Monthly Archives: May 2006

May 16, 2006

SEC Commissioner Glassman Declines to Seek Second Term

Yesterday, SEC Commissioner Cynthia Glassman issued this letter indicating that she would not seek a second term when her current term expires next month as she is ready to tackle new challenges. The Commissioner agreed to stay in office until a successor is found, which can take up to 18 months as noted in the SEC’s press release – however, this article predicts a successor will be named within a few days.

With a background as an economist, Commissioner Glassman hasn’t been afraid to assert herself and joined fellow Republican Commissioner Paul Atkins in a stand against a number of measures passed by former Chair Donaldson and the two Democratic Commissioners. It will be interesting to see who is selected as her replacement – among the names being circulated is Kathy Casey, majority staff director for the Senate Banking Committee’s chairman, Sen. Richard Shelby (R-Ala.).

Nasdaq’s FAQs re: Transition to an Exchange

Yesterday, the Nasdaq issued a set of FAQs about its transition to a stock exchange. The timing of the Nasdaq becoming an exchange is still noted as the “2nd quarter of 2006,” but the FAQs also note that this might be delayed.

Yesterday, the Nasdaq also sent this bulletin to listed companies, which states much of what I have blogged about before regarding the Nasdaq taking care of the transition from a 12(g) to a 12(b) reporting company for all listed companies that don’t exercise their right to “opt out” by May 30th. The bulletin also notes that listed companies will keep the same ’34 Act filing number for purposes of their SEC filings (ie. they will keep their numbers beginning with a “0-” despite the fact that listed companies will now be registered under Section 12(b)).

Notes from the May 10th Internal Controls Roundtable

These notes from last week’s 404 Roundtable, hosted by the SEC and the PCAOB, are available from the FEI’s “Section 404 Blog” – and here are notes from the NACD and notes from This is the SEC’s related briefing paper.

The timing of any “next steps” was not discussed during the roundtable – but according to this Reuters article, Chairman Cox told reporters immediately afterwards that the SEC and PCAOB plan to issue “statements” within the “next few weeks.”

May 15, 2006

Court Questions Prosecutor’s Opposition to Corporate Payment of Employees’ Attorney Fees

Last Tuesday, the NY Times ran this article about the testimony given at a hearing into whether federal prosecutors improperly pressured KPMG to cease paying the legal fees of former employees indicted for selling illegal tax shelters. The hearing before Judge Lewis Kaplan of the US District Court of New York focused on the so-called “Thompson Memorandum,” written by then US Deputy Attorney General Larry Thompson. The Thompson Memorandum contains nine factors that prosecutors could consider when determining whether to indict a company – one factor was whether the company advanced legal fees to employees caught up in an investigation. [This Memorandum is discussed within some of the law firm memos posted in the “Attorney-Client Privilege” Practice Area].

It appears that Judge Kaplan has questioned the constitutionality of the prosecutor’s policy regarding advancement of fees. According to this article, “When a prosecutor, Marc Weinstein, said the document written in 2003 by Larry D. Thompson, a former deputy attorney general, did not advise companies that they risk indictment by paying the legal fees for all employees, the judge cut him off. Kaplan said if what Weinstein said was accurate, then the Department of Justice in Washington chose poor wording of the document and ”it’s time they start all over again because that’s sure not what they’ve said to the defense bar.”

The defendant’s pre-hearing brief in this case – US v. Stein – gives some pretty interesting (albeit one-sided) insights into how potential criminal defendants may be pressured by the U.S. Attorney’s Office into cutting off the advancement of legal fees to employees. And here is an amicus curie brief filed on behalf of the SIA, Bond Market Associationn, Associaton of Corporate Counsel and the US Chamber of Commerce which questions the legality of the DOJ’s position in the Thompson Memo that companies under investigation should deny legal fee advances to “culpable” individuals. Both of these pre-hearing briefs are posted in the “Indemnification Arrangements” Practice Area.

There often is tension in situations like this – where companies can be put under a lot of pressure to deny protections to individuals who have not been convicted (at least, not yet). Just review some of the recent cases like Homestore in Delaware, where the court dismissed efforts by a company to avoid paying the fees of an executive who really was “culpable.” And then there are the very valid concerns about the massive legal fees incurred by indicted executives who “eat up” the D&O coverage of other directors and officers who are less culpable (for example, as noted in the WSJ Law Blog, check out how large the Hollinger legal bills were: well over $4 million each for Conrad Black and Richard Pearle!).

