September 28, 2007

Incoming! 2nd Wave of Executive Compensation Comment Letters

Over the last day or so, Corp Fin started faxing out a second wave of comment letters as part of Phase One of its compensation disclosure review project. These are new comment letters to companies who had not yet received a letter - this is not a second round of comments to those companies who originally received letters in August.

Member Appreciation Package”: With just over a week left, the mad dash to register at the last minute has begun as our HQ is overwhelmed. Most waiting this long are watching our popular Conferences by video webcast and are taking advantage of our “Member Appreciation Package,” which enables you to catch all three of these Conferences at a much reduced rate:

- “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
- “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks" (10/10)
- “4th Annual Executive Compensation Conference” (10/11)

Register for the “Member Appreciation Package” online – or use this Order Form.

If you have any questions, contact our HQ at or 925.685.5111.

The SEC's (and Fed's) New Regulation R

At last week's open Commission meeting, the SEC adopted Regulation R. This is a joint project with the Federal Reserve Board. The Federal Reserve Board adopted this Regulation at an open meeting on Monday. Regulation R replaces the SEC’s prior efforts in the area of bank broker activities — including the previously proposed Regulation B - as it creates some exceptions for banks from the definition of the term “broker” under Section 3(a)(4) of the '34 Act, as amended by the Gramm-Leach-Bliley Act. The SEC also amended existing bank dealer rules that were originally adopted by the SEC in 2003.

Here are opening remarks from Market Reg Director Erik Sirri. Here is the SEC's adopting release regarding exemptions for banks under Section 3(a)(5) of the '34 Act - and here is the adopting release regarding definitions of terms and exemptions relating to "broker" exceptions for banks.

Next, the federal banking agencies will issue, after consulting with the SEC, recordkeeping rules and guidelines for bank securities activities. And any future regulatory actions regarding bank securities activities will apparently be jointly issued by the SEC and the bank agencies.

How to Value Illiquid Assets

In this podcast, Espen Robak, President of Pluris Valuation Advisors, provides some insight into how to value illiquid assets, including:

- Given the sub-prime market meltdown, valuation of illiquid assets is big news these days. What areas are implicated in valuing illiquid assets?
- Can you talk a little more about last year's FAS 157, which requires "fair value" methodologies for valuing assets?
- What different approaches are companies taking to valuing their illiquid assets?

- Broc Romanek

September 27, 2007

Still Looking for Relief: 409A Deadline

Even though the IRS and Treasury recently pushed back the deadline for some of the 409A provisions, many believe that they didn't go far enough. Recently, 96 law firms joined together to send this letter requesting a broader extension of the deadline for amendment of deferred compensation plans to comply with Section 409A to the IRS and Department of Treasury.

Corp Fin Guidance: Filing Date Adjustments, Filing Deletions/Withdrawals, Etc.

Given the number of questions we get on the topic, I was pretty excited to see Corp Fin issue written guidance about how they handle EDGAR filing date adjustments, post-acceptance corrections, filing deletions and withdrawals, and continuing hardship exemptions.

I imagine that if the Office of Disclosure Support continues to issue this type of guidance on relatively common situations like this, it will diminish the number of phone calls they receive...

Clawbacks and Careful Drafting

From Mike Melbinger's blog: A case decided earlier this month caught my attention, as it illustrates three important points. In JPMorgan Chase & Co. v Pierce, JPMorgan sued its former Senior Vice President Sandra Pierce to recover $376,000 in compensation Ms. Pierce received from 1999 through 2003 under certain Stock Award Agreements. Pierce left JPMorgan in December 2004 to accept a position with another Bank. The Stock Award Agreements authorized JPMorgan to "claw back" stock award compensation Pierce received if she became employed by a JPMorgan competitor and "perform[ed] the same or substantially similar functions to those which [she] performed while employed by [JPMorgan]." [ed. note: we have posted the opinion in the "Clawback Provisions" Practice Area on]

The court faced three interesting and relevant issues: (1) whether the claw back provisions of the award agreements was enforceable, (2) whether JPMorgan Chase had properly delegated the authority to make the decision on competitive employment to is Human Resources Director, and (3) whether the court should apply a deferential standard of review to the decision of the Human Resources Director.

The court dispose of the first issue easily, finding that the claw back provision was clearly enforceable as a matter of Delaware contract law.

The second issue was a bit closer, since JPMorgan's documentation of its delegation of authority to the Human Resources Director was less than thorough. (Make a note: be sure to document all delegations of authority carefully and fully.)

The third issue was the unusual feature of this case/decision - its discussion of the judicial standard of review applicable to ERISA cases. Many of us have - for years - drafted our equity compensation plans (and other non-ERISA plans) to include language we developed for ERISA plans following the US Supreme Court's decision in Firestone v. Bruch (1989). Firestone held that if the plan document reserved to the plan administrator the power and authority to apply and interpret the plan's (ambiguous) terms in its sole discretion, and the plan administrator made such a decision, then the court would only overturn that decision if it found the administrator's decision to be "arbitrary and capricious" - a high standard. We add this language in the hope that a court seeing this interpretive language will look to ERISA, by analogy, for guidance and apply the arbitrary and capricious standard. In this case, the court did not rely solely on the arbitrary and capricious standard, but seemed to apply a similar analysis in finding in favor of JPMorgan and its Human Resources Director.

Act Now: Join Mike - as well as in-house practitioners from McDonalds and Intel - to learn more about protective/proactive plan drafting and claw backs for their panel at the "4th Annual Executive Compensation Conference." You can catch this Conference in two weeks either in San Fran or by video webcast. And you can watch this Conference online - along with our "2nd Annual Exec Comp Disclosure Conference" and "Hot Topics Conference" as part of a "Member Appreciation Package."

- Broc Romanek

September 26, 2007

What in the XBRL is Going On?

Yesterday, the SEC pulled out all the stops in marketing its "landmark" announcement that the XBRL taxonomy for US GAAP is ready to be tested by third parties (but not the general public quite yet), with an intended completion date of December 5th. It certainly is quite an achievement for the team that has worked closely with the SEC Staff to get this project moving faster than imaginable. This development follows last week's announcement that the SEC has made the source code for its Interactive Financial Report Viewer available for free use by the market.

This is all to the good. However, I get a little worried about the Chairman's remarks that rules could be proposed in the Spring and adopted as early as next Fall - and that these final rules could have include a schedule mandating XBRL. Something this big - and this technical - takes time based on historical experience with Edgar, etc. [Perhaps an omen was the fact that the SEC's press conference yesterday was delayed half an hour due to technical glitches. They were breaking out the duct tape!]

It is comforting to know that - for the last year - 8,300 U.S. financial institutions have been using XBRL to submit their quarterly Call Reports to the banking regulators. But my faint memory of Call Reports is that they are fairly simplistic compared to US GAAP - but it's still comforting to know that there is some XBRL experience out there beyond the several dozen pilot volunteers.

