Monthly Archives: October 2003

October 17, 2003

11-Ks and 404 On Wednesday

On Wednesday – on a teleconference program on my old website – David Lynn, Chief Counsel of Corp Fin, clarified that Section 404 of is not applicable to Forms 11-K. Section 404, and the SEC’s rules implementing it, requires each issuer that files
periodic reports with the SEC under the Securities Exchange Act of 1934 to (i) establish and maintain a system of internal control over financial reporting, (ii) include in its annual report a report by management on the system of internal controls, and (iii) accompany the report with an attestation report on the system of internal controls.

As noted by Gibson Dunn in a recent client alert, “this guidance addresses a significant question that was left open in the release adopting the Section 404 internal control requirements. Although most employee benefit plans would not have been viewed as “accelerated filers,” and thus would not have been required to comply with the Section 404 rules until filing the Form 11-K report for the fiscal year ending on or after April 15, 2005 (whereas public companies that qualify as “accelerated filers” must comply with the 404 rules for fiscal years ending after June 15, 2004), there was substantial uncertainty as to how the 404 rules would
apply in the context of employee benefit plans. Accordingly, the SEC staff’s interpretation provides reasonable and welcome relief.”

October 16, 2003

Microsoft Receives Tender Offer No-Action

After my blog last night, the SEC posted its no-action response to a request from Microsoft that sought exemptive relief from certain tender offer provisions to conduct its option exchange program. The relief granted includes exemptions from:

– Rule 13e-4(f)(2)(ii) to permit Microsoft to terminate withdrawal rights for tendered options at the end of the Election Period.

– Rule 13e-4(f)(8)(i) to permit Microsoft to exclude certain options and certain option holders from the program.

– Rule 13e-4(f)(8)(ii) to permit Microsoft (i) to pay holders of Multi-year Grant Options less for those options than other options with similar terms, (ii) to pay option holders, who are entitled to a total payment in excess of $20,000, a portion of the payment on a deferred and contingent basis, (iii) to further defer the contingent payment portion due to senior management, and (iv) to calculate the initial payment due to senior management holders in certain foreign jurisdictions with adverse tax regimes based on the relevant increased tax imposed.

In addition, the SEC staff noted that it would not object nor take enforcement action if:

– the pricing structure has a final price that will be neither known nor paid until after the Averaging Period ends.

– the total payment for transferred options is determined after the Election Period and during the Averaging Period (i.e. Rules 13e-4(f)(1)(ii) and 14e-1(b)).

– the total payment for options is determined after the Election Period and pays holders for transferred options (i.e. Rules 13e-4(f)(5) and 14e-1(c)).

October 15, 2003

Microsoft Files Tender Offer Documents

Another day of hectic travel, so I borrow liberally from Mike O’Sullivan’s blog to inform you that Microsoft has filed tender offer documents divulging the details of its novel stock option transfer program, which is designed to permit its employees to sell their underwater options to J.P. Morgan.

There are a number of tender offer documents – but the main document appears to be the “Notice to Eligible Employees of Stock Option Transfer Program.”

As I am at the NASPP conference with a horde of experts on the topic, I will endeavor to get you insights into this arrangement tommorrow.

October 14, 2003

Shareholder Access Release is Up

The SEC has posted its shareholder access proposal – lots of questions asked in the release…

GMI Study Shows Link Between Good Governance & Financial Performance

GovernanceMetrics International – one of the governance rating services – recently completed a study that demonstrated a positive link between strong governance practices and a company’s financial performance. Among other things, GMI found that overall, average annual total returns are higher as the percentage of independent directors increases.

For subscribers, we have posted an interview with Howard Sherman, the Chief Operating Officer of GMI, on the results of that study and the relationship between corporate governance and a company’s financial performance.

8-Ks and 906 Certifications

I have received a few clarifying questions on what Paula Dubberly stated at the ACCA conference last week regarding the SEC/DOJ joint position on 906 certs (see my10/8 blog). The most common question relates to 8-Ks – its should be noted that the joint position applies to no 8-K, even ones with financial statements.

October 10, 2003

NYSE Sends Its Presumed Final

On Wednesday, the NYSE filed a second amendment to its proposed corporate governance listing standards with the SEC. The NYSE had made its original filing last August and filed the first amendment back in April. The current amendment (which reflects the Exchange’s response to 64 comment letters from the public as well as from the SEC) is expected to be the NYSE’s final filing with the SEC – as the NYSE sent an email to issuers indicating that the SEC might approve these standards as early as next week.

Markets Appear to Appreciate Director Independence

The executive search firm Christian & Timbers recently released results of a study it did on 15 large public companies that had each elected new, independent directors to their boards. That study found that the value of the company’s stocks rose at an annualized rate of 91.5% during the period beginning with the election of the new directors.

