Monthly Archives: November 2004

November 30, 2004

45-Day Internal Controls Implementation Delay for Smaller Accelerated Filers

Today, the SEC issued an exemptive order to grant certain accelerated filers an additional 45 days to include their 404 report (and the related auditor attestation). The exemptive order applies to an accelerated filer that has a fiscal year ending between and including November 15, 2004 and February 28, 2005, and that had a public equity float of less than $700 million at the end of its second fiscal quarter in 2004.

The PCAOB also met today to adopt a temporary rule, subject to SEC approval, that would permit the delayed filing of the auditor’s attestation consistent with the SEC’s exemptive order.

Securities Act Reform Practice Area

In preparation for tomorrow’s webcast – “The Overhaul: ’33 Act Reform” – we have developed a Securities Act Reform Practice Area devoted to the ’33 Act reform proposal – including a Table of Contents from Shearman & Sterling that helps navigate the 389-page proposing release. In the Practice Area, we also have posted the 97-page copy of the release from the Federal Register.

The New SEC Phone Book is Here!

We have just posted the new edition of the “SEC Phone Directory” – not available anywhere else on the Web! The “SEC Phone Directory” is available from home page under the “SEC Rules/Guidance” button.

Moody’s Ratings of Internal Control Disclosures

In the wake of SEC Chief Accountant’s Donald Nicolaisen’s speech in early October about internal controls – during which the Chief Accountant noted that Moody’s would be analyzing internal control disclosures – a number of members have asked me about how Moody’s intends to divide material weaknesses into two degrees of severity.

The first category – “Category A” – of material weaknesses concern control problems with specific transaction-level processes such as tax accrual, bad-debt reserves, and impairment charges. These require attention, but external auditors can effectively “audit around” them and still deliver an unqualified opinion of the financial statements.

The second category – “Category B” – of material weaknesses, however, cannot be circumvented by auditors because they represent “company level” control problems, such as ineffective control environments, audit committees, and financial reporting processes, encompassing everything from a lax code of conduct, to feeble fraud-prevention guidelines, to poor attempts at assigning executive responsibility.

Moody’s does not intend to publicize the categorization of internal control disclosures for any particular company. However, Moody’s has made clear the process it will be using (which is described in this Special Comment in our Internal Controls Practice Area) – and if a company’s rating is adjusted due to material weakness disclosures, the rationale for the downgrade would be disclosed at that time.

November 29, 2004

PCAOB to Meet on Internal Controls

In a vaguely worded announcement, the PCAOB will meet tomorrow morning on internal controls. My guess is they will vote on delaying implementation for smaller companies – a topic covered in a feature article in Saturday’s Washington Post.

8-K Trends: Part I

With last Tuesday’s release of FAQs by the SEC Staff, it might be a good time to take stock in how many 8-Ks are being filed. The SEC predicted each company would, on average, file an additional five 8-Ks per year – resulting in 59,000 additional 8-K filings from the nearly 12,000 companies that file them, which prediction is about double the rate of filings before the new rules were adopted. Notably, the SEC originally estimated that the new rules would cause two new 8-Ks per year in the proposing release – but bumped this number up substantially in the adopting release.

But the SEC probably didn’t bump up their estimate enough. I don’t have actual statistics – but I have looked at quite a few companies that appear to be averaging the filing of an 8-K per week. And it doesn’t appear to depend on the size of the company – plenty of smaller companies are filing 8-Ks at this clip. For example, look at this filing stream for the Williams Companies – I count 14 8-Ks filed since August 23rd. Of course, many companies are not filing at this rate and actual stats might prove closer to the SEC’s final estimate.

The New Obstruction of Justice

Here is a rehash of an interesting blog from Bruce Carton of the Securities Litigation Watch: Prosecutors requested a fall 2005 trial date yesterday for Sanjay Kumar, former CEO of Computer Associates International, who is charged with obstruction of justice, conspiracy and lying to law enforcement officers in a multibillion-dollar financial fraud. The obstruction of justice charge is particularly notable, and perhaps novel, because it relates to statements Kumar made not to any government official but rather to the company’s outside counsel (Wachtell Lipton), which was conducting an internal investigation of the matter.

