Monthly Archives: September 2003

September 30, 2003

More Underwater Options for Cash

Following the Microsoft trend, Martha Stewart Living Omnimedia plans to offer officers the right to exchange underwater options for restricted stock – and also has a separate offer to other eligible employees to exchange underwater options for a special cash bonus right. Officers are not entitled to participate in the cash offer and vice versa.

Martha Stewart filed two related Schedule TOs on September 25th, one for eligible employees and the other for officers.

At the upcoming NASPP conference in Orlando on October 15-18, this trend to offer employees cash for underwater options will be the subject of several panels – register now for the conference!

Schering-Plough’s Regulation FD Action

For subscribers, we have posted an interview with Dave Matheson of Perkins Coie LLP on the SEC’s Schering-Plough FD Enforcement Action.

SEC Releases Hedge Fund Study

Yesterday, the SEC issued its Staff Report on Hedge Funds. From this 134 page pdf file, the following are the most significant Staff recommendations:

– consider requiring hedge fund advisers to register as investment advisers under the Advisers Act, taking into account whether the benefits outweigh the burdens of registration.

– address certain valuation and fee disclosure issues relating to registered funds of hedge funds.

– consider permitting general solicitation in fund offerings limited to qualified purchasers.

September 29, 2003

Shareholder Access Debate Intensifies Readers

Readers of WSJ might have noticed a full-page advertisement on Thursday by a group of investors calling for the SEC to adopt a shareholder access rule. This ad followed a 9/23 press conference held by members of Calpers, AFSCME, CalSTERS, New York State Comptroller, New York City Comptroller and Connecticut State Treasurer on the same point.

At the press conference, AFSCME released a survey showing that 84% of 1,030 individual investors stated that there should be a process to allow shareholders to nominate candidates for boards. The survey also showed that a majority of the respondents believed that management is not in the best position to determine who should be nominated. Many institutional investors have made clear that this rulemaking is their top priority right now.

It is my belief that the SEC is not going to be able to ignore this kind of pressure – just like Dick Grasso couldn’t. Trivia question – Which company was the last to ring a bell on the floor of the NYSE with Dick? Answer in tomorrow’s blog – winners to be prominently identified.

Always a laggard, the ABA finally has submitted its comment letter on the disclosure of nominating commitee activities proposal.

SEC Ain’t Spending It As Fast As It Gets It

Before the end of its fiscal year tomorrow, the SEC will not be able to spend $103 million (or 40% of the $258 million budget increase) it received from Congress to hire more accountants and lawyers. The SEC is moving carefully towards it goal of bringing on 800 new professionals. Believe me, they have more than enough resumes and have their pick of the litter (i.e. only Ivy League need apply).

What is Harvey Pitt Doing Now

Based on an interview published yesterday with the Washington Post, Harvey’s new consulting firm is giving “seals of approval” to boards before they obtain D&O insurance.

In the interview, Harvey espouses an opinion about using more cash in executive compensation – which Professor Charles Elson rightfully criticizes. Catch Professor Elson with Pat McGurn of ISS on our October 22nd webcast, “The Wildest Proxy Season Ever: Forecast for 2004.”

September 26, 2003

Going “Whole Hog” to Provide

In its definitive proxy statement filed September 24th, Micronetics discloses personal e-mail addresses for both of its audit committee members.

We doubt that many other companies will go this far to comply with the rules adopted by the SEC under Section 301 of SOX, which require that audit committees establish confidential, anonymous procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters. As you might recall, the SEC’s rules do not mandate specific procedures.

SOX Scorecard/Timeline for Small Business Issuers

Thanks to Faegre & Benson for contributing a SOX Scorecard and Timeline for Small Business Issuers that we have coded and posted in’s “Small Business” Practice Area. A quick glance at this excellent resource reveals that small business issuers really didn’t get cut much of a timing break from the SEC – all the effective dates are in 2003…

Faegre & Benson also contributed an annotated compensation committee charter and an annotated governance/nominating committee charter, which we have added to our Portals on those topics. Still seeking sample evaluations for those committees if you got one to share!