During his remarks, Chairman Cox waxed about a mythical Sally Q spending more time with her kids because XBRL saved her research time. I understand the point, but I don't really view XBRL as a substitute for reviewing SEC filings. We all know that two companies with identical situations might well report completely different numbers for a particular line item because each selected a different accounting treatment. Reading the financials in their full context will continue to remain important. [Here is an old article about putting together a form on the fly; I'm not sure how this could work and keep numbers in context - maybe someone could explain that to me?]

In the end, I think the bigger impact of XBRL will be on the ability for companies to internally put together their financials. Yes, there might be cost savings - but there also will be implementation costs. But the real change here might be a streamlined and quicker process for gathering the data that makes up a company's financials. It's gonna be an interesting ride for Captain XBRL...

Misreporting Results: More Than One Way to Do It

From Lynn Turner: People often wonder ask why there are restatements - corrections of errors - in financial statements. Of course, fraud - such as the multitude of companies in a list as long as your arm such as Enron, Worldcom, Parmalot, Adelphia, Lernout and Hauspie, Tyco, etc. - has been one reason for restatements have wrecked havoc on shareholder portfolios.

But the fact that financial statements were just flat out done wrong the first time can also be a key reason. As noted in this 1998 article citing two surveys, a very high percentage of financial executives acknowledge themselves that they had done their financial statements wrong. And many more were using flexibility in accounting rules to present a less balanced, but more favorable view, of the company.

No wonder since the corporate scandals began to break in 2001 and 2002, and new reforms have subsequently been implemented, that there has been plenty of restatements necessary. If people in a survey were willing to say the books were cooked, one can only imagine how much cooking was actually going on. You can't have the high percentage of books being cooked that are cited in these surveys and avoid a wave of restatements. In the culture evidenced by the surveys, getting it done right the first time was not rewarded. As a result, a lot of companies are getting a chance to get it right the second time.

Ten Compensation Disclosure Fixes

The Sept-Oct 2007 issue of The Corporate Counsel – which has just been sent to the printer - includes important analysis and guidance regarding fixes companies will need to make to their proxy disclosures next year given the SEC’s recent wave of comment letters – and much more.

We have posted this blurred issue so that non-subscribers can get a sense of it before trying a 2008 no-risk trial, under which you can get this issue and the rest of 2007 for free. The issue includes pieces on:

- Ten Compensation Disclosure Fixes
- Disclose Performance Target Levels Whenever Possible
- Make Benchmarking Disclosure Meaningful
- Provide the Whole Termination and Change-in-Control Picture
- Maximize the Utility of the Compensation Tables
- Staff Affirms "No-Sale" for Restricted Stock
- Use of S-3ASR instead of S-8 to Register Stock Plan?
- Rule 14a-8 Proof of "Record" Ownership—Staff Says No to Investment Advisor Affirmation
- Filing Form T-1 After S-3 Effectiveness—Don’t Use Form 8-K
- Updating the Exhibit 5 Legality Opinion at Each Shelf Takedown
- California’s Listed Issuers/Securities Exemptions Updated
- Rule 144—Acting in Concert Under a 401(k) Plan

- Broc Romanek

September 25, 2007

Loss of Broker Non-Votes: Ain't Happening for the '08 Proxy Season

Yesterday, the NYSE sent an email to listed companies informing them that Rule 452 won't be revised to eliminate broker discretionary voting in director elections for next proxy season. Previously, it was the NYSE's stated intention to have the rule change in place and effective by January 1, 2008. As could be expected, the NYSE's proposal is being considered by the SEC as part of the broader range of issues relating to the SEC's own shareholder communications and proxy access proposals.

John White on CD&A, etc.

Don’t forget the keynote presentation by John White, the Director of the SEC’s Division of Corporation Finance at the “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference.” The Conference is two weeks from today; don't procrastinate any further.

Also, Paula Dubberly – an SEC Associate Director and one of the primary authors of the SEC’s executive compensation rules – will be sitting on five panels during this critical Conference.

Act Now: You can catch this critical Conference either live in San Francisco or via video webcast. Remember how practical last year’s Conference was – this year will be no different: Register today.

Member Appreciation Package”: Most folks watching this popular Conference by video webcast are taking advantage of our “Member Appreciation Package,” which enables you to catch all three of these Conferences at a much reduced rate:

- “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
- “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks" (10/10)
- “4th Annual Executive Compensation Conference” (10/11)

Register for the “Member Appreciation Package” online – or use this Order Form.

If you have any questions, contact us at or 925.685.5111.

Latest Developments in Capital Market Deals

Tune in tomorrow, Wednesday, September 26th for this webcast – “Latest Developments in Capital Market Deals” – to learn about all the latest deal trends and developments featuring these experts:

- Jon Abram, Partner, Dorsey & Whitney
- Robert Hayward, Partner, Kirkland & Ellis
- Michael Kaplan, Partner, Davis Polk & Wardwell
- Erika Robinson, Partner, WilmerHale
- Robert Santangelo, Managing Director, Credit Suisse

- Broc Romanek

September 24, 2007

Some Notable Credit Crunch Disclosures and Developments...

Despite the Fed's reduction in interest rates last week, a number of deals are in trouble and have produced some interesting developments and disclosures. As a result, caselaw regarding MAC clauses and other merger provisions will likely be fleshed out over the next year (remember the September-October issue of the Deal Lawyers print newsletter opens with a related piece: "The 'Downturn' Roadmap: Parsing the Shift in Deal Terms").

Here are some of the notable developments and disclosures:

1. Harman International's Form 8-K - According to this article, late Friday, Goldman Sachs and Kohlberg Kravis Roberts scuttled their pending $8 billion buyout of Harman International after discovering details about Harman that raised concerns about its business. You may recall that this deal was one of the first to introduce "stub equity."

2. Genesco's Form 8-K (filed 9/20/07) - As noted in this article, Genesco is suing to force Finish Line and UBS to complete the deal it made to buy Genesco (here is the Form 8-K regarding the lawsuit filed Friday).

3. Reddy Ice Holding's Proxy Statement (filed 9/12/07) - As noted in this article, Morgan Stanley, the deal's solo underwriting bank, claimed in late August that the financing agreements had been breached and said that it was "reserving its rights." According to the proxy, Morgan Stanley argued that GSO Capital Partners, the buyout's equity sponsor, and a special committee altered some dates in the original deal agreement and, specifically, stretched out the debt marketing period without Morgan Stanley's consent. Morgan Stanley insisted that GSO had breached the debt financing contract by doing that.

4. Accredited Home Lenders Holding Co.'s Form 8-K (filed 9/20/07) - As noted in this article, Accredited Home Lenders compromised on its price tag in order to save its sale to the Lone Star Fund.

5. SLM Corp.'s Additional Soliciting Material (filed 8/7/07) - As noted in this article, Sallie Mae's purchase by a consortium led by JC Flowers & Co. might tank as the buyers are having second thoughts.

Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing

Join tomorrow for a webcast – “Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing” – to hear Tim O'Connor of Imperial Capital, and Mark Palmer and Jonathan Gill of Bracewell Giuliani discuss the latest trends and developments regarding the opportunities and strategies available in distressed situations. Given what’s happening in the credit markets – this program is particularly timely!

