Monthly Archives: October 2004

October 28, 2004

Hedge Fund Adviser Registration

In a controversial 3-2 vote on Tuesday, the SEC adopted new Rule 230(b)(3)-2 of the Advisers Act, which will require hedge fund advisers to register with the SEC. Such registration will permit the SEC to conduct examinations of advisers, require compliance controls, regulate disclosure to investors and prevent certain individuals (such as felons) from managing hedge funds.

The rule eliminates the ability of advisers to rely on an exemption from adviser registration designed for advisers providing advice only to a small number of clients. The new rule also contains provisions for advisers located outside the United States to limit the extraterritorial application. Hedge fund advisers must register with the SEC by February 1, 2006.

More on Changes to the Form 10-Q

Following up on the interview that was blogged about yesterday, the SEC release adopting the new Form 8-K rules also included revisions to Form 10-Q. In our Form 10-Q Practice Area, we have posted a redlined version of the changes to Part II of Form 10-Q.

-Posted by Julie Hoffman

October 27, 2004

Proposed ’33 Act Reform

Yesterday, the SEC proposed its long-awaited ’33 Act reform at an open Commission meeting. “Well-Known Seasoned Issuer” (“WKSI,” pronounced “WICK-SEE”?) is a new term of art to define a category of issuers to which the most significant proposed revisions apply. A WKSI is an S-3 eligible issuer that has $700M in float, or in limited circumstances, has issued $1B of registered debt in the last three years.

The reform proposal can loosely be grouped into the following 5 categories (which are all summaries based on meeting notes and subject to certain conditions):

1. Easier Communications Around Registered Offerings
• WKSIs would be permitted to communicate orally or in writing at any time
• All issuers/offering participants would be permitted to use a free writing prospectus after filing the registration statement
• Communications more than 30 days prior to filing a registration statement would not be an offer (so long as they don’t mention an offering)
• Definition of “prospectus” would be narrowed
• Exemptions for research reports would be expanded

2. Liability Issues
• Would interpret 12(a)(2) and 17(a)(2) disclosure liability to be assessed against the information conveyed to an investor at the time of its investment decision
• Would provide that the application of Section 11 liability in shelf offerings would be similar to non-shelf offerings

3. Registration Procedures
• WKSIs would be permitted to use “automatic shelf registration,” which would involve automatic effectiveness, pay-as-you-go fees and maximum flexibility in the offering process
• The shelf system would be modernized to: include a single rule detailing the information permitted to be omitted from a base prospectus; require a new registration statement every three years; permit immediate takedowns; permit at-the-market offerings and permit material changes to plan of distribution in a prospectus supplement
• S-3 eligible companies would be permitted to identify selling security holders in the prospectus supplement where the securities are outstanding at the time the registration statement is filed
• Form S-1/F-1 would permit incorporation by reference, and therefore, S-2/F-2 would be eliminated

4. Prospectus Delivery Reform
• Would move to an “access equals delivery” model for final prospectuses, but would require notification to investors that they purchased securities in a registered offering

5. Changes to Exchange Act Reports
• Risk factors would be required in 10-Ks
• Voluntary filers would be required to disclose their filing status as such
• Accelerated Filers would be required to disclose material, unresolved Staff comments

Deferred Compensation Legislation Become Law

Last Friday, President Bush signed the tax overhaul legislation that includes the deferred compensation provisions – so the Treasury Department now has 60 days to adopt regulations under the law to flush out how the deferred compensation provisions work. (Unlike other tax bills, there was no ceremony for this legislation-signing – Bush signed it on Air Force One on his way to a campaign stop.)

However, we understand that the Treasury Department will act well before then to allow for better year-end planning – and such planning is essential. That’s why the NASPP is hosting a webcast on November 17th regarding “Deferred Compensation Legislation: Ten Things You Need to Do By Year-End!” Join the NASPP now and get the rest of ’04 for free.

Carl’s Corner

The October installment for Carl’s Corner is on “Purchase Prices in Shareholders’ Agreements.”

October 26, 2004

Today’s “The Rise of IDS Offerings” Webcast

For those of you that will listen to today’s webcast on “The Rise of Income Deposit Securities Offerings” – please print out these course materials in advance.

How the New 8-K Rules Impact Your Upcoming 10-Q

You know how I love practical guidance – that is why I love this interview with Bob Hayward, John Jennings and Mike Manos on Form 10-Q Changes for Third Quarter 2004, as it includes a checklist of how the new 8-K rules impact the upcoming 10-Q filings.

For those waiting for the 8-K webcast transcript, thanks for your patience as posting it is beyond my control – hopefully it will be ready soon.

