February 29, 2008

How the SEC is Tackling the Subprime Crisis

Recently, SEC Chairman Cox delivered a speech about the subprime crisis. The SEC's efforts include:

- Enforcement has created a Subprime Task Force to investigate possible fraud in connection with collateralized debt obligations and other subprime vehicles, as well as looking at whether bank holding companies and securities firms fully disclosed the risks of their CDO portfolios and valuations (and whether brokers followed suitability requirements in selling these securities).

- Market Reg (ahem, Trading Practices) is ramping up its "Consolidated Supervised Entity" program, which focuses on the quality of risk controls and liquidity for the largest banks, including the strength of their internal risk management and accounting issues related to off-balance sheet and CDO-related liabilities. I'm sure the newish Office of Risk Assessment will be providing input here.

- Corp Fin is reviewing the adequacy of disclosures by companies implicated in the subprime crisis.

If you want to brighten up your day with a little humor, take a look at this "Subprime Primer" that we have posted in our "Subprime" Practice Area.

Subprime Crisis: Congressional Pressure on the SEC

As noted in this article, Senator Jack Reed (D-RI) sent this letter to the SEC asking what is being done to increase transparency in the capital markets in light of the subprime, in particular why banks are not fully disclosing the risks posed by securitized loans. A few weeks ago, as noted in this article, Sen. Reed sent a similar letter to the FASB - and a letter to the IASB. These letters are posted in our "Subprime" Practice Area.

In response to a query in our "Q&A Forum" a few days ago, I breezed through some bank disclosures to review their "Risk Factors" and was surprised how few were tailored - even now - to what is happening in the markets and to each institution. Even though Kevin LaCroix reports in the "D&O Diary Blog" that the first subprime lawsuit filed has been dismissed, there are hundreds of credit-related lawsuits already filed (with undoubtably more to come) - so full disclosure would seem to be the wisest course.

Lynn Turner on the Recent Banking Crisis

Below are some thoughts from Lynn Turner, former SEC Chief Accountant, on what has been revealed recently at financial institutions:

Interesting that after the fiasco with the lack of controls at SocGen, we now have a control problem at AIG. And Merrill Lynch announced they didn't even have a chief risk officer, and CitiGroup has been sued over the lack of transparency in their financial reporting. It appears this is somewhat of a systemic problem among financial institutions that the banking and securities regulators failed to regulate and get fixed.

The amazing and stunning run of articles on SocGen raise questions as to whether:

1. SocGen and certainly its investors could have benefitted by increased transparency with respect to its internal controls and assurance on whether they were operating effectively (which clearly they were not).

2. Did SocGen notify its independent auditors, which are two of the Big 4 firms, when SocGen was tipped off as per below to the concerns? And did SocGen have a risk officer, that when they were tipped off, should have stopped these risky activities with a lack of internal controls?

3. Whether a similar situation could/does exist with a US financial institutions given the concerns cited with respect to a lack of timely settlements of derivatives around the globe. This would seemingly be a material weakness that should be reported to investors if it did exist. Certainly it is a major risk so let us hope independent auditors have examined closely and carefully controls over such transactions, along with the federal banking regulators.

4. Why SocGen called the trader a "rogue" when the bank was tipped off to concerns about his strategy in November, but allowed him to continue trading while he was apparently generating gains. It appears only when the trades turned to huge losses that he became a "rogue" and someone to be throw under the bus to save others.

The Role of Boards in the Subprime Crisis

In this podcast, Ken Daly, President of the NACD, addresses the role of directors in the unfolding subprime crisis, including:

- Does responsibility for some of the elements of this debacle lie with the audit committees of companies only or does it lie with the entire board?
- Is government regulation vs. self-regulation by directors the answer to this crisis?
- What did the boards know and were there reasons why the quality of information going to the boards was inadequate to assess the risks of subprime mortgages?
- Do directors need different training, background or communications to prevent repeats of the credit crisis?

- Broc Romanek

February 28, 2008

Samples: Converting a Form SB-2 to Form S-1

Bob Dow of Arnall Golden Gregory has been in the process of taking a Form SB-2 and amending it with a Form S-1, pursuant to the recent SEC rulemaking regarding smaller reporting companies (see these related memos). In that connection, he decided to try to find a few samples where other companies are doing the same - below are a few he found. He notes that some of them still have inconsistencies, such as references to the registration statement as SB-2 within the body (esp. under "Available Information," "Legal Matters" and "Signatures"); the title of the document varies ("S-1/A" "SB-2/A on Form S-1" etc.); and some have neglected to add the new filer status check boxes recently added to S-1. The samples include:

- Majic Wheels Corp.

- General Environmental Management

- Visual Management Systems

- Battery Control Corp.

- PerfectEnergy International Limited

- Monster Offers

- Patient Portal Technologies

CII Weighs In on Auditor Departures

In this podcast, Jeff Mahoney, General Counsel of the Council of Institutional Investors, discusses CII’s recent petition to the SEC for rulemaking regarding plain English disclosure of auditor departures, including:

- What is the current state of affairs with respect to disclosure of auditor departures?
- Why does CII believe that enhanced disclosure of auditor departures is necessary?
- Why do you think companies don't provide better disclosure of this area given its importance?

The Nasdaq Proposes to List SPACs

Last week, the Nasdaq Stock Market issued this proposal to create new listing standards that will relate to special purpose acquisition companies. Previously, even if a SPAC met Nasdaq's market and financial initial listing standards, Nasdaq would not list the SPAC. These determinations were based on concerns about the underwriters of some of the earlier deals and because a SPAC is a "shell company" that does not have current business operations.

Under the Nasdaq's proposal, Nasdaq would seek to list SPACs (whose listings are dominated by AMEX, according to this WSJ article) - albeit under more stringent listing standards compared to operating companies, including the following criteria:

- Gross proceeds from the initial public offering (IPO) must be deposited in an escrow account maintained by an insured depository institution as defined by the Federal Deposit Insurance Act or in a separate bank account established by a registered broker or dealer.

- Within 36 months of the effectiveness of its IPO registration statement, the company must complete one or more business combinations using aggregate cash consideration equal to at least 80% of the value of the escrow account at the time of the initial combination.

- So long as the company is in the acquisition stage, each business combination must be approved both by the company's shareholders and by a majority of the company's independent directors. Following each business combination, the combined company must meet all of the requirements for initial listing.

- Broc Romanek

February 27, 2008

Coming Soon: California Legislature to Fix E-Proxy Problem

Last week, as an "urgency measure," a bill sponsored by the California Corporations Committee was finally introduced in the California Legislature to address the e-proxy problem that I have been blogging about. It requires a 2/3 vote - but would take effect immediately if passed. Thanks to Keith Bishop for continuing to keep us apprised of the latest.

