shareholders’ meeting after reaching the retirement age - 70%
- Other - 24%

Now it's time for you to participate in our latest Quick Survey on Board Leadership! Thanks!

Section16Treatise.net is Launched!

In response to numerous requests, we have created an online version of the popular Romeo & Dye's Section 16 Treatise and Reporting Guide: Section16Treatise.net. Dated as of Fall 2005, this 2nd Edition of the Treatise from Peter Romeo and Alan Dye is twice as long as the 1st Edition - and the online version of the Treatise has been updated from the hard copy Treatise mailed early in 2005 to reflect the SEC’s adoption of amendments to Rules 16b-3 and 16b-7.

We launched this site as many members have expressed frustration with the challenges of locating a copy of the popular Treatise within their own firm or company, as it remains the type of valued resource that everyone uses as a deskside reference. With this online resource, never go searching for that hidden copy again - try a No-Risk Trial today!

Breaking Barriers: The $1000 Billable Hour!

According to the latest National Law Journal billing survey, Benjamin Civiletti, the former U.S. attorney general and now chairman of the Venable law firm, is the first US lawyer to report charging $1,000 an hour. Apparently the old record was $875, charged by a London partner of Reed Smith.

Not really cause to celebrate - but it reminds me to prompt you to renew your membership to TheCorporateCounsel.net (and our other publications) now, as all our memberships run on a calendar-year basis and expire at the end of the month.

Can you believe that one full year's worth of TheCorporateCounsel.net costs only as much as 45 minutes of Mr. Civiletti's time (and we don't clutter up the site with ads, etc.)!

Business Roundtable Issues Updated Governance Best Practices

In early November, the BRT issued an updated "Principles of Corporate Governance." The BRT's first Principles were released in May 2002. We have added these new guidelines to our "Model Governance Policies" Practice Area.

Here are some highlights from the updated Principles:

- Board leadership: The principles emphasize the critical importance of independent board leadership and, in recognition of the fact that no one leadership structure is right for every company. In a May 2005 survey, nearly 82% of member companies’ boards are at least 80% independent.

- Executive sessions: The principles recommend placing time for an executive session on the agenda for every regular board meeting, and follow-up with senior management at the conclusion of each executive session.

- Director-shareholder relations: The principles state that the board is responsible for responding to communications from shareholders and addressing issues of concern to shareholders - and contains an expanded set of best practice recommendations for boards in carrying out these responsibilities. In a May 2005 survey, 90% of BRT companies reported that they have established procedures for shareholder communications with directors.

December 13, 2005

More Binding Majority Vote Proposals on the Horizon

According to this ISS article, union activist AFSCME has filed four more binding shareholder proposals seeking a majority vote standard. AFSCME was unsuccessful with its Paychex binding proposal two months ago, partially because the proposal didn't contain a carve-out for contested elections (and thus didn't obtain ISS support).

The article also notes that the Sheet Metal Workers International Association is targeting companies that have instituted director resignation guidelines - filing nonbinding proposals with ten of those companies.

Finally, in a meeting last Monday, the ABA Director Voting Task Force reiterated its support for the voluntary director resignation policy concept and said it plans to release specific recommendations and an explanatory report "no later than February 2006."

SEC's Attorney Responsibility Safe Harbors: Under Duress?

Last week, the Court of Appeals for the DC Circuit issued an opinion - American Bar Association v. FTC - that may spell trouble for the SEC with respect to the safe harbor aspects of its Part 205 Attorney Conduct rules. In its decision, the court affirmed the ABA's view that a federal privacy law aimed at financial institutions (ie. Gramm-Leach-Bliley Act) does not cover the legal profession - as the ABA's press release notes, "This ruling underscores that for more than two centuries we have rightly relied on state supreme courts to exercise responsibility for oversight in order to protect and safeguard the confidentiality of attorney-client communications and the public interest."

We have posted a copy of the court opinion in our "Attorney Responsibility" Practice Area.

Corp Fin Comments on Internal Control Issues

The most recent entry in Knowledge Mosaic's Soap Box does a little sleuthing of Corp Fin comment letters on internal control issues. Interestingly, only 50 comment letters posted on the SEC's site contain the term "internal controls" - probably because the SEC is still playing catch-up in posting their comment letters issued since August 2004.

