Monthly Archives: April 2005

April 15, 2005

Enforcement Director Cutler To Leave SEC

After nearly four years at the SEC, Enforcement Chief Stephen Cutler has announced he will go back into private practice in a month. Stephen joined the Commission as Deputy Director of Enforcement on Arthur Levitt’s watch and was appointed Director of Enforcement by Harvey Pitt. If past experience of other former Enforcement Directors is any indication, he will do quite well in private practice. Here is the related SEC press release.

Now comes the traditional scramble to determine whether the next Enforcement Director comes from within the agency or from the outside world. In terms of post-SEC earning power, this position can be even more lucrative than the Chairman spot or any other position within the Commission.

Six-Month Delay for Option Expensing

Yesterday, the SEC announced the adoption of a new rule that amends the compliance dates for the FASB’s 123R. Under Statement No. 123R, companies would have been required to implement the standard as of the beginning of the first interim or annual period that begins after June 15, 2005, or after December 15, 2005 for small business issuers. Calendar year-end companies that are not small business issuers, therefore, would have been permitted to follow the pre-existing accounting literature for the first and second quarters of 2005, but required to follow 123R for their third quarter reports.

The SEC’s new rule allows companies to implement 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005, or Dec. 15, 2005 for small business issuers. This means, for example, that the financial statements for a calendar year-end company do not need to comply with 123R until the interim financial statements for the first quarter of 2006 are filed. The financial statements for a company, other than a small business issuer, with a June 30 year-end, however, must comply with 123R when the interim financial statements for the quarter beginning July 1, 2005 are filed. The SEC’s new rule does not change the accounting required by 123R; it changes only the dates for compliance with the standard.

Chairman Donaldson Bobblehead?

Each of us has our own gauge of our own success. For some, it’s money; for others, it’s fame. For me, it’s a bobblehead. When they make a bobblehead with your likeness, you know you made it! Check out this article regarding bobbleheads of the US Supreme Court Justices.

April 14, 2005

63,000 Internal Control Problems and Counting

During yesterday’s SEC 404 Roundtable, PwC said a study of 225 clients identified nearly 63,000 control problems or about 275 per company, most of which were fixed by the end of the review process.

The upshot of the Roundtable is that the PCAOB will likely issue staff guidance within 30 to 45 days to help clarify some aspects of Auditing Standard No. 2. And SEC Chairman Donaldson said that he will instruct his staff to present recommendations for change soon.

More on Majority Vote Movement

Haven’t heard yet whether the Council of Institutional Investors voted to back the majority vote movement (which CalPERS and ISS already have) during their meeting yesterday – but SEC Commissioner Harvey Goldscmid gave a speech there during which he vowed that the shareholder access proposal is not yet dead.

During the CII meeting, ISS released this 30-page white paper on the majority vote movement. Also posted is a transcript from a webcast they conducted recently on the topic (and I had already blogged about their new policy on this topic).

By the way, for the first time ever, the CII now has a majority of its 16 board members coming from unions – so we should expect a more activist agenda from CII in the near term…

SEC Changes Form 20-F for Transitional International Reporting Relief

To take into account the new international financial reporting standards – and encourage their use – the SEC adopted amendments yesterday to Form 20-F in order to permit those non-US issuers that adopt the new standards before 2007 to file just two years of income statements, changes in shareholders’ equity and cash flow rather than three years worth of those financials. No changes to US GAAP reconciliation were made.

April 13, 2005

The Latest Reg FD Practices

Not surprising given the confusion right now in the Reg FD area, one member disagreed with some statements that I blogged about a few weeks back regarding the Flowserve settlement, particularly what corporate practice should be in light of it. Here is that member’s take:

“The facts and circumstances of Flowserve created a perfect storm of bad facts that resulted – appropriately – in an enforcement action. But it is not wise to make a blanket statement about the number of days after which one violates FD. Reg FD concerns selective disclosure of material information.

In Flowserve’s case, where it had previously lowered its guidance 3 times during the year, the fact that it was sticking with its prior guidance was material. Additionally, the timing was such that it was near the end of the period for which the guidance had been given.

I don’t know what analysts who covered the company were expecting, but it seems that they were expecting another lowering of guidance. These facts alone distinguish many other situations involving public company earnings guidance. If a company issues guidance at the beginning of the fiscal year and there is nothing to suggest that guidance could or should change, and depending on the history of the company maintaining or changing guidance, I would not find it an FD violation if there was a reaffirmation months later.

