December 13, 2005

More Binding Majority Vote Proposals on the Horizon

According to this ISS article, union activist AFSCME has filed four more binding shareholder proposals seeking a majority vote standard. AFSCME was unsuccessful with its Paychex binding proposal two months ago, partially because the proposal didn’t contain a carve-out for contested elections (and thus didn’t obtain ISS support).

The article also notes that the Sheet Metal Workers International Association is targeting companies that have instituted director resignation guidelines – filing nonbinding proposals with ten of those companies.

Finally, in a meeting last Monday, the ABA Director Voting Task Force reiterated its support for the voluntary director resignation policy concept and said it plans to release specific recommendations and an explanatory report “no later than February 2006.”

SEC’s Attorney Responsibility Safe Harbors: Under Duress?

Last week, the Court of Appeals for the DC Circuit issued an opinion – American Bar Association v. FTC – that may spell trouble for the SEC with respect to the safe harbor aspects of its Part 205 Attorney Conduct rules. In its decision, the court affirmed the ABA’s view that a federal privacy law aimed at financial institutions (ie. Gramm-Leach-Bliley Act) does not cover the legal profession – as the ABA’s press release notes, “This ruling underscores that for more than two centuries we have rightly relied on state supreme courts to exercise responsibility for oversight in order to protect and safeguard the confidentiality of attorney-client communications and the public interest.”

We have posted a copy of the court opinion in our “Attorney Responsibility” Practice Area.

Corp Fin Comments on Internal Control Issues

The most recent entry in Knowledge Mosaic’s Soap Box does a little sleuthing of Corp Fin comment letters on internal control issues. Interestingly, only 50 comment letters posted on the SEC’s site contain the term “internal controls” – probably because the SEC is still playing catch-up in posting their comment letters issued since August 2004.

Here are some lessons learned according to Knowledge Mosaic:

1. Disagreeing with auditors can be a tough sell – Innovo Group, Inc. concluded that its internal controls were effective despite an auditor’s finding of material weakness. The SEC staff questioned just how the company could reach that conclusion in light of the finding. The company responded with an amended filing stating that their controls were, in fact, ineffective. Digital Recorders, Inc. believed that its disclosure controls were effective despite an auditor’s finding of material weakness in its internal controls. The company was asked to more fully explain how it could reach that conclusion. It did so in its subsequent 10-K filing, noting that the internal control weakness was limited in scope and that there were compensating disclosure controls in place.

2. Equivocating won’t wash – Both Proliance International, Inc. (formerly known as Transpro) and Rentrak Corp. claimed that their controls were effective, but noted certain exceptions. That didn’t fly. Your controls are either effective or they aren’t. Both companies submitted new filings acknowledging their controls to be ineffective. (See letters to Proliance and Rentrak, amended filings of Proliance and Rentrak.)

3. You gotta come clean – Comstock Homebuilding Companies, Inc. admitted to material weaknesses in its internal controls, but failed to provide any real detail on the nature of the problems. In response to the staff comment letter, the company’s amended filing used bullets to clearly identify six specific areas of material weakness.