April 28, 2006

Battle Over a Footnote: Strange Results

Can anyone make heads or tails of this amended Form 8-K filed by National Presto Industries on April 25th (original filing date was April 13th). Appears that the company tried to set aside instructions from the SEC's Division of Investment Management Staff, after which things got stranger and stranger...check out the 13 exhibits consisting of correspondence - including emails - between the SEC Staff, the company and the company's independent auditor. This is not the company's first scrape with the SEC; see this press release from 2002.

SEC Chairman Cox Testifies About Disclosure on the Hill

On Tuesday, Chairman Cox testified before the US Senate Banking Committee on the broad topic of improving financial disclosures. Here is a copy of his written testimony - and the FEI "Section 404 Blog" has notes about his oral comments, some of which address internal controls.

SEC Approves PCAOB's Independence Rules Re: Tax Services

Last Thursday, the SEC finally approved the PCAOB's auditor independence and ethics rules, which had been adopted by the PCAOB in final form last July (subject to the SEC's blessing). In addition to addressing, pre-approval of tax services to audit clients, the new rules prohibit contingent fee arrangements for services provided to audit clients.

As noted in the Gibson Dunn memo posted in our "Auditor Independence " Practice Area, the PCAOB’s new rules include several important matters for issuers to consider. As noted in this memo, "the PCAOB’s new rules include specific guidance regarding the manner in which audit committees are to pre-approve permissible tax services to be performed by the outside auditor. The rules also restrict an outside auditor from providing tax services to persons at an audit client who perform a "financial reporting oversight role" (other than directors). In addition, the PCAOB’s new rules provide that an auditor will not be deemed independent if the auditor (1) plans, markets or opines in favor of certain types of tax transactions for the audit client, or (2) provides tax services to an audit client for a contingent fee."

April 27, 2006

Corp Fin's Effectiveness Orders: No More Triplicate!

According to this press release, Corp Fin's long-standing practice of executing effectiveness orders in triplicate is going the way of the dodo bird. For those not doing deals, these orders are executed by Assistant Directors in Corp Fin, pursuant to delegated authority from the Commission, to officially declare a registration statement "effective."

The orders are printed on old-fashioned triplicate paper, the kind you have to type up on a manual typewriter - and the typing permeates through the three layers, although the last layer is always a little hard to read. One copy is sent via regular mail to the issuer, one layer goes into some type of permanent record and one copy is probably sold on e-Bay (I am obviously in a joking mood today).

I have to be honest here, it saddens me to see this development as I view the time-honored ritual of typing up an effectiveness order and cornering an Assistant Director to sign it as one of the last remaining vestiges of the "old days." Alas, no more microfiche, no more mimeograph. The SEC Historical Society should take a snapshot of a junior Staffer leaning over an Assistant Director's desk with the multiple pages of an effectiveness order flapping in the wind.

As for the notion of a registration statement "going effective," it has always struck me as odd that a deal could be held up on Wall Street because a junior Staffer was down at Starbucks throwing down a double latte rather than shepparding the proper papers through this process. In other words, unless the registration statement is on a form that allows for automatic effectiveness, a deal can't go forward until the order is officially executed (even though all comments already are cleared by the Staff - or the registration statement was selected for a "no review" in the first place!). A very mechanical process - and one that will partially remain after this new development; now it will just be an electronic process rather than a paper one.

For you former (and current?) Staffers out there, remember shopping for an Assistant Director that might be amenable to signing your order if your own AD was out of the office? Some ADs had the reputuation of being difficult, such as quizzing you on the contents on the registration statement even though it was just a no-review! In hindsight, they probably were the smart ones - they just wanted the reputation of being unapproachable so that they weren't hassled...

SEC Still Has Its Own Material Weaknesses

Last Friday, the GAO released this 29-page report covering the SEC's financials for fiscal years '05 and '04 and noting that the SEC still has material weaknesses in its internal controls. The report concluded that many of the material weaknesses carried over from an earlier GAO report that I blogged about many moons ago. In the report, the GAO made 14 recommendations about how the SEC could improve its internal controls.

CalPERS Demands Meeting with UnitedHealth Group's Compensation Committee

Wow! I was quite surprised to read - in this WSJ article and otherwise - that CalPERS had sent a letter to the head of UnitedHealth Group's compensation committee to demand a telephonic meeting before the company's annual meeting (which is next week - should be a humdinger) to learn more about the details of the company's alleged options backdating practices. I know that activist funds have demanded meetings with directors before, but I can't quite recall one soley over compensation pay practices nor one that was reported in the mainstream press.

Perhaps this is the start of a new practice by large shareholders? Of course, this is one of the more egregious examples of pay practices, as the lawsuits already have been filed - and UnitedHealth Group is making governance changes as fast as it can. [Speaking of UnitedHealth Group, read my reply contained in Saturday's WSJ Online to last week's Alan Murray column.]

April 26, 2006

What the Top Compensation Consultants Are NOW Telling Compensation Committees!

Tomorrow's CompensationStandards.com webcast - "What the Top Compensation Consultants Are NOW Telling Compensation Committees!" - should be a doozy as so many changes are happening so fast in the compensation arena.

If you intend on participating, please download the three sets of talking points before the webcast starts.

The "3rd Annual Executive Compensation Conference"

On CompensationStandards.com, we have just posted the agenda for the "3rd Annual Executive Compensation Conference." As the more than 3000 that took in each of the first two conferences can attest, more practical guidance is gleaned from this conference than any other. And with the SEC's new proposals raising the profile of compensation practices to even higher heights, you will not want to miss this year's Conference.

This year's Conference will be held on Thursday, October 12th in Las Vegas - and by nationwide live video webcast. CLE credit in most states - and ISS credit for directors - is available. Register today!

Early Bird Discount: Act Now!

Act before May 31st and receive an additional 50% off the firmwide rate to the "3rd Annual Executive Compensation Conference." This special rate of $995 will enable everyone in your company or firm to access the live video webcast of the Conference (as well as access the video archive of the Conference and all the course materials). This is a tremendous savings for both law firms and companies whose directors need to get up-to-speed. Applies to companies and firms that have a firmwide license to CompensationStandards.com.

