May 30, 2008

SOX in the Balance: The Appeal of the PCAOB Lawsuit

Last month, a three judge panel of the DC Circuit Court of Appeals heard oral arguments in Free Enterprise Fund, et al. v. Public Company Accounting Oversight Board, et al.. The lawsuit, originally filed in February 2006, alleges that the provisions of the Sarbanes-Oxley Act establishing the PCAOB are unconstitutional because those provisions violate separation of powers principles. With no separability clause in the Sarbanes-Oxley Act, a finding that one provision of the law is unconstitutional could bring down the whole Act. The pending appeal is from a March 2007 District Court ruling in favor of the PCAOB.

Based on the transcript of the oral argument, the focus of the Court was on the uniqueness of the PCAOB’s structure as essentially a government entity for constitutional purposes, but not a government entity for statutory purposes. While the appellants conceded the SEC’s role in overseeing the PCAOB’s rulemaking, they targeted their attack on the PCAOB’s allegedly unchecked enforcement and inspection function. In addition, the Court focused its questioning on the “for cause” requirement for removal of PCAOB Board members (as opposed to an at will removal standard), which is likewise the standard for removal of SEC Commissioners and thus puts the PCAOB’s leadership two “for cause” steps away from the President. While the government argued that the PCAOB was built around the self-regulatory organization model, the appellants (and the Court) pointed out the significant distinctions with the PCAOB, principally in that its board is appointed by the SEC and board members are only removable by the SEC for cause.

While it is certainly difficult to tell solely from the oral argument, this case may not be a slam dunk for the PCAOB and the government. Certainly the consequences of a ruling against the PCAOB are difficult to imagine - reopening the PCAOB and all of Sarbanes-Oxley at this point would undoubtedly be a bad idea.

In this commentary, Jonathan Weil of Bloomberg points out the views expressed during the oral argument by Judge Kavanaugh, who was by far the most vocal of the three judges on the panel.

LIBOR on Shaky Ground

I can’t think of anything more ubiquitous as a benchmark in financings and derivatives than the London Interbank Offered Rate (LIBOR), which has come under attack in the last few months for being out of synch with market developments. Yesterday’s WSJ featured an interesting article on the problems with LIBOR and some data suggesting how far out of whack LIBOR has become. Later today, the British Bankers Association will announce plans to make the first changes to LIBOR in over ten years.

Before becoming a lawyer, I managed assets and liabilities for a bank, and I can recall anxiously awaiting for the moment shortly after 11:00 a.m. London time when the BBA would post the day’s LIBOR and it would pop up on my Telerate screen. I always envisioned a bunch of guys in bowler hats (kind of like the bankers in Mary Poppins) drinking tea and setting the daily rates, but in reality, the BBA surveys its 16 member banks on how much it would cost them to borrow from each other for 15 periods ranging from overnight to one year (in currencies including dollars, euros and yen), and then averages the results of that survey data. Always taking the numbers as gospel, it never occurred to me that LIBOR’s reliability could ever be called into question, given the tendency of any survey and average to potentially distort reality. Notably, the WSJ article indicates that during times of market turmoil like we have faced in the past several months, banks have an incentive to avoid submitting rates to the survey that are higher than those submitted by their peers, lest they signal financial problems or desperation. This incentive tends to force the rates used to compute LIBOR to cluster together. This trend is perhaps confirmed by the fact that when the BBA threatened a month ago to ban from the survey any banks that misquoted their rates, the three month rate shot up 18 basis points over the next two days.

I doubt that the current troubles with LIBOR will push too many players to other benchmarks, particularly given how entrenched LIBOR is in the US and abroad. There are of course other alternatives for benchmarking short-term rates, such as the US Fed Funds rate. The principal difference between LIBOR and the Fed Funds rate is that while LIBOR is based on survey data, the Fed Funds rate is a target interest rate fixed by the Federal Open Market Committee and implemented through the open market operations carried out by the New York Federal Reserve.

2008: The Year of the Hedge Fund Activist

We have just posted the transcript for the DealLawyers.com webcast: "2008: The Year of the Hedge Fund Activist." Catch the companion webcast - "How to Handle Hedge Fund Activism" - on July 15th.

- Dave Lynn

May 29, 2008

Just Extended! Early Bird Discount for Compensation Conferences

We have extended the deadline of our Early Bird Discount since we had so many last minute calls from members who had requested checks so that they could register for our Conferences - "Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference" & "5th Annual Executive Compensation Conference" – which will take place in New Orleans and via Nationwide Video Webcast on October 21st-22nd. Here are the Conference Agendas. We will not extend the Early Bird Discount beyond the new deadline of June 30th, so please act now.

Like last year’s blockbuster conferences, an archive of the entire video for both conferences will be right there at your desktop to refer to - and refresh your memory - when you are actually grappling with drafting the disclosures or reviewing/approving pay packages. Here are FAQs about the Conferences.

For those choosing to attend by coming to New Orleans, I encourage you to also register for the "16th Annual NASPP Conference," where over 2000 folks attend 45+ panels. And if you attend the NASPP Conference, you can take advantage of a special reduced rate for the Exec Comp Conferences.

If you have questions or need help registering, please contact our headquarters at info@thecorporatecounsel.net or 925.685.5111 (they are on West Coast, open 8 am - 4 pm).

SEC Nominations Move Forward

A Senate Banking, Housing and Urban Affairs Committee hearing is now scheduled for Tuesday, June 3rd to consider the nominations of Luis Aguilar, Elisse Walter and Troy Paredes. The hearing will include a number of other nominees for open positions at various federal agencies, including the Treasury Department, HUD, GNMA, the National Credit Union Administration Board and the President’s Council of Economic Advisors. Once the Senate Banking Committee has considered the nominations, it remains to be seen whether the SEC nominees will be fast-tracked for a vote by the full Senate.

This article from yesterday’s Washington Post notes the government-wide exodus of senior officials as the current administration winds down, as well as the difficulties faced in moving nominees forward. I agree with some of the experts cited in the article that the process of changeover in agencies is exceptionally difficult for the staff and tends to go on for way too long these days. Even for agencies like the SEC, which doesn’t have any political appointees beyond the Commissioners, the unwritten rule is that directors and perhaps other senior Staffers can expect to be replaced when a new Chairman comes aboard. Even in the best of circumstances, this makes for at least a couple of years of uncertainty about the direction of SEC policy and a lot of Staff distraction.

SEC Settles an Auction Rate Securities Case

The SEC recently settled an administrative proceeding instituted against First Southwest Company for its role as an underwriter of and agent for auction rate securities. The auction rate securities market has seen some significant disruptions throughout the credit crisis, and the activities of market participants in connection with recent auctions may receive more attention from Enforcement in the coming months. Back in 2006, the SEC had reached a $13 million settlement with 15 investment banks, and the industry agreed to impose a voluntary code of conduct for the auction-rate market.

The SEC’s Order in the First Southwest case indicates that, without adequate disclosure, the broker-dealer intervened in the auctions that served to reset the interest rate on the securities by bidding for its own account in order to prevent failed auctions and to prevent “all hold” auctions (when a below market rate is set because no securities are for sale in the auction). In some of these interventions, First Southwest’s activity had an effect on the clearing rate derived from the auction, which is the rate that determines the interest rate or yield that the issuer must pay to investors until the next auction. The only charge brought by the SEC on this conduct was for violation of Securities Act Section 17(a)(2), based on the misstatements and omissions about the potential for such intervention in the auctions.

In determining the penalty assessed on First Southwest, the SEC noted the firm’s cooperation, but also noted that First Southwest had not self-reported the potential violations to the SEC. The SEC noted that it “aims to promote voluntary disclosures in industry-wide investigations and to encourage firms to provide comprehensive information to the staff in such investigations.”

- Dave Lynn

May 28, 2008

Now Available: May-June Issue of The Corporate Counsel

We just put the finishing touches and mailed the May-June '08 issue of The Corporate Counsel, which includes analysis of:

- More on Obtaining Staff Guidance
- Amended Rule 144—Impact on Pledgees and Donees
- More on the New 8-K CDIs
- Parsing the Integration Safe Harbors
- Corp Fin's Mini Re-Org
- S-3 Eligibility Waivers—8-K Latitude?
- Staff Says No Non-GAAP Financial Statements
- Use of Company Stock to Make Matching Contribution to 401(k) Plan—NYSE Notice and Shareholder Approval Requirements
- 8-K Reporting of JPMorgan Chase's CEO Option/SAR Grant
- Bebchuk Status Report

If you are not a subscriber to The Corporate Counsel, try a no-risk trial today. If you still need to renew your subscription for this year, do so today so you won't miss this critical guidance.

Using SOX 302 Certifications to Plead Scienter

Since the enactment of the Sarbanes-Oxley Act, courts have been split on the extent to which CEO/CFO certifications may be used by private plaintiffs to satisfy the requirement for pleading scienter under Section 10(b) and Rule 10b-5.

In this podcast, Howard Suskin and Jennifer Lawson of Jenner & Block provide insight into the use of SOX Section 302 certifications to plead scienter, including:

- How are Section 302 certifications being used by plaintiff's lawyers in lawsuits?
- What are the courts’ reactions so far? Are they drawing an inference of scienter?
- What do you advise companies to do now to minimize the risk of scienter being found?

You can also access a related memo on this topic in our "Securities Litigation" Practice Area.

