February 28, 2006

Marty Dunn Named Acting Corp Fin Director

Marty Dunn, the Deputy Director (Legal) of Corp Fin, has deservedly been named Acting Director to head up Corp Fin now that Alan Beller has left and before John White assumes the directorship on March 20th. Marty has been with Corp Fin since 1988.

Notes from the SEC's Small Business Advisory Committee Meeting

I blogged last week briefly about the SEC's Small Business Advisory Committee latest meeting. Here are more extensive notes about the meeting from FEI's "Section 404 Blog," which are partially repeated below:

"The SEC Advisory Committee on Smaller Public Companies (SEC ACSPC) voted unamimously at its public meeting to release for public comment its Exposure Draft (ED) of what will ultimately be its "Final Report" to the SEC. The ED contains over 30 recommendations regarding improving regulation of smaller public companies, and and is expected to be formally released for public comment by Feb. 24 or shortly therafter. There will be a 30 day comment period on the ED. A summary of what is expected to be in the ED, based on a "draft of the ED" posted on the SEC's website for informational purposes as of Feb. 14, 2006, is available here.

Among the most controversial, if not the most controversial, of the SEC ACSPC's recommendations, concerns its recommendation to exempt microcaps and smallcaps from certain provisions of Section 404. The size threshholds the SEC ACSPC proposes to use to define "microcap" and "smallcap" companies generally are :

- under $128 million market cap for microcaps, and
- between $128 million and $787 million for "smallcaps".

For puposes of the Section 404 exemptions specifically, the SEC ACSPC adds an additonal metric relating to revenue to determine which companies would be exempted under Section 404:

- microcaps (as defined above) with less than $125 million revenue, and
- smallcaps (as defined above) with less than $10 million revenue.

Additionally, smallcaps (as defined above) with more than $10 million in revenue, but less than $250 million in revenue, would be exempt from the auditor attestation portion of Section 404 only [Section 404(b)] but not from the management report requirment under Section 404 [Section 404(a)].

Further, the SEC ACSPC recommends that if the SEC decides not to offer such exemptions, that the SEC ask the PCAOB to issue a more "cost-effective" version of an auditing standard, referred to generically as "ASX," which the SEC ACSPC recommends to be scoped more narrowly than the current auditing standard (AS2). ASX is proposed to encompass: "an audit of the design and implementation of internal control over financial reporting."

Also, the SEC ACSPC recommends that the SEC and PCAOB provide additional guidance "to help clarify and encourage greater cost-effectiveness in the implementation of AS2."

Although the SEC ACSPC voted unanimously to release the ED for public comment, some dissenting views were voiced, particularly with respect to the Section 404 related recommendations, and dissenting views submited by SEC ACSPC members prior to Feb. 23 will be included in the ED, said SEC ACSPC co-chair Herb Wander at the Feb. 21 meeting. Among those expressing dissenting views on the Section 404 exemptions were Mark Jensen of Deloitte, John Veihmeyer of KPMG, and Kurt Schacht of CFA Institute. (Info on members of the SEC ACSPC is available here.)

One SEC ACSPC member from a smaller bank expressed frustration at the dissent of the members of Big 4 accounting firms, noting the perception that Big 4 firms had abandoned smaller companies under the pressure to complete 404 audits for larger companies, noting some referred to the Sarbanes-Oxley Act as the 'full employment act for auditors.'"

The "Sith Lord" Analyst Conference Call

I'm just loosely following the battle between Overstock.com's CEO Patrick Byrne and those that he alleges are conspiring against the company (a short-selling hedge fund, an independent research firm and others - here are the pleadings in that lawsuit), but I found this Joe Nocera column in Saturday's NY Times about the "Sith Lord" analyst conference call to be quite amusing (you need to provide your email address to access an archive of that call). Here is an excerpt from that column:

"If you know anything about Patrick Byrne, it's probably his famous "Sith Lord" conference call. Held last summer, it was an hourlong monologue during which Mr. Byrne laid out a vast, overarching conspiracy, made up of dozens of Wall Street players — including the New York attorney general, Eliot Spitzer! — all under the thumb of an mysterious puppet master, whom Mr. Byrne labeled the Sith Lord. He titled the conspiracy "The Miscreants' Ball," an obvious reference to Michael Milken's old Predators' Ball.

Although Mr. Byrne told me that his Sith Lord speech ranked among "the 10 proudest moments of my life," most people, including me, thought it was loony beyond belief. Roddy Boyd of The New York Post recalled hearing about it from someone on Wall Street. "When he described it, I thought he was embellishing," Mr. Boyd said. But when he listened to the replay, 'my jaw dropped — you cannot make up what occurred on that phone call.'"

February 27, 2006

Nasdaq's Proposal re: Transition of Companies from 12(g) to 12(b) Registration

On Friday, Nasdaq filed a proposed rule change which sets forth a proposed process of how Nasdaq issuers would transition the registration of their securities from Section 12(g) to Section 12(b) as Nasdaq officially becomes a national securities exchange (which likely will occur in early April). This is an issue that I blogged about last week in the context of which Section 12 box to check on the cover page of the upcoming Form 10-Ks.

The Nasdaq's proposed rule would allow an easy transition of the registration of the securities for its 3200 companies from Section 12(g) to Section 12(b) without each company having to file their own Form 8-A. Each Nasdaq company would have a 10-day window to "opt out" of this process - but I can't imagine any company would want to do that as they then would either have to file their own Form 8-A or be kicked down to the Pink Sheets or the OTC Bulletin Board.

No word yet on how - and if - '34 Act filing numbers for each Nasdaq company would change...

The Latest Pfizer Proxy Statement

Always striving to be a disclosure leader, Pfizer's latest proxy statement filed Friday is no exception. As I am sure Mark Borges will be blogging about shortly in his "Proxy Disclosure Blog," Pfizer voluntarily makes quite a few of the new disclosures that are discussed in the SEC's recent executive compensation proposals.

Here is a quote from me in a Dow Jones article about Pfizer's disclosure, "Given that investors are demanding the types of disclosures that the SEC has proposed, it makes sense that companies would voluntarily make them this year rather than wait for the SEC to adopt final rules."

FEI's Staff Notes from the PCAOB's SAG Meeting: Auditor Liability Limits

A few weeks back, I asked if anyone had taken notes during the PCAOB's Standing Advisory Group February 9th meeting, during which auditor liability clauses were debated.

Glad I asked! Here are a full set of staff notes from that meeting courtesy of the Financial Executives International staff - and below are those notes related to the auditor liability issue:

- Some members of PCAOB staff and members of SAG have heard anecdotally that litigation related clauses have become widespread; others said there is a lack of data on this and suggested the PCAOB gather facts to present subsequently to SAG.

- Specific types of litigation related clauses which auditors are putting in engagement letters with clients include:

1. Indemnification - which virtually everyone agreed, for public company audits, would clearly be violation of SEC independence rules; nothing to debate here.