April 25, 2006

More Voting Results on Majority Vote Shareholder Proposals

According to ISS' "Corporate Governance Blog," Sprint Nextel shareholders supported an AFL-CIO shareholder proposal on majority voting at its annual meeting last week with 66.4% of the votes cast. That follows a 61.7% showing at Novell on April 6th for a United Brotherhood of Carpenters and Joiners proposal. These early votes suggest that majority voting will receive significant investor support this season at companies that have not adopted board election reforms, such as director resignation policies and majority vote standards.

However, majority vote proposals continue to receive less support at companies that have adopted resignation policies (which companies retained plurality voting). Last week, similar proposals received 37.5% at Wachovia and failed to reach a majority at Burlington Northern Santa Fe. Electronic Data Systems reported that a majority elections resolution got 32% support, but that tally counted abstentions as votes against. In February, all three companies director resignation policies.

These votes are consistent with earlier results, where majority vote proposals failed to pass at Morgan Stanley, Hewlett-Packard, Ciena and Analog Devices, all of which had adopted resignation policies. More to come: majority vote proposals will appear on the ballot at 24 companies this week alone!

Final Report from the SEC's Small Business Advisory Committee

Yesterday, the SEC's Small Business Advisory Committee submitted its 241-page final report to the SEC. The FEI's "Section 404 Blog" has a summary of its contents. Here is a statement from Chairman Cox on the report.

What Now After Dabit

There's been lots of commentary after the recent US Supreme Court's case on SLUSA, Merrill Lynch v. Dabit (including all these law firm memos). In this podcast, John Stigi of Sheppard Mullin Richter & Hampton provides some insight into the decision - and one more coming up - and analyzes the lay of the land in its aftermath, including:

- What did the US Supreme Court decide in Dabit? Why is the decision important?
- What other US Supreme Court case will be decided soon that might further impact securities class actions?
- What do you think the plaintiffs’ bar plan of action might be now?

Study: AIM Market Could Be the New Nasdaq

According to this Reuters article, a recent study suggests that the London Stock Exchange's AIM market is the new Nasdaq, one reason why the Nasdaq has bought a 15% stake in the LSE. Learn more about what AIM is all about - and how (and why) a company might list on AIM - on our May 11th webcast: "How to Go Public on the London Stock Exchange’s AIM."

April 24, 2006

Your Upcoming Form 10-Q: What to Do With Risk Factors?

Listening to Meredith Cross of Wilmer Hale at a local seminar last week, I was reminded that, under the new '33 Act reform, companies are now grappling with how to handle the risk factor discussion in their upcoming Form 10-Qs.

For those of you that just filed Form 10-Ks recently, you will recall that the reform amended Form 10-K to require companies to describe - under the caption “Risk Factors” and only “where appropriate” - the risk factors described in S-K Item 503(c) that are applicable to the company. As the adopting release clarified, “a risk factor discussion in a Form 10-K may not be necessary or appropriate in all cases, depending on the issuer.”

Now, companies must consider another new disclosure requirement - to "set forth any material changes from risk factors as previously disclosed in the registrant's Form 10-K." A challenge is presented because the SEC stated in the adopting release that "we discourage, unnecessary restatement or repetition of risk factors in quarterly reports." Thus, the SEC doesn't appear to want a "cut and paste" of the 10-K risk factor section in the 10-Q, but rather an update of any risk factors described in the 10-K.

It remains to be seen how closely the SEC Staff will enforce this “discouragement,” as some companies may wish to follow their established routine of including all risk factors in each Form 10-Q, either for forward-looking safe harbor purposes or for the benefit of investors who may not know that they otherwise would need to search back through earlier filings to determine what other risks exist for that particular company.

To help you sort through this predicament, in our "Form 10-Q" and "Securities Act Reform" Practice Areas, we have posted a list of companies that already have been faced with complying with the new 10-Q requirement.

Are These Hedge Fund Results Real?

Wondering where the next large scale fraud is going to come from? I think Floyd Norris might have hit the nail on the head in his column in Friday's NY Times. Maybe I'm getting paranoid in my old age, but there always is a "next" big wave of fraud and it seems like it usually emanates from the latest "too good to be true" investment vehicle.

Handling Whistleblowers

In this podcast, Phil Johnston, Special Counsel of Nexsen Pruet, a former CEO of two public companies and a co-author of the Corporate Governance Leadership Blog, provides some insight into what works in implementing a whistleblower compliance program, including:

- In the overall scheme of compliance, how important is Section 301(4) of Sarbanes-Oxley?
- Not-for-profits are also implicated by Sarbanes-Oxley as Section 301(4) makes it a crime to retaliate against a whistleblower. How have not-for-profits reacted to this new law?
- Based on your own experiences from serving on a director on five different public company boards, what do you see as the biggest mistakes that companies typically make in implementing their whistleblower compliance programs?
- I understand you have done research in the whistleblower cottage industry, including visiting a number of service providers. What should boards consider in selecting a service provider?

April 21, 2006

SEC's Small Business Advisory Committee Wraps Up

Yesterday, the SEC's Small Business Advisory Committee held its final meeting. The Committee has until April 23rd to formally submit its final report with any finishing touches to the 150-page draft final report that was approved yesterday. The ball is now in the SEC's court; Corp Fin Director John White remarked during the meeting that the SEC will have an open mind regarding the Committee's recommendations. No timetable for that consideration was announced.

Learn more from FEI's "Section 404 Blog," including their two pages of notes from the meeting.

17,000 Comments on the SEC's Executive Compensation Proposal!

With the April 10th deadline safely behind us - although comment letters will continue to dribble in, such as the forthcoming ABA letter - I thought it would be a good time to link to letters submitted from the more noteworthy market participants rather than have you slug through the nearly 17,000 letters that have poured in on this hot topic.

That number is a little misleading because the AFL-CIO was successful in having its members send in over 16,000 letters of this variety! Quite an impressive mobilization of the troops (unless software was used to bombard the SEC with a bunch of identical comment emails - wonder if that's possible?)!