Here are some lessons learned according to Knowledge Mosaic:

1. Disagreeing with auditors can be a tough sell - Innovo Group, Inc. concluded that its internal controls were effective despite an auditor’s finding of material weakness. The SEC staff questioned just how the company could reach that conclusion in light of the finding. The company responded with an amended filing stating that their controls were, in fact, ineffective. Digital Recorders, Inc. believed that its disclosure controls were effective despite an auditor’s finding of material weakness in its internal controls. The company was asked to more fully explain how it could reach that conclusion. It did so in its subsequent 10-K filing, noting that the internal control weakness was limited in scope and that there were compensating disclosure controls in place.

2. Equivocating won’t wash - Both Proliance International, Inc. (formerly known as Transpro) and Rentrak Corp. claimed that their controls were effective, but noted certain exceptions. That didn’t fly. Your controls are either effective or they aren’t. Both companies submitted new filings acknowledging their controls to be ineffective. (See letters to Proliance and Rentrak, amended filings of Proliance and Rentrak.)

3. You gotta come clean - Comstock Homebuilding Companies, Inc. admitted to material weaknesses in its internal controls, but failed to provide any real detail on the nature of the problems. In response to the staff comment letter, the company’s amended filing used bullets to clearly identify six specific areas of material weakness.

December 12, 2005

Corp Fin Posts Updated "Current Accounting Issues" Outline

On Friday, Corp Fin posted an updated Current Accounting and Disclosure Issues Outline. I believe this outline was last updated in March and then before that, last December as I blogged about back then.

No More Shareholder Proposals? Is That Possible?

Friday's NY Times ran this article that laid out a proposed framework by Vice Chancellor Strine that would result in the elimination of shareholder proposals across the board. VC Strine himself doesn't endorse this framework; he just proposes it as food for thought.

The framework goes like this: state laws are changed to allow contested elections of directors - outside of the takeover context - every three years. If insurgents, who would appear on the ballots sent out by management, received 35% of the vote, they would get some of their expenses reimbursed as well as have the chance to win the election. In exchange, shareholders would lose the power to be able to submit nonbinding resolutions to companies.

Although interesting, I believe the reality is that it would be very hard for companies and shareholders to come to a meeting of the minds on this. Whenever reform of 14a-8 is proposed by the SEC - which happens once per decade on average - a huge battle erupts. There simply is too much history behind the shareholder proposal rule to eliminate it entirely.

No Big Surprise: Corporate CEOs Lacking Public Confidence

The "lack of confidence" tone of this article from the NY Times on Friday is consistent with a letter recently sent to the SEC by a number of American, Canadian and European investors. Below is a quote from that letter that reflects why executive compensation is the #1 hot button for shareholders these days:

"Sixty companies in the bottom decile of the Russell 3000 lost $769 billion in market value and $475 billion in economic value over the five years ended in 2004, while paying their top five executive officers more than $12 billion."

SEC's Hedge Fund Rules in Peril?

According to news reports, pointed questions from two of the three paneled judges in the US Court of Appeals for DC over whether the SEC had the appropriate authority to regulate hedge funds indicate that a majority of the panel might vote to overturn the new rules that take effect in February.

Personally, I have no opinion as to whether the SEC overstepped their bounds - but I wouldn't be surprised if the next spate of monumental frauds will be somehow interwined with the hedge fund industry. Anyone remember Long-Term Capital almost bringing the market to its knees?

December 9, 2005

Preparing for the Proxy Season: Cost Savings Tips and Processing Issues

In this podcast, Glen Wittenberg of ADP Investor Communication Services provides tips and insights into how to save money and avoid processing errors during the proxy season:

- What are the most common methods that companies can use today to save extra money?
- How many companies are leveraging edelivery to their shareholders last year (and other evoting stats)?
- What types of companies are good candidates to take advantage of "drop" mailing?
- What are the most common processing errors that you see companies make?

SEC Posts E-Proxy Proposing Release

Yesterday, the SEC posted its 106-page proposing release regarding E-Proxy.

