Monthly Archives: January 2003

January 17, 2003

Shortly, we will be posting

Shortly, we will be posting a list of links to the entities/organizations that host director education programs. Spurred by the proposed new listing standards and corporate governance ratings services, the number of these programs has grown dramatically in the past six months.

The odd thing that i am hearing is that not too many directors attend these programs – rather, it is in-house counsel, corporate secretaries and others that populate the programs – and the directors that do attend typically are from the smaller companies. This makes sense as larger companies normally can afford to bring in experts to conduct educational programs on site at a board meeting (and directors of these companies tend to be shorter on time availability than most).

If you have an opinion or different experience, send me an email at

January 15, 2003

The SEC’s next open meeting

The SEC’s next open meeting is Wednesday, January 22nd to adopt rules relating to:

* standards of professional conduct for attorneys
* off-balance sheet arrangements
* auditor independence and related disclosures
* mutual funds voting and policy disclosure

See the SEC digest with the meeting notice at

January 15, 2003

Today, the SEC held an

Today, the SEC held an open Commission meeting to consider a variety of rulemaking (the Commission will adopt 9 rules and present 4 major studies during the next 2 weeks). The SEC adopted final rules on pro formas and filing of earnings releases; black-out pension funds; code of ethics for senior officers; and “audit committee financial experts”. The SEC delayed the adoption of rules relating to internal control reports and analyst certifications.

A. Financial Expert – As for “audit committee financial expert” (which term has been expanded from “financial expert”), the SEC listened to the 200 commentators that thought that the proposed definition of expert was too narrow. Accordingly, the definition has been significantly liberalized compared to the proposal.

Under the final rule, companies must disclose whether they have such an expert – and if not, why not. This rule is effective for fiscal years ended 7/15/03 or later (except for small business issuers, which take effect for fiscal years after 12/15/03). The rule does apply to foreign private issuers.

“Audit committee financial experts” must have five attributes:

1. understanding of financial statements and GAAP;
2. assess general application of GAAP in connection with accounting for estimates, accurals, and reserves;
3. experience preparing, auditing, analyzing, evaluating financial statements that present level of complexity of accounting issues comparable to the breadth of the issues that could reasonably be expected to be presented by the company’s financial statements;
4. understanding of internal controls; and
5. understanding of audit committee functions.

In addition, such persons must acquire such attributes through education and experience as a CFO, chief accounting officer, controller, public accountant, auditor or position that performs similar functions – including experience “actively supervising” one or more of the above named persons. This would seem to include CEOs – but the adopting release will clarify that “active supervision” means “hands-on” supervision and not just someone higher on an organization chart (so CEOs might well not fit).

A safe harbor in the rule states:

– designation as an “audit committee financial expert” will not deem such person as an “expert” for securities law purposes
– designation does not impose additional duties or liabilities as compared to other audit committee members (in the absence of express imposition of such duties and liabilities)
– designation does not impact the duties or liabilities of other audit committee members

B. Pro Formas/Earnings Releases [thanks to Mike Holliday for his notes here!]

The SEC modified its proposal so that Reg G will not apply to non-GAAP information included in disclosure already subject to SEC detailed requirements covering business combinations.

The non-GAAP definition will not include measures required to be disclosed by GAAP or SEC rules or a system of regulation applicable to the registrant. In addition, EBITDA will be exempt from the prohibition on excluding charges or liabilities that
required or will require cash settlement, or would have required cash settlement absent an ability to settle in another manner.

Item 10 of Form 8-K was changed so that non-GAAP per share measures will generally be permitted. In addition, the Reg G provision permitting forward-looking non-GAAP measures where comparable quantitative information is not available without
unreasonable effort will also apply to Item 10 SEC filings. Also, the provision on information subject to SEC disclosure requirements covering business combinations in Reg G will be included in Item 10.

Form 8-K will require submission of earnings releases and announcements on Form 8-K. Note that this applies to results for completed fiscal periods and does not apply to forecasts for future periods. Also, the 8-K requirement applies whether or not the release or announcement contains non-GAAP measures. The 8-K requirement was modified so that it will not require that earnings releases and announcements be “filed” on Form 8-K, but will permit a company to “furnish” the release or announcement on Form 8-K. If “furnished”, Item 10 of S-K will not apply. (Of course, Reg G will always apply if non-GAAP measures are included.)

A new Item 12 of Regulation S-K will be created that will apply to earnings press releases and announcements that are “furnished” on Form 8-K. Item 12 will require reconciliation to GAAP, equal or greater prominence for comparable GAAP measures, purpose for using non-GAAP and why management believes non-GAAP provides useful information to investors. One Form 8-K could
satisfy the new 8-K requirement and Regulation FD. (The FD timing requirement would have to be met.)

