Monthly Archives: January 2005

January 31, 2005

Securities Act Reform Project

The comment period for the Securities Act Reform Project was originally scheduled to close today. There are reports that the comment period will be extended to February 15 – although no extension has been posted on the SEC website yet.

Also, The Financial Times is reporting that there has been opposition by some commenters to the proposal to open up internet roadshows to retail investors. Several fund managers have told the SEC that the proposal could damage the funds’ businesses – they appear to be concerned that either the companies will stop doing the roadshows or that the companies will put less informative roadshows together if they will have to file the information with the SEC. NetRoadShow, a provider of online roadroads to financial firms, has solicited comments in opposition to this proposal on its website.

Former Auditor Sentenced to One Year

One of the first auditing professionals charged with destroying documents in violation of the Sarbanes-Oxley Act has been sentenced to a year in federal prison and ordered to pay a $5,000 fine. A former partner in the San Francisco office of Ernst & Young, Thomas Trauger, plead guilty last October to tampering with the financial documents of online credit card issuer NextCard Inc. He admitted to altering audit records after the SEC raised doubts about the company’s accounting practices.

NASDAQ Non-Compliant Companies

Each trading day, NASDAQ publishes a list of companies that are non-compliant with its continued listing standards. The list can be found here. A company is added to the list five business days after NASDAQ notifies it of the deficiency and is removed from the list one business day after NASDAQ determines that it has regained compliance, or the company no longer trades on NASDAQ.

NASDAQ’s continued listing standards can be found here.

Posted by Julie Hoffman

January 28, 2005

GAO to Issue SEC Report Card on PUCHA

Yesterday, Rep. John D. Dingell, Ranking Member of the House Committee on Energy and Commerce, released a “commitment letter” from the GAO agreeing to perform a study and submit a report by June 17, 2005 on the SEC’s administration and enforcement of PUCHA. The work was requested by Reps. Dingell and Edward J. Markey in letters dated April 21, 2004 and August 18, 2004, partly in response to Enron’s collapse. In particular, the SEC’s December 2003 opinion denying Enron’s application for an exemption (two years after Enron filed for bankruptcy) appears to have troubled the Congressmen.

The GAO study will assess:

(1) the extent to which the SEC’s Office of Public Utility Regulation (OPUR) reviews registered holding companies and the results of the reviews;
(2) the extent to which OPUR reviews claims of exemption–filed as either self-certifications or applications for SEC order and the results of the reviews;
(3) OPUR’s process for issuing no-action letters; and
(4) how OPUR determines whether companies have a controlling influence in public utilities or public utility holding companies.

February Eminders Are Up!

Check out our latest edition of the monthly Eminders newsletter. If you wish to receive it via email, simply place your email address into this form.

Posted by Julie Hoffman

January 27, 2005

General Counsels Pay Up

The announcement on January 21 that Gemstar’s former General Counsel, Jonathan Orlick, will pay a fine of $306,000 and be barred from being a director or officer of a public company for 10 years is just the latest in a growing trend of SEC Enforcement actions that end with general counsels agreeing to fines and disgorgements.

In September 2004, Electro Scientific Industries, Inc.’s former General Counsel, John E. Isselmann, Jr., agreed to pay $50,000 to settle the SEC action against him. And in May 2004, former General Counsel for Warnaco, Stanley Silverstein, agreed to pay $165,000 to settle the SEC action against him.

As we blogged on January 14, SEC Enforcement Director Stephen Cutler addressed the increased interest in lawyers in a September 2004 speech by referring to the Enforcement Division’s “access theory” from the 1970s: if you ensure good behavior by those who control “access” to the capital markets, then you can achieve more than you would by going after every bad actor. At that time, Cutler noted that the Staff had named lawyers as respondents or defendants in more than 30 of the enforcement actions in the past two years, which were evenly split between in-house and outside counsel.

Cutler confirmed the Staff’s continuing interest in the behavior of lawyers in a December 2004 speech by noting that the Staff is looking for intentional, knowing misconduct on the part of lawyers. Additionally, he said that the Staff was “also looking hard at situations in which lawyer misconduct meets statutory scienter requirements that are short of actual knowledge.”

Director Compensation Info

Be sure to check out our most recent “Inside Track with Broc” – an interview with Paul Hodgson, Senior Research Associate of The Corporate Library. The interview provides helpful information on The Corporate Library’s Director Compensation Database.

