January 31, 2006

Table of Contents for SEC's Proposing Release

On CompensationStandards.com, we have posted a table of contents for the SEC's 370-page proposing release - complete with page numbers. This TOC can be inserted to replace pages 5-7 of the release - and it is posted in the new "The SEC's Proposals" portal, where we continue to post analysis and commentary on the SEC's proposal. Thanks to Eliot Robinson of Powell Goldstein for this useful contribution!

More Companies to Follow Intel's Majority Vote Lead?

In this recent article, ISS notes that more companies are thinking of adopting pure majority vote standards like Intel did a week ago. For example, the article says Temple-Inland has agreed to adopt such a standard in the face of a shareholder proposal. Note that Temple-Inland doesn't mention this as a development on their website, so I can't confirm that it's true.

Results from Board Leadership Survey

Here are the results from our recent survey on board leadership. These results are repeated below:

1. Does your company have a non-executive chairman of the board?

- Yes - 36%
- No - 64%

2. If the answer to #1 is “Yes,” the non-executive chairman is selected by:

- CEO - 0%
- Majority of independent directors on the board - 20%
- Majority of all members of the board - 67%
- Nominating or governance committee - 13%

3. If the answer to #1 is “Yes,” is the non-executive chairman position rotated among independent directors?

- Yes - 0%
- No - 100%

4. Does your company have a lead director on the board (not including a non-executive chair)?

- Yes - 41%
- No - 59%

5. If the answer to #4 is “Yes,” the lead director is selected by:

- CEO - 0%
- Majority of independent directors on the board - 44%
- Majority of all members of the board - 31%
- Nominating or governance committee - 25%

6. If the answer to #4 is “Yes,” is the lead director position rotated among independent directors?

- Yes - 35%
- No - 65%

January 30, 2006

The SEC's Proposing Release is Posted!

Late Friday, the SEC posted this 370-page proposing release regarding executive compensation and related-party transaction disclosures. Reads like a novel; here are some page numbers for a handful of the many key sections of the release:

- description of new "Compensation Discussion & Analysis" section (pgs. 16-19)
- discussion of possible double-counting of comp (p. 24)
- introduction of revised "Summary Compensation Table" (p. 25-26)
- discussion of "Total Compensation" column (p. 27)
- discussion of Plan-Based Awards tables and use of 123R valuations (p. 30-38)
- discussion of proposed Perks requirements (p. 43)
- interpretive guidance regarding what a perquisite is (p. 46-48)

This is just the tip of the iceberg for a 370-page release; learn more about "what you need to do now" from our two imminent webcasts noted below.

What You Need to Do Now!

As many of us are in the process of drafting proxy disclosures for this proxy season, the following two CompensationStandards.com webcasts are very timely:

1. Tomorrow, catch these two programs that have been combined into one from 1:00- 2:30 pm eastern: "Your Upcoming Proxy Disclosures: What You Need to Do Now!" and "Meeting the SEC's New Expectations: Real Life Examples (and Explanations)," featuring:

- Paula Dubberly, Associate Director, SEC's Division of Corporation Finance
- Ron Mueller, Partner, Gibson Dunn & Crutcher LLP
- Mark Borges, Principal, Mercer Human Resource Consulting

2. Then, on Wednesday, these two topics will be covered in a single webcast from 4:00- 5:00 pm eastern: “The New 8-K Compensation Rules:What You Need To Do Now” and “Related Party Transactions: What Disclosures You Need to Make Now!,” featuring:

- David Lynn, Chief Counsel, SEC's Division of Corporation Finance
- Alan Dye, Partner, Hogan & Hartson and Editor of Section16.net
- Amy Goodman, Partner, Gibson, Dunn & Crutcher
- Beth Young, Senior Research Analyst, The Corporate Library

To catch these webcasts, try a no-risk trial (or renew your membership) to CompensationStandards.com.

Perk Disclosures Could Come Back to Haunt Your CEO

As this article from Saturday's WSJ illustrates, greater perk disclosure elicited by the SEC's guidance will facilitate the ability of activists to use it in a campaign against management. The WSJ reports that Carl Icahn plans to pressure Time Warner's management "in the coming weeks by spotlighting what he says are egregious expenses and perks."

Yesterday's NY Times ran this excellent interview with Nell Minow on executive pay, which is a nice companion piece for the podcast I did with Nell last week. And for a laugh, check out the article - "Brother, Can You Spare a Perk?" - in the February 6th issue of Forbes (can't find a link for this one).

Disney CEO Succession Planning Under Attack

Remember the closely-followed CEO succession tale at Disney last year, when recently departed CEO Michael Eisner's candidate won the job. Now, the New York Post reports that Disney's lead director buried a negative evaluation of Robert Iger, Disney's new CEO. Disney has denied the allegation. Here is an excerpt from Friday's New York Post article:

"Disney Chairman George Mitchell quashed a negative evaluation of Bob Iger by the media giant's executive search firm Heidrick & Struggles last year and never brought the report to the full board, sources familiar with the matter told The Post.

The banished report - which few members of Disney's board even knew existed - raises new questions about the legitimacy of Disney's search for Michael Eisner's replacement.

Sources said Mitchell felt the report, brought to him by Heidrick & Struggles' Senior Chairman Gerard Roche, was too negative on Iger, who was the preferred candidate of both Mitchell and Eisner to take Disney's reins."

I'm sure we will be hearing more about this - but it's a good time to get a refresher on CEO succession planning from our "CEO Succession" Practice Area, including this interview with Mark Van Clieaf on Bona Fide CEO Succession & Selection Processes. By the way, you can register for a free confidential strategic duty audit on Mark's new site for directors.

January 27, 2006

NYSE's Procedures Change for Delinquent Filers

Last week, the SEC approved a NYSE rule change to change the procedures that delinquent filing companies must follow. Under revised Section 802.01E, the NYSE has:

- adopted separate criteria for monitoring the continued listing status of those companies that have a position in the market (relating to both the nature of their business and their large publicly-held market capitalization) such that delisting from the NYSE would be significantly contrary to the national interest and investor interests (notwithstanding a delay in an annual report filing that extends beyond one year); and

- shortened the initial monitoring period for companies that miss their filing due date from 9 months to 6 months

- lengthened from 3 months to 6 months the additional period that the NYSE may grant companies prior to the commencement of suspension and delisting procedures

Phyllis Plitch notes in her article that Fannie Mae stands to benefit the most under this controversial rule change. We will be posting more information about these new procedures in our "Delisting" Practice Area.

FASB to Clear Up Another Option Expensing Issue

From Mike Melbinger's Compensation Blog: "While we wait for the SEC's executive compensation proposals, the FASB continues to issue helpful interpretations - "FASB Staff Pronouncements" or "FSPs" - on some of the more frightening issues that have arisen under FAS 123R.

Last week, it issued a proposed FSP addressing the problem of options that may be settled in cash under certain circumstances (usually only upon certain types of changes in control). The proposed FSP seems to require that options or similar instrument be classified as liabilities, rather than compensation, if "the entity can be required under any circumstances to settle the option or similar instrument by transferring cash or other assets." (Paragraph 32). For liability awards, compensation expense must be recognized in the same manner as for stock-settled awards, but the fair value is remeasured each quarter, based upon any change in the market value of the stock covered by the award.

Provisions that allow options to be settled for cash upon certain changes in control are important for a variety of reasons and included in most well drafted option plans or award agreements (as discussed in my April 29, 2005 Blog). Thus, simply eliminating this feature from plans and award agreements is not a satisfactory alternative.

