Monthly Archives: August 2003

August 13, 2003

The SEC posted 35 FAQs

The SEC posted 35 FAQs about auditor independence today.

Yesterday, the ABA’s House of Delegates voted to approve changes to its model code of conduct – 239 to 147 – to allow lawyers to disclose client confidences to protect a company from harm caused by an employee’s crime. This “reporting out” could go either to a regulator or another party, such as shareholders or creditors.

Now, the SEC will deliberate on whether to proceed with its own “reporting out” proposal. Lucky Item 13 of Form 8-K here we come?

We are hearing that a few companies provide outside counsel with a role as part of their “reporting up” policies (such as providing that if an attorney is not sure she is covered, she can call them to make the determination or to provide guidance on whether a matter is material). This is likely to be done by smaller companies that have limited securities expertise on its staff.

Tune into today’s webcast regarding “Designing Reporting-Up and Complaint Procedures” for more on these topics.

August 12, 2003

At yesterday’s “internal controls” session

At yesterday’s “internal controls” session at the ABA Annual Meeting, there was much discussion about the PCAOB’s July 29th Roundtable. Based on a review of the transcript of the Roundtable, it is clear that on many topics, companies and the FEI represented the minority viewpoint, while the PCAOB, the SEC staff, the audit firms and institutional investors were unified to advocate broader, deeper engagements for audit firms. However, conclusions were not reached on most issues.

Here are some of the highlights from the transcript:

– Although no specific timetable was mentioned, it has been clear that the PCAOB’s goal is to have final standards approved by the SEC by the end of 2003. As a result, the PCAOB could issue an exposure draft in the late August/September timeframe.

– As for documentation, most participants advocated “principles-based” rather than “rules-based” guidance. Although companies recognized that there is some necessary level of documentation, they largely favored leaving documentation to management’s discretion. By emphasizing the view that documentation is the foundation for controls, the audit firms seemed to be pushing for more documentation.

– There was much discussion on whether an audit committee that fails to comply with listing requirements should raise a presumption of material weakness in internal controls. Investors want this presumption.

– Corp Fin Director Alan Beller noted that there are 3 requirements in the SEC’s SOX 404 rules that work together: (1) Management must assess internal controls and disclose any material weaknesses at year-end; (2) Each quarter, management must assess changes in internal controls and disclose any change in internal control that has materially affected or is reasonably likely to materially affect internal controls; SEC specifically did not refer to “material weaknesses” but noted that if the change is due to the correction of a material weakness, then management must consider the need to disclose; (3) Management must report significant deficiencies and material weaknesses to the audit committee and external auditors that had or are likely to have a material effect on internal controls.

– As for auditor independence (long my pet peeve – see recent “50 Nuggets” webcast), the SEC staff reminded participants that management should direct the work to be done and that it is management’s job to make the assessment on internal controls – and the staff indicated it will soon release FAQs on this topic.

Yesterday, the ABA House of Delegates narrowly approved rule changes to the model confidentiality rules that will allow lawyers to turn in corporate clients that are committing fraud – today is the day that the House considers the “reporting up and out” framework (and based on this, the SEC will decide what to do with its outstanding proposal on “reporting out” sometime this fall).

For subscribers, we have posted an interview with Chris Herzeca on the Process of Board Evaluation.

August 11, 2003

On Friday, the SEC posted

On Friday, the SEC posted its proposing release regarding disclosure of nominating committee activities and shareholder communications with directors.

A recent phenomenon are companies increasingly asking their outside counsel to sign off on their reporting up policies. This is a tough situation for outside counsel seeking to appease their clients – but not willing to take on unnecessary risk.

Whether outside counsel should indeed sign off probably depends on what the client is asking them to sign. If the client simply wants outside counsel to acknowledge that they have read it and that they will comply, there shouldn’t be a problem with signing. If the client is asking for more – or if the policy contains procedures that counsel doesn’t think they can live with – counsel should think twice before signing.

The bottom line is that it’s unclear what the signing gets the inhouse lawyer. If an inside lawyer gets “hooked” under the attorney conduct rules, that lawyer might have a claim against an outside lawyer who signed – but failed to comply. But this gets into a morass. If there is a contract right, it belongs to the company, not the inhouse lawyer who violated the rules. We shall soon see whether the ABA Task Force addresses this at the ongoing ABA Annual Conference. Tune into Wednesday’s webcast regarding “Designing Reporting-Up and Complaint Procedures” for more on this topic.

The PCAOB has configured its website to now accept registration applications from audit firms.

August 6, 2003

At the open Commission meeting

At the open Commission meeting today, the SEC generally followed the recommendations made in the July 15 Staff Report in proposing changes to what is disclosed regarding the nominating process for directors and about shareholder communications with directors.

The big surprise was the 30-day comment period, particularly with the vacation month looming ahead. The goal of the short comment period is to adopt final rules in time for the 2004 proxy season. At the meeting, the staff stated that the 2nd half of the proposals – regarding actual shareholder access to the ballot – would likely be proposed by the end of September.

An outline of these proposals is in the SEC’s press release at

For subscribers, we have posted an interview with Chip Presten regarding the Attorney Conduct Rules at

August 5, 2003

Today, the SEC’s “reporting up”

Today, the SEC’s “reporting up” rules become effective. Our “Quick Survey” (~100 respondents) reveals that 13% don’t intend to adopt a written policy; 24% say they are waiting for the SEC to decide about “reporting out” before adopting a policy; 47% say they are in the process of drafting a written policy and 15% have adopted one already. Thanks to Marty Wagner at Xerox for donating their “reporting up” policy to our library as “Sample 2” at

The Delaware General Assembly recently amended Section 251(c) of the DGCL to delete the second sentence thereof (which permitted corporations, to agree in their merger agreements, to submit the merger agreement for stockholder adoption irrespective of whether the directors determine at any time subsequent to declaring the advisability of the merger agreement that the agreement no longer is advisable and recommend against its adoption). In lieu of previous DGCL Section 251(c), a new DGCL Section 146 has been adopted which essentially embodies the old DGCL Section 251(c) language.