2. Alternative dispute resolution (ADR) - many not troubled by this as a commercial agreement between two business parties like any other vendor agreement, some think its cheaper than going to jury trial, consumer rep says recent studies say ADR is not much cheaper, investor reps said the problem with these clauses is they are out of the sunshine, unlike in court system, where even if ultimately settled out of court, a complaint is filed which public has access to, without such filing, investors have no way of knowing if certain firms are being subject to a lot of these ADR private proceedings, etc,. companies do not seem to be disclosing such agreements (with noted exceptions of Sun Microsystems and another company); how can shareholders ratify auditors if they don't have this info, etc.

3. Limitation of liability - punitive damages , or actual damages, some of the same investor concerns as stated for ADRs above, also, debate about whether limitation of liability clauses with auditors pose an independence issue per se, and even if not, doesn't it effect auditors performance, wouldn't they put their best resources on their riskiest clients (i.e.., the ones that don't sign of f on limitation of liability); term "actual damages" is undefined, subjective, unknown.

- Some believe there is distinction in how "permissible" some of these clauses should be and were troubled by PCAOB staff seeming to blend or group some of these diff types of clauses together for discussion; others troubled by all the clauses; some said it was problematic to ask SAG to discuss this without providing any data as to how prevalent these clauses are.

- Nick Cyprus (who is a member of FEI's Committee on Corporate Reporting (CCR) provided overall statistics from an informal survey CCR recently conducted: 22 companies responded, 64% percent have ADR clauses;, 100 percent% did not disclose them. Cyprus added that his view was, having heard the SAG's discussion, "if you have this language in your agreements with auditors, you should be disclosing it."

- Some pointed out they might not object to ADR clauses generally, but they would if it prohibited discovery of documents or ability to call on witnesses.

- Some also pointed out they would not necessarily object to certain litigation related clauses like ADR if it was a matter of negotiation between auditor and client, but some understand there are instances in which auditors have given client no choice: to either sign the engagement letter with such a clause, or the auditor would resign.

- Some believe audit committees and board members are not fully aware of such clauses being asked of them; others believe it puts audit committee member at increased risk in their fiduciary role by signing engagement letters that limit the liability of their auditors vis a vis the company, or that could potentially put company at disadvantage vs. the auditors; a PCAOB board member asked that research be done as to whether a company could still sue its auditor in a derivative suit (even for negligence) if such clauses were signed.

- There was discussion as to whether there should be any requirement for auditors' communication with audit committees as to any such proposed clauses, as well as whether there should be any requirement for companies to disclose any such litigation related clauses entered into with its auditors.

- It was noted that the AICPA proposed standard (applicable to audits of non-issuers; PCAOB standards apply to audits of issuers - "issuers" generally meaning public companies or companies subject to Sarbanes-Oxley Act) in September 2005 on this topic; AICPA currently is reviewing comment letters filed.

February 24, 2006

The New European Union Whistleblower Law Guidelines

Recently, the Article 29 Working Party of the European Commission adopted a pan-European approach to Sarbanes-Oxley whistleblowing. It is similar to the French model, but with a broader reach - now U.S. companies operating throughout the EU will now have to comply in other countries beyond France and Germany.

In this podcast, Mark Schreiber of Edwards Angell Palmer & Dodge and Robert Bond of Faegre & Benson discuss these latest developments in the European Union. We have posted a copy of the EU Opinion in our "Whistleblowers" Practice Area.

Record Individual Auditor Penalties Levied by SEC in Xerox Enforcement Action

On Wednesday, the SEC settled an action, related to audits of Xerox, against four former and current KPMG partners, including a former leading partner in the accounting profession. Two auditors each agreed to pay a civil penalty of $150,000 and one agreed to pay $100,000 (and a sanction against a concurring or review partner). These are record payments from an auditor's own pocket. According to this NY Times article, the SEC previously has obtained fines against seven individual auditors in four cases, none more than $85,000.

These fines are insignificant compared to the penalties already collected related to the Xerox audits. As you might recall, six former Xerox executives agreed in mid-2003 to pay more than $22 million - and Xerox agreed to pay $10 million in April 2002. However, the amounts in this new settlement are notable since they come from someone's own pocketbook rather than "deep pockets."

Fannie Mae Report: Over 2600 Pages!

Good grief! Not to be outdone by Richard Breeden's tomes on WorldCom and Hollinger, the Fannie Mae report released yesterday by former U.S. Senator Warren Rudman and Paul Weiss totals nearly 700 pages - and over 2600 pages when you include the appendices. That's a whole lot of billables! This 34-page executive summary is even barely manageable for someone with such a short attention span like me. [When I was a kid, I preferred the Classics Comics over the classics themselves. They were easier than Cliffnotes. Still have a few laying around.]

This article from the Washington Post today paints an interesting picture of the former Fannie Mae CFO going ballistic when the company's audit committee chair had the nerve to call the Fannie Mae internal auditor in '04 (ie. post-SOX). Sounds like a domineering CFO....

February 23, 2006

The Roots of Sarbanes-Oxley

Lynn Turner of Glass Lewis gives us a history lesson: "Often one reads that SOX was hastily created by Congress without much thought. However, that position is usually espoused by people who had - or have - no knowledge of the legislative history, or quite frankly oppose the regulation.

The intial "roots" of Sarbanes-Oxley go back to the '72-'73 Bear market and scandals such as Penn Central, Equity Funding, National Student Marketing - as well as the corporate corrupt payments and bribes that came to light during the Watergate investigations and other such shenanagins. During that time, Congress held many hearings into corporate governance practices and the accounting profession in general. The Congressional Staff also undertook an investigation and created a Staff Report on the accounting profession.

As a result of these deliberations, legislation was introduced in 1978 on these problems and further hearings were held. However, after the death of one key Congressional backer and another backer decided not to stand for re-election, this legislation stalled. This legislation would have created an oversight body for the accounting profession - similar to today's PCAOB - and would have strengthened audit committees.

Similar legislation was considered once again by members of Congress, regulators and the profession during the debate over the '95 tort reform legislation known as PSLRA. However, no legislation was enacted.

In 2002, after 42 further witnesses presented during 10 days of public hearings, the Senate passed a precursor to Sarbanes-Oxley. Then, the House conducted numerous hearings and heard from many witnesses. After the WorldCom scandal came to light, both the Senate and House overwhelmingly adopted Sarbanes-Oxley - which included many similarities to the '78 legislation (in some places, it is nearly word for word). Not exactly what one might call a 'rush to judgment.'"

We have posted a copy of the unenacted '78 legislation in our "Sarbanes-Oxley" Practice Area for those who wish to compare it to the language in the Sarbanes-Oxley Act.

Throwing Stones in Glass Houses?

