Monthly Archives: November 2003

November 26, 2003

D&O Insurance Developments At the

At the end of the summer, the SEC announced a policy change so 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.

For members, learn how the D&O insurance industry has reacted – among other new developments in this industry – in my interview with Joseph Monteleone of The Hartford on D&O Insurance Developments.

2004 PCAOB Budget – and List of Non-Delinquent Companies

Yesterday, the PCAOB approved a $103 million budget for 2004, a 51% increase from 2003, including $26 million for information technology, $48 million for salaries and benefits, and $8.2 million for travel. Much of the increase is to add 100 new inspectors.

For the most part, the PCAOB is funded by fees charged to public companies – and the PCAOB has begun publishing a weekly list of which companies have paid their fees. It would probably be a more effective collection mechanism if the PCAOB published a list of delinquent companies. In fact, the list notes that the omission of a name does not mean that the omitted company is delinquent: “Just because an issuer does not appear on this list does not mean that the issuer has outstanding a past-due share of the accounting support fee.”

No word if the novel collection mechanism of prohibiting independent auditors from issuing “clean” opinions to any clients that are delinquent in paying the PCAOB is in effect yet. Gobble, gobble!

November 25, 2003

Transcript of “Internal Controls and

For members, we have posted the transcript from last week’s popular webcast with John Huber and Teri Iannaconi on internal controls and attestations.

Congressional Report on Mandatory Rotation of Auditors

On Friday, the GAO submitted its report to Congress (as required by SOX) regarding the potential effects of mandatory rotation of auditors. Based on surveys of large accounting firms and public companies (as well as interviews with other stakeholders), the report states that more experience with SOX reforms is needed before the full effect of SOX’s requirements can be assessed – and therefore the SEC and PCAOB should monitor and evaluate the effectiveness of existing requirements.

In my mind, mandatory rotation of audit partners is what is needed (and what we now have under new SOX rules) and that rotation of the firms themselves could very well lead to more opportunities for corporate fraud as auditors will have less incentive to work hard near the end of their rotation – and not possess an abundance of knowledge about clients at the beginning of rotations.

The Debate Over Shareholder Access

Last month, Harvard Law School sponsored six panels – with very notable participants – that debated various aspects of shareholder access. Two transcripts of these debates are now available (the first three panels – and the second three panels). We have added these transcripts to our rapidly growing “Shareholder Access Portal.”

Note that the SEC posted its adopting release on disclosure of nominating committees/shareholder communications late yesterday – and that I amended yesterday’s blog about “effective date” issues for 9/30 companies.

NASD Proposes IPO Rules

Following up on some of the recommendations of NYSE/NASD IPO Advisory Committee issued in May, the NASD proposed rules yesterday that would:

– Require the lead managing underwriter to disclose indications of interest and final allocations to the issuer’s pricing committee;

– Prohibit acceptance of market orders to purchase IPO shares in the aftermarket for one trading day following an IPO;

– Impose procedures designed to ensure that reneged IPO allocations are not used to benefit favored clients of the underwriter;

– Require that any lock-up that applies to shares owned by the issuer’s officers and directors also applies to shares they purchase in “friends and family” programs; and

– Impose new notification requirements when underwriters waive lock-ups.

The NASD also proposed additional regulatory steps that would promote transparency in IPO pricing, such as requiring underwriters to:

– Retain an independent broker/dealer to opine that the initial IPO price range at which the offering is marketed and the final offering price are reasonable and to require that the independent broker/dealer’s opinion is disclosed in the prospectus;

– Use an auction or other system to collect indications of interest to help establish the final IPO price; or

– Include a “valuation disclosure” section in the prospectus with information about how the managing underwriter and issuer arrived at the initial price range and final IPO price, such as the issuer’s one-year projected earnings or P/E ratios and share price information of comparable companies.

November 24, 2003

SEC Staff as Referee for

At the ASCS Issues Update conference last Thursday, Corp Fin Director Alan Beller talked about the need for the SEC staff to act as referee for the “opt-in” shareholder proposals that companies are receiving now (“opt-in” proposals are those that act as a trigger under the SEC’s proposed shareholder access framework – i.e. submitted by a 1% shareholder and asking shareholders whether they want a shareholder nominee to be added to the ballot the following year).

Alan was uncertain when the staff would provide written guidance in this area (my guess is it will come through no-action letter responses) and pointed out that the staff could act as referee at 3 different points in time: when a company receives a proposal, when the company delivers proxy materials, and when shareholders vote. It did not appear that Alan was too concerned about the ABA’s assertion that the SEC doesn’t have the authority to retroactively apply triggering events that occur before a proposal is finalized.

