October 31, 2007

Lessons Learned: The SEC's Comment Letter Database

A few weeks back, I blogged about an executive compensation comment letter that the SEC Staff might have accidentally uploaded. I say "accidentally" because it was pulled off the EDGAR database a few hours after my blog was posted (but note that the comment letter continues to "live on" within the paid databases like Securities Mosaic and 10-K Wizard).

This episode serves as a lesson for companies to monitor their "filings" on the SEC's website. Here I use the term "filings" pretty broadly, as it now includes content that the SEC Staff might upload (like comment letters) as well as third-party content (like third party tender offers).

[Keith Bishop notes: To someone who grew up in Nevada, October 31 is not Halloween but Nevada Day. We used to get the day off (which worked well with it also being Halloween). The story behind Nevada Day is actually somewhat interesting. Back in 1864, President Lincoln needed support for the 13th Amendment (abolishing slavery). Three more votes from Nevada would help ensure victory. The perceived need for prompt admission was so great that the entire Nevada Constitution (over 18,000 words) was sent by telegraph to Washington D.C. That's a lot of dots and dashes.

President Lincoln proclaimed Nevada the 36th state on October 31, 1864. Nevada's new Congressional delegation obliged by voting for the 13th Amendment. Alas, the Nevada Legislature has sacrificed tradition on the alter of convenience and moved observance to Nevada Day to the last Friday in October. NRS 236.015(1). Keith wrote a treatise on Nevada Law of Corporations & Business Organizations (now out of print).]


Compensation Arrangements for Private Equity Deals

Tune in tomorrow for this DealLawyers.com webcast - "Compensation Arrangements for Private Equity Deals" - to hear Jeremy Goldstein of Wachtell Lipton and Shawn Hamilton and Craig Rowley of the Hay Group discuss:

- What are the latest compensation trends and developments when companies are purchased by private equity funds?
- What compensation issues should a target board consider when it’s approached by a private equity fund?
- What type of due diligence should be conducted into a target’s compensation plans by a potential acquiror?
- How should elements of pay be re-balanced and re-mixed when going private?

Please print out these course materials before catching the program.

"We are Overpaid," Say US Executives

Here is a recent article from the Financial Times about internal pay equity, etc.:

"Most US corporate leaders believe chief executives are overpaid and do not provide value for money for their com­panies, according to a study that will embolden critics of excessive compensation. The findings – to be published today by the National Association of Corporate Directors – are likely to strengthen calls by investors and politicians, including George W. Bush, US president, for restraint on executive pay at a time of growing income inequality in the US.

Top executives’ criticism of their peers’ compensation levels could also encourage activist investors and hedge funds to target underperforming companies with highly-paid leaders at shareholder meetings. Four out of six chief executives or company presidents polled by the NACD in July and August said the compensation of top executives was high relative to their performance.

Only 2.2 per cent of the nearly 70 chief executives and presidents involved in the survey said compensation was too low, while a third deemed it “just right”. Their views were backed up by outside directors, with more than 80 per cent of them saying chief executives were overpaid.

“There is an overall realisation that executive compensation is an area that boards and management are struggling with,” said Peter Gleason, chief operating officer of the NACD. The issue is particularly sensitive because the gap between rich and poor in America has reached its widest point in more than 60 years.

Figures released last week showed the share of national income claimed by the wealthiest 1 per cent of Americans had reached 21.2 per cent – a postwar record – partly because of booming company profits. Mr Bush last week told The Wall Street Journal that he thought some executive compensation was excessive and that some boards needed to improve their oversight of this.

Nearly 60 per cent of the directors polled by the NACD said the reason for excessive pay packages was the absence of objective ways to measure an executive’s performance. Nearly half criticised the use of options and equity awards that reward executives when the company’s share price goes up, rather than when its operations improve. Investors have become more vocal in attacking what they often call “pay for failure” – large severance packages awarded to ousted chief executives."

- Broc Romanek

October 30, 2007

Court Attacks Applicability of Attorney-Client Privilege to In-House Counsel

Back in August, a federal district court ordered Merck & Co. to produce thousands of internal electronic documents which the company had vigorously argued were protected by the attorney-client privilege, and held that communications by a lawyer acting in a business capacity are not privileged. This ruling may foreshadow a trend that threatens electronic communications between corporate and in-house counsel, as well as the modern role of corporate counsel in heavily regulated industries. For more info, see this memo from our "Attorney-Client Privilege" Practice Area.

Associate Salary Survey Shows Many Top $200K

Typically, we don't cover this type of topic in this blog (as it's well-covered in many others) - but this American Lawyer survey is a jaw dropper...

[What in the world are they putting in Snowball's birdfeed?]

Broccoli Governance? I Kid You Not

Over the past five years, the governance movement surely has grown beyond anyone's imagination. In fact, it has grown so much that the predictable backlash against Sarbanes-Oxley has gained traction on Capitol Hill. However, governance has grown far beyond the dicates of Sarbanes-Oxley.

"Governance" is now applied to areas far beyond the boardroom. For example, here are a number of Capability Maturity Models that are supposed to represent governance models of various business processes. There even is a reference to broccoli!

This is what has happened to governance. It has become a buzzword - many use the term indiscriminately, attaching adjectives to it (such as IT Governance, Project Governance, etc.). Quite a few governance definitions have started to take on a life of their own, without any connection to the original meaning and usage - so that it gets to the point where one can't assume that everyone is talking about the same thing, even when using the same term.

This is not happening so much for those of us dealing with corporate board governance; rather, it's happening in those areas where "governance" really doesn't exist, yet has become a part of the daily vernacular. I'm not sure this really is all that bad, I just worry about those processing my broccoli are fussing too much over it...

- Broc Romanek

October 29, 2007

For Those Doing E-Proxy: A Sample Affidavit of Distribution

Much thanks to independent election inspector Carl Hagberg, who created a Sample Affidavit of Distribution in Word (that we have posted in our "E-Proxy" Practice Area). This Affidavit can serve as a quasi-checklist of all the things that need to be done to ensure that all classes of shareholders will be covered for those using voluntary e-proxy. It's a draft sample - any comments are welcome by Carl or myself!

The Latest E-Proxy Examples

I've got e-proxy on the mind as I prepare to talk about the topic during the Association of Corporate Counsel's annual conference in Chicago. With nearly 30 companies trying voluntary e-proxy so far, certain trends are becoming evident - some of these will be discussed during our upcoming November 15th webcast: "Annual Reports: How to Create Them for an Online World."

Taking a quick swing through the IR web pages of some of those companies doing e-proxy reveals that many of them explain very little to shareholders about what they are doing. Not only is that not fair to shareholders in my opinion, that will not help the company reach quorum.

Here are examples of what some larger companies are doing online to explain e-proxy to shareholders:

- Sun Microsystems issued a press release announcing it is using voluntary e-proxy. Sun's page about it's annual reports also explains that it is using e-proxy. So far, this is the best online communication to shareholders I've seen.

- SaraLee has two "Order Hardcopy" buttons on its annual meeting web page.

- Nike posted this page that explains e-proxy - the link to this page is called "Electronic Delivery of Shareholder Materials," in contrast to SaraLee's "Order Hardcopy."

- Microsoft does something similar to Nike if you scroll down a little on this page (except I can't seem to get into that page as the link goes to a .docx file, which is the latest Word format that not many folks have yet - fyi, Microsoft has posted a compatibility pack for XP and 2003 versions of Word, Excel and PowerPoint that allows them to open and read the newest file formats).

Some other companies really confused me - their IR web pages said they are collecting consents for e-delivery; yet their proxy materials indicate they are using e-proxy. Of course, they could be doing both - but if so, they should explain that when they solicit consents.

As many more voluntary e-proxy'ers are expected as we near the calendar year-end, we hopefully will see some more descriptive explanations of what companies are doing - shoot me an email if you see something innovative. I'll continue to post examples of what companies are doing in our "E-Proxy" Practice Area.

Twenty Years: The '87 Market Break

This recent NY Times column gave me a chuckle. Joe Nocera recounts where he was when the market sliced 23% off the S&P 500 in a day (do the math to figure out what that means in today's terms - the Dow dropping 3500 points in a day! About 10x the drop that happened on October 19th this year).

I had a similar flashback because I was on a law school field trip that day, visiting the Philadelphia Stock Exchange. The President of the Exchange was showing us around and began to cry because of the millions he was losing as he talked. Given that I worked at a sandwich shop in addition to a clerkship to make ends meet, I wasn't moved much - but it still was quite a sight (and I'm sure he made it all back within a few weeks).

A year later, I started my first attorney job as a novice examiner in Corp Fin - and within two weeks of my start date, the SEC held a huge keg party at a local bar to celebrate the anniversary of the market break. That sure don't happen anymore..

- Broc Romanek

October 26, 2007

A Potential Setback for the SEC’s PIPEs Actions

Over the past few years, the SEC has brought actions against several individuals and hedge funds for federal securities law violations arising from short selling in connection with PIPE (private investment in public equity) offerings. Recently, the SEC Staff has been sending inquiries to hedge funds that invest in PIPEs, requesting the records of client accounts and PIPE transactions – so more actions are no doubt likely. Most of the SEC actions to date have settled, but a few are winding their way through the courts.

