December 28, 2006

And What a Year It Was!

With Sarbanes-Oxley in the rear-view mirror for 4 years now, one would think that this would have been a quiet year for corporate governance developments. To the contrary, it was arguably the most dramatic year of change in recent history. Here is a snapshot of some of the more significant developments:

- The majority-vote movement matured at an incredible pace. Within the span of a single year, over half of the Fortune 500 adopted some form of policy or standard to move away from pure plurality voting for director elections. This trend is likely to continue as it’s the governance change that investors seek the most.

- An area not touched by Sarbanes-Oxley - executive compensation - continued to be inspected under a microscope by both investors and regulators. The SEC adopted sweeping changes to its compensation disclosure rules and investors became more willing to challenge companies that continue outlandish compensation policies. And House Democrats intend to consider executive compensation legislation early in 2007. [Today's WSJ and Washington Post contain articles in which Rep. Barney Frank expresses displeasure over the SEC's recent change in its exec comp rules - and we have announced a January 11th webcast just on these new changes. More on all this next week.]

- More and more hedge funds and private equity funds found “value” in using governance as an entree into forcing management to alter strategic course or to put a company into "play." The recent hiring of Ken Bertsch, a former TIAA-CREF governance analyst who had been working for Moody’s, by Morgan Stanley is an indicator that using governance as a “big stick” is likely to continue.

- The recent sale of the two primary proxy advisory services - ISS and Glass Lewis - at handsome premiums is a pretty good indicator that governance as a skill set can be quite profitable.

- The re-opening of the SEC’s “shareholder access” proposal - spurred by a recent 2nd Circuit decision - was unthinkable a year ago. But it’s now reality.

- The proposed elimination of broker votes in 2008 - via a rulemaking from the NYSE - means that the 2008 proxy season promises to be the wildest yet. But 2007 surely will be wild enough.

One thing we know for sure - we can’t predict what the New Year will bring! Happy Holidays!

Some Thoughts from Professor John Coffee

In an interview with the Corporate Crime Reporter, Professor John Coffee waxes on problems with the McNulty Memo and the Paulson Committee Report.

A Conservative Year for Holiday Cheer

Fried Frank took it easy in this year's annual festive message. Each year, the firm issues an alert at the end of the year which focuses on a true - and zany - government prosecutorial act. No food fraud to report on this year...

December 27, 2006

Problems with PIPEs

More and more members are e-mailing me their stories (or posting their queries in the Q&A Forum) regarding their challenges in getting a PIPEs registration statement processed by Corp Fin. Today's WSJ includes this article about how the Staff is "increasingly reluctant to sign off on transactions involving "private investments in public equity."

Deputy Director Marty Dunn is quoted as follows: "We have not told anyone that they cannot do these deals, we've just told them that they have to register them appropriately." Mr. Dunn says SEC staffers hope to provide clarification early next year on when registrations for shares issued in connection with PIPE transactions may be done in a secondary offering, and when a primary offering would be needed.

As the article notes, it doesn't help that the Enforcement Division is having success finding insider trading involved in some of these deals. The D&O Diary Blog covers the latest Enforcement developments regarding PIPEs - and the "SEC Actions Blog" has an interesting discussion of the latest Enforcement case against Friedman Billings Ramsey that involves a unique theory.

Problems with Empty Voting

From ISS' "Corporate Governance Blog": Reuters ran an article recently entitled "MergerTalk: Hedge Funds Find New Ways to Sway Votes," which looks at the practice of empty voting. The practice of "empty voting" entails borrowing shares prior to a record date, which then gives the borrower the voting rights. Once the record date has passed, the borrower returns the shares and effectively controls a large number of votes without a continuing economic interest. Some critics say this creative share borrowing is being done to manipulate voting outcomes and seriously undermines corporate governance transparency for large shareholdings.

The story specifically cited hedge fund's ability to purchase over-the-counter (OTC) equity swaps, obtaining large blocks of shares for voting without any true ownership. Holders are also not required to disclose their current assets in OTC swaps, nor are the banks that structure the swaps. Henry Hu, a University of Texas Law Professor, recently came out with a study on the practice of share lending and empty voting and is advocating fixing the disclosure system to make this practice more transparent.

Industry and academic focus is growing on instances where manipulating the vote is the objective, but similar problems can exist through normal sharelending, even if the motivation is benign. What are your thoughts on the practice of share lending and its impact on voting as well as the practice of "empty voting"...widespread problem or an anomaly to be watched?

A Boom Year for Mergers and a Furious Pace for Law Firms

On Friday, the NY Times ran this article about how busy law firms were doing deals this year. It notes the impact this has had on associate bonuses and quotes one partner on how he recently had to do his first all-nighter. Geez, I did all-nighters pretty regularly when I was at my law firms (and even do them occasionally in this job). My favorite quote was from Peter Lyons: "If you’re an M.& A. lawyer and you’re not busy now, it’s time to find something else to do for a living.”

December 26, 2006

SEC's Surprise Amendment of Executive Compensation Rules: Effective for 2007!

In a surprise move, the SEC adopted interim final rules late Friday, which more closely conform the amounts reported for stock-based awards in the Summary Compensation Table and other tables to the expense for such awards reflected in financial statements as dictated by FAS 123(R). These new rules go into effect for this coming year, as they are effective upon publication in the Federal Register. Note that the SEC is also soliciting comment on these rule changes, so it's possible that the SEC may take further action addressing them (including their effective date). Here is the SEC's press release - and here is the adopting release.

This holiday gift from the SEC has a hint of Festivus to it. Perhaps a feat of strength from the Commission? Or a subtle way for the agency to air a grievance?

What The New Rules Mean for You: Modifications to Align with FAS 123(R)

The purpose of the SEC's new rules is to more closely align the SEC's disclosure requirements with the accounting dictates of FAS 123(R). The bottom line of these new rules for us means that the value of equity awards granted in a particular year will now be spread out over a number of years instead of all in the year of grant - and this will change who are the highest paid executive officers when determining NEOs.

So the good news is that the new rules should reduce anomalies arising from one-time grants and are more consistent with other parts of the SEC's compensation disclosure rules (such as reporting cash compensation as it is accrued or as performance goals are met). But the bad news is that a lot of companies have already done a lot of work preparing to make disclosures under what suddenly are "old" rules - and under the new rules, companies will have to reassess who are their "Named Executive Officers."

The rule changes will impact the value of equity awards that are reportable in the Stock Awards and Option Awards columns of the Summary Compensation Table, as they will now be amortized over the same period - and in the same manner - as they are accounted for under FAS 123(R) (with some exceptions; for example, the SEC requires a "no forfeiture" assumption in the case of service-based awards for SCT purposes - so if a company's FAS 123(R) expense assumes any service-based forfeitures for the NEOs, the SCT amount and the corresponding amount in the financials will differ). Under the new rules, there likely also will be changes in the amounts disclosed in the Grants of Plan-Based Awards Table as well as the Director Compensation Table.