Broadridge's Latest E-Proxy Stats

In our "E-Proxy" Practice Area, we have posted the latest e-proxy statistics from Broadridge. As of January 31st:

- 96 companies have used e-proxy so far

- Size range of companies using e-proxy varies considerably; all shapes and sizes (eg. 38% had less than 10,000 shareholders)

- Bifurcation is not being used as much as I would have thought; of all shareholders for the companies using e-proxy, only 5% received paper initially instead of the "notice only"

- 0.76% of shareholders requested paper after receiving a notice

- 62% of companies using e-proxy had routine matters on their meeting agenda; another 30% had non-routine matters proposed by management; and 8% had non-routine matters proposed by shareholders

- Retail vote goes down dramatically using e-proxy (based on 61 meeting results); number of retail accounts voting drops from 18.3% to 4.4% (over a 75% drop) and number of retail shares voting drops from 28.8% to 12.6% (over a 55% drop)

Our "Voluntary E-Proxy" Survey Results

Here are the survey results from our recent "Quick Survey on Voluntary E-Proxy," repeated below:

1. Does your company intend to use voluntary e-proxy this year?
- Yes - 33.8%
- Maybe, not decided yet - 13.0%
- No, but maybe next year - 48.1%
- No, we will never use it since we intend to continue to send paper - 5.2%

2. If the answer to #1 is not "Yes," which of these reasons did the company consider?
- Concerned about reaching quorum - 21.6%
- Timeframe is too tight to complete proxy materials - 33.3%
- Timeframe is too tight because board/board committee meeting dates pre-set - 13.7%
- Too many shareholders will want paper - 19.6%
- Want to see how other companies fare with e-proxy - 74.5%

3. In case shareholders request paper, we intend to print this amount of proxy materials:

- 7% or greater - 56.5%
- 5-6% - 17.4%
- 4% - 5.8%
- 3% - 2.9%
- 2% - 1.5%
- Less than 2% - 7.3%
- Print materials on demand (such as making Xerox copies) - 8.7%

Please take a moment to answer this new "Quick Survey on More on Blackout Periods". Always a popular topic, we periodically conduct this type of survey, but it has been three years since the last one...

- Broc Romanek

February 26, 2008

How Corp Fin is "Clearing" Performance Target Comments

At an ALI-ABA conference last Friday, Corp Fin Director John White noted that the Staff has "cleared" about 70% of its targeted reviews of executive compensation disclosures, meaning that those companies had received a letter indicating that the review process was over.

The Staff is now using two types of letters to "clear" exec comp reviews. In addition to the typical letter from the Staff indicating that the comments are "all clear," the Staff is using a modified letter that states that the Staff "neither agrees or disagrees" with the company's conclusion about its basis for excluding performance targets; this leaves the door open for the Staff to challenge the exclusion at a later date. However, a company that receives this type of letter can consider the Staff's review complete. While its true the Staff could challenge the exclusion at a later date - most likely in a different filing - they won't consider the original comment on the 2007 proxy outstanding. Here is a sample of what the "neither agrees or disagrees" letter looks like.

We now have over 100 comment letters (and responses) posted on CompensationStandards.com - and you will want to read Mark Borges' recent blogs that analyze the meaning of specific comments, including this one that begins "to paraphase Alice in Wonderland, reading the publicly-available comment letters and responses gets "curiouser and curiouser."

The Section 162(m) Workshop (and Transcript Posted)

We have announced that our 162(m) program - "The Section 162(m) Workshop" - will take place on March 25th on CompensationStandards.com. This webcast will be held in a "workshop" style, where experts provide analysis of the numerous issues raised for specific types of employment arrangements, including guidance on what well-designed plans should look like under the IRS' latest guidance.

We have also posted the transcript from the recent webcast: "The New IRS Letter Ruling: How It Impacts Your Employment Arrangements, Accounting, Proxy Disclosures, Etc."

Postponed: This Thursday's House Hearing on Severance Pay

As noted in this WSJ article, the House Committee on Oversight and Government Reform was scheduled to hold a hearing - “Executive Compensation II: CEO Pay and the Mortgage Crisis” - on Thursday, but today it was announced that it was postponed. When it's re-scheduled, it should be a "doozy" as three current and former CEOs (Charles Prince, Stan O'Neal and Angelo Mozilo) as well as three chairs of compensation committees not only face the questions of Congress, but those of Nell Minow of The Corporate Library and the mayor of a town in Michigan hit hard by subprime. It should be some interesting theater...

Possible New SEC Commissioners?

In Saturday's WSJ, this article names four possible successors to Commissioner Paul Atkins (who is a Republican) when his term runs out this summer (Douglas Cox, Steven Guynn, Stuart Kaswell, Troy Paredes) - as drawn up by the White House - as well as lists the two Democratic candidates (Luis Aguilar, Elisse Walter) that have been sitting in the White House for some time.

- Broc Romanek

February 25, 2008

Hurdles to E-Delivery of Proxy Materials to Plan Participants

In this podcast, Randy Gegelman of Faegre & Benson explains how employers can deliver proxy materials to plan participants, including:

- How do the SEC’s e-proxy rules differ from the DOL’s guidance on electronic delivery?
- Does that mean that "notice only" method can’t be used for 401(k) plan participants?
- What have plan sponsors been doing?
- Is this strictly an ERISA issue or are there securities issues remaining on the table?

I'm not a big Oscars person, but this satirical montage is hilarious, particularly if you've seen any of the movies that were nominated for "Best Picture."

US Supreme Court: Individuals Can Sue under ERISA against 401(k) Plan Administrators

Last week, the US Supreme Court unanimous decided - in LaRue v. DeWolff, Boberg & Associates - that ERISA permits individual defined contribution plan participants to sue for fiduciary breaches that impair the value of plan assets in the individual’s plan account. This holding could have important implications for future ERISA litigation activity and present significant insurance coverage issues. Here is a copy of the opinion - and we have begun posting memos analyzing this case in our "ERISA Securities Litigation" Practice Area.

The ‘Former’ SEC Staff Speaks

We have posted the transcript from our recent webcast: "The ‘Former’ SEC Staff Speaks."

- Broc Romanek

February 22, 2008

IRS Provides More Guidance on Section 162(m) Position

Yesterday, the IRS published Revenue Ruling 2008-13, which provides guidance for identifying performance-based compensation for purposes of Section 162(m) and clarifies some of the open issues from the private letter ruling that I blogged about yesterday.

The ruling provides transition relief for awards with a "performance period" (but really meaning the service period to which the performance goal relates) that begins on or before January 1, 2009, or compensation paid pursuant to an employment agreement in effect today, and while that agreement continues in effect (determined without regard to extensions, including auto-extensions). In other words, the clarifications from this new ruling are (1) they expressly cover retirement now and (2) they give relief for a couple of years - and for existing employment agreements.

The transition period will be helpful - but it may not be as "long" as it sounds. Many contracts have automatic renewal provisions that may limit the transition relief (see the language "without respect to future renewals. . . including. . . automatic) - and the "voluntary retirement" holding will likely cause additional issues for companies. At least there will be some time to "negotiate" required changes with executives. Read more analysis of the ruling in "Melbinger's Compensation Blog."

Stay tuned for another CompensationStandards.com program - "The Section 162(m) Workshop" - that will take place next month to help you navigate the many issues that you will now need to consider.

California Supreme Court Dodges Internal Affairs Conflict Issue

Last week, the California Supreme Court issued its opinion in the appeal in Grosset v. Wenaas; I blogged about this case way back in 2005 and we have posted memos regarding this case in our "Internal Affairs Doctrine" Practice Area. From Keith Bishop:

The case involved a shareholder derivative suit and a Delaware corporation (JNI Corporation). The Court of Appeal applied Delaware law because the requirements for standing in a derivative action implicate the "internal affairs" of the corporation. The Court of Appeal also found - in the alternative that California imposed a continuous ownership requirement that was consistent with Delaware law. Accordingly, the shareholder was out of luck and he appealed to the California Supreme Court.

