Monthly Archives: November 2004

November 8, 2004

QLCC Survey

In our “Qualified Legal Compliance Committees” Practice Area, we have posted a survey from Skadden Arps regarding QLCCs. The survey canvassed the disclosure of nearly 7,000 companies and found that 2% have established a QLCC (plus other factoids listed in the survey).

Pay Madness Even in Montana

This article from the Billings Gazette describes how employees at Blue Cross Blue Shield in Montana are ashamed to work there because the CEO gets paid so much.

This illustrates what is at the heart of executive compensation – it sets the tone for a company’s culture. If a CEO is receiving all types of lavish perks, how can anyone be surprised when rank and file employees make inappropriate decisions when a gray issue arises? For most of us, our behavior is principally driven by our environment – and in today’s society, the bling is king.

Six Degrees of Jack Nicholson

Don’t ask, but in a prior life I liked to tell people that Jack Nicholson was my uncle. Uncle Jack stories were a big hit. Here is one from the family album.


November 5, 2004

Alan Beller’s Compensation Disclosure Speech Is Up!

Yesterday, the SEC posted Alan Beller’s outstanding speech from our October 20th conference – and if you are involved with proxy disclosures, it is must reading. On, the video archive of Alan delivering the speech is still available, as well as the Q&A afterwards that flushes out some of Alan’s comments.

Right now, we are offering a special catch-up offer to those that missed the conference – this offer includes access to for 2005 at a special reduced rate. This offer expires on December 15th.

SEC Slams Wachovia for Merger Proxy Disclosure Violations

Yesterday, the SEC’s Enforcement Division settled an action with Wachovia in connection with its 2001 merger with First Union. The SEC alleged that Wachovia failed to disclose – in quarterly reports and a joint proxy statement-prospectus – that it had purchased $500 million of First Union stock during the period when there were competing bids for the target.

In levying a $37 million penalty – which is pretty hefty for a disclosure violation – the SEC singled out Wachovia’s lack of cooperation during the SEC’s investigation.

SEC Approves NYSE’s Revised Governance Standards

Yesterday, the SEC approved the NYSE’s revised proposed changes to its governance listing standards. Among other modifications, the amended standards change the independence ‘bright-line’ standard that addresses a director’s relationship with the listed company’s auditor. The look-back provision was modified to impact only individuals who actually worked on the company’s audit while employed by the audit firm – but the standard will now disqualify any director who has an immediate family member who is a current partner at the audit firm. Previously, a director was disqualified only if the immediate family member was with the audit firm in a “professional capacity.”

Since there may be directors who were independent under the previous
standard – but will not be independent under the revised standard – the
rule provides a transition period: companies will have until their first annual meeting after June 30, 2005 to remedy any independence issue resulting from this change. If a director’s independence status changes, the company must file an Interim Written Affirmation promptly – utilizing the transition period will not mean that a company is out of compliance, but the company must indicate reliance on the transition period on Exhibit A or E, as appropriate.

We have begun posting law firm memos related to these changes in Section D.13 of our Sarbanes-Oxley Law Firm Memos.

November 4, 2004

’33 Act Proposing Release Available

Late yesterday, the SEC posted the hefty proposing release for ’33 Act Reform. Comment period ends 75 days after the release is published in the Federal Register (so the deadline likely will be sometime in mid-January).

Responding to Audit Inquiry Letters

As the nature of the auditor-issuer relationship evolves under the pressures of a new regulatory environment, there has been much discussion about what audit responses should look like – see this interview with Dean Hanley on Responding to Audit Inquiry Letters to learn more.

The Sale of Personal Intangible Assets

I’ve been trying to go light on compensation issues to give you – and me – a break from the madness, but I can’t help myself as I got riled up guest-teaching at Georgetown’s LLM corporate governance class last night. This past Sunday, Gretchen Morgenson wrote a column in the NY Times about how Audiovox sold some assets this summer, at which time their board revised the definition of “change of control” under an LTIP so that the asset sale would constitute a triggering event and pay two executives a million or two apiece. Here is the section of the proxy statement describing this action.

But the crazy thing is that the company also paid $16 million to one of these executives (who jumped over to the acquiror of the assets) in exchange for his “personally held intangibles,” which apparently consists of his personal contact information, personal and business relationships, “personal know-how” and trade names/patentable assets. Here is a filed copy of the Personally Held Intangibles Purchase Agreement.

I agree with Gretchen; I just don’t understand how all of these intangibles can accrue to an executive – who got paid quite nicely by the company while he acquired these intangibles – rather than the company. Are we all just independent contractors for the firm we work for? Someone please take me off the ledge and explain the way of the world to me…

November 3, 2004

No Chaperone is Necessary!

Just reading over the FAQs that Market Reg issued yesterday about the Global Research Settlement – and can’t help but chuckle over the answers that address situations where a chaperone might be necessary. And you wonder why investors have lost confidence in our markets.

