Monthly Archives: January 2004

January 30, 2004

New NYSE FAQs on Corporate

As predicted by Broc, the NYSE yesterday posted on its website a set of FAQs on the new corporate governance rules in Section 303A of its listed company manual. There are 51 FAQs (up from the 47 predicted).

Companies Choosy About Their Auditors

According to ratings and analysis service Auditor-Trak, in 2003 each of the Big 4 accounting firms lost more public company audit clients than it acquired. Smaller national firms — Grant Thornton, BDO Seidman and McGladrey & Pullen — collectively acquired 21% of the clients lost by their Big Four competitors. Perhaps more interestingly, 34% of the public companies that formerly used a Big Four auditor and made a change opted for a regional or local firm as a replacement. Any firm auditing public companies must register with the PCAOB of course; it would appear that perhaps the early claims that this requirement would lead to a further constriction of the universe of public auditors might have been off the mark.

Complying with SOX 404

There has been continued murmurings that the SEC will postpone the effectiveness of its new rules requiring management to report on its assessment of the company’s internal controls (see Broc’s Blog from January 14) but a recent survey conducted by PricewaterhouseCoopers found that a majority of companies are working earnestly to be prepared to comply on time. PwC reports that fully 95% of executives say that they expect their companies to meet the deadline for compliance with Section 404 but almost half admit that it will be hard to do.

It’s a Small World

And the themes underpinning Sarbanes-Oxley continue to resonate throughout. On Wednesday, a number of policy makers, business leaders, investors and other experts operating under the umbrella of the Latin American Roundtable on Corporate Governance issued its white paper on that topic. The Organisation for Economic Cooperating and Development, one of the groups working on the white paper, summarizes some of the key action items as “taking voting rights seriously; treating shareholders fairly during changes in corporate control and de-listings; insuring the integrity of financial reporting and improving disclosure; developing effective boards of directors; improving the quality, effectiveness and predictability of the legal and regulatory framework; and continuing regional co-operation.”

Meanwhile, the Financial Services Authority of Britain continues to keep up the pressure in Europe, having just levied its largest fine ever against a financial advisory firm for compliance failures. The fine, which was equal to almost one and a half million dollars, was assessed against a unit of Deloitte & Touche for failures related to its investment trust sales and other pension work.

Posted by Kimberley Drexler

January 29, 2004

Now Here is a Nice

Check out the new proxy statement from Hewlett-Packard – which includes lots of information in response to the new SRO requirements. Walt Disney also recently filed its proxy statement (see yesterday’s NY Times for an article about the SEC’s investigation into Disney’s lack of disclosure regarding related parties).

Martha Stewart Teaches Us a Lesson

The case against Martha Stewart is being brought under atypical securities law theories. Even at this early stage, the case can teach us some lesson. Read more from an interview with Bruce Brumberg on What Compliance Lessons You Can Learn From the Martha Stewart Case.

NYSE Expected to Soon Issue More FAQs

I got some feedback on my blog yesterday about “direct” communications with directors and amended my entry slightly to indicate that officers, such as the corporate secretary, may indeed be appropriate “middlemen” between non-management directors and shareholders. Fortunately, this guessing game should soon be over as I hear rumors of 47 FAQs to be released shortly by the NYSE staff on their new governance listing standards.

As reflected in my amended entry, I have seen no written guidance saying the administration has to be by a “non-management employee.” In the SEC’s adopting release regarding shareholder/director communcations, the SEC noted that the company does not have to disclose who is handling the communications nor is a company required to describe the process. Nor does the SEC specify that the person has to be a non-management employee – instead, the SEC stated that “a company’s process for collecting and organizing security holder communications, as well as similar or related activities, need not be disclosed, provided that the company’s process is approved by a majority of the independent directors.” See the SEC’s commentary on this at footnote 118 and at footnote 59. [If you are looking for samples of what companies are disclosing about how investors can contact shareholders, we have them in our “Shareholder Access Portal”]

January 28, 2004

Untangling SFAS 150 One of

One of the more complicated rulemakings in some time is SFAS 150 – even the effective date(s) are complicated. Under SFAS 150, an issuer must, in most circumstances, classify as a liability – not as equity – a financial instrument that falls into any of three specified categories. In certain circumstances, that could result in a freestanding financial instrument indexed to the issuer’s stock price.