Coming Soon! Stay tuned: we are planning a bonus segment to cover how you should implement these new rules in connection with our January 18th Web Conference: "The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!" This critical Conference will be available to 2007 members of CompensationStandards.com at no charge - so renew your membership for 2007 or try a no-risk trial today.

SEC Issues FPI Deregistration Re-Proposing Release

On Friday, the SEC issued its re-proposing release regarding foreign private issuer deregistration.

December 21, 2006

A Few Corp Fin Items Before the Holidays

Yesterday, the SEC posted these items on its website:

- the proposing release regarding the 404 management report on internal controls

- a speech on "Materiality of Errors" by Todd Hardiman, a Corp Fin Associate Chief Accountant (along with this Corp Fin PowerPoint) delivered at last week's AICPA National Conference

- an updated version of the "Current Accounting and Disclosure Issues" Outline prepared by Corp Fin's Office of Chief Accountant

- a luncheon speech from Commissioner Annette Nazareth, given before the ABA's Committee on Federal Regulation of Securities a few weeks ago

PCAOB Inspections: PwC's Turn in the Barrel

The AAO Weblog does a good job describing PricewaterhouseCooper's new PCAOB inspection report that was issued last week. Here is an excerpt from Jack Ciesielski's blog:

"It found that the firm’s quality control was lacking in some audits: revenue and receivables at one audit client were inadequately tested, for one example. When the auditors repaired their audit, they increased the confirmations of accounts receivable by a factor of ten. On other engagements, the firm had failed to test impairment charges, various aspects of inventory and fair values of investments. PwC acknowledged the deficient audits and remedied them.

One could look at the report - and the one issued on Deloitte & Touche last week as well - and get the idea that the Big Four are out of control. And certainly, it’s bound to be spun that way in the press.

No apologies here for their mistakes - they don’t even sound like they’re failures involving extremely vexing issues. But it’s not an unfair question to ask all involved: what do you expect a regulator like the PCAOB to do? How can you expect them to inspect the Big Four each year and NOT find something? After all, their existence has to be justified as well - and if there are tens of thousands of audit engagements occurring each year, they’re not all going to be pristine. One would believe there’s plenty of meat for the PCAOB to chew if it wants to find it.

The fact that there’s a PCAOB inspection lurking in the bowels of each Big Four firm each year probably raises the quality of each employee’s work over what it would be in the absence of an inspection machine. But just because the PCAOB doesn’t bring one member of the Big Four to its knees each year doesn’t mean it’s not doing its job, either. Hopefully, if one of the Big Four goes off the rails into a swamp of total audit sleaze, the PCAOB mechanism is there to get them back onto the rails. Because it hasn’t happened yet, investors should be glad."

Options Backdating Study: "Lucky" Directors Reap Benefits Too

Check out Harvard Law School's new "Corporate Governance Blog" - and not to just read about the latest option backing study that has been in the media this week, co-authored by Professors Lucian Bebchuk, Yaniv Grinsten and Urs Peyer. The new study - entitled "Lucky Directors" - focuses on 800 seemingly backdated options at 460 companies involving 1400 independent directors. The key findings of the study are that, out of all director grants during 1996-2005, 9% fell on days with a stock price equal to a monthly low - and 3.8% of these grants were "super-lucky," taking place at the lowest stock price of a quarter.

Maybe this is why IBM announced it will eliminate option grants to directors yesterday? I tend to doubt it as aligning shareholders' interests with directors' interests still makes sense...

Personal note: The holiday miracle at work: "Rocky Balboa" gets two thumbs up! I'm not kidding, the critics are liking this movie - a pretty good indicator about how bad movies were this year overall. Happy Festivus to you and yours!

December 20, 2006

PCAOB's Internal Controls Proposal: Farewell AS #2; Hello AS #5?

Yesterday, the PCAOB proposed a new 131-page standard that would supersede Auditing Standard No. 2. Here is the related press release and briefing paper - and here is a statement from SEC Chairman Cox and Chief Accountant Hewitt. The proposal has a 70-day comment period.

As the FEI's "Section 404 Blog" notes in its summary of the PCAOB's action yesterday: One board member referred to the proposed rule as “AS5,” although standards are not assigned numbers until final. So perhaps it's farewell old AS #2, we knew you more than we ever cared to...

Forensic Accounting for Non-Experts

In this podcast, Howard Silverstone of Forensic Resolutions, and a co-author of a recent book "Forensic Accounting and Fraud Investigation for Non-Experts," helps to explain the basics of forensic accounting, including:

- What forensic basics should in-house lawyers have a handle on to help prevent fraud?
- What are some examples of how lawyers can spot accounting fraud trouble?
- What types of documentary evidence should lawyers be looking for?
- If a lawyer spots trouble, how can they determine whether their CFO or someone else in the Controller's office may be involved?

Another Proxy Advisor Sold: Glass Lewis

On the heels of ISS being sold last month, rival proxy advisor Glass Lewis is being acquired by Xinhua Finance, a Chinese financial media company. At the end of summer, Xinhua purchased an initial 19.9% of Glass Lewis and now plans to purchase the remaining 80.1% in early 2007. Given the influence of ISS and Glass Lewis on voting issues, these deals are noteworthy...

December 19, 2006

Sample CEO Succession Plan

Yesterday's WSJ carried an interesting article regarding interim CEOs and CEO succession planning (or more accurately, lack thereof). As I have pointed out a few times, the last remaining key area of corporate governance untouched by the reform wave of the past 5 years is CEO succession planning. It's such a critical task for boards to perform, yet it is rarely done - and it was very hard for me to locate a company that actually had something in writing! I have added this sample CEO succession plan (in a Word file) to our "CEO Succession" Practice Area and our "Sample Documents" Portal.

404 Extension: Traps for the Unwary

Regarding last week's release that further postpones the 404 compliance date for non-accelerated filers, thanks to Mike Kaplan of Davis Polk and John Newell of Goodwin Procter for the following traps for the unwary:

- If you become accelerated or large accelerated during the extension period, the postponement relief no longer applies (the same caution the SEC gave us last time)

- The extension for non-accelerated filers is for companies who are not accelerated filers at the end of the applicable year (so if you have a $55 million float in May, you need to decide whether you think your float may go up to $75 million by June 30th, in which case you now have just 6 months to finish 404 compliance - or you need to decide to spend money now, just in case your stock goes up)

- If you go public early in a year (pre-2/15 for US companies; pre-3/31 for FPIs) off of 9-month numbers, your first annual report (on which you get a pass) is the one you file within a few months after you go public; you are then subject to 404 in your next annual report, which is due the following year and covers a period before you went public (this may force people to delay 1st quarter IPOs or to spend money on SOX work before they are even public)

Tis the Season to Renew

As all our memberships are on a calendar year basis, don't forget to renew them before the end of next week. You can renew all of our publications in our "Renewal Center" located at the top right of TheCorporateCounsel.net home page.

December 18, 2006

SEC Extends 404 Compliance Dates for Non-Accelerated Filers: 4th Time a Charm?