PCAOB Auditor Registration Update

Back on September 11th, I blogged at length about the costly nature of the PCAOB registration process and indicated that only 200 – of the likely universe of 700 – audit firms had registered.

On Tuesday, PCAOB Chair William McDonough testified before a US Senate Committee that the PCAOB has received almost 500 registration applications from U.S. accounting firms and that the first 38 of those applications were approved last week. That is more than I expected, but it still appears that a few hundred small firms said “fuhgedaboutit.”

September 25, 2003

What is the Appropriate Motivation

One aspect of boardroom reform that has not been fully explored is what should be an acceptable motivation for someone who seeks to serve as a director. Historically, directors have agreed to serve principally for the prestige and clublike atmosphere. Some have done it for the money – although this is unlikely the case for those directors that earn big dollars as officers at other companies.

At the recent BRT Roundtable on Corporate Governance, Fannie Mae CEO Franklin Raines explained that he joined Pfizer’s board to enhance his ability to be an innovator – which in turn would benefit his employer. This is an honest and understandable answer – but does it serve the needs of Pfizer’s shareholders to whom he now owes fiduciary duties?

Professional directors are not necessarily the answer as they inevitably take on multiple board seats to earn their livelihood. I’m not sure there is a good answer here. I just know that I serve on a local domestic violence non-profit board to give back to my community (there is no pay involved) – but that “feel good” model doesn’t really fit the public company world.

On, we have posted the transcript from the BRT Roundtable, which included Reps. Oxley and Frank, Hank McKinnell, Dick Grasso, Nell Minow, William Donaldson and others.

But I Live For My E-mail…

Although the news constantly reminds us of the perils of e-mail communications – WSJ reports today that the case against Frank Quattrone hinges on a single email – most lawyers can’t help but use e-mail as their primary mode of communication, both internally within their organization as well as externally with their clients. We have posted an interview with Michele Lange of Kroll OnTrack to further explore Potential E-Pitfalls.

What many of us don’t realize is that some organizations capture every voicemail that is left for one of their employees. These voicemails are archived on disks and stored according to a document retention policy (I guess this is where Comedy Central finds the ideas for “Crank Yankers”). It’s all too scary for someone like me that is addicted to e-mail.

PCAOB Reschedules Consideration of Investigation Rules

Postponed by Hurricane Isabel, the PCAOB will now consider adoption of its investigation, adjudication and registration withdrawal rules on September 29th, right before its Roundtable on Audits and Documentation. All of this will be webcast.

For companies, the investigation rules probably will be among the most important rulemakings the PCAOB conducts – as they will set forth the terms of how independent auditors turn over the records of their clients, etc.

September 24, 2003

New Twists in Convertible Debt

Today is our webcast on novel features of recent convert offerings – subscribers of should check it out live – or by audio archive or transcript!

Reporting Out Next?

The ABA Task Force on Corporate Responsibility has released its final report that was approved at the ABA Annual Meeting back in August. Still no word whether the SEC will act on its outstanding proposal regarding reporting out. Hopefully, the Commission will take some time to observe the impact of its reporting up rules and the ABA’s recommendations before it acts.

By the way, did you notice how I blogged yesterday about the SEC’s tardiness on the PCAOB’s ethic rules – and a few hours later they appeared! Maybe I should wish for 402 guidance from the SEC…

An Accountant’s Perspective of SOX Surprises

Rick Telberg, Editor of Online Content for The CPA Letter, offers his Top 10 Surprises of SOX:

1. There’s new caution in mergers and acquisitions, as public companies fret over uncertain financial liability for the private companies they acquire. Due diligence is costing more and taking longer for both sides in a deal, and some deals aren’t getting done or even being considered because of it. And the law is unclear on whether the public company’s executives will be held accountable for the private company’s history. Deals are taking months instead of weeks.

