January 31, 2008

SEC’s Filing Fee Lockbox Agent Changes – Effective Monday!

There is nothing worse than having your registration statement bounced by EDGAR because of an unpaid filing fee (I think the correct term is being put into “fee suspense” or something like that). Unfortunately, that is what could happen to you if you mail or wire a filing fee to the old Mellon Bank account after this Friday.

Earlier this month, the SEC put out a notice that the lockbox financial agent is changing, and now this week the agency published final rules implementing the changes. Effective Monday, February 4th, U.S. Bank will take over as the lockbox agent, so all checks and wires need to be sent to U.S. Bank beginning on Monday. The SEC states that no payments should be submitted to Mellon Bank after tomorrow.

The SEC’s notice provides the specifics on how to wire fees to U.S. Bank. The most critical data for getting your fee through to the lockbox are the SEC's account number at U.S. Bank and the SEC-assigned account number, identified as the CIK number. Payments may still be made by a certified or bank cashiers check as well, and the notice provides the new U.S. Bank addresses for mail or courier delivery of checks.

The final rules eliminate the option of making payments in cash or personal check - I wonder how many fees have actually been paid with a briefcase full of cash?

Corp Fin Releases New Smaller Company Compliance Guides

The Staff recently posted two new “small entity compliance guides” to explain the new smaller reporting company disclosure system that replaces Regulation S-B and the expanded eligibility for primary offerings by smaller companies on Form S-3. The Staff prepared these guides under the mandate of Section 212 of the Small Business Regulatory Enforcement Fairness Act, and they admonish that the guides are not to serve as a substitute for reading the actual rules.

In the guide entitled “Changeover to the SEC’s New Smaller Reporting Company System by Small Business Issuers and Non-Accelerated Filer Companies,” the Staff explains the smaller reporting company system generally, as well as the transition provisions for small business issuers and companies that are new to the smaller reporting company system. The guide includes some examples, charts and FAQs to explain the requirements.

The guide entitled “Eligibility of Smaller Companies to Use Form S-3 or F-3 for Primary Securities Offerings” outlines the new S-3 primary eligibility requirements for companies with less than a $75 million public float. This guide is more bare-bones, perhaps because the adopting release already included a number of detailed examples of the calculations involved.

The Staff also posted a small entity compliance guide for Rule 14-8(i)(8) earlier this month. This guide explains 14a-8 very generally and then talks about the amendment to (i)(8) to permit exclusion of access proposals.

All in all, it looks like these guides (particularly the smaller reporting company guide) can be useful resources. Unlike the Section 404 compliance guide, these latest guides weren’t accompanied by a catchy slogan like “it doesn’t have to be a chore.” Personally, I would have gone with something like “Form S-3: Not Just for the Big Dogs Anymore”

January-February Issue: Deal Lawyers Print Newsletter

This January-February issue includes articles on:

- Fairness Opinions after Revised NASD Rule 2290: Models & Analysis
- Navigating a Loan-to-Own Transaction: 11 Steps
- Practical Guidelines for Special Committees
- Perspectives from an Industry Insider: Understanding Activist Hedge Funds
- M&A Implications of New Changes to Rules 144 & 145

As all subscriptions are on a calendar year basis, it is time for you to renew your subscription. If you are missing these critical issues, try a 2008 no-risk trial to get a non-blurred version of this issue for free.

- Dave Lynn

January 30, 2008

How to Attend Today's "Rule 144" Conference

Many of you have registered for the big webconference - “New Rule 144: Everything You Need to Know - And Do NOW” – which will be video webcast today starting at noon eastern (video archive will be available starting tomorrow).

Remember you need to register to attend; members of TheCorporateCounsel.net get a discount - but the Conference is not automatically part of the site's membership. It's not too late to register, even if the Conference has started since everything will be archived.

Here are instructions on how to attend the Conference:

1. Ensure you have the proper "Player": To watch the Conference, you will need either the Windows Media Player or the Flash Player (which works for a Mac); RealPlayer will not work for this Conference. You can download a free player if you need to.

2. Determine whether CLE credit is available in your state: This Conference is accredited for CLE in 15 states – here is the list of CLE states. CLE credit will not be available for states that are not on this list.

3. If you seek CLE credit, you will need to input your contact information in our “Online CLE Tracker”: To comply with certain state bar requirements, we have built a system whereby those in states where this webcast is accredited and want to earn CLE will need to click through a series of periodic prompts (i.e. about every 15-20 minutes) to prove they sat through the webcast. When you go to the webconference, you will see a link in a red box to go to the "Online CLE Tracker."

4. Print out the Course Materials: You should print off these "Course Materials," including this printable set of model documents.

5. Attend today starting at noon eastern: If you intend to attend live today, the Conference starts at 12:00 noon eastern time. Here is the Conference Agenda, which has the schedule of panels (remember that all panels will be archived and you can watch them afterwards).

To attend, go to the home page of TheCorporateCounsel.net and - and click on the large link at the top with the Conference title and input your ID and password when prompted. If you have questions, please email our HQ at info@thecorporatecounsel.net.

Part II: "The Latest Developments: Your Upcoming Proxy Disclosures —What You Need to Do Now!

Last week, you heard primarily from Corp Fin's Michael Reedich about the Staff's expectations for this proxy season (audio archive available now). Catch Part II of this CompensationStandards.com webconference tomorrow and hear from the experts - Dave Lynn, Mark Borges, Alan Dye and Ron Mueller - about how to meet the Staff's expectations in "The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!"

Over 50 Executive Compensation Comment Letters: Our Updated List

In the "SEC Comments" Practice Area on CompensationStandards.com, we continue to update our list of links to the SEC's executive compensation comment letters and responses.

We have now posted 50 comment letters and responses (some companies have more than one letter and response available). During last week's CompensationStandards.com webcast, Staffer Mike Reedich noted that about 70% of the 350 companies that received comment letters had received a second comment letter - so my guess is that the number of letters being posted to the SEC's site will continue to trickle rather than flood.

By the way, these letters and responses were the inspiration for an article in yesterday's WSJ entitled "SEC Unhappy With Answers on Executive Pay." It still strikes me as odd whenever the mainstream media writes a piece about the SEC comment process...

House's Severance Hearing Postponed

Perhaps because Countrywide CEO Anthony Mozilo agreed to forego the $37.5 million in cash severance and other benefits that he stood to receive if the company’s acquisition by Bank of America is completed, the hearing before the House Oversight and Government Reform Committee on severance packages - originally scheduled for next week - has been postponed until Thursday, February 28th.

- Broc Romanek

January 29, 2008

Sound Disclosure Practices for Annual Reports

I heard Professor Bob Howell do his thing a few weeks back and he is quite the entertainer. In this podcast, the Professor explains how to best approach drafting disclosure for proxy materials, including:

- What are desired practices for MD&A?
- How should companies draft their risk factors?
- What is the best way that companies can get their message across in the "letter to shareholders" in the annual report?
- How should companies be disclosing "economic (e.g. cash) performance"?

More 10-K Practice Pointers

We had a nice response to our recent competition: "The Main Event: Vote for Your Favorite 10-K Practice Pointers." My good friend Doug Chia of Johnson & Johnson now chimes in with his own - "tongue in cheek" - set of pointers:

1. Start with a blank sheet of paper - Uh, yeah, OK. No one ever does this. It's just something SEC staffers like to say because it sounds good in theory. I guess they have visions of us sitting down with our CEOs, CFOs, GCs and Controllers at off-site locations with nothing on the agenda except for brainstorming about what story we want to tell this year. But in reality, unlike Richard Nelson Bolles, the author of "What Color Is Your Parachute," none of us has time to completely re-write our disclosures every year. Our senior officers' calendars are too packed to get everyone to be in the same room for more than 10 minutes (particularly if they know lawyers will be in the room). That's not what they are getting paid those "Holy Cow" numbers to do. Plus, none of us in the in-house world are paid enough to put ourselves through that exercise every year!

2. Consider filing under XBRL - Again, not something many of us are going to do unless we're forced to, but I thought I'd throw it in to receive "brownie" points from Chairman Cox in case he reads this!

3. Start early - Ha! Another one that sounds good, but no one ever does it. It's just like the papers we were assigned to write in high school and college--we started doing all of the research and writing the papers the night before the due date (and after "Late Night with David Letterman"). I guess life would be too boring without last minute fire drills.

8. Analysis, analysis, analysis - As they say in New Jersey, "Puh-leeze!" Ever notice that the words "analysis" and "analyst" start with the letters A-N-A-L.

5. "All" means all - NOT! All means everything you are required to disclosed based on the rules. Anything over and above that is just voluntary stuff that could potentially lead to a post on one of those blogs like Footnoted.org whose only real goal is to embarrass you and your executives, or worse, could get you fired!