For example, FAQ 28 deals with “Can both Research and Investment Banking personnel participate in social and athletic events organized in connection with a conference?” and the answer gets into influencing of seating arrangements.

Friendly Advice on Nasdaq Staff Reviews

Over the past year or so, I have occasionally blogged when the Nasdaq has updated its PDF of formal interpretative letters (the Nasdaq keeps all of their interpretative letters combined into one PDF – an awkward format). The Nasdaq will issue a letter to issuers for a fee of at least $2,000. In August this year, Nasdaq posted a large number of helpful new interpretative letters that address a number of director independence and shareholder approval issues.

Suzanne Rothwell of Skadden Arps reminds us that it remains important that – regardless of whether a Nasdaq interpretative letter is on point and indicates that shareholder approval is not required in a situation – Nasdaq companies and their counsel should contact Nasdaq staff for at least an informal review of any situation involving an issuance of securities where it is believed that shareholder approval is unnecessary.

The same advice applies in the case of director independence issues. Since Nasdaq’s interpretative letters are entirely fact-specific, any change to the facts (some of which may not be reflected in the the applicable interpretative letter) may change the outcome.

The Passing of Milton Cohen

On October 30th, the legendary Milton Cohen passed away. Mr. Cohen was one of the seminal figures in the history of the SEC, from his start at the Commission in 1935 – just after its founding – to when he became Corp Fin Director in 1942.

He returned in 1961 to head a group that published a 6-volume set, which became the cornerstone for the integrated disclosure system that was eventually adopted. He then published one of the most influential law review pieces ever – “Truth in Securities Revisited” – which set forth the principles that underpin the ’33 Act reform that was proposed just last week. The SEC has posted a statement in his honor.

November 2, 2004

Warning Letters Regarding Internal Controls Status

Each of the Big Four auditing firms is in the process of notifying a significant number of their clients that the auditor believes the company is significantly behind schedule on their 404 work, and unless appropriate action is taken promptly, the auditor believes management will not be able to complete its assessment before the reporting deadline, or if completed, management’s assessment will likely not be completed in sufficient time for the auditor to complete its assessment.

It appears that two firms are providing warnings orally (and then tracking them internally) and two firms are providing warnings in writing. The most severe warning described above is known as a “red letter” or a “category 3 letter,” depending on the firm’s nomenclature. Based on anecdotal evidence, my guess is that 20-30% of companies are receiving red letters.

I hear that a much greater number of companies are receiving a “yellow letter” or “category 2 letter,” which still is a warning but less severe than a red letter. (Unfortunately, I have even heard from a few companies that they have been dropped by their Big 4 auditor due to “staffing issues” related to 404; another fallout for smaller companies as a result of Sarbanes-Oxley – see this press release from one company that got dropped.)

For the most part, those companies not receiving notification apparently are deemed to be on “green letter” or “category 1 letter” status – however, at least one of the Big 4 is providing letters to companies with this status. These companies have been determined to be “on track” to complete their 404 work on time.

With so many companies receiving written warnings from their auditor, the question remains – “what do I need to disclose if I receive a letter?” The possible answers – and sample disclosures – are in this new Disclosure about Internal Controls Status page that I have posted in our “Internal Controls Practice Area.”

New Competition for ISS and Glass Lewis

As we gear up for tomorrow’s webcast – “Another Wild Proxy Season? Forecast for 2005” – featuring Pat McGurn of ISS, Greg Taxin of Glass Lewis and David Drake of Georgeson – you should be aware that a new proxy advice service has been born. (Don’t forget to print off the Course Materials before tomorrow’s webcast!)

Learn more about PROXY Governance – which is a subsidiary of FolioFn, the company founded by former SEC Commissioner Steve Wallman – in my interview with Jim Melican on a New Kind of Proxy Advisory and Voting Service.

For Small Business Fans Only

Yesterday, the SEC posted a transcript of its Annual Government-Business Forum on Small Business Capital Formation, which was held back in September.

November 1, 2004

8-K Transcript is Up!

We have posted the long-awaited transcript from our webcast, “Reality Bites: More on the New 8-K Rules.” All of the information from this webcast is still relevant as there has been no written guidance from the SEC Staff since then.

And the November Eminders is Up!

We have posted our November issue of Eminders!

NYSE Posts Amendments to Its Corporate Governance Standards

In early September, the SEC proposed changes to the NYSE governance listing standards. On Thursday, the NYSE posted an amendment to its standards after receiving comments – including some from members of Congress.

In the revised standards, the NYSE has withdrawn its proposed changes to the definition of immediate family member relating to a a company’s auditor that would have been part of the bright line independence test – but it has kept the other proposed changes to the bright line test that focus on specific relationships which would impair the independence of a director, such as individuals who formerly were affiliated with the auditor only if those individuals actually worked on the company’s audit.

The SEC still needs to adopt these revised standards before they are applicable to listed companies, which adoption is expected this week. The NYSE is giving companies until their first annual meeting after January 1, 2005 to replace a director who was independent under the existing standards, but isn’t under the revised standard.