On Friday, Nasdaq filed a proposed rule change which sets forth a proposed process of how Nasdaq issuers would transition the registration of their securities from Section 12(g) to Section 12(b) as Nasdaq officially becomes a national securities exchange (which likely will occur in early April). This is an issue that I blogged about last week in the context of which Section 12 box to check on the cover page of the upcoming Form 10-Ks.
The Nasdaq’s proposed rule would allow an easy transition of the registration of the securities for its 3200 companies from Section 12(g) to Section 12(b) without each company having to file their own Form 8-A. Each Nasdaq company would have a 10-day window to “opt out” of this process – but I can’t imagine any company would want to do that as they then would either have to file their own Form 8-A or be kicked down to the Pink Sheets or the OTC Bulletin Board.
No word yet on how – and if – ’34 Act filing numbers for each Nasdaq company would change…
The Latest Pfizer Proxy Statement
Always striving to be a disclosure leader, Pfizer’s latest proxy statement filed Friday is no exception. As I am sure Mark Borges will be blogging about shortly in his “Proxy Disclosure Blog,” Pfizer voluntarily makes quite a few of the new disclosures that are discussed in the SEC’s recent executive compensation proposals.
Here is a quote from me in a Dow Jones article about Pfizer’s disclosure, “Given that investors are demanding the types of disclosures that the SEC has proposed, it makes sense that companies would voluntarily make them this year rather than wait for the SEC to adopt final rules.”
FEI’s Staff Notes from the PCAOB’s SAG Meeting: Auditor Liability Limits
A few weeks back, I asked if anyone had taken notes during the PCAOB’s Standing Advisory Group February 9th meeting, during which auditor liability clauses were debated.
– Some members of PCAOB staff and members of SAG have heard anecdotally that litigation related clauses have become widespread; others said there is a lack of data on this and suggested the PCAOB gather facts to present subsequently to SAG.
– Specific types of litigation related clauses which auditors are putting in engagement letters with clients include:
1. Indemnification – which virtually everyone agreed, for public company audits, would clearly be violation of SEC independence rules; nothing to debate here.
2. Alternative dispute resolution (ADR) – many not troubled by this as a commercial agreement between two business parties like any other vendor agreement, some think its cheaper than going to jury trial, consumer rep says recent studies say ADR is not much cheaper, investor reps said the problem with these clauses is they are out of the sunshine, unlike in court system, where even if ultimately settled out of court, a complaint is filed which public has access to, without such filing, investors have no way of knowing if certain firms are being subject to a lot of these ADR private proceedings, etc,. companies do not seem to be disclosing such agreements (with noted exceptions of Sun Microsystems and another company); how can shareholders ratify auditors if they don’t have this info, etc.
3. Limitation of liability – punitive damages , or actual damages, some of the same investor concerns as stated for ADRs above, also, debate about whether limitation of liability clauses with auditors pose an independence issue per se, and even if not, doesn’t it effect auditors performance, wouldn’t they put their best resources on their riskiest clients (i.e.., the ones that don’t sign of f on limitation of liability); term “actual damages” is undefined, subjective, unknown.
– Some believe there is distinction in how “permissible” some of these clauses should be and were troubled by PCAOB staff seeming to blend or group some of these diff types of clauses together for discussion; others troubled by all the clauses; some said it was problematic to ask SAG to discuss this without providing any data as to how prevalent these clauses are.
– Nick Cyprus (who is a member of FEI’s Committee on Corporate Reporting (CCR) provided overall statistics from an informal survey CCR recently conducted: 22 companies responded, 64% percent have ADR clauses;, 100 percent% did not disclose them. Cyprus added that his view was, having heard the SAG’s discussion, “if you have this language in your agreements with auditors, you should be disclosing it.”
– Some pointed out they might not object to ADR clauses generally, but they would if it prohibited discovery of documents or ability to call on witnesses.
– Some also pointed out they would not necessarily object to certain litigation related clauses like ADR if it was a matter of negotiation between auditor and client, but some understand there are instances in which auditors have given client no choice: to either sign the engagement letter with such a clause, or the auditor would resign.
– Some believe audit committees and board members are not fully aware of such clauses being asked of them; others believe it puts audit committee member at increased risk in their fiduciary role by signing engagement letters that limit the liability of their auditors vis a vis the company, or that could potentially put company at disadvantage vs. the auditors; a PCAOB board member asked that research be done as to whether a company could still sue its auditor in a derivative suit (even for negligence) if such clauses were signed.
– There was discussion as to whether there should be any requirement for auditors’ communication with audit committees as to any such proposed clauses, as well as whether there should be any requirement for companies to disclose any such litigation related clauses entered into with its auditors.
– It was noted that the AICPA proposed standard (applicable to audits of non-issuers; PCAOB standards apply to audits of issuers – “issuers” generally meaning public companies or companies subject to Sarbanes-Oxley Act) in September 2005 on this topic; AICPA currently is reviewing comment letters filed.