As noted in this Bloomberg article and this over-the-top press release issued yesterday by the defendant, one PIPEs case has met with some resistance in the US District Court for the Western District of North Carolina. In the case of SEC v. John F. Mangan, Jr. and Hugh L. McColl, III, the SEC charged Mangan, a former Friedman, Billings, Ramsey & Co. broker, with unlawful insider trading by short selling CompuDyne Corp. securities prior to the public announcement of a PIPE offering, and with engaging in the unregistered sale of securities in violation of Securities Act Section 5. The district court judge dismissed the Section 5 claim, but is allowing the case to proceed on the insider trading allegations.

Mangan was alleged to have shorted some CompuDyne securities after public announcement of the PIPE and prior to the filing or effectiveness of a resale registration statement for the PIPE shares. Mangan did not borrow or otherwise obtain stock to cover at the time of the short sales. Mangan then covered the short sales with shares purchased in the PIPE, after the registration statement was declared effective. The SEC has for many years taken the position Section 5 can be violated in a situation where short sales are made prior to the effective date of a registration statement of securities of the same class as those sold short, and then those short sales are covered (as planned at the time of sale) with shares obtained in the registered offering. [See Release No. 33-5323 (Oct. 16, 1972) and Release No. 34-10636 (Feb. 11, 1974).] In the SEC’s view, the two-step process that Mangan is alleged to have conducted is one unregistered public distribution where the PIPE shares are sold for Section 5 purposes at the time of the short sales.

The SEC Enforcement Staff has indicated that it may appeal the ruling in the Mangan case and that it will definitely proceed with the insider trading portion of the case. This “win” for the defendant on the Section 5 theory may, however, make it harder for the SEC to reach settlements in any other similar cases that are out there.

Shareholder Proposals: Some Helpful Tips for the Upcoming Season

It is hard for me to believe that the shareholder proposal season is rapidly approaching and, for many, is already well under way. This will be the first shareholder proposal season in quite some time where Marty Dunn will not be calling the shots on the Corp Fin no-action letters, and it remains to be seen whether the changing of the guard at the SEC will impact the process and results.

Marty and some of his colleagues at O’Melveny & Myers recently offered up some useful guidance on the “don’ts” you want to keep in mind when dealing with proponents and the Staff. These are the types of substantive and procedural things that the Staff sees over and over again each proxy season. Some of the procedural missteps to avoid are:

1. If you are going to argue that the proponent did not satisfy a procedural requirement of Rule 14a-8, don’t send the proponent a notice that will not stand up to Staff scrutiny – there is lots of guidance out there on what serves as adequate notice.

2. If a proponent does not meet the procedural requirements of the rule, but you failed to send a deficiency notice as required by Rule 14a-8(f), don’t argue that Rule 14a-8(i)(3) permits exclusion of the proposal because the failure to meet the procedural requirements of Rule 14a-8 is a violation of the proxy rules.

3. If you have several no-action requests to submit, don’t wait to submit them all at the same time – submitting them collectively will inevitably result in unnecessary delays.

4. If you receive correspondence from a proponent, don’t hold it back from the Staff.

5. If you think that Staff is not going to agree with your request, don’t include language indicating that the request constitutes an automatic right to appeal or that the Staff should contact the company if it does not agree with the argument for exclusion.

6. If you receive a request from the proponent to withdraw the proposal, don’t delay in forwarding that letter to the Staff, along with a letter withdrawing the no-action request.

For more practical guidance, take a look at our “Shareholder Proposals” Practice Area.

What’s in a Name?

I think it is funny that we are starting to see some crazy company names emerging from Silicon Valley these days, as start-ups proliferate and venture capital funding is again flowing freely. This LA Times article notes that, in an effort to get noticed in the Web 2.0 world, entrepreneurs are rolling out names like Abazab, Wakoopa, Squidoo and Xobni. I’m not even sure how to pronounce that last one, but it is “inbox” spelled backwards. In short, everyone wants to be the next Google.

Of course the federal securities laws have to throw cold water on the naming game fun. The instruction to Item 501(b)(1) of Regulation S-K indicates that if you have a name that is similar to a well-known company, or if your name indicates a line of business in which you are not engaged or only engaged to a limited extent, then you have to include disclosure necessary to avoid any misleading inference or, in the worst case, change your name. When I was reviewing filings in Corp Fin, particularly in the late ‘90s, we would raise a comment based on that Instruction more often than you might expect. Fortunately, I don’t think anyone ever had to actually change their name.

- Dave Lynn

October 25, 2007

Treasury Rethinks the SEC’s Role

As part of the continuing efforts to address the competitiveness of the US financial markets, the Treasury Department announced that it is seeking public comment on improving the regulatory structure for the financial system. While a large portion of the request for comments is oriented toward regulation of financial institutions such as banks and insurance companies, some of the questions particularly target the split jurisdiction of the SEC and CFTC, as well as the role of the states in the securities and futures regulatory framework. The specific questions raised on these topics are:

- Is there a continued rationale for distinguishing between securities and futures products and their respective intermediaries?
- Is there a continued rationale for having separate regulators for these types of financial products and institutions?
- What type of regulation would be optimal for firms that provide financial services related to securities and futures products? Should this regulation be driven by the need to protect customers or by the broader issues of market integrity and financial system stability?
- What is the optimal role for the states in securities and futures regulation?
- What are the key consumer/investor protection elements associated with products offered by securities and futures firms? Should there be a regulatory distinction among retail, institutional, wholesale, commercial, and hedging customers?
- Would it be useful to apply some of the principles of the Commodity Futures Modernization Act of 2000 to the securities regulatory regime? Is a tiered system of regulation appropriate? Is it appropriate to make distinctions based on the relative sophistication of the market participants and/or the integrity of the market?

Comments on these and the other broad questions included in the release are due to the Treasury by November 21.

This is obviously not the first time that the jurisdictional divide between securities and futures has been raised as an issue, but I think now more than ever the debate is worth having – and settling. Based on my own experience at the SEC, I know that the uncontrollable march of financial innovation is constantly testing this artificial regulatory divide, making life difficult for those who seek to make real strides in developing potentially beneficial financial products for institutions and consumers.

Unfortunately, as noted in this Wall Street Journal opinion piece authored by William Brodsky of the CBOE, combining the SEC and the CFTC (or creating a new regulator of financial products) has been hampered by Congressional turf battles, given that different committees oversee these agencies. Brodsky notes that the problems with the split jurisdiction are highlighted by a proposal that the CBOE filed with the SEC in June 2005 to trade options on funds that invest in gold, which has gone nowhere as the SEC and CFTC are still trying to decide who should regulate the product.

There is no doubt that Treasury is taking on some big issues with its competitiveness improvement efforts. As the clock ticks down on this Administration, it will be interesting to see if any progress can be made on some of these critically important issues.

Rule 10b5-1 Plans: Countrywide CEO’s Sales in the Spotlight

At our conference entitled “Hot Topics and Practical Guidance: The Corporate Counsel Speaks,” SEC Enforcement Director Linda Chatman Thomsen spoke about, among other things, the SEC Staff’s interest in the use of Rule 10b5-1 trading plans for illegitimate purposes. Her speech was followed by an excellent panel consisting of Linda, Alan Dye and Ron Mueller, who discussed the ins and outs of using Rule 10b5-1 plans. If you missed the conference, it is not too late – you can still register to access the archived video.

At the time of Linda Thomsen’s remarks earlier this month, there was no evidence that the Staff’s interest in Rule 10b5-1 plans had resulted in any active SEC investigations of insider sales through these plans. That has now changed, with reports surfacing of an informal inquiry looking into stock sales by Countrywide CEO Angelo Mozilo. As noted in this NY Times article, an anonymous source confirmed the existence of the inquiry and its focus on Mozilo’s trades. The article notes: “Since October 2006, Mr. Mozilo has twice raised the number of shares that could be sold under his plans. In December 2006, when Countrywide shares were trading at $40.50, he increased the number of shares to be sold each month to 465,000 from 350,000. Then in February, when shares hit a high of $45.03, he increased the number of shares sold each month to 580,000. Shares closed down 74 cents yesterday, to $17.35. This month, the state treasurer of North Carolina, Richard Moore, wrote to the S.E.C. chairman, Christopher Cox, and questioned the changes Mr. Mozilo made to his selling program. ‘The timing of these sales and the changes to the trading plans raise serious questions about whether this is a mere coincidence,’ Mr. Moore wrote.”

Earlier this month, Countrywide put out this unusual press release defending Mozilo’s Rule 10b5-1 trades. The controversy over Mozilo’s stock sales under his 10b5-1 plan is not new – in an earnings call back in July, an analyst questioned Mozilo’s sales under his 10b5-1 plan while Countrywide was buying back its stock at the same time.

Be sure to check out our “Rule 10b5-1” Practice Area for the latest developments in this area.

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

We have posted the transcript from our recent DealLawyers.com webcast: "Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing."