By the way, Alan did confirm that the newly adopted disclosure rules on nominating committees/shareholder communications would indeed apply to 9/30 companies – in fact, the adopting release just came out and states that the rule is effective January 1, 2004, and that the disclosures will apply to proxy or information statements that are first sent or given to security holders on – or after – January 1, 2004. The disclosures will apply to 10-Qs and 10-Ks for the first reporting period ending after January 1, 2004.

Senate Bill Seeks to Expense Options Only for Top 5 Officers

On November 19, a bipartisan group of senators – Senators Mike Enzi (R-Wyo.), Harry Reid (D-Nev.), John Ensign (R-Nev.), Barbara Boxer (D-Calif.) and George Allen (R-Va.) – introduced a bill that would require that a company expense the options of only the CEO and the next four most highly compensated executive officers. The stated purpose of the bill was to be a compromise aimed at convincing the FASB to back down from making companies expense all options.

Wanna See Something Cool?

If so, you gotta check out these photographs of the universe taken by the Hubble telescope.

November 19, 2003

SEC Adopts Nominating Committee/Shareholder Communication

Today, at an open Commission meeting, the SEC adopted the proposed rules on disclosures regarding nominating committee functions and communications between security holders and boards of directors. During the meeting, Commissioner Goldschmid pushed Corp Fin Director Alan Beller pretty hard about finalizing the rules on shareholder access as soon as possible (for which the comment period does not end until late December). Goldschmid asked about possibly getting it out in February and Beller did not commit.

On the new rules, the SEC has issued a press release – but not an adopting release yet. Below are notes from Mike Holliday on today’s meeting (note how the SEC was responsive to a number of the points made in the comments):

1. A required disclosure was added to provide the company’s policy, if it has one, on director attendance at annual meetings, and a statement of the number of directors attending the prior year’s annual meeting.

2. A requirement was added to require disclosure of changes in nominating committee procedures in periodic reports.

3. Instead of describing the material terms of a nominating committee charter, the registrant is required to make the charter available by posting on its website and disclosing in the proxy statement where the charter is located, or the charter can be attached to the proxy statement every three years.

4. While disclosure of qualifications for board membership is required, disclosure of specific standards for the overall structure and composition of the board will not be required.

5. The name of the source of each nominee (other than nominees who are executive officers or directors standing for re-election) will not have to be disclosed. Instead, the registant will disclose the source by category of source (security holder, non-management director, CEO, other executive officer, third party search firm, or other specified source).

6. The 3% beneficial ownership trigger to require additional information where the committee does not nominate a candidate recommend by a security holder is increased to more than 5%.

7. The requirement to disclose the specific reasons for the nominating committee’s determination not to nominate a recommended candidate in certain circumstances is eliminated.

8. The name of the recommended nominee will be required to be disclosed in addition to the name of the nominating shareholder(s) where the committee determines not to nominate a candidate recommended by a more than 5% shareholder(s), but written consent to the disclosure must be given by the recommended nominee and the nominating shareholder(s).

9. The requirement to disclose material actions taken as a result of shareholder communications is eliminated.

Effective Date of New Rules – September 30th Companies Beware!

Mike Holliday points out that these new rules may be particularly burdensome to companies with September 30th fiscal year ends. The SEC’s press release states that the rules will apply to proxy statements first sent or given to security holders on or after the date that is 30 days after publication in the federal register. This could pick up September 30 companies who may be preparing and printing their proxy statements soon for their upcoming annual meetings. The effective date does not allow much lead time to plan and take timely corporate action (not to mention draft, review, print, stuff in envelopes, etc.). The following is the SEC’s paragraph on effectiveness:

“The rules adopted today are expected to be available on the Commission’s website within the next few days and will apply to proxy and information statements first sent or given to security holders on or after the date that is 30 days after their publication in the Federal Register.”

November 19, 2003

What to Disclose under the

When John Newell of Goodwin Procter sent me his excellent checklist of what disclosures are now required under the SRO standards (this checklist is in our “Proxy Season Resource Center” with other law firm checklists) – he provided the following interesting observations:

“The NYSE has advised listed companies that the new disclosures will not be required in documents before the date on which the company must comply with the amended NYSE listing standards — for calendar year companies, their first annual meeting after January 15, 2004.

Nasdaq has informally advised that companies should include the Nasdaq proxy statement disclosure in proxy statements sent to stockholders for annual meetings held on or after January 15th. It is possible that there will be further clarification on these positions in coming weeks. However, companies may want to consider including these disclosures, whether or not the SROs require them to do so, for the following reasons:

1. Many companies have significant institutional holders who may be looking for information about companies’ compliance with the new corporate governance requirements. Being proactive about corporate governance is a good investor relations strategy. Many companies have been early-adopters on corporate governance matters during the past 15 months, and they may take the same view on the new SRO disclosure requirements.