This is why companies need to address these tricky situations before they arise, within employment agreements and the like. Get some negotiating and drafting tips in the “Clawback Provisions” Practice Area on

Understanding the EU Prospectus Directive

Tune in tomorrow for the NASPP’s webcast – “Understanding the EU Prospectus Directive” – to learn, among other topics:

– Which stock plans are most likely to be subject to the directive and what exemptions are available
– How to comply with the directive, including how to file a prospectus in your home member state and passport it to other EU countries
– How the directive intersects with local laws and the EU countries where compliance is most problematic
– What to do if you discover that your stock plans are in violation of the directive

A Refresher on CEO/CFO Certifications

We are still getting plenty of queries on CEO/CFO certifications, so I thought it was a good time for a refresher with this podcast with Andy Thorpe of Morrison & Foerster (and a former SEC Staffer who worked on the 302 rulemaking), who provides some insight into how to handle CEO/CFO certifications, including:

– Can a CEO/CFO vary the language at all in a 302 certification?
– What about a 906 certification?
– What happens if a CEO/CFO is hired after a period end? Can they skip the certification until they are on the job longer?
– What other questions are being asked about CEO/CFO certifications?

May 12, 2006

New Life for House’s Truth-in-Pay Bill

Cheryl Hall of the Dallas Morning-News devoted her Wednesday column to providing an update on the progress of the House bill on executive pay (here is a blog from November when bill was introduced). Here is an excerpt from Cheryl’s column:

“U.S. Rep. Barney Frank owes Exxon Mobil Corp.’s Lee Raymond a thank-you note. In November, the Democratic congressman from Massachusetts introduced a bill that would force public corporations to give easy-to-read, fully detailed reports on their top executives’ pay, retirement, perks and golden parachutes.

But it was going nowhere fast until last week, when all 33 Democrats on the Republican-dominated House Financial Services Committee forced hearings in the near future on the bill. Mr. Raymond’s stupefying retirement package and high gasoline prices created this solidarity, says Mr. Frank, who sees executive compensation escalation as corporate America’s arms race.

“It’s not simply that these guys are getting large amounts of money,” says Mr. Frank. “But they’re getting large amounts of money at the same time that large numbers of workers are seeing their pensions jeopardized, their wages frozen in real terms, their jobs abolished.”

Not since Enron Corp. and Ken Lay have public angst and outrage seemed so unified. As a result, the winds of change are blowing from various directions at once. Regulators, stockholder groups and now perhaps Congress are saying enough is way too much. Charles Peck, a compensation specialist at the Conference Board in New York, has watched packages spiral upward for decades. “If you do the abnormal enough times, it becomes the norm,” he says. “Shareholders are waking up to the fact that there’s a whole lot of stuff going on underneath.”

Under Mr. Frank’s bill, companies would have to ‘fess up to the private jets, limos, vacations, maids and special considerations that otherwise might have been buried in incomprehensible verbiage. The Protection Against Executive Compensation Abuse Act is similar in many respects to new rules the Securities and Exchange Commission is about to hand down. These mandate a plain-English, single-page tally of top executives’ compensation – present and future. These tough disclosure regulations should be in place for the next proxy season.

So why doesn’t Mr. Frank just wait for the SEC rules to take hold? “Excuse me,” Mr. Frank says incredulously. “You must have a different version of the Constitution than I do. You must have one that says, ‘Article 1: The SEC shall …’ ”

And there is one critical difference. His bill would give shareholders the right to vote on whether the execs deserve the bounty. “CEOs pick the boards of directors, and the boards of directors pick the CEOs,” says Mr. Frank. “They scratch each other’s back. So there is no market mechanism for controlling CEO salaries. The only way to do that is to give stockholders a chance to vote.” This is something the SEC cannot mandate because companies are incorporated under state laws. “We have no jurisdiction,” says a commission spokesman. “All that Frank wants to achieve is unachievable by us.”

Former CEO Ordered to Pay $22 Million in Disgorgement

On Wednesday, the SEC announced that Gemstar-TV Guide International’s former CEO was ordered by the US District Court for the Central District of California to pay $22 million in disgorgement (including interest and penalties) for his role in a fraudulent scheme to inflate the company’s revenues. Now that is a clawback – one of the largest fines ever handed down for an individual charged with accounting fraud! [The SEC had sought $60.9 million but the court did not rule on a $29.5 million severance payment because the former CEO didn’t have access to it.]