This “‘force the vote” provision, when combined with a no-soliciation covenant (without a fiduciary termination right) and majority stockholder lockups (which operated to make a proposed third party stautory, long-form merger a fait accompli), was struck down in a 3-2 split decision by the Delaware Supreme Court in the Omnicare v. NCS case this past April as constituting a preclusive, coercive and draconian combination of terms. [Side note – One of the Delaware Supreme Court Judges who ruled against such combination of merger agreement terms – Judge Walsh – just retired and was replaced by high-profile Delaware Chancery Court Vice Chancellor Jack Jacobs]. The Omnicare decision, which was written with great breadth, was criticized by some in the M&A bar, including Cliff Neimeth and Cathy Reese of Greenberg Traurig in a recent article in the M&A Lawyer. It is unlikely that the Delaware legislature was reacting to Omnicare – but it is a bizarre development. We will keep you posted…

The SEC has taken the position that defendants who settle injunctive proceedings with the SEC – in which they neither admit nor deny the allegations – will be deemed by the SEC to admit the allegations for purposes of subsequent SEC administrative proceedings. See Mike O’Sullivan’s blog about this development in our Blog City – and the SEC’s announcement of its policy change in In the Matter of Marshall E. Melton and Asset Management & Research, Inc. at

The SEC also has issued a 5-page paper to explain what persons must do when they respond to a subpoena or voluntarily provide information to the SEC staff at

August 4, 2003

On Friday, the NYSE responded

On Friday, the NYSE responded to statements made by the Council of Institutional Investors regarding the Exchange’s corporate governance in a 10-page paper, which is at

For subscribers, we have posted an interview with David Bynes regarding Generic Stock Certificates at

August 1, 2003

I’ve had a number of

I’ve had a number of requests for what Alan Dye said about the Section 16 changes on the “50 Nuggests” webcast – the following summarizes his comments:

Version 8.6 of the EDGAR Filer Manual became final on July 28, 2003. The new version reflects the filing procedures applicable to Section 16 reports filed on or after July 28.

As reflected in the new Manual, the reprogrammed electronic filing system addresses all but one of the seven “glitches” that existed in the version of the electronic filing system that was in use from May 5 until July 28. Of the six glitches that were addressed, only four were “fixed” in a way that allows insiders to report transactions the same way they were reported in paper filings. Specifically:

1. When an insider reports a transaction on Form 4 or Form 5, the insider may now report his or her total holdings of securities of the class involved in the reported transaction in the appropriate table (i.e., Table I or Table II), leaving blank the columns that call for transactional information. It is no longer necessary to report “holdings” in a footnote to a line on which a transaction is reported.

2. When reporting a gift, grant, award, or other transaction for which the insider neither pays nor receives consideration, the insider may insert in the price column (Column 4 of Table I or Column 8 of Table II) a footnote or, instead, a “0.” In paper filings, insiders typically left the price column blank in this context. The electronic filing system will not accept a report, however, if the price column is left blank.

3. When reporting a transaction in a derivative security that does not have a dollar-denominated conversion or exercise price (e.g., phantom stock that is convertible into common stock on a “1-for-1” basis), the insider may insert a footnote in Column 2 of Table II, and explain the conversion terms in the footnote (e.g., explaining that the security converts on a “1-for-1” basis). It is no longer necessary to insert a “0” in the conversion price column. In paper filings, insiders typically inserted “1-for-1” or similar words in Column 2. The electronic filing system will not accept a report, however, that does not include in Table II either a dollar amount or a footnote.

4. When reporting a derivative security for which the vesting date and/or expiration date is not known (i.e., phantom stock that pays out upon the insider’s retirement), the insider may insert (in Column 2 of Table II of Form 3 or Column 6 of Table II of Form 4 or Form 5) a footnote in the appropriate sub-column and explain the terms of the security in the footnote. It is no longer necessary to use a “dummy date” (i.e., “08/08/1988”).

5. When reporting a derivative security that has multiple fixed vesting dates, the insider may insert a footnote in the “date exercisable” column (Column 2 of Table II of Form 3 or Column 6 of Table II of Form 4 or Form 5) and explain the vesting terms in the footnote. It is no longer necessary to insert the first vesting date, accompanied by a footnote (although an insider may choose to do so).

6. Insiders may now insert an address in Box 1 of Form 3, Form 4, or Form 5, and need not leave the address box blank. If, however, the insider leaves the box blank, the electronic filing system will complete the box automatically, using the insider’s address as it appears in his or her Form ID.

The glitch that the SEC chose not to fix is the requirement that, when reporting multiple transactions, the total holdings column (Column 5 of Table I or Column 9 of Table II) reflect a running tally of the insider’s holdings. In paper filings, insiders typically left the total holdings column blank until the last line on which a transaction was reported.

The most important upshot of the reprogrammed e-filing system is that some third-party “filers” reportedly have not yet been updated – so that attempts to make filings with these filers get rejected by the SEC’s system. Be careful to check the SEC’s Edgar database after you make a filing to ensure it is successful! The Romeo & Dye Section 16 Filer is upgraded and compatible with the SEC’s latest changes – and its still free through 9/30 (and then still has the lowest price – yet one of the best – filers available) – check it out at