On Friday, the SEC issued an adopting release to provide for the extension proposed in August to push back the internal controls compliance dates for non-accelerated filers - such date is pushed back from annual reports for fiscal years that end on or after July 15, 2007 to annual reports for fiscal years that end on or after December 15, 2007. This is the 4th "reprieve from the guv'nor" for non-accelerated filers.

The SEC also extended the date by which a non-accelerated filer must begin to comply with the auditor attestation requirement - now that is not required until they file annual reports for fiscal years ending on or after December 15, 2008. This provides time to consider what will be in new (and improved) Auditing Standard No. 2, as well as any implementation guidance that the PCAOB plans to issue for auditors of smaller companies. Any company that provides only a management report - and not an auditor attestation - must state in the annual report that it doesn't include the auditor’s attestation and that the company’s auditor has not attested to management’s report. The management report filed without the auditor attestation will be considered “furnished” rather than “filed.”

Both of these actions were adopted by the Commission in seriatim and were basically adopted as proposed. The SEC's press release includes a nifty compliance date chart...

SEC Provides 404 Relief for New '34 Act Reporters

As part of the same adopting release, the SEC gave relief from the Section 404 requirements for newly public companies by providing them with a transition period so that they can skip 404 for the 1st annual report that they file after becoming a '34 Act reporting company. Any company that has become public through an IPO (equity or debt), a registered exchange offer or otherwise has become subject to the '34 Act reporting requirements for the first time (eg. a newly registered foreign private issuer) can avail itself of this transition period. Any company that uses this transition period will need to include a statement in its first annual report that it doesn't include either a management’s report or an auditor attestation.

And the SEC also posted its revised mutual fund governance proposal that reopens the comment period for its June 2006 proposal to enable the public to comment on two papers prepared by the SEC's Office of Economic Analysis that will be made public by including them in the comment file at some point. The comment period is 60 days from the date that the second paper is placed on file...

Women in the Boardroom

In this podcast, Toni Wolfman, Executive in Residence of the Women's Leadership Institute of Bentley College and an author of The Boston Club’s "Census of Women Directors and Executive Officers of Massachusetts Public Companies," discusses the latest issues relating to women in the boardroom, including:

- What were the key findings from The Boston Club's report on women directors?
- Why should companies include more women on boards?
- How can companies looking for qualified director candidates find the right female candidates?

December 15, 2006

Welcome Waiver Relief via DOJ's "McNulty" Memorandum

On Tuesday, Department of Justice Deputy Attorney General Paul McNulty announced major changes to the DOJ's policies outlined in the 2003 Thompson Memorandum. In essence, this so-called "McNulty Memorandum" supersedes the "Thompson Memorandum" and "McCallum Memorandum." Here are prepared remarks of Deputy Attorney General McNulty and a DOJ press release.

The two key policy shifts outlined in the “McNulty Memorandum” are (i) federal prosecutors must now obtain written approval before seeking a waiver of the attorney-client privilege and work product protection and (ii) prosecutors generally may not consider a corporation’s payment of legal fees to employees in determining a company’s cooperation.

The McNulty Memorandum spends considerable time addressing waiver issues, taking a more thoughtful approach to requests for waivers of the attorney-client privilege compared to the DOJ's recent approaches - but skeptics remain. For example, one member notes that he is somewhat skeptical of the distinction that they make between "non-factual attorney work product" (Category II) and factual information that "may or may be privileged" (Category I). If it's work product, then it should all be worthy of the same level of consideration.

We have begun posting related law firm memos (and the responses of the ABA and US Chamber of Commerce) in our "Attorney-Client Privilege" Practice Area.

Does Senator Specter's New Bill Still Have a Purpose?

Beating the McNulty Memo by nearly a week, Senator Arlen Specter (R-Pa and outgoing chair of the Senate Judiciary Committee) introduced a bill on December 7th - the "Attorney-Client Privilege Protection Act of 2006" - that would curtail many of the hotly contested issues raised by the Thompson Memorandum.

Senator Specter’s legislation would prohibit federal prosecutors from using a company’s waiver of attorney-client privilege, and other factors, to determine the level of cooperation while it is under investigation. In part, the proposed legislation states:

"In any Federal investigation or criminal or civil enforcement matter, an agent or attorney of the United States shall not—

(1) demand, request, or condition treatment of the disclosure by an organization, or person affiliated with that organization, of any communication protected by the attorney-client privilege or any attorney work product;

(2) condition a civil or criminal charging decision relating to a organization, or person affiliated with that organization, on, or use as a factor in determining whether an organization, or person affiliated with that organization, is cooperating with the Government —…."

While the McNulty Memo establishes that failure to comply with a DOJ request for waiver should not be held against a company in determining cooperation, the new Memo appears to still be viewed by some as "encouraging" the culture of waiver. Accordingly, the cooperation debate now is focused on whether the guidelines and procedures of the McNulty Memorandum go far enough to address the concerns of Sen. Specter and business organizations so that the Specter Act would be unnecessary...

SEC Speaks at the AICPA Conference

At the annual AICPA National Conference that wrapped up in DC Wednesday, a number of SEC Staffers from the Office of Chief Accountant gave speeches, including these:

- Stock Option Backdating
- Fair Value Accounting
- Earnings Per Share
- Auditor Independence
- Professional Judgment in Financial Reporting
- SAB 108 and FIN 46R
- Improving Audit Effectiveness
- Purchase Price Allocations
- Risk Based Evaluations of ICFR
- IFRS Roadmap

I didn't attend the shindig but I did run a few of my accountant friends to the airport afterwards. They said that this year's AICPA Conference did not include any "big reveals" from any of the regulators. By the way, anyone notice the global warming on the East Coast? I have been driving with the top down for a week...

December 14, 2006

The SEC's Big Day

Yesterday, at a loooong open Commission meeting, the SEC:

- adopted e-Proxy

- re-proposed foreign private issuer deregistration rules

- proposed interpretive guidance for management reports that evaluate internal controls

- proposed higher net worth threshold for "accredited investor" definition and antifraud rule for advisers to pooled investment vehicles

At the meeting, there were only a few surprises (but note that reading the releases - whenever they're posted - often brings more surprises). Most people already had a head’s up regarding the change to a single trading volume test for purposes of FPI deregistration and there were no real surprises in connection with internal control guidance (other than that the SEC didn't address the status of the August 2006 proposal to extend the 404 compliance deadlines for non-accelerated filers and create a SOX 404 transition period for IPO filers; apparently that will be approved seriatim by the Commissioners soon). By seriatim approval, the SEC re-opened the comment period on proposals to enhance the independence and effectiveness of investment company directors (and the proposing release will include economic analyses of mutual fund governance and independence issues by the SEC's Office of Economic Analysis).