2. Annual reports, quarterlies and proxies are getting heavier and thicker with detail. But it’s not clear investors, who had a hard time staying awake through the turgid prose before SOX, are absorbing all the new footnotes. General Electric’s latest annual report, for example, weighs in at 160 pages, twice the size of last year’s. Wal-Mart, the superstore, has put out a superstore-sized annual report, three times the size of the previous year’s.

3. After years of stagnation in a flat economy, Sarbanes-Oxley is reportedly fueling salary increases of about 6 percent across the finance function. Cash managers saw the most significant salary increase in 2003, receiving a 10 percent increase.

4. Outside auditors were hit by insult as well as injury through the financial traumas of the post-bubble era. But today the Final Four are bigger and busier than ever. And corporate clients are paying up to 30 to 40 percent more in fees to get up to speed with the new rules and regulations.

5. Financial software companies are enjoying a new bounty of business. Some information technology types are saying this is the best thing that’s happened to their industry since the Year 200 bug was supposed to crash the world’s computers

6. Private companies, supposedly exempt from SOX, are feeling a trickle-down effect. There are few signs that lenders and investors are embracing separate standards for private firms, forcing even smaller companies to ramp up their controls and reporting.

7. Talk about trickle-down. The law was designed to make top executives take personal responsibility, but many are reportedly strong-arming middle-level and lower-level managers to sign off on their reports before sending them upstairs.

8. Second-tier CPA firms were expected to get bypassed in the bonanza of new work sparked by Sarbanes-Oxley. But in the turmoil of more client switches than at any time in the history of public audits, large local firms are picking up a surprising amount of business. Even more surprising: They’ve learned to be careful and are passing up a lot of opportunities if they don’t like the client.

9. After years of declines, many colleges are reporting surges of interest in accounting courses and careers. Suddenly CPAs are sexy again. And whatever happened to the 1990’s panic over a labor shortage? Firms are hiring.

10. And, contrary to worries within the profession that new government involvement and oversight of the profession would usurp the profession’s traditional roles in self-determination, state and national professional associations appear to be as vibrant, active and well-supported by their members as ever before.

September 23, 2003

Deconstructing Microsoft’s Proxy Statement Late

Late last week, Microsoft filed its definitive proxy statement. It contains a brief description of its pre-approval policy for audit/non-audit services on page 12 and an updated calendar of audit committee activities at the back.

More importantly, as Mike O’Sullivan notes, while Microsoft does seek approval for certain changes to its 2001 Stock Plan – principally to eliminate a sublimit on the amount of restricted stock it can grant – Microsoft does not seek approval for the changes it expects to make to its underwater employee options once they are sold to JP Morgan.

If Microsoft still plans to complete its Stock Option Transfer Program in 2003, it can be assumed that Microsoft would seek whatever stockholder approvals it needs in this proxy statement. Therefore, it’s fair to assume that Microsoft will not be seeking stockholder approval, even under the new Nasdaq rule, for its planned amendments to the options acquired by JP Morgan.

Change in Accountants to Be Scrutinized by PCAOB

At the PLI Director’s Institute yesterday, PCAOB Board Member Charles Niemeier stated that the PCAOB will closely scrutinze any instances of a company firing auditors. This is not necessarily anything new as the SEC’s Enforcement staff routinely reviews any Form 8-Ks filed under Item 4. But its noteworthy because the PCAOB staff might have more motivation, time and resources to delve further than the SEC staff.

For subscribers, we have provided analysis/disclosure samples for companies to consider when they change auditors.

SEC and PCAOB Ethics – What’s Up With That…

Have you noticed that the SEC hasn’t approved any PCAOB rules since August 1, or even noticed any. For example, the PCAOB Code of Ethics was adopted as a final rule by the PCAOB on June 30 – but it hasn’t even been noticed yet (and neither organization lets you know if the PCAOB has filed them with the SEC either). Let alone approved or rejected. What’s up with that? It is interesting that the SEC would let the PCAOB meander along without an ethics code given what’s going on at the NYSE and all the attention that situation is getting.