The Supreme Court found that because California and Delaware law have parallel continuous ownership requirements there is no conflict of law. Hence, it was able to avoid discussing the Delaware Supreme Court's decision in Vantagepoint Venture Partners v. Examen.

The case is important because it sets forth the California Supreme Court's analysis of California's shareholder derivative statute, Corporations Code Section 800. However, the opinion leaves unanswered how the California Supreme Court will deal with the internal affairs doctrine when it finds that California and Delaware corporate law are in conflict.

Inside Perspective of Accounting Fraud

In this podcast, Walter Pavlo, a money launderer, and Neil Weinberg, Senior Editor of Forbes, explain how they wrote a book about why someone turns to crime - in this case, the biggest accounting fraud ever (which occurred at MCI), including:

- What is the book about?
- Why did you write the book?
- What has been the most interesting feedback about the book?

- Broc Romanek

February 21, 2008

Progress Report: SEC's Advisory Committee on Improvements to Financial Reporting

Last week, the SEC's "Advisory Committee on Improvements to Financial Reporting" published a progress report, which includes 12 recommendations for the SEC to consider - many of them important and some of them far-ranging. The key themes include: increasing emphasis on investor perspective in financial reporting system; consolidating process of setting and interpreting accounting standards; promoting design of more uniform and principles-based accounting standards; creating a disciplined framework for increased use of professional judgment; and taking steps to coordinate US GAAP with IFRS. The Advisory Committee will issue a final report (with final recommendations) later this year. Here is a statement from Chairman Cox - and memos analyzing the Progress Report are posted in our "Auditing Process" Practice Area.

Yesterday, the SEC posted these recommendations for public comment, as they have done with other advisory committees. Like other advisory committee reports, there is a short 30-day comment period - given the importance of the issues, don't forget to weigh in.

E-Proxy: Broadridge's Candid Assessment

Yesterday, Broadridge posted this interesting article about how e-proxy is faring, which consists of excerpts from five interviews with in-house folks that have recently been through the voluntary e-proxy process. For these five companies, the costs savings have been real, but there have been some "lessons learned" about usability - as aptly noted by Dominic Jones in his "IR Web Report."

Ninety Law Firms Petition IRS on Section 162(m) Position

Last week's CompensationStandards.com webcast on the IRS' recent Section 162(m) private letter ruling was a blockbuster (audio archive available now; transcript coming soon) during which Ken Griffin of the IRS noted that further guidance should be expected from the IRS soon. To help their cause, 90 law firms signed off on this letter that was sent to the IRS on Tuesday. Stay tuned...

Kudos to those individuals that work hard to get so many firms to sign off on anything. Even with the ability to quickly communicate by e-mail these days, it amazes me when these collaborative efforts on short notice get completed. It's not an easy thing to do.

- Broc Romanek

February 20, 2008

What to Do If You Can't Timely File Your 10-Q?

Brink Dickerson of Troutman Sanders recently delved into the question of "what are the SEC Staff's most recent views with respect to what a company should do if it is unable to file a Form 10-Q - even after the extension provided by Form 12b-25 - because the company’s auditors have not completed their Reg. S-X 10-01(d) review?" This can occur due to a number of reasons, ranging from an untimely auditor resignation to a complex accounting issue that the auditors simply have not resolved.

Brink states that the Staff generally believes that it is best to disclose as much accurate information as quickly as possible, either through filing a Form 10-Q that has not been reviewed or a Form 8-K. When a Form 8-K is filed, practices range from disclosing just recent high-level operating results and limited other financial data in the body of the filing (or in a press release that is attached as an exhibit) to filing essentially complete financial statements (along with the MD&A) as an Exhibit 99. When the filing is ready to be made, the Staff may either seek the filing an unreviewed Form 10-Q - because of the accompanying certifications and the fact that investors naturally would look for a document labeled as a Form 10-Q for quarterly results - or the filing of a Form 8-K; here is where you may want to contact the Staff that handles your industry to see which approach they prefer.

In all events, Brink says that:
1. the lack of the review needs to be clearly highlighted through an introductory note (see the March 2001 Current Issues Outline Update)
2. the reasons for the lack of the review should be disclosed completely
3. the companies expectations with respect to filing a definitive Form 10-Q (or Form 10-Q/A) should be discussed
4. to the extent that any numbers could be expected to change as a result of the review, those numbers and, if possible, the potential outcomes should be discussed
5. columns containing financial information should be labeled “unreviewed”

Most critically, he points out that the importance of accuracy far outweighs the benefits of filing quickly, and companies should not file either a Form 10-Q or a Form 8-K if it does not have an appropriate level of confidence in the numbers that are disclosed. Unfortunately, a Form 10-Q that has not been officially reviewed by the auditors still will be substantially deficient for '34 Act purposes, so filing one will not solve Form S-3 eligibility issues. It will, however, help with investor and stock exchange relations - and may solve some covenant violation concerns caused by the absence of any filing. FYI, the review requirements for Form 10-Qs originate from this adopting release relating to audit committee disclosure from 1999.

SEC Certification of Delaware Law Issues

Last summer, the Delaware legislature amended the Delaware Constitution to permit the SEC to certify questions of law directly to the Delaware Supreme Court (one of the many things I have been meaning to blog about, but keeps getting bumped). In this podcast, J.W. Verret of Skadden, Arps and a recent law clerk for Vice Chancellor John Noble analyzes a host of recent Delaware law developments and issues, including:

- What did the Delaware legislature do last year?
- Has the SEC used this new ability yet?
- What are the types of issues that the SEC may ask for certification?
- Why are bylaws so important?
- How does Rule 14a-8 relate to Delaware corporate law?
- Does it matter whether a new proposed bylaw put forward by shareholders goes on the company's ballot?
- How clear is Delaware law on what a new bylaw can say?
- What is the likelihood the Delaware Supreme Court will accept a question certified from the SEC?
- What are the consequences of the SEC giving a no-action letter on a bylaw without pre-certifying?

MAC Clauses: All the Rage

Join DealLawyers.com tomorrow for the webcast – "MAC Clauses: All the Rage" – to hear from the experts on how "material adverse change" provisions are under more scrutiny than ever, causing some deal practices to change. These changing practices not only impact how lawyers negotiate deals, but they entail wide-ranging ramifications for dealmakers. The panel includes:

- Professor Steven Davidoff of Wayne State Law School and the "M&A Law Prof" Blog
- John Grossbauer, Potter Anderson & Corroon
- Travis Laster, Abrams & Laster
- Patrick Lord, Dechert
- Derek Winokur, Dechert

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

We have posted the transcript from Part II of the CompensationStandards.com webconference: "The Latest Developments: Your Upcoming Proxy Disclosures —What You Need to Do Now!"

- Broc Romanek

February 19, 2008

More on the 10-Q (and 10-K) Cover Page "Glitch"

A number of members e-mailed me after Friday's blog about the parenthetical on the cover page of the 10-Q (which is also on the Form 10-K cover page). The parenthetical states: (Do not check if a smaller reporting company).

One member noted that if you look at the PDF version of the SEC's adopting release - rather than the version published in the Federal Register - you will see that (on page 210) the parenthetical is located underneath the check box for "non-accelerated filer." He inferred that, since smaller reporting companies are non-accelerated filers, the SEC wanted smaller reporting companies to check only the box for "smaller reporting company" and not both boxes.