In this speech, Commissioner Campos identified some of the changes that the PCAOB is expected to make in the new standard to replace AS #2 next week:

- Scalable (meaning that smaller companies can scale the standard to meet their facts and circumstances)

- Streamlined (meaning intended to achieve maximum efficiency and cost effectiveness)

- Organized to make clear that management should perform their assessment from the top down (not bottom up)

- The new standard is supposed to be about 1/3 of the length of AS #2

- Supposed to be in plain English

Quite a few law firm memos have already emailed notes on the internal controls aspect of this meeting, including this one from Sidley Austin, and we will be posting them in the "Internal Controls" Practice Area.

The Adoption of E-Proxy - and a Proposal to Make It Mandatory

For me, the most surprises came in the e-Proxy initiative. It was no surprise that the earliest that companies and other persons can use e-Proxy is the compliance date of July 1, 2007 - but it was surprising that the SEC went on to propose that e-Proxy be mandatory. After speaking to a handful of companies about whether they would take advantage of e-Proxy, a few smart ones had calculated the thresholds for when its cheaper to continue to mail in paper (using bulk mail rates) rather than mail first class (to meet the "3 business day" requirement) to those that request paper (and incur the administrative headaches of maintaining a separate list for those shareholders who request paper). The thresholds were quite a bit lower than they had assumed before they went through this exercise. Companies should conduct their own calculations and see if it's worth submitting a comment letter on this proposal.

Under the adopted e-Proxy framework, a company may deliver online to satisfy proxy material obligations if it:

- Posts its proxy materials on a website, and

- Provides a plain English notice at least 40 days before the shareholder meeting, which includes the URL of where the proxy materials are posted and a toll free number and email address to enable shareholders to request paper copies.

Brokers, banks and similar intermediaries can deliver proxy materials using e-Proxy, with the notice and paper delivery provided through them.

Here are a few changes from what the SEC had originally proposed:

- A proxy card may not accompany the notice - but a proxy card may be delivered 10 days after delivery of the notice if accompanied by a second copy of the notice

- Shareholders can request paper delivery just one-time that would apply to all future meetings; they don't have to request it on a per-meeting basis

- Once a shareholder requests paper, the must send the proxy materials within 3 business days after receiving the request (the proposal had been 2 business days)

- Third-parties who use e-Proxy must send a notice by the later of 40 days before the meeting or 10 days after the company filed its proxy materials - and must honor shareholder requests for paper delivery

Commissioner Campos stated that he viewed e-Proxy as a first step toward shareholder access. Commissioner Nazareth stated that while she was supportive of e-Proxy, she wanted further study of its impact before moving to shareholder access. No one else commented on the interplay between e-Proxy and shareholder access.

John W. Jones Legal Education Fund

In memory of my good friend and former Corp Fin Staffer, John Jones, Radio One and Minority Media and Telecommunications Council have created the "John W. Jones Legal Education Fund." Donations, which are fully tax deductible, should be made to the "John W. Jones Legal Education Fund" and sent to:

Minority Media and Telecommunications Council
3636 16th Street, NW
Suite B-366
Washington, DC 20010

December 13, 2006

First Batch of PCAOB Inspection Reports Released

A few weeks ago, the PCAOB released the first auditor inspection reports of this year; reports for Deloitte & Touche, BDO Seidman and Grant Thornton. These inspection reports were released a bit behind the schedule of reports released in past years (eg. last year, Deloitte's report was released in late October) - leading some companies to criticize the PCAOB because they want to see how their auditors are performing before re-hiring them for next year.

The reports highlight some serious shortcomings in audits performed by these auditors. In some cases, the problems identified by the PCAOB were so significant that they resulted in the auditor's clients making changes in their accounting or disclosure practices. Last year, the PCAOB found problems with the audits of 8 Deloitte clients; this year that number rose to 17.

Perhaps one reason it took so long for the PCAOB to issue these reports are the strong objections mentioned in this WSJ article by all three of the auditors. It also appears some of these differences of view arose due to the auditors not having clearly documented what they did do (or conversely, what they did not do). For example, Deloitte disagreed with the PCAOB's conclusions in nearly two-thirds of the audits cited (their rebuttal is included as part of a response letter included with the PCAOB's report).

SEC Proposes Changes to Regulation M and Regulation SHO

Last week, the SEC issued a proposing release regarding amendments to Rule 105 of Regulation M. The proposed amendments would prohibit a person that has effected a short sale during the Rule 105 restricted period from purchasing securities in the offering.

The SEC also issued a proposing release that would amend the short sale price test by removing restrictions on the execution prices of short sales as well as prohibiting any SRO from having a price test. In addition, the SEC proposed to amend Regulation SHO to remove the requirement that a broker-dealer mark a sell order of an equity security as “short exempt” if the seller is relying on an exception from a price test.

A Peak at Today's SEC Commission Meeting?

A lot of last minute conjecture on how the SEC will handle internal controls during today's open Commission meeting (here is the agenda). FEI's "Section 404" Blog does a nice job capturing some of the scuttlebutt, like this speech from PCAOB Chair Mark Olson and yesterday's WSJ article. We shall soon see how reality shakes out...

IRS Guidance: Section 16 Persons Who Don't Cure Discounted Stock Options by Year-End

Last week, the IRS issued Notice 2006-100 to provide interim guidance to employers regarding their reporting and withholding obligations for calendar years 2005 and 2006 with respect to deferrals of compensation and amounts includible in gross income under Section 409A. This WilmerHale alert summarizes the effect of the interim reporting and withholding guidance on persons subject to the disclosure requirements under Section 16, including:

- Section 16 persons are required to include the option spread on vested options as of December 31 in income for each such year, to the extent not previously included in income;

- The amount included in income is subject to the 20% Section 409A penalty tax and interest, in addition to regular income and employment taxes; and

- Employers and payers are required to report the option spread on vested options for each such year to the extent not previously reported; however, employers are only required to withhold income and employment taxes with respect to such amounts for 2006. No withholding of the Section 409A penalty tax or interest is required.

December 12, 2006

Our "What is a Perk" Survey Results

After a little more than a month, we have wrapped up our popular "What is a Perk" survey, with many members providing their input. The survey results are quite lengthy and come with a big fat disclaimer that they do not necessarily reflect what the actual law is (and don't forget to take our new survey on related-party transaction procedures and policies):

A. Company Airplane Use

1. Spousal/family member tag-along on corporate plane where executive is flying for business reasons (assume no incremental cost of tag-along):

- Definitely a perk - 42.3%
- Leaning toward a perk - 26.2%
- Leaning toward not a perk -17.2%
- Definitely not a perk - 14.3%

2. Spousal/family member tag-along on corporate plane where executive is flying for personal reasons (assume no incremental cost of tag-along):

- Definitely a perk - 76.6%
- Leaning toward a perk - 8.6%
- Leaning toward not a perk - 5.0%
- Definitely not a perk - 9.7%

3. Executive use of corporate plane for outside board meetings (i.e., director of another company):

- Definitely a perk - 60.5%
- Leaning toward a perk - 22.1%
- Leaning toward not a perk - 9.4%
- Definitely not a perk - 8.0%

4. Outside director's use of corporate plane to attend company’s board meeting (i.e., picking up directors for meetings):