Posted by Julie Hoffman

January 26, 2005

Reminder – Alan Dye’s Webcast on

Today, Alan Dye, Editor of and Partner at Hogan & Hartson, will host his Annual Q&A on Section 16, starting at 4:00 eastern. Join Alan as he discusses:

– What are the latest issues that have arisen and how to resolve them
– What novel disclosure considerations exist for this proxy season
– How to tweak your compliance program
– Answers to the many questions you posed to Alan in advance of the program

Also on, take a look at Alan’s updated popular year-end tools.

Foreign Filers’ Concerns to Be Addressed

The SEC is seeking ways to ease the burden on foreign companies of the (relatively) new U.S. corporate governance rules. Yesterday, in a speech at the London School of Economics, Chairman Donaldson said that:

– He has asked the Staff to consider whether to recommend that the Commission delay the effective date for internal controls for non-U.S. companies. International companies with U.S. listings are currently required to meet the requirements from July 15 onwards.

– He expects that the Commission will consider whether there should be a new approach to the deregistration process for foreign private issuers, as many do not feel prepared to meet the U.S. requirements.

– He expects that the Commission will consider adopting the proposed amendments to the reporting requirements that would facilitate foreign private issuers’ conversion to IFRS.

NYSE Year-End Reminders

Last week, the NYSE sent a letter to listed companies, reminding them of their obligations regarding notifications to the Exchange, as well as other filing requirements.

Posted by Julie Hoffman

January 25, 2005

SEC Speaks in San Diego

Thanks to Amy Seidel of Faegre & Benson, we have posted notes from Northwestern’s San Diego conference held late last week.

Among the many interesting points made, SEC Chief Accountant Don Nicholaisen stated that on the FASB’s option expensing standard – FAS 123r – the SEC has been asked to provide implementation guidance.

In addition to these comprehensive notes, Faegre & Benson has contributed a number of new resources for the “Proxy Season Resource Center,” including charts for 10-K and proxy statement disclosure controls and this list of accelerated filer deadlines.

And on, we have posted notes from the M&A panel at the San Diego conference.

The Latest on Director Compensation

On, we have been trying to keep the “Director Compensation” Practice Area up-to-date with survey data. And this interesting interview with Paul Hodgson on Director Compensation Database should help those grappling with director pay levels too.

Also, on, we have a “Director Compensation” Practice Area devoted to disclosure about director pay.

A Tribute to My Grandma

I will be working remotely the remainder of the week, as I attend the funeral of my 96 year-old grandma in Jacksonville. A woman with boundless energy – sneaking into Cuba purely to go dancing when she was in her 70s – Grandma’s passion was family, with 11 children of her own. She loved to recite the number of great-grandchildren and great-great-grandchildren she had; both numbering over 100. Now that is “old school” living and a full life!

From there, I am off to Orlando to speak at the ASCS’ Annual Essentials conference. By the way, the ASCS has officially changed its name to the “Society of Corporate Secretaries & Governance Professionals,” also known as the “Society.”

January 24, 2005

Internal Controls: Where the Rubber Meets the Road

A number of members have been sending me their complaints about the internal controls process. Here are a handful:

– There appears to be a lot of fuzziness on the part of independent auditors regarding the lines between what is a material weakness versus significant deficiency.

– We’ve had a number of clients try to get us involved in their disputes with the independent auditors – for example, asking us to call the SEC, PCAOB and other accounting firms to try to check the positions being taken by their current auditors.

– When we ask the independent auditors about the specific basis for a determination of specific significant deficiencies or material weaknesses, they reply that it is part of “best practices.” It gives us pause that a failure to follow someone’s notion of best practices might be tantamount to a significant deficiency or material weakness.

– We just had a client tell us that their auditor told them that using the company’s in-house legal department/counsel as the recipient of “whistleblower” complaints is a significant deficiency. This doesn’t make sense (and it would cause a large percentage of companies to have a significant deficiency, since many companies use their GC or other in house counsel as the clearinghouse for whistleblower complaints).

