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.