According to paragraph 53 of the indictment filed against Kumar:

“Shortly after being retained in February 2002, the Company’s Law Firm met with the defendant SANJAY KUMAR and other CA executives in order to inquire into their knowledge of the practices that were the subject of the Government Investigations. During these meetings, KUMAR and others did not disclose, falsely denied and otherwise concealed the existence of the 35-day month practice. Moreover, KUMAR and others concocted and presented to the Company’s Law Firm an assortment of false justifications, the purpose of which was to support their false denials of the 35-day month practice. KUMAR and others knew, and in fact intended, that the Company’s Law Firm would present these false justifications to the United States Attorney’s Office, the SEC and the FBI so as to obstruct and impeded the Government Investigations.”

Four former executives of the company, including its chief financial officer and general counsel, have reportedly already pleaded guilty to the charge of obstructing justice by lying to the lawyers from Wachtell. According to this article in the National Post, this new form of obstruction was the subject of discussion recently by defense attorneys John Keker and Theodore Wells, Jr. at PLI’s Securities Institute conference:

“You better understand how broad these obstruction statutes are — and how risky for both you and your clients,” Mr. Keker told the audience of securities lawyers.

He pointed to the case against Computer Associates International, in which the three executives — including the general counsel — pleaded guilty to obstruction of justice for lying to their own lawyers at Wachtell Lipton Rosen & Katz, who were conducting an internal investigation.

Government prosecutors said the general counsel hid some information and gave incorrect information to Wachtell, even though he knew the findings were being passed along to the government.

“What’s really scary here is some prosecutors are now taking the position that if an employee makes a false statement to the outside lawyer doing the internal investigation, that can constitute obstruction based on the theory that the outside lawyer is doing the investigation with the purpose of giving that information to the government,” said Mr. Wells, who, like Mr. Keker, is consistently ranked as one of America’s leading white-collar defence lawyers.

“So now we’ve moved from a situation where you’re not supposed to make false statements to government agents, which at least people understand, to a world where if you make a false statement to the lawyer from Skadden Arps or Cravath, that in and of itself may constitute an act of obstruction.”

November 23, 2004

SEC Staff Issues 8-K FAQs

The SEC Staff has issued the long-awaited 8-K FAQs! There are 30 FAQs – plus an interesting introduction about the purpose of the 8-K rules and a warning to ensure that companies have implemented appropriate disclosure controls and procedures to handle the new rules.

PCAOB Issues More Internal Control FAQs

Yesterday, the PCAOB issued FAQs 30-36 to assist in the implementation of PCAOB Auditing Standard No. 2. Among the topics addressed in the new FAQs are audits of multi-national companies that involve the work of more than one auditor; audits of federally insured financial institutions; the timing of auditors’ communications to management and audit committees regarding material weaknesses or significant deficiencies in internal control; evaluations of deficiencies in information technology general controls; and the ability of outside auditors to use internal auditors to provide direct assistance in the audit of internal control over financial reporting.

Amendment of California’s Corporation Disclosure Act

The original California Corporate Disclosure Act was adopted in the aftermath of Sarbanes-Oxley and required public companies doing business in California to file various corporate data with the California Secretary of State’s office. The intent of the Act was to provide people with access to key public information without having to scour voluminous SEC filings. Unfortunately, the original Act’s disclosure requirements exceeded those required by the SEC and required the expenditure of additional resources by companies complying with the Act.

Governor Schwarzenegger recently approved a law amending California’s Corporation Disclosure Act. Regrettably, this Act continues to diverge from SEC disclosure requirements in some material respects and California remains the only state in the nation to impose such a duplicative and burdensome filing requirement upon its businesses – and the Act still applies both to public companies incorporated in California and to companies that are simply qualified to do business in California. Learn how the Act has changed in my interview with Jason Slater on Changes to California’s Corporate Disclosure Act.

And Even More Notes from the PLI Securities Law Institute

Here is our last batch of notes from PLI’s Securities Law Institute from the “SEC Review Developments” and “Follow-Up On Recent Disclosure Initiatives” panels.

November 22, 2004

Latest SEC Thinking on Internal Controls

On Saturday, at a panel from the ABA’s Committee of Federal Regulation of Securities’ Fall Meeting, Corp Fin Director Alan Beller stated that the SEC Staff is considering taking action regarding the ability of accelerated filers to comply with the internal controls deadline – and is thinking of whether a category of smaller accelerated filers should be given more time.

