Monthly Archives: April 2006

April 13, 2006

Buddy Donohue Named Investment Management Director

On Monday, Chairman Cox announced Andrew “Buddy” Donohue as the next Director of Investment Management. Donohue, 55, is currently the Global General Counsel for Merrill Lynch Investment Managers and is also Chairman of ML’s Global Risk Oversight Committee. Mr. Donohue graduated from Hofstra University and earned his J.D. from New York University School of Law. He will be sworn in by Chairman Cox on May 15, 2006 and will have many interesting issues to deal with, as we blogged about on Monday.

With this announcement, only three more top positions remain to be named: Market Reg Director, SEC Chief Accountant and PCAOB Chair.

More on the SEC’s Subpoena-Gate

Yesterday, the Commission issued a Policy Statement for Staff members to follow when seeking information from the press. In the Policy Statement, the Commission sets forth 13 guidelines/procedures for the SEC Staff to follow to ensure that “vigorous enforcement” of the securities laws is conducted “completely consistently” with the principles of the First Amendment. The guidelines are intended “to avoid the issuance of subpoenas to members of the media that might impair the news gathering and reporting functions.” Among other things, the Statement requires that the Director of Enforcement, in consultation with the SEC’s General Counsel and with notification of the Chairman, authorize any subpoenas to the media.

This Policy Statement will hopefully put to bed this issue, which began in late February 2006, when news reports appeared about the SEC serving subpoenas for records of columnists for MarketWatch and Dow Jones Newswires in an investigation about possible stock fraud involving and where Chairman Cox took the unusual step of halting the subpoenas.

April 12, 2006

The Directormap Project

I have added a cool site – The Directormap Project – from Jackie Cook, a Senior Research Associate at The Corporate Library, to our “Majority Vote Movement” Practice Area. The site publishes the results of director elections, including a chart of the director results for the past few years and another chart showing the largest spread between the least supported board nominees and the average of other nominees (with more than a 30% difference). Jackie also has put together this page that lists all the majority vote shareholder proposals that will be on the ballot this year, including links to the proxy materials of each company and their annual meeting date. Thanks to Jim McRitchie over at for pointing this out!

More Majority Vote Proposal Results

As ISS reports in this article, the majority vote proposal at Morgan Stanley’s annual meeting last week received only 40% of votes cast. Morgan Stanley is among those companies adopting director resignation policies – and this showing was similar to the support received last month by shareholder proposals at three other companies that have adopted director resignation policies (as noted in this blog).

In comparison, a majority vote proposal at Novell’s annual meeting two weeks ago won 61.7% of votes cast – that company has not adopted a director resignation policy.

Disaster Planning

In this podcast, Glenn Pomerantz, a Director of Insurance Claim Services at BDO Seidman, provides some pointers regarding disaster planning, including:

– What are companies doing these days to prepare for natural disasters?
– Is there really any way to prepare for disasters like Hurricane Katrina?
– Which industries are most vulnerable?
– What can businesses expect from their insurers?
– How are things looking in New Orleans?

April 11, 2006

US Sentencing Commission Acts to Reverse Culture of Waiver

Last Wednesday, the US Sentencing Commission voted to remove the provision on waiver of the attorney-client privilege and work product protections that was added in 2004 to the Commentary to the Sentencing Guidelines for organizations (the provision to be removed is the last sentence in Application Note 12 of the Commentary to Section 8C2. 5).

Although the provision in the Commentary to be removed is worded in the negative – waiver is not required unless “necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization” – the exception had become the rule and many hope that the Commission’s action is a significant step in reversing what some have referred to as a “culture of waiver.”

Many commenters had urged the Commission to remove the existing language and replace it with an express statement that waivers of the attorney-client privilege and work product protections are not to be considered in evaluating the level of cooperation or determining the appropriate sentence. It doesn’t look like the Commission went that far.

The next step is that the Commission will submit the removal of the waiver provision and other amendments it approved to the Sentencing Guidelines, to Congress on May 1st. Unless Congress takes affirmative action to modify or disapprove an amendment in the submission to Congress, the change will become effective on November 1st. Learn more from memos posted in our “Sentencing Guidelines” Practice Area.

Director Pay Rises 14%

According to a new ISS study, total director pay increased by almost 14% last year, from an average of $126,325 in 2004 to $143,807 in 2005. The jump comes on the heels of a more than 23 percent increase from 2003 when total average pay stood at $102,400. The press release includes this quote from me: “Boards need to tread carefully here as more investors are seeing director pay as the next governance battle,” Romanek warns. “And more importantly, since directors set their own pay levels, greater pay might lead to courts finding independence of boards compromised if pay is set too high. This is a universal claim in every compensation lawsuit brought in the last few years and likely will continue to be so.”