SEC Flushes Out Qualitative Materiality in Enforcement Action

Last week, the SEC settled charges with KPMG LLP, two former partners, and a current partner and senior manager for “improper professional conduct” as auditors for Gemstar-TV Guide International. KPMG was not fined by the SEC – but it did agree to compensate Gemstar shareholders in the amount of $10 million, the largest payment ever made by an accounting firm in an SEC action.

According to a Floyd Norris column in Thursday’s NY Times, “The standard is what is important to investors,” said Kelley Bowers, an assistant regional director of enforcement in the Los Angeles office of the S.E.C. “A growing part of the business can be important to investors even though it is a small part of the business.” Audit firms have long taken the position that they did not need to challenge errors in company accounts if the amounts involved were “immaterial,” often defined as being perhaps 5 or 10 percent of a company’s revenues or profits.

From 1999 through 2002, Gemstar-TV Guide was promoting to analysts the prospects of its interactive program guide, which customers could navigate through and select television programs. Because the guide provided a small part of the company’s total business, the SEC said, the auditors considered the amounts of some questionable transactions involving it to be immaterial, including transactions where advertisers in the print edition were given an equal amount of free advertising in the interactive guide. The revenues were then attributed to the interactive division, helping it to show rapid growth.

The auditors should have considered “qualitative materiality,” the SEC said in its administrative order, saying the revenue in question “related to business lines that were closely watched by securities analysts and had a material effect on the valuation of Gemstar stock.”

According to the settlement, KPMG has agreed to conduct additional training for its partners and managers on qualitative materiality – and adopt a policy that requires more-effective consultation between audit engagement teams and KPMG’s national office in connection with possible restatements.

October 25, 2004 Lives!

If you haven’t heard Alan Beller’s speech last week – noted in this NY Times article yesterday – it is MUST viewing as it is very significant for those involved with drafting proxy disclosures – and the video contains Q&A following his speech that includes important clarifications to his remarks.

Due to the incredible demand, we have decided to maintain next year – and have posted a special offer for those that renew by December 15th.

In addition, for those that waited and missed the 10/20 conference, you can still subscribe this year and obtain a special rate if you also subscribe for next year at the same time.

More Than a Pet Peeve – It’s Theft

True story: As the 10/20 conference is about to commence, frantic call from IT person at a major law firm saying “I have 50 irate lawyers over here that have tried using the ID and password you have provided and it won’t work.” A quick check of our records reveal that a license for only one user was purchased.

Unfortunately, this is not an isolated incident for any of our online services. I’m not sure why lawyers (of all people) think they are entitled to steal from us – but last time I checked, theft is still a crime in most states. But its the ethics that bothers me, we work hard and I believe we provide full value for the prices we charge. So why cheat us?

By the way, a few years back, Legg Mason was hit with a $20 million dollar judgment because its employees were sharing IDs/passwords for an online service.

A Preview of the Disney Trial?

With lots of attention being paid to the Disney trial, it is probably taking a look at the recent opinion of Vice Chancellor Noble of the Delaware Court of Chauncery in Integrated Health Services v. Elgin.

This opinion was discussed during my videotaped panel with current and former Delaware Supreme Court Chief Justices Steele and Veasey – and it is the first case that interprets the “good faith” standard enunciated in the May 2003 Disney decision arising out of the Ovitz severance payment.

October 21, 2004

Nasdaq Approves Code of Conduct Rules for Foreign Issuers

Today, the SEC approved the Nasdaq amendments that amend Rule 4350 and related interpretative material to provide time frames for foreign issuers and foreign private issuers to disclose certain code of conduct waivers. The amendments provide that:

1. Foreign issuers, other than foreign private issuers, are required to disclose any waivers of the code of conduct by the board of directors for directors and executive officers in the same time frame as domestic issuers, i.e., via a Form 8-K within five business days.

2. Foreign private issuers are required to disclose waivers of the code of conduct by the board of directors for directors and executive officers either on the issuer’s next Form 20-F or 40-F, or on a Form 6-K.

How Closely Are Mutual Funds Following Their Voting Guidelines?

Last month, the AFL-CIO issued a report – Behind the Curtain: How the 10 Largest Mutual Fund Families Voted when Presented with 12 Opportunities to Curb CEO Pay Abuse in 2004 – that ranked the 10 largest mutual fund families (based on assets managed in stock funds for retail investors) on how closely they followed the AFL-CIO’s guidelines on proxy voting on pay issues.

As you may recall, mutual funds began reporting their voting records at the end of August for the first time. Because mutual funds hold about a quarter of the domestic stockholdings, their votes can be decisive.