IFRS 101: Educating the New Class of Accountants

If International Financial Reporting Standards (IFRS) is really going to come to pass for US issuers in the next five years or so, then some radical changes will need to be made to our US GAAP-based system – and soon. One of the most important areas where this change needs to occur is in the accounting departments of our colleges and universities, on the theory that accounting majors should not be wasting their time learning the intricacies of US GAAP, if what they will have to apply in four years is IFRS as established by the IASB.

This CFO.com article notes that the Big Four accounting firms are moving forward with efforts to help develop IFRS-focused curricula and to provide other resources that may be used by academia. These efforts are encouraging, but perhaps may not be enough to accomplish the real sea change that is needed to make IFRS a reality on such a relatively short timetable. Ultimately, perhaps the ideal would be for graduating students to have a better handle on IFRS than the partners that they go to work for at accounting firms!

The SEC announced that it signed protocols with financial regulators in Belgium, Bulgaria, Norway and Portugal to share information on the application of IFRS. These protocols, which are based on a model protocol developed between the SEC and the Committee of European Securities Regulators, provide for the confidential exchange of issuer-specific information that will be relevant toward implementing IFRS. The SEC has a similar arrangement with the UK Financial Reporting Council and the UK Financial Services Authority.

-Dave Lynn

May 27, 2008

The Rise of the Small Entity Compliance Guide

It is now obvious that the Staff has been very busy drafting "Small Entity Compliance Guides" under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996. While the requirement to prepare these guides has been in place since SBREFA was originally enacted 12 years ago, the Staff's efforts on this front seem to have gotten a boost from the enactment of the Fair Minimum Wage Act of 2007, which requires that: (1) the guides be posted on agency websites; (2) they be made available at the same time a rule becomes effective; and (3) they include an explanation of actions a small business must take to comply with the rule. The Fair Minimum Wage Act also requires each federal agency head to report to Congress annually on the status of their agency's compliance with revised requirements for making the compliance guides available to small businesses. The requirement to prepare a small entity compliance guide is triggered whenever the SEC prepares a Final Regulatory Flexibility Analysis under SBREFA as part of its rulemaking, which is usually found in the "back-end" of the adopting release that folks often skip over.

Each guide makes clear that it is intended to summarize and explain the rules, but should not be looked at as a substitute for the rule itself. Interestingly, SBREFA gave the small entity compliance guide a special status from a litigation perspective. The Act provides that "[a]n agency's small entity compliance guide shall not be subject to judicial review, except that in any civil or administrative action against a small entity for a violation occurring after the effective date of this section, the content of the small entity compliance guide may be considered as evidence of the reasonableness or appropriateness of any proposed fines, penalties or damages." For this reason alone, it is probably a good idea to know what these guides say.

Last week, Corp Fin posted a new compliance guide regarding e-proxy, which includes a handy chart comparing key differences between the notice only and full set delivery options. The compliance guide phenomenon is not just limited to Corp Fin, however - the Division of Trading and Markets also recently posted a new page collecting some of its compliance guides that meet the SBREFA requirements.

While these guides don't include any new interpretive guidance, as I noted in the blog earlier this year, they can serve as a useful resource if you are looking for a quick overview of the rules, or something written in plain English that you can refer to in order to easily explain the rules to clients or others. One guide that I have always found particularly useful (although I don't think it started out life as a small entity compliance guide) is the Division of Trading and Markets' Guide to Broker-Dealer Registration, which was last updated in April 2008.

Controlling Person Liability: Joint and Several, Proportional or Both?

Recently, the Eleventh Circuit decided a case of first impression on the issue of whether - following enactment of the Private Securities Litigation Reform Act of 1995 - a controlling person is jointly and severally liable as specified in Exchange Act Section 20(a), or rather is subject to the proportionate liability scheme of Exchange Act Section 21(D)(f) (which was added by the PSLRA). In LaPerriere v. Vesta Insurance Group, Inc. (11th Cir.; Apr. 30, 2008), the Eleventh Circuit reversed the District Court's conclusion that the proportionate liability regime set out in Section 21(D)(f) “trumps” Section 20(a). Instead, the Eleventh Circuit stated "[r]ecognizing that implicit repeals of statutory provisions are disfavored, we hold that section 21(D)(f) and section 20(a) should be read in harmony to preserve both the PSLRA’s proportionate liability scheme and a controlling person’s derivative liability under section 20(a)."

The court essentially set forth a two-part test in seeking to reconcile the two statutory provisions. In this regard, the court stated:

"Section 21(D)(f) is not superfluous, however. It does have a role to play. As the Conference Committee Report also explained, while the PSLRA did not modify 'in any manner' the standard of liability under the securities laws, including section 20(a), it did change the rules for allocating damages among the parties once liability has been established by the fact finder. Before the PSLRA was enacted, if one of those parties was found liable as a controlling person of violating section 20(a), it would have been responsible jointly and severally for the damages to the same extent as the primary violator. Under the proportionate liability provisions of the PSLRA, if a party is found liable as a controlling person under section 20(a), there is a new standard for allocating damages. What has changed is not the standard of liability that applies to controlling persons - the 'Applicability' provision states that has not been modified 'in any manner' - but their responsibility as liable persons for the damages. The proportionate liability provisions of section 21(D)(f) are applicable only after liability is determined, and liability is governed by the standard set out in section 20(a)."

For more on this decision, check out our "Securities Litigation" Practice Area.

May-June Issue: Deal Lawyers Print Newsletter

This May-June issue includes articles on:

- M&A Targets Today: Seeking Deal Certainty in an Uncertain Environment
- How to Negotiate an M&A Engagement Letter with Your Investment Banker
- Structuring Portfolio Companies: Director Independence
- Ten Practice Tips for Negotiating the Letter of Intent
- How to Do a Deal Without Shareholder Approval: The "Financial Viability Exception"
- A Moment of Clarity: How to Avoid Ambiguities in Your Advance Notice Bylaws

Try a no-risk trial to get a non-blurred version of this issue for free.

- Dave Lynn

May 22, 2008

Countrywide Derivative Litigation: Rule 10b5-1 Sales in the Spotlight Again

Last week's ruling permitting plaintiffs to move forward on some claims in a derivative suit against Countrywide Financial Corp. received quite a bit of attention (see, e.g., this NY Times article and this Bloomberg article), but perhaps the most interesting elements of the case detailed in the order were allegations about insiders' sales of substantial amounts of Countrywide stock right around the time of a company repurchase plan and pursuant to Rule 10b5-1 plans.

I blogged about reports of the SEC's interest in Countrywide CEO Angelo Mozilo's use of Rule 10b5-1 plans last Fall, and his trades under 10b5-1 plans were a topic of great interest during the hearing before the House Committee Oversight and Government Reform earlier this year. Now, with the May 14th Order of Judge Mariana Pfaelzer on the motions to dismiss for In re Countrywide Financial Corp. Derivative Litigation, much more detail about the trading activity of Countrywide insiders in advance of the company's troubles has come to light.

Among the most notable allegations regarding insider sales were large trades conducted around the time of the announcement of Countrywide's stock repurchase programs in November 2006 and May 2007. The judge asks regarding these trades: "how could the Board members approve a repurchase of $2.4 billion dollars worth of stock, and nearly contemporaneously liquidate $148 million of their personal holdings just months before the stock dropped some 80-90%?" Ultimately, while noting that these trades appear to be suspicious, the judge didn't find sufficient detail in the complaint for the allegations to survive a motion to dismiss.

It was a very different story when considering Mozilo's trades. Noting that Mozilo actively amended and modified his 10b5-1 plans, Judge Pfaelzer states: "Mozilo’s actions appear to defeat the very purpose of 10b5-1 plans, which were created to allow corporate insiders to 'passively' sell their stock based on triggers, such as specified dates and prices, without direct involvement…[a]ccordingly, his amendments of 10b5-1 plans at the height of the market does not support the inference 'that the sales were pre-scheduled and not suspicious.'" The judge rejected claims that inferences of scienter were mitigated by the fact that Mozilo's trades involved amounts of stock that represented only a small proportion of his substantial holdings, citing a 9th Circuit holding that “where, as here, stock sales result in a truly astronomical figure, less weight should be given to the fact that they may represent a small portion of the defendant's holdings.” Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1232 (9th Cir. 2004).

While not discussed in the Order, it appears from Countrywide's filings that the company actually instituted a special kind of repurchase program around the time of the insiders' sales called an "accelerated share repurchase program," which usually involves a company purchasing shares of its own stock from a broker-dealer at a set price on one or more specified dates. The broker-dealer borrows the shares that are sold to the issuer and thereby puts itself in a short position, which it then covers by conducting open market purchases over time. From the disclosures, it appears that the company financed the purchase of the stock through the issuance of debt securities. One thing that makes an accelerated share repurchase program different from the usual buyback program is that companies often complete the buyback all at once or over a very short period of time, rather than entering the market over a long period of time to buy back stock at attractive prices.

SEC Publishes CIFiR Subcommittee Reports for Comment

Last week, the SEC published for public comment the four subcommittee reports that were presented to the Advisory Committee on Improvements to Financial Reporting at its May 2, 2008 open meeting. The Subcommittee Reports largely reflect additional considerations and comment on previously identified proposals.

The "Delivering Financial Information" Subcommittee's report reflects some further consideration of issues briefly identified in the Committee's February Progress Report as issues for future consideration. For example, the Subcommittee has developed some "Preliminary Hypotheses" with respect to the use of Key Performance Indicators (KPIs), improvements to quarterly earnings release disclosure and timing and the use of executive summaries in Exchange Act periodic reports (similar to summaries found in offering documents). The Subcommittee's report outlines some suggestions and considerations that could ultimately result in Committee recommendations in these areas.