If you remember back to the end of last year, this was the situation in which the Justice Department – responsible for criminal prosecution – agreed to a plea bargain in which the former CEO was given 6 months home detention, a $250,000 fine, and an order to make a $1 million charitable contribution. The judge threw out the plea bargain due to its leniency, which the SEC Staff appropriately opposed at the time (as noted in this blog).

Searching for Hidden Treasure

I found the following piece interesting in Susan Mangiero’s Pension Risk Matters Blog: “I’ve spent the last few weeks trying to uncover information about the retirement plan decision-makers at various companies. I’m willing to pay money for this information. Why?

Simply put, I want to know who has responsibility for making multi-million dollar decisions that affect thousands of employees and retirees. Once identified, I’d like to read their bios, understand how they were selected, read about how they are evaluated and identify to whom they report.

Unfortunately, my quest has provided scant results. Here is a summary of what I know. (I welcome comments about possible data sources.)

1. There is no universally accepted organizational structure to determine who is in charge of recommending and deciding on what retirement benefits to offer those outside the executive suite.

2. When a retirement benefits committee exists, it goes by different names, some of which are listed below.

(a) Master Retirement Committee
(b) Trust Selection Committee
(c) Saving and Investment Plan Committee
(d) Pension Committee
(e) Retirement Board
(f) Fiduciary Committee
(g) Benefits Committee
(h) Deferred Compensation Board
(i) Compensation and Employee Benefits Committee

3. Titles of benefits-related decision-makers vary. Some examples follow.

(a) 401K Board Chairperson
(b) Benefits Director
(c) Benefits and Compensation Director
(d) Benefits Administrator
(e) Head of Human Resources
(f) Compensation Committee Chairperson

4. The SEC has proposed a significant overhaul of reporting rules as relates to executive compensation and compensation committees. It appears to be silent with respect to the compensation decision-making process for employees below C-level.

5. Page 1 of Form 5500 requires the identification of the plan sponsor and plan administrator, respectively. Schedule P to Form 5500 requires the signature of a fiduciary and the name of a trustee or custodian. (According to the U.S. Department of Labor website: “Each year, pension and welfare benefit plans generally are required to file an annual return/report regarding their financial condition, investments, and operations. The annual reporting requirement is generally satisfied by filing the Form 5500 Annual Return/Report of Employee Benefit Plan and any required attachments.”)

6. ERISA mandates the distribution of a Summary Plan Description (SPD) to each plan participant and beneficiary currently receiving benefits. Required information includes “the name, title and address of the principal place of business of each trustee of the plan”. Education and experience are not mandatory disclosure items.

The bottom line is that a systematic identification of who does what and why with respect to employee benefits is simply not a reality as things stand today. This makes it difficult (perhaps impossible) to effect change. Hunting for treasure shouldn’t be this hard!”

May 11, 2006

Executives Take Company Planes as if Their Own

Looks like the executive pay issue is growing in prominence for the mainstream press as the NY Times ran this article attacking personal airplane use by executives on the front page of yesterday’s paper. That’s right – page A1.

The article’s statistics about a 45% increase in amounts billed as personal use from the 100 largest companies – from 2004 to 2005 – could have been easily predicted. In the article, the rise is explained by the IRS cutting back on what companies could deduct when they pay for their executive’s personal travel – thus increasing the burden on companies.

I believe an even more significant reason for the increase is that the SEC Staff had been providing warnings about perk valuations long before the SEC proposed the use of the incremental valuation method a few months ago (see Alan Beller’s speech at our “1st Annual Executive Compensation Conference” in October 2004 and we analyzed this issue way back in the May-June 2004 issue of The Corporate Counsel). I believe some companies took this message to heart and moved away from some of the more egregious valuation methods, such as SIFL.

Unfortunately, valuation methodologies – as well as how companies determine what is “personal” versus “business” use – continue to vary greatly from company to company, as we recently highlighted on pages 8-9 of the September-October 2005 issue of The Corporate Counsel.

So no one should be surprised when these numbers go up significantly when 2005 is compared to 2006 – and even more so when 2006 is compared to 2007, as this is when the “rubber meets the road” as the SEC new rules take effect and hopefully the result is more uniformity in practice. I say “hopefully” because the SEC’s proposed rules lack a clear definition of what costs should be included in the incremental calculation, as noted on pages 5-8 of this comment letter (which also argues that the valuation should be made from the perspective of the executive; not the company). More guidance in this area is necessary to ensure that companies don’t continue to abuse “loopholes” to hide the true costs of personal airplane use.