The comment letters listed below are in no particular order (and apologies to the many others that submitted letters - it's dizzying to scroll through and pick through the list of comment letters on the SEC's site):

1. Associations

- ICGN Executive Remuneration Committee

- Centre for Financial Market Integrity

- Association of Corporate Counsel

- New York City Bar

- Securities Industry Association

- US Chamber of Commerce


- Business Roundtable

- Society of Corporate Secretaries & Governance Professionals

2. Institutional Investors

- Council of Institutional Investors

- Group of 16 Institutional Investors (with $1.5 trillion in assets)

- National Association of State Treasurers

- Vanguard Group

- Florida State Board Administration



- Wisconsin Investment Board

- Walden Asset Management

- Connecuticut State Treasurer

- British Columbia Investment Management Corporation

- Amalgamated Bank Longview Funds

- Hermes

- International Brotherhood of Electrical Workers Pension Benefit Fund

- Governance for Owners

3. Compensation Consultants

- Frederick W. Cook & Associates

- Steven Hall & Partners

- Pearl Meyer & Partners

- Watson Wyatt

- Mercer Human Resources Consulting

- Buck Consultants

- Compensia

- Hewitt Associates

- Towers Perrin

- Brian Foley Company

- James Reda & Associates

- Mark Van Clieaf

4. Law and Accounting Firms

- Cravath, Swaine & Moore

- Chadbourne & Park

- Fenwick & West

- Foley & Lardner

- Ernst & Young


- Deloitte

5. Other

- CompensationStandards.com

- Institutional Shareholder Services

- The Corporate Library

April 20, 2006

A Form 12b-25 Filing Update

You may find a recent survey regarding December year-end companies that filed their 10-Ks late both interesting and useful. As widely reported, the number of late filers declined 30% from last year (although still triple from '03 levels), which could be expected given that this is the second year of internal controls and companies (and their auditors) had more of a "grip" on their 404 obligations this time around (remember that last year was a record year for 12b-25 filings, as noted in this blog).

Note that only about 25% of the companies filing late also reported a material weakness, down from around 50% last year. This is a little surprising as an inability to be able to close your books and get your financial reports done within two and a half months should be a pretty good indicator that you don't have adequate internal controls. Also check out the interesting statistic that over 80 companies filed late for both the past two years - these companies were much more likely to report a material weakness (in fact, it's surprising that not all of these companies didn't report a material weakness given they were late two years in a row). We have posted the recent Glass Lewis survey (and this addendum) in our "Rule 12b-25" Practice Area.

The Latest Internal Control Fee Studies

As widely reported, two new studies - one from FEI and another from CRA - have been released indicating that the costs of 404 compliance has gone down, while audit fees have increased. Rather than rehash the study findings, you can read this NY Times article or look at the studies themselves which we have posted in our "Internal Controls" Practice Area.

By the way, the SEC and PCAOB announced yesterday that they have set their next internal controls roundtable for May 10th.

Practical Considerations: Implementing a Majority Vote Standard

We have posted the transcript from the popular webcast: "Practical Considerations: Implementing a Majority Vote Standard."

More on the Perils of Conducting the Internal Investigation

From Bruce Carton's "Securities Litigation Watch": Not too long ago, a lawyer or firm getting hired to conduct an internal investigation into a company's possible securities law violations was the beginning of a usually lengthy, no-lose gravy train. Get a team together, map out all the documents and witnesses from which to gather information, bill heavily while collecting all of this information (and then while writing up a brilliant report), collect a big check, and move on.

Lately, however, some downside seems to be emerging in the internal investigation business. We first observed in November 2004 that prosecutors in the Computer Associates criminal case charged the former CEO of the company with obstruction of justice based on statements he made not to any government official but rather to the company's outside counsel (Wachtell Lipton), which was conducting an internal investigation of the matter. In a sense, the prosecutors' "deputized" the lawyers conducting the internal investigation by taking the position that a false statement made to an outside lawyer conducting an internal investigation is obstruction of justice when the outside lawyer is doing the investigation with the purpose of giving that information to the government.

Next, we discussed in this post the SEC's reported Wells call threatening enforcement action against a lawyer who conducted an internal investigation into possible financial fraud at Endocare. The underlying article did not say exactly what the lawyer did to provoke the SEC, but the company had earlier issued a press release last year saying the probe the lawyer conducted found no "intentional wrongdoing by management.'' The article referenced a speech by then SEC Enforcement Director Stephen Cutler, in which he stated that he was "concerned'' that some lawyers hired to investigate signs of fraud might have helped cover it up.

As also discussed in the article, one former SEC assistant enforcement director noted that if the SEC proceeded with this case, other lawyers might think very hard before taking on company investigations and "there will be some firms who look at this and say we will never do another...." Notably, the SEC does not appear to have proceeded with any lawsuit against the lawyer in the nearly year and a half since the Wells call was reported.

Most recently, an article by Lynn Hume in today's Bond Buyer states that the San Diego city attorney intends to sue the law firm Vinson & Elkins for an internal investigation report that he says was a "whitewash" that failed to hold city officials fully accountable. The city attorney claims that V&E was part of an effort to "help the people that were under investigation escape responsibility because that's where the money was."

April 19, 2006

Those Big Numbers Keep Rolling In

With proxy season in full swing, I fear picking up the paper in the morning since it seems like there is a new story of a CEO making a killing at the expense of shareholders each and every day. Since our CompensationStandards.com mission attempts to focus on the positive - such as these CEOs That Have Set An Example - I have refrained from carping on some of the mind-numbing CEO pay levels that have been disclosed recently.

I can't help but wonder how the boards reacted at these companies when they realized that they have doled out pay packages that have reached payouts in the aggregate that exceed a billion dollars (yes, that's billion with a "b"). You would think that their reaction would be a "Holy Cow" moment. If not, maybe they have served on the board too long?

And as Mike Melbinger has been discussing in "Melbinger's Compensation Blog," it appears that the culture of greed has spawned more allegations of suspicious timing of option grants to senior managers. [Get a load of today's WSJ story about the UnitedHealthcare CEO who now wants to rein in his - and other senior managers - pay. Easy for him to say now that he has over $1.6 billion in unrealized option gains. With rampant allegations of option-backdating, this guy is backpedaling fast.]

It looks like a good time for all of us to get a refresher on responsible pay practices in next week's webcast on CompensationStandards.com: "What the Top Compensation Consultants Are NOW Telling Compensation Committees!"

Whole Lot of "Perking" Going On

On his "Proxy Disclosure Blog," Mark Borges has provided numerous examples of what companies are disclosing now about perks - and there have been a fair number of interesting disclosures. Mark's analysis of proxy statements as they have been filed has been invaluable to those of us grappling with the SEC's changing expectations.