Coming Soon: On November 1st, join us for the webcast: “Compensation Arrangements for Private Equity Deals.”

Act Now: To catch these programs, try a 2008 no-risk trial to today – and get the "Rest of 2007" at no charge.

Delaware Supreme Court: Rejects Deepening Insolvency Cause of Action

A few weeks ago, the Delaware Supreme Court decided - in Trenwick America Litigation Trust v. Billet, No. 495, 2006 (Del. Aug. 14, 2007) - that no cause of action asserting deepening insolvency exists under Delaware law. Sitting en banc, the court didn't issue its own decision - rather, it relied on the lengthy opinion of Vice Chancellor Strine issued in August of last year, where he looked carefully at the underlying theory (and other available causes of action) and concluded that the deepening insolvency theory was incoherent. We have posted memos regarding this decision in our "Bankruptcy & Reorganization" Practice Area.

- Broc Romanek

September 21, 2007

Senate Judiciary Committee Hears Testimony on Attorney-Client Privilege

On Tuesday, the Senate Judiciary Committee held a hearing about approaches to corporate fraud prosecutions, and in particular the state of attorney-client privilege under the McNulty Memorandum. The Senate is still considering the Attorney-Client Privilege Protection Act of 2007 (S. 196), which was introduced by Senator Arlen Specter (R-PA) earlier this year. The bill would prohibit the government from demanding, requesting, or conditioning treatment on the disclosure of any communication protected by the attorney-client privilege or any attorney work product. In addition, the bill would prohibit the government from making charging decisions or determining the level of cooperation based on such things as a valid assertion of attorney-client privilege or attorney work product, the provision of counsel or legal fees to employees, the entry of joint defense and other agreements with employees, information sharing or the failure to terminate or sanction an employee. The bill would also prohibit the government from demanding that an organization not take any of these sorts of actions.

Among the witnesses at Tuesday’s hearing was Andrew Weissmann, former Director of the Justice Department’s Enron Task Force and now a partner at Jenner & Block. In his written testimony, Weissmann summed up the concerns of many with the statement: “In light of the Draconian consequences of an indictment and the fact that the federal common law criminal standard can be so easily triggered – despite a company’s best efforts to thwart criminal conduct – prosecutors have enormous leverage. To avoid indictment, corporations will go to great lengths to be deemed “cooperative” with a government investigation. KPMG is a prime example, and one that has been spotlighted in the decisions by Judge Kaplan in the United States v. Stein case. In those decisions, the Court essentially equated the actions of the firm to those of the government, because the disproportionate power of the government was deemed to have turned the company into a mere amanuensis of the prosecution. The Bristol Myers prosecution is another notable example illustrating the effects of such disproportionate power: the company there acceded to a request by the lead prosecutor to endow a chair at the prosecutor’s alma mater in order to resolve the investigation short of indictment.” Weissmann went on to note that lack of oversight of corporate charging decisions at DOJ, the problems with penalizing assertions of an employee's Fifth Amendment rights and the McNulty Memorandum’s continued infringement of the attorney-client privilege all support passage of the Attorney-Client Privilege Protection Act of 2007.

As discussed in Edith Orenstein’s FEI Financial Reporting Blog, former Chief Justice of the Delaware Supreme Court E. Norman Veasey submitted a report to the Committee outlining anecdotal evidence of prosecutorial abuses occurring both before and after publication of the McNulty Memorandum. Based on information obtained from members of the Association of Corporate Counsel and the National Association of Criminal Defense Lawyers, Veasey reported (as a “neutral”) on twelve instances of “inappropriately coercive behavior” on the part of the government. These accounts include prosecutors requesting that a company turn over all privileged material in a corporate fraud case after the release of the McNulty Memorandum, requests from the government for information as to whether the company was paying for lawyers to represent fact witnesses in an FCPA case, and – in a pre-McNulty environmental case – pressure from the government to fire employees who received target letters.

With the upcoming confirmation hearings for Attorney-General, there is no doubt that this issue will remain hot. For more information, check out our "Attorney-Client Privilege" Practice Area.

Over Two Trillion Served!

An SEC press release issued yesterday about XBRL reminded me of those signs outside of McDonald’s restaurants touting the number of customers served. When Woody Allen woke up in the year 2173 in the movie Sleeper, the McDonald’s sign said that over 795 sexdecillion (that’s 51 zeros) had been served.

The SEC said that the combined market capitalization of companies submitting interactive data financial reports has surpassed $2 trillion. That $2 trillion in market cap is made up of over 40 large companies participating in the SEC’s voluntary XBRL program.

The SEC also put out an XBRL “teaser,” with a statement that Chairman Cox expects to make a separate announcement next week about another major milestone on the interactive financial reporting front.

XBRL is clearly on an expedited path to realization at the SEC. At last month’s inaugural meeting of the Advisory Committee to Improve Financial Reporting (CIFR), Corp Fin Director John White said that the SEC is moving forward with future XBRL rulemaking, and will be doing stuff before next August when CIFR is supposed to deliver its report. Pretty soon those XBRL market cap numbers could be a lot higher…

Back in the Saddle – The Sarbanes-Oxley Report

Just when you thought (or hoped) it was over, Billy Broc and Dave “the Animal” are back in this latest edition of The Sarbanes-Oxley Report. Billy Broc talks about what he is looking forward to at the "15th Annual NASPP Conference” in just two weeks.

Don't forget to take advantage of the free “Chicago” concert on Tuesday, October 9th. You must register in advance to attend this event – and space is limited. Register now to ensure that you get your tickets – don’t wait until the last minute for this one. Keep in mind that the concert is offered to NASPP Conference session attendees only (also the NASPP cannot accommodate guests for the concert). Thanks again to Fidelity Investments for co-sponsoring this event with the NASPP!

- Dave Lynn

September 20, 2007

Small Audit Firms Charged with PCAOB Registration Failures

Last week, the SEC announced charges against 69 audit firms and partners for issuing audit opinions while not registered with the Public Company Accounting Oversight Board. Most of these cases were settled, however the SEC did issue ten contested orders.

All of these cases were brought under Section 102(a) of the Sarbanes-Oxley Act, which provides that “it shall be unlawful for any person that is not a registered public accounting firm to prepare or issue, or to participate in the preparation or issuance of, any audit report with respect to any issuer.” Section 102(a) became effective on October 22, 2003, and to date 1806 accounting firms have registered with the PCAOB.

The SEC’s settled cases largely targeted firms that performed audits for fiscal years ending in 2003 and 2004. The audits were conducted for companies that were all issuers under Sarbanes-Oxley, including companies that were not traded, companies that were trading on the OTCBB or Pink Sheets, and in one case a company that was trading on the AMEX. The audit fees collected by these unregistered firms ranged from $32,000 to nothing, with the firm of Preferred Accounting Services, Inc. charging a whopping $100 for its audit while not registered. (Who says you can’t get anything for $100 these days?) For those firms that did collect audit fees, most returned the fees. Two firms that did not return fees were ordered to disgorge the fees they collected. The firms that collected no fees for their audits provided the SEC with an undertaking that they would not seek to collect the fees from the issuers. The other penalties faced by the audit firms and their partners included censures and cease-and-desist orders.