Rather than require that options be classified as liabilities if they could be settled for cash under any circumstances, the FSP would allow the company to apply a "probability" standard that assesses the probability that that the change in control circumstance would occur. Since the "change in control" circumstances under which most plans permit options to be settled for cash are relatively rare, this could be a good result for companies."

Governance Reform Report Card

Yesterday, I was chuckling about the Washington Post's article about how governance reform has fared, particularly the "report card" from four experts. On how executive pay is working, Harvey Pitt gave a grade of "D" and Nell Minow gave it an "F" - on the other hand, the Business Roundtable Governance Task Force Chair gave a grade of "B" and a Professor gave a grade of "B+." The academic gave exec pay practices higher marks than a member of management!

I have been battling a few academics on the pay issue for the past several weeks, such as a rebuttal to two Wharton professors yesterday who wrote that pay might not be excessive because its high levels could be a result of supply/demand and the complexities of the global market. Those two labels are just too easy to apply without some explanation; I feel they fail to take into account the "real world" causes that we have extensively written about in The Corporate Counsel.

Or consider this excerpt from a recent WSJ article: "The average CEO's salary in the U.S. is 40 times greater than the average worker's salary. In Japan, it is 11 times greater; in France, 15 times; in Canada, 20; in South Africa, 21, and in Britain, 22."

This morning, I posted the following comment to a blog regarding the Washington Post article from Professor Ribstein:

Two thoughts:

1. Executive compensation reform doesn't have to come from the regulators; in fact, it shouldn't. Rather, it should come from those primarily responsible - boards and their advisors.

2. Compensation reform can help to stop corporate fraud because the incentives to commit fraud could be minimized. Why do you think numbers were smoothed so much over the past decade? Likely because option grants became a routine annual event (when they originally were never intended to be so).

Executive compensation is well-known to be at the heart of corporate governance - yet, Sarbanes-Oxley and all the other recent governance reforms didn't touch executive compensation. That time has come.

Bill McDonough may not know how to properly pay executives - but many that practice in the field do. For example, here are four simple tools we recommend to ensure that pay is appropriate:

1. Tallying ALL Components
2. Internal Pay Equity
3. Accumulated Gains Table
4. Hold Until Retirement

January 26, 2006

Congress Moves to Block SERP Payouts at Troubled Companies

Yesterday's WSJ ran this article about how Congress is seeking to effectively cap payouts under SERPs for executives at troubled companies. According to the article, the limitation is tucked into a pension bill that is expected to be passed into law this spring. Remember my repeated warnings about Congress using executive pay as a political football if boards don't take matters into their own hands!

Here is an excerpt from the article:

"Congress still hasn't worked out the final restrictions on executive retirement plans, but they may kick in when a company's defined-benefit pension plan is funded at 60% or less of its projected liabilities.

Traditional, or defined-benefit, pension plans, in which benefits are based on an employee's pay and years of service, are considered underfunded if their assets fall short of the sum they expect to pay out in the future. Such plans have been on the decline in recent years as companies have sought to shift more of the burden of retirement savings to their employees, but they are still common in highly unionized industries.

The House plans to press for language in the measure that would block payment of new benefits to every manager covered by a troubled company's executive retirement plan. The Senate and the Bush administration, according to House and Senate staff members, believe the new rule should apply only to the company's highest-ranking executives. If a troubled company were to go ahead and fund its executive plans anyway, it would face stiff tax penalties.

The pension-overhaul bill that contains the measure is expected to be sent to President Bush before mid-April. when many companies are required to make contributions to their defined-benefit plans."

Delaware Supreme Court Considers Disney Appeal

Yesterday, the Delaware Supreme Court heard oral arguments in the appeal of last year's Disney case. Professor Gordon Smith has all the appellate briefs posted on the Conglomerate Blog - and a number of professors weighed in yesterday with their analysis of the hearing as they watched it via webcast. Here is a Reuter's article summarizing the hearing. The Supreme Court has 90 days to decide, although a decision is expected sooner.

Don't forget you can watch Delaware Supreme Court Chief Justice Myron Steele discuss his thoughts on boards and compensation in the archived video from our "2nd Annual Executive Compensation Conference."

PCAOB Standing Advisory Group to Consider Auditor Liability Caps

Yesterday, the PCAOB announced that its February 9th standing advisory group meeting will include "possible effects of the inclusion of litigation-related clauses in audit engagement letters" on its agenda. That should be interesting!

Here is a 39-page discussion paper on the topic. Coincidentally, I had just posted a new survey on auditor engagement letters and inspection reports. Please participate!

January 25, 2006

Change in Executive Compensation Disclosure Webcast Date

Since the SEC's proposing release is not yet available, we have pushed back the January 26th date of CompensationStandards.com's first proxy disclosure webcast to next Tuesday, January 31st. So now on January 31st (subject to the SEC's release being available by then), SEC Staffer Paula Dubberly, Ron Mueller and Mark Borges will discuss both of these topics: "Your Upcoming Proxy Disclosures—What You Need to Do Now!" and "Meeting the SEC's New Expectations: Real Life Examples (and Explanations)."

Then, the next day - Wednesday, February 1st - Paula Dubberly, Alan Dye, Amy Goodman and Beth Young will cover both the new 8-K rules and related-party transactions disclosures during an extended webcast: "Related Party Transactions: What Disclosures You Need to Make Now!"

The bottom line is that we have squeezed our three webcasts down into two (and made them both longer) - because we know many of you need practical implementation guidance as soon as possible. To catch these webcasts, try a no-risk trial (or renew your membership) to CompensationStandards.com.

Conducting Roadshows Online

In this podcast, Brad Hammond, President of RetailRoadshow.com, explains how an online roadshow works, including:

- What is RetailRoadshow.com?
- What is its level of traffic so far?
- What do you think issuers and underwriters will be doing with their roadshows going forward? Creating two distinct versions? Keeping them offline entirely?
- What are your production practice tips for those thinking of doing an online roadshow?

Forecast for 2006 Proxy Season and Solicitation Strategies to Consider

We have posted the transcript from the popular webcast: "Forecast for 2006 Proxy Season and Solicitation Strategies to Consider."

Attorneys Beware

From Lyle Robert's "The 10b-5 Daily" Blog: The National Law Journal has an article on the widening exposure of law firms in securities class actions. Although the Supreme Court's prohibition on aiding and abetting liability in private securities fraud actions has generally shielded law firms, in some cases courts have found that the law firms acted as primary violators. Plaintiffs have added fuel to that fire by arguing that even if a law firm did not make (or substantially participate in) a misrepresentation to the market, it can be held liable as a primary participant in a fraudulent scheme. (For more on scheme liability, see this post.)

January 24, 2006

Evaluating Risks to a Company's Financials from Hedging

The PCAOB has posted the last of its inspection reports to be issued on each of the six largest auditing firms, which cover inspections conducted during 2004 for selected 2003 audits performed by these firms. The latest inspection report is for Grant Thorton.

The report notes numerous auditing deficiencies, as have the five earlier reports. A number of the deficiencies relate to auditing of financial instruments, such as derivatives. In fact, there recently have been over 40 restatements related to errors in accounting for derivatives and hedges.

To learn more about this area, check out the reports and studies on the risks posed by hedging in our new "Risk Management" Practice Area.