Alan expressed the view that to the extent that a company has financials that the company stands behind – but the company cannot complete its 404 report timely to include in the 10-K – he would prefer that the company file the 10-K without the 404 report and auditor’s attestation, so at least there is the 10-K information available to investors (but the 10-K would nonetheless be considered deficient). Alan stated that SEC Staff is considering whether such a company would be deemed deficient in its filing obligations for purposes of Form S-3 eligibility. We should hear relatively shortly from the SEC Staff whether they will take such action.

More PLI Notes

Speaking of internal controls, we have posted notes from PLI’s Securities Law Institute from the internal controls panel as well as the popular Q&A Picnic with Alan Beller.

Reporting Up and Shopping Around for Legal Advice

Our February e-minders described an example of reporting up at TV Azteca (because the company’s Chair didn’t want to disclose one of his related party transactions) – yesterday, Pat McGheehan wrote a column in the NY Times with many more details, illustrating how TV Azteca continued to shop around for the specific legal advice that they desired.

[Personal note– took the kids to SpongeBob Squarepants this weekend; took a pass on “Seed of Chucky.” On the NBA brawl, I agree completely with Michael Wilbon’s column.]

November 18, 2004

Phase-In; Phase-Out

Yesterday, the SEC adopted its proposed release to postpone the final phase-in period for acceleration of periodic report deadlines that apply to “accelerated filers.” Under the amended rules, the deadline for accelerated filers will remain at 75 days after year end for annual reports and at 40 days after quarter end for quarterly reports. The accelerated filing phase-in will resume for reports filed for fiscal years ending on or after Dec. 15, 2005, when an accelerated filer will have to file its annual report within 60 days after year end and file its quarterly reports within 35 days after quarter end.

The SEC said that the primary purpose of the postponement is to allow additional time and opportunity for accelerated filers and their auditors to focus their efforts on complying with new requirements regarding internal control over financial reporting that were mandated by Section 404 of SOX.

The PCAOB is Making Its List

At its meeting with its Standing Advisory Group yesterday, the PCAOB revealed an ambitious agenda for developing auditing standards in 2005.

The topics include:

• Auditor independence and tax services.
• Detection of and reporting on financial fraud.
• The relative authority of auditing guidance in the Board’s interim auditing standards.
• Communications with audit committees.
• Engagement quality review, also known as concurring or second partner review.
• Auditing related-party transactions.
• Consistency of application of generally accepted accounting principles.
• Use of confirmations in an audit.
• Auditing fair value measurements and disclosures.
• Elements of quality control for registered firms.
• Assessing audit risk.

The Staff of the PCAOB acknowledged that it may not be possible to address all of the above issues in 2005, so it may need to focus on the topics with the highest priority.

-Posted by Julie Hoffman

November 17, 2004

Notes from PLI Securities Law Institute

We have posted notes from three panels – New 8-K Rules, MD&A, Accounting Disclosures and Issues – from last week’s PLI conference. More to come.

Job Descriptions – Chief Compliance Officer

Many companies are in the process of hiring a chief compliance officer – so we have posted a number of CCO job descriptions, available from our Sample Document Library or Compliance Training Practice Area.

Understanding The Corporate Library

To get a better understanding for how The Corporate Library administers its governance ratings, here is an interview with Paul Hodgson on Role of Compensation on Governance Ratings.

November 16, 2004

Analysis of Auditor Engagement Letters

I have posted 12 questions that audit committees should consider asking themselves when they negotiate this year’s engagement letter with their independent auditor – as well as analysis of some of the new provisions that auditors are sticking in their letters (all of this resides in our “Audit Committees” Practice Area).

More important now than in the past, audit committees should attempt to negotiate these letters as auditors are attempting to pass off as much potential liability as possible. As indicated in the analysis, some audit committees are finding success in pushing back in certain areas. If you have had a different experience with your auditor than what is described in this analysis, please let me know.

More Sample 404 Management Reports

In our Internal Controls Practice Area, we continue to post additional samples of 404 Management Reports – both with material weaknesses identified and without.

Why Would the SEC Deny the Withdrawal of a Registration Statement?

Proving that you learn something new each day, I couldn’t figure out why the SEC would bring this enforcement action to deny withdrawal of a registration statement. I presumed that even if a company withdrew and there had been fraud, the SEC could still act because they have jurisdiction if the fraud has occurred – or is likely – to reoccur.