Coke’s New Director Pay Plan

Quite a bit of discussion over Coke’s new director pay plan adopted last week. As noted in this Form 8-K, the company’s new director pay package entitles each director to receive stock equal to $175,000 annually – but the shares will be payable in cash after a three-year period only if the company meets a target of 8% compounded annual growth in earnings per share. The company says it will use its 2005 earnings per share of $2.17 as the base for the growth calculation. If the target is not met, all share units and hypothetical dividends would be forfeited.

It is quite rare for directors to have an “all-or-nothing” pay package and a number of commentators have expressed concerns over its design, such as “the approach would make directors fixated on earnings and undermine their role as watchdogs.”

One member reminds me that SPX just settled a lawsuit over director participation in its annual bonus plan, as it seems the company’s directors could not resist adjusting the performance calculation to increase the size of the bonus pool. In the UK and Australia, directors that participate in company incentive plans are no longer considered independent – a real danger since the plaintiff’s bar routinely fixates on the independence of directors when bringing a lawsuit against a company.

Another member notes that director stock options have been criticized as providing directors an incentive to look the other way at Enron and Worldcom – this criticism is aimed generally at all incentive plan participation because directors are fiduciaries for shareholders, they do not operate the company. Linking their pay directly to financial results, the domain of the executives, is inconsistent with their duties and responsibilities.

Notes from Stanford’s Executive Compensation Program

On, under “The SEC’s Proposals,” we have posted notes from last week’s Executive Compensation Program hosted by Stanford’s new corporate governance center.

April 10, 2006

“Time of Sale” and Recirculation

Off on vaca this week after taking in the ABA Business Law Section Spring Meeting late last week in Tampa. [No worries, Julie will be adding to some blogs I have pre-written for the remainder of this week.]

At Friday’s session with Corp Fin Director John White and Deputy Director Marty Dunn, there was discussion regarding the “time of sale” when adverse developments come to light after pricing – after investors originally make an investment decision – but before the offering closes. These are those situations when companies and their underwriters would like a new “time of sale” because the new information would then be part of the disclosure package that the investor considered in making the investment decision (thereby reducing the likelihood of liability for misleading or omitted disclosure).

For these situations. John and Marty emphasized that when investors are approached with the new information, the investors have to be advised that they have two choices, either: (i) keep the existing sale and retain rights attached to that original sale or (ii) mutually agree to terminate and enter into a new sale. In other words, a company and its underwriter cannot change the time of sale unilaterally by canceling the old contract and entering into a new contract.

The key here is a mutual decision; the investor can’t be told that “we can keep you in if you take the new offer or else you are no longer in the offering.” Marty made an analogy to “good” and “bad” rescission offerings where investors must be given a choice along the same lines.

Recirculation: Corp Fin Assistant Directors Won’t Weigh In

John and Marty also noted that the Division’s Assistant Directors no longer will be calling the shots as to how – and when – recirculation is necessary when new information arises after pricing. As also discussed during the recent “SEC Speaks” conference, new Rule 159 provides that conveyance of information is a facts and circumstances analysis as to whether information was conveyed at the time of sale.

In light of the new rule, Assistant Directors will no longer use their delegated authority to declare registration statements effective to inquire as to the details of how new information was conveyed. Rather, to serve as a reminder of the company’s obligation in selected circumstances, the Assistant Directors might ask for a straight-forward representation that the information will indeed be conveyed. This representation can be provided orally.

This new approach will take quite an adjustment for both Assistant Directors and those of us familar with the SEC Staff leading the way in these sticky situations. This new approach will end the ability for practitioners to try to come as close as possible to a line drawn by the Staff. Or as Marty more artfully put it, practitioners will not be able to ask “can you hear me now?” – we are on our own.

The State of Corp Fin’s Review Process

In rare form, Marty gave a snapshot of Corp Fin today, noting that the Division just dipped below 500 Staffers down to 485, including 180 lawyers and 250 accountants – with this number not likely to go up anytime soon under existing budget conditions. Marty wistfully noted that the Staff was having a lot of “going away” parties once more (I remember in the mid-90s when there was at least one such party each and every week; hard to see your friends go off into the black hole of law firms – never to see them again).

Marty also explained how the Staff looked at the filings of 6000 companies last year, many of them in the form of a “preliminary review.” Unlike the former – more cursory – “screening” process, a preliminary review takes significant more time and the disclosure is partially reviewed as part of this exam. A company may be the subject of a preliminary review and never know it. Corp Fin still also conducts full and targeted reviews. All of this also was discussed during the “SEC Speaks” conference.