The facts of Flowserve also revealed that there was a failure to follow the company’s own stated policy and a long delay in filing an 8-K to disclose the reaffirmation. The subsequent denial by the two Flowserve executives of the reaffirmation was also a contributing factor to the result.”

To help clear up some of the uncertainty in this area, join us for a webcast -“The Latest Regulation FD Practices” – on Monday, May 2nd to hear John Huber of Latham & Watkins, Keith Higgins of Ropes & Gray and Stan Keller of Palmer & Dodge analyze how companies have reacted – and should be reacting – to the series of SEC Reg FD enforcement actions that have taken place over the past year, including the Flowshare settlement.

In the meantime, you can peruse the numerous law firm memos regarding Flowshare that we have made available in our “Regulation FD” Practice Area.

Recent Developments in Delaware Entity Law

Like last year, Lou Hering provides the lowdown on the latest Delaware law developments regarding LLCs and other entities in this interview.

SEC Intends to Delay Option Expensing

Today, the WSJ reports that the SEC intends to delay the implementation date of the FASB’s option expensing rule until next January, effectively giving them a six-month reprieve. It is reported that companies whose fiscal year starts from mid-year through year-end wouldn’t qualify for the delay.

If approved by the SEC (which would override the FASB), the delay would mark the second time that the implementation date has been delayed. Last year, the FASB voted to give companies six additional months, from last December until June 15, 2005, which is the effective date as it stands today.

April 12, 2005

Understanding Equity Burn Rates

The potential dilutive effect of option granting practices over the past decade has been the subject of intense investor interest – and many companies are now taking action in response to this uprising. Learn more about equity burn rates in this excellent article from ISS.

Tomorrow’s D&O Insurance Webcast

On, don’t forget tomorrow’s, Wednesday, April 13th webcast – “D&O Insurance Today” – during which Joseph McLaughlin of Simpson Thacher, Patricia Villareal of Jones Day, and Kit Chaskin of Sachnoff & Weaver will analyze why you should be taking a second look at your D&O insurance policies – and provide practical guidance about what to do about your policies today.

Now That’s My Kind of CEO!

Perusing the special CEO pay supplement in yesterday’s WSJ, I loved this interview with Biomet CEO Dane Miller so much that I just had to copy an excerpt. Note that Dane’s salary just passed $500k for the first time and that the other NEOs get paid nearly the same as him. Here is a fraction of the interview:

WSJ: Does shared greed mean the board becomes captive of management?

Dr. Miller: Some organizations that pay their senior management large sums also tend to pay their boards large money. They tend to want to keep each other happy.

WSJ: Should your cash compensation more closely reflect your employer’s record results?

Dr. Miller: Earnings grow on behalf of shareholders. If revenues and earnings should drop, I would expect my compensation program to go in that direction as well. But I don’t think there is any direct connection between the growth in revenues or earnings and what a company should compensate its CEO. If everybody’s pay increase paralleled the increase in revenues and earnings, the company’s results wouldn’t increase.

WSJ: But isn’t that what pay for performance is all about?

Dr. Miller: Our compound annual growth rate approaches 20% in both earnings and revenues. Taking the 20% growth number back 20 years, the corporation probably couldn’t afford me today.

WSJ: Clearly, collecting a huge salary would bother you — especially when you walk around the factory floor talking to workers earning $15 or $20 an hour. What else makes you uncomfortable about making an obscene amount as CEO?

Dr. Miller: Everyone should have a little problem making an obscene amount of money on the backs of shareholders.

April 11, 2005

More SEC Guidance on IPO Allocations

On Thursday, the SEC issued this interpretive release concerning prohibited conduct in connection with securities distributions under Regulation M, particularly with a focus on IPO allocations.

The release is a reminder that Reg M prohibits any attempts to induce aftermarket purchases during a restricted period and it lists 7 activities that the SEC believes violates Reg M (based on three enforcement actions the SEC recently brought). Section V (page 19) covers policies, procedures and systems underwriters should have, and states that firms also should take corrective action if breaches occur. The release says that the SEC will continue to solicit comments on its guidance – until June 7th – as it continues to monitor IPO allocation practices.