But I learned that the SEC takes action to deny withdrawal once in a blue moon – because if the company withdraws before they sell anything, the SEC apparently loses jurisdiction (although don’t ask me how – got this answer from an old timer and I would think 10b-5 and Section 5 could help against a fraudulent offer). Gotta get those fraudulent red herrings!

November 15, 2004

The SEC Speaks at PLI

During last week’s PLI Securities Institute, members of the SEC Staff gave an update on the status of some pressing matters, including:

– Corp Fin Associate Director Paula Dubberly indicated that written guidance on the new 8-K rules would be forthcoming shortly, possibly this week

– Corp Fin Director Alan Beller said that the SEC would act on its outstanding proposal to delay the accelerated filer deadline for periodic reports “sooner rather than later”

– Alan closed his Picnic Q&A by strongly urging the audience to read his speech about compensation disclosures that he delivered at our 10/20 conference (in fact, Eliot Spitzer wrapped up his keynote speech by admonishing investors for not taking a stronger stance in the comp area)

– Chief Accountant Donald Nicolaisen vaguely addressed the potential to delay the 404 deadline further by noting the SEC might consider something in a few weeks (but wasn’t clear what was being considered and definitely didn’t promise anything)

During the course of this week, we will be posting more detailed notes from this conference on

Deferred Compensation: Ten Things You Need to Do By Year-End!

On Wednesday, the NASPP is holding a webcast – “Deferred Compensation Legislation: Ten Things You Need to Do By Year-End!” – that is critical for anyone that has any type of deferred compensation arrangements as the window of opportunity to take action in the wake of the new JOBS Act is dwindling.

More on the 8-K Rules

I recently spoke at the ASCS Chicago Annual Chapter meeting and heard a great panel of in-house lawyers providing 8-K tips – and they have reprised their tips in this interview!

November 10, 2004

PLI Conference in NYC

Julie Hoffman and I will be manning our booth in NYC over the rest of the week at PLI’s annual securities law institute. Come on by and say hello!

By the way, here are some quotes from me in the context of the SEC’s proposal to have the SROs improve their own governance.

Survey on Code of Ethics for Directors

We have posted a Quick Survey on codes of ethics for directors, regarding whether companies have a separate code for directors – and why – and more.

Here are the final results from our past survey on earnings releases and 10-Qs.

The Launch of

We have launched a new site for M&A practitioners – The key resources on this new site will be a series of regular webcasts – as well as practical contributions from a highly regarded advisory board.

The first webcast deals with the “Impact of Internal Controls on M&A” – featuring the SEC’s Deputy Chief Accountant Andy Bailey, John Huber of Latham & Watkins, Teri Iannaconi of KPMG, and Mary Korby and Gil Friedlander of Weil Gotshal. We also have a “30 Nuggets” webcast scheduled with some of the sharpest and wittest M&A legal minds in the biz.

Learn more about what is on the site at Ten Good Reasons to Try Try a no-risk trial and take advantage of the low introductory rates.

November 9, 2004

Wild Proxy Season Transcript is Up!

We have posted the transcript from last week’s webcast, “Another Wild Proxy Season? Forecast for 2005.”

Shareholder Proposals for Shareholder Access

With the SEC’s shareholder access proposal stalled, a coalition of CalPERS, NY State Common Retirement Fund, AFSCME and Illinois State Board of Investment have submitted shareholder proposals to Walt Disney and Halliburton to give shareholders the right to nominate up to two directors. Last year, AFSCME submitted a similar proposal to Marsh & McLennan, but the proposal was withdrawn after the company appointed a former federal prosecutor to its board.

The Disney shareholder proposal asks if the company would become subject to the shareholder right of access included in the SEC’s proposed proxy access Rule 14a-11, which would allow shareholder groups that have held more than 5% of Disney’s outstanding common shares for more than two years to nominate up to a specified number of candidates who are independent from both the nominating shareholder and from Disney for election to the board. In the case of Disney, the rule would allow a shareholder to nominate up to 2 directors because Disney’s board currently has 11 members.

It should be noted that the shareholder proposal at Disney could be withdrawn as the company asked for names of potential independent directors to be added to the board – and is now considering the candidates submitted by the coalition.

Free Email Alerts for New Cases

There is a new free weekly service – Federal Filings Alert – that reports on new cases filed in U.S. district courts in selected areas of the law including antitrust, copyright, equal employment, products liability – but unfortunately not in corporate & securities.