265. Don't use generic risk factors that don't apply to your company's business - Are you kidding me? If risk factors constitute your insurance policy, as we are all so fond of saying, and it only costs whatever the printer charges for your document to be a couple of pages longer, throw in the kitchen sink! Too many risk factors can't possibly get you in trouble. No one ever got sued for having too many risk fators.

7. Check the numbering on your exhibits list - Seriously, misnumbering is a tell-tale sign of sloppy lawyering! (Note the misnumbering of this list!)

Jan-Feb Issue of The Corporate Counsel

We recently mailed the Jan-Feb issue of The Corporate Counsel. For those that haven't tried a no-risk trial, here is a blurred version of the issue so you can get a sense of it. This issue includes analysis of:

- The Commission's Useful Integration (Rule 152, etc.) Guidance in August's Reg D Proposing Release
- Yet Another Statutory Basis for a Reg D Offering: Section 28
- This Year, Preliminary Proxy Filing Can Lead to Real-Time Review of 402/404 Disclosures
- S-K Item 404(a) Follow-Up—More on Which In-Laws are Related Persons
- Audit Committee Involvement in Drafting the CD&A—Why Pile On?
- "Proxy Access"
- Bebchuk Shareholder Proposal Follow-Up
- Google's TSOs—S-3 Registration Rather Than S-8—Follow-Up
- Stoneridge!@#$%
- Enforcement Staff Busy Advising Backdaters and Others When Investigation Has Closed
- Bulletin Board Companies Left Out of S-3 Expansion
- Cheap Stock—IPO Disclosure Overkill
- Management Blogs—Reg FD Dissemination?
- 8-K Amendment Coming to Clarify that 4.02 Reporting Cannot Be (Buried) in 10-Q/K
- FASB Re-Examining FAS 5 Disclosure Criteria—Eventual Impact on the Audit Letter Process
- Fixed 1934 Act Fees?
- Annual Salary Survey
- New Staff 144 Positions on Gifts and Pledges by Affiliates—and Blockbuster Position On Hedging

- Broc Romanek

January 28, 2008

VotePal.com Leverages the Web: The Future is Now

Recently, the SEC posted the adopting release for its e-forum rulemaking. Even though most of this rulemaking essentially codified what was arguably already permissible under the proxy rules, I believe this rulemaking will spur the investor community to start leveraging the Web more.

During last week's proxy season webcast, Pat McGurn talked about this topic as well (audio archive and transcript are available now). Although not an e-forum example per se, I pointed out VotePal.com to illustrate the point of how one shareholder can easily get its views known on a shoestring budget (this particular shareholder's beef relates to omitting the shareholder's name from certain communications with other shareholders and not properly reporting election results). This site is quite elementary: the shareholder simply has posted a chronological list of any documents related to his agitation at Alaska Air. Note this statement on the left side of the site's home page: "We've Proven Anyone Can Conduct a Proxy Contest...How About You??"

Practice Tip: Votepal.com provides us with a reminder that anything we write these days could surprise you and wind up online. The site contains several letters written by Alaska Air's law firm (here is an example). Ignore the Web at your own peril!

Pay-for-Performance Disclosure: Transcript from Proxy Season Webcast

We have posted the transcript from last week's popular webcast with RiskMetrics' Pat McGurn: "Forecast for 2008 Proxy Season: Wild and Woolly."

Here is a notable excerpt from Pat's remarks regarding disclosure of pay-for-performance targets (which dovetails the extensive conversation about this topic with SEC Staffer Mike Reedich and others during last Wednesday's webcast on CompensationStandards.com):

"If issuers want to stay out of trouble this year, there are a couple of quick ways to do it. The first one on the CD&A side has to do with what I call the "can't discern alignment" issue. The fact that many companies in 2007 omitted the targets and the hurdles under their performance-based pay programs. I don't think there is anything that's going to get you into trouble with investors faster this year than continuing to use stealth over those targets and hurdles.

I think obviously the SEC has now set a bar for confidential treatment of those numbers and that information going forward. But I think it's something that shareholders are going to judge on their own as well, and if there is one big flash point issue this year, it is going to be on "pay-for-performance" and whether there is enough information for shareholders to figure out how high the bar has been set in the CD&A this year."

Alan Dye: Keeping Yourself Out of the Section 16 ‘Hot Water’

For members of Section16.net or the NASPP, tune into tomorrow's webcast - "Alan Dye: Keeping Yourself Out of the Section 16 ‘Hot Water’" - to hear Alan Dye give us guidance on all the latest developments in the Section 16 area. This always is one of the most popular webcasts around. Try a Section16.net no-risk trial to catch this 90-minute program.

Microfinance in Africa

A friend of mine recently launched a microfinance initiative in Buyobo, Uganda, and arranged for a Ugandan charity called FDNC to provide follow up visits to her borrowers. FDNC provides all sorts of health, education and training outreach to women and children in rural villages. FDNC receives funding from a USA charity called Hope for Uganda Students (HUGS).

Now, Parade magazine is holding a charity-giving challenge and will give $50,000 to the 4 USA charities that generate the most new donors by January 31st - and the top 50 will receive $1,000. So my friend is trying to get at least 50 new donors for HUGS during the next three days. You only have to give $10 - the important thing is how many people give - not how much they give. So please go to this web site and donate $10.

- Broc Romanek

January 25, 2008

Next Wednesday's "Rule 144 Conference": Things to Do in Advance

Many of you have registered for the upcoming webconference - “New Rule 144: Everything You Need to Know - And Do NOW” – which will be video webcast on Wednesday, January 30th (video archive will be available starting the following day).

Here are instructions to attend the Conference:

1. Test your access now: To watch the Conference, you will need either the Windows Media Player or the Flash Player (which works for a Mac); RealPlayer will not work for this Conference. To test your access, please go to: “Test Your Ability to Access Webconference.”

2. Determine whether CLE credit is available in your state: We expect this Conference to be accredited for CLE in about 15 states – here is the list of CLE states. CLE credit will not be available for states that are not on this list.

3. If you seek CLE credit, you will need to input your contact information in our “Online CLE Tracker”: To comply with certain state bar requirements, we have built a system whereby those in states where this webcast is accredited and want to earn CLE will need to click through a series of periodic prompts (i.e. about every 15-20 minutes) to prove they sat through the webcast. Soon, we will have this "Online CLE Tracker" up and you can input your information in advance of the Conference if you wish.

4. Print out the Course Materials: You can now access these "Course Materials," including this printable set of model documents. [We just tweaked a few of the rep letters to add a representation about shell companies - so if you already printed out a set of our model documents, you may want to print them out again.]

5. Attend on Wednesday, January 30th starting at noon eastern: If you intend to attend live on Wednesday, the Conference starts at 12:00 noon eastern time (this is earlier than originally announced as the Conference is now longer). Here is the Conference Agenda, which has the schedule of panels (remember that all panels will be archived and you can watch them afterwards).

To attend, go to the home page of TheCorporateCounsel.net and - and click on the large link at the top with the Conference title and input your ID and password when prompted. If you have questions, please email our HQ at info@thecorporatecounsel.net.

Podcast: Impact of Stoneridge

In this podcast, Lisa Wood of Foley Hoag discusses the recent US Supreme Court decision regarding aiding & abetting in Stoneridge Investment Partners v. Scientific-Atlanta, including:

- What did the Supreme Court decide in Stoneridge?
- What does this mean for aiding & abetting allegations going forward?
- What should companies and other market participants do to protect themselves in the wake of Stoneridge?

The Stoneridge Memo Phenomenon

I don't know why it struck me, but the force and speed by which law firms sent their memos out last week - in the wake of the US Supreme Court's Stoneridge decision - was truly amazing. So far, we have posted over 40 of these memos, with the bulk of them being drafted within 48 hours of the decision being rendered. So below is a question I ask you:

- Broc Romanek

January 24, 2008

Smaller Companies: How Your 10-K Changes This Proxy Season

Catch today's webcast - "Smaller Companies: How Your 10-K Changes This Proxy Season" - to hear Dave Lynn, John Jenkins and Harry Pangas discuss how to prepare your Form 10-K this proxy season, with a focus on what changes you need to make this year due to the SEC's new rules and regulations for smaller companies.

Unlike our other webcasts, this one was taped in advance so you can listen to it at anytime (and there will be no transcript). And you will also want to review these "Course Materials," which consist of practice pointers that the panelists put together. Some good stuff!

Finally, Dave has put together the latest installment of our challenge to you: "Pro or Troll #4: New Smaller Reporting Companies Rules."

Head's Up for Smaller Companies: Read the Actual Rule Text

A member recently alerted us to a possible glitch in the SEC's adopting release for smaller company regulatory relief and simplification. In the release, the SEC stated that Item 407 of Regulation S-K was being amended to provide that "smaller reporting companies are: "… Not required to provide an Audit Committee Report until the first annual report after their initial registration statement is filed with the Commission and becomes effective."