- Definitely a perk - 9.1%
- Leaning toward a perk - 11.6%
- Leaning toward not a perk - 18.8%
- Definitely not a perk - 60.5%

5. Executive use of corporate plane to attend a meeting of the board/trustees of a charitable organization:

- Definitely a perk - 50.7%
- Leaning toward a perk - 29.0%
- Leaning toward not a perk - 13.8%
- Definitely not a perk - 6.5%

B. Other Spousal/Family Member Issues

1. Travel costs associated with spouse attendance with directors at annual board retreat/meeting where all spouses are invited:

- Definitely a perk - 37.4%
- Leaning toward a perk - 28.2%
- Leaning toward not a perk - 18.7%
- Definitely not a perk - 15.8%

2. Travel costs associated with spouse attendance with directors at a board meeting where spouses are welcome, but not formally invited, and only a few spouses attend:

- Definitely a perk - 65.9%
- Leaning toward a perk - 25.6%
- Leaning toward not a perk - 6.3%
- Definitely not a perk - 2.2%

3. Spousal golf and other extra services, such as day travel or spa services, for when the board is in a formal meeting:

- Definitely a perk - 78.8%
- Leaning toward a perk - 13.6%
- Leaning toward not a perk - 4.4%
- Definitely not a perk - 3.3%

C. Mixed Business and Personal Use

1. Country club membership paid by company that is not used exclusively for business purposes, if the membership is used a few times by the executive or a family member for personal reasons:

- Entire amount of country club expenses is a perk - 26.6%
- Allocate incremental cost of those few personal uses as a perk - 47.6%
- Allocate all expenses, including a portion of the membership cost on some basis, as a perk - 22.5%
- Not a perk - 3.3%

2. Luxury box paid by company that is not used exclusively for business purposes, if the box is used a few times by the executive or a family member for personal reasons:

- Entire amount of ownership expenses is a perk - 11.7%
- Allocate incremental cost as a perk (eg. cost of refreshments) - 43.8%
- Allocate all expenses, including a portion of the membership cost on some basis, as a perk (eg. by dividing number of events box is paid for in order to allocate the cost on a per event basis) - 36.4%
- Not a perk - 8.1%

3. Membership in airline club paid by company that provide facilities at airports, if the club is also used by executive during personal travel:

- Entire amount of club expenses is a perk - 14.0%
- Allocate incremental cost as a perk (eg. cost of refreshments) - 34.7%
- Allocate all expenses, including a portion of the membership cost on some basis, as a perk (eg. valuation based on percentage of personal use) - 19.9%
- Not a perk - 31.4%

4. Relocation expenses for existing executive that the company has required to relocate:

- Definitely a perk - 17.7%
- Leaning toward a perk - 7.8%
- Leaning toward not a perk - 13.3%
- Definitely not a perk - 61.3%

5. Relocation expenses for newly hired executive, extended to induce the executive to accept an employment offer:

- Definitely a perk - 23.3%
- Leaning toward a perk - 11.8%
- Leaning toward not a perk - 11.4%
- Definitely not a perk - 53.5%

6. CEO’s assistant (whose compensation is paid for entirely by company) who spends 60% of his time taking care of personal tasks (such as maintaining the CEO's personal calendar, paying personal bills, etc.) and the other 40% is work-related:

- Definitely a perk - 35.1%
- Leaning toward a perk - 39.1%
- Leaning toward not a perk - 16.2%
- Definitely not a perk - 9.6%

D. New Questions Added After Initial Survey Posting

1. Would your answers change to the above questions if the executive paid the full incremental cost to the company?

- Yes to most - 44.2%
- Yes to a few - 27.9%
- Maybe for a few - 11.1%
- No - 16.8%

What is an Abusive Perk?

A while back, a USA Today reporter wrote an article illustrating how country club memberships are a common perk for CEOs (note the survey results above regarding whether country club memberships are perks). Below is a list of perks that also are common that I would view as more abusive than country club memberships:

- Financial planning - We've paid them so much that they cannot even manage it and now we have to pay for the manager and tax planning? I just don't see any basis for it and the amounts generally are insignificant.

- Commuting costs - If an executive has elected not to live near the company, that's a lifestyle or family choice and not a company expense (although executives more and more commute from the East Coast across country on a regular basis).

- Tax payments, including gross-ups - This is the one (although not technically disclosable as a perk) that is really radioactive with investors.

- Cell phones - Small amounts, but are you saying they would not have one if not for the company needing to be able to reach them? Of course, this one hits home for many of us since lawyers often get reimbursed for their cell phones.

On footnoted.org, Michelle Leder regularly analyzes perk disclosures and has found some pretty wild ones over the years. I found this recent one on Oracle's Larry Ellison to be provocative - $1.8 million on home security?

Wanna Be A Frillionaire?

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December 11, 2006

The "Scott" Report: The Aftermath So Far

In the wake of the issuance of an Interim Report from the Committee on Capital Markets Regulation on November 30th, there has been quite a bit of commentary and follow-up. Here is a list:

- Incoming House Financial Services Committee Chairman, Congressman Barney Frank (D-Mass.) intends to hold hearings on the Interim Report early next year - see this Washington Post article.

- Last week, the Committee issued a statement to clarify its position on the NYSE’s recently proposed elimination of broker non-votes, from urging the NYSE to reconsider its proposal to supporting it (except asking the NYSE to reconsider how proposal applies to mutual funds). I hear that the language on this issue was slipped into the report after two of the more investor friendly Committee members had reviewed the final draft; hence the change. The Interim Report was amended for this change.

- Some have dubbed the Interim Report as the "Greenberg" report after noting the Committee's ties to ousted AIG Chair Hank Greenberg and acceptance of financing from two Committee members. See this related Washington Post article.

- A search of articles on the Interim Report show that those who have been critical include former Treasury Secretary Larry Summers, former SEC Chairmen Richard Breeden and Arthur Levitt, former SEC Commissioner Harvey Goldschmid, NY Attorney General - NY Governor Elect Elliot Spitzer, the Council for Institutional Investors, and current SEC Commissioner Roel Campos. In addition, Senator Dodd and former SEC Chief Accountant Donald Nicholiasen have expressed concerns over the approach to regulation advocated by the Committee.

- Quite a few members responded to my blog on principles-based regulation - here is one response: Materiality is gauged using a principled approach set forth by the US Supreme Court years ago, as supplemented by additional SEC guidance; the Committee asks for a more principled approach to regulation, but then turns around and asks for more rules on materiality. It makes one wonder if what they are really saying is that they favor rules when it favors their special interests, and principles when they might not.

- Here are other thoughts from various members: Even though its an "interim" report, I thought it needed more empirical data and legal/financial analyses in certain areas to support the recommendations; it was sort of a stab at SEC Chairman Cox who already put these things on the Commission's agenda for '07; seemed a bit like a "get your act together SEC and do something pronto" message in some spots; certain recommendations could create bureaucratic burdens for the SEC which probably are counterproductive; we certainly do need to attract FPI listings and foreign capital lost post-SOX and we should harmonize our regime a bit more with Western EU on accounting, principles-based rules and corporate governance, but we have to make sure not to erode investor protections at the same time; the interplay of SROs, SEC, state AGs, Delaware vs. the less common law-oriented states, etc. makes all of this complex and time consuming stuff.