Drafting the New Option Expensing Disclosures

For NASPP members, there is a webcast program tomorrow - “Drafting the New Option Expensing Disclosures” – during which SEC Corp Fin Chief Accountant Carol Stacey, Ron Mueller and Keith Higgins will discuss the 10-Q and 10-K (as well as earnings release) disclosures that are now required due to mandatory option expensing. If you are not a NASPP member yet, take advantage of a no-risk trial.

Who is that Masked SEC Staffer?

From Jim McRitchie's CorpGov.net: "Who says all government employees knock off early because they don't have entrepreneurial incentives? Shareholder activist John Chevedden writes: Perhaps this is like an urban legend - On the Monday Holiday at 5:00 p.m. I picked up a telephone message from the SEC in Washington, DC and figured there was no reason to call back due to the 3-hour time difference. Then about 10:00 p.m. I decided I would just leave an answering machine message. And the person answered the telephone at 1:00 a.m. in DC!"

January 23, 2006

Nell Minow on Majority Voting and Compensation Disclosures

In this podcast, Nell Minow, Editor of The Corporate Library, provides her reactions to the executive compensation disclosure proposals from last week’s open Commission meeting and the ongoing majority vote movement, including:

- What do you think of the SEC's new executive compensation proposal?
- How do you think the new related-party transaction disclosures will impact investor attitudes?
- What importance do you place on the majority vote movement?
- Do you think hedge fund or other short-term activists might abuse a majority vote standard?
- Might other more traditional activists now use their "no" votes differently under that standard?

Is ISS Conflicted?

Today's Washington Post includes this lengthy article about ISS and its potential conflicts.

Should We Merge or IPO?

For those participating in tomorrow's DealLawyers.com webcast - "Should We Merge or IPO?" - please print off these course materials from Dave Segre of Wilson Sonsini. In addition to Dave (who did Google's IPO), join Jim Fulton of Cooley Godward, Scott Stanton of Morrison & Foerster and banker Ralph Della Ratta of Western Reserve Partners.

Proxy Season Checklists

We continue to post checklists related to the proxy season - including ones yesterday from Davis Polk and Covington & Burling - in our "Proxy Season" Practice Area.

You might also want to check out this letter that the NYSE just sent to listed companies, reminding them of their proxy season obligations.

January 20, 2006

Wow! Intel Adopts Majority Vote Standard

On the heels of recommendations from the ABA Director Voting Task Force's preliminary report, which I blogged about yesterday, comes an announcement from Intel that it has amended its bylaws to adopt a majority vote standard, which includes a director resignation provision to address hold-overs. This excerpt from Intel's related press release - and Form 8-K - explains how the holdover provision works:

"Under the laws of Delaware, where Intel is incorporated, if an incumbent director is not elected, that director continues to serve as a "holdover director" until the director's successor is duly elected and qualified. To address this potential outcome, the board has also adopted a director resignation policy in the company's bylaws. If an incumbent director is not elected by a majority of the votes cast, the director shall offer his or her resignation to the board. The Corporate Governance and Nominating Committee would then make a recommendation to the board on whether to accept or reject the resignation, or whether other action should be taken. The board will publicly disclose its decision and the rationale behind it within 90 days of the certification of the election results."

This is quite a development that bears watching, particularly since investors are said to be quite unhappy with the ABA's preliminary report recommendations. If you haven't been watching the developments in this area so far, it bears pointing out that Intel's approach differs significantly from the so-called "plurality plus" approach of Pfizer and a few dozen other companies that have adopted director resignation provisions in their corporate goverance guidelines - because those guidelines operate under a plurality voting standard. We have added Intel to our "Chart: Companies w/ Majority Vote Governance Guidelines."

Change in the NASD's WKSI Exemption Policy

In various forums, the NASD Staff previously confirmed that the NASD would not require the filing of a registration statement on behalf of a WKSI, unless the offering was subject to the NASD's conflict-of-interest rule (Rule 2720). Now, the NASD appears to have changed that policy exemption.

For more information on this change, set forth below is an explanation from an e-mail sent yesterday by the ABA's NASD Corporate Financing Rules Subcommittee. The email reflects a conversation that two members of the Subcommittee had recently with the Staff of the NASD Corporate Financing Department and General Counsel's Office:

"The NASD's new position is that if a registered offering by a WKSI cannot rely on an exemption from NASD filing currently in NASD Rule 2710(b)(7), the offering must be filed with the NASD for review. The most relevant exemptions are for: (1) offerings of any security by an issuer with an outstanding issue of investment grade rated unsecured non-convertible debt/preferred securities with an original term of at least four years (except if an IPO); (2) shelf offerings on Forms S-3 or F-3 (under standards before October 21, 1992); (3) shelf offerings by Canadian issuers on Form F-10 (as of June 21, 1991); and (4) offerings of investment grade debt."

New French Whistleblower Process and Related EU-SOX Compliance

Thanks to Mark Schreiber of Edwards Angell Palmer & Dodge and Raphael Dana of Soulier for these documents that you need for complying with French whistleblowing laws that are translated into English: CNIL Single Authorization and Decision; CNIL Introduction to Single Authorization; and CNIL Forms for Single Authorization. These are posted in our "Whistleblowers" Practice Area.

In this podcast, Mark and Raphael discuss the latest developments with the French CNIL's just published online single authorization program. This is where the real work for US companies complying with SOX in EU now starts. The new CNIL single authorization process is the first of the simplified compliance processes in Europe - and the European Commission Article 29 Working Group has begun to endorse this model on a pan-European basis, meaning other EU countries will likely follow suit. The podcast discussion includes:

- How can companies now comply with the new single authorization and final CNIL guidelines on whistleblower schemes in France?
- What exactly is the new CNIL online compliance process, what are the underlying company requirements, how long does it take, and what strategic choices do US and other companies need to make to qualify?
- How is this new process consistent with SOX and does the SEC agree?
- What does the new CNIL authorization process mean for complying with whistleblower laws in other European countries?

January 19, 2006

A Little Gloss on the SEC's Upcoming Proposing Release

During a panel yesterday at Northwestern’s 33rd Annual Securities Regulation Institute in San Diego, according to some emails I received from attendees, SEC Corp Fin Associate Director Paula Dubberly spoke briefly about the upcoming proposing release on the executive compensation disclosure rules, including:

- there will be interpretive guidance that would apply to 2006 proxy statements

- the SEC likely will encourage early adoption of some of the narrative disclosure

- the proposing release isn't likely to be available until next week at the earliest

Depending on when the proposing release is available, we might have to push back our January 26th webcast slightly: "Your Upcoming Proxy Disclosures—What You Need to Do Now!" The level of interest in the new proposal is incredible, as we already have posted a dozen law firm memos just covering the open meeting in "The SEC's Proposal" Practice Area.

Preliminary Report from the ABA's Director Voting Task Force

The American Bar Association's Director Voting Task Force released its preliminary report on majority voting earlier this week. The report recommends that the plurality default standard be maintained in the Model Business Corporation Act; but that companies could choose to adopt bylaw provisions that would require directors - who received more "withheld" votes than "for" votes - to remain in office for no more than 90 days. The board may, but is not obligated to, appoint “any qualified individual” (including the director who received more votes against him/her than for him/her) to fill this vacancy. In addition, the report contemplates revisions to the MBCA that would facilitate and enforce resignations tendered by directors. The Task Force is soliciting comments on its proposals (by February 20th). We have posted a copy of the preliminary report in our "Majority Vote Movement" Practice Area.

