TheCorporateCounsel.net Blog |
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Friday, October 24, 2003
Regulation G's Mixed Blessing for REITs In its FAQ No. 7 issued in June, the SEC staff reiterated that only the measure "funds from operations" - known as "FFO" - as defined by the industry association NAREIT could be used by companies as "funds from operations per share" in earnings releases and materials that are filed/furnished with the SEC. This exception for the real estate industry was first espoused in footnote 50 of Reg G's adopting release. The mixed blessing is that NAREIT's definition was not universely applied by real estate companies - thus, the SEC's exception did not really help those companies too much. In FAQ 7, the SEC staff made clear that use of a modified measure would be subject to all of the provisions of Item 10(e) of Regulation S-K. Lately, NAREIT has been in discussions with the SEC staff over a disagreement regarding the exclusion of impairment charges from FFO - the staff ruled it can't be excluded. As noted in a recent alert, NAREIT believes that this staff position is inconsistent with guidance it issued in July 2000, which indicated that impairment write-downs of depreciable real estate should be excluded from FFO. As I understand it, the theory for the NAREIT approach is that impairment charges should be treated like depreciation. The SEC staff appears to disagree. [it doesn't appear that the NAREIT alert is available on their web site - if you want a copy of the alert, shoot me an email.] Disclosure of Potential Environmental Liabilities Investors consistently seek more disclosure about potential environmental liabilities; companies consistently are loathe to provide too much disclosure for fear of tipping their hand in litigation. Alan Beller has stated that if the SEC puts out an interpretative release on MD&A in time for the upcoming proxy season (a window that is now measured in weeks), it will address this tension. For TheCorporateCounsel.net subscribers, we have posted an interview with Greg Rogers on Environmental Liabilities Risks and Disclosure. Thursday, October 23, 2003
Completed My Set of Audit Committee Evaluations! Like collecting baseball cards, we have completed a set of sample audit committee evaluations by obtaining one from each of the Big 4. Subscribers of TheCorporateCounsel.net can review these samples in our "Audit Committee Portal." When putting together a committee evaluation, I believe its important to not overwhelm directors with too many questions. Quality over quantity. Its also important to have company-specific questions, particularly questions that probe into the committee's performance for handling critical matters that arose over the past year. The principal purpose of the evaluation process is continuous improvement. Two different sets of directors should evaluate the committee, those on the committee and those not on the committee - although questions for those not on the committee often are part of the overall board evaluation. Note that under the PCAOB's proposal regarding internal control attestations, the independent auditor would be required to evaluate the audit committee's performance (see paragraphs 56-59 of the proposed standard)! [I find it odd that I haven't seen a single client memo on this proposal yet, arguably the most important rulemaking of the year.] Forced and Sudden Auditor Rotation One of the side effects of the absolute prohibition of certain non-audit services in Section 301 of Sarbanes-Oxley is that a company might suddenly find itself without an auditor with little warning. There is no materiality standard or safe harbor in Section 301 for these prohibitions. Changing an auditor is expensive as the new auditor has to exert a lot of effort to get up to speed and - more often than not - a change results in a restatement. The first example of this dilemma comes from the Royal Bank of Canada, which had one of its two auditors (Canadian companies often have two auditors, a practice that is now changing) because it performed $200k (Canadian dollars) of non-audit services at a foreign subsidiary. Audit committees are responsible for ensuring they don't have this messy - and expensive - situation on their hands. This can be quite a challenge for multinational companies with dozens of audit firms to oversee in far flung places (the Big 4 have loose affiliations with audit firms all over the world that share the same brand name, but really have separate operations - one of the issues implicated by the PCAOB trying to regulate the Big 4 as if they were really only 4 firms). For TheCorporateCounsel.net subscribers - thanks to Marilyn Mooney of Fulbright & Jaworski - we have posted a nifty chart that audit committees can use to keep track of the various types of audit/non-audit services performed by the independent auditor (its at the bottom of the memo which