More on California's Internal Affairs Doctrine

Keith Bishop provides us with an update on California's internal affairs doctrine that made news six months ago when VantagePoint v. Examen was decided. Last week, a new case was decided: Friese v. Superior Court. We have posted the court opinion in the "California Corporations" Practice Area - and here is an article about the case.

Keith notes: You may recall that when the SEC adopted Rule 10b5-1, there was no corresponding safe harbor in California law - but ultimately a California regulation was adopted (10 CCR 260.402). The Friese decision is interesting because it is the second published opinion issued by the California Courts of Appeal since the VantagePoint decision that considers the internal affairs doctrine. In this case, the court does not mention the VantagePoint decision - but it instead discusses the same State Farm case that the VantagePoint court used to support its decision.

This case also distinguishes the second case, Grosset v. Wenaas. In that case, the Court of Appeal decided that the issue of whether a stockholder can maintain a derivative action on behalf of a corporation is governed by the internal affairs doctrine. In this case, the court found that the insider trading law is a securities law and not governed by the internal affairs doctrine.

While neither case resolves the question of what a California court will do with respect to the California's pseudo-foreign corporation statute (Corp. Code Sec. 2115), they certainly demonstrate that the courts won't be taking a "one-size-fits-all" approach to the application of the internal affairs doctrine. Therefore, it is fair to say we don't know yet whether the smoke is black or white as to whether Section 2115 will be upheld by the California courts.

Another Latrell Sprewell Moment?

Yesterday's Washington Post reports: "’No, the Ballmer children don't have their Xbox 360 yet . . . unfortunately, thanks to the wonders of Sarbanes-Oxley, management does not get a free Xbox 360 anymore,’ Steve Ballmer, chief executive of Microsoft Corp., told a crowd of 500 local technology executives who gathered at the Capital Hilton yesterday to hear him speak.

Sarbanes-Oxley has been blamed for a lot of things, but the deprivation of Steve Ballmer's kids is certainly a new one. ‘If I get an XBox 360 from the company, that's income to me, and it's got to be disclosed,’ he said. ‘And our audit committee decided it wasn't worth it.’ Thankfully, Santa doesn't answer to the same regulators.”

My response: Basketball fans might feel a hint of Latrell Sprewell in these remarks. Latrell told journalists last year that he wouldn't play hard because the team wasn't trying hard enough to extend his contract when they only offered $21 million over three years. His response to that offer: "I've got a family to feed." Latrell was making $14.6 million per year at the time (now he is out of work because no team will sign him). Read Dick Vitale's thoughts and this humor piece about Latrell's attitude.

Anyways, maybe Mr. Ballmer's comments were taken out of context - but if not, I don't see the harm in him taking a few hundred out of the millions he makes annually and buy the Xbox for his kids himself...

December 8, 2005

The Skinny: The First Automatic Shelf Ever Filed

If you are a deal junkie, here is one you gotta check out! In this podcast, Rusty McGranahan of Skadden Arps provides some insight into what it’s like to do a deal under the new ’33 Act reform rules as he participated in the first Form S-3ASR ever filed (ie. for Temple-Inland), including:

- What was done differently in drafting the base prospectus?
- What was done differently during the offering process? Were any free writing prospectuses used?
- Did any issues arise on filing day?
- Did any issues arise in drafting the underwriting agreement? How about when delivering the legal opinions?

The SEC and Avian Flu

My wife sometimes thinks I'm a bit of the hypochondriac. I don't think so - at least not any more than any other married man - but it is true that I have been worried about widespread outbreak of the avian flu long before the media started to carry daily articles about it. So I was relieved to see the SEC issue this interpretive release that will allow drug companies to immediately record sales of life-saving vaccines stockpiled by the federal government for future pandemics.

As noted by the US Senators pushing this move, current rules prohibit companies from recognizing revenue until the products were withdrawn from inventory - and that offered no incentives to fill orders (although that ain't the reason that most drug companies gave up on vaccines as a primary source of business). The SEC's interpretation may not be extended by analogy to other circumstances - drug companies may make the accounting change in the first quarter of their next fiscal year.