For a more humorous - and more critical - take on recent perk disclosures, check out Michelle Leder's footnoted.org. Below is one of my favorites from the related party category...

Driver’s Ed on the Company Dime…

From footnoted.org: "As with many professional sports, making it to the top of the professional racing circuit can take years of hard work and plenty of near-death experiences. Michael Waltrip, pictured here with his car, is one of the success stories. Now Waltrip’s company is helping two sons of Aaron’s Rent (RNT) executive Bill Butler train to become race car drivers courtesy of the company. In the proxy that the company filed on Friday, the company noted that Aaron’s is sponsoring Waltrip’s "driver development program" and that the two drivers participating in the program in 2005 are Butler’s sons. But here’s the real kicker: Aaron’s estimates that it paid $890K last year to train Butler’s sons and will spend nearly $1 million this year on the program.

So what exactly are the Butler boys — known as KBIII and Brett — learning for this money? This article that was sent out to Aaron’s franchisees details the program:

During the work week, KBIII and Brett learn about the cars they race and how to build them, repair them and make them perform faster. They train their bodies for the rigors of racing. They learn strategies for winning races. Then, come the weekend, they put it all to the test.

We’re guessing that since dad — Aaron’s Sales and Lease Ownership President Bill Butler — only made $425K last year, paying twice that amount to teach your sons to be professional drivers was probably out of the question. But getting the company that you work for to pay for that training and counting it as a marketing expense, seems like a very creative use of accounting rules."

Personal aside: I don't know about you, but I hated driver's ed. Creepy phys ed teacher and I already could drive better than him. Can you believe there is a forum where folks discuss bad driver's ed experiences...and then you have this movie entitled "Hell's Highway - The True Story Of Highway Safety Films"...

April 18, 2006

One Borrowed Share, But One Very Real Vote

This article from Sunday's NY Times touches on the other half of the majority vote debate - what to type of integrity exists in today's voting process now that votes in director elections could mean much more than they do today? The article parses a recent study entitled "Vote Trading and Information Aggregation" from a group of professors that found, over a two-year period, that there was a significant spike in the number of borrowed shares on the typical record date. And they found an almost-as-big decline in such shares, on average, the day after those record dates. In their opinion, the only plausible explanation is that traders borrowed shares solely to acquire votes.

This is not "new" news really, as there have been reports going back a while of funds buying votes without economic risk. In fact, when DealLawyers.com was launched at the end of 2004, one of the first queries in that Q&A Forum (ie. #3) dealt with the ability of such a hedge fund to use Schedule 13G (as opposed to Schedule 13D) when such an arrangement resulted in the fund holding more than 5% of a company's stock.

What About Overvoting?

Interestingly, the NY Times article (and the study) doesn't delve into the topic of overvoting - a topic that I was interviewed about last year (see this related blog). This issue and more surely will draw more scrutiny of the voting process, which may very well be tested in court when director elections are too close to call under a majority vote standard.

My Ten Cents on the SEC's Journalist Subpoena Saga

I know the First Amendment is important, even more so now that I call myself a "journalist" when folks ask what I do for a living (and if you ever lived in DC, you know that is the first question you get asked at a cocktail party). But I still can't believe how much press was given to the SEC's new policy regarding journalist subpoenas - since Chairman Cox first noted that the policy was forthcoming a month ago, I must have read two dozen articles about the topic.

As this NY Times article noted last Friday, "Before the Gradient inquiry, officials said they could recall no other instances of subpoenas of journalists other than in some well-known insider trading cases involving journalists in the 1980's and 1990's. In those cases, unlike the Gradient inquiry, the reporters were the subjects of the investigation." Sure sounds like the SEC's Enforcement Division wasn't abusing their power in this area...at least not before the latest hubbub (which, depending on what really happened, appears to an isolated case at most).

April 17, 2006

The SEC's Smaller Public Company Advisory Committee's Impending Report

With sunset quickly approaching, this should be a big week for the SEC’s Advisory Committee on Smaller Public Companies. Last week, the Committee held a teleconference meeting to further consider the draft of the Advisory Committee's final report, which is scheduled to be adopted at their meeting this Thursday (and must be submitted to the Commission before April 23rd, the sunset date for the Committee).

Under the Committee’s draft recommendations, a tier of the smallest public companies (based on market cap and revenue criterion) would continue to be exempt from the internal controls requirement "unless and until" a suitable framework is developed for these companies to meet 404 in a cost-effective way. Additionally, the next largest tier of companies (also based on market cap and revenue) would be exempt from external auditor involvement in their 404 process (resulting in a self-assessment) until a suitable framework is developed.

During last week's teleconference meeting (here is an audio archive), the Committee discussed whether it should revise its proposals relating to SOX 404 relief, given that some Commissioners have been reported to be opposed to giving a complete 404 pass to smaller public companies. The upshot of the teleconference meeting: no Commissioner has taken a formal position on the Committee’s proposals - so going into this week, the Committee decided to keep the proposal "as is" with minor changes. Learn more about what happened at the meeting from FEI's "Section 404 Blog."

More on Nasdaq Issuer's Transition From 12(g) to 12(b) Registration

On April 6th, the SEC approved a rule change that allows Nasdaq to file a single application on behalf of its issuers to transition their 1934 Act registration from Section 12(g) to Section 12(b).

As I blogged about a few months ago, new NASD Rule 4130 provides that each company authorizes Nasdaq to file the transition application with the SEC (unless they have opted out) immediately preceding the day the Nasdaq begins operations as an exchange (which can happen any day now). Companies that opt out won’t be eligible to be listed when Nasdaq begins operations as an exchange (unless it files its own 12(b) application).

At the SEC Speaks conference in early March, the Staff indicated that it was leaning towards not issuing new Exchange Act numbers for this transition, so Nasdaq companies likely will continue to have "0-" numbers. CIK numbers would also remain the same.

Business Roundtable's 4th Annual Governance Survey

Recently, the Business Roundtable published its 4th annual survey of corporate governance practices among its members, showing continuing improvements in corporate governance practices, including these findings:

- Pay-for-performance - 57% report an increase in the pay-for-performance element of senior executive compensation in the past year, compared to 49% in 2005 and 40% in 2004. Of the companies placing more emphasis on performance, 20% indicate that the performance element includes primarily long-term goals, 73% stress a mix of long- and short-term performance goals, and only 7% stress short-term goals.