- Dave Lynn

October 24, 2007

The SEC’s Corporate Penalties Debate Continues with the Nortel Settlement

Disagreement among the SEC's Commissioners on the topic of corporate penalties appears to continue, despite the recent efforts directed at improving the situation. As Broc noted in the blog earlier this year, the SEC has changed its internal policies so that Enforcement lawyers must seek approval from the Commissioners before they begin settlement talks that involve fining corporations. That shift followed on the heels of a January 2006 policy statement outlining the analytical steps that the SEC follows in deciding whether to levy penalties against companies.

Despite these efforts, the much hoped for unanimity on penalties appears elusive. Along with last week’s announcement of the $35 million penalty obtained in the settlement of proceedings against Nortel Networks came a relatively unusual “real time” dissent from Commission Paul Atkins. As noted in this Bloomberg article, Commissioner Atkins issued a statement calling the $35 million penalty a “public relations gesture” and noting that the settlement “does nothing to further the SEC’s objectives” of protecting investors and maintaining far, orderly and efficient markets. The Commissioner also noted that the penalty “will be paid by Nortel shareholders, many of whom were victims of the financial fraud.”

While it is not surprising that Commissioner Atkins would oppose the terms of this settlement, it is certainly unusual to see this level of public dissent around the time of announcing the Commission-approved deal.

PCAOB Reports on Inspections of Smaller Audit Firms

Earlier this week, the PCAOB released a report on common issues identified in inspections of US audit firms that audited 100 or fewer public companies. The report is based on inspections conducted from 2004 through 2006, and it does not identify any particular firms. In the report, the PCAOB outlines significant areas where it believes firms should seek to ensure compliance with applicable standards and requirements.

The specific areas addressed in the report are:

- Revenue
- Related-Party Transactions
- Equity Transactions
- Business Combinations and Impairment of Assets
- Going-Concern Considerations
- Loans and Accounts Receivable (including allowance accounts)
- Service Organizations
- Use of Other Auditors
- Use of the Work of Specialists
- Independence
- Concurring Partner Review

The PCAOB notes that many of the smaller firms that were the subject of inspections had taken steps to address quality control deficiencies, including improving their methodologies through the use of audit programs and practice aids, arranging for annual technical training, improving the availability of appropriate technical resources, encouraging personnel to make appropriate use of external resources and enhancing their own internal monitoring of audit performance. For more analysis of the PCAOB’s report, check out Kevin LaCroix’s “D&O Diary” Blog.

Separately, the PCAOB announced that it had approved two amendments to PCAOB Rule 4003, which addresses the minimum frequency with which the PCAOB conducts inspections of different categories of registered public accounting firms. Specifically, the amendments would eliminate a requirement that the PCAOB regularly inspect each registered public accounting firm that plays a “substantial role” in audits but does not issue audit reports. Further, the amendments would eliminate the requirement to inspect each registered public accounting firm that issues an audit report, even if the firm does not regularly issue audit reports. These amendments to Rule 4003 will decrease the PCAOB’s inspection burden in low-risk areas, while maintaining the discretion to inspect any firms in these categories if necessary.

Test Your Section 16 Knowledge: Are You a Pro or Troll?

We have posted one of our popular quizzes - “Pro” or “Troll”? Test Your Knowledge - on Section16.net. 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”), except one of the questions offers answers of "Tuesday" or "Wednesday." Then, you will be told whether you were correct—and we also provide some analysis if you wish to learn more about each answer.

For a Section 16 geek like myself, this one is great fun!

- Dave Lynn

October 23, 2007

Section 409A Deadline Postponed!

Yesterday, the IRS and Treasury Department issued Notice 2007-86, which generally extends the transition relief for compliance with Section 409A through December 31, 2008. Section 409A affects all types of plans that involve (or are considered to involve) a deferral of compensation.

In the notice, the IRS and Treasury also confirmed that they expect to issue guidance regarding a correction program as soon as possible. This guidance is expected to provide methods by which some unintentional operational failures may be corrected in the same taxable year in which they occurred in order to avoid application of Section 409A, and other methods by which some unintentional operational failures may result in only limited amounts becoming includible in income and subject to additional taxes under Section 409A.

This latest round of transition relief does not affect the guidance provided in Notice 2007-78 regarding predetermined cashout features, or the guidance regarding the application of Section 409A(b), which imposes restrictions on certain trusts and other arrangements.

This much needed extension should give everyone the additional time that they need in order to analyze their plans and complete all of the changes necessary to bring arrangements into compliance with the final regulations issued in April 2007.

No Comprehensive Delay for FASB’s Fair Value Measurement Standard

In more deadline news, the FASB recently rejected suggestions that it delay the effective date of FAS 157, Fair Value Measurements (Sept. 2006). The FASB did, however, direct its staff to analyze whether to delay application of the standard for some items subject to measurement and to specific entities. As it now stands, FAS 157 is effective for fiscal years beginning after November 15, 2007.

As noted in this issue of KPMG’s Defining Issues, the possibilities that the FASB Staff may consider are deferring FAS 157’s requirements for:

- nonfinancial assets and liabilities other than derivatives within the scope of FAS 133;
- private entities; and
- smaller public companies below a yet-to-be determined size.

FAS 157 defines fair value as “the price that would be received for an asset or paid to transfer a liability in a current market transaction between marketplace participants in the reference market for the asset or liability.” The new standard also establishes a framework for measuring fair value.

As a result of the upcoming effective date of FAS 157, companies will be expected to disclose the anticipated effects of adopting the standard in their MD&A, as well as possible disclosure in the notes to the financial statements under SAB 74, Disclosure Of The Impact That Recently Issued Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted in a Future Period.

For more information about FAS 157 and FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (Feb. 2007), check out our “Fair Value Accounting” Practice Area.

Latest Developments in Capital Market Deals

We have posted the transcript from our recent webcast: “Latest Developments in Capital Market Deals.”

- Dave Lynn

October 22, 2007

Executive Compensation Disclosure Best Practices from RiskMetrics Group

It seems to be the season for reports on executive compensation disclosure. Following up on the SEC Staff’s recent report on observations from its review efforts, RiskMetrics Group has published its own evaluation of executive compensation disclosures from the 2007 proxy season.

Mark Borges provides an extensive summary and analysis of the report on his CompensationStandards.com blog. Mark notes: “Less a critique of how companies fared in disclosing their executive compensation programs than the kick off of a dialogue among executives, directors, and investors on the development of a set of disclosure ‘best practices,’ the Report is the first public statement that I’ve seen from the investor community (or at least, one of its leading representatives) commenting on compliance with the new rules.

Like the Staff report, RiskMetrics focuses much of its attention on the Compensation Discussion and Analysis. Nonetheless, the Report should also be read in the context of preparing the tabular disclosure and accompanying narrative discussions. At a high level, the Report addresses seven specific topics:

- Clarity and accessibility for investors and other key reads
- The connection between compensation practices and strategy or other company-specific features
- The role of executives and compensation consultants in the compensation-setting process
- The pay mix
- Performance metrics and peer groups
- Performance results, payouts, and pay-for-performance links
- A holistic picture, in which the whole is greater than the sum of the parts

In many ways, RiskMetrics uses these topics to expand, from an investor’s perspective, on the Staff’s two principal messages: (1) the CD&A should focus on how and why a company arrives at specific executive compensation decisions and policies, and (2) the manner of presentation matters — in particular, using plain English and organizing the tabular information in a way that helps an investor understand a company’s disclosure.”

Business Roundtable Reports on Corporate Governance

Recently, the Business Roundtable announced the results of its Fifth Annual Corporate Governance Survey. For the survey, the Business Roundtable polled it membership, consisting of 160 CEOs of large US companies. Among the most notable trends from the survey is an increase in independent directors (90% of respondents had boards that were at least 80% independent), as well as a significant jump in the number of companies that have adopted majority voting (82% of the responding companies).

The survey results also included the following:

- Sarbanes-Oxley spending continues to decline, with moderate decreases in costs expected with the new SEC/PCAOB internal controls guidance.
- 75% of CEOs serve on no more than one other public company board.
- A still surprisingly low 38% of companies responding indicated that board members met with shareholders in the past year.
- 71% of respondents expect their non-management or independent directors to meet in executive session at every board meeting.
- 40% of companies responding indicated that they adjusted the pay-for-performance element of senior executive compensation in the past year, in addition to 57% that reported doing so in 2006.

SEC Passes on Zions Bancorp Option Auction

As noted in this article from today’s Wall Street Journal, Zions Bancorp received a letter from the SEC’s Chief Accountant indicating that the Staff had no objection to the bank’s use of results from its ESOARS auction model for computing options expense under FAS 123(R).

As Broc noted in the blog earlier this year, Zions had received a letter in January from the SEC’s Chief Accountant indicating concurrence with their approach, but noting concerns with the auction process. The Council of Institutional Investors then wrote a letter to the SEC expressing concerns about whether market instruments such as ESOARS can appropriately value employee stock options. It appears that the Staff’s latest letter will clear the way for Zions to market its ESOARS to other companies as an alternative option valuation methodology.

- Dave Lynn

October 19, 2007

SEC Staff Uploads First Executive Compensation Comment Letter

Much sooner than I expected, here is the first comment letter uploaded on EDGAR from Corp Fin's executive compensation review project. Based on a proxy statement that is related to a director election contest with Carl Icahn, this comment letter was sent to Motorola on August 21st and uploaded a mere six days later.