I agree that this makes sense if the parenthetical is properly lined up with "non-accelerated filer" (one wonders why a similar instruction isn't required to ensure a Large Accelerated Filer doesn't also check the "Accelerated Filer" box). The same check box disclosure also appears on the cover page of other forms - and the location of the parenthetical is consistent across all of the them, so it wouldn't appear that the parenthetical was an oversight, notwithstanding what was told by someone on the Staff to the members who fed me the information for Friday's blog.

SEC Proposes Changes to Foreign Private Issuer Reporting and Registration Requirements

Last Wednesday, the SEC proposed a series of amendments to its filing, disclosure and registration requirements for foreign private issuers. Among other proposed changes, the SEC would require FPIs to file their reports electronically on EDGAR (ie. no more paper filings) - and shorten the existing 6-month filing deadline for FPIs to file annual reports on Form 20-F to 90 days for large accelerated and accelerated FPIs and 120 days for smaller reporting FPIs. Here is the SEC's press release and Corp Fin's opening statement. Here is some analysis of the SEC's actions from Cleary Gottlieb:

Based on the description provided by the SEC staff, the proposed amendments would appear to have both positive and negative potential consequences for non-U.S. companies:

- On the positive side, the amendments would provide an automatic exemption from SEC registration for many non-U.S. companies that do not list or publicly offer securities in the United States, so long as they publish English versions of their home country annual reports and certain other documents on their websites. The current version of the exemption requires companies to submit an application to the SEC (which many companies do not do), and to submit paper copies of their home country documents to the SEC.

- On the other hand, the amendments would for the first time make eligibility for the exemption contingent on a company meeting substantive eligibility criteria: no more than 20% of its share trading volume can take place in the U.S. over-the-counter market, and it must maintaining a listing in its primary market. The current version of the exemption is available for all non-U.S. companies that do not list or publicly offer their securities in the United States.

- Additionally, the amendments would shorten the deadline for non-U.S. reporting companies to file their annual reports on Form 20-F, to 90 days after the end of a fiscal year for larger companies and 120 days for smaller companies. This proposal is likely to solicit significant comment, particularly in Europe where the home country reporting deadline is 120 days, as well as in other countries with home country reporting deadlines that are longer than the 90-day proposal.

The text of the proposed amendments is not yet publicly available, but should be published for public comment shortly. Once this occurs, it should be possible to assess more definitively the potential practical consequences of the amendments.

Impersonations on Earnings Calls

I found this WSJ article on Saturday fascinating about how someone has gained entry into a number of earnings calls recently to ask questions by impersonating well-known analysts. I caught up with Joe Herrick to ask him how - and why - he has done these impersonations in this podcast.

- Broc Romanek

February 15, 2008

Head's Up: How Your Form 10-K Changes This Year

As a result of amendments to the disclosure rules for "smaller reporting companies" adopted in December and effective last week - February 4th - there are changes to Form 10-K that all reporting companies need to make in their Form 10-K reports. For companies that are not eligible (and do not elect) to report under the new "smaller reporting company" framework, these changes are minor - essentially amounting to changes in the check boxes relating to the company's status on the cover page of Form 10-K.

Courtesy of John Newell of Goodwin Procter, we have posted "Comparison of Changes to Form 10-K," which is a redline comparison of the newly-effective cover page of Form 10-K compared to the old version (this is a Word file and should help you tweak the Form you saved from last year; here is a PDF version if you need it).

On Monday, the SEC finally posted an updated Form 10-K - even though the new Form had been effective for a week - and as several members have e-mailed me, the SEC mistakenly reverted back to an old version of the Form for the Part III in its PDF...

More Glitches in Smaller Company Reporting

Recently, I blogged about a glitch in the SEC's smaller company reporting scheme relating to audit committee reports - and there have been a few others identified in our "Q&A Forum." Thanks to Steve Amen and Grant Leach of Kutak Rock, here is another:

"We've been working on a Form 10-Q for a company with a September 30th year end that qualifies as a "smaller reporting company." As we looked at the SEC's adopting release regarding changes to Form 10-Q resulting from the new smaller reporting company rules, we noticed that the familiar paragraph in which registrant's indicate their filing status has been modified (as expected) to include the new option for "smaller reporting company". However, in the adopting release, the whole thing looks like this:

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): - Large accelerated filer - Accelerated filer - Non-accelerated filer - Smaller Reporting Company (Do not check if a smaller reporting company)

We could not make any sense out the parenthetical language at the bottom and we finally decided to call the Corp Fin Staff for clarification. Turns out it's a glitch and we were told we could delete it from the cover page."

Let The Trades Begin: New Rule 144 Is Now Effective

Starting today, new Rule 144 is effective. The SEC has posted a copy of the new Form 144 in a PDF; we have a Word version available in our "Rule 144" Practice Area.

As noted by Ron Orol in this The Deal.com article, as much as $35 billion in restricted securities will suddenly be available to trade - so you can expect a sudden uptick in Rule 144 activity. So I posit this reminder: have you sent your memo to all our officers and directors explaining the new rule changes?

During our recent “Rule 144 Conference," it was stressed that all companies need to get their officers and directors up to speed, particularly with the new potential pitfalls now facing affiliates. If you have not yet done so, we encourage you to furnish all your officers and directors with the model memorandum provided in the Conference "Course Materials." It will get your key executives and directors updated on what they need to know now—and prevent costly violations.

By the way, I just posted a podcast with Ron Orol on DealLawyers.com regarding his new book: "Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking On The World."

- Broc Romanek

February 14, 2008

One "Must" Fix This Season: Full "Walk-Away" Value Disclosure

As part of its executive compenation review project, the SEC Staff has issued many comments on change-of-control and severance disclosures. We have urged companies to improve the clarity of disclosures in this area by providing full walk-away values in a table this year - including not just unvested grants, but previously exercised grants and projecting out future grants (here is a model table; learn more how to do this in our "4th Annual Exec Comp Conf" Archive). This is something that shareholders clearly want to see - and can help companies shorten their executive compensation section.

Below is a recent blurb from Mark Borges' "Proxy Disclosure" Blog on CompensationStandards.com (and since Mark posted the blog below, he has added another one about a different company):

Out on the speaking circuit, one of the more provacative executive compensation disclosure topics is whether companies should be reporting the "walk-away" number as part of their termination and change-in-control disclosure. While I can't say that I've seen any trend start to emerge yet, it's a subject that never fails to stimulate strong positions and lively debate.

Recently, Scott Spector pointed me to the Starbucks proxy statement (filed on January 24th) which contains the first "walk away" numbers I've seen this year. As part of its "Potential Payments Upon Termination or Change in Control" disclosure, the company provides a table showing the fiscal year-end value of outstanding vested stock options, aggregate deferred compensation plan account balances, and unvested stock options that would accelerate upon the occurrence of certain specified triggering events. It also totals these amounts, with and without the accelerated vesting portion, essentially showing what its named executive officers would receive if they left the company under any circumstance.

Since this is Starbucks' first filing under the new rules, I can't tell if they elected to provide this disclosure to get out ahead of the issue or because this level of transparency made sense given the relative simplicity of their executive compensation program. In any event, it will be interesting to see whether other companies follow their lead this proxy season.

How Many Companies Will Disclose Performance Targets This Year?

A recent poll by Watson Wyatt Worldwide got a bit of play in the mainstream press; in the poll, the consulting firm found only 42% of companies plan to disclose the specific goals used in their executive compensation plans for the 2007 fiscal year; 31% have no plans to reveal the goals and the remaining 27% are unsure.

