April 17, 2006

The SEC’s Smaller Public Company Advisory Committee’s Impending Report

With sunset quickly approaching, this should be a big week for the SEC’s Advisory Committee on Smaller Public Companies. Last week, the Committee held a teleconference meeting to further consider the draft of the Advisory Committee’s final report, which is scheduled to be adopted at their meeting this Thursday (and must be submitted to the Commission before April 23rd, the sunset date for the Committee).

Under the Committee’s draft recommendations, a tier of the smallest public companies (based on market cap and revenue criterion) would continue to be exempt from the internal controls requirement “unless and until” a suitable framework is developed for these companies to meet 404 in a cost-effective way. Additionally, the next largest tier of companies (also based on market cap and revenue) would be exempt from external auditor involvement in their 404 process (resulting in a self-assessment) until a suitable framework is developed.

During last week’s teleconference meeting (here is an audio archive), the Committee discussed whether it should revise its proposals relating to SOX 404 relief, given that some Commissioners have been reported to be opposed to giving a complete 404 pass to smaller public companies. The upshot of the teleconference meeting: no Commissioner has taken a formal position on the Committee’s proposals – so going into this week, the Committee decided to keep the proposal “as is” with minor changes. Learn more about what happened at the meeting from FEI’s “Section 404 Blog.”

More on Nasdaq Issuer’s Transition From 12(g) to 12(b) Registration

On April 6th, the SEC approved a rule change that allows Nasdaq to file a single application on behalf of its issuers to transition their 1934 Act registration from Section 12(g) to Section 12(b).

As I blogged about a few months ago, new NASD Rule 4130 provides that each company authorizes Nasdaq to file the transition application with the SEC (unless they have opted out) immediately preceding the day the Nasdaq begins operations as an exchange (which can happen any day now). Companies that opt out won’t be eligible to be listed when Nasdaq begins operations as an exchange (unless it files its own 12(b) application).

At the SEC Speaks conference in early March, the Staff indicated that it was leaning towards not issuing new Exchange Act numbers for this transition, so Nasdaq companies likely will continue to have “0-” numbers. CIK numbers would also remain the same.

Business Roundtable’s 4th Annual Governance Survey

Recently, the Business Roundtable published its 4th annual survey of corporate governance practices among its members, showing continuing improvements in corporate governance practices, including these findings:

– Pay-for-performance – 57% report an increase in the pay-for-performance element of senior executive compensation in the past year, compared to 49% in 2005 and 40% in 2004. Of the companies placing more emphasis on performance, 20% indicate that the performance element includes primarily long-term goals, 73% stress a mix of long- and short-term performance goals, and only 7% stress short-term goals.

– Board independence – 91% have an independent chairman, lead director or presiding director – up from 83% in 2005 and 71% in 2004. The percentage of companies with an independent chairman has continued to increase, from 4% in 2004 and 9% in 2005, to 11% in this 2006 survey.

– Executive sessions – 69% reported that independent directors met in executive session at every board meeting in 2005, and 75% expect the same for 2006. This percentage is up from 68% in 2004 and 55% in 2003.

– Shareholder communications – 91% have established procedures for shareholder communications with directors, up from 90% last year and 87% in 2004. And 93% of companies say their Nominating/Governance Committee is willing to consider shareholder recommendations for board nominees, a steady increase from the 85% of companies in 2005.

– Costs of Sarbanes-Oxley – Sarbanes-Oxley costs appear to be declining, with 94% expecting costs to either remain the same (42%) or decrease (52%) for 2006, and only 6% projecting that costs will go up this year. The portion of companies reporting estimated costs of more than $10 million dropped to 40% from the 47% reported in 2005.

– Director evaluations – 38% performed individual director evaluations in 2005 and 45% are planning to do such evaluations in 2006, up sharply from the 27% in 2004. Of these companies, a growing number rely on peer reviews – 38% in 2005, and 48% planning to do so in 2006.

– Director qualifications – 97% say their Nominating/Governance Committee has established qualifications for directors, a significant increase from 87% in 2005.

– Committee meetings – 52% indicate they have seen a “significant” increase in the number or length of meetings of the Audit Committee in the past two years, while 33% indicate a “significant” increase in the number or length of meetings of the Compensation Committee in the same period.

– Compensation consultants -85% report that they have retained a compensation consultant in the last year, and 53% of CEOs report that their Nominating/Governance Committees have retained a search firm in the last year.

– Stock ownership requirements – 93% say their compensation committees have stock ownership guidelines or requirements for senior executives and 88% of companies have stock ownership guidelines or requirements for directors, with 32% establishing the director guidelines within the past year.