The related SEC press release is at

January 14, 2003

Rumor has it that the

Rumor has it that the SEC is leaning towards not including the proposed “noisy withdrawal” requirement in its final rules (final rules must be adopted by January 26th) – see the related Washington Post story at

The California Secretary of State has issued the form that must be used to comply with California’s new annual disclosure requirements – this new form (known as the “Corporate Disclosure Statement”) is available at

Gibson Dunn & Crutcher has several articles related to this new disclosure requirement at

January 13, 2003

In a radio address over

In a radio address over the weekend, President Bush promised that the SEC’s budget would be significantly raised next year – to over $840 million.

However, the SEC has not been appropriated the additional money for this year’s budget that was approved by Congress last summer. This stalling has drained the existing SEC staff and has kept many potential staffers on hold for several months. Its unclear if this logjam will ever break.

January 10, 2003

The members of the new

The members of the new Public Company Accounting Oversight Board are getting paid industry rates (or even better for some members no doubt, such as the Acting Chair who was working for the SEC before). Each of the four members will receive $452,000 per year – and the chair will earn $556,000 annually. With a budget of nearly $45 million, the Board intends to hire 200 staffers this year and 70 more next year. See a related Washington Post article at

January 9, 2003

Today, the Conference Board’s Blue

Today, the Conference Board’s Blue Ribbon Commission published its final corporate governance recommendations – including 3 alternative models for the board of directors. See

Yesterday, the US Sentencing Commission released its new sentencing guidelines – they take effect January 24th. See the related Washington Post article at

January 8, 2003

The SEC designated Charles Niemeier

The SEC designated Charles Niemeier to be the Acting Chairman of the Public Company Accounting Oversight Board – moving over from acting as the Chief Accountant in the Division of Enforcement and co-chairman of the SEC’s Financial Fraud Task Force.

Also today, the SEC held an open meeting and proposed a rule that would direct the SROs to prohibit the listing of any security if the issuer does not comply with the audit committee requirements established by Section 301 of Sarbanes-Oxley. Under the proposed rule, an issuer would not be prohibited from having a security listed so long as:

– each member of the audit committee was independent according to specified criteria in Sarbames-Oxley

– the audit committee was directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditor

– the audit committee had procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters – including procedures for the confidential, anonymous submission by employees regarding questionable accounting or auditing matters.

– the audit committee had the authority to engage independent counsel and other advisors, as necessary; and

– the issuer provided appropriate funding for the audit committee.

The proposed rule would apply to both domestic and foreign listed issuers – but the SEC will note in the proposing release that it seeks specific comment on certain areas due to known conflicts with laws of other countries ( allowing non-management employees to serve as audit committee members, allowing shareholders to select or ratify the selection of auditors, allowing alternative structures such as boards of auditors to perform auditor oversight functions where such structures are provided for under local law; and addressing the issue of foreign government shareholder representation on audit committees).

The proposed rule would also require disclosure regarding the identification of the audit committee in annual reports and audit committee independence. The proposing release is at

The comment period is 30 days (and rules must be adopted by late April) – and the transition period is proposed as no later than the 1st anniversary of the final rule. If you listen to the archived webcast, the discussion of this rule starts at minute 26. Much of the discussion is about independence standards for non-listed companies (as proposed, they would have to pick a standard from an SRO of their choice) and application to non-US companies (discussed above). The archive is at

The SEC will be holding another open meeting next Wednesday, 1/15, at 10 am to adopt rules regarding pro formas and filing of earnings releases; black-out pension funds; code of ethics for senior officers; “financial experts” on audit committees; and internal control reports – as well as analyst independence.

January 3, 2003

Fresh start for a new

Fresh start for a new year – I am now the Editor of This is the location of my new blog – and I promise to include more practical information than i have provided in the past.

If you would like to contact me – or 703.237.9222. This contact info is always in the “About Us” section of

The SEC is holding an open meeting on Wednesday, January 8th to direct the SROS to prohibit the listing of any security of an issuer that is not in compliance with the audit committee requirements established by the Section 301 of the Sarbanes-Oxley Act of 2002. These requirements relate to: the independence of audit committee members; the audit committee’s responsibility to select and oversee the issuer’s independent accountant; procedures for handling complaints regarding the issuer’s accounting practices; the authority of the audit committee to engage advisors; and funding for the independent auditor and any outside advisors engaged by the audit committee.