In more accounting committee news, the Treasury Department’s Advisory Committee on the Auditing Profession posted a notice regarding the Committee's activities, along with a request for comment on the Committee's draft report until June 13.

Sovereign Wealth Funds and Activism

In this DealLawyers.com podcast, Ron Orol, Senior Writer for The Daily Deal, The Deal and TheDeal.com and author of, "Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World,"discusses sovereign wealth funds, including:

- What is a "sovereign wealth fund"?
- How are they working with activist investors, particularly in a post-Dubai Ports World politically charged environment?
- What about sovereign wealth fund as activists themselves?
- What are regulators in Washington doing regarding sovereign wealth funds?

- Dave Lynn

May 21, 2008

Stoneridge in Action

Now that the Supreme Court has weighed in against the notion of "scheme" liability in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 128 S.Ct. 761 (2008), the federal courts have begun applying the Stoneridge holding to securities fraud claims against various types of third parties. (In Stoneridge, the Court held 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 Pugh v. Tribune Co., (7th Cir.; April 2, 2008), the first appellate court to apply Stoneridge rejected the notion of finding "scheme liability" in a situation where a company employee was allegedly involved in a scheme to defraud that ultimately led to a securities fraud. Employees of Tribune and its subsidiaries had participated in a scheme to falsely inflate circulation figures for two Tribune publications in order to increase the amounts charged for advertising. Once the fraud was uncovered, Tribune took a $90 million charge to earnings and several employees pled guilty to fraud charges. The plaintiffs sued Tribune Co. and several individual defendants under Exchange Act Sections 10(b) and 20(a) for losses caused by the inflated revenue generated through the fraudulent circulation number scheme. The District Court dismissed the claims with prejudice.

The Seventh Circuit affirmed, most notably applying Stoneridge to plaintiff's claims against Louis Sito - the Tribune employee allegedly behind the circulation scheme – and finding that he was not liable for securities fraud based on a theory that it was "foreseeable" that that the circulation fraud would lead to an overstatement of the company's revenues. The court indicated that Sito "had participated in a fraudulent scheme but had no role in preparing or disseminating Tribune’s financial statements or press releases." The court concluded that the Supreme Court's holding "indicates that an indirect chain to the contents of false public statements is too remote to establish primary liability."

In another recent case, In re DVI Inc. Securities Litigation (E.D. Pa.; April 29, 2008), the District Court in the Eastern District of Pennsylvania applied Stoneridge in addressing class certification for claims against a law firm. The plaintiffs had alleged that the firm (Clifford Chance) "initiated and masterminded" a "workaround" that allowed DVI to fraudulently misrepresent the adequacy of the company's internal controls. The court noted that the misleading 10-Q in which the internal controls disclosure was included "was issued solely by DVI and contains no indication that any statement therein is attributable to Clifford Chance." Because investors did not rely upon the allegedly deceptive conduct of Clifford Chance and the conduct was not "publicly disclosed such that it affected the market for DVI's securities," the court found that the plaintiffs were not entitled to the fraud on the market presumption in establishing reliance on a class-wide basis with respect to the activities of the firm.

These cases may indicate that the lower courts will apply the Supreme Court's Stoneridge holding relatively broadly - including (somewhat surprisingly) to situations where there is some affiliation between the defendant and the issuer, such as an employee.

Convertible Securities: New Accounting for Cash-Settled Instruments

This WSJ article from last Friday noted that convertible securities are very cheap right now, given the widespread exit from the market earlier this year by those hedge funds pursuing a convertible arbitrage strategy. Financial firms in need of cash have been going to the market with convertible deals, given the attractiveness of convertibles over selling common stock at depressed levels or issuing long-term debt. The article notes that recent issuances have offered relative high yields and some attractive add-ons, such as compensation for changes in dividends or takeovers that come at lower prices.

Companies considering a convertible debt issuance or that have convertibles already on their books should take look at the new FASB Staff Position (FSP) No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)." This new position will be effective for fiscal years (and interim periods) beginning after December 15, 2008, and is to be applied retrospectively to all past periods presented – even in those situations where the convertible instrument has matured, converted or has otherwise been extinguished as of the effective date of the FSP.

The FSP will likely have a big impact on the financial statements of companies that have issued the relatively popular flavor of convertible debt securities that, upon conversion, may be settled by the company fully or partially in cash. While today most types of convertible debt instruments are treated as debt securities for accounting purposes, under the new FSP companies will need to allocate between the liability and equity components of the instrument. Splitting up the debt and equity components will inevitably result in a debt discount, which will need to be amortized to interest expense over the expected life of the debt. As a result of the FSP, companies that have issued cash-settled convertible securities will see an increase in interest expense associated with those instruments (and a resulting reduction in earnings and earnings per share), with a decrease in the net carrying amount of debt on the balance sheet along with an increase in the amount of equity.

The Firm, but Fair, Hand

First there was Adam Smith's "Invisible Hand," then there was "Slowhand" (aka Eric Clapton), and now apparently we have the "Firm, but Fair, Hand." I ran across this advertisement on the editorial page of my local newspaper. I can't recall ever seeing this kind of "campaign-style" ad from an interest group defending the record of the SEC and its Chairman, but then again there have been a lot of things over the past few years that I don't recall seeing before…

- Dave Lynn

May 20, 2008

New Quick Survey: Earnings Guidance

General Electric's recent high-profile failure to meet its own earnings guidance may well revive the debate over providing quarterly guidance. As noted in this FT.com piece, while some major companies such as Coca-Cola and Google have avoided the quarterly guidance game, the practice still remains entrenched.

In this new "Quick Survey on Earnings Guidance," we ask about your company's guidance practices. Please take a moment to complete the four questions.

Disclosing Beneficial Owners of Private Companies

A bill introduced in the Senate earlier this month by Senators Levin, Coleman and Obama would, if enacted, require disclosure about the beneficial ownership of private corporations and LLCs. S. 2956 would set, beginning in fiscal 2011, standards for state incorporation systems that would require the name and current address of each beneficial owner, and if the beneficial owner exercises control of over the corporation or LLC through another legal entity, the identity of the legal entity and each beneficial owner who will use that entity to exercise control over the corporation or LLC. This beneficial ownership information would need to be updated annually if the state requires an annual filing; however, if no annual filing is required, then the information would need to be updated whenever there is a change in beneficial ownership. Additional requirements would apply for any beneficial owner who is not a U.S. citizen or lawful permanent resident.

The legislation would define "beneficial owner" as "an individual who has a level of control over, or entitlement to, the funds or assets of a corporation or limited liability company that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the corporation or limited liability company." The bill would specifically carve-out from the definition of corporation or LLC "any business concern that is an issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781) or that is required to file reports under section 15(d) of that Act (15 U.S.C. 78o(d)), or any corporation or limited liability company formed by such a business concern."

The text of S. 2956 notes that all countries in the EU require information about beneficial ownership of corporate entities, and that the U.S. has been criticized for the lack of information about the ownership of companies that could potentially be involved in terrorism, money laundering, fraud and other misconduct. The bill has been referred to the Committee on Homeland Security and Governmental Affairs.

This legislation appears to reflect some frustration with the states for not improving their corporate registration systems to capture ownership information, particularly for law enforcement purposes. The bill notes that a person forming a corporation or LLC typically provides a state with less information than is needed to obtain a bank account or a driver's license!

Third Party Disclosure of Undisclosed SEC Investigations

Last summer, I blogged about varying practices as to when to disclose pending SEC inquiries or investigations of a company or its officers and directors. Various factors may be pushing the timing of disclosure forward, and one recent development may force some companies to make the disclosure sooner than they otherwise might have under the rules.

Disclosureinsight.com is now offering free e-mail updates regarding companies that appear to have undisclosed enforcement activity, based on information derived from FOIA requests. As noted in this article from the Minneapolis-St. Paul Star Tribune, this new site was created by John Gavin, who started his SEC Insight service back in 2000 based on information derived through the FOIA process. Gavin sued the SEC in 2004 over the agency's FOIA practices, namely the blanket denial of FOIA requests using the "Glomar response" (see Broc's blog about this litigation from 2005).

- Dave Lynn

May 19, 2008

Pencils Down for Rule Makers?

As noted on the FEI Financial Reporting Blog last Friday, the White House Chief of Staff recently sent a memorandum to agency heads stating that all rules expected to be finalized by the end of the administration must be proposed by June 1, and that final rules must be adopted by November 1 – except in extraordinary circumstances. This Dow Jones Newswire article (subscription required) notes that the memo probably did not come as a surprise to the agencies, given that the policy had been telegraphed ahead of time. It still appears possible under this policy for agencies to propose rules after the June 1 deadline, but only if the rules are expected to be ultimately adopted (or reconsidered) after President Bush leaves office.