More likely than not, this uploaded comment letter is an outlier given the SEC Staff's announcement that comment letters won't be posted until at least 45 days after the review is completed (which really means the review is "closed" since it's supposed to include the company's responses) - so I don't expect other letters from the review project to be publicly available for quite some time. [Note later in the morning: "poof," the letter has been erased from the SEC's website.]

By the way, finding these comment letters may be challenging - the Motorola letter doesn't come up even if you limit your search to all "Uploaded" correspondence within the last six months. Let me know if you see any in your travels!

And one more aside: check out what happens when you click to enter Motorola's investor relations webpage. You need to click through a disclaimer regarding the lack of a duty to update. Interesting...

Billy Broc's Dream

Or is it a nightmare? Billy Broc remembers his precious law firm days in this week's installment of "The Sarbanes-Oxley Report" entitled "Billy Broc's Dream." I hate those prickly comma situations...

[I highly recommend the new George Clooney movie entitled "Michael Clayton." George plays a down n' out lawyer whose responsibilities in the Big Firm is to serve as the "fixer." The tagline is "The Truth Can be Adjusted," but it's actually a more realistic movie than I expected rather than typical Hollywood fare.

And for those still wishing that there ain't no climate change, we have a record 34 days without measurable rain here in the DC area...]

Stoneridge Galore!

Last week, the US Supreme Court heard oral arguments in the monumental Stoneridge case dealing with secondary actor liability. Here is a transcript of the oral argument - and here are a bunch of blogs that covered the action:

- SCOTUS

- The Race to the Bottom

- Bainbridge

- The Volokh Conspiracy

- SEC Actions

- D&O Diary

- 10b-5 Daily

- Broc Romanek

October 18, 2007

PCAOB Proposes Internal Controls Staff Guidance for Smaller Companies

Yesterday, the PCAOB proposed Staff guidance - in the form of these "preliminary staff views" - on applying Auditing Standard No. 5 to audits of smaller, less complex companies. Here is the related press release. When the PCAOB adopted AS #5 in May, the Board committed to provide additional guidance on applying the standard to audits of smaller public companies.

The New RiskMetrics Group Structure

For me, it's gonna take a while to get used to saying "RiskMetrics" instead of "ISS" in the wake of the company's reorganization. In this podcast, Cheryl Gustitus, Head of Global Communications at RiskMetrics, describes how the recently announced reorganization at RiskMetrics Group impacts ISS, including:

- Where does ISS fit into the reorganization of RiskMetrics?
- How is the ISS division of RiskMetrics now organized?
- Will the policy-setting process of ISS change at all?
- How does that policy-setting process work?

Latest Post-Season Proxy Season Report

Recently, RiskMetrics issued its latest "Post-Proxy Season Report." Among other notables, this report reveals that as of mid-September:

- 656 shareholder proposals had been voted upon this year, up from 581 at the same time last year.

- 107 shareholder proposals have earned a majority of votes cast, down from 116 proposals last year (two years ago, just 85 proposals received majority support).

- Corp Fin had issued 155 no-action responses allowing the exclusion of a shareholder proposal, up from 129.

- Broc Romanek

October 17, 2007

Mind the Gap! California's Investment Adviser Registration Proposal

Another nugget from Keith Bishop, a former Commissioner of California's Department of Corporations: Recently, the Department of Corporations issued a proposed rule that would require the registration of hedge fund advisers under California's Corporate Securities Law of 1968 (the "CSL"). As you might expect, there is a bit of history to this new proposal.

In 1971, the Department issued Policy Letter No. 151 (the "1971 Letter") indicating that a general partner of a single limited partnership would not have to be licensed as an "investment adviser" under the CSL. The basis of the 1971 letter was the Department's view that a general partner is, in effect, giving advice to itself rather than to "others" as required under Section 25009 of the CSL. The 1971 Letter had generally been relied on by California-based general partners of venture capital companies ("VCCs”) seeking an exemption from licensing in California as an investment adviser.

In April 1998, the Department issued Release No. 110-C (the "1998 Release"), which essentially revoked the 1971 Letter. In the 1998 Release, the Department indicated that the position taken in the 1971 Letter was contrary to the treatment of investment advisers by the SEC under the Investment Advisers Act of 1940.

I was no longer Commissioner and objected strongly to the Department's revocation of the 1971 Letter on a number of grounds. In particular, I was concerned with the effect on general partners of VCCs. At my urging, the Department in 2002 adopted Rule 260.204.9 which exempts any investment adviser that:

- Does not hold itself out generally to the public as an investment adviser;
- Has fewer than 15 clients;
- Is exempt from registration under the Federal Advisers Act by virtue of Section 203(b)(3) of that act; and either has "assets under management" of not less than $25 million or provides investment advice to only "venture capital companies," as defined in the rule.

In 2004, the SEC adopted a new rule (Rule 203(b)(3)-2) and rule amendments to require advisers to certain private investment pools (aka "hedge funds") to register with the SEC under the Advisers Act. Prior to that time, these hedge fund advisers relied upon the so-called "private adviser" exemption set forth in Section 203(b)(3) of the Advisers Act. That section exempts advisers who (i) has had fewer than fifteen clients during the preceding twelve months, (ii) does not hold itself out generally to the public as an investment adviser, and (iii) is not an adviser to any registered investment company.

Two years later, the DC Circuit in Goldstein v. Securities and Exchange Commission vacated the regulatory framework for hedge fund advisers established by the SEC through its adoption of Rule 203(b)(3)-2 and related amendments. As a result hedge fund advisers can now rely again on the Section 203(b)(3) exemption from the federal registration requirements. The DOC's rule currently exempts these advisers if they have assets under management of not less than $25 million (i.e., above the threshold for federal registration).

The Department's proposal represents an attempt to refill the lacuna in regulation that resulted from the Goldstein decision. For those advisers that deregistered under the Advisers Act or who have not registered with the SEC since the Goldstein decision, the Department’s rule would require state-level registration. The comment period for the Department’s proposal ends on November 26, 2007. Here is the Department's notice, proposed text and initial statement of reasons.

Remember that the SEC adopted IA Rule 206(4)-8 in August. This rule prohibits advisers to pooled investment vehicles from making false or misleading statements to, or otherwise defrauding, investors or prospective investors in those pooled vehicles.

FINRA/NASD's Fairness Opinion Proposal: Finally Final

After a long wait - and four amendments - the SEC has issued an Order approving FINRA (formerly NASD) Rule 2290 on an accelerated basis (this rule was first proposed in mid-'05). As noted in Amendment No. 4, Rule 2290 addresses disclosures and procedures in connection with the issuance of fairness opinions by a broker/dealer firm. In that amendment, FINRA stated that it will announce an effective date for the new rule in a Notice to Members to be published no later than 60 days following the SEC's approval and that the effective date will be 30 days following publication of the Notice, so we should know that date soon. Look for a DealLawyers.com webcast on fairness opinions coming soon...

Rep. Barney Frank Opposes a SEC Vote on Shareholder Access

Here is an excerpt from a Tuesday Dow Jones article: "The Securities and Exchange Commission should not vote this year to finalize a rule on a controversial shareholder-democracy issue, and it runs the risk of being overturned by Congress if it does, House Financial Services Committee Chairman Barney Frank said Tuesday.

Frank, Democrat-Mass., said it would be 'a great mistake' for the SEC to act on such issues without a full complement of Democrats on the five-member commission. He added that it's possible Congress could act this year to suspend any SEC action on proxy access.

SEC Chairman Christopher Cox last week reiterated plans to have the commission vote this year to clarify whether shareholders should be able to propose proxy-access measures, allowing them to place the names of their own candidates for corporate boards on company proxy ballots."

- Broc Romanek

October 16, 2007

Gauging the Success of a Conference: Patting Ourselves on the Back

Perhaps I am too close to it (yes, way too close), but what is the appropriate measure to determine whether a conference was worth its salt? To me, the most important measure is the feedback we receive from attendees. So far, feedback from our three Conferences has been very positive - but we're always looking to improve; please feel free to email me with any criticism you might have. [I feel the same way about our sites; we can only improve if we know what you are looking for.]

Another measure - albeit far less important than the attendee's experience - is whether the conference received any media coverage. In this category, some of our speakers indeed created some news - the NY Times ran an article based on coverage of our Conferences on no less than three days! And other reporters told me that our Conferences continue to be on their "must attend" list for the content they hear and contacts they make. Here are links to the NY Times articles:

- Comp consultant Ira Kay and our own Jesse Brill discussed a variety of executive compensation practices during several panels of the "4th Annual Executive Compensation Conference": see Saturday's article entitled "What if C.E.O. Pay Is Fair?"

- SEC Enforcement Director Linda Chatman Thomsen discussed 10b5-1 plans during her keynote and the succesive panel on those plans: see Thursday's article entitled "Stock Sales by Chief of Lender Questioned"

- SEC Corp Fin Director John White's keynote analyzed executive compensation disclosures under the new SEC rules: see Wednesday's article entitled "S.E.C. Finds Fault on Pay Disclosures"

Of course, the sheer number of attendees is another indicator of a conference's success. In that department, the result continues to be overwhelming. We had over 2400 in San Francisco (we pulled off a nice wave cheer before Wednesday's plenary session), with another 3500 online.