EC Issues Cross-Border Directive

Here are selected excerpts from an article in the latest ISS Friday Report:

The European Commission has unveiled its latest draft of a directive to remove barriers to shareholder voting. The proposal, almost three years in the making, seeks to ensure that investors in European Union companies will have timely access to complete information and can easily exercise their voting rights across national borders.

In large markets such as the United Kingdom, Spain, Italy, France or Germany, more than 30 percent of the share capital of listed companies typically is held by non-resident shareholders. In other countries such as Luxembourg, Latvia, Hungary, Belgium, or the Netherlands, this proportion may reach 50 percent, and in some cases as much as 70 to 80 percent.

Earlier EU reports noted that many national laws governing shareholder meetings and voting have not been updated to reflect the modernization and computerization of share holdings and are ill-suited to modern investing and cross-border investment. Key obstacles faced by non-resident shareholders include share blocking, insufficient or late access to information, and overly burdensome requirements on distance voting.

The proposed directive, which would eliminate the main obstacles to cross-border voting and enhance other shareholder rights, calls for the following minimum standards:

- General meetings should be convened with at least 30 days notice. All relevant information should be available on that date at the latest and posted on the corporate issuer's website. The meeting notice should contain all necessary information. An earlier version of the directive proposed a 21-day standard.

- Share blocking should be abolished and replaced by a record date, which should be set no earlier than 30 days before the meeting. Record dates are now used in the U.S. and the U.K.

- All shareholders, including non-residents, should have the right to ask questions, either in person or by mail.

- Shareholders with at least 5 percent of a company's outstanding shares (or a stake worth at least 10 million euros ($12 million)) should have the right to present a resolution for a vote.

- Proxy voting should not be subject to excessive administrative requirements, nor should it be unduly restricted. Shareholders should have a choice of methods for distance voting.

- Voting results should be available to all shareholders and posted on the issuer's website.

To take effect, the new directive must be ratified by both the European Parliament and the European Council under the process of codetermination. If both bodies approve it, then the EU member states will be required to incorporate the rules into their own company laws in order to be compliant. This process may take anywhere from eight months to two years, depending upon how many changes the Parliament or Council make.

January 18, 2006

The SEC's Executive Compensation Disclosure Proposals

Yesterday, at an open Commission meeting that lasted nearly two hours, the SEC proposed a broad overhaul of the executive compensation disclosure rules. The comment period is 60 days. Here is Chairman Cox's opening statement and Commissioner Atkin's statement.

Apologies for not blogging "live" from the meeting like footnoted.org - but as you can see from Michelle's entries yesterday, there typically is not much action at open Commission meetings (she was soliciting $1 donations to pay for her train down to the meeting; my guess is she won't travel again for such limited content - plus the meetings are webcast and thus few attend physically from outside the building).

In my book, the highlight of the open meeting was when Chairman Cox jokingly suggested that a bunch of schoolteachers be hired to do plain English reviews of company filings. Guess that might have spooked some Corp Fin lawyers as to whether they have any real job security!

As fleshed out in the SEC's press release, the proposals would refine existing tabular disclosure and combine it with improved narrative disclosure (and cover the CEO, CFO and the three other highest paid executive officers and the directors), including these noteworthy developments:

1. A new "Compensation Discussion and Analysis" section would replace the Compensation Committee Report – focusing on the most important factors underlying each company’s compensation policies and decisions. Not sure yet if comp committee members names would still be listed underneath (not likely since the new section would be considered "filed" rather than "furnished").

2. Executive compensation disclosure would be organized into three categories: (1) compensation over the last three years; (2) holdings of outstanding equity-related interests received as compensation that are the source of future gains; and (3) retirement plans and other post-employment payments and benefits.

3. The Summary Compensation Table would be reorganized - and include a new column for total compensation and a dollar value for all stock-based awards, measured at grant date fair value (computed pursuant to FAS 123R).

4. The perk threshold would be reduced to $10,000 - and more importantly, the proposing release will include interpretive guidance is provided for determining what is a perquisite (meaning that compliance is likely to be mandatory for this proxy season).

5. Two supplemental tables would report Grants of Performance-Based Awards and Grants of All Other Equity Awards.

And much more, such as tables for outstanding equity interests, retirement plan, post-employment, etc. There even would be a Director Compensation Table similar to the Summary Compensation Table. And there are proposed changes to the 8-K disclosure requirements, including consolidation of all Form 8-K disclosure regarding employment arrangements under a single item.

Tune in next week! On CompensationStandards.com, we already have begun to post commentary and analysis in the new "The SEC's Proposals" Practice Area. And join SEC Corp Fin Associate Director Paula Dubberly, Ron Mueller and Mark Borges next Thursday for the webcast: "Your Upcoming Proxy Disclosures—What You Need to Do Now!"

The SEC's Related Party Transactions and Director Independence Proposals

As expected, the SEC's proposals also would update related party disclosure requirements. Principal changes would include required disclosure regarding policies and procedures for approving related party transactions, a slight expansion of the categories of related persons and a change in the threshold for disclosure from $60,000 to $120,000.

The requirement to disclose these transactions would also be made more principles-based. They also would require disclosure if the company is a participant in a transaction in which a related person has a direct or indirect material interest.

A proposed new item (Item 407 of Regulations S-K and S-B) would require:

- disclosure of whether each director and director nominee is independent;

- a description of any relationships not otherwise disclosed that were considered when determining whether each director and director nominee is independent; and

- disclosure of any audit, nominating and compensation committee members who are not independent.

Perhaps the SEC has been sitting on the NYSE's proposal - that touches upon director independence issues - to ensure that its own proposal doesn't pose a conflict. So maybe we shall see the NYSE release put out for comment by the SEC sooner rather than later.

Learn what to do now! Join SEC Corp Fin Associate Director Paula Dubberly, Alan Dye, Amy Goodman and Beth Young for the February 1st webcast: "Related Party Transactions: What Disclosures You Need to Make Now!"

Now Comes the Fiery Rhetoric...

Over the past week, I've had fun spending time educating reporters about how the SEC's disclosure framework works - and how executive compensation practices figure into all of this. Hey Mom, I was quoted in the Palm Beach Post and the Middle East North Africa Financial Network (which picked up a story from the Chicago Tribune)! All good stuff.

Then yesterday, I started getting a little crazy tooling around the Web and rebutting some bizarre postings from academics who have criticized Chairman Cox and claim that enhanced executive compensation disclosures will cost too much. I've heard a few arguments against enhanced disclosure, but none until now based on the projected cost of the disclosure. For the life of me, I don't see how you can equate the SEC's new proposal to the very costly internal control regulations (404 is much more than mere disclosure).

The only costs involved in the new proposal is the steep learning curve for those of us that draft disclosures, as most of the data that will underlie the new disclosures is readily available. All companies already collect compensation data for financial and tax reporting purposes - and many companies started collecting the data in a format similar to what the SEC now seeks as part of implementing tally sheets. In fact, I would argue that - down the line - the new tables will be easier to put together than the disclosure that is required under the existing disclosure framework.

Grace Periods Are Over

As I blogged last week, memberships to our publications expired on December 31st. Our extra extension period is now over - and non-renewers aren't able to access content from our sites. Renew today in order to access any of our upcoming webcasts. Please don't contact me as I don't handle renewals - instead, renew online or contact our HQ in California at 925.685.5111 or info@thecorporatecounsel.net.