Given this latest directive and the lack of full slate of Commissioners at the SEC, it doesn't appear likely that we will see much in the way of controversial proposals (e.g., shareholder access) coming up for a vote in the next couple of weeks – but there will no doubt be some proposals trying to "beat the clock." Will the SEC's "summer reading" be a bit lighter than it has been in the past couple of years? We will have a better sense in just a couple of weeks…

Survey Results: Rule 144 Practices

In response to some questions we have been asked about Rule 144 practices, we posted a survey - here are the survey results, which are repeated below:

1. If asked to render a legend removal opinion regarding restricted securities of a reporting issuer that is current in filing its 1934 Act reports, where the securities have been held more than six months but less than twelve months, we are:

- Not willing to provide such a legend removal opinion until the end of the twelve month period - 35.1%
- Willing to provide a legend removal opinion - 16.2%
- Undecided regarding what our practice will be - 21.6%
- Depends on the circumstances of each situation - 27.0%

2. Where a pre-February 15, 2008 registration rights agreement provides that a holder of restricted securities may demand registration of the securities until all of the securities may be resold in a single sale under Rule 144(k), we are taking the following position in the case of reporting issuers:

- If the securities have been held for at least six months but less than twelve months, the issuer is not obligated to register the securities so long as the issuer is current in filing its 1934 Act reports - 55.2%
- The issuer must register the securities unless they have been held for at least twelve months - 44.8%

Only One Day Left! Early Bird Discount for Compensation Conferences

You have only one day - until the end of tomorrow, May 20th - to take advantage of the Early Bird Discount to register for our Conferences - "Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference" & "5th Annual Executive Compensation Conference" – which will take place in New Orleans and via Nationwide Video Webcast on October 21st-22nd. Here are the Conference Agendas.

Like last year’s blockbuster conferences, an archive of the entire video for both conferences will be right there at your desktop to refer to - and refresh your memory - when you are actually grappling with drafting the disclosures or reviewing/approving pay packages. Here are FAQs about the Conferences.

For those choosing to attend by coming to New Orleans, I encourage you to also register for the "16th Annual NASPP Conference," where over 2000 folks attend 45+ panels. And if you attend the NASPP Conference, you can take advantage of a special reduced rate for the Exec Comp Conferences.

Register by end of tomorrow for Early-Bird Rates: Whether you attend in New Orleans or by video webcast, take advantage of early-bird rates by registering by May 20th. You can register online or use this order form to register by mail/fax. Note that we have combined both of our popular Conferences - one focusing on proxy disclosures and the other on compensation practices - into one package to simplify registration.

If you have questions or need help registering, please contact our headquarters at info@thecorporatecounsel.net or 925.685.5111 (they are on West Coast, open 8 am - 4 pm).

- Dave Lynn

May 16, 2008

The SEC Pushes Banks on Liquidity Disclosures: Exhibit A

As noted in this WSJ article last week, SEC Chairman Cox said in a speech that the four largest investment banks are being pushed by the agency to provide better disclosure about their "actual capital and liquidity positions...in terms that the market can readily understand and digest." According to the article, these disclosures will begin after the second quarter, with additional information about concentrated exposures within the investment banks phased-in later.

Maybe all this Market Reg-type stuff is beyond me, but I don't understand why the SEC Chairman has to twist arms to get this type of disclosure from the banks? Wouldn't the banks provide this disclosure under MD&A - Item 303 of Regulation S-K - as part of their liquidity disclosures? This harkens back to my surprise about how the banks were not fully baking the impact of the credit crunch into their risk factors (see this blog). All of this baffles me as I always thought companies perceived their SEC filings as "liability" documents - meaning that they would disclose as much "bad stuff" as possible in them to avoid liability.

Anyways, I chalk up this entire incident as "Exhibit A" for why the prospect of principles-based regulation is scary. Looks like even line-item regulation doesn't fully work...

Criminal? Stretching Sarbanes-Oxley Beyond Corporate Fraud

Keith Bishop notes: The 11th Circuit recently rendered an interesting decision in US v. HUNT, (11th Cir. 5-5-2008). In that case, a police officer was convicted of making a false false entry into a police incident report with the intent to impede, obstruct, or influence an FBI investigation.

So what does that have to do with securities law? The statute in question is 18 U.S.C. Sec. 1519 which was amended by Section 802 of Sarbanes-Oxley to provide "Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both."

The case is noteworthy because the Court found that the statute was not: (1) limited to corporate fraud or malfeasance even though it was enacted as part of Sarbanes-Oxley and (2) unconstitutionally vague.

SEC Approves NYSE's New SPAC Listing Standards

Last week, in this order, the SEC approved the NYSE's rule changes to make it easier for SPACs to be listed on the exchange. In addition to SPAC listings, the rule changes will impact reverse mergers. Recently, DealBook reported on the first SPAC looking to jump from AMEX to NYSE.

It is expected that the Nasdaq's SPAC proposals will be approved soon too. Come hear all the latest about the Nasdaq in this June webcast: "Nasdaq Speaks '08: Latest Developments and Interpretations."

- Broc Romanek

May 15, 2008

Mandatory XBRL: Gulp, Large Companies By Next Spring!

Yesterday, the SEC held an open Commission meeting to propose mandatory XBRL. As expected, the SEC proposed a phase-in period for mandatory XBRL - starting with approximately the largest 500 companies (specifically, those with a public float of over $5 billion) filing in XBRL for fiscal periods ending on or after December 15, 2008. So they would start making XBRL-tagged filings as early as the spring of 2009! Umm, that's not even a year away; the latest April tags can't even be used for testing yet. Did someone wet their diaper?

Moving on, smaller companies and foreign private issuers would phase-in over a three-year period, with all filing in XBRL by 2011. Year 2 would bring in large accelerated filers (about another 1700 companies) and Year 3 would capture all remaining filers using US GAAP, which includes FPIs that file in IFRS. Here is the SEC's press release, the Chairman's opening statement (which quotes "Women's Wear Daily") and Corp Fin's opening statement.

A few more items:

1. "Limited" liability - During the meeting, the SEC was coy about what the proposed liability scheme will be (and who might be on the hook for the tagging). It was mentioned that there would be "limited" liability, but no one mentioned if XBRL data would be considered "furnished" rather than "filed," as is currently the case under the SEC's pilot program. This is an issue that likely will be intensely debated during the comment period, regardless of what the SEC actually proposes (and in my opinion, limited liability for the accuracy of the financials is a huge mistake - if investors can't rely on the numbers tagged in XBRL, what's the real value of them?).

2. Grace period for first times - XBRL will be considered late if not provided to the SEC - as well as posted on corporate websites! - at the same time as the related report. There are two exceptions: a 30-day grace period would be permitted for a company's first XBRL filing - and also for the first time they are required to include the footnotes and schedules tagged in detail.

3. Consequences of late filing - If not provided timely, the penalty is that the company would be deemed not current with their '34 Act reports (hence, not eligible for short form registration or the resale exemption safe harbor under Rule 144).

4. Transition - In the first year, footnotes and schedules would be allowed to be filed in "blocked tags," which means each item has its own tag and is much easier than the alternative.

5. Costs - In his "IR Web Report," Dominic Jones blogs some good stuff about the projected costs of XBRL for companies. Put me down as leery of the SEC's estimate that the average price for an XBRL conversion will be under $30,000 and require less than 40 hours of work.

There is a 60-day comment period that commences once the proposing release is published in the Federal Registrar - meaning that the deadline will land about a week after our July 16th webcast: "XBRL: Understanding the New Frontier."

It's a good time to pick up your free book "XBRL for Dummies" from Hitachi - although I haven't seen it myself, so I can't vouch for its real-life usefulness...

XBRL and Third-Party Assurance

One issue that wasn't discussed at the open meeting yesterday, but bound to be commented upon - and considered by the groups that are in the process of making reform recommendations like the SEC's Advisory Committee on Improvements to Financial Reporting - is third-party assurance. Here is an article by two accounting professors (who were Academic Accounting Fellows at the SEC not long ago) discussing the challenges that XBRL presents for third-party assurance, raising interesting questions like: what to do about “bad” tagging that may be invisible when looked at through a viewer or other rendering tool, but can create errors when end-users try to slice and dice the data?

Although the article doesn’t really provide much in the way of answers - in sum, the authors suggest that software may be able to help automate the assurance process at some point and that academics have a lot to offer - it’s a good capsule of the state of XBRL and some of the conceptual difficulties that it presents for auditors (and lawyers).

The Myth: XBRL is Just Another Edgar

It's a bummer that Chairman Cox kicked off his opening statement comparing XBRL to Edgar, as I think it will serve to perpetuate the myth that XBRL is essentially another Edgar project. He would have been better served dispelling the myth if he wants to keep us corporate types as part of his audience on this topic. Otherwise, most folks I know will simply roll their eyes and assume this is something that they can pass off to financial printers, etc. and not bother to understand what it's about.

Simply put, Edgar is about tagging so that a document will be received by the SEC; XBRL is about tagging so that numbers have meaning. An Edgar tagging error is not a big deal compared to an XBRL tagging error, which might cause a company's stock to drop 20% in the course of an hour.

I'm not saying that printers and others won't be helpful; you will need them - it's just that XBRL is much more than the conversion of documents. I've blogged about this myth before...

And no, I'm not being critical just because I haven't been invited to one of the SEC's "XBRL blogger lovefests." Although it is a tad strange - plug "XBRL" and "blog" any-which-way into Google and this blog consistently comes up in the Top Ten. Compare the "hard-hitting" analytical reporting from some of the bloggers that did get an invite: ShopYield.com and Cara Community.

FASB's New House of GAAP

I haven't mentioned Jack Ciesielski's "AAO Weblog" much since he limited parts of his fine blog to paying subscribers (I do understand that the man has to make a living), but here is one available to the public:

Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles," was issued last week. It's not a standard that will drive investment decisions - but if you're an investor who's in a conversation with a CFO and the subject comes up, it might help to understand what the of "GAAP hierarchy" comes up, it might help to know a little bit about it.