However, this "poll" was far from being scientific - just like our "Quick Surveys" aren't - since it encompassed only 135 representatives from companies that were listening to a Watson Wyatt webcast. So I would take these numbers with a grain of salt - particularly given the SEC Staff's continued strong interest in this area (see our recent webcast where a SEC Staffer addressed this topic at length) and institutional investors very strong interest in improved performance target disclosure this year. This was a hot topic during RiskMetric's Conference last week and those companies that don't adequately disclose performance targets should expect to become targets themselves during '09.

Update: We now have over 80 comment letters (and their responses) posted in the "SEC Comments" Practice Area on CompensationStandards.com.

Directors Speak Out on Internal Pay Equity

According to a recent survey by Heidrick & Struggles and the Center for Effective Organizations, 90% of director respondents said CEO pay should be no more than two to three times higher than the next highest paid executive. And 85% said the mix was right at their company right now.

But I wonder whether these directors truly conduct an internal pay analysis since only a few hundred companies (out of 10,000; thus a small fraction) disclosed last year that they consider this benchmarking tool as a factor in their decisionmaking - and even those few companies that truly do consider internal pay equity don't always conduct the analysis properly (eg. neglecting to include equity grants in the calculation). This issue of the Compensation Standards print newsletter from last year has an article explaining "How to Implement Internal Pay Equity."

Also in the survey: 32% of the director respondents said CEOs are overpaid; up from 25% in the past - the respondents blamed it on compensation consulting firms and the creation of new incentive compensation programs.

A Rememberance: Sadly, Anita Karu passed away on Sunday after a brief illness. As many of you know, Anita was a senior attorney that worked in Corp Fin for over 25 years (much of it in Chris Owings group). She was a true believer in the Commission’s mission - very dedicated. We will all miss her!

- Broc Romanek

February 13, 2008

Just Added! IRS Staffer to Address Section 162(m) Uncertainties During Tomorrow's Webcast

We're excited to have Ken Griffin, Associate General Counsel in the IRS' Executive Compensation Branch (and the Staffer who signed the PLR at issue) join the panel for tomorrow's webcast on CompensationStandards.com - "The New IRS Letter Ruling: How It Impacts Your Employment Arrangements, Accounting, Proxy Disclosures, Etc."

Many of the memos analyzing the recent Private Letter Ruling - which reverses the IRS' long-standing position on the effect of standard severance arrangements on the deductibility of performance-based compensation under Section 162(m) - have raised questions about the magnitude of the change (eg. whether there is a retroactive impact). Come hear Ken provide some guidance about the latest IRS' positions. This webcast promises to be a "biggie."

The following panelists will address the tax, accounting, plan design and disclosure issues raised by this PLR:

- Ken Griffin, Associate Chief Counsel, Executive Compensation Branch, IRS
- Elizabeth Drigotas, Principal, Washington National Tax, Deloitte Tax LLP
- Mike Kesner, Head of Deloitte Consulting’s Executive Compensation Practice
- Mike Melbinger, Partner, Winston & Strawn
- Paula Todd, Managing Principal, Towers Perrin
- Jeremy Goldstein, Partner, Wachtell Lipton Rosen & Katz
- Dave Lynn, Editor, CompensationStandards.com

Corp Fin Rejects "Proxy Access" Proposals: AFSCME to Sue Next?

As expected - given the SEC's recent rulemaking to "stay the course" on how it wants Corp Fin to handle "proxy access" proposals - Corp Fin agreed with five companies on Monday to allow them to exclude proposals submitted by AFSCME that would amend the bylaws to require that the companies include in their proxy materials the name, along with certain disclosures and statements, of any person nominated for election to the board by a shareholder who has beneficially owned 3% or more of the company's outstanding common stock for at least two years.

Given the SEC's rulemaking, AFSCME expected this response and said as much when it announced last month that it was submitting these proposals. It is expected that AFSCME will sue like it did two years ago in the AFSCME v. AIG case, where it won in the 2nd Circuit.

The Corp Fin's responses are:

- Bear Stearns Companies

- JPMorgan Chase & Co.

- Croghan Bancshares

- Kellwood Company

- E*TRADE Financial Corporation

We should be grateful to the SEC for posting these no-action responses, since they made a special effort to post them. Typically, shareholder proposal responses are not posted because there are so many that it would drain the Staff's limited resources. Fyi, Corp Fin posted these on its "Frequently Requested Materials" page.

Pro or Troll #5: Risk Management and Governance Trends in 2008

Courtesy of Jennifer Meiselman, Managing Director of Risk Advisory Services, BDO Consulting, come try your hand at our newest "Pro or Troll" game - this one focusing on risk management.

- Broc Romanek

February 12, 2008

A New Breed? The Blogging Activist

Last week, I spoke at the annual RiskMetrics' Conference (my panel was on executive pay, more on that later) and I hung around for most of the program since I have always enjoyed the Conference because it's slant is different than the traditional legal fare. I was there when Carl Icahn announced he was thinking of starting a blog (although he didn't call it a blog - nor was he really sure what it was gonna be, if anything). Perhaps Carl's blog will look something like this blog - seeking change in companies he feels are undervalued. Carl also noted he would blog about governance more generally. At the Conference, he spoke out about outsized executive pay, as did nearly every speaker at the Conference.

For me, Carl's announcement was just another wake-up call that we are truly in the infancy of how the Web will be leveraged by activists to place pressure on boards and management. And I say "wake up call" because I think that most companies are nowhere near ready to handle what is coming. They don't view their IR web pages as a "campaign" tool and in fact, most companies outsource their IR web page to third-parties who have no clue about how to run a campaign because they merely provide simple tools to allow companies the bare minimum online.

I also think that most proxy solicitors don't have a real handle on how to leverage the Web either. I understand that personal relationships with one's largest shareholders is the best route to handling a tough vote. But I think we will find that the Web is a necessary adjunct to the traditional means by which proxy solicitors do their job. E-proxy plays a big role in this (and don't take it just from me, check out this interesting paper from Professor Jeffrey Gordon entitled "Proxy Contests in an Era of Increasing Shareholder Power: Forget Issuer Proxy Access and Focus on E-Proxy.")

All Marty Lipton, All The Time

At the RiskMetrics conference, Marty Lipton talked about some of his grander moments over the years (eg. original label for the poison pill was the "warrant dividend plan") and provided his views on the current state of affairs (he's not really a professional entrencher of management; rather, he's an entrencher of allowing the board to exercise its fiduciary duties). It was good stuff. During the Q&A, there was some heated moments between Marty regarding his views on "say on pay" and some in the predominantly investor audience.

By the way, a member points out a "Poison Pill" blog dedicated solely to Marty Lipton (albeit the blog may be defunct; it has been silent for a few months). It's definitely different and I guess even corporate attorneys can have their own paparazzi...

RiskMetrics Goes Public

Speaking of RiskMetrics, its IPO occurred a few weeks back (and yes, I bought a few shares). Here is the IPO prospectus. It will be interesting to see their voting recommendations for their own annual meeting. Given their governance principles - which includes providing a say on pay and allowing for proxy access - they likely will get high marks. Here is a snapshot of some key governance principles:

- Annual Election of Directors - All of our directors will stand for election annually to create greater alignment between the directors' and stockholders' interests and to promote greater accountability to our stockholders.