Board and Chair Independence: SEC Loses Mutual Fund Court Decision (Again)

Perhaps the most amusing sight at the ABA conference was watching a panel regarding hedge fund regulation as they got the news from a Blackberry – in the midst of the panel discussion – that the SEC had again lost a court challenge to the US Chamber of Commerce over rules regarding mutual fund board and chairman independence. The panel was neither surprised nor sorrowful.

The U.S. Court of Appeals for the District of Columbia Circuit has given the SEC 90 days to collect comments on the cost of implementing the new rules, as the court faulted the SEC for relying on a non-public survey of compensation in the mutual fund industry as a basis for implementing the rules.

As I blogged about before, the Chamber first sued the SEC in September 2004 – and the same court temporarily blocked the rules from taking effect last August. Here is a copy of the court opinion.

April 6, 2006

Pop Quiz: Take Care When Preparing Those New Automatic Shelfs!

In scanning some of the new Form S-3ARs (ie. automatically effective shelf registration statements), I was reminded how confusing it can be to remember which new undertakings are required for which forms.

So here’s a pop quiz to test yourself: can you spot the oddity on the facing page of this S-3ASR filed recently? The answer is at the end of today’s blog (so don’t read all the way down if you want to take the quiz first).

By the way, there is no gloating here. This is all so new and I’m sure many of us are leaving a cookie-trail of glitches (or at least glitchettes). Reminds me to remind you to always take any answers in our Q&A Forum with a grain of salt (and bear our disclaimer in mind).

What About Not Requiring Auditor Independence?

In this article, a financial reporter proposes doing away with one of the most sacred tenets of auditor regulation: auditor independence. The author proposes letting auditors do any – and all – work for clients they want, as long as it’s fully disclosed, and then letting the market decide whether to trust the numbers. I personally don’t like this concept – but leave it out there as “food for thought.”

Or How About Principles-Based Regulation of Auditor Independence?

According to this recent survey from the European Federation of Accountants, over three-quarters of the EU Member countries have now adopted an EU Recommendation that principles-based regulation be applied for auditor independence issues. I am told that this is a tightening of the standard for Europe.

Pop Quiz Answer

For the pop quiz at the top of today’s blog, the oddity is the delaying amendment at the bottom of the facing page. This is not applicable for a Form S-3ASR. In fact, Rule 473(d) states that you aren’t allowed to file a delaying amendment with something that goes effective automatically.

April 5, 2006

SEC Continues XBRL Push

With a series of XBRL roundtables coming up, the SEC announced last week that 17 companies have signed up to become guinea pigs for the new “incentives-based” XBRL pilot. As could be expected, a majority of volunteers have some vested interest in the success of XBRL – and interestingly, 3 Brazilian companies are on the list, obviously disproportionate to their representation among SEC reporting companies.

This is a more formal exercise than the original Spring 2005 pilot program. Under the new second pilot program, the 17 companies have volunteered to submit XBRL filings for all quarterly and annual financials for one year in exchange for “faster review.”

Some of the companies from the first pilot signed up for pilot #2 – and some did not (but for those that didn’t, their effort is ongoing and they can still submit XBRL documents at any time). So far, 10 companies from the original pilot program have submitted about 30 XBRL documents, of which only a handful contain the more complicated 10-K/10-Q financials (albeit many of the 8-Ks include the 10-K/10-Q financials; in such cases, the company concentrates on getting their filing made timely and then follows up later with the financials tagged in XBRL – remember these XBRL documents are not officially “filed”; just “submitted”).

Maybe I will be convinced otherwise at one of the roundtables or thereafter, but I still believe the best way for the SEC to move towards automated analyses is to adopt a templated approach to supplementing financial statements (perhaps using XBRL under the template). XBRL in it’s “raw form” is a very tough nut.

And I hope the SEC moves somewhat slowly, as it will take time to integrate folks from different departments into teams to pull this off. These teams will be broader in scope than today’s disclosure committees, as the IT staff and other technologists will have to get up-to-speed on certain aspects of financial reporting.

What Does XBRL Implementation Mean For a Company?

To get an in-house view of this all, I caught up with Jim Brashear of Sabre Holdings – one of those sharp lawyers who understands technology better than most – who had this to say:

“The simplest XBRL implementation is adding a step to the existing disclosure processes, which “translates” the work-product into XBRL formatting. Longer-term XBRL implementation might also involve making significant changes in the company’s accounting systems, internal controls over financial disclosure and other accounting processes.