Here's the background. The American Institute of CPAs had long decided what constituted the strength in various "levels" of generally accepted accounting principles because their constituents - auditors - needed a consistent policy on how to handle conflicts in accounting literature when more than one standard might be found on a single topic. Hence, there were "levels" with in the "house of GAAP," as it's frequently called. When the AICPA dictated auditing standards, it mattered that they be the ones to establish the hierarchy - but that right was removed with the establishment of the Public Company Accounting Oversight Board in 2003. The right to set accounting principles was also removed from the AICPA by the Sarbanes-Oxley Act: it required the SEC to appoint a single accounting standard setter for the establishment of accounting standards. And it picked the FASB, not the AICPA.

The FASB has now revised the standards hierarchy; it's absorbed many AICPA standards into its own domain. They didn't simply vanish along with the AICPA's authority. Here's how the new hierarchy of generally accepted accounting principles shapes up, in descending order of authority:

- FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and American Institute of Certified Public Accountants (AICPA) Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by actions of the FASB

- FASB Technical Bulletins and, if cleared, by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position

- AICPA Accounting Standards Executive Committee Practice Bulletins that have been cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force (EITF), and the Topics discussed in Appendix D of EITF Abstracts

- Implementation guides (Q&As) published by the FASB staff, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry.

The hierarchy still needs to be approved by the PCAOB to be completely effective on the auditing community. When you look at how many sources of accounting principles still exist after the clean-up, you can appreciate the calls for simplicity and the arguments made in favor of International Financial Reporting Standards. Make no mistake however: the more popular they become, the more interpretation and guidance they'll require. It wouldn't be surprising to IFRS principles grow at a rapid clip over the next few years.

- Broc Romanek

May 14, 2008

Big Changes Afoot in the Audit Industry

We all know about globalization in accounting standards, IFRS, etc. We know that the accounting industry is being closely studied for reform, with a series of changes (eg. limiting liability) being kicked around by the SEC's Advisory Committee on Improvements to Financial Reporting and the Treasury Secretary's "Blueprint" for a modernized regulatory structure.

But we haven't heard much about how the Big 4 might be taking action itself. In this podcast, Francine McKenna, CEO of McKenna Partners (and a fellow blogger on re:theauditors.com) discusses some of the new structural developments, including analying Ernst & Young's announcement to merge its European partnerships and integrate a further 42 countries into a single unit. This is a bold shift by a Big Four firm to overcome the country-level legal and regulatory restrictions that have limited the Big 4 national partnerships and frustrated their efforts to mirror the global reach of their multinational clients.

Auditors' Access to Board Minutes: Results of Our Quick Poll

A few weeks ago, I blogged a poll about auditors asking to review board minutes. The poll results indicated:

- 40% allowed auditors to read them, but not copy them
- 18% provided auditors with a copy to take, with privileged parts redacted
- 36% provided auditors with a full copy to take
- 7% don't allow auditors to review minutes

On her blog, Francine McKenna discussed these results:

I have answered the poll as I believe one of my former clients would have. This former client, still completing several years of restatements, having made a fairly recent change in auditors, subject of internal and SEC investigations, defendant in more than a few lawsuits, and the recipient of assorted Sarbanes-Oxley material weakness and significant deficiencies, has no choice but to do whatever their new auditor asks. I believe their auditor has them by the short-hairs.

However, it looks like there are more than a few companies, more than 65% of the respondents to the poll, that believe that keeping information from their external auditors, perhaps under the guise of privilege, is ok and good policy. Who, in heck's name, are their auditors?

Advance Notice Bylaws: Delaware Supreme Court Affirms Jana Partners

Yesterday, the Delaware Supreme Court issued this Order affirming the decision of the Court of Chancery in the CNET/Jana matter.

JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues

Today, join DealLawyers.com for the rescheduled webcast - "JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues" - as Professors Elson, Davidoff and Cunningham analyze a host of novel provisions in the JPMorgan Chase/Bear Stearns merger agreement.

- Broc Romanek

May 13, 2008

Senator Clinton's New Executive Compensation Bill

On his "Proxy Disclosure Blog" on CompensationStandards.com, Mark Borges continues to report on proxy disclosures as well as other items. For example, here is a recent entry from him:

I was doing some research on "Say on Pay" today when I stumbled across a piece of legislation that was introduced in the US Senate earlier this month that has potential implications for, among other things, executive compensation disclosure.

S. 2866, the "Corporate Executive Compensation Accountability and Transparency Act," was introduced by Senator Hillary Clinton (D-NY) on April 15th and referred to the Senate Committee on Finance for consideration. The bill aggregates a number of pay-related proposals and ideas that were in the news last year and consolidates them under a single executive compensation heading. Among other things, the bill would:

- Amend Section 409A of the Internal Revenue Code to impose a $1 million cap on the amount of compensation that can be deferred each year

- Amend Section 304 of the Sarbanes-Oxley Act of 2002 (the provision providing that, where a company is required to restate its financial statements as a result of misconduct, the CEO and CFO must reimburse the company for bonus or other incentive or equity-based compensation, or any trading profits, received during the 12-month period following the filing of the financial statements) to extend the 12 month period to 36 months and define what constitutes "misconduct" for purposes of the statute

- Add a provision to the Securities Exchange Act of 1934 mandating that reporting companies give their shareholders an annual advisory vote on their executive compensation programs (a provision that essentially mirrors the bill that passed the House of Representatives in 2007)

- Require the Securities and Exchange Commission to promulgate rules "clarifying and strengthening" the disclosure requirements concerning the compensation paid to compensation consultants and other advisors to the board compensation committee. Further, these rules would be required to (i) prohibit compensation consultants to the compensation committee from performing any other work for the company if its presents a conflict of interest or otherwise compromises the consultant's independence and (ii) contain an independence standard that would preclude a consultant from working with a compensation committee if it had a noncompensation-related business or financial relationship with the company during the previous 18 months

Finally, in an area that's close to my heart, the bill directs the SEC to promulgate rules requiring the disclosure of the full grant date fair value of equity awards in the Summary Compensation Table. While this provision wouldn't require the Commission to scrap its December 2006 interim final rules on the reporting of equity awards, that is essentially what it's intended to do.

At this point, it's difficult to know whether Senator Clinton is serious about advancing this bill, or whether it's just a campaign tactic. (Earlier this month, when the excessive executive compensation issue reared its head on the campaign trail, Senator Obama urged the Senate to take up his Say on Pay bill.) Either way, it's a strong indication of the type of legislation that may be coming next year when a new Administration is installed in Washington.

Our New "Compensation Consultant's Blog": A Baker's Dozen Now Blogging!

We're pretty excited that thirteen compensation consultants have agreed to contribute to "The Consultant's Blog" on CompensationStandards.com. If you're a member of the site, input your email address on the blog to get new entries pushed out to you.

Only One Week Left! Early Bird Discount for Compensation Conferences

You have only one week - until May 20th - to take advantage of the Early Bird Discount to register for our Conferences - "Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference" & "5th Annual Executive Compensation Conference" – which will take place in New Orleans and via Nationwide Video Webcast on October 21st-22nd. Here are the Conference Agendas.

Like last year’s blockbuster conferences, an archive of the entire video for both conferences will be right there at your desktop to refer to - and refresh your memory - when you are actually grappling with drafting the disclosures or reviewing/approving pay packages. Here are FAQs about the Conferences.

For those choosing to attend by coming to New Orleans, I encourage you to also register for the "16th Annual NASPP Conference," where over 2000 folks attend 45+ panels. And if you attend the NASPP Conference, you can take advantage of a special reduced rate for the Exec Comp Conferences.

Register by May 20th for Early-Bird Rates: Whether you attend in New Orleans or by video webcast, take advantage of early-bird rates by registering by May 20th. You can register online or use this order form to register by mail/fax. Note that we have combined both of our popular Conferences - one focusing on proxy disclosures and the other on compensation practices - into one package to simplify registration.

If you have questions or need help registering, please contact our headquarters at info@thecorporatecounsel.net or 925.685.5111 (they are on West Coast, open 8 am - 4 pm).

- Broc Romanek

May 12, 2008

Investor Relations Officers as Bloggers

As I've mused before, I believe the day will come when more of you will be either a contributor to a blog or otherwise participating in some form of "expressing yourself online" activity. A perfect example is an IRO who gets the word out about a company's investor relations through a blog.

In this podcast, Lynn Tyson, VP-Investor Relations of Dell and a co-blogger of "Dell Shares," provides tips and insights into how investor relations officers can blog for their companies, including:

- What was the genesis for launching the "Dell Shares" blog?
- What types of internal approval did you need to obtain?
- Have there been any surprises from blogging?
- What changes have you made to your blogging style since you started?

Fyi, since I blogged about my pet peeve regarding the use of a click-through disclaimer on the "Dell Shares" blog, it has been removed. Bravo!

More on the SEC's Staffing Levels

Last week, SEC Chair Chris Cox gave this testimony regarding the SEC's '09 budget before the US Senate's Appropriations Subcommittee on Financial Services. On the same day, ten Senators sent this letter to the head of that subcommittee requesting more funding for the SEC - in the amount of $50 million - than the Bush Administration is seeking.

