Monthly Archives: December 2003

December 30, 2003

Severance Pay in the Headlines

Over the past few weeks, severance pay has dominated the news headlines. We have last week’s SEC enforcement action against the former CEO of Vivendi that included his relinquishment of $25 million of severance pay (which consisted of the amount he negotiated when he resigned). The SEC’s action was the first use of Section 1103 of Sarbanes-Oxley (because the SEC froze the payment before it was made pending its investigation) and the amount has been placed in escrow, with the intent to pay shareholders under the Fair Funds provision of SOX.

The NYSE is considering suing Dick Grasso to recoup some of the severance payments it made (and Grasso is allegedly considering suing to get some of the money he left behind). And the Office of Federal Housing Enterprise Oversight has sued the former Freddie Mac CEO and CFO to recoup severance payments made to them after they were fired this summer.

Shareholders have been more actively speaking out on severance pay. Quite a few shareholder proposals that sought to limit severance pay got majority votes this year, including one at Qwest last week.

The recent NACD Blue Ribbon Commission Report on Exec Comp recommends that severance pay should be limited to 2x-3x of base pay (not other forms of comp), with reductions in cases where the CEO is asked to leave over performance issues or eliminated entirely if the CEO resigns for another position or “for other reasons.” It also recommends that the package size be tied to tenure through a vesting formula that requires a certain period of service (eg. 5 years) to receive the maximum benefit.

The Most Overlooked Features on

I thought I would close out the year by noting some valuable features on that might not be well known:

HTML Version of Corp Fin’s Accounting Training Manual (on

Q&A Forum on Rule 144, moderated by Bob Barron and Jesse Brill

20 Areas of Sample Disclosures, complete with analysis

List of Links to Director Education Programs

Comprehensive MD&A Library in HTML, courtesy of Linda Quinn and Ottilie Jarmel

December 29, 2003

Stock Ownership Guidelines Grow in

Over the past year, there has been significant growth in the number of companies that require or encourage officers and/or directors to maintain certain levels of stock in their companies. Several studies show that nearly half of large companies now maintain them for officers (up from a third) and about a third of large companies maintain them for directors.

For members, we have posted 20 samples of stock ownership guidelines.

270-Page Report on SEC’s Weaknesses

On Christmas Eve, the WSJ ran a lengthy article about the SEC weaknesses as detailed by a 270-page report prepared by SEC staffers and McKinsey consultants. The report is non-public and was commissioned by then-Chair Harvey Pitt.

The article indicates that the report is fairly critical of the agency as being too reactive and not having sufficient resources to do its job. Two telling statistics: only 33% of enforcement investigations are generated internally and 15% of them come from reading the morning papers.

Corp Fin is assailed for having an “assembly line mentality” for focusing on achieving numerical targets of reviews and picking “smaller, easier-to-review filings rather than more complex ones.” I wonder how much McKinsey got paid to come in and tell them all these well known facts. I coulda done it for half…

December 23, 2003

Last Minute Holiday Shopping? How

I finally found a sample D&O Questionnaire, updated for the new listing standards. It is posted in our “Sample D&O Questionnaires” (which already includes an updated Nasdaq questionnaire). Happy Holidays!

Lobster Fraud! Fried Frank Continues Its Annual Play on Food

Read all about it here. I like a law firm that likes to have some fun…

December 22, 2003

SEC Issues MD&A Interpretive Guidance

Late Friday, the SEC issued an interpretive release on MD&A – something the staff had been promising for the past month or so.

Most of the guidance in the release has been well known for some time, as much of it had been either provided in the Fortune 500 report, in prior rulemakings or mentioned at conferences by senior staffers. Some of the recommendations that are relatively new include the recommended use of:

introductory overview – includes most important matters on which senior management focuses in evaluating financial condition and operating performance and provides context for the discussion and analysis of the financial statements (and does not duplicate disclosure that follows).

clear headings – use more to assist investors to follow flow of MD&A.