Implementing XBRL disclosure may, therefore, constitute a “material change” in a company’s internal controls over financial disclosure, so adoption ought to be coordinated with internal and external auditors as part of the Section 404 assessment process. It would be prudent to do so with the knowledge of the company’s audit committee.

The company should involve the Disclosure Controls Committee early and often as it considers XBRL disclosure. Also, discuss XBRL planning with external vendors involved in your disclosure processes, such as your financial printer and provider of SEC filings on your company’s website.

The company’s existing disclosure teams will need to develop at least a basic understanding of XML before implementing XBRL. They should learn how to use tools that will integrate the company’s existing processes with XBRL reporting. For example, if the company uses Microsoft Office Word and Excel to develop its disclosure documents, the team members should become familiar with the XML functions in those tools. So, the company should provide appropriate training in its XBRL planning.

As the company increasingly integrates XBRL into its accounting systems, internal processes and external disclosure, it will also increasingly need to involve XBRL and IT experts. The company will need to consider the extent to which XBRL expertise will exist in-house, versus the company relying on external vendors.”

Speaking of an XBRL Templated Approach…

As I start to dig into what the XBRL alternatives are, I came across this interesting new service – called “EarningsDirect” – being offered by Business Wire in conjunction with CoreFiling.

This new service allows companies to adopt XBRL incrementally, via three “levels” of templates. And the good news is that the company creates the “instance” (ie. it doesn’t rely on an automated conversion that may or may not be very accurate). And I understand it’s pretty cheap too.

I like this phased-in approach because it will allow companies to take baby steps towards XBRL implementation that are not disruptive to their existing processes (read internal controls). As companies gain expertise, they can more fully embrace the external reporting process, with the ultimate goal of implementing XBRL upstream in their accounting systems.

The first step is called Level 1. The company submits its earnings report as it normally does, but also issues with it a PDF instance document with associated XBRL files, which are created from a Excel spreadsheet. The spreadsheet only captures standard data (not customized for the industry or company) – about 200 data points or so – but it gets the company into the XBRL reporting game. [The EarningsDirect service does not address the use of the XBRL tags in the news release itself, nor the use of XBRL tags in SEC filings. Rather, it just generates a supplemental PDF document with XBRL nodes.]

As described on this page, Level 2 (not yet available) would involve the use of Excel spreadsheets that are more customized for particular industries – and Level 3 (now available) involves the development of a customize taxonomy document for a particular company. Here is an example of a Level 3 preliminary earnings report from Reuters. If you open the Attachments tab in the PDF, you can see that there are attached an XBRL instance document, an XSD schema document and three XML taxonomy documents.

One burning question relates to presentation: “How do I know that whats in this file with all the angle brackets is the same as my earnings release that I’ve sweated blood over?” It appears the way that data is tied in the XBRL to the presentation on the page with TagTips (eg. hover over any of the numbers in the Reuters PDF above, using Adobe Acrobat Reader v7.0 onwards) is designed to resolve that concern.

As alluded to below, another burning question is: what’s in it for the company? True that the company will looks investor-friendly, but what if investors don’t use the information?

Is the Tail Wagging the Dog?

The question remains whether there are investors and analysts out there that are capable of consuming XBRL data today? We likely will – and should – hear about this topic during the SEC’s roundtables, but I think the answer is “not yet.” Perhaps another reason why there is no rush to push us deep into the 21st century – or maybe it’s more like “if we build it, they will come“? I miss the ’90s, back when I still had hair…

[Wow! Maryland Terps won the woman’s b-ball tourney last night in a great game; nice finish to exciting NCAA tourneys. Of course, it helps that I had picked Florida in my pool and won $200. Hadn’t picked a winner in a decade.]

April 4, 2006

Corp Fin Director John White: “The Need to Know”

Wasting scant time in making his first speech as the new Director of Corp Fin, John White delivered an impressive speech yesterday on what companies should consider this year in anticipation of the SEC adopting its executive compensation proposals. Emphasizing that he was speaking from the perspective of a private practitioner – in which he served just two weeks ago – John addressed both substance and process.

Among other substantive issues, John noted:

1. Total Compensation – time for all companies to use tally sheets

2. Processes for Setting Compensation – think about the story you’d like to tell, and reshape your processes now.

3. The Role of Executive Officers – reshape role of any executive for whom you would not want sunlight on their involvement

4. The Role and Identity of Compensation Consultants – Know the answers to these two queries:

– What are the nature and scope of their assignments? What instructions have they received?

-If the compensation committee engaged a consultant, did that same consultant do any work for the company or for any executives?

On the process front, John talked about the possible need to retool the disclosure controls and procedures to ensure that the appropriate data is captured to comply with the coming final rules. He noted that the disclosure committee might need to be tweaked to handle the different type of disclosures that could be elicted.