Lynn's history lesson above is clearly directed towards beating back the recent lawsuit that questions the constitutionality of Sarbanes-Oxley. Many commentators have expressed similar sentiments that this would be a mistake, such as this editorial.

As an aside, it is interesting that the co-plaintiff CPA firm - Beckstead & Watts - that brought this lawsuit (which would disband the PCAOB if successful) was recently the subject of a highly critical PCAOB inspection report. According to the September 2005 report, this small firm was auditing 61 public companies, despite having only one partner and two staffers! And that my friend is not a typo...

[Side note: In relation to my comment yesterday that the mainstream press wouldn't necessarily be familiar with the plurality voting concept, a member reminded me that no candidate in the 2000, 1996 and 1992 Presidential elections reached a majority. Not quite on point, but a pretty interesting fact. Check out the Presidential voting results from the past 150 years on this cool site.]

Thoughts on CEO Succession Planning

In this podcast, Jo Bennett of Battalia Winston International (an executive search firm) provides some pointers regarding CEO succession planning, including:

- How should boards plan for orderly succession planning?
- How about emergency succession planning?
- Are there any developments recently changing how boards plan?
- Should boards have any written policies regarding planning - or is it more of an informal process?

February 22, 2006

SuperValu and Gannett Restate Bylaws to Allow for Majority Voting

Add SuperValu and Gannett to the list of companies that have adopted a pure majority voting standard for director elections. They follow in the footsteps of Intel and Dell in recent weeks. Here is SuperValu's Form 8-K that describes this change; Gannett hasn't yet filed this change with the SEC, but here is a copy of the company's restated bylaws (see Article II, Section 6). Interestingly, Gannett adopted a director resignation guideline a few months ago and has now taken this additional step.

As promised, we have announced a new webcast - "Practical Considerations: Implementing a Majority Vote Standard" - during which a panel with "real life" experience will educate us on how to implement a majority vote (and related) standard. You know, the practical stuff - we will leave the debating over whether the majority vote standard is a good idea or not for the academics (although former Chief Justice Veasey will provide an overview of that debate when he discusses the ABA's report). Representatives from Intel and Dell will tell their stories; as well as Pfizer and Paychex. I am pretty excited about this one!

As an aside, it's not surprising how much confusion exists over precisely what is a majority vote standard. For example, this article claims that Nike has changed its plurality standard - but I believe Nike merely has adopted a director resignation policy that overlays a plurality standard. Hard to tell since Nike has not made any related SEC filing nor provided any other information on its website - but many of the articles on this subject tell conflicting stories. I don't blame the reporters as the concept of plurality voting doesn't exist in our political framework.

Draft of Final Report from SEC's Small Business Advisory Committee

Yesterday, the SEC's Advisory Committee on Smaller Public Companies held one of its last meetings to consider a 165-page draft of its final report. Here are the audio archive and written statements related to yesterday's meeting - and here are comments submitted in response to the original questions posed by the Committee.

Getting Fired? Not a Bad Deal if You're a CEO

Ethics matter. That supposedly is the gist of the story of the RadioShack CEO being forced to resign. But Floyd Norris of the NY Times provides the gory details in this article about how the board arguably hasn't done its job to protect the company and shareholders. This Form 8-K includes a copy of the CEO's resignation agreement.

The departing CEO not only will receive $1 million in quarterly payments - but he has one year to exercise his 1.63 million options (which are underwater today); all in exchange for a 18-month noncompete. This from a company that may very well cease to exist before the 18-month period expires. And you wonder why the company desperately seeks a turnaround? If you or I got fired, I guarantee you that we wouldn't even get that nice watch.

[My Olympic beef - If I never see Bob Costas again, I will survive. What is with NBC trying to break down our athletes so that they go negative. Enough with trying to create a Shani/Chad war, prodding Apolo Anton Ohno to whine that he "only" got bronze, or condemning Lindsey Jacobellis for "settling" for a silver? Lord knows what they will do to Sasha if she falls tomorrow. These people don't even get paid - they truly love their sport! I would like to strap all those NBC suits who think that this negative attitude is what the American public wants to hear into a luge and let her rip...]

February 21, 2006

A 'Holy Cow' Moment for Analog Device's Deferred Compensation Practices

In Sunday's NY Times, Gretchen Morgenson's column delves into the disclosures made in Analog Device's recent proxy statement that the CEO received $145 million in deferred compensation last year - as Gretchen notes, "a money mountain that is remarkable not only for its size but also for what it included." The CEO earned interest at a level about 50% above the market rate - and was allowed to defer amounts earned from exercised options in addition to salary and bonus.

Analog Devices is to be commended for voluntarily making this type of disclosure (as we hope all companies will, since the SEC's proposal likely will be adopted in time to require it next year anyways). But it likely won't be lost on investors that Analog Devices is in the midst of settling a SEC enforcement action initiated in late 2004 that relates to its compensation practices (i.e. timing of the option grants) - and now they have to consider this disclosure piled on top of that when considering the effectiveness of the company's compensation committee and board.

Related Party Transactions: What Disclosures You Need to Make Now!

We have posted the transcript from the popular CompensationStandards.com webcast: "Related Party Transactions: What Disclosures You Need to Make Now!"

Cracking 1500!

In our "Q&A Forum," the rapid pace of questions continues unabated to the point that I am unsure if I can keep up so diligently. We shot past the threshold of 1500 questions last week (with another 275 in the "Rule 144 Q&A Forum").

Remember! Please feel free to answer any questions in any of the Forums - even if just want to kibitz about (or correct) an answer that is already posted! Your reply can be anonymous or with attribution...

As mind-numbing as 1500 is to me, Alan Dye has faced over 2600 questions in the "Section 16 Q&A Forum" with another 1250 in the "Section 16 Electronic Filing Issues Forum." Truly amazing, the guy is aging before our very eyes!

On all of these Forums, the vast majority of questions posed are answered - and the number of questions listed above actually underestimate the real totals as the numerous follow-ups aren't counted as new questions with our software. And don't forget that all answers are completely disclaimed!

February 17, 2006

Nasdaq's Upcoming Exchange Status: What It Means for 10-Ks

As noted in this press release, Nasdaq's application to become a national securities exchange has been approved by the SEC. For those of you listed on Nasdaq, you might wonder if you need to check the "12(b)" box for this year's 10-K.

As you might recall, companies listed on a national securities exchange must register their securities under Section 12(b) of the '34 Act - all others register under Section 12(g). So Nasdaq companies historically have been required to register under Section 12(g) because Nasdaq was not an exchange - and these companies received a '34 Act filing number that begins with a "0-." In comparison, companies filing under Section 12(b) get a '34 Act filing number that begins with a "1-."

The answer depends on when you file and when the Nasdaq's transition to a national securities exchange becomes final. As noted in the SEC's approval order, this transition is expected to occur in April - meaning that any companies filing 10-Ks before then don't have to worry about checking the 12(b) box.