Among those settling charges were a number of sole proprietors, including an 81-year old auditor located in Bellmore, New York. In a few of the cases, the auditors continued to issue audit opinions even after the PCAOB had disapproved their registration applications because they had already conducted audits while unregistered. No issuers were charged in these actions with having filed non-compliant audit opinions.

You can easily check on the PCAOB’s website to see if an accounting firm is registered with the Board. The list of registered public accounting firms is updated regularly and includes the name of the firm and its headquarters office location.

PCAOB Board Member to Step Down

While on the topic of the PCAOB, founding Board Member Kayla Gillan announced on Tuesday that she will be stepping down from the Board by the end of January 2008. During her time at the PCAOB, Gillan has spearheaded efforts geared toward small businesses, known as the Forum on Auditing in the Small Business Environment. When the SEC re-upped Kayla, they gave her the unexpired term of departed Chair McDonough (whose term expires in January) rather than a full term - and PCAOB Board members are limited to only two terms under Section 101(e)(5)(B) of the Sarbanes-Oxley Act.

Tweaking Your D&O Questionnaire

It is not all about compensation disclosures at the “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference.” After all, this is a “Proxy” Disclosure Conference.

For example, catch Alan Dye, Amy Goodman and Keith Higgins during their panel – “How to Handle Related Party Transaction Disclosures and Director Independence” – to learn about:

- Challenging determinations of “materiality” for related persons
- Updating your D&O questionnaires
- The latest on related person transaction policy disclosures
- Parsing director independence disclosures

Act Now: You can catch this critical Conference either live in San Francisco or via video webcast. Remember how practical last year’s Conference was – this year will be no different: Register today.

Member Appreciation Package”: Most folks watching this popular Conference by video webcast are taking advantage of our “Member Appreciation Package,” which enables you to catch all three of these Conferences at a much reduced rate:

- “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
- “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks" (10/10)
- “4th Annual Executive Compensation Conference” (10/11)

Register for the “Member Appreciation Package” online – or use this Order Form.

If you have any questions, contact us at or 925.685.5111.

- Dave Lynn

September 19, 2007

Climate Change Risk Disclosure: Coming Soon to Your 10-K?

It was widely reported yesterday that efforts are underway to pressure the SEC into requiring more disclosure about the risks associated with climate change. As noted in this Washington Post article, “[n]ow a group of state officials, state pension fund managers and environmental organizations are pressing the SEC to force all public companies to come up with something more useful to investors. Among those who signed the formal petition were Bill Lockyer, California treasurer; Alex Sink, Florida's chief financial officer; and Richard Moore, North Carolina treasurer. In the petition, to be filed today, the group is asking the commission to require companies to assess and disclose their financial risks from climate change and legislation.”

The group’s 116-page petition is unusual in that it is not a traditional rulemaking petition, which typically asks the SEC to amend its rules to address a particular issue. Rather, the group’s petition seeks Commission interpretive guidance clarifying that, under existing law, companies are required to disclose material information related to climate change. The types of things that the group thinks companies must disclose, depending on the circumstances, are:

- Physical risks arising from climate change that are considered material to operations or financial condition;
- Financial risk and opportunities associated with “present or probable greenhouse gas regulation;” and
- Legal proceedings associated with climate change.

Appendix G of the petition lays out the proposed guidance that the group would like to see the SEC adopt, and it includes an analysis of the applicable GAAP and Regulation S-K requirements that could require disclosure about climate change issues. In addition to submitting the petition, the group also sent a letter to Corp Fin, asking that the Division not necessarily wait for Commission interpretive guidance, but rather pay close attention now to climate change risks when reviewing periodic reports.

These latest communications with the SEC are the culmination of several years of efforts to compel action on climate change disclosure. A group including many of the same investors - organized as the Investor Network on Climate Risk - wrote a letter to Chairman Cox last year, although - according to news reports - previous efforts such as this letter have gone unanswered. In the letter, the group noted efforts dating back to 2004 to have the SEC take additional steps under existing disclosure requirements to elicit better disclosure about climate risk in filings. In addition, that group asked the SEC to revise or change the Staff’s interpretation of Rule 14a-8’s ordinary business exclusion so that companies would be required to include shareholder proposals requesting a report on financial risks due to climate change.

These on-going efforts with respect to climate change reflect the broader trend that SEC disclosure requirements always seem to be a focal point for addressing the issue of the day. Whether it is Year 2000 risks (remember that?), business with countries subject to economic sanctions, computer security risks, the crisis in Darfur or other significant issues, there is often an effort on the part of investors, interest groups and legislators to compel some sort of disclosure in SEC filings. Often, the problem with these efforts is they don’t focus on what information is material to investors, and they rarely recognize that a "one size fits all" approach doesn't work when it comes to assessing materiality and the applicability of existing disclosure requirements. Climate change may very well stand apart from these other issues when it comes to materiality judgments, given the significant impact that climate change may ultimately have on many companies.

The State of Climate Change Disclosure Today

The group submitting the petition to the SEC indicates that disclosure about climate change in public filings has been “scant and inconsistent.” The group singles out Exxon Mobil and Allstate for their failures to adequately disclose the risks associated with climate change. A January 2007 study by Ceres and the Calvert Group indicated that companies comprising the S&P 500 were doing a poor job of disclosing climate change risks, both through their public filings and the Carbon Disclosure Project questionnaire process.

If you missed our June webconference “Tackling Global Warming: Challenges for Boards and their Advisors,” it is not too late to listen to the audio archive and review the great course materials. In the course materials for the panel entitled “Disclosure Obligations under SEC and Other Regulatory Frameworks,” Miranda Anderson of David Gardiner & Associates outlines some key information about voluntary climate change disclosure. With respect to SEC disclosure, she notes dramatic improvements over the past 5 years in the quantity and quality of disclosure about climate change risk, particularly among electric utilities and in the oil and gas sector. Insurers, automakers and the petrochemical industry have not done as well in this area.

Beyond disclosure concerns about climate change, companies need to focus on other important issues, such as the board’s fiduciary duties, D&O insurance, contracts and due diligence. All of these topics are covered in the "Tackling Global Warming" webconference. We have posted lots of other useful resources in our “Climate Change” Practice Area.

September-October Issue: Deal Lawyers Print Newsletter

The September-October issue of Deal Lawyers is at the printer and includes articles on:

- The "Downturn" Roadmap: Parsing the Shift in Deal Terms
- The "Downturn" Roadmap: A European Perspective
- What Does "Material" Mean?
- Four Things Buyers Need to Know About Successor Liability
- Some Thoughts on Appraisal Under Delaware Law
- The SEC Staff's Comment Letters: Termination and Change-in-Control Arrangements

Try a 2008 no-risk trial today - and get the "Rest of 2007" free.

- Dave Lynn

September 18, 2007

Executive Compensation Comment Creep?

A handful of members have recently told me that their client have gotten over 15 executive compensation comments on IPO filings sometime during the past month. I believe that this is a marked departure from the Staff's practice since the SEC adopted new comp rules a year ago as the Staff had been avoiding providing many exec comp comments on registration statements (with some exceptions). I guess now that the Staff is sending comment letters devoted to compensation issues as part of its compensation review project, this area is "fair game."