Court Rejects SEC's Imposition of Civil Penalties against Directors in Early SOX Test

A week ago, Bruce Carton ran the guest post below from Nicolas Morgan of DLA Piper Rudnick Gray Cary:

If the SEC thought it would gain home court advantage by asking Congress to allow monetary penalties to be awarded in administrative proceedings under Sarbanes-Oxley, the DC Circuit has set the record straight. On November 15, 2005, in The Rockies Fund v. SEC, the DC Circuit scolded the SEC for arbitrarily and capriciously awarding "the harshest available penalties" against the Funds' directors without any showing that their conduct "created a significant risk of substantial loss to others."

The SEC accused the Fund of mischaracterizing and overvaluing certain holdings on its SEC filings, but the SEC failed to demonstrate in the administrative proceeding that such conduct put any investors at risk of loss. Sarbanes-Oxley permitted the SEC to seek civil penalties in an administrative proceeding presided over by an SEC administrative law judge rather than in a federal court action. However, the DC Circuit confirmed that the SEC must make the same evidentiary showing to obtain civil penalties no matter which forum the SEC brings its enforcement action in.

December 7, 2005

Don't Forget the New Item 512 Undertakings!

When filing your registration statements, don't forget the new S-K Item 512 undertakings for Rule 415 offerings - FAQ #3 clearly says that you have to! The '33 Act reform amended the provisos after Item 512(a)(1)(iii) and added 512(a)(5)-(6). There have been quite a few registration statements filed recently that do not include the new undertakings.

It appears that some companies simply forgot that revised undertakings are now required. Also be careful not to just copy a law firm memo’s form undertakings, as there are different undertakings for different contexts (eg. undertakings for Form S-8s vs. Form S-3s). Read the regulations first.

As examples, here are two Form S-3ASRs that appear to have provided the correct undertakings (of course, there are others that also have done it correctly): eBay and General Electric.

ISS Clarifies Majority Vote Positions

Yesterday, ISS posted 8 FAQs about its majority vote position, dealing with a number of issues that have been raised since its 2006 voting policies were released last month. For example, ISS clarified that it will review director resignation guidelines on a case-by-case basis and noted that no single form of a resignation guideline has been "precleared" by ISS. If you are facing a shareholder proposal on this topic, this is a "must read" document.

SEC Speaks at the Annual AICPA Conference

No fewer than 11 SEC Staffers spoke at the Annual AICPA Conference in DC over the last few days. This is not more than the number of Staffers that speak at PLI's Annual SEC Speaks - but it is unusual that so many of the Staff's speeches get posted on the SEC's website.

Here are the 11 speeches - including this speech from Chairman Cox. Among other topics, the Chairman addresses greater competition beyond the Big 4; greater simplicity and transparency in financial reporting; and XBRL.

Going Private and Going Dark

Even though I knew today's DealLawyers.com webcast - "Going Private and Going Dark" - would be well received by those interested in that area, I have to admit even I have been surprised by the huge level of interest in this topic. Perhaps the demand of those waiting to go private and dark is even greater than the fairly sizable number of companies that has already done so over the past few years.

Join the expert lawyers and banker who will spend some time analyzing the feasability of these apparently attractive options - and look for John Jenkin's excellent 18-page memo regarding the state law issues for going dark and going private transactions that I just posted in the "Going Dark" Practice Area.

December 6, 2005

French CNIL Issues Final Whistleblower Guidelines

Last month, I blogged about the French data protection agency - the CNIL - issuing draft guidelines that could resolve some of the conflicts in the whistleblower area between Sarbanes-Oxley and EU data protection laws.

Last week, the CNIL issued final guidelines and we have posted a redlined versions of them - translated into English - in our "Whistleblower" Practice Area, marked from the draft guidelines. Much thanks to Mark Schreiber of Edwards Angell Palmer & Dodge LLP Boston for those!

In addition, Mark and his partner Jeff Held have conducted this podcast to provide analysis of what the final guidelines mean, including how US companies can now comply with both US and French law simultaneously.

Speaking of France...

Just flew back from a long weekend in Paris (my wife's b-day present); my first trip there and it was unbelievable. I need to get out more! Found cheapie plane tickets - taxes cost more than the flights!