Check out my recent interview with Richard Flowers, Jeff Ellis and Brad Kulman on the Impact of SFAS 150 to help untangle this recent accounting pronouncement.

NYSE’s Requirement to Communicate “Directly” with Independent Directors

I have been getting asked a lot of questions about the NYSE’s new requirement under Section 303A.03 that listed companies disclose a method for interested parties to “communicate directly with the presiding director or with non-management directors as a group.” The most common question is what is meant by “directly.”

From what I hear, the NYSE staff has been saying that a company doesn’t need to provide direct access to directors nor is it required to hire a third party. Rather, a non-management employee can undertake this task (it is unclear as to what constitutes a “non-management employee” – my guess is that it can be the corporate secretary or someone in the legal department – perhaps even if they are considered an officer).

However, this employee must be instructed from the non-management directors regarding what, when and how the directors want to review any communications. In other words, this employee can’t make any independent decisions (and of course, can’t share any communications with management unless instructed to do so by these directors). Obviously, it is wise to obtain these instructions in writing as part of a sound compliance program (and as CYA for the employee tapped as the “go-between”).

January 27, 2004

SEC Filing Fee Changes Finalized

After months of waiting, President Bush has signed the bill that includes the SEC filing fee changes – the new rate of $126.70 per million is effective for any filing made after 10:00 pm today – not January 28 as originally announced.

New Binding Bylaw Amendment Proposal to Create Shareholder Committee

The IRRC reports that AFSCME has submitted a binding bylaw proposal to Eastman Kodak that would create a “majority vote shareholder committee.” The proposal seeks – following a majority vote that is not adopted by the company – the creation of a committee comprised of the proposal’s proponents and other interested shareholders to communicate with the board regarding the proposal that got the majority vote.

Kodak has received majority votes on non-binding shareholder proposals for a number of consecutive years. Note that a similar type of proposal submitted to Kroger last year received the support of 47% of the votes cast.

First Credit Rating Agency Announces the Use of CGQ

Last week, Fitch announced that it will pay ISS to use its CGQ database as part of its creditworthiness assessment.

This is significant for ISS as all of the various rating agencies have been wooing the rating agencies for their business for quite some time. As to how much CGQ will mean to Fitch’s overall analysis, that remains to be seen.

Clean-Up on Sample D&O Questionnaire for NYSE Companies

We have done a little clean-up on the first sample D&O questionnaire for NYSE companies that is posted in our “Sample D&O Questionnaires.” This word file has been revised to remove the question as to whether the person has participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three (3) years (this applies to Nasdaq companies; not NYSE companies). In addition, there is a new question dealing specifically with relationships with charitable organizations.

January 25, 2004

Nasdaq Posts a Form of

Following up on the superb analysis on SRO certifications in the Jan-Feb issue of The Corporate Counsel – which had just left the printers and should be in your mailbox very soon – Nasdaq just posted a Form of Corporate Governance Certification to be used by listed companies to certify as to a number of matters as required by its new governance rules.

This certification is not required by any single Nasdaq rule; rather it serves to address a number of rule requirements, including the nature of the audit committee’s composition; adoption of the requisite audit committee and nominating committee charters; that the board has executive sessions for its independent directors; and that the company has – or will have – adopted a code of conduct.
Nasdaq-listed companies must file this certification with Nasdaq’s Listed Qualification Department immediately following the company’s next annual meeting after January 15, 2004, but no later than October 31, 2004 (foreign private issuers and small business companies have until July 31, 2005).

Alan Dye’s Section 16 Transcript is Up!

Members of the NASPP or can access the transcript from the annual webcast that Alan Dye held recently regarding the latest developments on Section 16. Always an incredibly popular program – now in its 12th year – the transcript covers 36 distinct topics!

January 23, 2004

50 Nuggets Transcript is Up!

For members, we have posted the transcript from our “50 Nuggets in 50 Minutes II” webcast featuring Alan Dye and myself.