How to Go Public on the London Stock Exchange’s AIM

Check out today’s webcast – “How to Go Public on the London Stock Exchange’s AIM” – to learn how the London Stock Exchange’s Alternative Investment Market (AIM) increasingly has become an option for companies seeking to go public.

The Impact of Stock Trading Plans on Potential Liability

From Lyle Robert’s “The 10b-5 Daily“: Whether selling company stock under a Rule 10b5-1 trading plan can help shield corporate executives from securities fraud liability is an open question. Although some courts have considered the existence of a trading plan in finding that an executive’s stock sales did not create a strong inference of scienter (i.e., fraudulent intent), a recent decision goes the other way. In In re Cardinal Health Inc. Sec. Litig., 2006 WL 932017 (S.D. Ohio April 12, 2006), the court held that it was “premature” to evaluate the impact of a trading plan at the motion to dismiss stage because it is an affirmative defense to insider trading allegations.

Some Final Thoughts on Form 10-Q Risk Factor Disclosure

Brink Dickerson responds to some of the comments made on his thoughts on risk factors in 10-Qs by noting: “Commentators are absolutely correct that the SEC is hostile to disclaimers of duties to update. However, I include one in any event – usually with the qualifier “except as required by law” – because of Winick and some similar authority.

I have received comments from the SEC on this language – and they usually comment on the companion language as well that provides that the risk factors are the ones that the company currently considers to be material, but may not necessarily every material risk factor – and usually am able to convince them that some middle ground is appropriate. In Winick vs. Pacific Gateway Exchange, Inc., 73 Fed. Appx. 250 (9th Cir. 2003), the court said that ‘The company repeatedly disclaimed any duty to update its forecasts; thus, the company’s predictions regarding its ability to meet future obligations could not have remained “alive” in the minds of reasonable investors.’

A disclaimer of an obligation to update – or the general absence of a duty to update – is consistent with case law in the other circuits as well, and it is unfortunate that the SEC does not recognize that in its comments.”

May 10, 2006

Whole Lotta Internal Control Commenting Going On

Just ahead of today’s SEC and PCAOB Section 404 Roundtable, there have been three recent notable commentaries:

1. On Monday, the GAO issued a report entitled “Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies,” which found that there is a disproportionate cost of compliance for smaller public companies to implement Section 404 but expresses concern over the Small Business Advisory Committee’s recommendation that smaller companies be exempt from Section 404.

2. On Monday, SEC Commissioner Cynthia Glassman gave a speech entitled “Internal Controls Over Financial Reporting – Putting Sarbanes-Oxley Section 404 in Perspective.”

3. Last Thursday, PCAOB Board Member Charlie Niemeier gave a speech entitled “Confronting the Challenges of Change in the World of Financial Reporting,” which includes comments on the rise in cost of capital when a company fails to have adequate internal controls as well as some interesting stats on foreign listings by US companies.

The FEI’s “Section 404 Blog” describes comment letters submitted to the SEC for the purposes of today’s roundtable. And yesterday, the SEC and four banking regulators issued a revised draft policy statement on complex structured finance activities of financial institutions – which includes internal controls and risk management procedures – to make it more principle-based, among other changes.

NYSE Proposes to Eliminate Treasury Share Exception

Last Friday, the NYSE submitted a proposal to the SEC that would eliminate the “treasury share exception” from the requirement for shareholder approval under Section 312.03 of the NYSE Listed Company Manual. From reading this blog, it’s clear what the history is on this. The proposal has not yet been published for comment by the SEC and could still be changed.

Although Section 312.03 requires that companies obtain shareholder approval before issuing stock in certain situations or in significant amounts, the calculation of whether the amount of shares issued triggers the shareholder approval requirement doesn’t apply to the reissuance of treasury stock in some cases (i.e., previously issued and listed shares that previously were reacquired by the company). In particular, the NYSE proposal would:

– Eliminate the treasury share exception entirely
– Require that companies notify the NYSE regarding issuances of treasury shares; and
– Clarify that the shareholder approval requirements for issuances to related parties cover a “series of related transactions”

In its proposal, the NYSE clarifies that companies may continue to rely on the treasury share exception until the SEC approves the rule change. But note on page 5 of the proposal: “Issuances effective on or after that date will be unable to utilize the treasury share exception, even if the issuer had contracted for the issuance prior to that effective date.” In other words, the NYSE states that once the SEC approves the rule change, the treasury share exception is not available for any transaction – even if contracted for prior to the rule change.