resides in our "Audit Committee Portal"). SEC Adopts Amendments to Rule 10b-18 Safe Harbor At its open Commission meeting yesterday, the SEC adopted changes to the Rule 10b-18 safe harbor. Rule 10b-18 provides a safe harbor from certain market manipulation violations under Rule 10b-5 for issuer repurchases of its common stock that meet certain conditions regarding the manner, timing, volume and price of repurchases. Thanks to Mike Holliday, based on the oral comments made at the meeting, it appears that the changes include: - elimination of the exclusion of block purchases from the volume limitation of 25% of the average daily trading volume (ADTV) so that block purchases will now have to be included in the 25% test; block purchases will also be included in the ADTV determination. The modifications adopted will provide a limited block purchase exception that would permit one block trade per week (probably of greatest value to small issuers). - exclusion of repurchases from the safe harbor during the period from the time of public announcement of a merger, acquisition or similar transaction involving a recapitalization until the completion of such transaction. This would appear to expand the present wording which excludes from the safe harbor a purchase made "pursuant to a merger, acquisition, or similar transaction involving a recapitalization." - expansion of merger exclusion from the safe harbor, but the SEC said it was also adopting a limited exception (e.g. whatever activity the issuer had during the 3 months prior to announcement of a merger would be permitted after announcement of the merger. In other words, the issuer could mirror the activity during the 3 prior months. It will be necessary to see exactly how this exception is worded in the adopting release. - adoption of new disclosure requirements that will require a tabular presentation of information on all purchases of any class of registered equity securities by the issuer or any "affiliated purchaser" as defined in Rule 10b-18, whether public or private purchases, and whether or not the purchases were made under the Rule 10b-18 safe harbor conditions. The table and related footnote information are required in Forms 10-Q and 10-K. The purchase information is required to be presented on a monthly basis for each quarter. The 10-K would report information for the fourth quarter. In addition to information about purchases, certain information about publicly announced repurchase plans or programs is required, including whether the issuer still intends to purchase under the plan or program. This latter point on future intent was opposed by some commenters, but it appears it was retained in the new requirements as adopted. Tuesday, October 21, 2003
The Wildest Proxy Season Ever: Forecast for 2004 Trust me that the 2004 proxy season will be wild. On top of the changes wrought by the NYSE/Nasdaq new rules regarding shareholder approval of equity comp plans (including the loss of broker non-votes), investors appear ready to cooperate more than ever. And the SEC staff likely will allow shareholder nomination proposals - so long as they reference the SEC’s proposed 14a-11 rule - so that "triggerable" circumstances will exist by the time the SEC adopts some form of shareholder access for 2005. Last season, similar proposals were deemed excludable by the staff, such as the Citigroup no-action letter (that essentially was part of the motivation for the SEC to embark on this initiative) that the SEC staff has informally indicated is still excludable. Tommorrow, on a TheCorporateCounsel.net webcast, join Pat McGurn of ISS as he dissects what trends are shaping up for next proxy season. In addition, Professor Charles Elson will spend some time discussing the Breeden report. I will be posting a PowerPoint from Pat sometime in the early afternoon and will link to it here and on the home page. Sign up for a "no-risk" trial to access this timely webcast. PCAOB Registration of European Auditors According to AccountingWeb.com, U.S. and European Union regulators are nearing agreement over the controversial matter of European firms registering with the PCAOB. U.S. firms have until tommorrow to register; EU firms have until April 2004. Last year, E.U. Commissioner of Internal Markets objected to the suggestion that EU firms need to register with the PCAOB, indicating that their own controls are sufficient and a required U.S. registration would subject EU audit firms to "a double regulatory regime which would be excessive, inefficient and disproportionate." Now, PCAOB Chairman McDonough says that a final agreement was imminent that would require EU firms to "joint register" with their local regulators and the PCAOB. One open issue is how much information firms will have to provide when registering. In addition, the compromise will require EU legislative changes, so that the EU registration requirements match those of the PCAOB. EU legislation can take up to 18 months - making it unlikely they could occur before the PCAOB registration deadline of April 2004. Monday, October 20, 2003