September 22, 2003

Status Report on SRO Corporate

Last week, I was on a panel with representatives from the NYSE and Nasdaq. They indicated that final standards should be blessed by the SEC within six weeks. On September 10th, the Nasdaq filed an amendment to its proposal.

Regarding interpretative advice, the NYSE should be posting FAQs about shareholder approval of equity compensation plans sometime in the next month – and the Nasdaq will be posting more interpretation on their “Legal & Compliance” page soon (they posted a handful back in the spring). Interestingly, the Nasdaq will be charging companies a fee for putting any interpretative guidance in writing – the NYSE has decided not to charge.

Restatements Galore

For 2003, expect more than the approximately 330 restatements that were made during 2002. This is due to a number of factors, including enhanced internal controls and more frequent changes in auditors.

And if Bob Herz, head of the FASB, is successful in aligning US accounting standards with international standards, there will be a general requirement to apply accounting changes retroactively. This undoubtably would result in an explosion of restatements each year.

For subscribers, we have posted an excellent interview with John Huber regarding Rules of the Road for Restatements.

September 20, 2003

Hurricane Takes Its Toll on

Isabel packed a wallop and knocked this blogger for a loop. Noteworthy is that even though the SEC was closed here in DC – EDGAR was open and accepting filings. Coming back to the blog, its amazing how much there is to report. Miss a few days and you have a dozen items worthy of mention. However, I will stick by my guns and not overwhelm the community by limiting myself to rolling out no more than a few tidbits per day.

Microsoft Announces New Details Re: Option Transfer Program

In his blog, good ole Mike O’Sullivan (safely ensconced on the West Coast) was able to nicely outline more details about Microsoft’s option exchange program as revealed in a recent S-3 filing. The shelf registration statement will be used to facilitate sales of Microsoft (including short sales) by JP Morgan to hedge their risk under the option transfer program.

As indicated in the S-3, Microsoft’s program contemplates that employees with options and SARs will have a 20 day period to elect to transfer their stock options or SARs to JP Morgan. In exchange for the options, JP Morgan will pay a cash amount to Microsoft. Microsoft will then pay 33% of the amount to the employees who transferred their options/SARs by 12/31/03 and the remaining amount over a period of time contingent on the optionee’s continued employment.

There are still a number of open questions about how the program will work, such as how the stock options/SARs became “transferable.” More might be gleaned when Microsoft files its proxy statement, which should occur any day now. Mike also notes that Microsoft has submitted two no-action letters confidentially on paper (and they likely relate to the terms of how the program will work).

GE Grants Performance Shares to CEO – and No Options

Picking up on a growing trend, General Electric announced that it will not grant options to its CEO. Instead, the CEO will receive performance shares, based on measures such as cash flow (which is harder to manipulate compared to earnings or revenue measures). This year, the CEO received a grant of 250,000 performance share units presently valued at $7.5 million (if the performance criteria are met). By comparison, his annual equity grant last year was 1 million stock options, with a present value of $8.4 million.

Here are some details of the CEO’s performance share units:

– half of the performance share units convert to shares of GE stock only if the company’s cash flow from operating activities has grown an average of 10 % or more per year over the period.

– the remaining half convert only if GE’s total shareholder return meets or exceeds the broader market.

– performance share units will be canceled if GE doesn’t meet the performance criteria.

– during the performance period, the CEO receives quarterly cash payments on each performance share unit equal to GE’s quarterly per-share dividend.

September 16, 2003

Clarification of Item 12 Guidance

As I mentioned on Monday, in the July-August issue of The Corporate Counsel (at pg 2), there was a discussion of the exception from the 8-K filing/furnishing requirement for oral presentations (e.g., the post-earnings release conference call) made within 48 hours after the earnings release is issued, and noted that the exception is available only where the earnings release 8-K is filed “prior to” the oral presentation.