- "Proxy Access" - Our bylaws set forth the provisions by which we will include in our proxy materials the name of a person nominated by one of our stockholders, or group of our stockholders, who meets specified requirements for election as a director. Generally, a nominating stockholder must have owned at least 4% of our outstanding common stock continuously for at least 2 years and must provide notice to us in accordance with our bylaws.

- Majority Voting - Our bylaws provide that in uncontested elections, our directors must be elected by majority vote and directors must submit a contingent resignation in advance of each annual stockholders meeting to help effectuate this process.

- Say on Pay - Our stockholders will be given the opportunity to vote on an advisory management resolution at each annual meeting to approve our Executive Compensation Policies and Practices as outlined in our annual proxy statement.

- Separation of Chairman/CEO; Lead Director - Our policy is that the role of our chairman should be filled by someone other than our chief executive officer and that our chairman should come from the ranks of our independent directors. If our board of directors ever concludes that it is in the best interests of our stockholders to have a chairman who is not an independent member of our board of directors, then we will disclose this reasoning in our proxy statement and we will appoint a lead independent director to provide appropriate independent management of our board of directors and its processes. Since 2004, the roles of our chairman and chief executive officer have been filled by the same individual. Our board of directors believes it is prudent and in the best interests of our stockholders to leave this arrangement in place until additional independent directors join our board of directors following our initial public offering. In the interim we have appointed Stephen Thieke as our lead independent director.

- Director Stock Ownership - In order to more strongly align the interests of our directors with those of our stockholders, non-vested stock grants will be a significant component of our directors' compensation. We will also require our directors to maintain certain levels of equity ownership.

- Poison Pills - Our board of directors' policy is that it will not adopt a shareholders' rights plan, or poison pill, without first seeking and obtaining stockholder approval.

The 'Former' M&A SEC Staff Speaks

We have posted the transcript from our recent DealLawyers.com webcast: "The 'Former' SEC Staff Speaks."

- Broc Romanek

February 11, 2008

The Voluntary E-Proxy Quick Survey

After I blogged recently about Broadridge's latest e-proxy stats, a number of members asked how many shareholders were requesting paper. Based on the stats provided by Broadridge, only an average of 0.79% were requesting paper from companies doing e-proxy so far.

We're receiving so many queries about e-proxy that I created this new "Quick Survey on Voluntary E-Proxy." Please take a moment to complete the three questions (note that the third question asks you to estimate even if your company doesn't intend to e-proxy this year).

And after you take the Quick Survey, check out Dominic Jones' IR Web Report blog about an e-proxying company adjourning their annual meeting because they missed quorum (note it's an atypical situation because this particular's company has shareholders that consist solely of veterinarian customers. Sounds like a dream I recently had; you see, there were these two pigs and a goat.).

E-Proxy & California Conflict: An Update

As I noted above, lots of e-proxy questions being posted in our "Q&A Forum" recently; one of them asked if there were any new developments regarding the California law conflict that I blogged about a while back. Here is an update from Keith Bishop:

No new developments to report. The Corporations Committee of the Business Law Section of the California State Bar is working on legislation but I don't think any legislative fix will be made in time for this year's proxy season. I don't believe that there is much basis for a preemption argument and I don't think that obtaining stockholder consents is a practical option for a public company.

How to Create an Online Annual Report - Free and in 5 Minutes!

Dominic Jones provides us with a real find - as described in his blog - by illustrating how easy it is to use the free software on Issuu.com. However, I second his big caveat: I do not recommend that you convert your online annual report to Flash or images - but if you are going to do so (as too many companies are), then free is the only way to go.

- Broc Romanek

February 8, 2008

Surprise! IRS' New Private Letter Ruling Causes Termination Provision Shockwaves

Last week, the IRS made a private letter ruling publicly available that is causing many to rethink the termination provisions in their plans and agreements. This PLR - dated September 21st! - relates to Section 162(m) and the deductability of pay arrangements for executives who are involuntarily terminated or quit with good reason. Many of the commentators so far observe that this is a reversal for the IRS.

We held off blogging on this huge development as we have read the wave of firm memos that have rolled in during the past week, many of them grappling with how to interpret this PLR and some disagreeing with each other. We have posted just over a dozen of these memos in the "Section 162(m) Compliance" Practice Area on CompensationStandards.com.

Next Week's Webcast: The New IRS Letter Ruling: How It Impacts Your Employment Arrangements, Accounting, Proxy Disclosures, Etc.

Sine the IRS' new private letter ruling may have implications for your upcoming financial reporting and proxy disclosures (not to mention compensation design), we have put together a quickie webcast for CompensationStandards.com - "The New IRS Letter Ruling: How It Impacts Your Employment Arrangements, Accounting, Proxy Disclosures, Etc." - for next Thursday. Join me, along with:

- Elizabeth Drigotas, Principal, Washington National Tax, Deloitte Tax LLP
- Mike Kesner, Head of Deloitte Consulting’s Executive Compensation Practice
- Mike Melbinger, Partner, Winston & Strawn LLP
- Paula Todd, Managing Principal, Towers Perrin
- Jeremy Goldstein, Partner, Wachtell Lipton Rosen & Katz

Options Backdating Update

While the tide of new options backdating cases seems to have crested, developments continue with the outstanding SEC/DOJ cases, as well as on the private litigation front.

Last month, Gregory Reyes, the former CEO of Brocade Communications, became the first CEO to be sentenced to jail time for backdating. Reyes now faces 21 months in prison and a $15 million fine. The former CFO of SafeNet, Carole Argo, also received a prison sentence – she will serve a six month sentence and pay a $1 million fine. While no time in prison is a good time, these certainly aren’t the kind long sentences faced by financial fraud kingpins like Dennis Kozlowski and Jeffrey Skilling. I doubt, however, that four or five years ago many would have predicted any sort of prison time from cases that some continue to argue only involve benign paperwork errors and a “technical” accounting issue.

The SEC also recently announced the settlement of civil charges against Andrew McKelvey, the former CEO of Monster Worldwide, for his involvement in a long-running backdating scheme at Monster. While the terms of the settlement provide for an injunction, disgorgement and an officer and director bar, the settlement didn't include a civil penalty "due to the overriding personal circumstances related to McKelvey."

On the private litigation front, the derivative lawsuit involving allegations of “spingloaded” options against Tyson foods and some of its current and former directors settled last month. Under the settlement, former Tyson CEO Don Tyson, as well as the company’s largest shareholder, agreed to pay $4.5 million to the company. As Broc noted in the blog last summer, Delaware Chancellor Chandler twice refused to dismiss the lawsuit, citing the inherent unfairness of springloaded options and the board of directors’ concealment of the unlawful scheme. Chancellor Chandler’s opinions in this case are posted in our "Backdated Options" Practice Area on CompensationStandards.com, and I suppose will continue to serve as the main authority out there on the state law implications of spingloading.

The San Francisco Regional Office Enforcement Staff was interviewed for this recent MarketWatch article concerning the backdating cases. Members of the Enforcement team expressed how shocked they were to first realize that such high level of people had been involved in creating bogus minutes – in particular respected, top-ranking lawyers. According to the article, the Staff used so-called “V-Charts” as a way of identifying suspicious option grants made at the bottom of the “V.” Marc Fagel, Acting Regional Director of the SEC’s San Francisco Regional Office, indicated that their focus in these cases was on management and not lower level employees. He also noted that the first line of defense for many executives – “I am not an accountant and I don’t know anything about this” – typically failed because it turned out that those executives were aware of the issues.