SEC to Act: Accelerated Filers, Best Price Rule and Deregistration of FPIs

The SEC announced yesterday that it will hold an open Commission meeting next Wednesday, December 14th at 10 am, to consider the following three items:

1. The adoption of the proposed amendments to the "accelerated filer" definition in Rule 12b-2, the new definition of “large accelerated filer" and the proposed amendments to the final phase-in of the Form 10-K and Form 10-Q accelerated filing deadlines. We have posted numerous law firm memos on the accelerated filing definitions and deadlines.

2. The long-awaited proposal of amendments to the “best-price rule” (Rule 14d-10) for issuer and third-party tender offers. According to the Sunshine Act notice, the proposals “would clarify that the best-price rule applies only with respect to the consideration offered and paid for securities tendered in a tender offer and should not apply to consideration offered and paid according to employment compensation, severance or other employee benefit arrangements entered into with employees or directors of the company that is the target of a third-party tender offer.”

3. The proposal of a new rule that would enable foreign private issuers to terminate their Exchange Act registration and reporting obligations and the proposal of a rule amendment that would apply the exemption from Exchange Act registration under Rule 12g3-2(b) to a class of equity securities immediately upon the effective date of the issuer's termination of effectiveness regarding that class of securities.

December 5, 2005

Violation of the SOX Prohibition of Loans to Officers

Last week, the SEC brought its first action for a violation of the 1934 Act Section 13(k) prohibition of personal loans to executive officers. The administrative proceeding was brought against the CEO and CFO of Stelmar Shipping, a foreign private issuer. The issuer had claimed that the extensions were mere “advances” and not loans.

In the Fall of 2003, Stelmar's CEO and CFO authorized interest-free loans from the issuer to themselves - note they were not approved by the board. During the course of the 2003 audit, the outside auditors learned about the loans and concluded that they were prohibited by Section 13(k). In March 2004, Stelmar reported the violation on a Form 6-K containing its proxy. (Interestingly, the issuer also imposed a financial fine of $50,000 and $30,000 on the CEO and CFO, respectively.) Stelmar was acquired early this year, but the CEO and CFO remained employed by Stelmar until (close to) the time of the acquisition.

Ultimately, the CEO and CFO agreed to a cease-and-desist order with the SEC.

PCAOB Member Gradison Named Acting Chairman

On Friday, the SEC named PCAOB Board Member Bill Gradison as Acting Chairman of the PCOAB. At the inception of the PCAOB in 2002, Gradison was named to a two-year term and was reappointed in 2004 to an additional five-year term.

Former PCAOB Chairman William McDonough’s resignation was effective as of last Wednesday, November 30th.

DealLawyer.com's Webcast Transcript Now Up!

The transcript for the DealLawyer.com’s webcast, "The Latest on Special Negotiating Committees," is now available.

December 2, 2005

Post-’33 Act Reform: List of Underwriting Agreements

We have created a list of underwriting agreements that have been filed with the SEC that seem to take the '33 Act reform into account. We will periodically update this list. Among the agreements filed so far are:

- Thomas Weisel Partners S-1 underwriting agreement (Buy.com, 11/28/05) (Note: form of legal opinions not included)

- Thomas Weisel Partners F-1 underwriting agreement (Scopus Video Networks, 11/18/05)

- Thomas Weisel Partners S-1 underwriting agreement (Rackable Systems, 11/30/05) (Note: agreement not to use FWP)

- W.R. Hambrecht & Co. S-1 underwriting agreement (Fortunet, 11/14/05)

- Credit Suisse First Boston Mortgage Securities ABS underwriting agreement (11/23/05)

First Automatic Shelfs and Free Writing Prospectuses Filed

The race to file automatic shelfs is on. Temple-Inland was first at 9:04 am - and the first FWP was filed by Platinum Underwriters Holdings at 9:29 am.

Here are some Form S-3ASRs filed yesterday (stands for "S-3 automatic shelf registration"):

- Temple-Inland (12/1/05)(pay-as-you-go and included a "description of securities" section)

- XL Capital Ltd (12/1/05) (pay-as-you go and included a "description of securities" section)

- Golden West Financial (12/1/05) (registered $2B of debt, pay-as-you go and included a "description of securities")

Death of the BlackBerry?