Status of Shareholder Access: Open Commission Meeting Soon?

With over 20,000 comment letters in (many of them "form" letters), the SEC appears to be set to hold an open Commission meeting sometime in November to consider at least some of the shareholder access ideas floated this summer. According to a Dow Jones article from last week, SEC Chairman Cox wants some rules in place for next proxy season - here is an excerpt from that article:

"Cox has said that he favored the second approach, under which investors with a 5% stake in a company for at least one year could propose changing bylaws in a way that would allow shareholder-backed candidates to appear on corporate proxy ballots. But the departure of one Democratic commissioner and the planned departure of the other may complicate matters."

Here is a NY Times article from Sunday - and here is an article from the RiskMetric's Governance Blog about the future on nonbinding proposals.

An Opportunity to Comment on RiskMetric's '08 Proxy Policies

Yesterday, RiskMetrics (formerly known as ISS) put up its "Request for Comment" tool for a number of potential modifications to its policies for 2008. Take advantage of this opportunity to influence these important proxy voting policies through an easy-to-use online form. This year, the topics include:

- Aggressive Accounting Practices (U.S.)
- Cumulative Voting (U.S.)
- Director Attendance (Japan)
- Independent Chair (U.S.)
- Non-Employee Director Limit on Equity Plan Participation (Canada)
- Stock Options for Non-Executive Directors (Belgium and the Netherlands)
- Poor Pay Practices (U.S.)
- Stock Option Overhang in ISS Governance Services' Binomial Option Pricing ("SVT") Model (U.S.)
- Say on Pay - Principles for Evaluating Remuneration (U.S. and International)
- Product Safety (U.S.)

- Broc Romanek

October 15, 2007

Three Cheers for Pfizer's Mock Usable Proxy Statement

When I saw Peggy Foran at our Proxy Disclosure Conference last Tuesday, I was excited to hear that Pfizer planned to unveil a mock proxy statement that had been made more "usable" during Friday's Center for Plain Language Symposium; Pfizer took its most recent proxy statement and reformatted it. Here is a keynote speech from SEC Chairman Cox at the Symposium.

I was excited because I believe not enough attention has been paid to the usability of disclosure documents. In fact, this is the subject of our next webcast on November 15th: "Annual Reports: How to Create Them for an Online World." Of course, substance is king - but format plays a role in how investors learn more about a company too. And as I've written before, in this new era of e-proxy, etc., the art of writing usable is a skill set that we all need to learn. Studies show that humans read differently online than in paper.

Anyways, I was dumbfounded to see this NY Times article on Saturday that poked Pfizer for creating a mock usable document. From reading the article, it appears that Pfizer was approached to volunteer to create this example - Pfizer was a logical choice because the company has long led the league in trying to push the envelope and serve as this country's governance leader, particularly under Peggy's leadership.

True, the Pfizer board made a misstep with its former CEO's post-retirement pay package - but you still have to give Peggy and company credit for all they have done over the past decade. Today's hot topic might have been majority vote legislation without Pfizer leading the way in voluntarily adopting a director resignation policy for majority withheld votes. There are numerous other examples of innovation, both big and small. I hope criticism in the press doesn't stop Pfizer or any other company from trying to do the right thing, particularly something as benign as mocking up last year's proxy to make it more usable.

[Pfizer hasn't made it publicly available yet. I intend to post it when I get it and will blog when it's up so you know since I've had so many requests.]

President Bush Attacks CEO Pay (Again)

On Thursday, President Bush attacked CEO pay in an interview, according to this WSJ article. He had first broached the topic in a speech on Wall Street back in February.

I also heard that Hillary Clinton spoke out about the pay disparity between CEOs and the work force while she was stumping in Iowa last week. Clearly, this issue could become one of the issues used to attract voters next November.

Jackpot for History Buffs: Old NY Times Articles Now Free

Recently, the NY Times made its archive of old articles - going back to 1851 - available to the public for free (despite the fact that it says you must pay when you search their archives, it indeed is free). For example, check out this 1935 article about the then new incoming SEC Chairman James Landis. Pretty cool stuff...

- Broc Romanek

October 11, 2007

Today: "4th Annual Executive Compensation" Conference

Tune in today for more of the same with: "4th Annual Executive Compensation" Conference. The Conference opens with a keynote from John Olson and then gets right into the practical "nitty gritty" of what boards and advisors should be doing vis a vis CEO pay. Plenty of implementation examples, such as how companies have implemented internal pay equity, wealth accumulation analyses, "walk away" number calculations and clawback provisions with teeth.

To watch, come to the home page of either TheCorporateCounsel.net or CompensationStandards.com and click the prominent link that says "Enter the Conference." Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or RealPlayer) and the speed of the connection that you have.

Here's an agenda for today's Conference; note that times are Pacific/West coast. Panels will be archived a day after they are shown live.

COSO Releases More Internal Control Guidance

A few weeks ago, the Committee of Sponsoring Organizations of the Treadway Commission released its latest Guidance on Monitoring Internal Control Systems. Called a discussion document, the guidance is the first phase of COSO's attempt to improve the understanding of internal control system. COSO is taking comments this latest guidance.

Ten Years: It Goes By Fast...

It's hard to believe that a decade has passed since the SEC submitted this Study to Congress about how technology - in particular, the Internet - impacts the securities markets. If my memory serves, I believe the SEC was required to produce a study as mandated by a provision of NSMIA.

Yours truly did the leg work on the Corp Fin chapter of the study; some of the more interesting stuff is in the footnotes, as they describe the pioneers that leveraged the Web. I had a box of really cool stuff that documented those examples (and many more that didn't make it into the final cut of the Study), but a flood in my basement wiped them out a while back...

- Broc Romanek

October 10, 2007

Today: "Hot Topics: The Corporate Counsel Speaks" Conference

Lots of big doings yesterday for our "2nd Annual Proxy Disclosure" Conference. Tune in today for more of the same with: "Hot Topics: The Corporate Counsel Speaks" Conference. The Conference opens with a blockbuster keynote from SEC Enforcement Director Linda Chatman Thomsen.

To watch, come to the home page of either TheCorporateCounsel.net or CompensationStandards.com and click the prominent link that says "Enter the Conference." Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or RealPlayer) and the speed of the connection that you have.

Here's an agenda for today's Conference; note that times are Pacific/West coast. Panels will be archived several hours after they are shown live.

John White's Speech, Etc.

I did some real-time blogging during yesterday's "2nd Annual Proxy Disclosure" Conference, noting this speech by Corp Fin Director John White (fyi, here is the Cleary Gottlieb memo on performance targets mentioned during a few panels). The archived panels from that Conference are being uploaded soon and will be accessible from a link at the top of the home pages of TheCorporateCounsel.net and CompensationStandards.com. Today's NY Times ran this article on John's speech and other remarks made at yesterday's Conference.

Problems with our Online CLE Tracking Tool

If you have registered for video webcast attendance to any our three Conferences this week, please be aware that we are experiencing some difficulties with our new online tracking tool. Rest assured that you can still earn CLE credit if your state bar has accredited our program (most states have).

If you are experiencing problems, simply send us (1) the name(s) of any lawyers who watch the Conference, (2) list which Conferences were watched (and number of hours attended), (3) the state bars for which CLE is sought, and (4) the bar numbers for those states. You can send these to info@naspp.com. We will be sending out CLE certifications out in about a month or so. We apologize for any inconvenience. Sometimes I truly despise technology...

Fictitious? Fishy 409A Guidance

This fictitious IRS notice about death and 409A made the rounds recently...

- Broc Romanek

October 9, 2007

John White: "Where's the Analysis?"

Here is text of the speech from Corp Fin Director John White that he is delivering right now at our Conference. It's entitled "Where's the Analysis?" and I urge everyone to read it (and watch the video, live or archived)...

- Broc Romanek

October 9, 2007

It's Here! The SEC Staff's Executive Compensation Report

Just in time for today's Conference - “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” - Corp Fin has released its Executive Compensation Disclosure Report (here is the related press release). During his keynote, Corp Fin Director John White will discuss this new Report, as well as all the panels during today's Conference (and the panels throughout the next few days of Conferencing also will be analyzing this latest Staff guidance). Hey man, this is "hot off the press"!

It's not too late to register (or upgrade your Confernce license to add more people; you can do so online through a form available on this site's home page) - and even if you can't watch it live, each panel's video will be archived several hours after its shown live. Register Now!

How to Attend Today's Conference Online

Come to the home page of either TheCorporateCounsel.net or CompensationStandards.com and click the prominent link that says "Enter the Conference." Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or RealPlayer) and the speed of the connection that you have.

Here's an agenda for today's Conference; note that times are Pacific/West coast. Panels will be archived several hours after they are shown live.

For Those Watching by Video Webcast (and Want CLE Credit)...

All three of our Conferences have been accredited in nearly every state which requires barred lawyers to earn CLE credit. The exception being one state where our application is pending (Kansas) and two states that don't recognize our online CLE (Delaware and Pennsylvania). In our FAQs, there is a complete list of CLE credit hours available via web attendance for each Conference.