January 17, 2006

Executive Compensation Disclosure at the Forefront

Hats off to Joe Nocera of the NY Times for his uplifting column on Saturday, during which he tackles the tough issue of what boards should be doing now to rein in excessive pay. Noting that mere disclosure won't fix many of the existing problems, Joe becomes the first reporter to identify that internal pay equity is a viable solution to many of today's ills (quoting Fred Cook repeatedly in the process).

Hopefully, many boards will now take this opportunity to implement many of the practices for which we have provided practical guidance - on CompensationStandards.com - in an effort to get back to responsible pay practices. Otherwise, shareholders are going to have their own "Holy Cow" moment when enhanced disclosures are made this proxy season (or next year, for those companies that don't have the backbone to follow the SEC's proposals this season).

Getting responsible isn't difficult - just use these "four tools" (that we fleshed out in the September-October issue of The Corporate Counsel):

1. Tallying ALL Components
2. Internal Pay Equity
3. Accumulated Gains Table
4. Hold Until Retirement

You will also want to make sure that your CEO and directors have read the recently posted 8-page summary of the important guidance that came out of the "2nd Annual Executive Compensation Conference" - as well as learn from the experts during our three upcoming proxy disclosure webcasts.

SEC Upgrades Enforcement Investigation of IBM's Option Expensing Disclosures

Last Thursday, IBM issued this brief press release to announce that the SEC has upgraded its probe of IBM's April 2005 disclosure related to how it is expensing stock options. In June, IBM previously announced that the SEC was informally looking at the matter after questions arose when IBM said on April 5 that it would begin accounting for the expense of stock options before the deadline in a hastily arranged conference call. Here is how a recent NY Times article described what happened:

"During the call, IBM Chief Financial Officer Mark Loughridge told analysts to "update" their models to reflect the new expense for the just-elapsed first quarter. A chart distributed with the call suggested that analysts lower their earnings-per-share estimates to 90 cents from $1.04, a drop of 14 cents. They did just that.

But when IBM put out its first-quarter financials nine days later, it reported earnings of 84 cents a share - and the new options cost contributed only 10 cents of expense. Some analysts complained that IBM had played up the impact of the options expensing in order to lower estimates ahead of a disappointing quarter."

In his blog, Mike Melbinger has been warning companies that the issues and assumptions relating to a company's implementation of FAS 123R were very important - and would be scrutinized. Learn more about how to disclose option expensing in press releases and SEC filings in this NASPP webcast - "Drafting the New Option Expensing Disclosures" - on January 25th, which will feature SEC Corp Fin Chief Accountant Carol Stacey, Ron Mueller and Keith Higgins. If you are not yet a member, try a No-Risk Trial to the NASPP today!

Alan Dye on the Latest Section 16 Developments

Don't forget tomorrow's popular Section16.net webcast - "Alan Dye on the Latest Section 16 Developments." Renew your membership or try a no-risk trial to catch this important program.

January 13, 2006

NYSE Considers Dumping Treasury Stock Exception

Last week, the NYSE published a notice requesting comment regarding whether to retain, modify or eliminate the "treasury stock exception" to 312.03 of the NYSE's Listed Company Manual, which requires shareholder approval as a prerequisite to listing additional shares in certain situations (e.g., generally if the newly listed shares represent 20% or more of the currently outstanding shares).

As the notice acknowledges, because of the way the rule is drafted, the issuance of shares from treasury (i.e., shares that were previously listed and issued but subsequently reacquired by the issuer) is not typically counted in determining whether the 20% threshold has been crossed triggering application of the shareholder approval requirement of 312.03. Though widely known, this "treasury share exception" has recently received increased attention - and some criticism from activist shareholders - in connection with transactions contemplated by Sovereign Bancorp.

The elimination or modification of the treasury share exception from 312.03 would require approval of the SEC following a public comment period. The NYSE has not yet determined to make any such proposal at this time - but, in a manner reminiscent of the way in which the NASD initially solicited comments on whether to propose new rules regarding fairness opinions, is first seeking comment from listed companies and their stockholders on the topic. Comments are due by January 20th.

By the way, the notice is also interesting for the additional detail it provides regarding the way in which the NYSE has historically interpreted 312.03. Thanks to Kevin Miller of Alston & Bird for providing the analysis above - also see the Davis Polk memo in our "NYSE Guidance" Practice Area!

The SEC's Push for XBRL Intensifies

It is clear that implementing XBRL is a top priority for Chairman Cox, as this is the topic he has publicly spoken about the most so far. With this press release, the SEC has reached out even more to the corporate community in an effort to entice them to volunteer for the ongoing XBRL pilot program.

For those that volunteer by February 10th, the SEC now promises expedited reviews of registration statements that the Staff has selected for review. And the carrot for WKSIs is that the Staff will inform volunteers whether their 10-Ks have been selected for review within 30 days after filing - and will undertake to provide any comments on that filing within 45-60 days of filing. I would hold out for the cash prizes...

Section 404 and Non-Accelerated Status

Referring to my December 22nd blog, a number of members have been kind enough to tell me that they have confirmed with the SEC Staff that an issuer whose non-affiliate float dropped below $50m can exit - and not file a 404 report in their next 10-K - even though they filed a 404 report last year.

I had neglected to go back and reword that old blog's soft language on this topic to reflect the Staff's confirmation, even though we had written about it a few weeks back in the most recent issue of The Corporate Counsel as well as in this site's Q&A Forum (see #1391).

January 12, 2006

Alan Beller to Leave Corp Fin

Yesterday, Alan Beller, the SEC’s Director of the Division of Corporation Finance, announced that he will be leaving the Staff to rejoin the private sector in February. Alan has had quite a run in his four years, as he has overseen a truly remarkable – and record – amount of rulemaking and other activity during his tenure. I don't think that many others could have shouldered such a heavy load in such a relatively short period of time (anyone recall when 2-3 rulemakings a year was the norm!).

In fact, Alan isn't just Corp Fin's Director; he also serves as Senior Counselor to the Commission and has been integral in shaping policies and rulemakings beyond the Corp Fin rulemaking adopted on his watch. He certainly deserves the glowing praise in this press release.

My First Visit to the SEC's New HQ

On Tuesday afternoon, I made my first visit inside the SEC's new headquarters as part of a semi-annual meeting between senior Corp Fin Staffers and the Securities Law Committee of the Society of Corporate Secretaries & Governance Professionals. In fact, we were the last outside group to meet with Alan before his lame duck status was announced.

Some quick thoughts on the new headquarters:

- When you first walk in, you notice right away that the building is much more roomy and bright (and adajcent to Union Station, which has a nice eatery in its basement). I didn't make it to the visitor’s waiting lounge and the fancy plasma TVs - useful information for those dedicated to watching Oprah.

- When you get your visitor badge, your photo will now be taken and displayed on the badge (so don't forget to "clean up nice" before you visit).

- The meeting rooms downstairs aren't the greatest, as they don't feel as roomy as the old HQ. Low ceilings perhaps? The official Commission meeting room is arranged "auditorium style" with widescreen monitors on the side walls.

- The Staff's offices are quite nice, as any new building should be. The office walls are too thin - and the hallways disturbingly quiet. Some offices look across a courtyard into other offices, making binoculars the new premium office furniture. Not too many Staffers have to share offices anymore.