Your next question might be: Do I have to file a Form 8-A to get my new '34 Act filing number when Nasdaq officially becomes an exchange? This query is addressed in footnote 207 of the SEC's approval order, which intimates that the Nasdaq is working with the SEC so that when that magical day happens in April, the thousands of Nasdaq companies out there won't all have to file an 8-A (as an exemptive relief request from Nasdaq to the SEC is expected to do the trick for them). Then, I believe Nasdaq intends to send a new 1934 Act # - as assigned by the SEC - to each of its listed companies.

This topic - and other ones related to the Nasdaq's transition to an exchange - will be addressed in either the upcoming issue of The Corporate Counsel (expected to be mailed in about 10 days) or the subsequent issue (which is expected to be mailed near the end of March).

Beware: 10-K Trap for the Unwary

I continue to hear from members troubled by the new requirement imposed by the JOBS Act - now embedded in the Internal Revenue Code (and in Revenue Procedure 2005-51) - that requires companies to disclose certain tax penalties in Item 3 (Legal Proceedings) of Form 10-K, regardless of materiality.

The concern comes from the process typically used to prepare a 10-K: to determine whether there have been any regulatory changes since the prior year, one conducts a "form check" on the 10-K by referring to the form itself and Reg S-K and Reg S-X. This new disclosure requirement is nowhere to be found in the form or the SEC's rules and regulations.

The heightened risk in this area is that companies that forget to add this new required disclosure can be hit with additional penalties! This new requirement is fleshed out in our "Proxy Season Resource Center," including the numerous checklists from law firms.

New PCAOB/SEC Internal Controls Roundtable

The SEC and PCAOB have announced that they will hold another joint roundtable on internal controls issues on May 10th at the SEC's HQ in Washington DC. They hope to receive feedback to be addressed during the roundtable - they are seeking written comments on 404 issues by May 1st. They hosted a similar roundtable last spring.

February 16, 2006

Notes from Northwestern's San Diego Conference

Thanks to Wilson Sonsini for these comprehensive notes from the recent Northwestern 2006 Securities Law Conference held in San Diego. We have posted them in our "Conference Notes" Practice Area.

Gotta give some love to SEC Commissioner Paul Atkins for citing one of my podcasts in footnote 3 of his speech in San Diego. Thanks!

Nasdaq to Create A New Tier of Listings

Yesterday, Nasdaq unveiled plans to create a third market "with the highest listing standards in the world." Nasdaq plans to launch its new "Global Select Market" on July 1st with the top companies already listed on the Nasdaq - apparently, over 1,000 Nasdaq companies qualify for the new Global Select tier (and reportedly 250 of the existing NYSE companies wouldn't qualify). Details of the listing standards were not released - although the press release states: "The continued listing standards will be the same for the Global Select and the Global Markets."

In addition, the Nasdaq National Market has been renamed the "NASDAQ Global Market" and the Nasdaq Capital Market (the former Nasdaq Small Cap Market) retains its current name.

Understanding Board Extranets

In this podcast, Greg Radner, Executive Vice President of Thomson Financial’s Corporate Executive Services and Product Manager of BoardLink, provides some insight into the latest technologies that facilitate board communications, including:

- What are you seeing companies do in the area of board communications? What are the major trends?
- What concerns do directors have about going online for board communications?
- What is driving directors and companies to look to this type of solution? Are there legal and compliance issues that online services like this can address?

February 15, 2006

Aiding and Abetting by Doing Nothing II

A month back, I blogged about the case filed against some auditors for allegedly aiding and abetting by doing nothing. Now comes an aspect of that same case that involves lawyers. Keith Bishop reports:

"Although it turned out better for the lawyers this time around, it is still somewhat frightening. I found two aspects of the case to be interesting. First, this is the only case that I can remember that involves claims based on allegedly incorrect Investment Company Act and Investment Adviser Act opinions. The plaintiffs claimed that these incorrect opinions allowed evasion of registration, which presumably would have allowed the SEC to detect the illegal activities of the clients.

Second, the plaintiffs also tried to pin liability on the lawyers for blocking an SEC investigation and delaying provisional relief. The disposition of the case does not involve resolution of the plaintiffs' factual allegations as the Court of Appeal applied a California statute (ie. SLAPP -Strategic Lawsuit Against Public Participation) that provides for the early dismissal of certain unmeritorious claims concerning a defendant's constitutionally protected speech or petitioning activity.

An important - but unresolved - question raised by this case is when does advocacy on behalf of a client in an SEC investigation turn into liability to the investors?" We have posted a copy of this court opinion in our "Attorney Responsibility" Practice Area.

A Philosophy for Drafting Agreements

In the latest installment of "Carl's Corner," learn from the master, Carl Schneider, about the philosophy you should consider when drafting agreements.

Romeo & Dye Section 16 Deskbook Now Available!

Peter and Alan have just finished their new 2006 Edition of the "Section 16 Deskbook," which is more comprehensive (and functional) than the annual Section 16 Outline. The Deskbook now takes the Outline's place as part of the Romeo & Dye Section 16 Annual Service. So if you have renewed your Annual Service, you should receive your copy soon - if not, try a no-risk trial today to receive it pronto!

February 14, 2006

A Valentine's Day Story

From Bruce Carton's Securities Litigation Blog:

"Subject: Be my valentine
From: auntbetty1234

Happy Valentine’s Day to my Nephew Smitmie. He’ll be 12 ½ on thursday. When I take him shopping, he just wants to buy-out everything in the store. He’s so cute and much smarter than most.

Love,
Aunt Betty"

You'd never guess it from its face, but the bizarre message above actually was the basis for the SEC"s insider trading case filed and settled recently against one William A. Day, a.k.a. "auntbetty1234."

The SEC's litigation release explains that on February 14, 2002, London, England-based Smith & Nephew, plc. and Oratec Interventions, Inc. publicly announced that they had entered into an agreement for Smith & Nephew to acquire all outstanding shares of Oratec through a tender offer of $12.50 per share. The SEC says that on February 13, 2002, approximately twenty-four hours before the acquisition was publicly announced, Day made the anonymous posting above using the online alias “auntbetty1234” on an internet message board dedicated to Oratec, the contents of which revealed that he possessed material, nonpublic information regarding the tender offer, including:

- the name of the acquiring company ("Nephew Smitmie");
- the price per share ("He’ll be 12 ½");
- the tender offer structure ("buy-out ");
- and the offer announcement date ("Happy Valentine’s Day").

"Much smarter than most?" I don't think so.

[Personal note: If you loved "Say Anything" by Cameron Crowe like I did, there is a nice article about Lloyd Dobler in today's Washington Post. I even went so far as marrying a Diane - and I met her at a "kegger." Remember the classic line from the movie, "You don't meet someone like Diane Court at a kegger." Well, I did!]