SEC Barely Adopts Regulation NMS

Last Wednesday, the SEC passed controversial Regulation NMS with another close 3-2 vote (Chairman Donaldson sided with the Democratic Commissioners). Reg NMS is a set of market-structure reforms that will force brokers and exchanges to guarantee the best available price to investors, so long as that price is immediately executable. Also known as the “order-protection rule,” it will apply to all marketplaces – including the Nasdaq Stock Market – and will require markets to go to a competing market if there is a better price. Opponents wanted the freedom to choose “speed” and “certainty of execution” over best price. Here is the related press release.

The SEC set a April 6, 2006 effective date, which some believe will eventually have to be pushed back because the technology won’t yet be available.

A Few Thoughts on Director Compensation

One hot topic today is how much to pay directors. I’m not sure I agree with the tone of this article from the Pittsburgh Gazette Review, which indicates that directors are lining their pockets. Directors face long hours these days, and more importantly, a heap of potential liability – and should be compensated accordingly.

One key to director’s pay is independence. Because of the unique nature of the who sets board pay – the directors themselves – the amounts and processes of setting pay are more susceptible to attack than CEO pay. In the complaints filed against directors for setting excessive CEO pay packages, their independence universally is assailed, with their own pay package being used as exhibit #1 against them.

And although the basic tools of board pay often are identical to those used for CEO pay (i.e. cash and equity), the primary goals of the two types of pay differ considerably. I believe director pay should be designed to incentivize directors to act independently and preserve the company’s value; whereas CEOs should be rewarded for superior corporate performance and growing the company’s value. I am no expert, but I don’t think this is an area that is well understood and likely will evolve over the next few years.

April 8, 2005

Internal Controls Roundtable

The Commission has announced the agenda and participants for the upcoming Internal Controls Roundtable, to be held next Wednesday, April 13. The Roundtable will be an all-day affair, from 9 to 5:30. It is open to the public and will also be webcasted. More information on the Roundtable is available.

Sarbanes-Oxley, UK Style

Portions of the United Kingdom’s Companies (Audit, Investigations and Community Enterprise) Act 2004 went into effect this week, placing U.K. companies under stricter auditing controls in an effort to improve the reliability of financial reporting and the independence of auditors. The Act also aims to strengthen the powers of company investigators.

The main requirements of the Act are:

• requiring directors to state in the Directors’ Report that they have not withheld any relevant information from their auditors and giving auditors rights to information from employees as well as officers – failure to comply is a criminal offense, including making a false statement in the Directors’ Report;

• requiring companies to publish details of non-audit services provided by their auditors;

• imposing independent auditing standards, monitoring and disciplinary procedures on the professional accountancy bodies; and

• strengthening the role of the Financial Reporting Review Panel in enforcing good accounting and reporting.

J&J Calls Out the Competition

As Mark Borges notes in his The Compensation Disclosure Blog on, Johnson & Johnson took their competition to task over non-disclosure of aircraft perk amounts. As noted in J&J’s March 15 definitive proxy:

“many other peer corporations require their chairman and certain other executive officers to use company aircraft for personal as well as business travel. As a result, at those corporations, personal use of company aircraft by the chairman and those other executive officers is not treated as a perquisite or personal benefit and the costs associated with such personal use of company aircraft are not reported in the proxy statement. The Company has not required the chairman and other executive officers to use corporate aircraft for personal travel. Mr. Weldon is taxed on the imputed income attributable to personal use of company aircraft and does not receive tax assistance from the Company with respect to these amounts.”

In the words of Alan Beller (in his 10/20/04 speech at our Executive Compensation Conference): “simply stating that company executives must always fly in company planes (or drive in company cars, or accept any other benefit) for security reasons does not relieve a company from considering whether these benefits are perks.” There is more in the “Airplane Use” Practice Area on Maybe next year, J&J will name names!

-Posted by Julie Hoffman

April 7, 2005

Impact of Class Action Fairness Act of 2005 on Securities Litigation

A lot has been written about the new class action law, but I haven’t seen much about how it might impact securities litigation. Learn more in this interview with Charles Rothfeld on Future of Securities Class Actions.

SEC Speaks on Titan Section 21(a) Report

On, we have posted the transcript of the remarks from Brian Breheny, Chief of Corp Fin’s Office of Mergers & Acquisitions, on the Titan Report from our webcast, “30 M&A Nuggets in 60 Minutes” (remainder of transcript coming soon).