- Board independence - 91% have an independent chairman, lead director or presiding director – up from 83% in 2005 and 71% in 2004. The percentage of companies with an independent chairman has continued to increase, from 4% in 2004 and 9% in 2005, to 11% in this 2006 survey.

- Executive sessions - 69% reported that independent directors met in executive session at every board meeting in 2005, and 75% expect the same for 2006. This percentage is up from 68% in 2004 and 55% in 2003.

- Shareholder communications - 91% have established procedures for shareholder communications with directors, up from 90% last year and 87% in 2004. And 93% of companies say their Nominating/Governance Committee is willing to consider shareholder recommendations for board nominees, a steady increase from the 85% of companies in 2005.

- Costs of Sarbanes-Oxley - Sarbanes-Oxley costs appear to be declining, with 94% expecting costs to either remain the same (42%) or decrease (52%) for 2006, and only 6% projecting that costs will go up this year. The portion of companies reporting estimated costs of more than $10 million dropped to 40% from the 47% reported in 2005.

- Director evaluations - 38% performed individual director evaluations in 2005 and 45% are planning to do such evaluations in 2006, up sharply from the 27% in 2004. Of these companies, a growing number rely on peer reviews – 38% in 2005, and 48% planning to do so in 2006.

- Director qualifications - 97% say their Nominating/Governance Committee has established qualifications for directors, a significant increase from 87% in 2005.

- Committee meetings - 52% indicate they have seen a “significant” increase in the number or length of meetings of the Audit Committee in the past two years, while 33% indicate a “significant” increase in the number or length of meetings of the Compensation Committee in the same period.

- Compensation consultants -85% report that they have retained a compensation consultant in the last year, and 53% of CEOs report that their Nominating/Governance Committees have retained a search firm in the last year.

- Stock ownership requirements - 93% say their compensation committees have stock ownership guidelines or requirements for senior executives and 88% of companies have stock ownership guidelines or requirements for directors, with 32% establishing the director guidelines within the past year.

April 13, 2006

Buddy Donohue Named Investment Management Director

On Monday, Chairman Cox announced Andrew "Buddy" Donohue as the next Director of Investment Management. Donohue, 55, is currently the Global General Counsel for Merrill Lynch Investment Managers and is also Chairman of ML’s Global Risk Oversight Committee. Mr. Donohue graduated from Hofstra University and earned his J.D. from New York University School of Law. He will be sworn in by Chairman Cox on May 15, 2006 and will have many interesting issues to deal with, as we blogged about on Monday.

With this announcement, only three more top positions remain to be named: Market Reg Director, SEC Chief Accountant and PCAOB Chair.

More on the SEC’s Subpoena-Gate

Yesterday, the Commission issued a Policy Statement for Staff members to follow when seeking information from the press. In the Policy Statement, the Commission sets forth 13 guidelines/procedures for the SEC Staff to follow to ensure that “vigorous enforcement” of the securities laws is conducted “completely consistently” with the principles of the First Amendment. The guidelines are intended “to avoid the issuance of subpoenas to members of the media that might impair the news gathering and reporting functions.” Among other things, the Statement requires that the Director of Enforcement, in consultation with the SEC’s General Counsel and with notification of the Chairman, authorize any subpoenas to the media.

This Policy Statement will hopefully put to bed this issue, which began in late February 2006, when news reports appeared about the SEC serving subpoenas for records of columnists for MarketWatch and Dow Jones Newswires in an investigation about possible stock fraud involving Overstock.com and where Chairman Cox took the unusual step of halting the subpoenas.

April 12, 2006

The Directormap Project

I have added a cool site - The Directormap Project - from Jackie Cook, a Senior Research Associate at The Corporate Library, to our "Majority Vote Movement" Practice Area. The site publishes the results of director elections, including a chart of the director results for the past few years and another chart showing the largest spread between the least supported board nominees and the average of other nominees (with more than a 30% difference). Jackie also has put together this page that lists all the majority vote shareholder proposals that will be on the ballot this year, including links to the proxy materials of each company and their annual meeting date. Thanks to Jim McRitchie over at CorpGov.net for pointing this out!

More Majority Vote Proposal Results

As ISS reports in this article, the majority vote proposal at Morgan Stanley's annual meeting last week received only 40% of votes cast. Morgan Stanley is among those companies adopting director resignation policies - and this showing was similar to the support received last month by shareholder proposals at three other companies that have adopted director resignation policies (as noted in this blog).

In comparison, a majority vote proposal at Novell's annual meeting two weeks ago won 61.7% of votes cast - that company has not adopted a director resignation policy.

Disaster Planning

In this podcast, Glenn Pomerantz, a Director of Insurance Claim Services at BDO Seidman, provides some pointers regarding disaster planning, including:

- What are companies doing these days to prepare for natural disasters?
- Is there really any way to prepare for disasters like Hurricane Katrina?
- Which industries are most vulnerable?
- What can businesses expect from their insurers?
- How are things looking in New Orleans?

April 11, 2006

US Sentencing Commission Acts to Reverse Culture of Waiver

Last Wednesday, the US Sentencing Commission voted to remove the provision on waiver of the attorney-client privilege and work product protections that was added in 2004 to the Commentary to the Sentencing Guidelines for organizations (the provision to be removed is the last sentence in Application Note 12 of the Commentary to Section 8C2. 5).

Although the provision in the Commentary to be removed is worded in the negative - waiver is not required unless "necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization" - the exception had become the rule and many hope that the Commission's action is a significant step in reversing what some have referred to as a "culture of waiver."

Many commenters had urged the Commission to remove the existing language and replace it with an express statement that waivers of the attorney-client privilege and work product protections are not to be considered in evaluating the level of cooperation or determining the appropriate sentence. It doesn't look like the Commission went that far.

The next step is that the Commission will submit the removal of the waiver provision and other amendments it approved to the Sentencing Guidelines, to Congress on May 1st. Unless Congress takes affirmative action to modify or disapprove an amendment in the submission to Congress, the change will become effective on November 1st. Learn more from memos posted in our "Sentencing Guidelines" Practice Area.