- Dave Lynn

February 7, 2008

CIFiR Posts Draft Progress Report for Upcoming Vote

The Advisory Committee on Improvements to Financial Reporting (CIFiR) has posted a Draft Progress Report in anticipation of a public meeting scheduled for Monday, February 11th. The Progress Report largely tracks CIFiR’s earlier Draft Decision Memo, with some tweaks here and there to the draft proposals – for more on those specific tweaks, check out the FEI Financial Reporting Blog.

As I mentioned in yesterday’s webcast – “The Former SEC Staff Speaks” – CIFiR is recommending an ambitious plan for rolling out XBRL, which seems largely consistent with Chairman Cox’s push to make XBRL a reality for at least some subset of issuers later this year. In the current draft proposal on the topic, the Committee recommends that once testing of the XBRL taxonomy currently out for comment is complete – and the voluntary XBRL filers have successfully used the taxonomy to submit tagged reports – a phase-in could commence with the largest 500 domestic public reporting companies “furnishing” separate tagged financial statements (presumably to be mandated as early as this Fall for calendar year-end Form 10-Ks). CIFiR’s draft recommendation further provides that one year later, the domestic large accelerated filer group would be required to furnish tagged data. Depending on the results of these efforts, the Committee would expect that, “over the long term,” the SEC should require all public reporting companies preparing GAAP financial statements to tag their filed financial statements using XBRL. Committee member Peter Wallison from the American Enterprise Institute submitted a separate statement that he believed maintaining a distinction during the phase-in of “furnished” versus “filed” tagged data was not necessary and that the implementation timetable should be left to the SEC.

One of the notable non-financial draft recommendations to be considered by the Committee on Monday is a call to update the SEC’s guidance on the use of corporate websites as a means of disclosing corporate information, including liability issues for summary information provided on a company’s website, hyperlinks from within or outside of a company’s website, treatment of non-GAAP information, and clarification about the public availability of information on a reporting company’s website.

For future consideration, the Committee is exploring the potential use of an executive summary in Exchange Act periodic reports – which is an interesting concept but in my mind potentially could add to the complexity of these already over-stuffed reports.

Posted: Electronic Form D Adopting Release

Yesterday, the SEC posted the adopting release for the rules implementing electronic filing of Form D. Unlike other recent rulemakings that were effective shortly after adoption, these rule changes have a longer lead time. Beginning September 15, 2008, issuers will have the option of filing Form D in paper or electronically – then, beginning March 16, 2009, electronic filing will become mandatory for Form D.

Yet Another SEC Office is Established

Earlier this week, the SEC announced the establishment of an Office of Collections and Distributions. Adding to the proliferation of “special purpose” Offices at the Commission, this group will be tasked with overseeing the distribution of so-called “Fair Funds” to investors. Previously, this function was carried out by the Division of Enforcement.

In a report issued last summer, the GAO criticized the SEC for its management of Fair Funds, citing, among other things, the decentralized approach for managing the Fair Funds program. At the time of the GAO report, the SEC had announced its plans to create this centralized Fair Funds office.

- Dave Lynn

February 6, 2008

Moody’s Weighs in on Bond Defaults and Late SEC Filings

As Broc noted in the blog last summer, the decision in Cyberonics, Inc. v. Wells Fargo Bank N.A. further muddied the debate on whether the language of a typical delivery covenant in an indenture (which obligates the issuer to deliver SEC reports to the trustee) could serve as a basis for declaring a default when an issuer becomes delinquent in filing its Exchange Act reports. The Cyberonics court interpreted a widely used delivery covenant to require that Exchange Act reports be filed with the trustee only after being filed with the SEC, and stated that Section 314(a) of the Trust Indenture Act does not provide a deadline for filing such reports with the SEC. This decision was in stark contrast to a decision of a New York state court in The Bank of New York v. BearingPoint, Inc., where that court ruled that the company’s failure to file its Exchange Act reports when required by the SEC constituted an event of default under the indenture. Both the Cyberonics and the Bank of New York opinions are posted in our "Late SEC Filings" Practice Area.

More litigation of this sort continues in a number of courts, with the next case likely to see a decision being UnitedHealth Group Inc. v. Wilmington Trust Co. in the U.S. District Court for the District of Minnesota.

Moody’s recently issued a report that outlines the issues raised in these decisions and similar litigation, as well as a useful appendix compiling the delivery covenants of a sampling of companies who have received default notices for failure to comply with those covenants. The Moody’s report highlights that of the two most prevalent variations on the delivery covenant, the one with language that states “the Company covenants and agrees to file with the Trustee, within 15 days after the Company is required to file with the Commission” is most protective of bondholder rights. Moody’s reaches this conclusion because – unlike the covenant at issue in Cyberonics and The Bank of New York that merely says reports will be filed with the Trustee “after it files” with the SEC – the more protective covenant expressly requires timely SEC reports while providing a default remedy if the promise is breached, and would avoid the necessity for costly litigation over this issue.

Moody’s notes that while many issuers will take a public stance that they are not in breach of the delivery covenant, only a small minority of issuers will actually choose to litigate this issue. In many cases, Moody’s found that issuers take preemptive action, such as conducting consent solicitations to eliminate events of default.

My two cents: As a devotee of the Trust Indenture Act, I think that Section 314(a) of the Trust Indenture Act does not impose a new or separate filing obligation on the obligor, but rather relies on what the issuer has to file under its obligations pursuant to Exchange Act Sections 13(a) or 15(d). This view is consistent with the holding on this issue in the Cyberonics decision.

Current Reporting Obligations When an Event of Default is Declared

While on the topic of declaring an event of default under an indenture, it is important to keep in mind the potential triggering event under Item 2.04 of Form 8-K around the time of an event of default.

The Staff clarified in Question 20 of its November 2004 Form 8-K FAQs that if the indenture requires notice before an acceleration and notice has not yet been provided, then no 8-K is triggered at that point – but if the acceleration happens automatically without declaration or notice, then the issuer must file the 8-K within four business days of when all of the facts necessary to trigger the default have occurred.

Even if an issuer takes the position that the notice of default fails to state a legitimate claim (as noted above is often the case with delivery covenant defaults), I believe that the Staff would still expect to see the Form 8-K filed within four business days of the triggering event – however, the issuer may include disclosure in the Form 8-K describing why it believes no event of default has occurred.

Executive Compensation Disclosure Webconference: Transcript Posted

The transcript has been posted for the first part of the two-part CompensationStandards.com webconference – "The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!" You can now read about some of the latest guidance from the Staff based on its targeted review of executive compensation disclosure, including:

- Performance Target Disclosures – Materiality and Confidentiality Standards
- Disclosure of Operational versus Financial Performance Targets
- Disclosure of Performance Targets for Completed versus Current or Future Periods
- "Degree of Difficulty" Disclosure Concerning Performance Targets
- Benchmarking Disclosures – Naming Peer Group Companies
- Presenting Two Years of Compensation Data and Related CD&A Disclosure
- Dealing with FAS 123R Reversals in the Summary Compensation Table

- Dave Lynn

February 5, 2008

The Latest on the SEC

Catch tomorrow’s webcast - "The Former SEC Staff Speaks" – to hear former SEC Senior Staffers Marty Dunn, John Huber and Brian Lane join me in a discussion of 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. Among the topics are:

- Shareholder access
- New types of shareholder proposals
- PIPEs enforcement cases
- SEC financial reporting developments
- XBRL and more…

Course Materials Now Available: As part of this webcast, you will want to review these Course Materials that relate to “materiality” determinations.