– Our independent auditor just told us that we have significant deficiencies for failing to run a background investigation (covering education, employment
history and criminal records) for all senior management as well as all
employees who will be involved in accounting or financial reporting
oversight. In addition, they cited us for failing to have an internal audit function.
I think companies are going to feel sandbagged by these and other positions the accounting firms take and that they will be particularly upset if there isn’t some measure of consistency among the firms about what constitutes a significant deficiency.

– Regarding audit committee evaluations, one of our clients has been asked by their auditor to review any notes made during the board meeting during which the evaluation was discussed as well as the responses to the questionnaires. The auditors seemed more focused on the thoroughness of the process than on the substantive results.

Send me your gripes and I will post them anonymously in “Insights and Gripes about Internal Controls” in our “Internal Controls” Practice Area, where we still daily update our list of excerpts from SEC filings that identify material weaknesses and significant deficiencies – and we post many other resources (such as this new 48-page report from the Big 4 giving their perspectives on internal control reporting).

SEC and PCAOB Post FAQs on 404 Deadline Delay

On Friday, the SEC posted 10 FAQs regarding its November 30th exemptive order that provided a 404 delay for certain smaller companies. At the same time, the PCAOB issued one related FAQ.

In particular, note FAQs 4-6, which discuss the effect of reliance on the SEC exemption on a company’s eligibility to register securities on Forms S-2 and S-3 – and FAQ 7 discusses Form S-8 eligibility.

Quick Survey: Internal Control Delays and Auditor’s Evaluation of Audit Committees

In response to members asking me whether I have heard much talk about companies delaying the schedule for their Q4 earning announcements because of 404 uncertainty, I have posted this quick survey. It also addresses filing 10-Ks belatedly and the process of independent auditors evaluating audit committees.

And here are the results from the just completed survey on timing of option grants.

January 21, 2005

Alan Beller Speaks on 404

In this speech that was just posted yesterday, Corp Fin Director Alan Beller weighs in on internal control disclosures. Here are is an excerpt from the speech:

“For their part, investors should remember that the internal control reporting provisions under Section 404 are disclosure provisions. Companies that complete their assessments and find material weaknesses and disclose them, and whose auditors complete the internal control audit and include the required report on internal controls, will be compliant with the reporting requirements of Section 404. Companies with internal control material weaknesses can also have financial statements and unqualified financial statement audit reports that meet our requirements, where the auditors are able to do substantive audit work that in effect overcomes those material weaknesses. Indeed, auditors have been doing that for a long time. Now investors will know and thus be better informed. And, importantly, material weaknesses in internal controls do not necessarily equate to deficient financial statements or financial statement audit reports.

Moreover, while we are and will be seeking appropriate disclosure through our rules and review and comment process, it is also incumbent on investors to demand from companies the disclosure they need to evaluate particular material weaknesses and to review and analyze that disclosure with particular care, in order to evaluate the implications of given material weaknesses for reliability of financial reporting and financial statements, and also to consider what remedial steps companies are taking. Any disclosure that a company has a material weakness is a serious matter for investors, but that disclosure should be the starting point rather than ending point for investors’ analysis. Further, understanding companies’ plans for remediation and their implications is particularly important in light of the fact that this is the first year that companies will be reporting under Section 404.

Also regarding remediation, where a company’s internal control report discloses that management identified a material weakness at the end of the company’s fiscal year (the time as of which the report must speak), but the company has remediated that material weakness by the time it files (or by the time of a subsequent filing), the report as of the end of the fiscal year must report the material weakness and the company must still include the necessary disclosures regarding the material weakness. The company may also further disclose (and may be required to disclose) that the material weakness subsequently was remediated. Indeed, some members of the advisory group established by the PCAOB have requested that the Board develop a standard for reviewing remediation, and the PCAOB staff has the matter under consideration.”

Grace Period Ends for and

If you have not renewed your membership to or (or the Romeo & Dye Section 16 Filer), today is the last day of the grace period. Starting Monday, you will no longer have access – so renew today!

Don’t forget Wednesday is the annual webcast on – “Alan Dye on the Latest Section 16 Developments.” NASPP members also get access to this popular event! If you have renewal questions, call our HQ at 925.685.5111 or send them an email at

Ann Yerger to Head CII

Last week, Ann Yerger was named Executive Director of the Council of Institutional Investors. Yerger joined CII in early 1996 as the Director of the Council’s Research Service and was named Deputy Director in 2002. Before joining CII, Yerger was deputy director of the Corporate Governance Service of the Investor Responsibility Research Center. Ann is a great choice and I wish her well!