Director Pay Rises 14%

According to a new ISS study, total director pay increased by almost 14% last year, from an average of $126,325 in 2004 to $143,807 in 2005. The jump comes on the heels of a more than 23 percent increase from 2003 when total average pay stood at $102,400. The press release includes this quote from me: "Boards need to tread carefully here as more investors are seeing director pay as the next governance battle," Romanek warns. "And more importantly, since directors set their own pay levels, greater pay might lead to courts finding independence of boards compromised if pay is set too high. This is a universal claim in every compensation lawsuit brought in the last few years and likely will continue to be so."

Coke's New Director Pay Plan

Quite a bit of discussion over Coke's new director pay plan adopted last week. As noted in this Form 8-K, the company's new director pay package entitles each director to receive stock equal to $175,000 annually - but the shares will be payable in cash after a three-year period only if the company meets a target of 8% compounded annual growth in earnings per share. The company says it will use its 2005 earnings per share of $2.17 as the base for the growth calculation. If the target is not met, all share units and hypothetical dividends would be forfeited.

It is quite rare for directors to have an "all-or-nothing" pay package and a number of commentators have expressed concerns over its design, such as "the approach would make directors fixated on earnings and undermine their role as watchdogs."

One member reminds me that SPX just settled a lawsuit over director participation in its annual bonus plan, as it seems the company's directors could not resist adjusting the performance calculation to increase the size of the bonus pool. In the UK and Australia, directors that participate in company incentive plans are no longer considered independent - a real danger since the plaintiff's bar routinely fixates on the independence of directors when bringing a lawsuit against a company.

Another member notes that director stock options have been criticized as providing directors an incentive to look the other way at Enron and Worldcom - this criticism is aimed generally at all incentive plan participation because directors are fiduciaries for shareholders, they do not operate the company. Linking their pay directly to financial results, the domain of the executives, is inconsistent with their duties and responsibilities.

Notes from Stanford's Executive Compensation Program

On CompensationStandards.com, under "The SEC's Proposals," we have posted notes from last week's Executive Compensation Program hosted by Stanford's new corporate governance center.

April 10, 2006

"Time of Sale" and Recirculation

Off on vaca this week after taking in the ABA Business Law Section Spring Meeting late last week in Tampa. [No worries, Julie will be adding to some blogs I have pre-written for the remainder of this week.]

At Friday's session with Corp Fin Director John White and Deputy Director Marty Dunn, there was discussion regarding the "time of sale" when adverse developments come to light after pricing - after investors originally make an investment decision - but before the offering closes. These are those situations when companies and their underwriters would like a new "time of sale" because the new information would then be part of the disclosure package that the investor considered in making the investment decision (thereby reducing the likelihood of liability for misleading or omitted disclosure).

For these situations. John and Marty emphasized that when investors are approached with the new information, the investors have to be advised that they have two choices, either: (i) keep the existing sale and retain rights attached to that original sale or (ii) mutually agree to terminate and enter into a new sale. In other words, a company and its underwriter cannot change the time of sale unilaterally by canceling the old contract and entering into a new contract.

The key here is a mutual decision; the investor can't be told that "we can keep you in if you take the new offer or else you are no longer in the offering." Marty made an analogy to "good" and "bad" rescission offerings where investors must be given a choice along the same lines.

Recirculation: Corp Fin Assistant Directors Won't Weigh In

John and Marty also noted that the Division's Assistant Directors no longer will be calling the shots as to how - and when - recirculation is necessary when new information arises after pricing. As also discussed during the recent "SEC Speaks" conference, new Rule 159 provides that conveyance of information is a facts and circumstances analysis as to whether information was conveyed at the time of sale.

In light of the new rule, Assistant Directors will no longer use their delegated authority to declare registration statements effective to inquire as to the details of how new information was conveyed. Rather, to serve as a reminder of the company's obligation in selected circumstances, the Assistant Directors might ask for a straight-forward representation that the information will indeed be conveyed. This representation can be provided orally.

This new approach will take quite an adjustment for both Assistant Directors and those of us familar with the SEC Staff leading the way in these sticky situations. This new approach will end the ability for practitioners to try to come as close as possible to a line drawn by the Staff. Or as Marty more artfully put it, practitioners will not be able to ask "can you hear me now?" - we are on our own.

The State of Corp Fin's Review Process

In rare form, Marty gave a snapshot of Corp Fin today, noting that the Division just dipped below 500 Staffers down to 485, including 180 lawyers and 250 accountants - with this number not likely to go up anytime soon under existing budget conditions. Marty wistfully noted that the Staff was having a lot of "going away" parties once more (I remember in the mid-90s when there was at least one such party each and every week; hard to see your friends go off into the black hole of law firms - never to see them again).

Marty also explained how the Staff looked at the filings of 6000 companies last year, many of them in the form of a "preliminary review." Unlike the former - more cursory - "screening" process, a preliminary review takes significant more time and the disclosure is partially reviewed as part of this exam. A company may be the subject of a preliminary review and never know it. Corp Fin still also conducts full and targeted reviews. All of this also was discussed during the "SEC Speaks" conference.

Board and Chair Independence: SEC Loses Mutual Fund Court Decision (Again)

Perhaps the most amusing sight at the ABA conference was watching a panel regarding hedge fund regulation as they got the news from a Blackberry - in the midst of the panel discussion - that the SEC had again lost a court challenge to the US Chamber of Commerce over rules regarding mutual fund board and chairman independence. The panel was neither surprised nor sorrowful.

The U.S. Court of Appeals for the District of Columbia Circuit has given the SEC 90 days to collect comments on the cost of implementing the new rules, as the court faulted the SEC for relying on a non-public survey of compensation in the mutual fund industry as a basis for implementing the rules.

As I blogged about before, the Chamber first sued the SEC in September 2004 - and the same court temporarily blocked the rules from taking effect last August. Here is a copy of the court opinion.

April 6, 2006

Pop Quiz: Take Care When Preparing Those New Automatic Shelfs!

In scanning some of the new Form S-3ARs (ie. automatically effective shelf registration statements), I was reminded how confusing it can be to remember which new undertakings are required for which forms.