- November was the best month for IPOs in the US in years - see this related article.

- Of course, the highlight of the Interim Report is footnote 105, where yours truly is cited...

The "Scott" Report: The Bloggers Speak

As predicted, the legal blogging community has plenty to say about the Scott Interim Report. Here are some of those musings:

- 10b-5 Daily - "The Public Value of Securities Class Actions"

- FEI's Section 404 Blog - "Reactions to Comm on Cap Mkts Reg Report; U.S. Chamber Outlines Its Own Action Plan"

- AAO Weblog - "Report: The Committee on Capital Markets Regulation"

- The D&O Diary - "Looking at The Paulson Committee’s Proposed Litigation Reforms"

- Business Associations Blog - "Interim Report of the Paulson Committee"

- SEC Actions Blog - "Paulson Committee Report Addresses SEC Enforcement and Corporate Criminal Liability"

Shareholder Access and By-Law Amendments: What to Expect Now

We have posted the transcript from our recent webcast: "Shareholder Access and By-Law Amendments: What to Expect Now."

December 8, 2006

Option Backdating: Corp Fin's Upcoming Guidance

Following up on my Monday blog, a number of members have asked for more information about what Corp Fin Chief Accountant Carol Stacey said at the ABA Fall Meeting Saturday regarding forthcoming option backdating guidance. In essence, Corp Fin hopes to issue guidance to clarify what filings will be required under various circumstances, with the likely result that the burden of needing to amend all prior filings being reduced - and alleviate the need to seek Staff approval before deciding not to amend the filings for all prior years (you still would have to restate for those prior years, but you may not have to file amended reports for those years). In other words, the expected relief relates both to not having to file amended reports for a large number of years and the detail required in the financial statement footnotes in order to minimize what needs to be reaudited.

Option Backdating: Nasdaq Issues FAQs on Appeals Process for Deliquent Companies

Since a significant number of companies have become delinquent in their SEC filings due to issues related to stock option backdating, the Nasdaq has updated some existing and added a few new FAQs regarding delisting and the appeals process in the backdating context.

In the FAQs, the appeals process is explained as follows: Nasdaq's Hearing Panel has the discretion to grant a delinquent company additional time to remain listed, provided the company has a specific plan to regain compliance and is taking appropriate steps to deal with the circumstances which caused the delinquency. The Panel may not, however, grant an extension which would exceed the earlier of 90 days from the date of its decision or 180 days from the date of the Nasdaq Staff's initial delisting notification. Generally, it is the 90-day limitation that restricts the time available to a company to cure its SEC filing deficiency.

When a Nasdaq company cannot cure its SEC filing deficiency within the extension of time provided by the Hearing Panel, it may appeal the Panel's determination to the Nasdaq Listing Council. An appeal to the Listing Council does not stay the Panel's decision to deny continued listing to the company. Further, the time for appeal, which must be made within 15 days of the date of the Hearing Panel decision, may have expired at the point when the company determines that it will not file within the extension period granted by the Hearing Panel.

However, all Panel decisions are also subject to being "called for review" by the Listing Council. In connection with a call for review, the Listing Council has the discretion to stay the Panel's decision. Should the Listing Council grant a stay, then the company would remain listed during the pendency of the Listing Council's review. If the Listing Council determines it is appropriate, it may grant the company additional time to regain compliance while listed, until the earlier of 60 days from the date of its decision or 180 days from the Hearing Panel's decision.

In a new FAQ, Nasdaq states that it is using the "call for review" process in certain cases in order to stay the delisting of companies that are SEC filing delinquent due to stock option issues while the company remains in the appeals process. This new FAQ is repeated below:

"Generally, the Listing Council will not exercise its discretion to stay a Panel delisting determination. However, with respect to companies that have become filing delinquent due to issues related to accounting for stock options, the Listing Council has determined that it may be appropriate to grant a stay. In that regard, the Listing Council recognizes that there are unique circumstances surrounding these issues: most issuers and their accounting firms were taken by surprise; the necessary investigation may require the thorough review of documents and processes surrounding hundreds or thousands of option grants over a period of time typically years ago; and these issues could have enormous effect on the company and the individuals involved.

In view of this, the Listing Council has determined that it may be appropriate to exercise its discretion on a case by case basis, balancing the need for timely financial reporting with the interests of shareholders and issuers in maintaining a listing on a more transparent, liquid market. In determining whether to grant a stay, the Council will, among other things, consider whether the issuer acted promptly and appropriately to address the problems that occasioned the filing delinquency, including whether the issuer commenced an independent investigation and took steps to deal directly with individuals who it determined engaged in misconduct; whether the issuer has adopted appropriate remedial measures to avoid a recurrence of these problems; and whether the issuer will be able to regain compliance within the maximum time afforded by NASDAQ's rules."

A Sad Farewell to John "The Duke" Jones

It is with deep sadness that I remember one of the nicest guys I have ever met, John Jones. John was the strong silent type, a former Captain in the Marines who enjoyed boxing (a three time All-American on the NCAA boxing team) - he always struck me that he could have been a movie star if he wanted. John spent a few years in Corp Fin starting in the late '90s and was General Counsel of Radio One when he suddenly passed away last Sunday of an apparent heart attack at the young age of 38. Our thoughts and prayers are with his family. If you knew John, please take a moment to sign this guest book on WashingtonPost.com.

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December 7, 2006

Third Time's a Charm?

Late yesterday, the SEC postponed - for a second time - a scheduled vote on whether to allow shareholders to nominate directors. Not surprisingly given the press reports leading up to next Wednesday's open Commission, it appears that the five commissioners have not reached the consensus that Chairman Cox is striving for. The SEC had originally planned to propose new rules on October 18th.

Until it proposes new rules, the SEC has said that the 2nd Circuit court's AFSCME decision will stand, giving shareholders more power to nominate directors. The SEC is being aggressively lobbied by both sides in the debate. In fact, the Business Roundtable threatened yesterday to sue the SEC if it acted, following the US Chamber of Commerce's lead who last month warned the SEC that it may not have the authority to act.

I wish I had a bookie that handled bets for this sort of thing, because it was easy money that the SEC would postpone this proposal given the magnitude and controversial nature of what it is considering. Here is the Sunshine Act notice for the December 13th Commission meeting with the neutered agenda (the big Corp Fin items left on the agenda are adopting e-Proxy and providing internal controls guidance).

Foreign Private Issuer Deregistration: Reproposal and Liberalization

The SEC also announced yesterday that it intends to re-propose the foreign private issuer deregistration rule at next week's December 13th meeting. This rulemaking also is controversial and resulted in the SEC receiving lots of comments and lots of visits from those that would be impacted overseas. Floyd Norris wrote his NY Times column today on this development.