Analysis of Shareholder Access Proposal

As the community knows, the SEC’s new proxy access rules will hinge on a couple of triggering events — one of which will be the receipt of 35% or more “withhold” votes for any given director or directors. (For a good recap of the rules based on the little we’ve gotten from the press release and the open meeting, see Mike O’Sullivan’s blog summarizing the proposal. We’re still hoping to see the SEC’s release later today.)

Floyd Norris reported in the New York Times yesterday that Calpers will be withholding its votes from members of any audit committee who vote to allow the company’s independent auditor to perform any tax advisory services. This is really not anything new as CalPERS had announced this policy during the past proxy season – and actually might withhold votes if an independent auditor provides any type of non-audit services this season.

October 8, 2003

11-Ks and 906 Certs –

At the Annual ACCA Conference, I just came off a panel with Paula Dubberly, Corp Fin’s Associate Director – Legal, who announced that she (and other members of the staff) just completed discussions with the Department of Justice – as well as members of the President’s Corporate Fraud Task Force – and they have jointly concluded that Section 906 of Sarbanes-Oxley does not apply to 8-Ks, 6-Ks and 11-Ks.

Of course, this would have been more welcome news back in June when most plans were filing their 11-Ks – but Senator Biden’s unexpected remarks on the topics put considerable pressure on the SEC staff to not take a position at that time. So those plans that filed the 906 certification in June seemingly are stuck with a cert in that filing – but can rest easy with the knowledge that the DOJ doesn’t believe that 906 applies. And don’t file the 906 cert next year…

October 8, 2003

SEC Proposes Rules on Shareholder

Although the SEC has not yet issued a rulemaking release (expected Friday) – but there is a press release – about its meeting this morning, the Commission did vote unanimously to propose rules allowing for shareholder access to corporate proxies. At the meeting today, Commissioner Harvey Goldschmid raised the question — addressed in summary fashion by the SEC’s General Counsel — of the Commission’s authority to regulate in this area. Commissioner Paul Atkins also appeared highly engaged with this issue. The SEC seems to be expecting a legal challenge on authority grounds to any access proposal it adopts, and we look forward to more on this angle of the rulemaking.

The SEC has put the proposal out for a 60-day comment period (following its official publication in the Federal Register).

Ethical Accountants

With the PCAOB, among others, continuing to spotlight the importance of accountants’ professional standards, at least one state has also stepped in to make it clear that the stakes have indeed been raised. The New York State Society of Certified Public Accountants announced on September 25 that it has adopted a bylaw amendment that requires its professional ethics committee (PEC) to share ethics violations with state and federal regulatory authorities. The PEC may even inform regulatory authorities about its investigations before a final determination is made about the alleged ethics violations. The new bylaw also requires the PEC to turn over all statements and other materials relating to the investigation, or copies thereof, requested by the regulatory authorities. New York is the first state society to adopt such an extensive referral process.

EC Adopts International Accounting Standards

On September 29, the European Commission adopted a regulation endorsing International Accounting Standards (IASs), including related interpretations, thereby confirming their compulsory use starting in 2005 under the terms of the general IAS Regulation adopted by the European Parliament and the Council in 2002. The regulation requires listed companies, including banks and insurance companies, to prepare their consolidated accounts in accordance with International Accounting Standards from 2005 onwards.

PCAOB Likely to Rebuff European Plea for Auditor Equality

As reported in the Financial Times today, Chairman William McDonough of the PCAOB is meeting next week with representatives from the European Union. McDonough has indicated that the PCAOB is unlikely to stand down on inspections of European audit firms in the near term. Chairman McDonough also indicated to the FT that the PCAOB was planning to review the independence implications raised by accountants providing tax services to their audit clients, although the Board has not set any specific time table for that review.

— Posted by Kimberley Drexler

October 7, 2003

Upshot of Proposed Attestation Standards

Although the proposed attestation standards are not yet posted, the PCAOB has posted a briefing paper. Here are my ten cents on the proposed standards:

– Overall, the bulk of the proposed attestation standards were not a surprise, particularly the PCAOB’s “one-size-does-not-fit-all” philosophy.

– However, the devil is in the details of a bevy of novel definitions. In the proposal, the most critical definitions are that of “significant deficiency” (if it results in more than a remote likelihood of a misstatement of the company’s annual or interim financial statements that is more than inconsequential in amount) and “material weakness” (if, by itself or in combination with other internal control deficiencies, it results in more than a remote likelihood of a material misstatement in the company’s annual or interim financial statements). Hopefully, the proposing release will clarify terms such as “more than remote” and “inconsequential.”

– From the issuers’ perspective, the proposal would allow companies to be able to rely on others, which is a positive development – but the discretion given to auditors as to how much documentation is considered adequate might be considered a negative one from the corporate viewpoint (ie. more expensive).