This could hurt those companies that may have contacted the NYSE and obtained their blessing that shareholder approval isn’t necessary, contracted for the arrangement, and then the arrangement is effected after the SEC approves the rule proposal; in this situation, shareholder approval would still be necessary despite the NYSE’s prior acquiescence.

Developments for LLCs Doing Business in New York

Significant developments for any LLC that does any business in New York. In this podcast, Monica Lord of Kramer Levin provides analysis of changes in the laws – that are effective on June 1st – impacting limited liability companies doing business in New York (here is more information on these new laws), including:

– What are the latest developments for LLCs doing business in New York?
– What are the consequences of noncompliance?
– Can you tell us more about the new requirement to disclose the identity of the top ten members?
– Are there any exemptions?
– What should LLCs do now in anticipation of these changes?
– I hear that a revision to the law is being considered in Albany. Might all this change?

May 9, 2006

Even More on Form 10-Q Risk Factor Disclosure

Many members reacted to yesterday’s blog, here is one from an anonymous member: “The last 2 sentences of the Coke disclosure is disclosure that I have seen the SEC Staff object to – in my mind, as long as the forward-looking cautionary statement is there, you don’t need all the stuff they did and simply say “there are no material changes.” Given there is now a specific form requirement that requires disclosure of material changes to risk factors, I believe that, regardless of what one discloses, if there are no new risks included, one is saying there are no material changes. I believe that is okay if true.”

And Stan Keller noted: “Keep in mind that MD&A sometimes is used on a standalone basis, e.g., in the glossy annual report. Thus, a discrete safe harbor statement within MD&A may make sense. Often the safe harbor statement used in the earnings press release will serve the purpose for the MD&A. Also, I counsel against use of “disclaim any obligation” language because of Staff sensitivity and suggest another formulation, such as ‘we do not intend to update.’ But our advice has been consistent with Coke’s – if there is no updating, and the company is comfortable not repeating the risk factors in the 10-Q, to refer to the 10-K risk factors without any statement that there have been no changes.”

Some Progress on the NASD’s Shelf Offering Proposal

Last week, the NASD proposed an amendment to its long-standing shelf offering proposal (it was originally published for comment by the SEC at the beginning of 2004! This is the 4th amendment.). The proposal is intended to clarify the application of the NASD’s filing and substantive underwriting requirements to shelf takedowns – the NASD has revised a number of aspects of the original proposal, including no longer proposing to amend the definition of “underwriter and related person.” Any rule change would not be effective until an approval order is issued by the SEC.

No More Broker Non-Votes? NYSE Advisory Panel Consensus

Somehow I missed this interesting piece a few weeks ago from Phyllis Plitch that ran on the Dow Jones newswire:

“In what would represent a major change in current shareholder voting rights, a committee formed last year by the New York Stock Exchange has reached a consensus that brokers should no longer vote for investors in director elections.

According to a person familiar with the situation, the panel stopped short of scrapping the controversial broker vote altogether, but has reached agreement that such votes shouldn’t be counted in board elections.

A recommendation on the broker voting issue is contained in a draft report circulated to members of the committee Wednesday. Once the report is finalized it is expected to go to the NYSE for approval in June. The recommendation isn’t likely to change as it is supported by most members of the committee, said the person, who requested anonymity.

The NYSE rule, which lets brokers cast votes in place of shareholders who don’t return voting instructions, has been long maligned by some activist investors as a “ballot-stuffing” device. Consideration of the thorny issue was part of the panel’s mandate to undertake a broad review of shareholder communications and proxy voting. The proxy working group’s chairman, Palo Alto, Calif., attorney Larry Sonsini declined comment on the substance of the report, but cautioned that the committee’s work is not yet complete. “There are a number of moving pieces that have to be rationalized,” he said.

The decades-old NYSE rule gives brokers the right to vote shares held in investors’ accounts – so-called street-name shares – on “routine” matters, when shareholders don’t provide voting instructions. What has been particularly vexing to some investor activists is that the NYSE considers director elections a routine matter. To their minds, adding insult to injury, brokers cast their votes with management, under long-time industry practice.