“layered” approach – present information in manner that emphasizes, within the universe of material information that is disclosed, information and analysis that is most important.

There is much more guidance and reading this release is a “must” before drafting MD&A. Fortunately, our recent webcast – “The New MD&A” – focused heavily on the process of conducting due diligence before drafting, so the transcript remains very relevant.

Personal note – In its discussion of the history of the SEC providing MD&A guidance, the release skips over the interpretive guidance given in the Y2K context. I guess that year of my life – I was the primary staff draftsperson of the Y2K interpetive release – was all just a dream (or nightmare?).

Shareholder Access Comment Deadline

Today is the deadline for comments on the shareholder access proposal and it appears that this one will now hold the record for most comments on a proposal – with well over 10,000 comment letters submitted so far! The prior record was last year’s proposal on disclosure of mutual fund policies and voting records.

For members, we have posted an interview with Ned Young of Hale & Dorr on Shareholder Access and Possible Changes in Control.

December 19, 2003

Transcript from “The New Governance

This webcast – featuring in-house practioners Peggy Foran of Pfizer, Jim Gunderson of Schlumberger, Susan Wolf of Schering-Plough, and Tina Van Dam of Dow Chemical was chock full of practice pointers. If you are a member of, check out the transcript.

Note that today is the holiday party at the SEC – so many staffers will be understandably busy during the afternoon.

SEC Issues Final Rules on Investment Companies/Advisors Compliance Programs

On Wednesday, the SEC posted its final rules on compliance programs for investment companies and investment advisers. The adopting release requests comments on whether there are other measures or refinements that would further enhance the independence and effectiveness of chief compliance officers under the rule, and comments on the definition of “material compliance matters” that must be reported to fund boards by chief compliance officers.

The release provides an effective date of Feb. 5 – and a compliance date of Oct 5, 2004. It specifies the deadlines for the first annual review by funds and advisers and the first annual report to the board by the chief compliance officer of a fund. The release also states that the transition period does not reduce the immediacy of the need for all funds to undertake a review of their policies and procedures.

December 18, 2003

Nasdaq Finally Issues Written Interpretation

Tucked amidst existing FAQs on governance on its “Legal & Compliance” page, the Nasdaq issued the following two interpretative positions yesterday (this confirms my blog from last Thursday about the NYSE and Nasdaq positions are now back to being split in this area):

“Independent Directors & Audit Committee Composition

The new NASDAQ rules approved by the Securities and Exchange Commission (“SEC”) on November 4, 2003 require certain annual proxy disclosures relating to director independence.

Is a company required to make these disclosures in the 2004 proxy season or can it wait until the following year?

A company must generally disclose its board determinations relating to director independence in the proxy statement for the first annual meeting occurring after January 15, 2004. Similarly, a company relying upon the Controlled Company exemption must generally make required disclosures in this same 2004 timeframe. See Rule 4350(c)(1), which requires that a company disclose those directors that the board of directors has determined to be independent under Rule 4200, and Rule 4350(c)(5), which provides an exemption to certain of the requirements of Rule 4350(c) for a Controlled Company (provided the company discloses that it is relying on this exemption and the basis for the determination that it is a Controlled Company). For example, if a company holding its annual meeting on February 25, 2004 files a proxy on January 8, 2004, that proxy must include these disclosures. Note: Since foreign private issuers and small business companies have until July 31, 2005 to comply, proxy disclosure would need to occur in the proxy for any annual meeting preceding that date.

On the other hand, disclosures by a company using the “exceptional and limited circumstances” provision, in order to have a non-independent director on the audit committee, compensation committee, or nominating committee, are required in the proxy statement for the next annual meeting subsequent to such determination (or, if the company does not file a proxy, in its Form 10-K or 20-F). See Rules 4350(c)(3)(C), 4350(c)(4)(C) and 4350(d)(2)(B). This longer timeframe is appropriate because a company using this exception would not have appointed committee members until following the election of directors at the annual meeting, and as such, no disclosure regarding reliance on this exception is required until the company’s 2005 annual meeting proxy statement.