- Apparently, it is tougher to meet fellow Staffers, partly since the Staff has grown in size (albeit a hiring freeze continues due to budgetary issues) - and partly because each floor contains a mix of members from the various Divisions. This might sound a little silly to an outsider, but it does make a difference when you can't assume everyone you pass in the hall is a fellow Division member. Maybe we need a shrink to explain why this is so, but I believe that is true for any organization.

Call me an old softie (or just an old-timer), but I will always miss the building at 450 Fifth St...

Corp Fin Takes a Position on Majority Vote Proposals and "Substantial Implementation"

Keir Gumbs of Covington & Burling notes: "Last week, the SEC staff rejected Hewlett-Packard’s argument that its majority voting policy "substantially implemented" a shareholder proposal seeking to establish a majority vote standard for the election of directors. The proposal at issue was submitted by the United Brotherhood of Carpenters Pension Fund, who requested that the company's board of directors "initiate the appropriate process" to amend Hewlett-Packard’s governance documents to provide that director nominees be elected by the affirmative vote of the majority of votes cast.

Under Hewlett-Packard’s majority voting policy, a director who received a greater number of votes withheld from his or her election than votes "for" such election was required to tender his or her resignation to Hewlett-Packard’s Nominating and Corporate Governance Committee. The SEC Staff rejected Hewlett-Packard argument that this policy compared favorably with the proposal.

Although the Staff’s letter does not go into particular detail, a conservative reading of this no-action letter suggests that a company would have to adopt a bylaw amendment - or obtain shareholder approval of a charter amendment - in order to substantially implement a majority vote shareholder proposal under Rule 14a-8(i)(10)."

I think that one upshot of this development may be that companies that are still mulling over whether to adopt a majority vote resignation guideline might now be less likely to do so. But don't forget ISS - if you adopt a guideline that conforms with ISS' policy, they will recommend against the shareholder proposal - so there is still that carrot. We continue to list the companies that have adopted such guidelines in our "Chart: Companies w/ Majority Vote Governance Guidelines."

January 11, 2006

More on the SEC's Upcoming Executive Compensation Proposals

More details about next Tuesday's proposals continue to be reported as the SEC held a press briefing yesterday to share more information about the proposals with journalists after the WSJ scooped everyone yesterday. In his "Compensation Disclosure Blog," Mark Borges does an excellent job analyzing the information that has been gleaned to date.

Today's WSJ continues to report on this hot topic, including these two articles: "They Say Jump: SEC Plans Tougher Pay Rules" and "Memo to Activists: Mind CEO Pay."

Bear in mind that the SEC's proposals will be far-reaching, extending beyond proxy disclosures to 8-Ks, etc. In other words, the SEC intends to address any areas that intersect with executive pay. Alan Dye will spend quite a bit of time specifically on 8-K comp disclosures on the January 31st webcast: "Meeting the SEC's New Expectations: Real Life Examples (and Explanations)."

More Responsible CEO Actions in the Compensation Area

On CompensationStandards.com, we have just posted this 8-page conference summary, which was recently dropped in the mail to subscribers of The Corporate Counsel. The summary provides a synopsis of the practical implementation guidance provided at the "2nd Annual Executive Compensation Conference" from last Fall.

We also continue to add to our list of "CEOs that Have Set an Example," including the actions noted in this Sunday NY Times article, which is repeated below:

"Skeptical about claims that soaring executive pay just reflects the value that the market places on talent? Consider this: Marsh Supermarkets, a publicly traded chain in Indianapolis, has terminated its supplemental executive retirement plans and rewritten the employment contracts of top executives to pare generous severance in the event the company is sold.

Don E. Marsh, the chairman and chief executive, said the changes would save Marsh's shareholders $28 million. The company, in a press release, characterized the cuts as a "show of commitment to the shareholders and employees."

It also may have been an acknowledgment of reality. Marsh, which lost $3.4 million in the quarter ended Oct. 15 on sales of $549.6 million, is trying to sell itself, and the hefty severance packages were not encouraging bidders. The stock has fallen 25 percent since Marsh announced the loss.

Don't worry, though. The men covered by the executives-only plan - Mr. Marsh; his brother, William L. Marsh, the president and chief operating officer; P. Lawrence Butt, the corporate counsel; Jack J. Bayt, president of one division; and Douglas W. Dougherty, the finance chief - would still get to split almost $19 million that the company already set aside for them."

Handling Disclosures of Security Breaches

In this podcast, Tom Smedinghoff of Baker & McKenzie explains the legal duties – and practical implications – of security breaches, including:

- How often do companies have security breaches these days?
- What are a company's legal obligations regarding information security?
- Are companies required to disclose security breaches? If so, what types of breaches are discloseable?
- If a company has a duty to disclose a breach, what is the best way to do it?
- What should companies do now to enable them to act quickly if sensitive information is disclosed by another party?

January 10, 2006

Get Ready to Rumble: The 2006 Proxy Season

If you plan to take in tomorrow's webcast - "Forecast for 2006 Proxy Season and Solicitation Strategies to Consider" - please print off these 38 pages of course materials from Pat McGurn of ISS first. Pat will open the webcast by going over what to expect this proxy season, then a panel of proxy solicitors will delve into specific strategies to consider in a variety of hot areas, including:

- What should companies be thinking about in terms of additional or modified disclosure if there is a stock plan on the ballot this year?

- More than 90 proposals to adopt majority voting are expected this season. How do you expect target companies to respond?

- Hedge fund activism is increasing and expected to do so. What should companies do or not do when approached?

- Looking forward, how might the SEC’s proposal for paperless proxy solicitation affect the landscape for activism?

Sneak Preview of the SEC's Executive Compensation Proposals?

As I blogged yesterday, the SEC has calendared next Tuesday as the date on which the Commission will formally vote to propose new comp disclosure requirements. Apparently, someone is talking from the SEC because the WSJ ran this front-page article today providing specific details about what to expect.

According to the article, these elements might be included in the SEC's proposals:

P1-AD989D_SEC_20060109215211.gif

Judge Orders Scrushy to Repay Bonuses

Last week, an Alabama Judge ruled that former HealthSouth CEO Richard Scrushy must repay $48 million in bonuses to the company. Scrushy received the bonuses over the years 1997 to 2002.

Jefferson County Circuit Judge Allwin E. Horn III said the bonuses were undeserved because they were based on erroneous financial reports. Specifically, the Judge's order states: "Scrushy was unjustly enriched by these payments to the detriment of HealthSouth and to allow Scrushy to retain the benefit of these payments would be unconscionable." Scrushy reportedly intends to appeal the decision. Here is a related article.

Over the past six months there have been calls for CIBC to recapture bonuses paid to senior executives in the several years prior to the bank’s massive settlement of its Enron litigation. Repaying what history determines to have been unearned and unwarranted comp is emerging as a common theme in the compensation arena, including Sarbanes-Oxley's Section 304 (more information on Section 304 in our "Securities Litigation" Practice Area).

January 9, 2006

SEC Ready to Propose New Executive Compensation Disclosures

The SEC has set Tuesday, January 17th as the date on which the Commission will consider proposing new executive compensation and related-party transaction disclosures for proxy statements. The Commission also will consider whether to propose requiring that most of the disclosure in proxy and information statements be provided in plain English. Here is the SEC's announcement.