Here is a summary of what is happening from Cleary Gottlieb:

"The new proposal would allow foreign private issuers to terminate SEC registration when their U.S. trading volume is below a threshold that will be specified in the rule proposal. Press reports have indicated that the threshold may be 5%. If so, the revised rule would be consistent with a proposal made by a group of European organizations, with the support of Cleary Gottlieb, in February 2004.

The SEC's initial rule proposal, made in December 2005, would have allowed foreign private issuers to deregister using a test based in part on the percentage of their shares held in the United States, and in part on trading volume (for the largest companies). The European organizations and Cleary Gottlieb supported this proposal, but suggested that the SEC revise the tests, which would have allowed only a few European companies to deregister (fewer than one in ten large companies included in a February 2006 study). The new SEC proposal, if it is in fact based on a 5% U.S. trading volume test, would appear to address this concern.

The SEC announced that the modified rule will be re-proposed for further comment, rather than adopted, because the SEC had previously stated that it was not in favor of a trading volume test when it released the December 2005 proposal. At the same time, the SEC appears to be committed to moving quickly, as it announced its intention to limit the comment period to 30 days, and that it hopes to adopt a final rule in the first quarter of 2007.

Whether the SEC's new rule will in fact provide a practical mechanism for companies to exit the U.S. market when they find that the costs of U.S. registration outweigh the benefits will depend on the details of the new proposal, which should be available shortly after the December 13 meeting."

Underwriter Compensation Developments

In this podcast, LizAnn Eisen of Cravath, Swaine & Moore discusses the latest issues relating to underwriter compensation, including:

- What are the latest developments regarding the NASD's rule regarding underwriter compensation?
- What are the latest market trends regarding underwriter compensation?
- For those representing underwriters, what should they be looking out for in this area?

December 6, 2006

PCAOB to Propose Revising Internal Controls Standard

On December 19th, the PCAOB will hold an open meeting to consider proposing a "new" internal control auditing standard which would supercede Auditing Standard #2. This meeting will be held roughly a week after the SEC proposes changes to management's Section 404 report (as well as take other internal controls-related actions; according to a Bloomberg report yesterday, the SEC may propose giving smaller companies an additional one-year delay).

The PCAOB's press release lays out a framework for the new standard that is consistent with what PCAOB Chairman Mark Olson and Chief Auditor Tom Ray have laid out in recent speeches: five goals and a series of sub-points, including the following listed in FEI's "Section 404" Blog:

1. Focus the internal control audit on most important matters [note: the press release used the term "important" in number 1, not "material" (although "material is used elsewhere) - it will be interesting to see if "important" is the term d'art used in the proposed standard]

2. Eliminate procedures that are unnecessary to achieve the intended benefits (including: permit [i.e., eliminate prohibition on] use of prior years work by auditors, and "require auditors to consider whether and how to use the work of others, instead of doing certain procedures themselves)

3. Incorporate guidance on efficiency - e.g. PCAOB's May 2005 "guidance," other guidance issued by the PCAOB to make implementation of the internal control audit standard (originally issued as AS2) more efficient and effective - directly into the new audit standard itself

4. Provide explicit and practical guidance on scaling the audit to fit the size and complexity of the company

5. A simplified standard - propose a "simplified" standard (vs. AS2) that is shorter, easier to understand, and more clearly scalable to audits of companies of all sizes and complexity, by:

- Reducing granularity

- Redefining key terms

- Clarifying that the auditor’s evaluation of materiality for purposes of an internal control audit is based on the same long-standing principles applicable to financial statement audits

- Consolidating the Board’s standards on using the work of others in internal control audits and in financial statement audits into one new standard, so as to better facilitate integration of the two audits.

Accounting Reform: How the Latest Developments Impact You

Tomorrow, join us for our webcast – "Accounting Reform: How the Latest Developments Impact You" – to hear Linda Griggs of Morgan Lewis and Teresa Iannaconi of KPMG discuss the latest developments in accounting standards, such as tax uncertainties, fair value measurements, pension plan and post-retirement standards and lease accounting - and how even the philosophy of regulation is changing as the FASB moves to a more principles-based framework.

One Stop Shopping?

Anyone out there figure out the best way (or web sites) that allow you to input what you seek and you get an email sent to you when it becomes available? I have found this discussion about how you can set RSS feeds so that you will be notified if a desired item shows up on Craigslist or similar sites, but I swear I have heard about others. Let me know and I will share - me no like going to the stores during the holiday season...

The Latest Private Equity Borrower Developments

In this DealLawyers.com podcast, Patrick Lawler of Chapman & Cutler delves into how private equity funds are borrowing to support their M&A habits, including:

- Has increased borrowing from private equity funds helped fuel the trend of these funds doing M&A?
- What are the latest private equity trends regarding when they borrow?
- What are some of the key issues that private equity borrowers consider in securing financing for their transactions?

December 5, 2006

Be Mindful of Your SEC Staff Correspondence!

A few weeks ago, this Associated Press article about Ford Motor's business in Syria and Sudan was spurred by a comment letter dated July 26th from Corp Fin - providing a nice reminder to all of us about being careful what we say in our response letters, given that they will be much more readily available to the public (and the media) than they were in the past. As I blogged about yesterday, the SEC has nearly caught up in its long-standing project to upload comment letters and related correspondence on EDGAR.

Recently, the Corp Fin Staff has begun issuing "no further comment" letters to companies once their comments have been cleared (here is a sample). However, since this practice is new, it might not happen in all instances and senior Staffers have publicly mentioned that you may need to call the Staff to ask for such a letter if you don't get one and want one (I would think you would always want one; it's suitable for framing even if you don't want it for your file).

The date of this "no further comment" letter should be the date that kicks off the 45-day waiting period before all the comment letters and responses are uploaded on EDGAR. As you might recall when the SEC's uploading project was announced a few years ago, the Staff adopted a policy that comment letters and responses would not be posted "no earlier than 45 days from when comments are cleared."

The Evolving 'Best Price' Rule

Tomorrow, catch the head of the SEC’s Office of Mergers & Acquisitions (as well as two former SEC Staffers) in the DealLawyers.com webcast: "The Evolving ‘Best Price’ Rule." Spurred by conflicting court decisions, the SEC recently adopted amendments to its "best price" rule. Join these experts as they explore the impact of this rulemaking on M&A activity:

- Brian Breheny, Chief, Office of Mergers & Acquisitions, SEC’s Division of Corporation Finance
- Dennis Garris, Partner, Alston & Bird LLP
- Jim Moloney, Partner, Gibson Dunn & Crutcher LLP

What this program will cover:

- What changes did the SEC make to the best price rule?
- What issues might still arise in the wake of the SEC’s changed rule?
- How might the SEC’s changes impact deal structures?
- How might the SEC’s changes impact compensation arrangements in transactions?