Must a company obtain approval from NASDAQ in order to utilize the “exceptional and limited circumstances” according to Marketplace Rule 4350(d)(2)(B)?

No, a company may choose to rely on the exception without getting NASDAQ’s approval. Of course, the company must make the disclosure required by the Rule in its next proxy statement.”

MD&A Transcript is Posted!

For members, we have posted the transcript of last Wednesday’s webcast – “The New MD&A” – featuring Ron Mueller of Gibson Dunn, Karl Groskaufmanis of Fried, Frank and Richard Harrison of GSI.

SEC Issues SAB 104 Regarding Revenue Recognition

Yesterday, the SEC cleaned up its guidance regarding how companies should recognize revenue in Staff Accounting Bulletin No. 104. SAB 104 revises and rescinds portions of the interpretative guidance included in Topic 13 of the codification of staff accounting bulletins in order to make the SEC’s interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The principal revisions relate to the rescission of material no longer necessary because of private sector developments in GAAP.

December 17, 2003

NYSE Issues FAQs on Shareholder

Yesterday, the NYSE sent notices to listed companies advising them of a list of FAQs regarding the shareholder approval of equity compensation rules. These FAQs have been long awaited – as borne out by the many issues raised in a November NASPP webcast.

The NYSE also stated it will be issuing a set of FAQs on the new governance listing standards in the near future. Nice of them to provide their interpretations for free (as opposed to Nasdaq).

PCAOB Proposes Oversight of Non-US Auditors

Last week, the PCAOB proposed rules relating to its oversight of non-US auditors. As I have mentioned a number of times, this is a highly controversial proposal because the PCAOB is essentially claiming global jurisdiction through this rulemaking – the first such claim for a regulator that I am aware of.

As part of this proposal, the PCAOB has decided to extend the registration deadline for non-U.S. audit firms by 90 days – now, the deadline is July 19, 2004.

Momentum of SEC Enforcement Grows

As reflected most recently by Director Stephen Cutler’s remarks at the AICPA conference last week (he noted the SEC was about to announce actions against 11 auditors), the momentum of the SEC’s Division of Enforcement continues. Here are some Enforcement statistics noted by Bruce Carton in his blog recently (as relayed by Linda Chatman Thomsen, Deputy Director of Enforcement, at an early December ABA meeting):

– In FY 2003, the SEC brought 679 enforcement actions (as compared to 598 cases in FY 2002 and 484 cases in FY 2001).
– 199 cases were in the financial fraud and issuer-reporting area. She observed that the percentage of issuer-reporting cases has been going up steadily over the last five years or so and that such cases first exceeded 100 in number in 2000.
– 109 cases were in the offering-fraud area, down from 119 in FY 2002.
– 137 cases were in the broker-dealer litigation area, up from 82 in FY 2002.
– 50 insider trading cases, down from 59 in FY 2002.
– 63 cases involved investment advisers.
– many more officer and director bars last year than in the past.

For members, we have an interview with Ken Winer of Foley & Lardner in which Ken discusses “SEC Enforcement and You.”

December 16, 2003

A Little Something, Something for

For TheCorporateCounsel members, we finally got our hands on a nice sample D&O questionnaire for Nasdaq companies – fully updated for the new governance listing standards and in a Word file.

Still working on one for NYSE companies – let me know if you see something. [personal anecdote – Saw Simon & Garfunkel last night. Truly amazing; Paul should run for President. Coincidently, I worked for Senator Paul Simon in the ’70s as an intern (back when he was a Rep) – he was the most noble politician I have come across. Condolences to his family.]