– The concept of mandatory “walk-throughs” arguably brings the involvement of auditors to new heights. A “walk-through” is when auditors kick the tires to ensure that the controls actually were implemented and operate as they were designed to operate.

– The bottom line is how will auditors “evaluate the results and form an opinion” when they consider whether a particular deficiency is “significant” or “material.” Considering the fact that the Big 4 still are being sued for the misdeeds of their clients (for which they bear some responsibility, of course), they likely will remain quite conservative – which could result in a long road to hoe for companies.

Okay, I am back to the Annual ACCA Conference and I will let Kimberley take it from here…

October 7, 2003

PCAOB Proposes Attestation Standards At

At its public meeting in Washington this morning, the PCAOB proposed its first substantive standard — the auditing and related professional practice standard for the attestation to Management’s Assessment of Internal Control over Financial Reporting. Section 404 of SOX, along with Section 103, directed the PCAOB to establish these professional standards.

The PCAOB’s chief auditor, Douglas Carmichael, explained that under the proposed standard, the auditor must evaluate both management’s assessment and conclusion and the internal controls themselves in order to provide its report with the required level of assurance. As part of that, audit committees should expect to have their own performances scrutinized and evaluated. An ineffective audit committee could itself be a failure of internal controls. The PCAOB expects to receive extensive comments on this last element of its proposal.

To satisfy the PCAOB, the audit of internal controls must be integrated with the audit of the financial statements. Note that while the PCAOB isn’t yet proposing to change the auditor independence rules generally, the PCAOB’s proposed standards would evidently prohibit the auditor from accepting an internal control engagement (for non-audit services) that has not been specifically (as opposed to categorically) pre-approved by the audit committee.

The PCAOB also adopted rules relating to its inspections of registered public accounting firms and proposed a rule defining some terms used in its professional practice standards.

More Details About Tomorrow’s SEC Open Meeting Leaked

Not to be outdone by the PCAOB, the SEC is set to have an open meeting tomorrow (at 9:30 a.m.) to take up its own significant and undoubtedly contentious topic – whether to propose rules that would require companies, under certain circumstances, to include security holder nominees for director in the company’s proxy materials.

Unlike the typical secrecy surrounding most proposals, the details of tomorrow’s proposal have been gradually leaked. The Washington Post reports today that the proposed framework will be triggered if either:

– a group representing at least 1 percent of a company’s investors puts a proposal on the proxy ballot requesting that a shareholder nominee or nominees be added to the ballot the following year. The proposal would need the approval of more than 50 percent of shareholders to win; or

– 35 percent of shareholders withhold their votes for a director or slate of directors, triggering a provision giving investors the right to try to get nominees on the next year’s ballot.

Once triggered, investors would have to win backing from 5% of shareholders to submit nominations. Shareholders would be allowed to propose one name for smaller boards and as many as three for larger ones. Nominees would have to get more than 50% of the vote to win.

Inside Scoop on Serving as a Director

For subscribers, we have posted a very interesting interview with Jim Ukropina on Serving as a Director. Jim, who sits on several Fortune 500 boards, provides his unique insights into a variety of topics, including the upcoming shareholder access proposal.

October 6, 2003

New SEC Settlement Policy Raises

The upcoming issue of The Corporate Counsel will discuss the SEC’s new enforcement settlement policy, that I blogged about back on August 5th. With regard to D&O insurance, this new SEC policy is very significant as it has an impact on the application of the various forms of the so-called intentional misconduct or dishonesty exclusion that exists in many policies. Specifically, if the exclusion requires only that the misconduct be established “in fact”, coverage in any ensuing civil litigation may well be precluded by the consent injunction entered in the SEC proceeding.

For subscribers, we have launched a new “D&O Insurance Portal,” which includes sample underwriting questions that you can ask your insurer (courtesy of Patricia Villareal of Jones Day).


The answer to last week’s trivia question – what nickname for the PCAOB is Chairman McDonough pushing for – is “P-COB.”

Chairman McDonough urged the use of this nickname during his Senate testimony last week. Although the Chairman himself has been guilty of using “Peek-a-boo,” it is now well known that the PCAOB strongly dislikes that nickname. I don’t know about you, but I just get a feeling that P-COB will fail to attract followers…why not try something simple, like “Oversight Board”…

Evelyn Davis – Looking Her Best

Yesterday’s NY Times contains a brief article about how a photo of Dick Grasso graces the cover of Evelyn’s upcoming annual booklet (typically, $525 per copy, minimum order of two). Evelyn had chosen that photo before the recent controversy over Dick’s compensation – but she is happy to keep the photo because “the most important thing is that it’s a great picture of me.” For those that aren’t familiar with Evelyn, that says it all.

On, we have posted an amusing interview with Evelyn from the Washington Post that ran in the spring.