In addition to our comprehensive guidance regarding the Staff's comment letters in the Sept-Oct issue of The Corporate Executive, a number of firms have issued memos about the comment letters. We have posted these memos in our "The SEC's New Rules" Practice Area on

Crunch Time!

Three weeks until our "2nd Annual Executive Compensation Disclosure Conference." Most law firms have re-upped their firmwide license so that everyone in the firm can take in this practical Conference via video webcast. However, it's always surprising how some folks wait until the very last minute to register.

And note that for just $200 more, your firm can get a firmwide license to all three of our October Conferences via our "Member Appreciation Package." Here is the agenda for all three of these Conferences.

If you need help navigating what you should do to register - or have a budget issue - I urge you to contact me (here is my contact info) - or our HQ at 925.685.5111 or

Workpaper Confidentiality, the IRS and FIN 48

A recent case may serve as a blueprint for companies to preserve claims of work product protection for their tax documents, including those documents that support their FIN 48 determinations. As you may recall from an earlier blog, the IRS reportedly is reading FIN 48 disclosures (as well as SEC comment letters and responses) to assist them in finding companies to challenge.

We have posted memos regarding the Textron case in our "Attorney-Client Privilege" Practice Area (including the opinion) - and here is a discussion from the TaxProf Blog.

- Broc Romanek

September 17, 2007

The State of the SEC's Commissioners

On Friday, the Washington Post ran this article about SEC Commissioner Campos' departure and the Commission in general. Here is an excerpt from the article:

"To give both sides their say, Cox voted this summer to support each of the competing plans. The SEC is tentatively scheduled to revisit the subject at a public meeting in November. Cox's position as the man in the middle will only intensify after Campos's departure.

Meanwhile, Nazareth, the other Democrat on the panel, has removed her name from consideration for reappointment and told friends she would like to leave the SEC by the end of the year, adding another layer of uncertainty. Her term expired in June, but she is able to remain in her post for up to 18 months."

Three Rule Changes for Nasdaq Companies

Over the last several weeks, the SEC has issued three releases approving amendments to the rules of the Nasdaq Stock Market:

1. Web Site Posting of Annual Report - Amended rules to permit companies to distribute annual reports by posting them on corporate web sites, which would require that they issue a press release providing information on the report's availability - and clarified that the annual report requirement can be satisfied by providing the company's annual filing with the SEC.

2. Quarterly Change in Number of Outstanding Shares - Amended rules to require that US companies that file with the SEC late must notify Nasdaq of quarterly changes in the number of shares outstanding so that Nasdaq may assess its fees for the listing of additional shares.

3. Discretionary Authority - Modified its discretionary authority provision - which is IM-4300 - to expand and clarify certain of the factors used in its exercise of discretionary authority where an individual employed by a company has a history of regulatory misconduct.

A Relatively Rare Form S-8 Case

A few weeks ago, the Ninth Circuit dealt - in SEC v. Phan - with how Form S-8 can (and cannot) be used. In this Section 5 case, the defendants (a CEO and his company) had used the automatically effective Form S-8 to raise capital for the cash-strapped company. Initially, the defendants registered on Form S-8 to compensate a consultant - but then they changed how they used the shares.

The Judge found that the Form S-8 could not be used by the issuer to register the resale of shares. However, the court also found that the fact that the ultimate transaction differed from the one registered on the Form S-8 didn't establish - as a matter of law - that the defendants made a material misstatement. We have posted a copy of the opinion in our "Form S-8" Practice Area.

- Broc Romanek

September 14, 2007

SEC's Enforcement Division Establishes Four "Working Groups"

According to this MSNBC article, the SEC's Enforcement Division has established four working groups to focus on the discrete issues associated with each one. The working groups are: subprime lending; hedge funds and insider trading; option backdating; and muni-bond offerings.

From a historical perspective, the formation of working groups is somewhat unusual, but not unprecedented. To me, they seem like common sense. Nearly everyone in the Enforcement Division is a generalist that takes on any - and all - types of cases. Now it looks like the Division is formally setting up these groups to specialize in certain types of cases. Precedents include the group that focused on muni securities cases in the mid- to late-'90s, the formation of the Internet enforcement group in the mid-'90s and the formation of the Accounting Fraud Task Force around 2000.

The Proper Valuation of ESOARS

Armed with an independent study, the Council of Institutional Investors continues to lobby the SEC to rescind its endorsement of ESOARS. Recall that I've blogged several times about ESOARS - it's a derivative instrument invented by Zions Bancorp to establish market values for stock option grants. We have more information on this instrument in our "ESOARS" Practice Area.

In this podcast, Greta Hotopp of Compensation Valuation provides some insight into ESOARS (the Compensation Valuation study is the one cited by CII), including:

- Why did you conduct a study of Zions Bancorp's ESOARS?
- Did your evaluation indicate that these ESOARS would allow for true price discovery?
- What other findings were made during your evaluation?

Accounting Issues for ESOARS?

A while back, there was a flurry of articles about accounting uncertainty that may derail the expansion of the market for ESOARS. Here is an excerpt from one of those articles:

"While critics have focused on whether auctions are a valid way to value stock options, a sleeper issue is how to account for such financial instruments, a seemingly technical question that could make or break the market for such products. 'We are in talks with FASB to try to get our Esoars instruments treated as equity,' said Zions vice president Evan Hill.

Deeming such products to be equities would be the best possible result for Zions, although it may delay trading until 2008. However, if standard-setters decide such products are a liability, they likely would be categorized as derivatives, dealing a one-two punch that could boost costs and volatility and raise valuation questions anew, making the tracking instrument far less appealing to companies looking for new ways to value employee stock options.

The reason: derivatives must be marked to market, generally each quarter. While the accounting for employee stock option grants wouldn't change under such an approach, companies would have to reassess any tracking instrument used in valuing those options. That might require frequent auctions, or reverting to options-pricing models, defeating the purpose of using Esoars-type products. Another downside is that as a liability, any increase in the value of the tracking securities would be treated as an expense, reducing earnings.

'I don't see it as deal killer, I see it as a deal complicator," said Hill. He predicted that some companies wouldn't object to using Esoars, even if they must be accounted for as a liability, but acknowledged others might decide that "it's just more headache than it's worth.'"

Before he left the SEC, Chief Economist Chester Spatt puzzled aloud as to how accounting policy can reward innovative approaches in a speech. Here is an excerpt:

“An interesting challenge with respect to fair value accounting is how can accounting policy reward innovative approaches? To the extent that the goal of accounting policy is to replicate a particular measurement objective, how can innovative ways to define or reach that objective be encouraged? Indeed, from the perspective of a registrant it is plausible that the goal is to minimize the expense being measured rather than measuring the expenses more accurately. This suggests potential tension between designs that are of interest to registrants and those that measure the expense more accurately, especially if the out-of-pocket cost of implementing that market-based approach exceeds that of implementing the model alternative.”