However, the actual amendments to Item 407 don't refer to the Audit Committee Report - instead, they refer to disclosure regarding the Audit Committee Financial Expert. I think the actual amendments are correct since the intent of the rules is to provide that the disclosure regarding Financial Experts required by Item 407(d)(5) will not be required for a smaller reporting company in its 1st annual report following the effective date of its first registration statement. Smaller reporting companies will be required to provide Audit Committee Reports.

Practice Tip: For both the SEC's adopting and proposing releases, don't forget to read the rule text near the end of the releases rather than rely on the narrative description of them in the forepart. After all, the rule text is what we all have to live by, long after the adopting release is mostly forgotten...

News from San Diego: Recap of Corp Fin Efforts

Yesterday, Corp Fin Director John White delivered this speech at the Northwestern Conference in San Diego. It provides a recap of all the SEC's ongoing efforts. In two weeks, get some expert perspectives from outside the SEC on what the Staff is up to (and has been doing recently) in our webcast: "The ‘Former’ SEC Staff Speaks."

I hear that Staffer Shelley Parratt had an interesting panel in which she said there have been a lot of questions about how companies can find out which AD group (ie. industry group in Corp Fin's "operations") they are in. There is information on the Corp Fin web page - but it can be confusing so the Staff plans to make it easier to use. Don't forget our handy "Corp Fin Organization Chart."

- Broc Romanek

January 23, 2008

Course Materials Now Available: Rule 144 Conference

With our blockbuster Conference only a week away - "New Rule 144: Everything You Need to Know – And Do NOW" - we have posted our Course Materials so that you can print them out in advance. If you have registered for the Conference, please use your ID and password to access these "Course Materials," including this printable set of model documents. (Note you need to register for the Conference to access these Materials; members of TheCorporateCounsel.net receive a discounted rate, but the Conference is separate from membership.)

In addition to a "Comprehensive Rule 144 Outline," nifty charts and useful analysis, the Course Materials include these model documents:

- Model Memorandum to Directors and Executive Officers
- Seller's Representation Letter #1 – Sales by Affiliate of Reporting Company
- Seller's Representation Letter #2 – Sales by Affiliate of Non-Reporting Company
- Seller's Representation Letter #3 – Sales of Restricted Securities by a Non-Affiliate
- Standard Broker's Representation Letter for Affiliates: "We Will Comply" Letter
- Legend Removal Representation Letter #4.a – to Broker
- Legend Removal Representation Letter #4.b – to Issuer and Transfer Agent
- Legend Removal Broker's Cover Letter #5 – to Transfer Agent and Issuer
- Broker Instruction/Representation Form
- Letter: Reminder of SEC Restrictions and Company Policy (can be stapled to stock certificate, etc.)

The Course Materials alone are worth the rate of this Conference. You will need all of these documents starting February 15th, when new Rule 144 becomes effective.

New Rule 12h-6: Deregistration Stats So Far

Last week, Corp Fin Director John White gave this speech at PLI's Annual European conference, which provides a solid recap of the SEC's international efforts in the corporate finance area. (Chairman Cox also recently delivered this speech entitled "International Business — An SEC Perspective.")

In his speech, John notes that 100 companies have filed to withdraw from U.S. registration under the SEC's new deregistration rules during 2007 (which doesn't include 25 that had previously deregistered under the older exit rules but filed a Form 15F to gain the benefit of new Rule 12h-6). The 100 FPIs represent just under 9% of all FPIs as of the beginning of 2007 and 53% are from the European Union.

It is notable that during 2007, more than 75 new foreign private issuers registered securities in the US. So perhaps it's too early to tell what the long-term impact of new Rule 12h-6 will be...

Probable Cause for Car Search: No Broker-Dealer License

I've heard of getting into trouble driving with a driver's license - but driving with a broker-dealer license? Keith Bishop notes: I thought that this recent California case was interesting for several reasons:

1. The Court of Appeal found that the police had probable cause that the defendant was selling securities without a broker-dealer license and could lawfully search the defendant's vehicle in connection with his arrest.

2. The appellate court upheld a burglary conviction based on the fact that the defendant entered the victim's home to solicit an investment.

3. The court ruled that violation of California's broker-dealer registration requirement (Cal. Corp. Code Sec. 25210) is a general intent crime. Thus, guilty knowledge is not an element of the crime. (For example, the defendant does not have to know that he or she is selling securities.) However, the defendant's good faith believe that he or she is not required to be licensed is an affirmative defense.

4. It should be noted that the defendants' failure to disclose that they lacked a B-D license also supported criminal convictions for selling securities by false statements or omissions (Cal. Corp. Code Sec. 25401).

- Broc Romanek

January 22, 2008

The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!

On CompensationStandards.com tomorrow, join Dave, Mark Borges, Ron Mueller, Alan Dye - and SEC Staffer Mike Reedich from Corp Fin's Exec Comp Task Force - for the first part in a two-part webconference: "The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!"

Among the important topics that will require up-to-the-minute guidance, the Conference will cover:

- What are the SEC Staff’s latest positions from their recent waves of comment letters - and upcoming Staff Report - such as the Staff’s new expectations for the CD&A, including specific suggestions and examples
- How to overcome the unexpected challenges from the Staff’s comment letters
- What are examples of what companies intend to change in this year’s proxy disclosures
- How to analyze and disclose perks, including how to determine whether something is a “perk”

Upcoming House Hearing on Severance Pay

Rep. Henry Waxman (D-Cal.) has asked Charles Prince, Stanley O’Neal, and Angelo Mozilo to testify at a February 7th hearing on severance pay (here are the letters sent to the executives and other requests for testimony). Until recently, Mr. Prince was the CEO of Citigroup and Mr. O’Neal was the CEO of Merrill Lynch; each took home around $40 million and $161 million, respectively, after being forced to retire after their firms suffered heavy losses from mortgage investments. Mr. Mozilo is the CEO of Countrywide Financial, who is expected to receive a $115 million payout if a planned buyout by Bank of America is completed.

According to RiskMetrics: “You should plan to address how [your severance package] aligns with the interests of … shareholders and whether this level of compensation is justified in light of your company’s recent performance and its role in the national mortgage crisis,” Waxman wrote in his letter to the three executives.

On Jan. 17, Waxman's committee sent out another round of letters--this time to current employees of the three companies, requesting documents and testimony on the process used to decide on severance packages for O'Neal, Prince, and Mozilo. Waxman called on John Thain, Merrill Lynch's new CEO; Vikram Pandit, the new CEO of Citigroup; and Mozilo himself, who still serves as CEO at least until the Bank of America takeover, to submit to the committee copies of all documents related to drafting the severance agreements at each company - including the names of outside consultants hired to help the board's compensation committee draft the agreements. The executives will have until Jan. 25 to submit the documents to the oversight committee, the letter states.

Three additional letters, also sent on Jan. 17, went to the respective chairmen of each company's compensation committee. Harley Snyder of Countrywide, John Finnegan of Merrill Lynch, and Richard Parsons of Citigroup were asked to appear at the Feb. 7 hearing committee hearing to address how the executives' severance pay was determined, and "on what basis [the] [b]oard of [d]irectors decided to approve [the] pay package," Waxman wrote.

Survey Results: Compensation Committees and Compensation Consultants

Speaking of Rep. Waxman, given his keen interest in compensation consultant conflicts, it's a good time to report the survey results from our most recent Quick Survey, repeated below:

1. Does your compensation committee:

- have a policy that it will not employ any compensation consultants who perform services for management - 16.1%
- not have such a policy, but does not intend to employ any of the same compensation consultants as management - 51.6%
- employ some (or all) of the same compensation consultants used by management - 32.3%

2. In practice, how does your compensation committee go about hiring an expert for making recommendations regarding CEO compensation?

- Management offers up a consultant to the compensation committee that it finds acceptable, subject to committee approval - 44.3%
- Compensation committee left completely on its own to find and hire whatever consultant it wants - 50.8%
- Compensation committee has not hired an expert for setting CEO compensation - 4.9%

3. Assume the company already is using consultant A for general compensation advisory purposes, will your compensation committee:

- Use the same consultant to help set executive compensation - 36.1%
- Use a different consultant to help set executive compensation - 37.7%
- Too early to tell what the compensation committee will do going forward - 26.2%

4. Regarding compensation committee charters, the committee has:

- A charter that states that the compensation committee will be the sole entity in the company to hire compensation consultants specifically related to CEO compensation - 59.0%
- A charter that states that both the compensation committee and management have the authority to hire compensation consultants specifically related to CEO compensation - 18.0%
- A charter that does not address who hires compensation consultants - 23.0%

My Ten Cents on Consultant Conflicts: I think Rep. Waxman's interest in conflicts is somewhat unfounded. My experience is that the relatively few board advisors on CEO pay within big consulting firms really are walled off from the much larger departments doing more general HR work. There are more important processes broken in the CEO pay area that are more worthy of attention, such as the severance pay area for which Rep. Waxman has called this hearing on...