SEC Goes After Independent Directors

Last Thursday, the SEC filed additional civil fraud charges in its long-running investigation of the Heartland Group high yield bond funds. Although this case is perhaps most noteworthy because of its analysis and response to mutual fund mispricings and bad acts by an independent pricing service, the SEC’s action does include meaningful relief under the ’33 Act as well.

The SEC obtained settled cease-and-desist orders against four independent directors of this registered investment company for violations of the antifraud provisions of the ’33 Act (in addition to violations of the fund pricing provisions of the ’40 Act). The funds’ prospectus expressly stated that the directors would monitor and assure the liquidity of the funds’ bonds. The directors failed to do this adequately and accepted the characterization of that failure as a violation of the antifraud provisions of the 1933 Act. More interestingly, they also agreed that their failure to participate meaningfully in the valuation of the Funds was a violation of the antifraud provisions of the ’33 Act – and not just of the ’40 Act.

The SEC’s actions against the directors came despite the fact that the independent directors had been lied to by the Funds’ advisor, had hired experts to assist them in performing their duties and had engaged in subsequent remedial actions once the Funds’ problems came to their attention.

December 15, 2003

First “Opt-In” Proposal Submitted –

To my knowledge, the first “opt-in” proposal has been submitted to a company, Marsh & McLennan (who is the parent of Putnam Mutual Funds). Three public pension funds – AFSCME, New York State Common Fund, Calpers and Calstrs – stated in a press release that they submitted the proposal because the company failed to properly control its money management business and does not have a sufficiently independent board.

Under the proposed shareholder access rules, if an “opt-in” shareholder proposal receives the support of a majority of shares voted at the company’s May annual meeting, shareholders would be permitted to submit board candidates for inclusion on the company’s proxy ballot the following year. Note that the SEC has not yet aopted this rule (comment period is open til 12/22) and the final parameters of what is an acceptable “opt-in” proposal is not known for certain. The company also can decide to challenge this proposal under a variety of exclusionary bases under Rule 14a-8.

Roy Disney – Taking It to the Web

Roy Disney and Stanley Gold recently left the Disney board in a huff to protest the leadership of CEO Michael Eisner. Now, they have launched a website – – in an effort to commence a grass-roots movement to oust Eisner, including the e-mail addresses of what they call “three key Disney directors.”

Rule 10b5-1 Plans

For subscribers, we have posted an interview with Darryl Rains of Morrison & Foerster on 10b5-1 Plan Advantages.

And don’t forget our “10b5-1″ Practice Area, which contains a load of resources including model plans/arrangements; analysis of SEC guidance in this area and sample 8-K announcements of plans.

December 12, 2003

Impact of SEC’s “Late Fund

Yesterday, the SEC issued its proposing release regarding amendments to the mutual fund pricing rules to prevent late trading in fund shares. The proposed rules would require that all purchase and redemption orders be received by the fund (or a single transfer agent designated by the fund or registered clearing agency) no later than the time at which the fund prices its securities, typically 4 pm.

This change would have an impact on the operation of 401(k) plans. The proposal states that administrators of defined contribution employee pension plans – such as 401(K) plans – have informed the SEC that they likely will be unable to process any purchase or redemption requests the same day they are made.

Another issue that operating companies have to consider is market timing through trading in 401(k) investment options by plan participants. For example, it has recently been reported that some employees have been engaging in market timing in the Federal Reserve’s employee thirft plan, and that the Fed has issued two letters to participants and imposed a restriction on rapid trading. Possible measures to restrict market timing in plans (e.g., redemption fees or trading restrictions) have to be reviewed for possible ERISA issues. Thanks to our roving reporter, Mike Holliday, for the information above!

Scrushy Looking to Overturn SOX

According to a brief story on, Richard Scrushy’s lawyers said yesterday that part of Scrushy’s defense in his criminal fraud case is “overturning SOX” (there is no further elaboration in the story). Scrushy, former CEO of Healthsouth, is alleged to have signed false 906 certifications. What kind of name is “Scrushy” anyways…