This Bloomberg article from last week - entitled "SEC's Bear Stearns Oversight Points to Fund Shortage" - argues that more money is necessary for the SEC to adequately do its job. Here is an excerpt:

SEC staffing levels peaked in 2005 at 3,851 full-time employees, including 1,232 in its enforcement division, which investigates fraud. The agency had 3,465 full-time employees in the fiscal year ended last September and staffing in the enforcement unit dropped to 1,111.

"Staffing levels haven't kept pace with the urgent work needing to be done,'' Arthur Levitt, a former chairman of the SEC, said today in a Bloomberg Television interview. "We need more people in enforcement and more people at the commission. Those budget cuts have got to be restored.''

Under Cox, who became chairman in August 2005, the SEC has left money on the table. The 2007 budget included $14 million in "available balances from prior years,'' according to the SEC's 2009 funding request. The $906 million Congress granted the SEC in 2008 includes $63.3 million in unspent money from earlier years.

"This is akin to the fire department laying off people as the house burns down,'' said Lynn Turner, a former SEC chief accountant. Nester said more than 90 percent of the money carried over to the 2008 budget from earlier years can't be used for staff salaries. Most of the $63.3 million represents funding intended
for contract work such as technology upgrades that wasn't spent, he said.

In re infoUSA: Special Litigation Committee Stay Granted In Backdating Case

Lots still going on with options backdating. For example, the SEC has settled/brought several actions during the past month, like this action brought against Marvell Technology and its COO last Thursday.

And there is this Delaware development from Travis Laster: In Ryan v.
Gifford
, Delaware Chancellor Chandler held that an investigatory board committee (but not a formal SLC) had waived the attorney-client privilege in connection with an investigation into stock option backdating by reporting on its
findings to the full board. That opinion and the Chancellor's subsequent denial of the application for interlocutory appeal have attracted well-deserved practitioner attention. Some have expressed concern that Delaware's traditional deference to the SLC process may have ebbed, particularly in the stock option backdating context.

In this opinion, issued in the option backdating case involving infoUSA, Chancellor Chandler applied traditional Delaware deference to an application by an SLC to stay the derivative litigation to investigate the underlying allegations and claims. The opinion confirms that traditional principles of Delaware law continue to apply to SLCs, even in the sensitive area of stock option backdating.

Here are a few highlights:

1. The Chancellor granted the stay even though the defendants previously had moved to dismiss the complaint under Rule 23.1 and the Court had found demand was futile. The Court rejected the argument that the SLC was formed "too late," noting specifically that under Delaware law, even a conflicted board has the power to appoint an SLC: "The fact that I have already determined demand is excused demonstrates why the board must act by means of a committee; it does not in any way explain why it cannot act through an SLC." (Page 3).

2. The Chancellor granted a stay of 150 days, towards the high end of the traditional 3-6 month range routinely granted by Delaware courts.

3. The Chancellor rejected an argument, based on Ryan, that the Committee was not sufficiently empowered to address the litigation.

4. The Chancellor held that any challenge to the independence of the SLC was premature and would be addressed at the same time the Court considered the bases for the SLC's conclusion.

Note that the infoUSA SLC was comprised of 5 directors, three newly appointed directors and 2 whom the Court previously had deemed disinterested.

- Broc Romanek

May 9, 2008

SEC Proposes Changes to Cross-Border Rules

Yesterday, the SEC posted a 194-page proposing release related to the amendments of its cross-border rules, the first proposed changes to the rules since they were initially adopted in 1999. A departure from recent practice, these proposals were approved by the Commission seriatim rather than in an open Commission meeting.

The proposing release includes many proposed rule changes that would codify existing Staff interpretive positions and exemptive orders - although there are some areas that are proposed to change - as well as some Staff interpretive guidance that the SEC seeks comment on. The SEC's proposals include:

1. Refinement of the tests for calculating U.S. ownership of the target company for purposes of determining eligibility to rely on the cross-border exemptions in both negotiated and hostile transactions, including changes to:

- Use the date of public announcement of the business combination as the reference point for calculating U.S. ownership;
- Permit the offeror to calculate U.S. ownership as of a date within a 60 day range before announcement;
- Specify when the offeror has reason to know certain information about U.S. ownership that may affect its ability to rely on the presumption of eligibility in non-negotiated tender offers;

2. Expanding relief under Tier I for affiliated transactions subject to Rule 13e-3 for transaction structures not covered under our current cross-border exemptions, such as schemes of arrangement, cash mergers, or compulsory acquisitions for cash;

3. Extending the specific relief afforded under Tier II to tender offers not subject to Sections 13(e) or 14(d) of the Exchange Act;

4. Expanding the relief afforded under Tier II in several ways to eliminate recurring conflicts between U.S. and foreign law and practice, including:

- Allowing more than one offer to be made abroad in conjunction with a U.S. offer;
- Permitting bidders to include foreign security holders in the U.S. offer and U.S. holders in the foreign offer(s);
- Allowing bidders to suspend back-end withdrawal rights while tendered securities are counted;
- Allowing subsequent offering periods to extend beyond 20 U.S. business days;
- Allowing securities tendered during the subsequent offering period to be purchased within 14 business days from the date of tender;
- Allowing bidders to pay interest on securities tendered during a subsequent offering period;
- Allowing separate offset and proration pools for securities tendered during the initial and subsequent offering periods;

5. Codifying existing exemptive orders with respect to the application of Rule 14e-5 for Tier II tender offers;

6. Expanding the availability of early commencement to offers not subject to Section 13(e) or 14(d) of the Exchange Act;

7. Requiring that all Form CBs and the Form F-Xs that accompany them be filed electronically;

8. Modifying the cover pages of certain tender offer schedules and registration statements to list any cross-border exemptions relied upon in conducting the relevant transactions; and

9. Permitting foreign institutions to report on Schedule 13G to the same extent as their U.S. counterparts, without individual no-action relief.

In addition to those proposed rule changes, the Corp Fin Staff provides interpretive guidance or solicit commenters’ views on the following issues:

1. The ability of bidders to terminate an initial offering period or any voluntary extension of that period before a scheduled expiration date;

2. The ability of bidders in tender offers to waive or reduce the minimum tender condition without providing withdrawal rights;

3. The application of the all-holders provisions of our tender offer rules to foreign target security holders;

4. The ability of bidders to exclude U.S. target security holders in cross-border tender offers; and

5. The ability of bidders to use the vendor placement procedure for exchange offers subject to Section 13(e) or 14(d) of the Exchange Act.

If you're wondering if the lack of an open Commission meeting means that this rulemaking is less important to the SEC, the answer would be "no." Until a few Chairman ago, most rulemakings were approved seriatim and only the ones that the SEC wanted to get the attention of the mass media were approved at an open meeting. "Seriatim" simply means that each Commissioner signs an order indicating whether they vote in favor of a particular proposing or adopting release.

That trend started to change when Harvey Pitt became Chair and it is my hunch that since the open meetings are more "open" now due to the Web, that trend has continued to today. Plus, the SEC likes the publicity. But it's a production to hold an open meeting, so some rulemakings have to go seriatim to keep the rulemaking machine humming.

More on Short Sellers and Rumors

My favorite part about blogging is reactions from members, particularly those that add more value to our experiences here. Here is another excellent addition from Keith Bishop following up on my recent blog about the SEC acting on short selling and rumors: There have been two recent cases involving challenges under California law to short selling:

1. Remember Broc's "Lord Sith" blog about Overstock.com's analyst call from about two years ago? Overstock.com did file suit. Among other things, Overstock alleged that the knowing and intentional dissemination of negative reports on Overstock.com containing false and/or misleading statements concerning Overstock constituted unlawful, unfair, or fraudulent business acts or practices by the defendants . . ., in violation of California Business and Professions Code § 17200. The Court of Appeal found California's unfair competition statutes do not exclude securities claims. Overstock.com also alleged violations of California's Corporate Securities Law. In a victory for Overstock.com, the Court of Appeal affirmed the trial court's denial of the defendants motion to strike the entire complaint under California's anti-SLAPP statute (Strategic Lawsuit Against Public Participation, Cal. Code of Civil Procedure § 425.16). Overstock.com, Inc. v. Gradient, 151 Cal. App. 4th 688 (2007).

2. Remember ZZZZ Best Co. and Barry Minkow (See In re ZZZZ Best Securities Litigation, 864 F. Supp. 960, 963 (C.D. Cal. 1994))? In Usana Health Sciences, Inc. v. Minkow (D. Utah, March 3, 2008), a company sued Barry Minkow and the Fraud Discovery Institute alleging that they engaged in a scheme of illegal market manipulation involving a lengthy and uncomplimentary report about the Company. In contrast to the decision in Overstock.com, the Court dismissed the state claims under California's anti-SLAPP statute.

For years, some issuers have been complaining about the short sellers and rumors. To some extent, Wall Street has dismissed these complaints. See Joe Nocera . "New Crusade for Master of Overstock", The New York Times, (June 10, 2006) (“Except for a few fellow-traveling Web sites, where Mr. Byrne is viewed as a heroic figure, most people who understand the issue or have looked into it think it's pretty bogus.”). Overstock.com teaches that it may be possible to pursue these complaints under California's Unfair Competition Law as well as its securities law. The differing conclusions of the courts in the Overstock and Usana cases make it clear that success in the face of free speech challenges is not assured. Finally, it is important to keep in mind that Overstock.com has not yet won its case - it has only survived a motion to strike. Nonetheless, the SEC's recent settlement and the Overstock.com decision may burnish the credibility of those who are complaining about short selling and rumor mongering and encourage more litigation in this area.