- Broc Romanek

January 21, 2008

Third Company Adopts “Say on Pay”

With a hat tip to RiskMetrics, the New York City Comptroller’s office announced in this press release that Par Pharmaceuticals has agreed to adopt an annual shareholder advisory vote on executive pay. In October, a non-binding proposal received 56.8% support at the company’s annual meeting.

Par Pharmaceuticals is the 3rd company to agree to an annual advisory vote on executive pay. On CompensationStandards.com, we are maintaining a list of those companies that have agreed to adopt some form of "say on pay" in the "Advisory Shareholder Vote/Say on Pay" Practice Area.

Deadhead Flights and Incremental Costs

In the CompensationStandards.com "Q&A Forum," Dave just posted this answer in response to a query about what is the latest thinking about the inclusion of deadhead flights in calculating the incremental cost of personal use of corporate aircraft:

"I think perhaps the most significant development on including deadhead flight costs was John White's discussion of the issue in his September 6, 2006 "Principles Matter" speech. It was there that he said "[i]n my view, if a deadhead flight leg causes a company to incur incremental costs, those must be included in the calculation of the perk's value."

Even with those comments out there, in the 2007 proxy season we saw that few companies disclosed that deadhead flights have been included in the incremental cost calculation. As we noted in the November-December 2007 issue of The Corporate Executive, the inclusion of deadhead costs could increase the reported incremental cost number by as much as two to four times the amount disclosed.

Brink Dickerson of Troutman Sanders did a great presentation on Airplane Perks at our "4th Annual Executive Compensation Conference" back in October. His presentation and materials are archived on CompensationStandards.com, which includes a survey of airplane perks disclosures at many companies. You can also see the "best practice" model disclosure regarding airplane perks in the January-February 2008 issue of The Corporate Executive, where we recommend that deadhead costs and the loss of corporate tax deductions should be factored into the incremental cost calculation."

Don't forget to tune into the two-part webconference - "The Latest Developments: Your Upcoming Proxy Disclosures —What You Need to Do Now!" - that kicks off this Wednesday on CompensationStandards.com!

Course Materials: Forecast for 2008 Proxy Season: Wild and Woolly

Catch Pat McGurn of RiskMetrics tomorrow on our webcast - "Forecast for 2008 Proxy Season: Wild and Woolly" - to hear all the latest on the proxy season, including:

- What will be the hot topics for investors in 2008? How do they differ from what was hot this year?
- What changes in governance policies should companies now consider as broker votes may well be gone in 2009?
- What new positions were taken by RiskMetrics in their upcoming 2008 voting guidelines?

Pat always puts together some great course materials - and this year is no exception - please print out these course materials before you listen.

- Broc Romanek

January 18, 2008

The IR Department as Bloggers: Welcome to the 21st Century!

Last week, I was on the road in the Midwest to speak to a few groups about a variety of topics. These topics generally related to what I call the inevitable convergence of a number of disciplines. Before you know it, I believe the IR and corporate governance departments will merge within companies - with disclosure lawyers also becoming a part of that combination. Don't forget: with the SEC's e-proxy rulemaking a year ago, the government explicitly recognized that many shareholders will look to corporate websites for information about their investments. I believe many of us will have to develop skill sets that we currently don't have.

One of these skill sets is broadening our "journalistic eye" and joining the "conversation" that is happening online. I know many of you will chuckle if I predicted that at least 50% of the folks reading this blog will one day be bloggers - but I really feel that's not too outrageous a statement. (More on all this high-minded theory some other day.)

A case in point is the new "Dell Shares" blog, where members of Dell's IR department take turns blogging about IR issues. Very interesting and Dell is to be applauded. Taking a page from Sun Microsystems and other tech companies, Dell has a number of employees blogging (and even discussion forums on their site). Here is the popular "Direct2Dell" Blog, which focuses on the company's products and services (and is available in Spanish, Chinese and Norwegian).

My pet peeve with Dell Shares is the disclaimer that Dell's IR department forces us to click-through to get to its blog. As I commented on Dell Shares, I find it ironic that the IR department forces us to click through a disclaimer when the other Dell blogs don't have such a disclaimer - given that Dell's IR department likely is much more sensitive to what they should or shouldn't be blogging than others within the company. Don't let that stubborn lawyer voice within you place unnecessary obstacles to allowing yourself or others to be a part of the growing worldwide "conversation."

The NYSE's Annual Letter to Listed Companies

Yesterday, the NYSE sent its annual letter to listed companies to remind them of their of annual compliance requirements (there is a separate letter for foreign private issuers). The letter mentions that the NYSE's proposed corporate governance rule changes are still pending before the SEC and they continue to discuss them with the Staff.

The NYSE also updated its "2008 Notification of Record and Stockholder Meeting Dates," which listed companies should use to notify the NYSE of their record and meeting dates.

The FASB Codifies GAAP!

Wouldn't it be cool if the FASB codified GAAP? Impossible? No, it's being done (and I imagine it has to be done if the SEC's XBRL taxonomy project is to be accurate). On Wednesday, the FASB issued this press release to launch the one-year verification phase of the FASB Accounting Standards CodificationTM (Codification).

During the verification period, constituents are encouraged to use the online Codification Research System to research accounting issues and provide feedback on whether the Codification content accurately reflects existing GAAP. The Codification content is not yet approved as authoritative so take it with a grain of salt. And you have to register as a user to try it out (even though its free).

- Broc Romanek

January 17, 2008

Proxy Statements: The Q&A Format

I'm a simple guy, so I dig the Q&A format of this Home Depot proxy statement from last year. For example, I think the Q&A format made it easier for the company's audit committee report (pages 66-68) to provide more useful information regarding the activities of the committee as compared to the boilerplate-type language that some companies use.

I've seen some companies use Q&A in the forepart of their proxy statement, but not many that use it for the entire document. One usability recommendation: don't use all caps for the questions (since that is hard for humans to read); rather, place the questions in boldface.

AFSCME's Proxy Solicitation Expense Proposals

As noted in RiskMetrics' "Corporate Governance" Blog, AFSCME intends (or has) submitted shareholder proposals seeking reimbursement for short-slate solicitation expenses at a handful of companies this coming proxy season. This is an alternative tactic to shareholder access that could render the access movement obsolete if it catches on.

In addition, according to RiskMetrics, AFSCME has now filed (or co-filed) binding proposals seeking shareholder access at four companies: Countrywide Financial; E*TRADE; Bear Stearns; and JP Morgan Chase. Additionally, CalPERS has submitted one to Kellwood.

Marty Dunn and other former senior Corp Fin Staffers will discuss all the latest types of shareholder proposals during our upcoming webcast: "The Former SEC Staff Speaks."

Analysis of Distressed Debt Survey

In this podcast, Evan Flaschen of Bracewell & Giuliani provides some thoughts about the survey his firm (along with Debtwire) conducted entitled "Survey: Distressed Debt Creditor Insight," including

- Why was the study undertaken?
- What were the study's major findings?
- What were the biggest surprises?
- What is the overall outlook for 2008 and are you seeing any evidence so far?

- Broc Romanek

January 16, 2008

Crank Up the Blog (and Firm Memo) Machine: Supreme Court Affirms Stoneridge

One of the reasons for the popularity of this blog is because it is one of the very few that covers corporate finance law. Perhaps it's because litigators love to talk more, but there are far more securities litigators blogging than financiers. Boy, do those litigators love a Supreme Court case - particularly one as tantalizing as Stoneridge, which was decided yesterday by SCOTUS. And in record time, the law firm memos started rolling in - we are posting them in the "Aiding & Abetting" section of the "Securities Litigation" Practice Area; here is a copy of the court opinion.

Here is a case summary from Dave: The theory of “scheme liability” as a basis for recovery against third parties in securities class actions bit the dust yesterday, with the Supreme Court's 5-3 ruling in Stoneridge Investment Partners v. Scientific-Atlanta. Ultimately, as stated in the majority opinion delivered by Justice Kennedy, the Court concluded that “the private right of action [under Section 10(b) and Rule 10b-5] does not reach the customer/supplier companies because the investors did not rely upon their statements or representations.” In his dissent, Justice Stevens states that the majority’s view of reliance “is unduly stringent and unmoored from authority.” Without scheme liability, plaintiffs will find it difficult to reach secondary actors involved in a fraud such as customers, suppliers – or perhaps even investment bankers – since the Supreme Court’s Central Bank decision cut off the ability to sue those third parties as aiders and abettors. Stoneridge represents yet another decision in a line of recent Supreme Court rulings that are hostile to plaintiffs and more favorable to business.
And for more detailed analysis, check out these litigation bloggers:

- "SCOTUS Blog"
- "D&O Diary Blog"
- "Truth on the Market"
- "Race to the Bottom"
- "Ideoblog"
- "Jake Zamansky’s Blog"

My Ten Cents: Policies Barring Executives from the Web

A few months ago, Whole Foods took the step to amend and restate the company's code of business conduct to bar top executives and directors from posting messages about Whole Foods, its competitors or vendors on any online forums (broadly defined to include blogs) that aren't sponsored by the company (unless approved by the board's nominating and governance committee). The restated code prohibits comments on third-party Web sites so executives will "avoid the actual and perceived improper use of company information. It not only bars postings that are anonymous, but also those under the person's real name. The bar applies to "company leadership," which includes directors, executive team members and regional vice presidents. The restated code (scroll to page 13) was disclosed in this Form 8-K.