The report ranked the 10 funds by the percentage of how often the fund met the AFL-CIO’s guidelines – and their was quite a variance as the scores ranged from a high of 100% for American Century to a low of 20% for Putnam. Fidelity, the nation’s largest fund family (and who was very opposed to disclosing its voting record during that debate) ranked 9th with a 25% score.

Charities Get Their Own Sarbanes-Oxley

Sarbanes-Oxley continues to ripple through other areas of the law. A week ago, Governor Schwarzenegger signed a California bill – SB 1262 – which will impose some SOX-like requirements on charities, including requirements that charities with gross revenues of more than $2 million prepare financial statements in accordance with GAAP that are audited by independent auditors.

Corporate charities meeting this threshold will have to have an audit committee with responsibilities similar to those under SOx. The boards of all charities will be required to review and approve the compensation and benefits of the President or CEO and the Treasurer or CFO to assure that it is “just and reasonable.”

Keith Bishop notes that there probably are more charities affected by this law than issuers affected by SOX. According the California Attorney General, there were over 80,000 charitable organizations registered in California as of January 2001.

October 20, 2004

Alan Beller’s Executive Compensation Speech

At our compensation conference today – its actually is still going on right now – Corp Fin Director Alan Beller gave a memorable 45 minute speech on executive compensation that is bound to raise the eyebrows – and sharpen the pencils – of those of you that are responsible for compensation disclosure. Kudos to Alan for speaking out and doing the responsible thing!

Alan mentioned that his speech will be posted on the SEC site in a day or so – you can review the archived video of it on whenever you wish.

There are an overwhelming number of attendees, both here and on the web – and a palatable buzz in the audience here in San Francisco. Very gratifying for six months of hard work and navigating an experiment in video conferencing. Tonight, I drink heavy…or go right to sleep.

October 19, 2004

SEC’s ’33 Act Reform Proposal – Ready to Roll!

The SEC is holding an open Commission meeting next Tuesday at 10 am to consider the long-awaited ’33 Act proposal. This is the project that was derailed for a while due to the extensive Sarbanes-Oxley rulemaking that got dumped on Corp Fin.

NYSE’s New Interactive Tool

The NYSE has developed a pretty neat interactive tool that will facilitate the ability of listed companies to comply with their listing standard obligations. Learn more in my interview with Janice O’Neill, who is Vice President, Corporate Compliance at the New York Stock Exchange.

SEC Enforcement Goes After Audit Committee Member

Last week, in the SEC’s enforcement action against Ahold, it is not only notable that the SEC did not seek any fines due to extensive cooperation (the topic of an upcoming interview) – but it is notable that the SEC went after a member of Ahold’s audit committee, Roland Fahlin, for causing violations of the reporting, books and records and internal controls provisions of the securities laws.

Here is a quote from the SEC’s press release: “This case also reflects the failure of a member of the company’s audit committee to perform his duties to oversee the reporting process of a public company,” said James Coffman, Assistant Director of the SEC’s Division of Enforcement. “The proceeding initiated against Mr. Fahlin today demonstrates the Commission’s commitment to bring enforcement actions against those board and audit committee members who fail to perform these important duties.”

October 18, 2004

Your Preparation for Wednesday’s Compensation Conference

If you are registered for the October 20th compensation conference and intend to participate by webcast, you might want to print off the Speaker Materials before it starts (scroll down beyond testing instructions to access the Speaker Materials) – if you intend to attend in San Francisco, we will have those materials already there for you as a handout. And don’t forget, if you are participating by webcast, please test your ability to access streaming video before the 20th – here are instructions on how to test.

If you have not registered yet – but have now decided to do so – you can register by just walking in on the day of the conference in San Francisco – or if you wish to participate by webcast, you can still register online. However, we can no longer process any registrations by phone because all of our staff is already setting up for the conference at the hotel. (Please don’t call me either as I also am at the conference location to help set up.)

If you have a question about what a speaker says during the conference, please post it in the Q&A Forum – and the speakers will try to post answers when they get back to their offices.

Remember that the program starts Wednesday at 7:30 am West Coast time – that is 10:30 am Eastern Time and 9:30 am Central Time. And all of the video will be archived – so you can jump in and out to watch segments as your day allows and come back to review anything you missed.

2005 Proxy Season Resource Center is Up!

We have updated our “Proxy Season Resource Center” for 2005 – if you are looking for something that you can’t find in there, please let me know and we will try to add it.

Here Come Those Disney Articles…

The significance of Wednesday’s Disney trial can’t be understated – and the media already is capturing that significance – see today’s NY Times and this article from today’s USA Today.