In some cases, without the broker vote being added to management’s tally, the outcome of dissident campaigns could have looked very different. In the high-profile election of Disney board members in 2004, 45% of the votes were cast against, or “withheld,” from the election of former Chairman and Chief Executive Michael Eisner. But hundreds of millions of shares were cast in favor of Eisner, even though the true stockholders never returned their broker-supplied proxies. If the broker vote wasn’t included in the tally, a majority of votes cast would have been withheld.

If the draft report doesn’t change, other shareholder voting issues would still be considered routine for purposes of the broker vote, such as auditor ratifications. The panel is throwing the question of whether the broker vote is needed at all back to the NYSE for further evaluation. A key argument heard from the NYSE and supporters of the rule over the years is that without the broker vote thrown into the mix, it would be harder for companies to reach an annual meeting quorum.

Any rule change would have to be approved by the Securities and Exchange Commission. An NYSE spokesman had no immediate comment.”

May 8, 2006

Tomorrow’s Webcast on Hedge Fund Activism

With so much going on with hedge funds these days, I am pretty excited about tomorrow’s webcast – “How to Handle Hedge Fund Activism” – where Craig Wasserman and Marc Wolinsky just joined a panel of their fellow Wachtell Lipton partners: Marty Lipton, David Katz, Josh Cammaker and Mark Gordon. Talk about an all-star line-up!

To catch this program, try a no-risk trial to, where a license for a single user only costs $195. This webcast alone is well worth the price of a license…

House Approves Tying Senior Manager Pensions to Funding Status

Last Wednesday, the US House of Representatives passed a motion – with a vote of 299-125 – that would restrict the pension benefits of senior managers whose companies’ pension plans are less than 80% funded. The bill primarily is aimed at companies switching to cash balance plans.

Rep. George Miller’s (D-Calif.) motion instructs conferees seeking to reconcile differing House and Senate pension reform legislation (H.R. 2830) to adopt provisions that would:

– restrict executive compensation, including nonqualified plans – in companies with pension plans that are less than 80% funded – equal to restrictions that would be imposed on benefits for workers and retirees in those plans, and

– insist that the definition of ”covered employee” include the CEO of the plan sponsor, any other employee of the plan sponsor who is a ”covered employee,” within the meaning of such term specified in the provisions contained in the Senate pension bill, and any other individual who is an officer or employee of the plan sponsor

This press release provides more information. Progress on reconciling the House motion with the Senate has been limited so far.

More on Form 10-Q Risk Factor Disclosure

One of the primary benefits of having an advisory board is receiving their sound counsel, even when they do not fully agree with you. Brink Dickerson of Troutman Sanders was kind enough to send along his thoughts on Coke’s approach to risk factors – which shows that he favors a different approach to the one I favored in this blog from last Monday:

“A well written MD&A will always contain forward-looking statements. They might be triggered by the requirement to discuss “known trends” and “uncertainties,” but they certainly will be triggered by the liquidity disclosure, which is required to address how companies expect to meet future liquidity needs. The safe harbor, as it applies to written statements, requires three things: Identification of the forward-looking statements (which, hopefully, is something more than the verb-to-be buzzword approach), the magic language that “actual results may differ materially,” and, most relevantly, accompaniment by “meaningful cautionary language.”

There now are hundreds of forward-looking statement cases. Few have focused intently on what it means to “accompany.” Two have come up with odd answers on this issue – one suggesting a “truth on the market” approach to counter the judge’s apparent distaste for the “fraud on the market” theory that might suggest that anything in the public domain that is cautionary would qualify (Judge Easterbrook, what were you thinking?) and another who dismissed based upon a safe harbor argument where the cautionary language was in a separate document.

However, the overwhelming majority of the cases involve situations where the meaningful cautionary language was in the same document and the issue did not have to be addressed, but dictum in a number of those cases suggests that is what the law requires. To me, “accompany” means “in the same document, appropriately captioned and not obscure.” Until a court holds clearly otherwise, that certainly is the best practice, if not the only practice that counsel could responsibly advocate.

Thus, a well written From 10-Q is going to contain forward-looking statements and should contain a safe harbor. But remember, safe-harbor disclosure is not required (and the SEC still appears reluctant to admit that the Reform Act is law).