Your Upcoming Proxy Disclosures—What You Need to Do Now!

We have posted the transcript from the popular CompensationStandards.com webcast: "Your Upcoming Proxy Disclosures—What You Need to Do Now!"

Web-Based Governance Tools

In this podcast, Diane Brown, Executive Vice President and General Manager of CT and Wolters Kluwer Corporate Legal Services, provides some insight into the latest technologies that facilitate corporate governance, including:

- As technology evolves, what do you see to be corporate secretaries’ top governance and compliance concerns?
- What’s new about the latest version of hCue?
- Why did you decide to add document management capabilities?
- Where do you see hCue going in the future?

February 13, 2006

Financial Institutions Get Interagency Advisory re: Limiting Auditor Liability

On Thursday, a final interagency advisory was collectively issued - by the Treasury Department, Fed Reserve, FDIC, OTS, OCC and NCUA - to inform financial institutions' boards and senior managers that they should not execute agreements that incorporate unsafe and unsound limitation of liability provisions in their engagements with independent auditors, including:

- The final advisory applies to all audits of financial institutions, regardless of their size, whether they are public or not, and whether the audits are required or voluntary.

- Limitation of liability provisions may weaken an external auditor's objectivity, impartiality and performance and, thus, reduce the regulatory agencies' ability to rely on the external audit.

- Limitation of liability provisions may not be consistent with the auditor independence standards of the SEC, PCAOB, and AICPA.

- The inclusion of limitation of liability provisions in external audit engagement letters and other agreements that are inconsistent with the final advisory will generally be considered an unsafe and unsound practice.

Coincidentally, this advisory came out on the same day that the PCAOB Standing Advisory Group debated this topic. I missed the PCAOB's meeting (and just don't have the stamina to listen to the meeting's audio archive after hosting so many webcasts myself over the past few weeks). If you listened, can you let me know if any interesting tidbits came out of it?

Perhaps Exxon Really Needs Stock Options

For a relatively unique view on the state of stock options - at least unique at this point in time - check out Floyd Norris' column in Friday's NY Times. Floyd does a great job of making his point that moving away from options and blindly granting restricted stock for well-established companies might be a mistake.

I also liked this quote: "The lesson here may be that while it is a good idea to keep executives from taking the money and running, it is also a good idea to assure they really care whether the stock rises." The bottom line is that each company has its own circumstances to consider and all companies should not seek to move as a herd. Performance-based options are one of the many choices to go forward with, and given that most of Western Europe would rarely think of using anything else, it is probably time that US practices caught up.

Want to Know What Your House is Worth?

If you are sitting in a pile of snow like me and looking for a lighter moment, go to Zillow.com to review a scary amount of data about your home. It was freaky to see an aerial view of my house pop up instantly on the site - but this beta site also produced an error of over 400% regarding my property taxes. All in all, a solid reminder of just how little privacy we have left...

February 10, 2006

Ways to Stay Out of the Media: Disclose All Executive Compensation Upfront

From Saturday's NY Times comes this blurb below illustrating why care should be taken to disclose all executive compensation in your proxy disclosures (as the SEC Staff has been urging since Corp Fin Director Alan Beller's speech at our 1st Annual Executive Compensation Conference). The point being - what will be your board's reaction to your disclosure being criticized in the media?

"In a federal filing last week, Wachovia disclosed what Wallace D. Malone Jr., the former chief executive of SouthTrust Bank — which Wachovia bought in November 2004 — would receive now that he is retired. At first glance, the payout appeared to be worth some $135 million.

Omitted from the filing were two figures that bring that number up considerably. The first is about $54 million worth of Wachovia shares held in a 401(k) for Mr. Malone; the company put them in a paragraph headed 'miscellaneous.' And $8.5 million in accelerated stock options granted in 2005 were disclosed in similarly vague terms.

Mary Eshet, a spokeswoman, said the 401(k) benefit, which the company contributed to, was 'personal retirement savings — the same benefit available to all employees — and it is not customary to disclose that type of benefit in a filing.' She said the $8.5 million was not disclosed because it was immaterial.

Brian Foley, a compensation specialist in White Plains who uncovered these omissions, found them intriguing. 'In whose world,' he asked, 'are an ex-executive's $54 million 401(k) benefit and $8.5 million in options not worth quantifying?'"

Mr. Malone's windfall has earned the scorn of quite a few newspapers, including the Charlotte Observer ("Scalping Shareholders") and the San Jose Mercury ("Parting pay still sweet for execs") - and even the Wisconsin Technology Network ("What color is your CEO's parachute?").

Will Mr. Malone Surface Next Year Disclosurewise?

If the SEC's proposals are adopted, we can assume that Mr. Malone will show up next year as one of the departed NEOs for whom disclosure will be required - because his severance will go into the "All Other Compensation Column" and on a total compensation comparison, would put him in the top five. If adopted as proposed, the new rules nearly guarantee that any executive - not just the CEO - who leaves during the year with a large severance package is going to wind up in the following year's "Summary Compensation Table."

Transcript Posted: Underwriting Agreements/Opinions After the ’33 Act Reform

We have posted the transcript for last week's popular webcast: "Underwriting Agreements and Legal Opinions After the ’33 Act Reform."

February 9, 2006

New Corp Fin Director: Heeeere's John!

Pardon the Johnny Carson reference (I'm reading a new Ed McMahon book) - but it seems appropriate given the exciting news that Chairman Cox has lured Cravath Partner John White to serve as the next Director for the SEC's Division of Corporation Finance.

That is quite a "catch" as John has over 30 years of Wall Street experience and is respected so much by the bar (and is quite well-versed in accounting issues). John starts work on March 20th. Here is the related press release.

Applicability of SOX’s Whistleblower Law Overseas

Following up on Monday's blog, in this podcast, Carrie Wofford and Tom White of Wilmer Cutler Pickering Hale and Dorr, address an important decision - in Carnero v. Boston Scientific Corp. - about the Sarbanes-Oxley whistleblower laws, including:

- Tell us about the new decision on Sarbanes-Oxley whistleblowers? Why is this issue such a hot one?
- Does this decision mean that companies' overseas offices can relax?
- Does this decision mean that U.S. regulators cannot now reach companies that retaliate against whistleblowers in foreign offices?
- Is this ruling likely to be reiterated by other circuits and DOL judges?
- Does the ruling create problems for companies in term of compliance training if foreign-based workers don't have the same protections that domestic workers get?

California Fairness Hearings and Reverse Mergers with Shell Companies

I've never been able to figure out why an operating company would want to engage in a reverse merger with a shell company. It always seems that the operating company gets all of the costs, headaches and liability of being public, without gaining a truly liquid market for its securities.

Nonetheless, the shell company industry somehow seems to continue, if not thrive - even though the regulators don't like it. Last summer, the SEC adopted rules regarding the use of Form S-8 by shell companies and Form 8-K in transactions in which shell companies cease to be shell companies.