I understand why the company took such an action, given the revelations that the CEO posted anonymous messages about the company and its competitors from 1999 through 2006 - and the SEC's and market's reactions to such revelations. But I hope that no companies would feel the need to follow Whole Food's "lead" here, because common sense should rein in company leaders from posting anonymous messages of the type made by the company's CEO (ie. misrepresenting oneself) and this is one area not crying out for yet another corporate policy.

In fact, I believe Whole Food's policy is too broad and would limit the company's leadership to engage in the important online "conversation." Ironically, Whole Foods is one of the few companies currently contributing to that conversation since it has allowed blogging by its leaders (at least the CEO; here is his blog). In today's world, the importance of being allowed to learn from like-minded individuals can't be overstated and the easiest way to do to engage them is through the Internet, either by e-mail or the Web.

One of the more influential books on my career is "The Cluetrain Manifesto," which essentially foretold the social networking/Web 2.0 craze that is here to stay. When the book was published in the late '90s, I saw the authors present here in DC at a local "Netpreneurs" event, complete with a guy in a Gorilla suit and beach balls being bounced above the crowd. Ah, those glorious '90s when I still had hair...

C'Mon, Step Up and Predict the Future


- Broc Romanek

January 15, 2008

The Latest E-Proxy Stats

Many of the companies I have spoken with continue to have a "wait and see" attitude about whether they will try voluntary e-proxy this year. The latest e-proxy statistics from Broadridge bear this out. Below is a summary of their findings as of the end of December; a more complete set of stats are posted in our "E-Proxy" Practice Area:

- 69 companies have used e-proxy so far (with 2 having to do a second notice); another 40 have committed to do e-proxy

- Size range of companies using e-proxy varies considerably; all shapes and sizes

- 2/3 of companies using e-proxy had routine matters on their meeting agenda; another 30% had non-routine matters proposed by management and 6% had non-routine matters proposed by shareholders

- Retail vote goes down dramatically using e-proxy (based on 51 meeting results); number of retail accounts voting drops from 17.1% to 4.0% (over a 75% drop) and number of retail shares voting drops from 28.0% to 13.3% (over a 50% drop)

- Real money can be saved; aggregate of $17.5 million net savings for the 69 companies

Foreign Private Issuers: May Try to Exclude US GAAP Even Before March 4th

Yesterday, the SEC posted this notice that it will entertain requests to allow foreign private issuers to file Form 20-Fs without US GAAP reconcilation even before the March 4th effective date of the SEC's new rules on the topic. The request has to be in writing to the SEC Staff (although they can call the Staff in advance to hash out their circumstances). Here is an excerpt from the SEC's notice:

In response to questions, the staff has advised companies that until this new rule is effective that they are subject to the existing rules regarding the inclusion of U.S. GAAP information in filings with the Commission. However, the staff is aware that some foreign private issuers with a fiscal year ending after November 15, 2007 that prepare their financial statements using IFRS, as issued by the IASB, will want to file their annual report on Form 20-F before March 4, 2008. These companies also want to exclude U.S. GAAP information from that filing. The staff does not want to discourage companies from filing their 20-F before March 4, 2008. Accordingly, these companies are encouraged to contact the staff in the Division of Corporation Finance to discuss this issue. These companies can contact either Craig Olinger – Deputy Chief Accountant (202-551-3547) or Wayne Carnall — Chief Accountant (202-551-3107) to discuss their particular facts or circumstances.

The staff also noted that this same release provides similar relief from the requirement to provide U.S. GAAP information if the financial statements are filed under Rules 3-05, 3-09, 3-10 and 3-16. Likewise, companies that intend to file financial statements with a fiscal year ending after November 15, 2007 that are prepared using IFRS, as issued by the IASB, that exclude U.S. GAAP information in a filing under the Securities Exchange Act of 1934 before March 4, 2008 are similarly encouraged to discuss their fact pattern with the staff.

M&A: The ‘Former’ SEC Staff Speaks

Catch the DealLawyers.com webcast tomorrow - "The ‘Former’ SEC Staff Speaks" - to hear former Senior Staffers from the SEC’s Office of Mergers & Acquisitions weigh in on the latest rulemakings - and interpretations – from the SEC. This webcast will provide a complete “bring-down” of what’s happening at the SEC - and provide practical guidance about what you should be doing as a result. Join:

- Dennis Garris, Partner, Alston & Bird LLP and former Head, SEC’s Office of Mergers & Acquisitions
- Jim Moloney, Partner, Gibson Dunn & Crutcher LLP and former Special Counsel, SEC’s Office of Mergers & Acquisitions

The grace period for DealLawyers.com has expired. As all memberships are on a calendar-year basis, if you haven't renewed, you won't be able to catch this webcast or this upcoming one: "MAC Clauses: All the Rage." So renew your membership today!

- Broc Romanek

January 14, 2008

Now Publicly Available: SEC's Executive Compensation Comments and Responses

For the subset of the 350 companies that were both reviewed by Corp Fin as part of the executive compensation review project and have received one of these "all clear" letters from the Staff, you will soon find your comment letter and response posted on the SEC's website. It looks like the Staff hung pretty close to the timeline of "45 days since the Staff started informing companies that they were clear," which is earliest that the Staff can post letters/responses pursuant to its own policy (which was confirmed in the Staff's Report on executive pay).

I just took a cursory swing through the SEC's database over the weekend and found these:

- Allstate - comment letter and response

- Bristol Myers - comment letter and response

- Berkshire Hathaway - comment letter and response

- Travelers Companies - comment letter and response

There's a few more out there and we've posted a more comprehensive list on CompensationStandards.com in a new "SEC Comments" Practice Area. Hopefully, somebody can prove me wrong - but it's quite challenging to run searches on the SEC's comment letter database - as well as the third-party providers' databases - to find these letters. The good ole boolean-type searches don't seem to work for these particular batch of letters...

Why the Blogosphere is Putting the "Hurt" on Mainstream Media

As everyone knows, mainstream media is in trouble, particularly daily newspapers. For example, the Washington Post has reduced its staff to such a degree that the "Business" section regularly runs a list of product recalls on its front page (and a majority of the Post's revenue stream now comes from its Kaplan Training enterprise; not its newspaper).

Here is a case in point why bloggers with greater knowledge in their niche can outdo the mainstream journalists. In this article from Saturday's Post, the reporter tries to make a story out of a fairly bland comment issued by Corp Fin last August asking how Berkshire Hathaway handles director nominations submitted by shareholders (comment letter and response are linked to above; note the article is written by a Bloomberg reporter, reaffirming how scantily the Post is devoting resources to business).

Here an excerpt from the article, which is entitled "Berkshire Hathaway to Formalize Director Nomination Procedure":

"The nominating committee does not have a formal policy by which shareholders may recommend director candidates," the SEC wrote in a letter to Hamburg dated Aug. 21. "Please state why it has no such policy, as required. Hamburg responded that company policy "will provide that Board of Director candidates recommended by shareholders will be evaluated using the same criteria as are applied to all other candidates." Hamburg didn't return a call seeking comment. A subsequent SEC letter to Hamburg, dated Nov. 27, said its review of Berkshire was complete, with no further comments.

A few years ago, the SEC added Item 7(d)(2) of Schedule 14A to require companies to disclose in their proxy statements if they have a "nominating or similar committee" and "whether the committee will consider nominees recommended by security holders” and, if so, “describe the procedures to be followed by security holders in submitting such recommendations." Apparently, Berkshire Hathaway forgot to include a description of their procedures in their proxy statement. From their response, it seems like the company will simply codify their existing procedures in a policy. These procedures - that all candidates are considered based on their qualifications - are pretty much the same as 99% of Corporate America.

These typical procedures are the backdrop of the ongoing extensive battle over proxy access. Very few companies receive nominations from shareholders (and I mean very few) because it's unlikely that their candidates will have the skill sets that boards are looking for - and of course, because they haven't gone through the board's recruiting process that often takes as long as six months. Most shareholders realize its a futile exercise and don't bother to submit nominations.

So the fact that Berkshire Hathaway will add this disclosure to their proxy statement is not really news at all. Rather, my opinion is that it's a reporter's lack of understanding about how the Corp Fin comment process works. Not surprising since it would be hard for an industry outsider to know...

The Latest on Fairness Opinions

We have posted the transcript from our recent DealLawyers.com webcast: "The Latest on Fairness Opinions."