Potential Proxy Solicitation Relief for Delinquent Filers

In our November-December 2007 issue of The Corporate Counsel, we mentioned that the Staff was considering how to provide relief for reporting issuers that must defer their annual meeting because reporting delinquencies or a pending restatement makes it impossible to comply with Rule 14a-3's requirement to deliver financial statements when soliciting proxies. Yesterday, the SEC published an adopting release for an amendment to its delegation of authority rules that will now permit Corp Fin to consider one-off exemptive applications in these circumstances.

Prior to this rule change, Corp Fin would listen to the concerns of issuers facing these problems, but indicate that it did not have the authority to do anything to help them out - now, Corp Fin will be able to formally consider an issuer’s specific request for exemptive relief from the requirements of Rule 14a-3(b) or Rule 14c-3(a).

While there is not likely to be a flood of these sorts of applications, it will certainly be something that can be used when an issuer finds itself stalled out in its SEC reporting due to a restatement or internal investigation – particularly when hostile shareholders are at the door demanding an annual meeting.

More Executive Compensation Inquiries

Some of the larger companies that have recently wrapped up their executive compensation comment process with Corp Fin now have a new inquiry to deal with - this time from the House Oversight and Government Reform Committee, chaired by Henry Waxman (D-CA). The Committee announced last week that it had sent letters to the compensation committee chairs of each of the Fortune 250 companies, requesting information about how those companies utilize compensation consultants in setting executive pay. As I noted in the blog back in December, the same Committee’s Majority Staff recently released a report raising concerns about potential compensation consultant conflicts of interest. Apparently that was not the end of the story, because the Committee indicates that its investigation into the role of compensation consultants in setting executive pay is ongoing.

The Committee’s questions focus on areas such as: (i) the retention of consultants; (ii) the parties to whom the consultant reports; (iii) the other services performed by the consultant; (iv) disclosure about the role of the compensation consultant; and (v) whether the company has a written policy about the other services that an executive compensation consultant can perform for the company. The Committee is expecting responses back by February 22, 2008.

- Dave Lynn

February 4, 2008

SEC Proposes Further Section 404 Delay

The SEC has proposed yet another one-year delay in implementation of an independent auditor’s attestation report on the internal controls for the smallest public companies. As noted in the blog at the end of last year, Chairman Cox had promised this delay in his testimony before the House Committee on Small Business.

Under the proposal, non-accelerated filers would be required to provide auditor’s attestation reports beginning with their annual reports filed for fiscal years ending on or after December 15, 2009. The proposal does not affect the requirement that management complete its own assessment of internal control over financial reporting – which is now required for all filers, regardless of size. The proposing release is out for a 30-day comment period.

The proposed delay in fully implementing Section 404(b) – to over seven years after Sarbanes-Oxley was enacted – coincides with an announcement that the Staff has commenced its previously discussed study of the costs and benefits associated with the auditor attestation requirement for smaller companies. This is supposed to be an analysis of “real world” data in order to measure experience with the recent SEC and PCAOB guidance for management and auditors. The final results of the study are not expected for several months.

Yet Another PIPEs Case Gone Bad

Something else the SEC should consider studying (and fast) is why it keeps getting its critical Securities Act Section 5 claims dismissed in federal District Courts across the land. I recently blogged about the dismissal of the SEC’s Section 5 claims in the case of SEC v Edwin Buchanan Lyon, IV. Only a few weeks after that setback, a judge in the Eastern District of Pennsylvania dismissed similar Section 5 claims in SEC v. Berlacher.

Unfortunately, with these decisions now coming in fast and furious, hedge funds that short in anticipation of PIPEs and then cover with the registered securities are emboldened to continue that strategy in the absence of any swift SEC action to protect the legal position.

I will be discussing these cases in more detail with the great panelists on our webcast – “The ‘Former’ SEC Staff Speaks” – coming up this Wednesday.

Our February Eminders is Posted!

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

- Dave Lynn

February 1, 2008

PCAOB Approves Auditing Standard No. 6

Earlier this week, the PCAOB announced the adoption of Auditing Standard No. 6, Evaluating Consistency of Financial Statements. The Board also adopted related amendments to its interim auditing standards. Now, the new auditing standard and amendments are off to the SEC for its approval.

The new auditing standard and the related amendments were adopted in the wake of the FASB’s issuance of FAS 154, Accounting for Changes and Error Corrections, as well as in light of the FASB’s impending issuance of The Hierarchy of Generally Accepted Accounting Principles.

Since FAS 154 established retrospective application as the required method for reporting a change in accounting principle (in the absence of explicit transition guidance in a newly adopted accounting principle), and redefined the term “restatement,” it was necessary for the PCAOB to revisit AU Section 320, Consistency of Application of Generally Accepted Accounting Principles, which reflected the provisions of the now superceded APB 20. Under the new Auditing Standard No. 6, auditors will be required to evaluate the consistency of a company’s financial statements and report on any inconsistencies. The standard will require an auditor’s report "to recognize a company’s correction of any material misstatement, regardless of whether it involves the application of an accounting principle."

With respect to the GAAP hierarchy, the PCAOB seeks to remove the hierarchy from the auditing standards, based on a belief that the hierarchy is more appropriately located in the accounting standards. The effective date of the FASB’s Statement of Financial Accounting Standards setting forth the GAAP hierarchy is expected to coincide with the PCAOB’s changes.

To find out more about what is going on at the PCAOB, be sure to check out our just announced webcast – "The PCAOB Speaks: Latest Developments and Interpretations" – on March 27th.

The Tellabs Remand

Last month, the Seventh Circuit Court of Appeals issued its decision in Makor Issues & Rights, Ltd. v. Tellabs, which had been remanded by the Supreme Court in June 2007.

On remand, the Seventh Circuit addressed whether the plaintiffs’ securities fraud allegations created a “strong inference” of scienter - as defined by the Supreme Court in its opinion - so that the complaint could survive a motion to dismiss under the pleading standards established by the Private Securities Litigation Reform Act. In adhering to its prior decision and reversing the lower court’s dismissal of the suit, the Court concluded that it was “exceedingly unlikely” that the material misrepresentations allegedly made by the corporate defendant were “the result of merely careless mistakes at the management level based on false information” provided by lower level employees. The Court found that the defendants asserted “no plausible story” to indicate that Tellabs senior management, who were involved in “authorizing or making public statements,” did not know the statements were false.

You can find additional analysis of this case in the memos posted in the Pleading Requirements section of our “Securities Litigation” Practice Area.

Alan Dye’s Section 16 Webcast: Transcript Posted

We have posted the transcript from Alan Dye’s popular Section16.net and Naspp.com webcast – “Keeping Yourself Out of the Section 16 ‘Hot Water.’” Among the questions Alan answered on the webcast were:

- What is the current practice regarding average price reporting now that the Staff has issued its interpretation saying it isn't permissible?

- We missed a Form 4 filing deadline by minutes – is there any way to avoid treating the missed deadline as a late filing, so that we don't have to disclose the delinquency in the proxy statement?

- Do you see any reason to prohibit executives from electing, during a quarterly blackout period, tax withholding of shares upon exercise of an option or vesting of restricted stock?

- What is the best practice to follow when preparing a Form 4 to report a transaction that does not affect the insider's other holdings? That is, is it best to report all of the insider's other holdings, even though there was no activity involving those holdings?

- Dave Lynn