“Risk factors” require the disclosure of risks that make a security “speculative or risky.” See Reg. S-K, Item 503(c). “Meaningful cautionary language” requires a discussion of the most likely reasons, but not necessarily all know reasons, that actual results may differ materially form those suggested by the forward-looking statements. See, e.g., Harris v. Ivax Corp, 182 F.3d 799 (11th Cir. 1999). These requirements are not the same, and good risk factor disclosure probably is a bit more robust than good safe-harbor disclosure.

Technically, a registrant could include Coke-like risk factor language in Item 1A of Part II of their Form 10-Q, i.e., a cross-reference to the Form 10-K risk factors and a statement that there have been no material changes and be fully compliant with their Form 10-Q obligations. But, the MD&A should be accompanied by a good safe harbor, and probably the most common practice is to put the safe harbor at the end of the MD&A section.

But, why not move the safe harbor introductory language – the “identification” plus “magic language” – to the beginning of Part II, Item 1A of the Form 10-Q and then follow it by traditional risk factor language? (And then follow that with language that expressly states that “We disclaim any obligation to update . . . except as required by law.”) This puts the safe harbor language in a readily findable spot and utilizes the, hopefully, good risk factors, and adds only minimal length to the document. We also know that meaningful cautionary language is supposed to be “alive” and change over time (common sense plus Judge Easterbrook, at least if you want him to uphold your motion to dismiss), and risk factor language should as well. So, republishing updated risk factors on a quarterly basis has other value.

I believe that this is the best approach, although I expect it to be the minority approach given the wording of the Item 1A and the fact that most registrants will not focus on the opportunity to combine their safe harbor and risk factors.”

May 5, 2006

Big Drop in Filing Fee Rates Planned for ’07

On Wednesday, in the midst of providing testimony on the Hill, Chairman Cox announced that the SEC would drop fee rates considerably for the next fiscal year – the registration filing fee rate will be reduced by 71.3%! The rate would decrease to $30.70 per $1 million worth of securities registered from the current rate of $107.00.

This new rate will be effective at the beginning of the SEC’s next fiscal year, October 1, 2006 or 5 days after the date on which the SEC receives its regular appropriation, whichever date comes later (and based on past experience, as evidenced by my blogs from prior years, it’s always the latter as Congress inevitably drags its feet in approving the federal budget).

An Open Letter to All Journalists

On, I have posted my “Open Letter to All Journalists,” which is an indirect response to the Holman Jenkins op-ed in Wednesday’s WSJ entitled: “Surprise! CEOs are Still Highly Paid!

I characterize my response as “indirect” because it is difficult to take Mr. Jenkins too seriously because I believe he will hold onto his views despite his lack of command over the subject matter. For example, Mr. Jenkins blasts pay-for-performance because Mr. Jenkins contends: “Pay for performance” is paying for the past, not the future, which is what stock prices care about.”

As far as I know, that’s not anyone else’s definition of “pay-for-performance.” In fact, pay-for-performance is precisely the opposite of what Mr. Jenkins believes it to be. A company enters into a CEO pay arrangement today with specified future performance targets that need to be triggered in order to earn the pay. But I thought posting my response could be useful to other journalists who need to get up-to-speed on responsible pay practices in the midst of so much misinformation out there on the topic.

Analysis: Comment Letters on the SEC’s Executive Compensation Disclosure Proposal

Last week, Jesse Brill submitted his second comment letter on the SEC’s executive compensation disclosure proposal. This second letter contains analysis of other interesting comment letters and reiterates some of the points made in his first comment letter. Check them out!

May 4, 2006

Free Writing Prospectuses: The Survey

Since the December 1st effective date of Securities Act reform, lawyers have been more careful about what constitutes the “disclosure package” as more writings are being considered a potential offer and filed as a free writing prospectus. Take our new survey on how many pieces typically constitute the “disclosure package” as well as the largest disclosure package you have worked on to date.

Free Writing Prospectuses: The Fun Stuff

As noted in our “Analysis of Free Writing Prospectuses” – which includes samples of the various types of FWPs filed so far – approximately 3000 FWPs have been filed with the SEC since December 1st. As part of the survey noted above, we have included a question asking which of six notable FWPs you find the most interesting. Check it out and have some fun.

If you are aware of other interesting FWPs not on this list, please drop me an email and let me know.