- Broc Romanek

January 11, 2008

CD&A: “To Be Competitive” is Not Analysis

We just mailed a Special Supplement to The Corporate Counsel, highlighting a potential trap for those in the process of preparing their CD&As. When seeking to justify compensation amounts, companies may be lulled into saying that they pay those amounts “to be competitive” – which may, in fact, become a red flag to highlight compensation decisions that were made without critical analysis. In this regard, it is not enough to merely describe analytical tools such as tally sheets – issuers need to provide the critical analysis and what is done in response to that analysis. Take a look at our final copy of the January-February 2008 issue of The Corporate Executive for examples of how the necessary analysis – and the actions taken in response to that analysis – can be described in your CD&A.

In order to keep this sort of essential guidance on your proxy disclosures coming, be sure to renew your subscriptions to The Corporate Counsel and The Corporate Executive today. If you are not yet a subscriber, we encourage you to take advantage of a no-risk trial.

GAO Study on the Audit Market: No Immediate Action Required

The Government Accountability Office has released another study of the market for audit services (the last study was mandated by the Sarbanes-Oxley Act), and this time the GAO reports that while there is significant concentration of auditors for large public companies, there is no need for Congress to step in at this point.

The GAO noted that 82 percent the Fortune 1000 saw their choice of auditor as limited to three or fewer firms, and about 60 percent viewed competition in their audit market as insufficient. Smaller companies, on the other hand, reported that they were satisfied with the auditor choices available to them. The study noted that concentration in the audit market for large companies is likely to continue, particularly given the challenges faced by those smaller accounting firms seeking to audit more public companies. The GAO also considered steps that have been suggested to increase competition – such as capping auditors’ liability – but it did not recommend that any such steps be pursued at this time.

The GAO’s findings will be food for thought for Treasury Department’s Advisory Committee on the Auditing Profession (discussed in this blog), which is expected to issue a report this summer.

All Quiet on the Corp Fin Front?

After such a huge push in rulemaking during 2007, it is understandable (and perhaps welcome) that Corp Fin has not announced any significant rulemaking projects over the next six months. The recently released Unified Agenda (also known as the Semiannual Regulatory Agenda) – which summarizes the rules and proposed rules that each Federal agency expects to issue during the next six months – doesn’t list any new rulemakings on Corp Fin’s plate in the coming months. On some outstanding rule proposals and solicitations of comment, such as proxy access, the next action is listed as “to be determined.” For the executive compensation rules, the agenda lists a projected final action in May 2008, so it remains to be seen what is contemplated on that front.

Absent from the latest Unified Agenda are some of the potential rulemaking initiatives that the Staff has been talking about over the past year or so, including rules regarding voluntary filers, amendments to Item 4.02 of Form 8-K, and the roll-out of mandatory interactive data. But the fact that a rulemaking doesn’t make it to the Unified Agenda is by no means a signal that it is not going to happen in the near future, because plans can change pretty quickly at the SEC these days.

- Dave Lynn

January 10, 2008

More Bad PIPEs Law

A few months ago, I blogged about the case of SEC v. John F. Mangan, Jr. and Hugh L. McColl, III, where the court dismissed the SEC's allegations that Mangan violated Section 5 by shorting PIPE shares before the resale registration was declared effective, and then covering the short sales with the PIPE shares after the resale registration statement was effective. As if that ruling wasn’t bad enough for the SEC, last week a judge in the Southern District of New York issued this opinion reaching the same unfortunate result in the case of SEC v. Edwin Buchanan Lyon, IV and his Gryphon Partners entities.

You can read more about these decisions (including our take) – and what the SEC intends to do about them – in the just-mailed November-December issue of The Corporate Counsel. Since all of our publications are on a calendar-year basis, renew your subscription to The Corporate Counsel today. If you are not yet a subscriber, we encourage you to take advantage of a no-risk trial, so you can get the latest analysis on topics such as this in The Corporate Counsel.

NASDAQ Rewrites its Rulebook

Recently, NASDAQ unveiled a proposed rewrite of the NASDAQ Marketplace Rules applicable to companies listed on the NASDAQ Stock Market. NASDAQ’s goal is to make the rulebook clearer and easier to understand by simplifying the organization and presentation of the rules, as well as the language of the rules themselves. This commendable effort does not appear to be directed at changing the substance of the initial and continued listing standards, but rather to present those standards in a more user-friendly way.

NASDAQ has put the proposed rulebook out for public comment until February 1, 2008, and it plans to file the proposed rule changes with the SEC by the end of the first quarter.

SAB 108 Implementation

Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, was issued to address the diversity in practice concerning the quantification of errors that arose in prior years, and it was effective for fiscal years ending after November 15, 2006. The SAB requires companies to use both the “iron curtain” and “rollover” approaches when quantifying misstatement amounts. SAB 108 does not require previously filed reports to be amended when companies correct prior-year financial statements for immaterial errors – rather, the errors may be corrected the next time the company files the prior year financial statements.

Audit Analytics recently published a study of companies adopting SAB 108 for years ended from November 15, 2006 to June 30, 2007. The study notes that a relatively small number of companies (296) have adopted SAB 108 in their 10-Ks. The companies making adjustments under the SAB were concentrated in a few industries, with finance and insurance companies comprising the largest sector. Clients of KPMG accounted for almost 40% of the total companies adopting SAB 108. Audit Analytics indicates that the relatively low number overall - and the concentration in some industries - may be accounted for by the lack of restatements among those companies or industries, where immaterial errors would have likely been corrected in the course of restating the financials. The study indicates that errors affecting liabilities and reserve accounts and tax accounting errors made up bulk of corrections under SAB 108.

- Dave Lynn

January 9, 2008

DOL Guidance on Proxy Proposals

The U.S. Department of Labor recently issued Advisory Opinion 2007-07A to the U.S. Chamber of Commerce, responding to the Chamber’s concerns about “the use of pension plan assets by plan fiduciaries to further public policy debates and political activities through proxy resolutions that have no connection to enhancing the value of the plan’s investment in a company.”

Mike Melbinger notes in his CompensationStandards.com blog: “By way of background for those not familiar with ERISA, the DOL has long considered the right to vote proxies related to a retirement plan's stock holdings as a valuable asset of the plan. In Advisory Opinion 2007-07A, the DOL said:

‘Under section 404(a)(1)(A) and (B) of ERISA, plan fiduciaries must act solely in the interest of participants and beneficiaries and for the exclusive purpose of paying benefits and defraying reasonable administrative expenses. In our view, plan fiduciaries risk violating the exclusive purpose rule when they exercise their fiduciary authority in an attempt to further legislative, regulatory or public policy issues through the proxy process when there is no clear economic benefit to the plan. In such cases, the Department would expect fiduciaries to be able to demonstrate in enforcement actions their compliance with the requirements of section 404(a)(1)(A) and (B).
* * *
Consistent with these various pronouncements, the use of pension plan assets by plan fiduciaries to further policy or political issues through proxy resolutions that have no connection to enhancing the value of the plan’s investment in a corporation would, in the view of the Department, violate the prudence and exclusive purpose requirements of section 404(a)(1)(A) and (B).’

Those of us familiar with ERISA's fiduciary requirements were sometimes curious as to how some union plan fiduciaries could square their proxy activism with ERISA. Apparently, the DOL was too.”

An Uptick in Securities Fraud Class Action Lawsuits

The latest study from Stanford’s Securities Class Action Clearinghouse and Cornerstone Research finds that the number of companies sued in securities fraud class action lawsuits rose 43 percent between 2006 and 2007, up from 116 in 2006 to 166. The current level of litigation activity still remains well below the ten-year historical average of 194 companies sued per year.

The study attributes the 2007 jump in cases to the subprime mortgage mess and increasingly choppy market conditions. Lawsuits against companies in the finance industry more than quadrupled to 47 in 2007, with 25 of those cases involving subprime issues.

In a demonstration of longevity, the study finds that of the 2,218 securities class action cases filed since 1996, 19 percent are continuing - primarily those filed in the past few years. Among the 81 percent of cases that have been resolved, 41 percent were dismissed and 59 percent were settled.

Among the other notable 2007 class action litigation developments cited in the study were:

- William Lerach’s guilty plea;
- The JDS Uniphase trial, notable in that the case actually went to trial and the defendants won; and
- The Supreme Court’s decision in Tellabs v. Makor

It now appears that the two-year lull in class action activity is over, and continued market volatility (like the day we had yesterday) seems likely to help propel the upward trend for the time being.

Heads Up on New Rule 144 Changes

Protect your company (and your key executives and clients) by learning what you need to know by catching our January 30th webconference - "New Rule 144: Everything You Need to Know - And Do NOW." The conference will be archived in case that date doesn't work for you.

Jesse Brill, Bob Barron and Alan Dye are busy working on the Key Conference Materials, which will provide the specific procedures, new memos, legends, representation letters, etc. that you will need to protect yourself. Take advantage of reduced rates for those of you that use the TheCorporateCounsel.net and The Corporate Counsel by registering online or via this order form.