As a result, we have pushed back the dates of our first two webcasts in the proxy disclosure webcast series so that they will include guidance based on the SEC's upcoming proposing release. The dates of the CompensationStandards.com webcasts are now:

- "Your Upcoming Proxy Disclosures: What You Need to Do Now!" (January 26th)
- "Meeting the SEC's New Expectations: Real Life Examples (and Explanations)" (January 31st)
- "Related Party Transactions: What Disclosures You Need to Make Now!" (February 1st)

Come join SEC Staffer Paula Dubberly; Ron Mueller; Mark Borges; Alan Dye and more on these webcasts, which will be critical for the disclosures you prepare this proxy season! Try a no-risk trial or renew your membership to CompensationStandards.com to catch these programs.

Extension of Grace Period

As I blogged last week, memberships to our publications expired on December 31st. In response to an email to non-renewers - indicating that the grace periods on our sites ended today - our HQ has been crushed by folks who waited until the last minute to renew.

As a result, we have extended the grace periods for a few days - so renew today in order to access Wednesday's webcast on TheCorporateCounsel.net: "Forecast for 2006 Proxy Season and Solicitation Strategies to Consider."

Who's Too Busy For The Annual Meeting?

Last week's article in the NY Times about Sovereign Bancorp pushing back its annual meeting - because management and the board were "too busy" - further solidified its hold on the title of governance posterchild of the year.

The company said the meeting could be pushed back at least four months so management could ''focus its full attention'' on a complex three-way deal in which it will sell a roughly 20% stake to Banco Santander Central Hispano of Spain and then use the proceeds to help buy Independence Community Bank. That deal is the subject of a heated battle, partly due to its own governance issues, as I have blogged about before on DealLawyers.com.

Here is an excerpt from the NY Times article: ''There is no valid excuse for manipulating the timing of the annual meeting,'' Franklin Mutual Advisers, Sovereign's second-largest shareholder, said in a statement. ''What kind of rationale is it to say that the board is essentially 'too busy' to convene an annual meeting? And what 'potential confusion' can be so debilitating as to justify taking away shareholders' right to vote?''

Even investors who say they support management said they disagreed with the company's tactics. ''If they are confident in what they are doing and confident in their ability to sell the story, they should let the vote happen,'' said David Watson, a vice president at Anchor Capital Advisors, a money management firm based in Boston. ''They are getting into games I don't think they should be getting into.''

The postponement of an annual meeting is uncommon, corporate governance specialists say. When it does happen, it is typically because of an inability to produce timely financial statements or as a way of avoiding a nasty takeover fight. It is highly unusual for a board to justify a delay by saying it is too busy with an acquisition.

''Companies that postpone meetings are ones that fear the outcome,'' said Gregory P. Taxin, chief executive of Glass, Lewis & Company, a proxy advisory firm. ''If we allowed political officials to do this, we would live in a banana republic with a bunch of dictators.''

January 6, 2006

SEC Clashes With DOJ Over Plea Deal

After so many recent blogs about regulators battling each other, I couldn't resist blogging on the SEC's rare disagreement with the Department of Justice over whether the former CEO of Gemstar-TV Guide International is getting too much of a sweetheart deal from the DOJ.

The SEC's complaints helped persuade U.S. District Judge John Walter to withhold approval of the plea deal in December. The agreement with the U.S. attorney in Los Angeles calls for the former CEO to spend six months in home detention for obstructing the SEC's probe of a $248 million accounting fraud at Gemstar. The case is U.S. v. Yuen, U.S. District Court for the Central District of California, 05-918.

Here is a related article - and I have posted the transcript of the court hearing in which the judge challenges the DOJ's plea bargain in our new "White Collar Crime" Practice Area.

Confusion Reigns Over 10-K and 10-Q Cover Pages

Some astute members noticed that the 10-K and 10-Q cover pages that I blogged about yesterday didn't include all the changes that were supposed to be included on the covers effective December 27th. I should have explained that I believed that EDGAR doesn't yet have the ability to receive submission headers that reflect LAF/AF/NAF status. The same type of filing snafus occurred on December 1st when EDGAR wasn't reprogrammed timely to accept the changed forms required by the '33 Act reform.

However, I will post updated forms later today with all the new checkboxes - because, from what I can tell, it seems that:

1. some financial printers are relatively unaware of this, but they can generally accommodate the change on the cover page;

2. the EDGAR submission fields have not yet been revised, so filings still need to indicate "yes" or "no" as to whether the filers are accelerated filers (note - this can cause confusion because most printers usually load the information off the cover page, so if the cover page doesn't have the same check boxes as the EDGAR submission header, the printer might not know how to fill out the EDGAR submission header); and

3. the forms on the SEC webpage and the CCH network have not yet been updated for this change.

Given all this, I don't feel like I led folks too far astray - but I certainly should have explained myself. Twenty lashes rain down on me!

The Latest on PIPEs

We have posted the transcript from our recent webcast: "The Latest on PIPEs."

New Rules for Special Committees and Fairness Opinions?

Trying to minimize repeating my blogs from the DealLawyers.com Blog this year, but I think it's important to point out the recent Delaware opinion - In re: Tele-communications, Inc. Shareholders Litigation, - that has raised significant concerns regarding whether contingent fees for advising a special committee are appropriate - and the need for a relative fairness opinion when the transaction consideration is allocated amongst classes of capital stock, among other issues raised. Read more about this case - including a copy of the opinion.

As for the concept of me blogging on two different sites - my wife looks at me now and says "you are now blogging for two?"

January 5, 2006

SEC Issues Statement on Financial Penalties

Yesterday, the SEC issued a statement on how the SEC intends to penalize companies with monetary fines going forward. This is a topic that generated much internal debate among the SEC's Commissioners during Chairman Donaldson's tenure.

During that time, Republican Commissioners Paul Atkins and Cynthia Glassman disagreed with their Democratic counterparts over whether such penalties deter wrongdoing and whether they unfairly punish shareholders who were
already harmed by the misconduct that led to the penalty. They argued that the SEC should focus on punishing the individuals who broke laws, since shareholders bear the burden of corporate penalties. According to news reports, the Commissioners met for over 40 hours to agree on these new guidelines.

As Chairman Cox noted in his remarks, the SEC's new statement is intended to create objective standards to make enforcement penalties more predictable and consistent. Enforcement Director Linda Chatman Thomsen also gave some remarks.

The SEC used two cases to illustrate its approach - one resulting in a $50 million penalty and the other requiring the company only to hire an independent consultant to review the company's financial accounting policy. The SEC slapped McAfee with a $50 million penalty for a nearly two-year fraud that pumped up revenue by $622 million. On the other hand, the SEC did not not lodge financial penalties against Applix because its conduct was confined to two discrete transactions that under-reported losses in 2001. The SEC moved against individual executives at both companies. More on this topic coming soon!

New 10-K and 10-Q Cover Pages Posted!

We have posted Word files of an updated 10-K cover page and a 10-Q cover page in the "Hot Topics Box" on TheCorporateCounsel.net home page. Lots of new checkboxes to add this time around...

Aiding and Abetting by Doing Nothing

Keith Bishop alerts us to an interesting California decision from November that addresses the issues of whether mere inaction can constitute aiding and abetting and the obligations of auditors to report up, Frame v. PricewaterhouseCoopers. The Frame opinion is another twist in the Grafton Partners saga - earlier this year, the California Supreme Court held that predispute jury trial waivers contained in the auditor's engagement letter were unenforceable in Grafton Partners v. Superior Court, 36 Cal. 4th 944 (2005).