A Personal Note: 20-Year Law School Reunion

I recently missed my twenty-year law school reunion. Yes, I had a bad attitude since I didn't "dig" law school - but I was out-of-town anyways. My primary reason for disliking law school was the style - way too serious and not much in the way of "real life." Isn't that true of most educational platforms? Anyways, I pose the question to you:

- Broc Romanek

May 8, 2008

Fare Thee Well Paul Atkins; Hello Troy Paredes

As the end of his term nears - and after six years in office - Republican SEC Commissioner Paul Atkins announced that he intends to leave the Commission "once a successor is appointed and takes office." Well that may be soon since President Bush has already nominated Professor Troy Paredes as Atkin's successor (as noted in this article). Given the speed of this nomination, the confirmation hearings may be upon us shortly.

So it looks like the Senate will consider the confirmation of three SEC Commissioners at once - Troy and the two Democratic candidates, Luis Aguilar and Elisse Walter. Three new Commissioners at once is beyond rare; according to this chart, it would be the first time it has happened since the Commission was formed in 1934.

By the way, Peter Schwartz recently wrote a pretty nice piece about Commissioner Atkins in his "Soap Box" (scroll down to April 28th entry).

I think it will be cool to have someone named "Troy" as a Commissioner. You may recall that was Fred Flintstone's nickname in Episode 140 when Fred became a surfer hipster dude and kept saying "Yeah, yeah, I'm hip, I'm hip." My friends made me a "Troy" T-shirt in college...

CorpGov.net: The First Governance Site

I've been a long-time reader of Jim McRitchie, who is Editor of CorpGov.net, a site that has been up over a decade and where Jim essentially has been blogging that entire time on his "News" page (even before there was blogging software available).

In this podcast
, Jim provides insights into what it's like to be a long-standing reporter on corporate governance issues, including:

- What led you to create CorpGov.net a decade ago?
- How has the site evolved over time?
- What have been the biggest surprises in managing the site?

The Future of Corporate Law: Symposium Notes

Below is a great example of the useful types of information that Jim McRitchie provides on CorpGov.net:

In the current issue of The Delaware Lawyer, a variety of practitioners and academics (including Lucian Bebchuk, Robert Thompson, Michael Dooley and Charles Elson) present brief appeals for reform of Delaware’s corporate statutes. Many of them, joined by professors Jennifer Hill, Brett McDonnell, Faith Kahn, Elizabeth Nowicki, and Ann Conaway, discussed their proposals for reform at the Delaware General Corporation Law for the 21st Century Symposium on May 5th at the Widener University School of Law in Wilmington.

Most Americans have become "forced capitalists" as companies have moved from traditional defined benefit pensions to 401(k) plans for employees, said Vice Chancellor Leo Strine Jr., a judge in Delaware's Court of Chancery, at the lunch address. These forced capitalists invest in the market through intermediaries or money managers, Strine said. He calls it "separation of ownership from ownership." (Experts look at corporate law statute, Delawareonline.com, 5/6/08)

Robert Thompson noted that "self-help" measures are important for shareholders. Delaware statutes have gaps with regard to that need. If Delaware doesn't address the need directly, it will likely lead to a patchwork of Federal provisions. Shareholders must be able to check directors when they are conflicted or entrenched. There has to be an effective way to exercise their franchise which cannot be redirected by the board. Delaware should write statutes which make Federal preemption less likely.

Charles Elson said that times change. As great as the Delaware corporate law scheme is, we need changes to better protect investors. Forty years ago, we were in a different era. Now, stock is aggregated and held by largely by institutional investors who are more sophisticated. They don't need protected by management. Shareholders need a way to replace directors, not just vote them down. Shareholders don't have the right to direct day to day operations and shouldn't. However, for directors to be accountable to shareholders, we need the threat of a real election. Make the election a vibrant process by allowing reimbursement for short slate contests instead of the current asymmetry where corporations only pay for one side. I get nervous when managers view themselves as the corporation. Elson has proposed a statute that would reimburse shareholders for the cost of putting forth a competing slate of directors if they are successful or nearly successful in getting people on the board.

Rick Alexander argued that five mergers were shot down by shareholders recently. The market is doing its job. Directors have a lot of information that isn't publicly available. There are legitimate differences. We're not going to maximize the economy by going with what 51% of stockholders think. What about the rights of the other 49%? Directors take their jobs very seriously. They know that failure to adopt resolutions that get a majority may cost them their jobs because ISS will recommend voting against them.

Jennifer Hill said the US hasn't looked much to developments in other countries. The federalist system provides competition for corporate charters in the US. Common law may be better than civil law. However, the idea that the US operates similarly to other common law countries is a misconception. In the UK and Australia changes happens much more frequently. SOX didn't give shareholders participatory rights, only some additional protection of their rights through disclosure and liability. In Australia and the UK a raft of recent laws have strengthened rights with provisions such as "say on pay." Bainbridge and Stout argue shareholders don't want rights. However, for Hill, News Corporation's move from Adelaide was instructive. Institutional investors wanted charter provisions to render inapplicable certain Delaware laws in order to maintain Australian rights where corporate constitutions can be changed by shareholders, meetings can be convened by 100 members, and no poison pills are allowed.

- Broc Romanek

May 7, 2008

"Say on Pay": Five Notables

With Aflac's annual meeting results now in, "say on pay" is in the news. Here are five items to consider:

1. Aflac's Pay Package Gets 93% Support - As noted in this NY Times article, Aflac's meeting on Monday was uneventful with the company's executive pay package getting overwhelming support.

2. RiskMetrics' Aflac Report - ISS kindly has given us permission to post its analysis of Aflac's "say on proposal." It is interesting comparing that to the PIRC report that I posted last week.

3. Shareholders Not Supporting "Say on Pay" As Much This Year - As noted in this Washington Post article, the level of support for "say on pay" proposals is down this year compared to last year (bearing in mind that last year's levels were remarkable for a "first year" type of proposal). So far, only proposals at Apple and Lexmark have garnered majority support.

Compare the Washington Post's conclusions with those of ISS from this article. Here is an excerpt: "This year, pay vote proposals have averaged 42.1 percent support at 21 companies so far. That is in line with results for calendar 2007, when 52 such proposals received 42.5 percent average support. Surprisingly, however, the measure received less support at a number of financial companies this season, including Citigroup, Morgan Stanley, Wachovia and Merrill Lynch, where many observers expected the measure would fare better than last year given investor anger over subprime-related losses."

As noted in the ISS piece, I'm also hearing that levels of support for proposals generally are down. I'm not sure of the reason, although some claim it's partly due to the lower level of retail holders voting under e-proxy (I'm not sure I buy that given that relatively few companies are doing e-proxy).

4. Two More Companies Agree to "Say on Pay" - Littlefield and MBIA have joined the group of companies that have agreed to allow their shareholders to vote on executive pay, bringing the total number to seven. MBIA's vote will occur in 2009 and Littlefield's vote is in a few weeks, where its shareholders will vote on two management resolutions that ask shareholders whether the total compensation received by the CEO, president, and directors in 2007 “is within 20 percent of an acceptable amount,” according to its proxy statement. Hat tip to this ISS article for uncovering these two!

5. RiskMetrics' Own "Say on Pay" Proposals - A few weeks ago, RiskMetrics Group filed its first proxy statement and it includes three separate resolutions for shareholder approval, which may become the model for future "say on pay" proposals. These three proposals are: (1) the company’s overall executive compensation philosophy; (2) whether the board executed these principles appropriately in making its 2007 compensation decisions; and (3) the board’s application of its compensation philosophy and policies to the company’s 2008 performance objectives.

Canada Revises Its Executive Compensation Proposals

Recently, the Canadian Securities Adminstrators re-published their executive compensation disclosure proposals. The original proposals were made a year ago - and interestingly, many Canadian companies have already voluntarily changed their disclosures to match the proposals. Here is a memo explaining how the proposals have changed.

The PCAOB Speaks: Latest Developments and Interpretations

We have posted the transcript from our recent webcast: "The PCAOB Speaks: Latest Developments and Interpretations."

- Broc Romanek

May 6, 2008

Sample: Wal-Mart Reacts to Advance By-Law Cases

In the wake of the two recent Delaware Chancery Court cases (Levitt Corp. v Office Depot; JANA Partners v. CNET) regarding advance by-laws, some companies are taking the memos posted in our "Advance By-Laws" Practice Area to heart. Essentially, the memos urge companies to specify in their Notice that the agenda item on director elections applies only to the election of director candidates described in the company's proxy statement; not to nominations generally. For example, when Wal-Mart filed its proxy statement recently, it limited its state law notice to only those nominees “named in the attached proxy statement.” Compare Wal-Mart's notice from last year.

Another example is the proxy statement filed by the Canadian company, Storm Cat Energy Corp. Interestingly, Storm Cat is incorporated in British Columbia, so it's not directly impacted by the recent Delaware decisions. (By the way, it's a cool name for a company, although I have a beef with them - when you click on "Annual Reports" on their IR web page, the 2005 glossy is the latest!)

J-SOX is On!

A few years in the making, Japan now has it's own version of the Sarbanes-Oxley Act. The J-SOX rules became effective on April 1st and they apply to about 3,800 Japanese listed firms, their large subsidiaries and affiliates. The new rules are bound to have their own challenges. Learn more in our "J-SOX" Practice Area.