However, there are two "catches" to earn CLE credit via web attendance:

1. Need to Watch Live - Nearly every state requires "live" - and not "archived" - attendance, which can be a pain for those on the East Coast as the Conferences are on a West Coast schedule (but partial CLE credit can be earned for many states as noted below).

2. Need to Click Periodic Pop-Up Boxes - To comply with the verification requirements of many of the state bars, we have built a system which requires those seeking CLE credit to click on a periodic prompt as they watch. These prompts - in the form of "pop-up boxs" - will occur every 10-15 minutes and last about a minute. By clicking each pop-up box you see, you have proved to your state bar that you attended (yes, this is annoying - complain to them, not us). Each pop-up box will be prominent and will say "You must click me." Keep clicking each one you see; don't stop after just clicking one.

Exception to the Two Catches Above: If you are in a self-study state, you can spare yourself from the hassle of watching with the "periodic prompt" - read yesterday's blog to learn more.

A few other items to note:

- Register for CLE Every Day - If you want CLE credit for web attendance, when you first enter the conference page on the day of the conference and click on one of the video feed links; from there, you must click the prominent link in the red box entitled "How to Earn CLE Credit for Web Attendance" and follow the steps. You will need to do this each day if you watch more than one Conference.

- Earn Partial CLE Credit - If you can only watch a portion of the Conference, you can still earn CLE credit for the amount of time watched (assuming you click on the prompts as noted above and your state bar allow for this; most state bars do); this is particularly relevant for those on the East Coast.

- Limits on Group Watching - You must click the periodic prompts yourself so you can prove to the state bar that you indeed attended (so you can’t earn CLE by sitting in a conference room unless you have your computer with you; unless you are in a "self study" state as noted above).

- CLE Certificate Mailed Out Next Month - If you followed our online CLE system, we will be mailing a CLE certificate to you - but it's gonna take us a while to get those out (at least a few weeks).

- Pending States - If you seek CLE credit for Kansas where our application is pending, you should sign-in for the prompt system in case they approve the Conference.

Here are a set of FAQs about earning CLE credit for web attendance.

Complete Set of Printable Course Materials Posted

You are now able to obtain – and print out – the course materials related to our three Conferences; on the Conference pages linked to below, there is a complete printable set of materials for each Conference if you look for the link in the upper right corner that has that title. Note that you will need your Conference ID and password to access the course materials (in many cases, your ID and password for TheCorporateCounsel.net or CompensationStandards.com will work if you have registered; if not, your Conference ID and password were e-mailed to you earlier this week).

If you're watching online, obtain the Course Materials for the your Conference(s) either here - or directly at these links (if you'll be in San Fran, a set will be handed out to you):

- "Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference" (to be held Tuesday, 10/9)
- "Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks" (to be held Wednesday, 10/10)
- "4th Annual Executive Compensation Conference" (to be held Thursday, 10/11)

For Those Coming to San Fran...

All three of the Conferences will be held at the San Francisco Marriott, which is at 55 4th Street (here is the hotel’s phone number if you get lost: (415) 896-1600 /(888) 575- 8934). Once you reach the hotel, you will want to check in to receive your badge, etc. - and if you are early enough, there is a continental breakfast available. This master agenda lists check-in and breakfast times for all three Conferences.

If you haven't registered yet, but do plan to attend in San Fran - note that our HQ can't accept registrations after 5 pm Pacific today. However, walk-in registration can be done at the SF Marriott - and bring a check or credit card. (Note: registrations for web attendance still can be done online at any time.)

- Broc Romanek

October 8, 2007

A Note on Online CLE: Exception for Self-Study from Our Tracking System

Our new online CLE tracking system is causing a little confusion. So let me try to clarify a few things. We built the time-stamp system in response to the requirements of many state bars that require that we track whether or not a lawyer is actually watching the Conference.

However, we are aware some state bars only require self-reporting, so that lawyers in those states only need to attest that they attended a CLE program. If you are seeking CLE for one of those states (and you are certain of it, eg. Minnesota), you may skip our tracking system and save yourself a hassle. (This also means that you can watch in a group because you don't have to click prompts from your own computer.) In other words, when you click a video feed for a Conference this week, you wouldn't click the button that says "Earn CLE Here" and not fill out the CLE application.

If you fall under these circumstances - and still want a CLE Certificate - simply send an email next week (when we're back in the office) with your contact information, state bars and bar numbers. If you are registered for the Conference, we can accommodate you as we have in the past.

- Broc Romanek

October 8, 2007

Sold! Glass Lewis Goes to Activist Institutional Investor

On Friday, Glass Lewis was sold by its Chinese parent to the Ontario Teachers' Pension Plan, one of Glass Lewis' clients, for $46 million (here is the press release). With $106 billion in net assets, this investor is one of Canada's largest and most aggressive institutional investors and shareholder rights advocates (the investor helped created a Canadian investor group dedicated to improving corporate governance). This is a pretty interesting development: I wonder if a change in ownership alone can help Glass Lewis grow (as well as allegations that conflicts may arise if an activist investor owns a proxy advisor).

Its been reported that RiskMetrics Group (which owns what used to be known as ISS) dropped out of the running to buy Glass Lewis shortly after it filed its Form S-1 to go public last month. Right before it filed the IPO registration statement, RiskMetrics announced a new company structure and brand framework under which ISS became a division and officially took the RiskMetrics name.

SEC Comments: Financials Prepared for International Financial Reporting Standards

It looks like Corp Fin continues to maintain links to comment letters it has issued to foreign private issuers containing financial statements prepared for the first time on the basis of International Financial Reporting Standards (commonly referred to as "IFRS"). The Staff also is posting links to the company's correspondence. Scroll down on this Corp Fin page to see these links.

VP Cheney's '04 Testimony to the SEC's Enforcement Division

Last week, it was revealed that Vice President Dick Cheney gave testimony to the Enforcment Division back in 2004, as part of the Staff's investigation of Halliburton (where Cheney used to serve as CEO) over the accounting of cost overruns on several big projects back in '98. The Staff's investigation is now closed after the company settled with the SEC two days after Cheney's testimony, paying a $7.5 million fine.

According to this WSJ article, Cheney didn't recall being told that Halliburton had booked millions of dollars in construction cost overruns as income, saying that the company's CFO was "probably" the person "whose general area of responsibility this fell into." Yeah, probably. And the CEO shouldn't care about that type of thing...

The SEC released Mr. Cheney's testimony under a Freedom of Information Act request filed by Dow Jones Newswires. I'd like to post a copy of the testimony, but that might take some doing. Let me know if you see a copy.

- Broc Romanek

October 5, 2007

SEC Staff Overhauls Its Internal Controls FAQs

Last week, the SEC Staff revised its FAQs on Management's Report on Internal Control over Financial Reporting. These FAQs were originally jointed issued by Corp Fin and the Office of Chief Accountant in late '04. [Admittedly, this development snuck by us - it never showed up on Corp Fin's "What's New" page, etc. We are redoubling our investigative efforts and promise it will never happen again.]

The Staff eliminated twelve FAQs it believed were no longer relevant or necessary or that were addressed by the SEC's recent interpretive guidance on management reports. The Staff also added four new FAQs pertaining to foreign private issuers.

Courtesy of Cleary Gottlieb, here is some analysis of the new foreign private issuer FAQs (as well as a blacklined copy of the overhauled FAQs, which is posted in our "Internal Controls" Practice Area):

- Scope of ICFR Evaluation Should be Based on Primary Financial Statements (New FAQ 12) - Management of an FPI that files home country accounts with a US GAAP reconciliation should plan and scope its ICFR evaluation based on the primary financial statements (i.e., home country GAAP). However, the evaluation should consider controls related to the preparation of the US GAAP reconciliation.

- Reference to "Interim Financial Statements" in Material Weakness Definition Does Not Apply to FPIs (New FAQ 13) - Since home country requirements vary significantly and there are no uniform requirements requiring FPIs to file periodic interim financial statements, the reference to "interim financial statements" in the definition of material weakness does not apply to FPIs (unless they are filing on domestic forms).

- Treatment of Entities for ICFR Evaluation Purposes Should Track Treatment in Primary Financial Statements (New FAQ 14) - If an entity is treated differently under primary GAAP (i.e., home country GAAP) than it is in the US GAAP reconciliation (e.g., consolidated in the home country accounts but equity method under US GAAP), the ICFR evaluation should be based on how the entity is treated in the primary financial statements.

- Scope Limitation Permitted for Certain Proportionately Consolidated Entities (New FAQ 15) - Some FPIs are required under home country GAAP to account for certain entities on a proportionate consolidation basis. Management's ICFR report ordinarily should include all consolidated entities, even if they are consolidated on a proportionate basis. However, in cases where the company does not have the right or authority to evaluate internal controls of the proportionately consolidated entity and lacks the access necessary in practice to make that evaluation, the proportionately consolidated entity's internal controls may be excluded from the scope of management's assessment. (Management must still evaluate controls over the recording of amounts relating to the proportionately consolidated entity in the company's consolidated financial statements). The FAQ specifies certain disclosure that must be provided regarding the exclusion of the internal controls of these entities from the scope of the ICFR assessment.