Below is some analysis from Keith: This case involves an appeal of the dismissal of claims against PwC for aiding and abetting fraud and conspiracy to commit fraud. The facts are rather complicated - but the argument on appeal was that PwC committed fraud by (1) returning documents reflecting the fraud; (2) destroying workpapers; (3) writing an internal e-mail that did not discuss the details of the fraud; (4) a PwC partner allegedly committing perjury in an SEC hearing; and (5) agreeing not to write and not writing an audit report that would have disclosed the fraud.

The Court of Appeal found that the first four items when viewed independently were insufficient to demonstrate a triable issue of material fact. However, the Court of Appeal found that when combined with the fifth item (absence of audit reports), a reasonable trier of fact could conclude that PwC provided substantial assistance to the fraud.

Note that this case deals with mere inaction (as opposed to omission in a communication) - the trial court had ruled that there was no evidence of an affirmative misrepresentation or misleading disclosure by PwC. On appeal, PwC argued that it had no duty to disclose. However, the Court of Appeal found that an independent duty is not required for aiding and abetting liability. PwC also contended that it had the option of not preparing an audit report under Generally Accepted Auditing Standards (GAAS) and its engagement letter (which expressly stated that PWC could decline to issue a report). The appellate court, however, found that neither GAAS nor the engagement letter prohibited disclosing the fraud to others.

The Court of Appeal found that the GAAS provisions were not necessarily controlling since they did not refer to limited partnerships. It also cited the inspection rights of limited partners under California law. In upholding the dismissal of the plaintiffs' conspiracy claims against PwC, the Court of Appeal found that PwC had no independent legal to inform the limited partners.

This appears to be inconsistent with the Court's statements with respect to aiding and abetting. However, the Court stated that in the context of aiding and abetting, the failure to disclose was relevant to the issue of whether PwC fulfilled its duty to its clients. This is not the same as whether PwC had and independent duty to the limited partners. Thus, the aiding and abetting claim survived dismissal while the conspiracy claim did not.

We have posted a copy of the opinion - as well as a correction of the original opinion - in our "Securities Litigation" Practice Area. And "Court of Appeal" is not a typo - for some reason, the California court likes it singular...

January 4, 2006

Chairman Cox Names New General Counsel

Not surprising if you read the LA newspapers (which have rumored this pick for some time), SEC Chairman Cox named a partner from his former law firm yesterday as the SEC's new general counsel. Brian Cartwright, a partner at Latham & Watkins, will start his new job on January 23rd - and his tenure will slightly overlap with the outgoing general counsel, Giovanni Prezioso, who will leave in the next month or so.

Here is the SEC's related press release, which touts Brian's managerial experience at Latham as well as notes that he is a former astrophysicist. Note that Brian has a corp fin/transactional background - most of the SEC's general counsels have a litigator's background.

Following on the astrophysicist theme, you gotta love the WSJ's Law Blog's headline of "Brian Cartwright's Really Smart." Hmm, now that I think about it - does that mean that the SEC needs more scientists? Maybe a biologist to head the Division of Investment Management and a physicist for Market Reg? An astrologer for Chief Accountant?

Kidding aside, as Chairman Cox selects personnel for the remaining vacant top spots, the "Alan Beller Watch" is sure to intensify...

Securities Lawsuits Drop During 2005

As noted in this Tuesday WSJ article, Stanford University Law School and Cornerstone Research just released their 2005 Securities Class Action Filings Report. The Report tracks securities class action lawsuit activity and presents an overview of the trends in litigation for the year. A full copy of the report is available on Stanford's Clearinghouse site as well as with other litigation trend studies posted in our "Securities Litigation" Practice Area.

The following highlights some of the key findings of the Report:

1. The overall number of class actions filed in 2005 decreased more than 17%, falling from 213 filings to 176. This year's number is also 10% below the average from 1996-2004.

2. The "Disclosure Dollar Loss," which is the amount of market capitalization companies lost upon announcement of a lawsuit, decreased 33%, from $147 billion in 2004 to $99 billion in 2005.

3. There was a substantial increase in the number of lawsuits alleging misrepresentations in financial reporting, increasing from 78% in 2004 to 89% in 2005, and false forward-looking statements, from 67% in 2004 to 82% in 2005.

Stanford Professor Joe Grundfest and Dr. John Gould of Cornerstone suggest that the end of the boom and bust cycles of the US equities market - and the improved governance in the wake of the Enron and WorldCom frauds may be two of the primary reasons for the marked declines in filings. Bill Lerach is quoted in the WSJ article as noting the increase in financial fraud filings was because cases alleging financial misstatements have a better chance of surviving in court.

January Eminders is Up!

The January issue of our monthly newsletter is posted. Enjoy!

Some New Year Commentary on the Accounting Profession

In our "Accounting Overview" Practice Area, we have posted an interesting speech from the current chairman of Ernst & Young, Jame Turley, given a month ago. Lynn Turner notes "Mr. Turley highlights the benefits that SOX has provided and urges against watering down the legislation. He notes the shortcomings in the past of the profession and need for humility in light of that. He then goes on to say the firms are too big to fail and should be protected against a catastrophic loss by the government.

Mr. Turley also notes the Chamber of Commerce has formed a Commission on the Regulation of the U.S. Capital Markets in the 21st Centruy for the purpose of examing the legal and regulatory framework so as to "modernize" the capital markets. Its report is due in 2007. He also raises the issue of the need for more forward looking and non-financial disclosure, what I call "Key Performance Indicators" or KPIs.

The speech does a very good job of teeing up some of the more important discussions that will no doubt take place in the next couple of years regarding the accounting profession. It is also interesting to note that the very same accounting firms - who argued before Justice and the FTC that they out to be permitted to consolidate, merge and become more concentrated - are now arguing that having done so, they should be given protection from events that might cause the few of them left to fail."

January 3, 2006

What Was Hot; What Was Not in 2005

Happy New Year! Here is my 2nd annual creation of an "In/Out" List:

- Hedge Fund Activists/Union Activists
- Free Writing Prospectuses/Gun-Jumping
- Auditor Liability Caps/Internal Controls
- "Really Vote No" Campaigns/"Just Vote No" Campaigns
- More Exec Comp Disclosure/Complaining about Comp Disclosure
- Going Dark and Private/Going Public
- Access Equals Delivery/Electronic Delivery
- Internal Pay Equity/Peer Benchmarking
- Podcasts/Text Interviews

If you have any further suggestions, please email them to me and I will add them to this list. For comparison, here is last year's list.

Time to Renew!

As all our memberships and subscriptions are based on a calendar year, some of yours may have expired over the weekend. You can renew online below for any of these fine print or online publications:

- TheCorporateCounsel.net
- The Corporate Counsel print newsletter
- The Corporate Executive print newsletter
- NASPP
- Section 16 Annual Service
- Section16.net
- Romeo & Dye's Section 16 Filer
- Section16Treatise.net
- CompensationStandards.com
- DealLawyers.com

Number of Restatements During 2005 Break Record

Last Thursday, the USA Today ran this article noting that there were a record number of restatements during 2005. The good news is that many of these restatements were announced as companies were completing their 404 work (499 in the March-May time frame; another 114 in August) and most of these companies have identified and corrected their problems.

With larger companies done with their initial year of internal controls testing, the number of restatements appeared to be trending down by the end of '05 - and '06 could be the first year in which there are significantly fewer restatements compared to the prior year since the numbers began to be tracked in '97. Of course, as smaller companies are required to complete their 404 work, this number likely will shoot up again...