First Federal Judge Rules Sentencing Guidelines Entirely Unconstitutional

A week ago Wednesday, a few days after the U.S. Supreme Court heard arguments about the constitutionality of federal sentencing rules, U.S. District Judge Owen Panner in Portland concluded that federal sentencing guidelines are unconstitutional because it violated the seperation-of-powers doctrine in US v. Detwiler.

This is the first opinion to find the guidelines unconstitutional in their entirety under last year’s Feeney Amendment, which gave the executive branch far more say in sentencing decisions – but the immediate implications of the ruling are unclear because some of the issues that Judge Panner raised are before the US Supreme Court (and Judge Panner’s decision is likely to be appealed to the 9th Circuit Court). The Feeney Amendment, among other things, gives the executive branch power to appoint individuals to the federal sentencing commission, which considers such questions as what sentences are appropriate for certain crimes.

Judge Panner’s 31-page decision outlines specific objections to the new law, such as the US President can stack the Sentencing Commission with political allies, effectively taking control of a commission that is supposed to be a part of the judicial branch; law gives federal prosecutors too much power to pressure defendants into pleading guilty (noting even before the amendment, 99% of all federal criminal convictions in Oregon resulted from a plea, not a trial); and the law tries to intimidate judges because it requires that the U.S. House and Senate judiciary committees and the attorney general be notified when a judge departs from the guidelines and hands down a shorter sentence.

October 15, 2004

Law Firm Sued Over Ex-Associate’s Golden Parachute

The New York Law Journal reported yesterday that a public company has filed a breach of fiduciary duty suit against a law firm and one of its partners for helping to enrich an associate who jumped from the firm to become general counsel of the company by creating generous golden parachutes (for the associate as well as other company executives).

And the major plaintiff firms are also getting into the executive compensation recovery business – check out this press release from Milberg Weiss about how it recovered $22 million in severance payments from 8 current and former officers at Florida Power & Light.

By the way, the Disney trial has been delayed two days – it now begins on October 20th – the same day as our compensation conference! To glean insight from the former and current Delaware Supreme Court Chief Justices about their thinking on executive compensation and director liability/indemnification – come hear the first panel of that conference. Last chance to register.

Reg FD Strikes the Howard Stern Show

Last week, the big news for loyal Stern listeners (sorry, I am not one) was that he’s going to Sirius radio. As told to me by a member, “it was interesting to hear Stern discussing how he had been walking around with his stomach in knots because he signed the contract a few days earlier – but wasn’t able to tell anyone about it because of “SEC rules.” Love how the SEC was able to do what the FCC couldn’t – keeping Stern quiet.

Sirius filed an 8-K announcing the news – oddly, they filed the 8-K under Item 8.01 (Other Events – which is akin to the former discretionary Item 5) rather than Item 1.01 (Material Agreements) even though they state that their “financial obligations under the agreement are material.” Stern is receiving $500 million over 5 years… maybe I am in the wrong business.

October 14, 2004

FASB Delays Option Expensing By 6 Months

As loosely predicted in Monday’s blog, yesterday the FASB voted to delay implementing option expensing by 6 months – so now it will become effective for public companies with fiscal periods beginning after June 15, 2005. The effective date for non-public companies, proposed in the exposure draft to be a year after the date for public companies, remains to be determined. The FASB also agreed to allow for modified retrospective application going back to the beginning of the fiscal year for companies that wish to implement the rule early.

The FASB said that the principal reason for the delay was its awareness of companies struggling to implement internal controls under Section 404 – and the FASB also said it is still on track to issue its final statement by year’s end. If you need a crash course in what options expensing means for you – at next week’s NASPP Annual Conference, there will be 9 panels covering expensing.

SEC Proposes Reg M Amendments

At an open meeting held yesterday, the SEC proposed amendments to Regulation M that seek to create greater transparency in the syndicate book-building process and syndicate activity in the after-market, by prohibiting several practices that, in the view of the SEC’s staff, “artificially stimulate demand” for IPO stocks.

Most of the proposed changes will affect all distributions of securities, not just IPOs. The SEC is proposing to prohibit quid pro quo and tying agreements by prohibiting underwriters from conditioning an allocation of securities on the investor purchasing the distribution securities in the aftermarket, purchasing securities in another offering, or paying higher-than-usual commissions on other transactions – but the proposal is not intended to interfere with the underwriter’s freedom to allocate shares to its best customers and legitimate book-building.

More details are in the SEC’s press release on the topic – and in the firm memos that we have begun posting in Section A.16 of of our Sarbanes-Oxley Law Firm Memos.

Deferred Compensation Legislation Memos

We have been posting them in droves – see Section E.29 of our Sarbanes-Oxley Law Firm Memos.