John’s speech was before an intimate audience for Stanford’s new corporate governance center’s inaugural program, which essentially was a roundtable on executive compensation disclosure. Set in a building besides the SEC’s headquarters, most of the SEC’s Commissioners attended as each panel offered a variety of views on the SEC’s compensation proposal (and I laughed, I cried, etc.).

SEC’s Cox Rules Out 404 Exemption for Small Companies

Apparently after Chairman Cox kicked off the Stanford program with a speech on executive compensation – according to a Bloomberg article – he told reporters on the way out that “small companies won’t get an exemption from Sarbanes-Oxley rules requiring independent auditors to certify they’re complying with securities laws.” I didn’t hear the Chairman say this nor can I find any other article on it. [In a speech, Commissioner Campos recently implied he also would not support an exemption.]

If true, this is an interesting development given that Rep. Oxley and Baker themselves have written a letter to the SEC stating that they believe that the SEC does have exemptive power here – which was followed by a letter from 20 professors that expressed the view that the SEC didn’t have the authority to provide such an exemption.

Downloading Our Webcasts

Some time ago, I blogged about software to help those members that wish to download our webcasts to listen to them in the car, etc. One member recently shared information about three new software programs that facilitate saving the audio streams by converting them to MP3 files, which can then be burnt to CDs:

URL Helper – to analyze the HTTP calls and help extract the exact URL necessary to directly download the stream (this information is often masked from the end-user, making this application quite handy)

HiDownload – ties right into URL Helper and allows direct downloads of the stream in the native format

Smart Audio Converter – converts from/to all major audio formats out there (wma, mp3, ogg, etc.)

April 3, 2006

FASB Proposes Comprehensive Overhaul of Pension Accounting

On Friday, the FASB issued a 115-page exposure draft proposing new standards for accounting for pension and other post-retirement plans; quite an achievement for the FASB to issue a proposal of this magnitude in such a relatively short period of time. Comments are due May 31st (and oddly, roundtables will be held after the comments are due). We have added this to our “Pension Plans” Practice Area.

This exposure draft reflects Phase 1 of a comprehensive overhaul of accounting for pensions and other post-retirement plans. There are many proposed changes as this is a complex statement. For example, the proposal would require companies to move certain pension values that are now reported in footnotes of their financial statements to their balance sheets — where all their assets and liabilities are reflected. And the proposal would require companies to measure their pension funds’ values on the same date they measure all their other obligations.

Believe it or not, the FASB’s goal is to issue a final statement by this September! And it would be effective for fiscal years ending after December 15, 2006 – so it would apply to this year for calendar-year companies! Retrospective application would be required, unless it is deemed impracticable for reasons explained in the exposure draft. As discussed in paragraphs 14-23, there are separate effective date and transition provisions for the new measurement date requirement to measure plan assets and benefit obligations as of the date of the employer’s statement of financial position. Whole lot of changing going on!

The proposed statement would apply to public entities and non-public entities, including not-for-profits. The impact for each company will vary and could be quite significant for some. These balance sheet changes could also impact contractual and other measurements for other purposes, such as shareholder’s equity, return on equity, etc.

In the future, the FASB will consider a Phase 2 regarding a variety of other issues related to accounting for post-retirement benefits. And don’t forget, Congress continues to debate all sorts of issues related to pension plans, including funding requirements.

More on CEO Pay

Last week, this 35-page report from The Corporate Library and AFSCME challenged large mutual funds to overcome their “systematic unwillingness” to use their voting power to check executive compensation.

In addition, The Corporate Library released this study entitled “Pay for Failure: The Compensation Committees Responsible” which highlights 11 of the largest companies in the U.S. that combined high levels of CEO compensation and poor performance over the past five years.

April E-minders is Up!

The April edition of our monthly newsletter is now available – sign up today to receive it on a complimentary basis.

Comments Submitted on the SEC’s Best Price Proposal

With the deadline now a month behind us, only ten comment letters have been submitted on the SEC’s best price rule proposal.

Kevin Miller of Alston & Bird notes that an overarching concern reflected in many of the comments is that the approval by an appropriate committee (as defined somewhat differently in each of the letters) should be sufficient in and of itself for purposes of satisfying the safe harbor and that challenges to any required determinations by such committees (or the independence of committee members) should not affect the availability of the safe harbor. Several comment letters note that permitting such challenges to affect the availability of the safe harbor would significantly undermine its utility by failing to eliminate unwarranted incentives to utilize statutory mergers in lieu of a two step acquisition structure involving a tender offer.

On my Blog, I have listed some highlights from a subset of these letters. Check it out!