Now, the California Commissioner of Corporations has followed up with a release that essentially closes the door on the use of fairness hearings in California for shell company reverse mergers. California is one of the few states that authorizes fairness hearings (ie. in Cal. Corp. Code Section 25142). The main attraction of the fairness hearing process is the availability of the exemption under Section 3(a)(10) of the Securities Act (for the SEC Staff's views on Section 3(a)(10), see Staff Legal Bulletin 3R).

Lately, the fairness hearing process has been widely used by public companies to acquire privately-held companies. Companies that have used the fairness hearing process include Cisco Systems, E-Bay and Boston Scientific. By using the fairness hearing process, a company can save hundreds of thousands of dollars. The California Department of Corporations reports that the market value of the securities covered by fairness hearing applications totaled over $40 billion for the period covering the 1998-2005 fiscal years. In the most recently completed fiscal year, the market value was over $3 billion.

We have posted the new California release in our "California Corporations" Practice Area.

February 8, 2006

Technical Amendments to the '33 Act Reform

Yesterday, the SEC posted a release with technical amendments to its '33 Act reform. The release contains four corrections, including applying the Item 512(h) indemnification statement to automatically effective shelfs (as had been previously noted over a month ago in our Q&A Forum). Look for some big Corp Fin news today...

SEC Approves PCAOB Auditing Standard No. 4

Yesterday, the PCAOB posted the SEC order approving Auditing Standard No. 4 regarding reporting on whether a previously-reported material weakness continues to exist. This PCAOB proposal had been languishing since last Spring.

On page 4 of the order, the PCAOB is directed to publish a "clear and concise outline of the affirmative audit steps set forth in the standard" within 90 days. So more to come here.

Sarbanes-Oxley Under Attack

Yesterday, the Free Enterprise Fund and and Beckstead & Watts filed a federal lawsuit in Washington DC against the Public Company Accounting Oversight Board and the four Board members in their official capacity. The lawsuit challenges Sections 101-109 of Sarbanes-Oxley, with the central argument being that the mere existence of the PCAOB - and the manner in which Board members are appointed and the PCAOB exercises its authority and is overseen by the SEC - violates the Appointments Clause of the U.S. Constitution (ie. Article II, Section 2). Another argument made is that these circumstances cause a violation of the "separation of powers" doctrine in the Constitution.

Since Sarbanes-Oxley lacks a "severability" clause, the entire law could be held unconstitutional if even one part of the Act is found to be a violation. Here is a copy of the complaint and a related white paper.

Congress could step in and pass a technical amendment to fix the alleged appointments violation - but there are many clamoring for a repeal/modification of other sections of Sarbanes-Oxley that might cause Congress to take a deeper look. This is what is urged by today's opinion column in the WSJ.

I think a more realistic expectation is reflected by the statement in this other WSJ article: "With members of Congress facing re-election in 10 months, it is unlikely that Republican lawmakers will try to gut legislation designed to restore consumer confidence in Wall Street."

How to Trade Restricted Securities

Last October, I blogged about a new network that allows for trading in restricted securities. In this podcast, Brad Monks, President of Restricted Stock Partners, explains how the Restricted Stock Trading Network operates, including:

- What is the RST Network?
- Who is using the Network so far?
- From a legal perspective, what's the applicable '33 Act exemption (Section 4(1 1/2)?) that users rely on?
- In your experience so far, do transfer agents require a legal opinion for each trade since the shares will be legended?
- What other questions are people asking?

February 7, 2006

The SEC's Budget Proposal for 2007

According to this article, the Bush administration is requesting $906 million for 2007, or about 2% more for the SEC compared to last year. Believe it or not, this is one of the largest increases for a federal agency in a tight budget year. Here are the SEC's budget request highlights:

- $328 million for Enforcement, a 2% increase

- $101 million for Corp Fin, a 1% increase

- $50 million for Market Reg, flat from last year

- $54 million for Investment Management, a 1% decrease

- $215 million for OCIE, a 1.5% increase (can you believe that OCIE didn't exist 10 years ago? now it is bigger than Corp Fin, Market Reg and IM combined!)

- An extra $15.3 million to improve technology (eg. implement XBRL and a new case-tracking system)

If you are looking for a job at the SEC, be prepared to be disappointed as this year's budget is extremely tight, mainly due to last year's overruns - and next year's budget envisions a shrinking workforce, providing for a total of 3,685 employees (a decrease of 79 from this year).

The Challenges of EDGAR Searches (and Labeling)

As many of you know, it can be quite challenging to conduct a search on EDGAR. This might start changing; as of yesterday, the SEC now requires each mutual fund to have its own distinct alphanumeric identification, which will help investors searching for information about funds on Edgar (as noted in yesterday's WSJ article).

Now that the SEC has acknowledged that investors should look to the Web to access corporate information - and in light of the SEC's e-proxy proposal - I say it's "high" time that searches be simplified for operating company information too. It is frustrating to input a company's name into the Edgar search tool and get a result of dozens (tip - using a ticker symbol is the only way to go).

But more importantly, from an investor's perspective, we need to get away from the legal mumbo jumbo. Can we really expect retail investors to recognize a proxy statement when they see "DEF 14A"? Why not call a "10-Q" a quarterly report instead? Using plain English for labeling is a concept whose time has come.

The Bankers Speak: What to Expect in 2006

Tune in tomorrow for a DealLawyers.com webcast - "The Bankers Speak: What to Expect in 2006" - and hear a panel of bankers riff about the latest trends and developments. Please print off these course materials before the webcast starts. Try a no-risk trial to DealLawyers.com to catch this important program!

Trends of Private Companies

In this podcast, Michael Petrecca, a Partner of PricewaterhouseCoopers’ Private Company Services Group, provides some insight into what trends private companies are facing (see the results of this PwC survey), including:

- What are some of the benefits to be gained by a private company in adopting certain provisions of Sarbanes-Oxley?

- According to PwC’s “Barometer Trends” survey, adopters tend to be from larger businesses, likely as a means to better position themselves for an IPO or to be acquired by a public company. Does this mean that only larger companies should take the time and incur the cost of adopting Sarbanes-Oxley principles?

- Surveyed CEOs also reported that their companies are affected in numerous ways by regulations, with the majority saying the cost of complying with federal and state regulations has increased over the past two years. Do you believe there will be a reversal in this trend in the near future?

- How do private companies determine if the benefits of adopting the principles of Sarbanes-Oxley outweigh the costs?

- Are banks and other financial institutions—typically the primary readers of the private company financial statements—forcing their clients to assume some SOX procedures?

February 6, 2006

The Challenges of Pay-for-Performance

In her NY Times column yesterday, Gretchen Morgenson tackled the topic of pay-for-performance and how Exxon Mobil's record earnings will undoubtably produce nice bonus windfalls for senior managers at that company.