In addition, a few days back, I guest blogged in “The Deal Guys Blog” about what Corp Fin Director Alan Beller said on the topic at the ABA Spring Meeting. Of course, this was a hot topic during the Negotiated Acquisitions committee meeting. [By the way, an informal splinter of that committee – calling itself the “Order of the Sub-Genius – will be presenting the 1st Annual Dr. Gonzo award at its fall meeting in Las Vegas!]

April 6, 2005

Option Valuation Webcast

With the deadline for option expensing bearing down on us, check out tomorrow’s NASPP webcast – “What You Need To Know About Option Valuation” – is more important than ever.

SEC Posts Briefing Paper for 404 Roundtable

Yesterday, the SEC posted this Briefing Paper for the April 13th Roundtable on internal controls. The Paper lists the Roundtable’s agenda, consisting of 6 Panels, as well as a summary and discussion questions. Here are the 6 panels (speakers not yet announced):

Panel 1 – The First Year

Panel 2 – Reporting to the Public

Panel 3 – Planning and Design

Panel 4 – Documentation and Testing

Panel 5 – Using Judgment in Communications and Conclusions

Panel 6 – Next Steps

The Future of Electronic Road Shows

At the ABA Spring Meeting, there was much discussion about the future of the offering process – a topic I will address this Friday at the “Cybersecurities Law Conference – 10th Anniversary of Cybersecurities Law.” Back when I was in Corp Fin’s Office of Chief Counsel, I remember spending countless hours trying to get the Bloomberg e-roadshow no-action response out – and how ridiculous the framework was (and still is) due to the outdated restrictions imposed by the ’33 Act.

Now with reform looming to remove many of these restrictions, how might future roadshows look? For starters, look at, where you can watch videos of executives from start-ups doing elevator pitches. After ’33 Act reform is implemented, it’s easy to imagine a pleathora of these “one-stop” sites that will house e-roadshows.

And what about a banker who dissects the daily grind of a physical roadshow in a blog, as that type of concept for a blog is very popular (in a way, its the online equivalent of reality TV – see this popular blog from a benchwarmer on the Phoenix Suns). Don’t laugh; one set of i-bankers already has started this ThinkBlog.

April 5, 2005

Delaware Supreme Court Rules in Disney Books & Records Case

On Thursday, the Delaware Supreme Court issued an order in a case that had been appealed by Roy Disney last year. Roy seeks to have the confidentiality restrictions lifted on the sensitive executive pay information he had successfully obtained in his books & records request to the Walt Disney Company. Roy has said that he wants to publicize the pay information in his quest to improve governance practices at the company. The order is posted in “Books & Records” section of the “Compensation Litigation Portal” in

In remanding the case back to Chancery Court, the Supreme Court requested that Vice Chancellor Lamb make specific factual findings about the confidential nature of the documents in question and to balance the harm and benefits of lifting the confidentiality designation. This kind of balancing approach may suggest the test for getting confidential documents is not quite as stringent as Vice Chancellor Lamb had articulated in his initial decision, in which he set a high bar for plaintiffs trying to overcome a confidentiality designation by the company.

Crocodile Tears over Executive Compensation

I cringe when the media does a special report on executive compensation (like the NY Times on Sunday and USA Today last Thursday) because my dad will call me and ask why Corporate America continues to perpetuate excessive pay practices. To answer him, I resort to my top four explanations of this dilemma:

1. “Who’s in Charge” Fingerpointing – Talk to most compensation consultants or lawyers about responsible practices and they are quick to point out that they have no control over what is paid and many feel they have no obligation to speak up to directors to advise them on responsible practices.

My hunch is that directors – most of whom serve in that role on a part-time basis – value the wisdom of their advisors and would welcome such input. And surprisingly, quite a few lawyers subtly talk in terms of representing the CEO, rather than the corporate entity for which they truly should serve. Need some backbone here.

2. The Catch-22 of Benchmarking – Unfortunately, nearly all compensation committees – based on the advice of their consultants – resort to relying on traditional benchmarking surveys to determine pay levels. This is true despite the fact that most agree that the compounded “ratcheting-up” effect of two decades of wanting to be in the top 25% has rendered survey data useless. Other benchmarking methods, such as internal pay equity, have yet to widely take hold.

The “Catch-22” here is that everyone is looking to the consultants for guidance in this area, but they are loathe to say their past data is bad – because that would be some form of admission of past failures. This cycle has to be stopped for normalcy to return.