Yesterday's papers carried stories about how RIM has lost yet another critical patent lawsuit - and how the odds of BlackBerry service continuing are not looking too good.

I know how life without a BlackBerry is unthinkable for many of you - but take it from a guy who has managed just fine without it, you will feel much freer without that beast ruling your life! I'll never forget sitting on a panel with a dude who was checking his BlackBerry as he was speaking from the dais. Free Willy!

December Eminders is Up!

We have posted the December issue of our monthly email newsletter.

December 1, 2005

Corp Fin Issues FAQs on '33 Act Reform

Yesterday, Corp Fin issued 25 FAQs that flesh out the '33 Act reform. According to a Cleary Gottlieb alert, highlights of the FAQs include:

- If an underwriter agrees not to use a free writing prospectus without the consent of the issuer, the issuer’s consent, in and of itself, will not constitute authorization or approval of the free writing prospectus for purposes of determining whether it is an “issuer free writing prospectus.” However, if the issuer’s actions amount to “adoption of or entanglement with” the free writing prospectus—a determination that will turn on the particular facts and circumstances of the situation—the issuer will be considered to have approved or authorized the free writing prospectus.

- Item 10(e) of Regulation S-K, which restricts the use of non-GAAP information in documents required to be filed with the SEC, does not apply to free writing prospectuses, unless they are included in, or incorporated by reference into, a registration statement or included in an Exchange Act filing. Regulation G, which restricts the use of non-GAAP information in public disclosures by issuers required to file Exchange Act reports, does apply to free writing prospectuses used by such issuers.

- Canadian issuers filing annual reports on Form 40-F under the Multi-Jurisdictional Disclosure System cannot qualify as “well-known seasoned issuers.”

- Convictions of an issuer or a subsidiary in a non-U.S. court of certain felonies or misdemeanors, such as larceny, robbery and the making of false reports, will result in ineligibility of the issuer under the definition of “ineligible issuer.”

- Notice that a sale was made pursuant to a registration statement, which is required by Rule 173 when a final prospectus is not delivered, may be made within two business days following the date of settlement.

I'm sure we will continue to see guidance from the SEC Staff as the reform is so broad in scope and there will be so many unanswered questions as we deal with the new rules in practice - such as how will confidential treatment requests relating to automatically effective shelfs be processed?

'33 Act Reform: Now Effective!

Remember that the '33 Act reform rules become effective today! There are lots of resources in our "Securities Act Reform" Practice Area, including notes from the recent ABA Fall Meeting regarding the NASD's positions in the WSKI shelf context. There also are numerous law firm memos on what companies should do with their outstanding shelfs, including this new memo from Cleary Gottlieb.

As for what new changes should be made to 10-K and 10-Q filings, look at the law firm memos called "proxy season checklists" posted in our "Proxy Season" Practice Area.

SEC General Counsel to Leave

Just as I was reading this Washington Post article about all the vacancies at the SEC's top levels, I received an email that the SEC's General Counsel, Giovanni Prezioso, announced he is leaving at the end of the year to return to the private sector (destination unknown yet). Here is the SEC's press release.

By the way, the Post article provides a pretty nice overview of what is happening at the SEC these days, including a handful of quasi-inside scoop (eg. Commissioners are socializing outside the building! News at 11!).

PCAOB Issues Report on Initial Implementation of AS No. 2

Yesterday, the PCAOB issued a 19-page report discussing issues identified in the course of its monitoring of the implementation of Auditing Standard No. 2, the internal controls guidance from the PCAOB.

No real surprises here - the PCAOB found that both auditors and issuers faced enormous challenges in the 1st year of implementation, including strains on available resources; a shortage of staff with prior training and experience in designing, evaluating, and testing controls; and the limited timeframe that issuers and auditors had to implement Section 404.

The PCAOB gave a warning shot as it said that its monitoring (mainly conducted through the inspection process) revealed that some audits performed under these difficult circumstances were not as effective or efficient as AS No. 2 intends and as the PCAOB expects they can be in the future. In its report, the PCAOB identified specific areas in which auditors should become more effective and efficient "by obtaining sufficient evidence for an opinion in a manner that appropriately conserves time and other resources."