- Dave Lynn

January 8, 2008

Smaller Companies: How Your 10-K Changes This Proxy Season

With the SEC's recent overhaul of the regulatory framework that applies to smaller companies, we have decided to do a webcast - "Smaller Companies: How Your 10-K Changes This Proxy Season" - in two weeks to help you navigate the changes to your Form 10-K this proxy season. This webcast will not just recap the new rules; instead, you will receive practice pointers on how to prepare your Form 10-K this proxy season, with a focus on what changes you need to make this year due to the new rules and regulations.

On the webcast, John Jenkins of Calfee, Halter, Harry Pangas of Sutherland Asbill and I will address - among other topics:

- What are the less obvious changes to your 10-K that you need to be aware of?
- What are the pros and cons of the a la carte approach? Where does it make a real difference regarding the amount of work - and does it have any ramifications to use the reduced disclosure in one place and not in others?
- Do smaller companies have to change their 10-K or 10-KSB this year?
- A laundry list of practice pointers to help you hit the ground running

Since all memberships are on a calendar-year basis, you will need to renew your membership to catch this webcast as well as the one featuring Pat McGurn on January 22nd: "Forecast for 2008 Proxy Season: Wild and Woolly."

Corporate Governance Survey Results from Shearman & Sterling

Recently, Shearman & Sterling released its annual survey on corporate governance practices of the 100 largest U.S. public companies. Among the trends described in the survey are:

- Majority voting continues to make headway as companies respond to shareholder pressure, with 56 of the 100 largest companies now requiring directors to be elected by a majority of the votes cast rather than a plurality (except, for the most part, in contested elections).

- Anti-takeover measures such as “poison pills” and classified boards continue to be on the decline. Only 17 of the 100 companies surveyed had poison pills in place, down from 33 in 2004, while 33 companies had classified boards, down from 54 in 2004.

- Independent directors comprise 75% or more of the boards of 87 of the surveyed companies, while the CEO is the only non-independent board member at 40 of the 100 largest companies.

- Of the 22 top 100 companies at which separate individuals serve as Chairman and CEO, only 5 have adopted policies requiring separation of those roles.

- Half of the surveyed companies have placed a limit on the number of boards on which a director may serve, up from 29 of the top 100 companies in 2004.

- Of the 66 surveyed companies addressing the topic of term limits for directors, only 3 have adopted mandatory term limits for their directors.

- 86 of the top 100 companies have disclosed a mandatory retirement age for their non-employee directors, with 72 being the most common mandatory retirement age.

- Of the top 100 companies, 71 disclosed related person transactions, with employment of a relative of a related person being the most commonly disclosed transaction.

Delinquent Filer ABCs

Last Friday, the SEC imposed 10-day trading suspensions on twelve companies, all starting with the letter “A.” The SEC said that it suspended trading in the securities of these companies because they had not filed periodic reports in over two years. A temporary trading suspension may last well beyond the 10 business day period contemplated in Exchange Act Section 12(k), because brokers cannot resume quotations until they determine that the issuers have satisfied the informational requirements of Rule 15c2-11. Often, the SEC will follow temporary trading suspensions with actions to revoke the company’s Exchange Act registration under Exchange Act Section 12(j). Here is the order for the first six companies and the order for the second six companies.

Given that they only got to Alford Refrigerated Warehouses, Inc. so far, it looks like the Enforcement Staff is just getting started on a potentially long list of delinquent issuers to target in 2008.

- Dave Lynn

January 7, 2008

Final Copy: Model CD&A Disclosures

We just mailed the final copy of the January-February 2008 Issue of The Corporate Executive, which provides model CD&A disclosures. We had posted an advance copy of this issue last month; there are slight changes from the advance copy. As all subscriptions are on a calendar-year basis, renew your subscription for '08 to receive this issue.

Or if you aren't a subscriber yet, try a no-risk trial. I will be writing the lead piece in each issue of The Corporate Executive this coming year.

The '07 IPO Market That Few Talked About

A few weeks back, the WSJ ran this article about how a fourth of the IPOs in '07 were blank check offerings. And here is an excerpt about the '07 IPO market from Renaissance Capital’s "2007 Annual IPO Review":

"During 2007, all of the talk about IPOs was that London and Hong Kong were stealing the New York IPO market’s thunder. But, with the largest number of IPOs and highest dollar volume since 2000, the 2007 U.S. IPO market performed well against the backdrop of the subprime and credit market crises. Driving the IPO market were fast growing Chinese companies in search of US capital and hot U.S. technology companies. Although IPOs were mostly immune from the problems of foreclosures, bad loans and deteriorating credits, the four largest issuers this year were financial companies, two of them money managers whose investments were potentially in these now contaminated realms of the credit markets. Technology continued its rebound, although performance was bifurcated, with sought after on-demand and virtualization software companies soaring and smaller names tanking.

Not all of the IPO action occurred in the US, however. The London Stock Exchange continued to attract European issuers, although many of its IPOs were smaller. But the LSE didn’t produce any global marquee names this year. Instead, the headline grabbing issuers were Chinese companies eschewing the New York exchanges for Shanghai and Hong Kong.

The 2007 was notable for the following:

- Highest volume and proceeds raised in seven years
- 2007 IPO first day pop and aftermarket returns were good but below 2006
- The Renaissance IPO Index® significantly outperformed the major indices
- Largest issuers were financials, which had disappointing debuts
- The majority of top performers were Chinese IPOs
- Stop the presses! Worst performers weren’t mostly biotech
- Tech IPOs were the largest component of the calendar, followed by healthcare
- Establishment of Hong Kong and Shanghai as hubs for hot IPOs
- Non-US exchanges Woo IPOs
- International activity, lead by China, continued to be strong
- Tremendous demand for small, high growth companies
- More Profits on the Come as Tech Deals Dominated
- Our predictions for 2008 are offered
- Highest Volume of IPOs and Proceeds in Seven Years

Deal volume was up 16% and proceeds raised increased 23% over 2006. The average market capitalization of IPOs rose as well, due to a continuing number of megadeals as well as investor preference for companies with credible track records."

Foreign Private Listings on the NYSE Rises During '07

According to this NYSE page, there were 42 new foreign companies listed on the NYSE during 2007, bringing the total number of foreign companies listed to 424. A pretty good year compared to the 29 listed for 2006, 19 listed for 2005 and 20 listed for 2004.

By the way, the SEC posted its adopting release regarding the ability of foreign private issuers to use International Financial Standards without US GAAP Reconcilation a few weeks back.

- Dave Lynn

January 4, 2008

Chancellor Chandler Elaborates On Special Committee Waiver Ruling

Travis Laster notes: You might recall Chancellor Chandler's November 30th opinion in Ryan v. Gifford, in which the Chancellor ordered production of communications between a special committee created to investigate option backdating and its counsel. The Chancellor provided two bases for his ruling: first, a traditional "good cause" analysis under Garner v. Wolfinbarger, and second, a more novel analysis in which the special committee was found to have waived privilege by presenting its report orally to the full board, including directors who were the subject of the investigation.

The company (but notably, not the committee or its counsel) sought interlocutory review of the waiver analysis in the November 30th decision. In a new opinion (posted in our "Options Backdating" Practice Area on CompensationStandards.com), the Chancellor denied the application, noting that the company did not challenge the Garner analysis and thus any appeal would be futile.

More importantly, the Chancellor's new opinion goes into much greater detail regarding the various factors that caused him to find a waiver from the presentation to the full board. These included (i) the lack of Special Committee authority to take action independently of the full board, (ii) the broad scope of the investigation combined with the absence of any written report presenting the committee's findings, (iii) the fact that directors who were the subject of the investigation had their personal counsel present to hear the report, (iv) the willingness of the company to refer to the committee's work in public filings and communications with regulatory authorities, and (v) the extensive reliance by the individual defendants on the exculpatory effects of the committee investigation, including in a subsequently withdrawn summary judgment brief.

The Chancellor also takes pains to confirm the narrow scope of his ruling: "[I]t is worthwhile to repeat that the relevant factual circumstances here include the receipt of purportedly privileged information by the director defendants in their individual capacities from the Special Committee. The decision would not apply to a situation (unlike that presented in this case) in which board members are found to be acting in their fiduciary capacity, where their personal lawyers are
not present, and where the board members do not use the privileged information to exculpate themselves. Similarly, the decision would not affect the privileges of a Special Litigation Committee formed under Zapata, or any other kind of committee that (unlike the Special Committee here) has the power to take action without approval of other board members."

The Chancellor's ruling thus does much to limit the potentially broad sweep of his earlier and much briefer opinion. Future special committees can still expect to see plaintiffs make waiver arguments based on Ryan, but it should be far easier for counsel to navigate around the waiver problem based on the additional analysis that the Chancellor has now provided.