The remaining FAQs are substantially the same and have been renumbered as a result of the elimination of the 12 old FAQs.

Exec Comp Comment Letters: Here Ye, Here Ye

Here is the latest installment of "The Sarbanes-Oxley Report" from Billy Broc and Dave the Animal: "Exec Comp Comment Letters: Here Ye, Here Ye."

How to Pick Up Your "Chicago" Concert Ticket

Many of those attending the NASPP Conference next week have registered for a free ticket to a "Chicago" concert on Tuesday, October 9th. The concert is jointly sponsored by the NASPP and Fidelity Investments. Here are some logistics:

Attendees can pick up their tickets to the concert at Fidelity’s registration desk at the San Francisco Marriott until 6:45 pm on Tuesday, October 9th (the day of the concert). After 6:45, Fidelity will have a satellite registration desk at the San Francisco Concourse Exhibition Center (which is the site of the concert) and attendees can pick up their tickets there.

There will be shuttle service from the Marriott to the San Francisco Concourse Exhibition Center. Buses will begin departing from the Marriott after the reception in the Exhibit Hall ends (starting at 7:00 pm). It’s not walking distance, you will need to take a shuttle bus.

Advance registration for the concert is now closed - but attendees can still register at the Conference; remember that only full NASPP Conference attendees are eligible - here are the eligibility requirements. If you didn't register in advance and show up at the concert site, you will need to prove that you are a NASPP Conference attendee to register there. You can do this by checking in for the NASPP Conference and picking up your Conference badge or by bringing the confirmation that you received when you registered for the NASPP Conference.

- Broc Romanek

October 4, 2007

Course Materials Now Available

You are now able to obtain – and print out – the course materials related to our three Conferences. Note that you will need your Conference ID and password to access the course materials (in many cases, your ID and password for TheCorporateCounsel.net or CompensationStandards.com will work if you have registered; if not, your Conference ID and password were e-mailed to you earlier this week).

If you're watching online, obtain the Course Materials for the your Conference(s) either here - or directly at these links (if you'll be in San Fran, a set will be handed out to you):

- "Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference" (to be held Tuesday, 10/9)
- "Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks" (to be held Wednesday, 10/10)
- "4th Annual Executive Compensation Conference" (to be held Thursday, 10/11)

Instructions for Those Watching Online: Come to the home page on the day of the Conference and click the prominent link that will be posted that day. Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or RealPlayer) and the speed of the connection that you have. Panels will be archived several hours after they are shown live.

For Those Watching by Video Webcast (and Want CLE Credit)...

All three of our Conferences have been accredited in nearly every state which requires barred lawyers to earn CLE credit. The exception being one state where our application is pending (Kansas) and two states that don't recognize our online CLE (Delaware and Pennsylvania). In our FAQs, there is a complete list of CLE credit hours available via web attendance for each Conference.

However, there are two "catches" to earn CLE credit via web attendance:

1. Need to Watch Live - Nearly every state requires "live" - and not "archived" - attendance, which can be a pain for those on the East Coast as the Conferences are on a West Coast schedule (but partial CLE credit can be earned as noted below).

2. Need to Click Periodic Pop-Up Boxes - To comply with the verification requirements of many of the state bars, we have built a system which requires those seeking CLE credit to click on a periodic prompt as they watch. These prompts - in the form of "pop-up boxs" - will occur every 10-15 minutes and last about a minute. By clicking each pop-up box you see, you have proved to your state bar that you attended (yes, this is annoying - complain to them, not us). Each pop-up box will be prominent and will say "You must click me." Keep clicking each one you see; don't stop after just clicking one.

A few other items to note:

- Register for CLE Every Day - If you want CLE credit for web attendance, when you first enter the conference page on the day of the conference and click on one of the video feed links; from there, you must click the prominent link in the red box entitled "How to Earn CLE Credit for Web Attendance" and follow the steps. You will need to do this each day if you watch more than one Conference.

- Earn Partial CLE Credit - If you can only watch a portion of the Conference, you can still earn CLE credit for the amount of time watched (assuming you click on the prompts as noted above); this is particularly relevant for those on the East Coast.

- Limits on Group Watching - You must click the periodic prompts yourself so you can prove to the state bar that you indeed attended (so you can’t earn CLE by sitting in a conference room unless you have your computer with you).

- CLE Certificate Mailed Out Next Month - If you followed our online CLE system, we will be mailing a CLE certificate to you - but it's gonna take us a while to get those out (at least a few weeks).

- Pending States - If you seek CLE credit for Kansas where our application is pending, you should sign-in for the prompt system in case they approve the Conference.

Here are a set of FAQs about earning CLE credit for web attendance.

For Those Coming to San Fran...

All three of the Conferences will be held at the San Francisco Marriott, which is at 55 4th Street (here is the hotel’s phone number if you get lost: (415) 896-1600 /(888) 575- 8934). Once you reach the hotel, you will want to check in to receive your badge, etc. - and if you are early enough, there is a continental breakfast available. This master agenda lists check-in and breakfast times for all three Conferences.

If you haven't registered yet, but do plan to attend in San Fran - note that our HQ can't accept registrations after 5 pm Pacific today. However, walk-in registration can be done at the SF Marriott - and bring a check or credit card. (Note: registrations for web attendance still can be done online at any time.)

[Captain XBRL strikes again! As noted in this blog, he drops Britney Spear's former lawyer from top of the heap...]

Free Stoneridge Webcast

Coming up next Tuesday is the much-anticipated Supreme Court oral argument in the case of Stoneridge Investment Partners v. Scientific-Atlanta. As we have noted in the blog before, this one is a biggie!

Tomorrow, the Center for Business Law & Regulation at Case Western Reserve University is hosting a half-day conference on the issues involved in this important case. This event will be webcast live - and for free.

- Broc Romanek

October 3, 2007

Shareholder Access: What Now?

Yesterday was the deadline for comments on the two competing shareholder access proposals, and as might be expected they both pulled in lots of comments. If anything was to be decided on the sheer number of comment letters, then the proposing release that would give 5% shareholders the ability to submit binding access bylaw amendments would be the hands down winner, with over 15,000 comment letters so far. Of those over 15,000 letters, a little more than 14,700 were designated by the SEC as “form” letters. The proposing release seeking to codify the SEC Staff’s interpretation of Rule 14a-8(i)(8) only garnered just north of 7,400 comments (of which over 7,370 were designated as “form” letters). True to form, while the investor community and individuals belonging to organizations with an interest in this matter turned out in force, there does not appear to be a whole lot of input from the issuer side on these proposals. While these comment numbers are nothing to sneeze at, they still don’t touch - when viewing the two access releases separately - the well over 20,000 letters commenting on the 2006 executive compensation disclosure proposals.

Now that the SEC Staff has all of these comments to sift through, it remains to be seen which way the SEC will ultimately go and when. In order to have proposals in place for the upcoming proxy season as Chairman Cox told the Senate Banking Committee he would at the end of July, it would seem that an adopting release needs to be on the SEC’s calendar in November, when many of the other Corp Fin proposals from earlier this year are expected to be considered. As noted in the RiskMetrics Risk & Governance Group blog, former Commissioner Campos said at a September CII conference that he doubted a replacement would be named in time to participate in shareholder access deliberations before next proxy season. Campos also indicated that he thought it was unlikely that Chairman Cox would push for a final decision on the issue without a full complement of commissioners.

At a House Committee on Financial Services hearing last week, investor and business representatives squared off on the shareholder access proposals. The SEC did not participate in the hearing. Reminiscent of the debate that ensued when shareholder access was last proposed in 2003, the two sides can seemingly find no middle ground. The investor side would rather see neither proposal move forward, and instead would like to submit access proposals without any restrictions. John Castellani, president of the Business Roundtable, raised the specter of “fractured boards representing special interests or small groups of shareholders” if the SEC adopts some form of shareholder access.

Adding to the uncertainty about the ultimate outcome of shareholder access is the outstanding warning from Senator Christopher Dodd (D-CT), who said that he will consider legislation to resolve the question of proxy access if the SEC doesn’t adopt access rules.

Farewell to Commissioner Nazareth

The SEC announced that Commissioner Annette Nazareth intends to step down. Commissioner Nazareth has indicated to the President that she does not wish to be re-nominated, and her term expired earlier this summer. No departure date has been set.

Commissioner Nazareth has been at the SEC for nine years, first as Director of the Division of Market Regulation and then as a commissioner. It is rare these days to see someone appointed to a commissioner slot from the Staff, and I believe that Nazareth’s experience on the Staff always contributed to her outstanding work as a commissioner. I really enjoyed working with Commissioner Nazareth and her excellent Staff – her departure is a big loss for the SEC.

ACAP Gets Off the Ground

Yesterday, Treasury Secretary Paulson announced the members of the Treasury Advisory Committee on the Auditing Profession. The date of the Committee’s first public meeting is set for October 15th. As Broc noted in this blog from back in May, the Committee - headed by former SEC Chairman Arthur Levitt and former SEC Chief Accountant Donald Nicolaisen - is tasked with examining issues such as audit firm concentration, how to strengthen the accounting industry’s financial soundness and how to enhance the ability to attract and retain qualified personnel. More information is available at the Committee’s website.