3. Strong Dose of Alice in Wonderland– I don’t know how else to explain it other than a lack of common sense, as I just don’t see how a CEO would be motivated to perform better if she was paid only $5 million rather than $50 million per year. At some point, more compensation will not get you more performance – and if anything, might reduce performance as immense wealth sometimes can change one’s ego and personality. And providing huge pay packages to retirees or severed officers – or “golden hellos” as mentioned in this recent Washington Post article – doesn’t seem to provide shareholder value as its not tied to performance.

4. Soft Legal Standards – Arguably, there is no real law that prevents directors from establishing excessive pay practices. The state legal standards are the law of corporate waste (which has no teeth whatsoever) and the array of fiduciary obligations that directors have, which essentially requires that the proper process be followed. In fact, as noted in the Integrated Health decision in Delaware, to avoid personal liability under a lack of good faith charge, only the barest minimum of process need be present (unless Vice Chancellor Chandler really surprises in his Disney decision come this summer).

Honest to Betsy, we didn’t think that we would have more than one Executive Compensation conference nor did we think that would be more than course materials for last year’s conference. And I truly hope that we won’t have to keep these up long, but it sure doesn’t look good.

For a refresher of the many issues still present in the compensation area, I strongly urge everyone to go back and read our “12 Steps to Responsible Executive Compensation Practices” from the May-June 2004 and Sept-Oct 2004 issues of The Corporate Counsel, which are still freely available to everyone on

April 4, 2005

404 Grouchiness?

As I dig out from under after 4 days at the ABA’s Spring Meeting in Nashville, I chuckled at the WSJ article on Friday which noted this excerpt from Monarch Casino’s 10-K (emphasis added by me):

“There has been no change in our internal controls over financial reporting during the year ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reports.

We are in the process of our compliance efforts mandated by Section 404 of the Sarbanes-Oxley Act of 2002. As we have done our due diligence in trying to understand the requirements and corresponding work necessary to successfully document our system of internal controls to the standards and satisfaction of third parties, we have encountered egregious estimates of time, dollars, outside consultant fees, and volumes of paperwork. As our implementation has progressed, we have yet to realize any control, operations or governance improvements or benefits. Additionally, and most importantly, the estimated potential cost to our shareholders in relation to the benefits, or even potential benefits, is unconscionable. We believe that these additional costs and expenses will merely confirm the existence of an already effective and functioning control system that already conforms with a recognized system of internal controls.

Although we intend to diligently pursue implementation and compliance with the Section 404 requirements, we do not believe it is in our shareholders’ best interests to incur unnecessary outsized costs in this effort. As we are a single location company with an extremely involved, hands-on senior management group in a highly regulated industry with significant insider ownership, the potential benefits to be derived from the Section 404 requirements are believed to be minimal. Consequently, we will make every effort internally to comply with the Section 404 requirements but will minimize what we believe to be the unreasonable and unnecessary expense of retaining outside third parties to assist in this effort.

As a result of this cautioned approach and the complexity of compliance, there is a risk that, notwithstanding the best efforts of our management group, we may fail to adopt sufficient internal controls over financial reporting that are in compliance with the Section 404 requirements.”

Wonder if these issues will be addressed at the SEC’s 404 Roundtable next week…

Corp Fin Updates “Current Accounting and Disclosure Issues” Outline

Even though dated March 4th, Corp Fin posted last week an updated version of its “Current Accounting and Disclosure Issues” outline. Note that its Table of Contents – pages 1-4 – indicate which sections are “Revised” and which are “New.”

AFSCME Loses Lawsuit Against AIG Over Proxy Access

As reported by ISS, the American Federation of State, County and Municipal Employees (known as “ASFCME”) sued AIG on February 25th in a New York City federal court after the SEC Staff advised AIG on February 14th that it could omit a binding shareholder proposal that seeks to amend the company’s bylaws to allow shareholders to nominate directors. Here is ASFCME’s press release on the lawsuit.

On March 22nd, ISS reported that the federal judge had dismissed the lawsuit. As you might recall, before this AIG no-action response, Corp Fin had already permitted the exclusion of similar proposals at Walt Disney, Halliburton, Qwest Communications and Verizon over the past two proxy seasons. It’s pretty rare for lawsuits to be filed over Rule 14a-8 actions by the SEC.