January 20, 2005

Staff Legal Bulletin 14B in Action

The Jan-Feb issue of The Corporate Counsel is being printed and will cover many timely topics, including what to consider if 404 will delay your 10-K. It also touches on how the SEC Staff is applying SLB 14B, the Staff Legal Bulletin that addresses Rule 14a-8 issues.

A number of practitioners are still griping about what SLB 14B didn’t cover, such as the lack of a requirement for proponents to send the company a copy of anything they send to the Staff (which means that a company has to keep calling the Staff asking if the proponent has submitted anything). And the failure to address John Chevedden’s assertion that if he has to revise his statements, he is not bound by the 500 word limitation (or rather, that it starts a new objection period – which by that time typically runs into the company’s printing deadline).

We encourage those of our members who have not yet discovered the essential practical resources of The Corporate Counsel (and The Corporate Executive) to try it on a no-risk trial basis to get this important issue!

Carl on Shareholder Rights’ Agreements

I have posted the January installment of “Carl’s Corner,” which deals with Seller Obligations, Methods of Payment and Use of Insurance under Shareholder Rights’ Agreements.

Ban on Puppets?

In the local news category, today’s Presidential Inauguration is causing a fuss here in DC for its cost and scope. No one quite understands why there is a ban on puppets along the parade route today. Is that like Kramer’s fear of clowns?

January 19, 2005

Double-Header Coming Up!

As the grace period for those of you that have not renewed yet for expires in a few days, bear in mind these upcoming two webcasts: On Wednesday, February 2 – “Demystifying Internal Controls Disclosures” – featuring John Huber of Latham & Watkins; Linda Griggs of Morgan Lewis, Mike Hermsen of Mayer Brown and David Lynn, Chief Counsel, Division of Corporation Finance, SEC. Join them to learn how to cope and prepare new and complex disclosures as the new rules take effect!

And on Tuesday, February 8, check out – “Last Minute Planning for the Proxy Season” – featuring Amy Goodman of Gibson, Dunn, Karl Groskaufmanis of Fried Frank, David Katz of Wachtell Lipton, and Michael Ullman of Johnson & Johnson. By popular demand, guidance from the experts to make sure you haven’t overlooked anything this proxy season!

[Thanks to Amy Goodman and Gibson Dunn for this fantastic updated audit committee checklist, that is posted in the Audit Committee Practice Area.]

To avoid missing these webcasts, renew for today!

Big Four Seeks Protection From Legal Action

The Business Roundtable is urging regulators to limit the liability accounting firms face from potential negligence claims. And as reflected by proposals on proportionate liability currently under consideration in the United Kingdom, the Big Four also is seeking protection from legal action in other countries.

Right now, E&Y faces a mulit-billion dollar claim from Equitable – and Deloitte is being sued in the US courts by the administrators of Italian dairy Parmalat. The $10 billion lawsuit could destroy Deloitte if successful.

EDGAR Open; SEC Closed for Inauguration

Even though the SEC is closed for the Inauguration tomorrow, according to this press release, EDGAR is open since it is not an official federal holiday.

January 18, 2005

Latest Developments on Section 11 Liability

Aside from being the first Section 11 decision worth reading in 35 years, the December opinion in the WorldCom litigation is the first important decision on Section 11 and its application to shelf offerings. Learn more in this excellent interview with John Jenkins on Latest Developments for Underwriters’ Due Diligence Defense.

I haven’t seen anyone else talk about this important decision – so I consider this is a “must” read. I blogged about this 159-page opinion from Judge Cote a few weeks back.

Poison Pill Developments

On, I just posted this informative interview with Bill Lawlor on Poison Pill Developments. Among other developments, Bill analyzes what companies might consider when faced with shareholder opposition to provisions in their pills during the proxy season.

Small Business to Get Internal Controls Relief from COSO

Last week, the Committee of Sponsoring Organizations (COSO) announced that it will develop guidance that will help small companies follow the new internal control rules without breaking their budgets. The new guidance, which will be produced by PricewaterhouseCoopers, will be available online by June 30th. COSO estimates that 5,000 companies with annual sales of less than $200 million can be helped from the upcoming guidance.