Our October Eminders is Posted!

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

- Dave Lynn

October 2, 2007

Spotlight on Insider Trading at Hedge Funds

In yesterday’s blog, three out of the top ten recent Enforcement cases that I listed involved allegations of insider trading—clearly a top priority at the SEC. In late August, the SEC sent a 27-page letter to registered hedge fund advisers, seeking information about employees and clients who might be in a position to obtain material non-public information. As noted in this Washington Post article, Mark Schonfeld of the SEC’s New York regional office indicated “[t]his is an effort to look out for potential insider trading at hedge funds and to ensure that hedge-fund advisers are living up to their obligation to detect and prevent insider trading.”

According to published reports, the letter asks for lists of all employees and clients of the fund, as well as any relatives serving as officers or directors of public companies. The letter also requests information about contacts at brokerage firms with which the fund has done business. In addition, the SEC is seeking information about controls in place to prevent insider trading.

With this level of scrutiny, now more than ever companies need to focus on their insider trading policies and the activities of their officers and directors (including the use of Rule 10b5-1 plans). Even though we are only a week away, it is still not too late to sign up for our three critical conferences. In addition to Linda Chatman Thomsen’s keynote address at our Hot Topics conference, you can also hear the latest on Rule 10b5-1 plans and everything you need to know—in a nutshell—to prevent inadvertent, costly insider trading, Section 16 and Rule 144 violations. Register now for:

- “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 info@compensationstandards.com or 925.685.5111.

Stock Option Legislation Introduced

Last Friday, Senator Carl Levin (D-Mich.) introduced a bill entitled the “Ending Corporate Tax Favors for Stock Options Act” (S. 2116). The bill was referred to the Senate Finance Committee.

Levin’s bill would:

- match the corporate tax deduction for stock option compensation to the book expense reflected in a company’s financial statements;

- permit companies to deduct stock option compensation in the same year that it is recorded on their books, rather than when the options are exercised;

- provide that research tax credits use the same stock option deduction when computing the “wages” eligible for those particular tax credits;

- establish a transition provision that would apply the new tax deduction to stock option exercises occurring after enactment, permit the old tax deduction rule to apply to options vested prior to adoption of FAS 123R, and allow a catch-up deduction in the first year after enactment for options that vested after adoption of FAS 123R but before the date of enactment; and

- make stock option compensation part of the same $1 million cap on the tax deductions that can now be claimed by public companies for other forms of executive compensation under Section 162(m).

In Senator Levin’s statement introducing the bill, he noted the significant disparity in pay between the CEO of a large corporation and the average worker. As for the influence of the tax code on executive compensation decisions, Levin noted: “When a company’s compensation committee learns that stock options can produce a low compensation expense on the books, while generating a generous tax deduction that is multiple times larger, it’s a pretty tempting proposition for the company to pay its executives with stock options instead of cash or stock. It’s a classic case of U.S. tax policy creating an unintended incentive for corporations to act.” This legislation stems from the Senate’s Permanent Subcommittee on Investigations hearing entitled “Executive Stock Options: Should the IRS and Stockholders be Given Different Information” from back in June. The bill would not affect the stock option compensation tax rules applicable to individuals.

Test Your M&A Knowledge: Are You a Pro or Troll?

We have posted one of our popular quizzes - “Pro” or “Troll”? Test Your Knowledge - on DealLawyers.com. 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.

- Dave Lynn

October 1, 2007

End of the Year Crush: SEC Enforcement Activity in September

Today is the start of fiscal 2008 at the SEC. As is typically the case, the end of the last fiscal year saw lots of Enforcement activity, as the Division sought to make or beat its budget numbers. The number of Enforcement cases and Corp Fin filing reviews are always very important for supporting the SEC’s annual budget request. The stepped-up Enforcement activity at year-end is demonstrated by the crush of 52 litigation releases issued in September, as compared to an average of around 36 litigation releases per month during the other 11 months of fiscal 2007. Here is my top 10 list of cases from the end-of-year blowout:

1. Daniel McKay – McKay was charged with trading on material non-public information that he misappropriated from his spouse, who was an executive vice president at Triangle Pharmaceuticals. As noted in this NY Times article from August, there has been a notable increase in insider trading cases involving husbands and wives.

2. Salvador Chavarria, et al. – Continuing the insider trading theme, three Dell accountants were charged with trading in options on Dell stock while in possession of material nonpublic information about the company’s disappointing results for the second quarter of 2006. This case should be a reminder that all employees in an organization (and particularly those with access to sensitive financial information) need to have the company’s insider trading policy drilled into their heads, as well as the potential consequences for not adhering to that policy.

3. Buca, Inc. – Buca, which operates the Buca di Beppo restaurant chain, was charged with, among other things, failing to report compensation to the company’s former CEO and CFO arising from reimbursed personal expenses. The personal expenses included ATM cash withdrawals, duplicate airline tickets, family wedding expenses, dog kenneling, home remodeling costs, vacations, and visits to strip clubs. The company is also charged with failing to report various related party transactions, including the former CEO's purchase of an Italian villa with company funds and the former CFO's ownership interest in a vendor. While the unreported compensation and related party transactions predate the SEC’s new rules, the case demonstrates that the SEC is more than ever willing to pursue these types of cases, even when the amounts involved are not large. Be sure to sign up now for next week’s conferences, including Linda Chatman Thomsen’s keynote speech at the “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks,” to hear more.

4. Exo-Brain – The SEC announced a final judgment against this company and its principal for the usual unregistered offering and fraudulent misrepresentations and omissions violations. I just thought the name “Exo-Brain” was cool.

5. Federal Home Loan Mortgage Corporation, et al. – Freddie Mac and four of its former executives settled charges stemming from the company’s alleged fraudulent scheme to deceive investors about its true performance, profitability, and growth trends. Much of the conduct centered around Freddie Mac’s accounting for derivatives. The company agreed to pay a $50 million civil penalty, which is expected to be distributed to injured investors through a Fair Fund.

6. Joseph Keeney – Keeney, who was acting a business consultant to Frederick’s of Hollywood, was charged with trading on the basis of material non-public information obtained about the possible merger of privately-held Frederick’s and publicly-held Movie Star, Inc. Keeney was directly involved in the merger negotiations and was in charge of maintaining communications between the Special Committees of the two boards.

7. FCPA Actions – The recent trend toward stepped-up Foreign Corrupt Practices Act enforcement continued last week with a case against a former EDS official named Chandramowli Srinivasan, who was charged with bribing senior employees of Indian state-owned enterprises. EDS was also charged with related reporting, books-and-records, and FD violations. In another case, the SEC announced a settlement with Bristow Group for FCPA violations arising from improper payments made to Nigerian state government officials.

8. Stock Loan Crackdown – In Darin DeMizio, et al. and Joseph Simone, et al., the SEC charged 38 defendants with involvement in schemes where stock loan traders paid improper finders fees and illegal kickbacks. The defendants include current and former stock loan traders at Morgan Stanley, Van der Moolen, Janney Montgomery, A.G. Edwards, Oppenheimer, and Nomura Securities. Clearly there are some real problems in the stock loan industry that the SEC is seeking to ferret out.

9. Dwight Sean Jones – Jones - who was a defensive end for the LA Raiders, Houston Oilers, and Green Bay Packers - was charged with failing to allow the SEC Staff to examine his business records. Jones had been a registered investment advisor. The SEC may be the least of his worries – he was arrested in June on charges of mortgage fraud.

10. Robert Berlacher, et al. – The SEC’s efforts to crack down on illegal insider trading by hedge funds in the PIPEs market continues with a case against Berlacher, his Lancaster Investment Partners fund and related funds. According to the SEC’s complaint, the defendants generated $1.7 million in gains by shorting stock based on information about upcoming PIPEs offering and then covering those shorts with PIPE shares.

SEC Filing Fees: No Changes For Now

Another sign of the new fiscal year is the SEC’s Fee Rate Advisory from Friday. As is typically the case, the SEC starts fiscal 2008 off under a continuing resolution, because Congress has not yet passed the agency’s regular appropriation. As Broc noted in this blog, the SEC sets the filing fees annually under the “Investor and Capital Markets Fee Relief Act of 2002,” and the fiscal 2008 fees were set in this April order. The new fees will not go into effect, however, until five days after the date of enactment of the SEC’s appropriation.

For now, the filing fee rate for Securities Act registration statements remains at the current rate of $30.70 million. The same rate applies under Exchange Act Sections 13(e) and 14(g). Once the appropriation is enacted, this rate will rise to $39.30 per million.

Webcast Crush: Test Your Access Now

We are receiving so many last minute registrations for our three critical Conferences coming up next week – particularly the Video Webcast sign-ups – that we are concerned that many more of you are waiting until the very last minute to register.

Those that wait any longer may not have sufficient time to sign up and adequately test your ability to access streaming video, which is the format by which the webcasts will be displayed.

Those that have not yet registered for these essential Conferences – particularly in view of the latest executive compensation proxy disclosure guidance that will be provided by senior SEC Staffers John White and Paula Dubberly - are encouraged to do so now by clicking any of the links below:

- “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 info@compensationstandards.com or 925.685.5111.

- Dave Lynn