2008: The Year of the Hedge Fund Activist

Join DealLawyers.com tomorrow for the webcast - "2008: The Year of the Hedge Fund Activist" - to learn about the latest strategies and tactics used by hedge fund activists, as well as latest planning tips employed by those that seek to stave off these attacks. The panel includes:

- David Katz, Partner, Wachtell Lipton Rosen & Katz
- Ron Orol, Senior Writer, The Deal and The Daily Deal
- Damien Park, President & CEO, Hedge Fund Solutions, LLC
- Veronica Rendon, Partner, Arnold & Porter LLP
- Professor Randall Thomas, Vanderbilt University Law School
- Christopher Young, Director of M&A Research, RiskMetrics Group

The Williams Act - 40 Years Later!

On May 21st and 22nd, Georgetown University Law Center will be hosting a conference to commemorate the 40th anniversary of the adoption of the Williams Act takeover regulations. The speakers and panelists will include members of the SEC staff, academics, financial journalists, international takeover regulators, practitioners, bankers, and Delaware judges. It's free - but you still need to register (here is the agenda). If you have questions, contact Larry Center at center@law.georgetown.edu.

Earlier that week, Corp Fin will be hosting a meeting of international takeover regulators at the Commission’s headquarters - so representatives from the UK, Germany, France, Hong Kong, Australia and Japan will likely be at the Georgetown conference, lunch and reception if you want to rub elbows with a group of regulators.

- Broc Romanek

May 5, 2008

Obtaining Staff Guidance: No-Action, Interpretive and Exemptive Requests

We just put the finishing touches and mailed the March-April '08 issue of The Corporate Counsel, which includes guidance on the process for obtaining issuer-specific and interpretive guidance from the Corp Fin Staff. For those that haven't tried a no-risk trial, try one now to get this issue rushed to you. In an upcoming issue, we will discuss the process for obtaining informal legal guidance and relief from Corp Fin's Office of the Chief Accountant.

The March-April '08 issue includes analysis of:

- Obtaining Staff Guidance Today
- Staff Response Process
- What Staff Relief Means
- The New 8-K Item 5.02 CDIs
- Current Disclosure of Cash Bonus, Etc. Plans (Item 5.02(e))
- Officer and Director Appointments, Resignations, etc. (5.02(b)–(d))
- Bebchuk's Shareholder Proposal—Follow-Up
- Expect More Full 1934 Act Reviews
- Non-AFs—Failure to Include the SOX 404(a) Report in the 10-K
- SEC–0; Short Sellers–3—More Thoughts on Mangan, Etc.

Happy 6th Anniversary to Me!

Today marks six full years of blogging for me. It's definitely personally and professionally rewarding, but it can tend to rule your life (but doesn't cause death like this NY Times' article intimates). That's why I'm so glad Dave joined me on this blog last year.

And I'm excited that Steve Haas of Hunton & Williams has joined me on the DealLawyers.com blog. On Friday, Steve posted his first entry. Any other M&A practitioners out there interested in blogging? I'm hoping to add a half-dozen others willing to post something once or twice per month. If interested, give me a buzz or email me. You too can "be somebody"!

Nasdaq: Housekeeping the Rules

Recently, Nasdaq submitted a proposal to the SEC that would reorganize the rules applicable Nasdaq-listed companies. These rules would be moved from the Rule 4000 Series of the Nasdaq manual to the Rule 5000 Series - and would not change the substance of any rule. According to Nasdaq, the reorganization is necessary because the rules have become complex over time and difficult to navigate.

I applaud the Nasdaq for recognizing the need to clean up its "house." We are in the process of doing the same for our sites, which have grown heavy with content over the years and are in need of some reorganization. Recently, Section16.net and CompensationStandards.com have undergone a "tune up." Let us know if you have suggestions about how improve our sites.

- Broc Romanek

May 2, 2008

The E-Proxy Experience: Practice Pointers and Pitfalls to Avoid

The interest in our inaugural issue of InvestorRelationships.com has been overwhelming. As Yoda would say, investor relationships are very strong in this one.

No doubt that one reason for the interest is the lead article entitled "The E-Proxy Experience: Practice Pointers and Pitfalls to Avoid." Sign-up for free copies of this new quarterly newsletter and see what you think of the pointers.

Broadridge's Latest E-Proxy Stats

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

- 283 companies have used voluntary e-proxy so far (a big leap from 103 at the end of February - understandable since proxy season is in full swing)

- Size range of companies using e-proxy varies considerably; all shapes and sizes (eg. 25% had less than 10,000 shareholders)

- Bifurcation is being used more as the proxy season progresses (but still not all that much); of all shareholders for the companies using e-proxy, now over 10% received paper initially instead of the "notice only" (up from 5% last month)

- 0.45% of shareholders requested paper after receiving a notice; this average is down from 0.70% at the end of February

- 55% of companies using e-proxy had routine matters on their meeting agenda; another 30% had non-routine matters proposed by management; and 14% had non-routine matters proposed by shareholders. None were contested elections.

- Retail vote goes down dramatically using e-proxy (based on 92 meeting results); number of retail accounts voting drops from 19.0% to 4.5% (over a 75% drop) and number of retail shares voting drops from 31.4% to 13.9% (a 56% drop)

This recent WSJ article entitled "Shareholder Voting Declines as Companies Adopt Web Ballots" muses on various reasons why retail voting has declined when e-proxy is used. I doubt it's a "temporary phenomenon as shareholders make the adjustment."

Our May Eminders is Posted!

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

"Witches Brew": SEC Accuses Trader of Rumormongering on Deal

As noted in this NY Times article on Friday (and this Wilson Sonsini memo), the SEC settled a case with a former securities who allegedly spread false rumors to profit from a pending buyout of Alliance Data Systems by the Blackstone Group (the deal tanked later due to other reasons). The SEC said this was its first "rumormongering" case.

According to the NY Times article, the trader allegedly "fabricated a rumor that Alliance Data’s takeover was being renegotiated to $70 a share from $81.75 a share. The trader said that Alliance Data’s board was meeting to discuss the revised proposal. At the time, Alliance Data’s board members were on a plane and could not be reached for comment." Trading in Alliance Data's stock was suspended due to heavy volume caused by the rumor, which the trader had sent via instant messages to 31 other traders and other market participants. He was short selling the stock at the time.

Reading the SEC's complaint, it's not clear if the trader knew that the board was on a plane and unavailable - my guess is that he didn't know (and thus was unlucky because if they had been reached and quashed the rumor more quickly, the damages would have been reduced and perhaps this case wouldn't have been brought or the penalty would be been less than the $130,000 he ended up paying).

In the SEC's press release, SEC Chairman Cox noted "“The commission will vigorously investigate and prosecute those who manipulate markets with this witch’s brew of damaging rumors and short sales.” It will be interesting to see if the SEC's Enforcement Division will be bringing more of these cases, particularly due to the heightened interest in hedge funds and their failures to adopt adequate insider trading compliance programs (see Dave's recent blog on the SEC's Section 21(a) Report involving the investigation of the Retirement Systems of Alabama).

- Broc Romanek

May 1, 2008

The SEC's 2009 Budget: Same Ol', Same Ol'

On the one hand, SEC Chairman Chris Cox has been under fire, mostly due to his comments just before the Bear Stearns deal was announced (and more generally due to the crisis on Wall Street). On the other, he is being mentioned as a possible running mate for John McCain, as noted in this ABC poll. This is the world of "inside the Beltway" in a nutshell.

In the face of the market crisis, Chairman Cox recently gave testimony before the House Subcommittee on Financial Services/Appropriations regarding the President's proposed SEC budget for fiscal year 2009. Noting that the agency's budget has not been increased for three years, Cox is seeking a 4% increase over two years. Trust me, this ain't much because after taking inflation into account and the impact of pay raises, the head count for the Staff would remain basically the same.

It's hard to imagine how the SEC will be able to regulate new markets (eg. rating agencies), delve into the complicated derivatives and securitization morass and chase the seemingly ever-increasing number of wrong-doers with its current level of staffing (this op-ed from yesterday's NY Times by three former SEC Chairs agrees). Not to mention the challenges of integrating a global regulatory framework. If that's not enough, maybe this will get your attention - there is a total of one person in the SEC's Office of Risk Assessment today.

Even some in the government are skeptical that the President's budget for the SEC makes sense. According to this article in the FT.com, the GAO will examine the SEC's Enforcement Division to ensure it has adequate recources; looking at the SEC's budget justification (page 13), you can see that the percentage of enforcement cases filed within two years of an inquiry first being made has markedly declined over the past few years. And in this speech, Senator Reed discusses his views on the topic.

SEC Filing Fees: Going Way Up

In yesterday's fee rate advisory, the SEC announced that filing fees will be going up after October 1st (or whenever Congress approves the SEC's budget, which historically is significantly later than October 1st) to $55.80 per million from $39.30 per million of securities registered with the SEC.

This is a 42% hike, after a 28% hike last year. Before this period, there had not been a hike for quite some time. Note that there is no mention in the SEC's press release of a reason for the hike. Actually, the press release doesn't even mention that this is a hike from last year (but we still remember how Chairman Cox was quite proud of the steep drop in '06, with a lot of fanfare in that press release). You may recall that the SEC's fee rates aren't related to the amount of funding available to the SEC; instead, the money goes to the US Treasury.

The Leap Year Curse

In typical leap year fashion, word on the street is that many companies missed the 120-day proxy filing deadline on Tuesday. Apparently, some service providers had the due date as Wednesday on their "filing calendar." Yikes, a "failure to communicate"?

- Broc Romanek