SEC Staffer Added to Executive Compensation Disclosure Webconference

I'm excited to announce that Mike Reedich, a key member of the SEC's Division of Corporation Finance's Executive Compensation Review Team has joined the panel for the first of two webcasts for our upcoming program: "The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!"

Since all memberships are on a calendar-year basis, you will need to renew your CompensationStandards.com membership to catch Mike, Dave Lynn, Mark Borges, Ron Mueller and Alan Dye on January 23rd and 31st.

Reaction: The Corporate Library Reports on Compensation Consultants

Here are some thoughts from an anonymous member about Dave's blog on a study from The Corporate Library finding that companies using compensation consultants tend to pay higher CEO compensation, and such compensation levels do not necessarily relate to increased shareholder returns:

"I cannot help but comment on the The Corporate Library report that you blogged about. I am very concerned about anyone relying on or using the results of The Corporate Library Report. The methodology is so flawed that I seriously question the validity of the report. It also demonstrates a complete lack of understanding of executive compensation practices. For example:

- It combines STIs and cash long-term incentive plans and then measures them as a percentage of base salary, with no reference to the peer groupings. The results could simply be a function of which companies have cash LTIPs in addition to STI plans, the mix of compensation elements at those companies, as well as the revenue sizes of the companies that each consultancy has as clients.
- It tries to measure long-term incentives by vehicle (e.g., stock options separately from performance plans), when the mix of LTI vehicles varies widely from company to company
- It ignores restricted stock grants and performance shares, significant elements of executive pay.
- It ignores the types of clients that the consultancy firms have. For example, some consultancy firms have a higher concentration of high-tech company clients, which generally focus on stock options (e.g., Compensia, Radford).
- It ignores the fact that many companies use 162(m) bonus pools in the Grants of Plan-Based Awards table which distorts what is actually attributable to the incentive plans
- It doesn't look at total pay
- While detailing the average target value of all performance-related equity awards and average maximum value as a percent of target for nonequity compensation for companies using consulting firms, the Report does not indicate those percentages for companies not disclosing they used compensation consulting firms. Thus, the numbers provide no comparison on which to make a judgment on the effect of compensation consulting firms on this issue.
- It does not acknowledge an obvious finding which is there is not a correlation of higher CEO pay to multi-service firms. In fact, the data appears to support a different conclusion, i.e., higher CEO pay is associated with boutique executive compensation consulting firms. This seems to indicate that independence is not an issue at multi-service firms.
- Finally, we disagree that compensation firms have very different methods of designing executive compensation practices. Our experience is that other factors are much more relevant, including the company's pay objectives, business strategy, competitive market for talent, life cycle, and culture, than the consulting firm or individual practitioners at those consulting firms."

- Broc Romanek

January 3, 2008

More Speeches, Thoughts (and Notes) from the Recent AICPA Conference

Last week, this AICPA Conference speech from SEC Deputy Chief Accountant Julie Erhardt was posted (the Conference was held a few weeks ago); it does a nice job summarizing the comments received on the SEC's concept release regarding the use of IFRS by US issuers. In addition, these AICPA speeches from Associate Chief Accountants were posted:

- Joel Levine's speech on XBRL
- Steven Jacob's speech on MD&A; and 404 internal control implementation issues
- Stephanie Hunsaker's speech on consents and experts; consolidation method to the equity method for an investment; and MD&A disclosures in the current credit environment
- Todd Hardiman's speech on large errors and materiality

We have posted notes from the Conference in our "Conference Notes" Practice Area. And here are some Conference insights from Jack Ciesielski's "AAO Weblog":

"I spent Monday through Wednesday attending the largest conference devoted to current events affecting financial reporting, featuring plenty of the SEC's staff - the ones who interact with the auditors examining the year end financials. And I'm wondering: when did the SEC become afraid of its own shadow? There seemed to be an overwhelming aura surrounding the SEC presenters, a kind of self-consciousness that they be careful to not "write GAAP" in the delivery of their speeches to the audience.

When this conference first began thirty-five years ago, the intent was to bring the SEC's thinkers and doers in front of a large audience of auditors, to discuss the problems they'd seen in filings with the audience. The intent was not to "speechify GAAP" - but to get the message out as to the problems they'd seen and describe how they handled it. The goal: to identify troublesome practice issues and tamp them down before they became pervasive by presenting them to the auditors who could do something about it. That's a worthwhile service to everyone involved in the financial reporting chain, from preparers down to users and the auditors in between.

That's not writing GAAP - that's being an effective regulator. (And don't forget that writing GAAP is something that the SEC is empowered to do.) Preventing problems through effective communication has always been at the heart of this conference. And this effective communication worked quite well long before the advent of Blackberries and the internet - accounting firms responsible for keeping their SEC knowledge current seemed to get the message quite well by the state-of-the-art information distribution means, like overnight delivery and fax machines.

Now that there's virtually instant transmission of data, including the publication of all the speeches on the SEC's website at no charge to readers, critics are complaining about the dissemination of the comments in the speeches as being unfair. Absurd.

The comments of the SEC commentators were full of reminders of current GAAP, but missed the pithiness of years past when they described fact patterns that showed how a standard was misinterpreted or misapplied, and how they expected it to be remedied if encountered in practice by members of the audience. Instead, many of the commentators offered comprehensive reminders of where trouble might occur in the application of new accounting standards, rather than reporting on the known snafus they'd seen. Instead of warning registrants and auditors about problems they'd seen, it'slike they're wish-listing problems they hope don't happen. While there's value in that approach, there might be a lot more value in what they'd done in the past. Shouldn't regulators act like regulators, instead of acting like their walking on eggshells?"

SEC Delays Direct Registration Deadline Until March 31st

Recently, I blogged about some quirks in the new direct registration program. In this adopting release issued last week - which approves the Exchanges' rule changes on an accelerated basis - the SEC extended the deadline for listed securities to be eligible for inclusion in the direct registration framework from January 1st to March 31st.

The SEC's release states ". . . .there has been some confusion regarding the steps the listed companies need to complete to become compliant with these requirements. As a result, certain listed companies are still in the process of completing the necessary steps, which could include modifying their by-laws or having their boards take other actions, to become DRS eligible. In addition, in some cases, even though a listed company has completed all actions required to be taken by the company to become compliant, the company’s transfer agent is still completing the process necessary for the transfer agent to facilitate the company’s DRS eligibility.

In order to assure that listed companies have adequate opportunity to comply with the listing standards that require listed securities to be eligible for inclusion in a direct registration program, each of the Exchanges is proposing to extend the effective date for its DRS eligibility requirement until March 31, 2008."

Section 16 Year-End Compliance Checklist

On Section16.net, Alan Dye has posted his annual "year-end checklist" for Section 16 compliance purposes (including a Word version of the checklist, which is accessible via a link on right corner of this page).

Don't forget to catch Alan in this annual webcast: "Alan Dye: Keeping Yourself Out of the Section 16 ‘Hot Water’" on January 28th. As all memberships are on a calendar-year basis, you will need to renew before then to listen to the webcast.

- Broc Romanek

January 2, 2008

Renewal Time: Accept No Substitutes!

Since all our web site memberships and print publication subscriptions are on a calendar year basis, it is past time to renew. The grace period for our site memberships will expire soon – go to our "Renewal Center" today to renew online. Here is a PDF that is a universal order form with the 2008 prices for all of our publications and web sites.

White Paper: Enhanced Covenants for Investment Grade Bonds and No Plain English Disclosure

Recently, a group of more than 50 fixed income investment managers - under the umbrella of "The Credit Roundtable" proposed a set of model covenants for investment grade bonds in a White Paper. The proposed model covenants address perceived shortcomings in current protections in investment grade bond deals which, in the view of the investment managers, have eroded over time. In addition, the White Paper calls for "verbatim disclosure of indenture provisions in offering documents" and explicitly rejects "plain English" descriptions of covenants. I doubt the SEC is gonna like that. We have posted memos analyzing the White Paper (and the White Paper itself) in our "Debt Financings" Practice Area.

The Downsizing of the FASB

A few weeks ago, I blogged about the proposed FASB reorg. This CFO.com article discusses the proposed downsizing of the FASB. Lynn Turner notes: One thing to bear in mind is that Ed Trott left the FASB in June of 2007 before his term was over. Now it appears that Mike Crooch is walking away two years early before the end of his term is due to run out in 2010. While members have infrequently left before their terms were over in the past, I don't recall in the history of the FASB where - in consecutive years - Board members walked away like this.

It raises a serious question as to why they are leaving; whether or not there is a problem with the health of the organization; whether it is for personal reasons or whether it is something else that is driving these departures. In addition, I understand the current investor representative who is serving out a term of the prior investor representative, who did not complete his term, has been asked by the Chair not to re-apply. This is resulting in a turnover of a majority of the Board members between June 30, 2007 and June 30, 2008. These typically are not signs indicative of an organization where all is well.

- Broc Romanek