SOX II! Now that is a Scary Thought... At the NACD Annual Conference today, PCAOB Chair William McDonough gave an excellent speech on "Restoring Trust" and explained how the number one topic on the Hill these days is not the Iraq occupation - but rather sheer rage over executive compensation. He noted how many in Congress were asking him if it would be feasible to pass a law regulating compensation. Much to Chairman McDonough's credit (my 1st time hearing him and he was simply great!), he recognizes that Congress' last foray in this area probably played a role in where we have gotten today (i.e. Section 162(m)). However, he believes that companies are not acting fast enough to curb excessive compensation and warns that SOX II could very well happen and that it "would curl your hair." In addition, he noted that Wednesday is the deadline for audit firms to register with the Oversight Board, with just under 500 firms registering so far. As it will do every year, the PCAOB has begun investigating the Big 4 and have already moved from checking the "tone at the top" to an examination of individual audits (with next year promising to be more intrusive as the PCAOB grows from its 88 staffers to a much larger agency). Ira Millstein, the Guru Speaks The luncheon speaker was Ira Millstein, Senior Partner at Weil Gotshal, who was widely recognized at the NACD conference as the ultimate governance guru. A second edition of his book, "Recurrent Crisis in Corporate Governance" is due out in December (as an aside, Nell Minow was sporting the 3rd edition of her governance book that will be available soon - its a great book). Ira pointed out that conceptually, two important events have occurred that outweigh the immediate impact of SOX and its related rules. First, he pointed out that the current governance revolution is a global one - not just localized here in the States. Second, he observed that governance has become a political issue - as governance undeniably impacts the company's economic growth and plays a role in the integrity of our retirement system (i.e. most retirement funds are in equities). Regarding shareholder access, Ira's view is that the current system has not performed well - and that access clearly would be better (albeit perhaps not the best solution). Most of all, it would add to the other new incentives that should help ensure that directors are thinking about what they are doing, so that they would "be proud to tell their mother" about the decisions they have made. Sunday, October 19, 2003
Shareholder Approval of Equity Compensation Plans Last week, the SEC approved the Amex's rules on shareholder approval - as well as amended rules for the Nasdaq. At the NASPP conference, David Drake of Georgeson Shareholder and Art Meyers of Palmer & Dodge gave an excellent presentation on the impact of the new rules - and the NASPP might have a reprise of that panel on a special webcast soon. Also note that the Sept/Oct issue of The Corporate Counsel that just hit the streets covers the new shareholder approval rules in detail. SFAS 123 Transition Deadline Looming One point well made at the NASPP conference was the upcoming SFAS 123 transition deadline for companies looking to expense their outstanding options under the increasingly popular prospective method. As set forth in SFAS 148 - which amended SFAS 123 and establishes three alternative transition deadlines - the deadline for selecting the prospective method is December 15th. Under the prospective method, the fair value expensing of options is applied only in the year of grant and subsequently. This initially results in a lower level of option expense in the income statement compared to the other two alternatives - which can make it appear that a company has a trend of increasing option expenses. However, this effect can be offset if the company intends to reduce the aggregate value of future grants - which is the case for many companies. From Bear Stearns, here is a list of the 350 companies that have adopted - or announced that they intend to adopt - 123 as of early September. Cert. Denied by Supreme Court in Section 16 Case On October 14th, the U.S. Supreme Court denied the application for certiorari filed by the defendants (insiders) in Levy v. Sterling Holding Company LLC (Docket No.03-171). This is the case with the troublesome decisions on Rule 16b-7 and Rule 16b-3. The SEC had filed an amicus brief in the rehearing before the entire Third Circuit arguing that the Court's interpretation of the SEC rules was incorrect. As you may recall, the Third Circuit did not follow the SEC's interpretation of the rules. Alan Dye - who was involved in the case - provides an analysis of this important case on Section16.net. |