The point intended to be made was that, where an issuer plans to hold an early morning conference call, the “prior to” requirement may mean the earnings release 8-K has to be filed the preceding day, to assure that it is publicly available prior to the conference call. Unfortunately, The Corporate Counsel wasn’t as clear as it should have been, and some readers thought it was a suggestion that the earnings release must in all cases be filed a day in advance of the conference call, regardless of the time of day the call is held.

To be clear, it appears that the Staff’s position is that, to avoid filing a second 8-K, the earnings release 8-K must be “accepted for filing” by EDGAR prior to the conference call (even if only by a nanosecond). Since EDGAR filings made after 5:30 p.m. eastern time are accepted for filing (and available on the SEC’s website) at 8:00 a.m. (6:00 a.m. during the current six-month pilot program that started July 28), issuers who file their earnings release 8-K after 5:30 p.m. – but before 10:00 p.m. – the day before the conference call should be able to conduct their conference call any time after 8:00 a.m. the following morning (6:00 a.m. during the pilot program).

Similarly, an issuer should be able to file an earnings release 8-K on the day of the conference call, so long as the 8-K is accepted for filing before the call. There will be further discussion of this in the next issue of The Corporate Counsel, which should be out in a few weeks.

FASB Issues Exposure Draft on Pension Plans

Yesterday, the FASB issued an exposure draft – Employers’ Disclosures about Pensions and Other Postretirement Benefits – that would improve financial statement
disclosures for defined benefit plans. This new statement would amend SFAS 87, 88, 106 and replace 132.

Under the exposure draft, the FASB would require companies to provide
more disclosure about their plan assets, benefit obligations, cash flows, benefit costs, as well as other relevant information (e.g. companies would be required for the first time to
provide financial statement users with a breakdown of plan assets by category, such as equity, debt, or real estate). In addition, companies would have to provide more information in 10-Qs about their pension costs.

If adopted, the proposal would be effective for fiscal years ending after December 15, 2003 and for the first fiscal quarter of the year following initial application of the annual
disclosure requirements.

September 16, 2003

It looks like California has

It looks like California has joined the jurisdictional flap over the SEC’s new “reporting up” rule. In response to the SEC’s General Counsel’s letter to the State of Washington, the Corporations Committee of the State Bar’s Business Law Section has sent a letter to the SEC notifying it that new Rule 205.3(d)(2) conflicts with California law.

The Corporations Committee also notified the SEC that – in the absence of an appellate judgment in favor of the SEC’s pre-emption claim – the California State Bar may not refuse to enforce Section 6068(e) of the California Business and Professions Code. Under Section 6068(e), California attorneys have an ethical obligation to maintain client confidences “at every peril to himself or herself.”

As you may recall, back on July 23, the SEC’s General Counsel publicly released a letter stating that state bar associations were pre-empted from disciplining an attorney who made voluntary disclosure of client confidences to the SEC in reliance on its rules. This letter was in response to a proposed action by the Washington State Bar Association Board of Governors. On July 26, the Washington State Bar Association Board of Governors took its action notwithstanding the SEC’s position.

Next, the California State Bar Board of Governors Standing Committee on Professional Responsibility and Conduct (COPRAC) will prepare and issue an educational Ethics Alert on this matter and the Executive Committee of the California Business Law Section and the Corporations Committee will work together with COPRAC to study these issues and draft the Alert.

The PCAOB is holding an open meeting to adopt investigation, disciplinary and registration withdrawal rules this Friday at noon. On September 29, the PCAOB is holding a roundtable on audit documentation.

The SEC has posted its proposed rules regarding the foreign bank exemption under Section 402 and the unavailability of Form F-6 for unsponsored American depositary receipts if a foreign issuer separately lists deposited securities on a registered national securities exchange.

Regarding filing fees, the SEC already has adopted a continuing resolution in the event that Congress does not act on the SEC’s 2004 fiscal budget by the end of September 30th, which is the end of the SEC’s fiscal year. I don’t recall Congress ever acting timely – and last year, it dragged approval of the SEC’s budget all the way to Christmas I believe. This rate change is quite significant as the fee for all registrations under the 1933 Act (including proxy contest solicitations) will go up over 50%.