Gretchen's last paragraph sums up her message: "It has long been a stock market axiom that a rising tide lifts all boats. But today's sea, alas, has become two-tiered. While a rising tide does lift shareowners' boats, those of the me-first managers float far higher."

For those that have watched our two Executive Compensation Conferences, you likely will be aware that we have been a little leery of the growing mantra of "pay-for-performance"; not based on principle, but because it is so difficult to establish performance measures that can't be gamed or that directly relate to an executive's performance.

Obviously, getting beyond a short-term stock price focus is the first step. But we have been unable to find a compensation expert that has expressed a simple-to-understand (and practical) methodology that adequately captures what investors truly are looking for - let us know if you do!

One yardstick that seems to work to address situations like Exxon-Mobil’s is to apply a consistent internal pay equity ratio—as a “governor” to address unforeseen situations. Read more about the challenges of pay-for-performance and how to implement internal pay methodologies in the summary of the "2nd Annual Executive Compensation Conference."

Court Says SOX Whistleblower Law Doesn't Extend Outside U.S.

On the whistleblower front, the U.S. Court of Appeals in the First Circuit recently decided - in Carnero v. Boston Scientific Corp. - that Section 806 of Sarbanes-Oxley doesn't have "extraterritorial" effect. In so doing, the 1st Circuit became the first appellate court to weigh in on SOX's whistleblower protections by holding that Section 806 does not extend to foreign workers employed by overseas subsidiaries of U.S. companies. We have posted a copy of the decision (and firm memos) in our "Whistleblowers" Practice Area.

This decision raises one of the more interesting statutory interpretation issues that pervades Sarbanes-Oxley. As with other sections, the 1st Circuit applies pretty well-established interpretative principles regarding Congressional intent to a statute as to which intent is often far from obvious. The extraterritoriality decision also raises issues as to where the water's edge is located. I will be conducting a podcast about this important development soon...

Should We Merge or IPO?

If you do any venture capital work, you might be interested in the transcript from the recent DealLawyers.com webcast: "Should We Merge or IPO?"

Latest Developments on Parallel SEC and DOJ Investigations

Way back on January 25th, the WSJ ran this article on two recent cases where federal judges have taken the SEC and DOJ to task for using what the judges deemed an unfair one-two-punch approach in criminal cases. Here is an excerpt from that article:

"In Oregon this month, a judge dismissed criminal charges against three corporate executives, saying the Justice Department unconstitutionally pursued a stealth criminal investigation under the cloak of a less-threatening civil proceeding by the SEC. And in Alabama last year, a judge dismissed charges that former HealthSouth Corp. Chief Executive Richard Scrushy lied to the SEC, ruling that he should have been warned that the Justice Department already had opened a criminal investigation when the SEC questioned him. In both cases, the judges found the line between the agencies' roles had become improperly blurred."

This development will be discussed by four former SEC Enforcement Staffers (and one who just left the DOJ) in the March 7th webcast: "How to Handle a SEC Enforcement Inquiry Today."

February 3, 2006

Dell Adopts Same Majority Vote Standard as Intel

According to this Form 8-K filed yesterday, Dell has adopted the same majority vote standard as Intel (contrary to media reports that Dell took it one step further and adopted a standard under which nominees must receive favorable votes from holders of a majority of the shares entitled to vote, rather than from those that actually vote). If you read the Form 8-K - which includes Dell's restated bylaws - you can rest assured that Dell's standard is the same as Intel's (except that Intel solves the holdover problem in their restated bylaws; Dell accomplishes that in its corporate governance guidelines).

This Chicago Tribune article (and a few other media pieces) got the explanation of the standard mixed up after Dell's initial press release jumbled the operative language. By the way, an in-house lawyer from Dell will serve on the panel for the upcoming webcast on how to implement these standards (I should be able to post the flyer for this program in the next day or so).

[Speaking of corrections: According to members more obsessed with Seinfeld than me, Kramer's friend's name was not Bob Sacramento as I blogged yesterday; it was "Bob Saccomanno." Translated into Italian: "Bob Handbag." This can be verified from the episode during which George mistakenly believes he is having a heart attack and Kramer says: "Oh yeah? My friend, Bob Saccomanno, he came in here for a hernia operation.. Oh yeah, routine surgery.. now he's sittin' around in a chair by a window going, "My name is Bob" .. George, whatever you do, don't let 'em cut you. Don't let 'em cut you."]

SIA's Underwriting Agreement Guidance

A number of those members that caught yesterday's superb webcast on the latest deal conveyance, underwriting agreement and legal opinion practices have asked for a copy of the Securities Industry Association's guidance that Jack Bostelman mentioned. We have posted those two SIA documents in the "Securities Act Reform" Practice Area. If you missed the program, the panelists had great chemistry and it was one of the best webcasts I have heard (and I have heard many) - the audio archive is now available.

Shareholders Blast Sovereign Bill Approval

As I run off this morning to teach my first governance class of the semester at George Mason, I see the title of this Associated Press article and immediately think, "how am I going to explain this to the students?"

Without knowing a whole lot about what the situation myself, the article claims that the Pennsylvania legislature is in cahoots with this year's governance posterchild, Sovereign Bancorp, when it passed a bill on Wednesday that would forbid the removal of company directors without cause and weaken an anti-takeover law by changing rules to determine which shares count toward the 20% threshold (the Pa. Governor hasn't yet signed the bill). Remember that the NYSE is pondering dumping the treasury stock exception due to Sovereign's actions.

If true, so much for state regulation as noted by Peter Langerman, CEO of Franklin Mutual Advisers, Sovereign's second-largest shareholder: "This is an extraordinary abuse of the legislative process" - and I would say that it's ironic that this type of behavior occurs during the high-profile Enron trials.

Coming Soon: Fair Valuations Galore and Lease Accounting Overhaul

In this podcast, Jack Ciesielski, Publisher of The Analyst's Accounting Observer, provides insight into the latest accounting trends, including:

- What are that latest FASB projects?
- How large does fair value accounting loom this year?
- What can we expect regarding lease accounting?

Gunjumping Lives!

Below is a nice Professor Bill Sjostrom blog from "Truth on the Market":

"Burger King announced today that it plans to file an IPO registration statement with the SEC in March (here is a Reuters article). According to BK’s CEO: “Our goal has always been to take Burger King public . . . . We believe the transparency and stability in ownership offered by being a public company will benefit our employees and franchisees for years to come.”

BK was purchased in 2002 from Diageo PLC by a group of private equity funds for about $1.5 billion. The funds are likely looking to partially cash out, so it will be interesting to see how many shares they sell in the deal. The timing of the IPO is probably motivated in part by the 50% increase in Wendy’s stock this past year and the strong showing of Chipotle’s recent IPO.