Categorical Standards for Director Independence

As discussed during the webcast, the topic for which I currently am getting the most questions involve categorical standards for director independence. Under new Section 303A.02(a) from the NYSE Listed Company Manual, listed companies must disclose that each independent director has no material relationships with the company – and the basis for any determination regarding any immaterial relationships. Alternatively, companies can disclose that they have adopted categorical standards to assist them in making independence determinations and make a general disclosure that the independent directors satisfy them.

Even though the new NYSE standards are not technically applicable yet, some of the NYSE companies that recently have filed proxy statements have addressed director independence determinations in their disclosure – and I have compiled these samples in “Determination of Director Independence” in our “Disclosure Analysis & Samples” Practice Area.

These samples also include Nasdaq companies, who must simply identify which directors are independent under Rule 4200 (this rule technically is applicable to these proxy statements – as the NYSE and Nasdaq have split as to effective dates of its new standards).

January 22, 2004

Investment Company Governance The SEC

The SEC has been quite active rulemaking in the area of investment company governance – last week, it proposed new governance standards for investment companies and codes of ethics for investment advisers.

Probably the most controversial aspect of the proposals is to require that at least 75% of a fund’s board be independent directors – and that the fund board chairman be an independent director.

Loads of Law Firm Guidance for the Proxy Season

During the past week, the number of law firm memos on what to disclose during this proxy season in our “Proxy Season Resource Center” has more than doubled. And more are being added daily!

January 21, 2004

Doing Good Governance Doesn’t Have

Sung to the tune of Neil Sedaka’s “Breaking Up is Hard to Do”…check out my interview with Jim Brashear on Holding Executive Sessions and Drafting Charters. Jim is Corporate Secretary of Sabre Holdings Corporation.

As Promised, SEC Going After Audit Firms

Last month at the AICPA conference, SEC Enforcement Director Stephen Cutler said that the SEC was preparing nearly a dozen cases against audit firms. Yesterday, the SEC started making good on that speech and charged two accounting firms of aiding and abetting a client’s fraud and ignoring their professional duties.

In an administrative order, the SEC claimed that Grant Thornton “rented’ out its name and prestige” to a small firm, Doeren Mayhew & Co. and that both firms failed to make a client – MCA Financial Corp. – disclose improper deals with related parties.

January 20, 2004

Reminder about Tomorrow’s “50 Nuggets”

Don’t forget tomorrow’s webcast – “50 Nuggets in 50 Minutes II” – for members of Broc and Alan Dye will be covering a host of proxy season & governance matters, among other timely items.

An audio archive and transcript will be posted following the live webcast. The non-member fee for this special webcast is $295. If you’re not a member and you wish to access this important program and hear from Broc and Alan, you may simply take advantage of a no-risk trial to

If you have not renewed your membership for 2004, you will not be able to access the webcast. You can renew online – or by fax by using this order form for If you have renewal questions, send an email to or call our HQ at 925.685.5111.

Corporate Executives are Apparently Not Eager to Repay Their Loans

A study put out last Friday by the Corporate Library reports that executives continue to owe their companies millions of dollars from loans that predated Sarbanes-Oxley’s prohibition of the practice. (SOX put a stop to almost all corporate loans to insiders but did not require that pre-existing loans be repaid.) Interestingly, the Corporate Library found that of 23 companies in its study that were operating split-value life insurance programs, only 10 have suspended that benefit.

The study also evaluates the types of loans outstanding and circumstances under which companies have forgiven loans to insiders. Although outright loans are pretty easy to identify as now forbidden by SOX, there are a number of more difficult questions that have been left in the statute’s wake. Broc will be hosting another webcast in three weeks that will explore cashless exercise and other murky areas arising out of SOX Section 402.

Posted by Kimberley Drexler

January 16, 2004

Our New “Corporate Governance Website”

Under the new NYSE listing standards, prior to their 2004 annual shareholder meetings, listed companies must create a corporate governance page on their websites. The bare minimum for compliance is a page that contains links to the company’s governance guidelines, code of conduct, and the charters of the key board committees. The next tier of compliance is to include additional information (egs. list of directors, committee assignments), corporate documents (egs. articles, bylaws, policies). Top tier companies also include instructions for submitting accounting and whistleblowing complaints.

Thanks to Michael Goldblatt, we have posted a new “Corporate Governance Websites” Portal, which has links to various governance webpages that comply with some or all of the new NYSE requirements already.