2. We do not know what the various proxy advice services (i.e. ISS and Glass Lewis – as well as the governance rating services) will do with proxy disclosure that doesn’t clearly indicate that the company will be in compliance with SRO requirements if management’s nominees are elected. Will they down-rate the company? This seems very plausible…I do not see them giving everyone a pass for this spring just because of a quirk in the effective dates. That’s just a guess.

3. The NYSE and Nasdaq will likely be reviewing this spring’s proxy statements to determine whether companies were in compliance as of their annual meeting dates. If the proxy statement indicates that the company will be in compliance on the date of its annual meeting, it may be better to include at least the required disclosure about directors and committees and avoid inquiries by SRO staff later.

4. Including the disclosure that would be required about directors, and to a lesser extent other corporate governance matters involving directors, may avoid later questions about whether the proxy materials omitted material information.

For example, in the case of a Nasdaq company that knows that it is likely that a non-independent director will be appointed to one of the three key committees under the “exceptional and limited circumstances” exception, it may be better to disclose that fact and avoid potential claims that stockholders would not have voted for this director if the company had disclosed that it knew that the board intended to appoint him/her to the audit committee but omitted disclosing this in the proxy statement.

My advice is, to the extent the company can determine the facts, to comply with the NYSE or Nasdaq disclosure requirements (in proxy statements and 10-Ks) to the greatest extent possible – and to make sure that website disclosure is up at least by the annual meeting for NYSE companies.”

SEC’s New Office of Risk Assessment

Yesterday, SEC Chair Donaldson announced that the SEC is on the verge of establishing a new Risk Assessment Office, which reportedly is “a cornerstone of efforts to counter criticism that it is not acting quickly enough to protect investors.”

The office will have a director and five staff and gather data on trends and risks to identify new areas of concern. Separately, each SEC Division will have its own risk assessment staff. The SEC’s Division directors and heads will sit on a Risk Management Committee. I just fail to see how this office would do much more than add another layer of red tape (unless they got Barnaby Jones to head it up).

Chairman Donaldson faced tough questions yesterday while testifying before the Senate Committee on Banking, Housing and Urban Affairs regarding mutual funds and this office appears to be one of his ways to correct the perception that Eliot Spitzer is running circles around him.

Legislative Update Webinar

On December 3rd, Akin Gump is offering a free webinar – “The Continuing Political Debate Over Corporate Governance — Where Will It Lead?” – during which Hank Terhune, Dave Carlin, and Charlie Johnson will review corporate governance issues that surfaced during the first session of the 108th Congress and a forecast of future activities, including an assessment of how governance will play a role in next year’s elections.

November 18, 2003

Download “Internal Controls” Powerpoint for

For today’s “Internal Controls” webcast at 4 pm eastern time, download the Powerpoint from John Huber and Teri Iannaconi now. Download it as a PDF, if you don’t have the Powerpoint “viewer” that enables web downloads of powerpoint presentations.

Growing Interest in Director Education

Probably bolstered by the new NYSE standard on corporate governance guidelines (that requires director education to be addressed), I have been getting numerous questions on director education. As a result, we have commenced a Quick Survey on Director Education and Orientation on – please take a moment to share your experiences.

Here’s a coupla thoughts on directors colleges – we have a list of links to all of them on by the way – many directors believe internal programs can be more useful since discussion among similarly situated directors can occur, management can participate and topics can be tailored to the company’s circumstances (and it can save travel time and expenses).

Some companies also are exploring the use of reading material, multiple shorter programs at various times during the year by in-house or outside speakers, a long session or retreat devoted to a topic, or some combination of all.

Sharing Privileged Information with Buyers Without Waiving Privilege

In an interview with Brette Simon of Sheppard, Mullin, this dilemma is explored.

As Brette explains on one hand, it is incumbent on you – as the seller – to disclose to the buyer all material information relating to the business it is purchasing. On the other hand, should you share this confidential information with the potential buyer, you jeopardize waiving the attorney-client privilege with respect to the particular information, and, potentially, any other privileged information relating to the same subject matter.

This means that if litigation is pending – or is later filed against you – by a third party claimant (other than the buyer) regarding the problem, and the opposing party requests this confidential information, you will be unable to assert that it is privileged, and you will have to provide potentially damaging information to the claimant.

November 17, 2003

Ending the Year with a

We have three important webcasts coming up to end the year – first is the one tommorrow with John Huber of Latham & Watkins and Teri Iannaconi of KPMG on the practical implications of internal controls and all the other procedures that companies must put in place now (you can download the PowerPoint for this program now if you wish).

The other two webcasts are “back-to-back” in early December – Ron Mueller of Gibson Dunn, Karl Groskaufmanis of Fried Frank and Stacey Geer of BellSouth dissect new due diligence and drafting practices behind “The New MD&A” on December 10th.