So here's a pop quiz to test yourself: can you spot the oddity on the facing page of this S-3ASR filed recently? The answer is at the end of today's blog (so don't read all the way down if you want to take the quiz first).

By the way, there is no gloating here. This is all so new and I'm sure many of us are leaving a cookie-trail of glitches (or at least glitchettes). Reminds me to remind you to always take any answers in our Q&A Forum with a grain of salt (and bear our disclaimer in mind).

What About Not Requiring Auditor Independence?

In this article, a financial reporter proposes doing away with one of the most sacred tenets of auditor regulation: auditor independence. The author proposes letting auditors do any - and all - work for clients they want, as long as it's fully disclosed, and then letting the market decide whether to trust the numbers. I personally don't like this concept - but leave it out there as "food for thought."

Or How About Principles-Based Regulation of Auditor Independence?

According to this recent survey from the European Federation of Accountants, over three-quarters of the EU Member countries have now adopted an EU Recommendation that principles-based regulation be applied for auditor independence issues. I am told that this is a tightening of the standard for Europe.

Pop Quiz Answer

For the pop quiz at the top of today's blog, the oddity is the delaying amendment at the bottom of the facing page. This is not applicable for a Form S-3ASR. In fact, Rule 473(d) states that you aren't allowed to file a delaying amendment with something that goes effective automatically.

April 5, 2006

SEC Continues XBRL Push

With a series of XBRL roundtables coming up, the SEC announced last week that 17 companies have signed up to become guinea pigs for the new “incentives-based” XBRL pilot. As could be expected, a majority of volunteers have some vested interest in the success of XBRL - and interestingly, 3 Brazilian companies are on the list, obviously disproportionate to their representation among SEC reporting companies.

This is a more formal exercise than the original Spring 2005 pilot program. Under the new second pilot program, the 17 companies have volunteered to submit XBRL filings for all quarterly and annual financials for one year in exchange for “faster review.”

Some of the companies from the first pilot signed up for pilot #2 - and some did not (but for those that didn't, their effort is ongoing and they can still submit XBRL documents at any time). So far, 10 companies from the original pilot program have submitted about 30 XBRL documents, of which only a handful contain the more complicated 10-K/10-Q financials (albeit many of the 8-Ks include the 10-K/10-Q financials; in such cases, the company concentrates on getting their filing made timely and then follows up later with the financials tagged in XBRL - remember these XBRL documents are not officially "filed"; just "submitted").

Maybe I will be convinced otherwise at one of the roundtables or thereafter, but I still believe the best way for the SEC to move towards automated analyses is to adopt a templated approach to supplementing financial statements (perhaps using XBRL under the template). XBRL in it’s “raw form” is a very tough nut.

And I hope the SEC moves somewhat slowly, as it will take time to integrate folks from different departments into teams to pull this off. These teams will be broader in scope than today's disclosure committees, as the IT staff and other technologists will have to get up-to-speed on certain aspects of financial reporting.

What Does XBRL Implementation Mean For a Company?

To get an in-house view of this all, I caught up with Jim Brashear of Sabre Holdings - one of those sharp lawyers who understands technology better than most - who had this to say:

"The simplest XBRL implementation is adding a step to the existing disclosure processes, which "translates" the work-product into XBRL formatting. Longer-term XBRL implementation might also involve making significant changes in the company's accounting systems, internal controls over financial disclosure and other accounting processes.

Implementing XBRL disclosure may, therefore, constitute a "material change" in a company's internal controls over financial disclosure, so adoption ought to be coordinated with internal and external auditors as part of the Section 404 assessment process. It would be prudent to do so with the knowledge of the company's audit committee.

The company should involve the Disclosure Controls Committee early and often as it considers XBRL disclosure. Also, discuss XBRL planning with external vendors involved in your disclosure processes, such as your financial printer and provider of SEC filings on your company's website.

The company's existing disclosure teams will need to develop at least a basic understanding of XML before implementing XBRL. They should learn how to use tools that will integrate the company's existing processes with XBRL reporting. For example, if the company uses Microsoft Office Word and Excel to develop its disclosure documents, the team members should become familiar with the XML functions in those tools. So, the company should provide appropriate training in its XBRL planning.

As the company increasingly integrates XBRL into its accounting systems, internal processes and external disclosure, it will also increasingly need to involve XBRL and IT experts. The company will need to consider the extent to which XBRL expertise will exist in-house, versus the company relying on external vendors."

Speaking of an XBRL Templated Approach...

As I start to dig into what the XBRL alternatives are, I came across this interesting new service - called "EarningsDirect" - being offered by Business Wire in conjunction with CoreFiling.

This new service allows companies to adopt XBRL incrementally, via three "levels" of templates. And the good news is that the company creates the “instance” (ie. it doesn’t rely on an automated conversion that may or may not be very accurate). And I understand it's pretty cheap too.

I like this phased-in approach because it will allow companies to take baby steps towards XBRL implementation that are not disruptive to their existing processes (read internal controls). As companies gain expertise, they can more fully embrace the external reporting process, with the ultimate goal of implementing XBRL upstream in their accounting systems.

The first step is called Level 1. The company submits its earnings report as it normally does, but also issues with it a PDF instance document with associated XBRL files, which are created from a Excel spreadsheet. The spreadsheet only captures standard data (not customized for the industry or company) - about 200 data points or so - but it gets the company into the XBRL reporting game. [The EarningsDirect service does not address the use of the XBRL tags in the news release itself, nor the use of XBRL tags in SEC filings. Rather, it just generates a supplemental PDF document with XBRL nodes.]

As described on this page, Level 2 (not yet available) would involve the use of Excel spreadsheets that are more customized for particular industries - and Level 3 (now available) involves the development of a customize taxonomy document for a particular company. Here is an example of a Level 3 preliminary earnings report from Reuters. If you open the Attachments tab in the PDF, you can see that there are attached an XBRL instance document, an XSD schema document and three XML taxonomy documents.

One burning question relates to presentation: "How do I know that whats in this file with all the angle brackets is the same as my earnings release that I've sweated blood over?" It appears the way that data is tied in the XBRL to the presentation on the page with TagTips (eg. hover over any of the numbers in the Reuters PDF above, using Adobe Acrobat Reader v7.0 onwards) is designed to resolve that concern.

As alluded to below, another burning question is: what’s in it for the company? True that the company will looks investor-friendly, but what if investors don't use the information?