Don't Forget to Register for the "Chicago" Concert

I will be seeing many of you at the "15th Annual NASPP Conference" in a few weeks. For those of you who need a break, don't forget to take advantage of the free "Chicago" concert on Tuesday, October 9th. You must register in advance to attend this event - and space is limited. Even if you don't really like the band, there is something unique about attending an event with a group of fellow conference attendees that changes the nature of the conference.

I remember the mad panic last year when folks were trying to register at the last minute for Huey Lewis. It was too late and they were bummed. Don't be that person.

Remember that the concert is offered to NASPP Conference session attendees only (also the NASPP cannot accommodate guests for the concert). Thanks to Fidelity Investments for co-sponsoring this event with the NASPP!

- Broc Romanek

September 13, 2007

Give Your Directors the "Good Stuff"

Our Fall 2007 Issue of Compensation Standards print newsletter is now available. We've been giving this valuable newsletter to you free all year in an effort to get the "responsible" message in front of directors. This print newsletter is written with directors in mind, short and to the point - and practical.

Sign up today for these free issues. Remember you can sign up to receive multiple copies so you can deliver them to your directors - or you can sign up your directors so they receive them directly from us.

It's important that directors continue to read about responsible practices. Other publications that cater to directors are not wed to this concept. For example, a recent issue of a board publication has a nice piece about "What to Do About Those Outrageous CEO Severance Deals" - but it only skims the surface, without guidance about how to unwind these arrangements (compare how our Summer Issue tackles this challenge). More shocking, the same issue includes pieces about "How to Buy a Yacht" and "Taking Spouses on Board Trips is 'Educational and Enjoyable'."

Not to pick on any particular publication - because nearly all of them fail to inject any sense of "do the right thing" in their commentary - but it's high time all of us take responsibility for good governance. And one of your roles in this mission is to ensure that your directors get the materials that will help them walk the responsible path - like this issue will help directors meet the SEC’s new, higher CD&A "Analysis" expectations.

Bad Hair Day

Someone certainly has a bad attitude in this new segment of the "Sarbanes-Oxley Report" entitled "Bad Hair Day." This is a "must watch" video for "Matrix" fans. Has Billy Broc walked off the set for good?

Changes to Two FINRA Proposals: Conflicts and Shelf Offerings

FINRA has filed an amendment to its proposal that would significantly amend Rule 2720, which regulates conflicts of interest for firms that participate in an offering of their own securities or those of a parent or other affiliate. The original proposal was issued in April 2006.

FINRA has also filed a 5th amendment to its proposal that regulates the underwriting terms and arrangements for shelf offerings under Rule 2710. The proposal was first published for comment in 2004. We have posted these proposals in our "Underwriting Arrangements" Practice Area.

- Broc Romanek

September 12, 2007

FASB's New Project on FAS 5 and Contingencies

Last week, the FASB voted to add a comprehensive project to reexamine FAS 5. As described in this handout, the project will have three phases. Phase 1 will address inconsistencies between proposed FAS 141R regarding business combinations and FAS 5. Phase 2 relates to eliciting enhanced disclosures under FAS 5. Phase 3 is “a long-term project to comprehensively reconsider all accounting models for contingencies.” See more on FEI's "Financial Reporting Blog."

What Does a New World Accounting Order Mean for Audit Committees?

KPMG's Audit Committee Institute has conducted this interesting interview with former FASB Chair Dennis Beresford (who is the audit committee chair for Kimberly-Clark Corp., Legg Mason and Fannie Mae). Dennis believes it's unlikely that many U.S. companies will begin using IFRS in the next few years - but that this could change over time.

Broadridge's Key Stats from the Proxy Season

Always interesting for those that are statisitic nerds, here are Broadridge's 2007 Proxy Season Key Statistics & Performance Ratings.

Speaking of Broadridge, don't forget the panel - “Solicitation, Media, and IR Strategies: After E-Proxy and the Loss of Broker Non-Votes” - which will include an update from Broadridge about what challenges (and opportunities) have been faced by companies trying voluntary e-proxy so far. This will help you to avoid the obstacles and mistakes incurred by those companies that were "early movers."

This - and more - practical guidance will be imparted during the October 10th Conference: “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks.” Register to attend this Conference.

You can choose to attend solely this Conference - or for just a little bit more, you can also take in these two Conferences - the “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” and “4th Annual Executive Compensation Conference” - online via our "Member Appreciation Package."

- Broc Romanek

September 11, 2007

Some Section 409A Deadlines Postponed!

Hat tip to Mike Melbinger's blog on this: Yesterday, the IRS released Notice 2007-78 offering transition relief for certain provisions of Code Sec. 409A that previously had a December 31, 2007 deadline. Specifically, Notice 2007-78:

- Extends to December 31, 2008, the deadline to adopt documents and amendments that comply with Section 409A, subject to limited requirements regarding the timely written designation of a time and form of payment.

- Provides guidance and additional relief addressing certain issues raised by the application to employment agreements and cashout features of Section 409A and the final regulations (Mike promises to blog more on this later today).

- Announces that the Treasury Department and the IRS anticipate issuing guidance containing a limited voluntary compliance program that will permit taxpayers to correct certain unintentional operational violations of 409A.

How Much Do You Know? The SEC's Executive Compensation Comment Letters

People dug the "Pro or Troll" quiz on, so I thought we would post one on devoted to the SEC's executive compensation letters. Give it a whirl - "Are You a Pro or Troll?"

It will take you less than a minute to complete the five-question quiz. It will score your answers as you go—and let you know how you compare against your peers. All participation is completely anonymous.

Don't Miss the Fancy Course Materials

Fyi, there will be a bunch of these fun quizzes available as part of the online experience when you watch the video webcast of “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference.” There will be a quiz that goes along with each panel, so you will be able to evaluate how much you learned compared to the other several thousand watching online.

In addition, each panel will include a set of the popular "Essential Practice Tips You Oughta Know" - as well as a compilation of the Staff's comments that pertain to that panel's topic area. No other conference provides as much practical information as this one. Register today!

The Evolution of Deal Rooms

In this podcast, Joel Lessem, the CEO of Firmex, explains how deal rooms are evolving, including:

- How are your deal rooms different from your competitors?
- How do you see the use of deal rooms evolving?
- What are some surprising ways that deal rooms are being used?

- Broc Romanek

September 10, 2007

ISS and Glass Lewis to Merge?

Thanks to Stephen Davis of Davis Global Investors for allowing us to blog this article from a recent issue of his "Global Proxy Watch":

"Behind the scenes, the world’s two biggest proxy advisors are in a fit of restructuring that promises again to reshape the global governance industry and, possibly, ignite a regulatory backlash, GPW has learned. Among fast-paced developments:

Xinhua Finance (XF) has secretly decided to sell Glass Lewis (GL) just nine months after buying it for US$45 million. The move comes hard on the heels of the Shanghai-based firm’s own in-house governance scandal, which triggered a stock plunge and brand damage at XF, and key staff and client defections at GL (GPW XI-21, 22, 25, 27). CEO Fredy Bush has apparently hired a merchant banker to shop the proxy advisor, with eyes on a deal as early as next month. The frontrunning contender so far: none other than RiskMetrics (RM), owner of rival industry giant Institutional Shareholder Services (ISS). At least one other unidentified company is also mulling a bid, while a private equity firm has pushed Xinhua to sell it GL at about half the purchase price.