As for the possible Securities Act violation, section 5 of the Act prohibits offers to sell a security unless a registration statement is on file with the SEC. “Offer” is broadly defined as “every attempt or offer to dispose of, or offer to buy, a security or interest in a security for value,” and the SEC interprets this to include any publicity that contributes to conditioning the public mind or arousing public interest in the issuer or its securities. Under this definition, it looks like Burger King has made an offer. There are, however, some safe harbor rules pursuant to which a company can disclose a proposed offering without it constituting an “offer.” Rule 135, in particular, may save BK from a section 5 violation, but it depends on whether its announcement contained a required legend. Regardless, statements from BK’s CEO seem to go beyond what is allowed under Rule 135. Incidentally, new Rule 163A which establishes a bright-line exclusion from the definition of offer for communications made more than 30 days prior to filing does not appear to apply because BK’s communication references the securities offering.

In the end, does it really matter? Probably not in this situation, and the SEC recognizes this. The remedy for a slipup of this nature (assuming it is one) is typically a 30-day cooling off period between the technical violation and the SEC declaring the registration statement effective. Given BK clearly will not be in a position to go effective on its IPO registration statement within 30 days, it looks like no harm, no foul."

I sure hope they run those BK ads during the Super Bowl where the King plunges over the goal line. I root for him every time! In the ad, the King is superimposed over the footage of Steve Young's legendary 49-yard scramble in the 1988 NFC Divisional Playoffs against the Minnesota Vikings.

February 2, 2006

Holy Sacramento! California Bill Seeks to Create Majority Vote Standard

Last week, a California Senator introduced a bill that would require the affirmative vote of a majority of the shares represented and voting at a meeting (provided that the affirmative votes constitute at least a majority of a quorum). We have posted a copy of this bill in our "Majority Vote Movement" Practice Area.

Although most public companies headquartered in California are incorporated in Delaware, there are a few well-known, publicly traded California corporations, such as Apple Computer and Cisco Systems, that would be affected by this legislation if it was adopted. Keith Bishop, a former California Commissioner of Corporations, will walk us through what is happening in the Golden State during a March webcast that I am putting the final touches on (remember how the California legislature overwhelming supported a shareholder access bill in '04, only to be vetoed by the Governor).

[In Seinfeld, remember how Kramer always talked about scams involving his friend Bob Sacramento. In all my years, I have never heard of anyone with that last name. Anyways, what did Bob look like? Find out in this Seinfeld Trivia Test.]

Majority Vote Standard: Pepco Joins Intel

Last week, I blogged about Intel's announcement that it adopted a "majority vote" standard for director elections. Buried in this recent Form 8-K about its compensation arrangements, Pepco announces that it has followed Intel's lead (see Item 5.03) - in fact, Pepco's formulation of the majority vote standard looks identical to Intel's formulation.

Blogging as an In-House Lawyer

I'm a fan of the spy genre, so it was pretty exciting to do my first "deep throat" podcast with the in-house lawyer behind the blog, WiredGC. In this podcast, John "Doe" explains what its like to blog from the in-house perspective, including:

- What led you to try blogging?
- What have been the most rewarding experiences from it?
- What is your employer's reaction to your blogs?
- Do you think more lawyers will try it?

February 1, 2006

More on Auditor Engagement Letters and Limits on Liability

It could be just a rumor, but I am hearing that PricewaterhouseCoopers has broken from the Big 4 pack and is not demanding liability limits like their brethren. In our "Auditor Engagement Letters" Practice Area, we have posted a recent letter from the Investment Company Institute urging the AICPA to take a position on auditor indemnification that conforms to the SEC's position and recommending that the SEC require that companies disclose any contractual provisions with their auditors that limit liability. The SEC's position is embedded in Section 602.02.f.i of the SEC's Financial Reporting Policies (which is the SEC's guideline that prohibits companies from indemnifying their auditors - and which was reaffirmed in late '04 as the SEC's position in FAQ #4 of "Other Matters" as part of the SEC's Auditor Independence FAQs).

Following up on my blog about the PCAOB's Standing Advisory Group's upcoming consideration of this issue, consider this useful background from Jack Ciesielski's AAO Weblog:

"Last June, the Federal Financial Institutions Examination Council came out strongly against practically any kind of limitation on auditor responsibility through engagement letters. Their hard-line comment document is still a work in progress; no formal policy has been issued yet. When they do, it’ll affect firms that report under the auspices of the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS).

While it’s not a regulator, the Professional Ethics Executive Committee of the American Institute of CPAs also exposed a comment document regarding liability caps; in fact, they’re debating the comments received on it this afternoon and deciding to issue a decision. As you can see from the PCAOB’s backgrounder, they examined the same kinds of liability limitations as the FFIEC. With regard to many of the kinds of limitations, the two bodies were in surprising agreement. (For instance, both agreed that auditor indemnification against claims based on the audit client’s negligence would not be a good thing for auditor independence.) In other areas, the AICPA was more favorably disposed to allowing limitations while the FFIEC was not. (Example: clauses that limited punitive damages were okay with the AICPA, but not the FFIEC.)(more)."

Don't forget to take our new survey on auditor inspection reports and engagement letters.

Ask Your Auditor about its PCAOB Inspection Report

Here is another topic that I have been blogging about for a while: how companies should endeavor to get as much information as they can from their independent auditors regarding the inspection reports issued by the PCAOB. As you might recall, companies have no right to receive the non-public sections of these reports from the PCAOB - but auditors are permitted to voluntarily share them with their clients (which has now been confirmed by the PCAOB numerous times).

At a minimum, I believe that companies should be asking auditors the following questions:

1. Do you believe that any of the issues raised in the non-public portions of the inspection report will affect our audit?

2. Can you describe generally the types of quality control criticisms contained in the non-public portions of the report?

Please let me know if there are other questions you think companies should ask - and whether your auditor was willing to respond to these questions. And don't forget to take our new survey on auditor inspection reports and engagement letters.

Underwriting Agreements and Legal Opinions After the ’33 Act Reform

I have received some provocative questions for tomorrow's webcast panel - "Underwriting Agreements and Legal Opinions After the ’33 Act Reform." With '33 Act reform still in its infancy, many are looking to Wall Street lawyers and bankers to see what procedures and practices are developing. Come find out from our expert panel!

February Issue of E-Minders is Posted!

We have posted our latest issue of E-Minders.

Disclosure of Shares Pledged as Collateral

Today's WSJ carries this interesting article about the SEC's proposal that would require companies to disclose any pledges of stock by named executive officers and directors. Ron Mueller notes that in his experience roughly 10% of companies now prohibit or limit the extent to which executive officers can pledge - but the remaining question is how many officers and directors actually pledge at all?

I don't think there is any way to know how many officers pledge shares. The only situations that the lawyers hear about are those in which problems ensue (e.g., when the brokers call the shares to satisfy the pledge arrangement).