Last – but not least – on December 11, we have a very practical examination of how companies are actually responding to the new SRO governance requirements. This will not be a recital of what are the new rules (the reason why I did not ask NYSE/Nasdaq reps to join the panel).

Rather, this will be inhouse lawyers explaining what their companies have actually done and why. This program – “The New Governance Listing Standards” – includes inhouse experts from both NYSE and Nasdaq companies. This webcast will ooze with practice pointers.

If you are not a subscriber, you can gain access to all three of these webcasts for free if you enter into a “no-risk” trial for 2004 (“no-risk” meaning you can obtain a refund at any time during ’04 – no questions asked). For those of you in law firms, check out the advantages of our new “firmwide” license.

Q&A with Alan Beller

Arguably the best part of the PLI Securities Law Institute is when the Director of the Division of Corporation Finance answers questions during a brown bag lunch on the second day of the conference.

During this session this year, Director Alan Beller answered 17 questions – members of TheCorporateCounsel can read notes with those questions and answers in our notes from “Lunch with Alan Beller.”

The IT Industry Gets to Work on Internal Controls just posted an interesting article on how the IT industry is looking to help companies reach compliance with the new internal controls requirements.

November 14, 2003

New Pension Plan Disclosures For

On Tuesday, the FASB took action on the proposed new disclosures for pension plans and other postretirement benefit plans, including a Project Update dated November 12. These are reported as tenative decisions until the final Statement, which the FASB staff was directed to draft, is issued.

The FASB’s changes will be effective for fiscal years ending after December 15, 2003, with a few exceptions. The FASB decided to defer – until fiscal years ending after June 15, 2004 – the new disclosures on the projected value of all benefit payments and any new disclosures not previously required regarding foreign plans. The FASB has not yet decided on the effective date for new disclosures about plan assets.

FYI, on, we have a section devoted to pension plan disclosure.

Does Governance Impact Corporate Performance? (or “Do Bankers Really Care?”)

This is one of those $64 questions – read my interview with Marc Zenner, formerly a banker with Citigroup to glean some insight into “Investment Banking and Corporate Governance.”

SEC to Adopt Nominating Committee Disclosure Requirements

Next Wednesday, the SEC will hold an open Commission meeting at 2 pm to consider the outstanding proposal regarding disclosure of shareholder communications and nominating committee activities.

All indications are that the SEC intends to apply these new requirements to the upcoming proxy season – see the Eleven Actions You Should Consider Now regarding this proposal in our “Shareholder Access” Portal.

November 13, 2003

PLI Notes about Attorney Responsibility

Last week’s PLI conference had quite a few panels about “reporting up” – including a speech by SEC Chair Donaldson – but the SEC did not tip its hat regarding whether its outstanding “noisy withdrawal” proposal will be adopted.

For subscribers, we have posted notes from one of the panels from the PLI Pre-Conference on attorney responsibility standards – the panel that included Jack Bostelman, Stan Keller, SEC staffer Richard Humes and others.

Results from the Microsoft Annual Meeting

At Tuesday’s annual meeting, Microsoft shareholders approved a proposal to let employees be paid with restricted stock units instead of options – a plan that was opposed by CalPERS. CalPERS voted against the proposal because Microsoft didn’t say what percentage of stock grants would carry performance criteria and because those criteria aren’t strong enough. Calpers owns 55.7 million shares of Microsoft stock.

A number of investor groups have expressed displeasure over the fact that Microsoft did not put its underwater exchange option arrangement with JP Morgan on the ballot.

Also noteworthy, former Microsoft president and board member Jon Shirley was removed from the company’s audit committee after complaints from CalPERS and the Ohio Public Employees Retirement System (the funds said a former employee shouldn’t sit on the committee).

November 12, 2003

A Sad Day It is

It is with great sadness that I tell you that Linda Quinn passed away yesterday. Linda was the Director of the Division of Corporation Finance when I first joined the SEC back in the late ’80s and not only was one of the finest lawyers around, she was one of the nicest people to work for. My best wishes to her family and friends.

Learn How to Improve Your Chances of Obtaining Shareholder Approval

Today, the NASPP is conducting a webcast – The New Stock Plan Approval Rules—Immediate Action Items & Guidance – at 4 pm eastern time. The panel consists of Art Meyers of Palmer & Dodge, Ron Mueller of Gibson Dunn & Crutcher and David Drake of Georgeson Shareholder.

A surprising number of lawyers belong to the NASPP as it offers the most relevant compensation guidance around – take advantage of the no-risk trial to access the webcast live or by archive.

Odds & Ends

Today, the PCAOB is meeting to proposed audit documentation standards, among other matters.

Yesterday, the SEC posted the adopting release for its Rule 10b-18 modifications.