RiskMetrics has the cash and ISS the motive to take over GL. Ex-CEO John Connolly had made serial efforts to buy the four-year old competitor. But if ISS and GL now combine, the unit will dominate more than 80% of the market—gaining potential new pricing power and clout. Experts predict such a deal would likely draw scrutiny by securities regulators, antitrust authorities and politicians in North America, Europe and, possibly, Australia. They could join those in the market worried that a single US firm could hold a near monopoly in the highly sensitive business of advising how shareowners vote on everything from board elections to mergers and acquisitions worldwide.

Still, GL-ISS nuptials could boost proxy firms that remain—such as Proxy Governance and Egan-Jones in the US, and ECGS in Europe. Equally, a takeover could spur market interest in specialist stewardship firms such as F&C, Governance for Owners and Hermes EOS. They would all be trolling for fund clients bent on service alternatives to the industry leader.

RiskMetrics, meanwhile, is rumored to have taken another transformative step. Sources say it opened confidential talks with US Securities and Exchange Commission officials in advance of filing formal IPO documents that would allow it to launch as a publicly traded company. Perhaps in preparation, RM will inform clients Monday that, as part of internal integration, all its products will carry the RiskMetrics label as of Sept. 17. The move, in effect, demotes the 27-year old ISS brand. Governance services will now be marketed under the RiskMetrics name.

Expect an IPO to rekindle debate about whether public ownership—or another buyer—might affect the quality or content of RM advice. Last month the US Government Accountability Office (GAO) concluded in a report that “potential conflicts of interest can arise” at proxy firms, but that the SEC had “not identified any major violations.” It also asserted that it is relatively easy for rivals to enter the industry, so fears of ISS monopoly power are overblown. Some industry watchers dismissed the GAO report as superficial. But expect its findings to fortify defenders of any RM takeover of GL."

The Board’s Role for Internal Investigations

In this podcast, Dave Taylor of Perkins Coie provides some insight into what the board’s role for internal investigations, including:

- Why are there more board-directed investigations?
- How do whistleblower complaints change the nature of an investigation?
- What is the board's role in an investigation?
- What are pitfalls that boards should avoid during an investigation?

Court Upholds SEC's Refusal to Comply with FOIA Request

A few weeks ago, ran this article that notes that the US District Court of Minnesota sided with the SEC regarding the agency's refusal to comply with a FOIA request that had been submitted by SEC Insight. This case had been going on for a few years; here is an old blog noting how the SEC lost the first round of this litigation.

In this appeal - although the SEC ultimately turned over some of the requested documents - the US District Court upheld the agency's refusal to produce the rest. However, Judge Paul Magnuson said the SEC's behavior in the case caused the court "great frustration." We've posted a copy of the court opinion in our "Confidential Treatment Requests" Practice Area.

[Saturday's WSJ had a funny "Salt and Pepper" cartoon featuring three cavemen around a fire: "Someday you be household name, Blog." Hmm, archive of the cartoon seems to be have removed - offensive to cavemen?]

- Broc Romanek

September 7, 2007

Chairman Cox Addresses Executive Compensation Comments

On Wednesday, SEC Chairman Cox spent the first three of his six minutes on CNBC's Squawk Box talking about the SEC Staff's first wave of comment letters related to its executive compensation review project. Here is the archived video.

Note that the Chairman didn't specify how many "hundreds" of comment letters will ultimately be sent by Corp Fin. That's something that isn't clear now, but probably will be mentioned in the Staff's upcoming Report.

Also note that not all of the Staff's comment letters have been faxed out yet. So far, just a first wave has been sent - another wave should be coming in the near future. That should keep some of you on edge...

The Corporate Executive: A Special September-October Issue

Our Sept-Oct issue of the The Corporate Executive is being dropped in the mail today. It provides comprehensive analysis and guidance regarding the Staff's comment letters. The issue includes sections on:

- Analysis and Guidance: The Staff’s Executive Compensation Comment Letters
- How to Respond to the Comments
- Overall Observations on the Staff’s Comments
- Putting the "A" Back Into CD&A
- Performance-Based Pay Disclosure
- Benchmarking
- Termination and Change-in-Control Arrangements
- Notable Comments on Compensation Tables, Corporate Governance Disclosures and Related Person Transaction Policies

Here is a blurred copy of the issue so non-subscribers can get a sense of what its like. Try a No-Risk Trial for 2008 and get this issue (and rest of 2007) for free. If you are a subscriber, you should be receiving your issue early next week - please don't call us to get it rushed...

Canada Delays Adopting New Executive Compensation Rules

Recently, the Canadian regulators issued this delaying notice, announcing that it was postponing the adoption of amended executive compensation rules. The proposed rules are fairly similar to what the SEC adopted last summer (see our "International" Practice Area on for firm memos regarding the proposals).

Canadian regulators still hope to adopt new rules, it just needs more time to analyze the comment letters it has received - and they won't finish that review in time to get new rules out for next year's proxy season. Looks like about 50 comment letters were submitted, a drop in the bucket compared to the thousands that the SEC's rulemaking garnered...

- Broc Romanek

September 6, 2007

Tweaking Your Equity-Based Comp Tables From One Year to Next

I've started doing the prep calls with the panels for our “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” - and it's amazing how much there will be to cover, even though we all have a year under our belt under the SEC's new rules. And that doesn't even take into account the flurry of SEC comment letters that just came out.

For example, during the “Analyzing the Equity-Based Tables” panel (featuring the SEC's Paula Dubberly, Howard Dicker, Alan Kailer and Martha Steinman), you will learn:

- How to properly classify an equity award from an accounting perspective (lots of companies made errors) - and what to do next year, if you got it wrong this year
- How many of your numbers will change columns from one year to next - and how to avoid pitfalls
- What are the latest trends in grant practices - and how that impacts your disclosure
- What are the SEC comments (and latest positions) on the equity-based tables, including the challenging comments regarding performance targets

You can catch this critical Conference either live in San Francisco or via video webcast. Remember how practical last year’s Conference was – this year will be no different: Register today!

In the SEC's Enforcement Division's Crosshairs: General Counsels

Following up on my blog that linked to an article that blamed lawyers for option backdating, Keith Bishop has compiled this lengthy list of SEC Enforcement actions against general counsels so far this year. As you can see, the actions aren't limited to backdating:

- On January 10th, the SEC announced that it had settled civil fraud charges against the former general counsel of Comverse Technology, William Sorin, under an agreement which provides for the payment of over $3 million in civil penalties, disgorgement, and prejudgment interest, a permanent injunction, a permanent officer-and-director bar, and suspension from appearing or practicing before the SEC as an attorney.

- On February 28th, the SEC filed a complaint charging Kent Roberts, the former general counsel and corporate secretary of McAfee, with securities fraud for wrongfully re-pricing McAfee stock option grants awarded to him and others in an effort to secretly increase the value of the grants.