Is the Tail Wagging the Dog?

The question remains whether there are investors and analysts out there that are capable of consuming XBRL data today? We likely will - and should - hear about this topic during the SEC's roundtables, but I think the answer is "not yet." Perhaps another reason why there is no rush to push us deep into the 21st century - or maybe it's more like "if we build it, they will come"? I miss the '90s, back when I still had hair...

[Wow! Maryland Terps won the woman's b-ball tourney last night in a great game; nice finish to exciting NCAA tourneys. Of course, it helps that I had picked Florida in my pool and won $200. Hadn't picked a winner in a decade.]

April 4, 2006

Corp Fin Director John White: "The Need to Know"

Wasting scant time in making his first speech as the new Director of Corp Fin, John White delivered an impressive speech yesterday on what companies should consider this year in anticipation of the SEC adopting its executive compensation proposals. Emphasizing that he was speaking from the perspective of a private practitioner - in which he served just two weeks ago - John addressed both substance and process.

Among other substantive issues, John noted:

1. Total Compensation - time for all companies to use tally sheets

2. Processes for Setting Compensation - think about the story you'd like to tell, and reshape your processes now.

3. The Role of Executive Officers - reshape role of any executive for whom you would not want sunlight on their involvement

4. The Role and Identity of Compensation Consultants - Know the answers to these two queries:

- What are the nature and scope of their assignments? What instructions have they received?

-If the compensation committee engaged a consultant, did that same consultant do any work for the company or for any executives?

On the process front, John talked about the possible need to retool the disclosure controls and procedures to ensure that the appropriate data is captured to comply with the coming final rules. He noted that the disclosure committee might need to be tweaked to handle the different type of disclosures that could be elicted.

John's speech was before an intimate audience for Stanford's new corporate governance center's inaugural program, which essentially was a roundtable on executive compensation disclosure. Set in a building besides the SEC's headquarters, most of the SEC's Commissioners attended as each panel offered a variety of views on the SEC's compensation proposal (and I laughed, I cried, etc.).

SEC's Cox Rules Out 404 Exemption for Small Companies

Apparently after Chairman Cox kicked off the Stanford program with a speech on executive compensation - according to a Bloomberg article - he told reporters on the way out that "small companies won't get an exemption from Sarbanes-Oxley rules requiring independent auditors to certify they're complying with securities laws." I didn't hear the Chairman say this nor can I find any other article on it. [In a speech, Commissioner Campos recently implied he also would not support an exemption.]

If true, this is an interesting development given that Rep. Oxley and Baker themselves have written a letter to the SEC stating that they believe that the SEC does have exemptive power here - which was followed by a letter from 20 professors that expressed the view that the SEC didn't have the authority to provide such an exemption.

Downloading Our Webcasts

Some time ago, I blogged about software to help those members that wish to download our webcasts to listen to them in the car, etc. One member recently shared information about three new software programs that facilitate saving the audio streams by converting them to MP3 files, which can then be burnt to CDs:

- URL Helper - to analyze the HTTP calls and help extract the exact URL necessary to directly download the stream (this information is often masked from the end-user, making this application quite handy)

- HiDownload - ties right into URL Helper and allows direct downloads of the stream in the native format

- Smart Audio Converter - converts from/to all major audio formats out there (wma, mp3, ogg, etc.)

April 3, 2006

FASB Proposes Comprehensive Overhaul of Pension Accounting

On Friday, the FASB issued a 115-page exposure draft proposing new standards for accounting for pension and other post-retirement plans; quite an achievement for the FASB to issue a proposal of this magnitude in such a relatively short period of time. Comments are due May 31st (and oddly, roundtables will be held after the comments are due). We have added this to our "Pension Plans" Practice Area.

This exposure draft reflects Phase 1 of a comprehensive overhaul of accounting for pensions and other post-retirement plans. There are many proposed changes as this is a complex statement. For example, the proposal would require companies to move certain pension values that are now reported in footnotes of their financial statements to their balance sheets — where all their assets and liabilities are reflected. And the proposal would require companies to measure their pension funds' values on the same date they measure all their other obligations.

Believe it or not, the FASB's goal is to issue a final statement by this September! And it would be effective for fiscal years ending after December 15, 2006 - so it would apply to this year for calendar-year companies! Retrospective application would be required, unless it is deemed impracticable for reasons explained in the exposure draft. As discussed in paragraphs 14-23, there are separate effective date and transition provisions for the new measurement date requirement to measure plan assets and benefit obligations as of the date of the employer's statement of financial position. Whole lot of changing going on!

The proposed statement would apply to public entities and non-public entities, including not-for-profits. The impact for each company will vary and could be quite significant for some. These balance sheet changes could also impact contractual and other measurements for other purposes, such as shareholder's equity, return on equity, etc.

In the future, the FASB will consider a Phase 2 regarding a variety of other issues related to accounting for post-retirement benefits. And don't forget, Congress continues to debate all sorts of issues related to pension plans, including funding requirements.

More on CEO Pay

Last week, this 35-page report from The Corporate Library and AFSCME challenged large mutual funds to overcome their "systematic unwillingness" to use their voting power to check executive compensation.

In addition, The Corporate Library released this study entitled "Pay for Failure: The Compensation Committees Responsible" which highlights 11 of the largest companies in the U.S. that combined high levels of CEO compensation and poor performance over the past five years.

April E-minders is Up!

The April edition of our monthly newsletter is now available - sign up today to receive it on a complimentary basis.

Comments Submitted on the SEC’s Best Price Proposal

With the deadline now a month behind us, only ten comment letters have been submitted on the SEC's best price rule proposal.

Kevin Miller of Alston & Bird notes that an overarching concern reflected in many of the comments is that the approval by an appropriate committee (as defined somewhat differently in each of the letters) should be sufficient in and of itself for purposes of satisfying the safe harbor and that challenges to any required determinations by such committees (or the independence of committee members) should not affect the availability of the safe harbor. Several comment letters note that permitting such challenges to affect the availability of the safe harbor would significantly undermine its utility by failing to eliminate unwarranted incentives to utilize statutory mergers in lieu of a two step acquisition structure involving a tender offer.

On my DealLawyers.com Blog, I have listed some highlights from a subset of these letters. Check it out!