6.5 Degrees of Separation: Boards More Independent

A few months back, The Corporate Library conducted a study of board members and their interrelationships, suggesting that “Sarbanes-Oxley has had a lasting and far-reaching impact on the corporate board network in the US.” Key findings of the study, include:

- Among the 4,288 people who sat last year on S&P 500 boards, 261 sat on at least three boards, down 13 percent from 301 in 2002

- Among CEOs, 195 held outside directorships, the same as in 2002 - but only 57 held more than one outside directorship, down from 72

- 8% of S&P 500 companies' boards are chaired by truly independent outsiders; up from 4% in 2002

- There has been a reduction in the average number of other S&P 500 boards that each board is linked to via shared directors, to 6.5 from 7.8

- 12 people held at least five S&P 500 directorships in 2005, down from 33 in 2002

- However, one finding deemed “surprising” was that the number of S&P 500 boards with no links at all to other S&P 500 boards declined to 40 from 51

December 4, 2006

Corp Fin: What's Doing

At the ABA Fall Meeting held in Washington DC over the weekend, Corp Fin Director John White, Corp Fin Chief Accountant Carol Stacey and other senior Staffers spoke on various panels and provided these tidbits, among others:

- for the December 13th open Commission meeting, the e-Proxy initiative may (or may not) apply to the '07 proxy season

- as the Commission has a draft final rule to review right now, it is possible that the "Katie Couric" rule could be added to the agenda and adopted at the December 13th meeting (and if adopted, could even apply to '07 proxy season)

- we will know precisely what will be on the agenda of the December 13th meeting no later than this Wednesday, as that is when the Sunshine Act requires that the SEC post a notice

- the "Current Accounting and Disclosure Issues" will be updated within the next few weeks; it was last updated in late '05

- a Corp Fin strategic plan for the near future is being worked on; new rulemaking and other projects to be identified

- some option backdating guidance will be forthcoming within a few weeks

- some executive compensation guidance might be forthcoming; estimated time unknown and "in what form" undecided

- a systematic review of executive compensation disclosures is expected to take place after the proxy season and a Staff report (and possible further rulemaking if deemed necessary) should result

- hiring freeze is finally off as Corp Fin has lost members through attrition (see the latest Staffers to leave in our December issue of Eminders)

- comment letters and related correspondence continues to be uploaded to the SEC's website at a rapid clip; nearly up-to-date now

Note that today's open Commission meeting has a revised agenda, which will not include the two hedge fund rulemakings: changing the definition of "accredited investors" and prohibiting advisers from making false or misleading statements to investors in certain pooled investment vehicles they manage, including hedge funds. According to this NY Times article, the SEC delayed considerations of these proposals to work out technical language; the proposals might be calendared for the already jam-packed December 13th open Commission meeting.

What's the Word on Shareholder Access?

Yes, this is the question that everyone is asking. Alas, there still is no word on what we can expect regarding shareholder access on December 13th - as reflected in this recent article, the Commissioners are still debating what to do and Chairman Cox is striving for a consensus. Thanks to Jim McRitchie's CorpGov.net for pointing out this interesting set of Directorship articles about where the Commission might be headed on this hotly contested issue.

December Eminders is Up!

The latest issue of our monthly email newsletter is now posted. And yes, we wuz robbed!

December 1, 2006

Parsing the Reasons for Auditor Resignations

A while back, Floyd Norris of the NY Times wrote this article urging the SEC to tweak its rules to require companies to provide reasons why an audit firm resigned in all cases, rather than the limited circumstances currently triggered under Item 4.01 of Form 8-K. Here is an excerpt from the article:

"A new study by Glass Lewis & Co., a consulting firm, finds that 1,430 public companies in the United States changed auditors in 2005, a turnover rate of 11.3 percent. The turnover is biggest at small companies, and about 60 percent of the departures are characterized by the companies as firings, with the rest resignations.

Why the changes? In 72 percent of the cases, the companies chose not to give any reason when they notified the Securities and Exchange Commission of the departure. That was up from 58 percent in 2004, when 1,451 companies changed auditors. Companies audited by the Big Four accounting firms, generally the larger companies, are even less likely to give reasons, with 82 percent choosing to remain quiet."

Director Resignations Intersecting with Auditor Resignations

Some companies have changed auditors after (1) in their 302 certifications, CEOs and CFOs said their company's internal controls were effective, (2) the auditors came in, conducted their audit and said "no, they weren't" and (3) restatements were made. Obviously, this type of situation can call management's certifications into question.

Even worse are situations like Take Two's, where this Form 8-K was filed in January 2006 to reflect the resignation of the audit committee chair - and then there is this Form 8-K filed in April where the auditor resigns and states they had no disagreements. The letter from the resigning audit committee chair's lawyer below is fascinating - and certainly raises eyebrows about the auditor who claimed there were no disagreements.

"As you know, we have just been retained to represent Barbara Kaczynski. I write in response to your email of Friday, January 20, 2006, to Ms. Kaczynski, regarding her resignation from the board of directors of Take-Two Interactive Software, Inc. (“Take-Two”).

Your email seeks confirmation from Ms. Kaczynski that her resignation from Take-Two’s board was not due to a disagreement with management of the type requiring disclosure under Item 5.02(a) of S.E.C. Form 8-K. Your email further asks Ms. Kaczynski to approve draft language describing the circumstances surrounding her resignation, which language the company intends to include in its upcoming Form 8-K disclosure.

Ms. Kaczynski does not know whether her resignation is of a type requiring disclosure under SEC rules and she does not feel able to express a view with respect to the language the Company intends to include in its Form 8-K disclosure about the resignation.

However, she is able to express to you directly the reasons why she resigned. During Ms. Kaczynski’s tenure as a board member and chair of the audit committee, several matters requiring the board’s attention caused Ms. Kaczynski concern. These matters included Take Two’s discovery of illicit images depicted in its “Grand Theft Auto” videogame, the Federal Trade Commission’s investigation of Take-Two following that discovery, and various SEC inquiries directed at Take-Two and its employees.

More recently, in connection with preparation of the 10-K and its late filing, Ms. Kaczynski’s concerns have risen significantly because of what she views as an increasingly unhealthy relationship between senior management and the board of directors. In her experience, management’s interactions with the board were characterized by a lack of cooperation and respect. Moreover, Ms. Kaczynski felt that management failed to keep the board informed of important issues facing the company or failed to do so in a timely fashion. In these circumstances, Ms. Kaczynski decided to resign her position as a member of the board."

Cell Phones Could Betray Former Users

Recently, Fox News ran this article about how sensitive information accumulated in your cell phone could be accessed by new users, even though you thought you had deleted the data. Resetting the phone may make it appear that confidential information was erased, but it actually can be recovered using inexpensive software that is readily available online.

The article made me wonder what kind of confidential information would be left on a Blackberry - or a computer hard drive for that matter - when it gets replaced on an upgrade. Lawyers have an ethical duty to protect client confidentiality, so lawyers disposing of smart phones, computers, PDAs, etc. should ensure that the data really gets deleted so that it cannot be recovered. That would also be a good practice for anyone seeking to protect their own personal data or to guard other confidential information.