- On March 1st, the SEC filed a complaint against Randi Collotta, a compliance officer and lawyer, alleging that she provided material, nonpublic information concerning upcoming corporate acquisitions involving Morgan Stanley's investment banking clients to a registered representative at a Florida broker-dealer.

- On March 28th, the SEC charged two former in-house attorneys of Enron Corp., Jordan Mintz, a former Enron Vice President and General Counsel of Enron's Global Finance group and Rex Rogers, a former Enron Vice President and Associate General Counsel, in connection with a fraudulent scheme to make material misrepresentations in, and to omit material disclosures from, Enron's public filings.

- On April 2nd, the SEC filed suit against Christi Sulzbach, the former general counsel at Tenet Healthcare. The suit charges that Tenet, through the general counsel and other executives, misled the investing public by failing to disclose Tenet's strategy, its impact on revenues and earnings, and its unsustainability in the portion of its public filings with the Commission known as MD&A.

- On April 5th, the SEC issued an Order Instituting Administrative Proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions against Myron Olesnyckyj. Olesnyckyj served as General Counsel of Monster Worldwide.

- On April 18th, the SEC filed a civil injunctive action against Kevin Heron, the former general counsel, corporate secretary, and chief insider trading compliance officer of Amkor Technology. The complaint alleges that alleges that over a two-year period, Heron illegally traded in Amkor securities prior to five Amkor public announcements relating to financial results and company business transactions.

- On April 24th, the SEC filed a civil suit against Nancy Heinen, the former general counsel at Apple, saying her actions led to "fraudulent" stock option backdating at the company.

- On May 31st, the SEC filed civil fraud charges against California-based software maker Mercury Interactive and four former senior officers of Mercury, including its former General Counsel, Susan Skaer. The SEC alleges that the former senior officers perpetrated a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other employees undisclosed, secret compensation by backdating stock option grants, failing to record hundreds of millions of dollars of compensation expense, and falsifying documents to further this scheme.

- On June 6th, the SEC instituted Rule 102(e) administrative proceedings against Chris Gunderson, the General Counsel of Universal Express. The SEC's proceedings are based upon an injunction issued in February 2007 by the U.S. District Court for the Southern District of New York.

- On August 3rd, the SEC announced that a federal jury found Michael Pietrzak and Maurice Furlong liable for securities fraud and other charges in their operation of Hexagon Consolidated Companies of America, a development stage mining company headquartered in Reno. Pietrzak was HCCA's general counsel, CFO, and executive secretary, as well as a director. (The SEC filed this case in 2003).

- On August 28th, the SEC charged Lisa Berry with routinely backdating option grants from 1997 to 2003, first as General Counsel of KLA-Tencor Corporation and then as General Counsel of Juniper Networks. The Commission alleges that Berry's misconduct caused the two companies to conceal hundreds of millions of dollars in stock option compensation expenses relating to undisclosed in-the-money options provided to company executives and employees.

The D&O Insurance Market Is Soft

This month's Directors & Boards' e-briefing includes a piece by Holland & Knight about "The D&O Insurance Market Is Soft." Funny how everything has its cycles - not too long ago, the D&O insurance market was rock hard...

- Broc Romanek

September 5, 2007

Are You a Legal Pro or Troll? Try Our New Challenge

It will take you less than a minute to complete this five-question quiz: “Pro” or “Troll”? Test Your Knowledge. It will score your answers as you go—and let you know how you compare against your peers.

Simply read each statement and decide whether you agree with it (by clicking “Ah Yes”) or disagree (by clicking “That’s Ridiculous”). Then, you will be told whether you were correct—and we also provide some analysis if you wish to learn more about each answer.

Survey Results: Lead/Presiding Directors

Here are the results from our recent survey about lead and presiding directors:

1. Does your board have a lead or presiding director?
- Yes - 84.4%
- No - 15.6%

2. What is the term of the lead/presiding director?
- 1 year - 25.9%
- 2 years - 18.5%
- 3-4 years - 11.1%
- More than 4 years - 0.0%
- Undetermined - 44.4%

3. Are there "term limits" for the lead/presiding director?
- Yes - 3.7%
- No - 96.3%

4. What are the responsibilities of the lead/presiding director:
- Chairs non-management director meetings - 85.2%
- Chairs executive sessions - 81.5%
- Input on board agendas - 59.3%
- Liaison between management and independent directors - 70.4%
- Works on governance and compliance matters - 33.3%

5. Does the lead/presiding director receive extra compensation for these additional responsibilities?
- Yes - 40.7%
- No - 59.3%

Our September Eminders is Posted!

We have posted the September issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

- Broc Romanek

September 4, 2007

Shareholder Access: The Launch of

In what should be a stark reminder of how shareholders may increasingly use the Web under e-proxy, a website recently was launched to serve as a clearinghouse for those opposed to certain facets of the SEC's recent shareholder access proposals. The site is

The primary goals of the site are to enlist 500 institutions and financial professionals to sign a joint statement - and facilitate the filing of several thousand comment letters from individual investors (with copies of the comments going to members of the House and Senate). In particular, the site aims to ensure that the following three proposals aren't adopted:

1. the "opt-out" option that would allow the most unresponsive companies - those with the worst records when it comes to good corporate conduct and governance - to drop out of the shareholder resolution process and isolate themselves further;

2. the unilateral substitution of the electronic petition model or "chat room" for the vibrant and public 14a-8 shareholder resolution process; and

3. the raising of shareholder resolution resubmission levels from the current 3%, 6% and 10% vote levels to 10%, 15% and 20% levels, thus effectively killing many important shareholder resolutions.

In a press conference last Wednesday, the heads of the organizations that launched the site held a press conference (Walden Asset Management's Senior VP Tim Smith, Interfaith Center on Corporate Responsibility's Executive Director Laura Berry and Ceres' Director of Investor Programs Chris Fox - note that Ceres didn't launch the site, but did participate in the press conference) and announced support for the ability of shareholders to nominate directors, urging that the SEC use "a reasonable level of shares required for the nomination process."

An Incredible 5000!

I recently checked the two Q&A Forums on (in response to a member's request to help convince an ignorant judge that Romeo & Dye were the Section 16 authorities) and was shocked to see that Alan has now answered over 5000 questions on them. That's amazing! Congrats Mr. Dye!

Also amazing is that Alan now has been blogging over three years on Time flies...

SEC Speeches: Going Way Back!

The SEC has been busy posting old SEC speeches on its web site - all the way back to 1965! (Looks like the new SEC Archivist has been doing his job.) It appears that Commissioners "back in the day" gave as many speeches as the SEC Commissioners do today.

Some familiar themes existed back then, such as this one on "The SEC's Role in Changing Patterns in Financial Reporting" before a conference entitled "The Age of the Conglomerate." It's interesting to note that the rules were so few and simpler back then that a Commissioner could deliver a speech that delved deeply into the intricacies of a specific rule, such as this 1970 speech on "Another Look at Shareholder Proposals in Proxy Statements" by Commissioner Richard Smith.

- Broc Romanek