Survey Results: Trading Policies for Outside Directors

Our June 2005 survey on blackout practices ended with a question as to whether outside directors were subject to restrictions. Our most recent survey followed up on that theme with the following results:

1. Are outside directors at your company subject to restrictions on trading in company securities?

– Yes – 100%
– No – 0%

2. If yes, are they subject to the same restrictions as senior management?

– Yes – 93.7%
– No – 6.3%

3. Are outside directors free to trade at any time when there are no restrictions or must they also preclear their trades (eg. with the compliance or legal department)?

– Must always preclear- 88.8%
– Only needs to preclear in limited circumstances – 6.3%
– Never needs to preclear – 5.0%

4. If preclearance is required, how long is the preclearance valid?

– Less than 3 trading days – 35.5%
– 3-5 trading days – 28.9%
– 5-10 trading days – 18.4%
– More than 10 trading days – 17.1%

May 3, 2006

The SEC’s Virtual Workforce Pilot Program

During his testimony last week before the US House Appropriations Subcommittee regarding the SEC’s budget, Chairman Cox discussed how the SEC has made “great strides in increasing participation” by Staffers in the Commission’s telework program. He noted that “during the first half of this year, we increased our telework participation to more than 1,100 employees. This represents an increase of 532 over the level at the start of fiscal 2005.”

He also noted that “our evaluation to date of our Virtual Workforce pilot program within the Division of Corporation Finance, we are considering options for expanding the program to other divisions and offices within the agency.” This pilot program consists of Staffers who work from home 100% of the time; whereas the telework program consists of Staffers who work from home one or two days per week. Both efforts are part of an overall initiative within the federal government to encourage more teleworking (which saves $ on office space, etc.). I’m sure there are lots of ex-Staffers out there wishing they had never left…

Comments from Corp Fin’s Office of Global Security Risk

During his testimony, Chairman Cox noted that the Office of Global Security Risk issued comments to 137 companies over the past year. I believe these comments often come in this form:

“We note the several references to your operations in ___. Please identify for us the __countries in which you have operations. If any of these operations are in a country identified by the U.S. State Department as state sponsor of terrorism, or if you have other contacts with any such country, identify each such country for us. Advise us also whether your __subsidiary is in __, a country identified by the U.S. State Department as a state sponsor of terrorism.

If any of your operations or other contacts is with a country identified as a state sponsor of terrorism, please advise us of the materiality of those contacts to the Company, and give us your views as to whether those contacts constitute a material investment risk for your security holders.

If you have contacts with more than one such country, provide the requested information with respect to your contacts with the countries individually and in the aggregate. In preparing your response, please consider that evaluations of materiality should not be based solely on quantitative factors, but should include consideration of all factors, including the potential impact of corporate activities upon a company’s reputation and share value, that a reasonable investor would deem important in making an investment decision.”

On a related note, last Thursday, the SEC jointly released this special study with the Federal Reserve and Office of the Comptroller regarding sound practices to strengthen the resilience of the US financial system.

Grasso Pay Package ‘Shocked’ Board

Couldn’t resist this short article from Friday’s WSJ describing the NYSE Board’s “Holy Cow” moment: “A newly surfaced document calls into question whether the board of the New York Stock Exchange fully understood the scope of the pay package being offered to former Big Board boss Dick Grasso. That $188 million pay package is the subject of a lawsuit against Mr. Grasso by New York state’s attorney general, Eliot Spitzer, whose case argues that such compensation was inappropriate for the head of a what was then a nonprofit organization.

The NYSE’s board “did not receive detailed information from the compensation committee,” according to internal notes prepared by former New York Stock Exchange Compensation Committee Chairman H. Carl McCall and his assistant in 2003. Mr. McCall’s notes said he realized that the board was in the dark when he started chairing the NYSE’s compensation committee in June 2003. The NYSE is now part of publicly listed NYSE Group Inc.

The notes became public by court order Wednesday after they came up during Mr. Spitzer’s deposition of Linda Scott, Mr. McCall’s assistant. They indicate that many board members were “shocked” when Mr. McCall gave them a “heads up” on the size of Mr. Grasso’s pay package.”

da Vinci Code Judge Embeds Own Code in Ruling

Who says that lawyers don’t have a sense of humor? UK Judge Peter Smith, who decided the case brought against Dan Brown involving “The Da Vinci Code,” embedded a coded message in his ruling: smithcodeJaeiextostpsacgreamqwfkadpmqz. This coded message has now been cracked. Judge Smith’s clerk confirmed that the judge is a “humorous type of person.”