Monthly Archives: October 2007

October 31, 2007

Lessons Learned: The SEC’s Comment Letter Database

A few weeks back, I blogged about an executive compensation comment letter that the SEC Staff might have accidentally uploaded. I say “accidentally” because it was pulled off the EDGAR database a few hours after my blog was posted (but note that the comment letter continues to “live on” within the paid databases like Securities Mosaic and 10-K Wizard).

This episode serves as a lesson for companies to monitor their “filings” on the SEC’s website. Here I use the term “filings” pretty broadly, as it now includes content that the SEC Staff might upload (like comment letters) as well as third-party content (like third party tender offers).

[Keith Bishop notes: To someone who grew up in Nevada, October 31 is not Halloween but Nevada Day. We used to get the day off (which worked well with it also being Halloween). The story behind Nevada Day is actually somewhat interesting. Back in 1864, President Lincoln needed support for the 13th Amendment (abolishing slavery). Three more votes from Nevada would help ensure victory. The perceived need for prompt admission was so great that the entire Nevada Constitution (over 18,000 words) was sent by telegraph to Washington D.C. That’s a lot of dots and dashes.

President Lincoln proclaimed Nevada the 36th state on October 31, 1864. Nevada’s new Congressional delegation obliged by voting for the 13th Amendment. Alas, the Nevada Legislature has sacrificed tradition on the alter of convenience and moved observance to Nevada Day to the last Friday in October. NRS 236.015(1). Keith wrote a treatise on Nevada Law of Corporations & Business Organizations (now out of print).]

Compensation Arrangements for Private Equity Deals

Tune in tomorrow for this webcast – “Compensation Arrangements for Private Equity Deals” – to hear Jeremy Goldstein of Wachtell Lipton and Shawn Hamilton and Craig Rowley of the Hay Group discuss:

– What are the latest compensation trends and developments when companies are purchased by private equity funds?
– What compensation issues should a target board consider when it’s approached by a private equity fund?
– What type of due diligence should be conducted into a target’s compensation plans by a potential acquiror?
– How should elements of pay be re-balanced and re-mixed when going private?

Please print out these course materials before catching the program.

“We are Overpaid,” Say US Executives

Here is a recent article from the Financial Times about internal pay equity, etc.:

“Most US corporate leaders believe chief executives are overpaid and do not provide value for money for their com­panies, according to a study that will embolden critics of excessive compensation. The findings – to be published today by the National Association of Corporate Directors – are likely to strengthen calls by investors and politicians, including George W. Bush, US president, for restraint on executive pay at a time of growing income inequality in the US.

Top executives’ criticism of their peers’ compensation levels could also encourage activist investors and hedge funds to target underperforming companies with highly-paid leaders at shareholder meetings. Four out of six chief executives or company presidents polled by the NACD in July and August said the compensation of top executives was high relative to their performance.

Only 2.2 per cent of the nearly 70 chief executives and presidents involved in the survey said compensation was too low, while a third deemed it “just right”. Their views were backed up by outside directors, with more than 80 per cent of them saying chief executives were overpaid.

“There is an overall realisation that executive compensation is an area that boards and management are struggling with,” said Peter Gleason, chief operating officer of the NACD. The issue is particularly sensitive because the gap between rich and poor in America has reached its widest point in more than 60 years.

Figures released last week showed the share of national income claimed by the wealthiest 1 per cent of Americans had reached 21.2 per cent – a postwar record – partly because of booming company profits. Mr Bush last week told The Wall Street Journal that he thought some executive compensation was excessive and that some boards needed to improve their oversight of this.

Nearly 60 per cent of the directors polled by the NACD said the reason for excessive pay packages was the absence of objective ways to measure an executive’s performance. Nearly half criticised the use of options and equity awards that reward executives when the company’s share price goes up, rather than when its operations improve. Investors have become more vocal in attacking what they often call “pay for failure” – large severance packages awarded to ousted chief executives.”

– Broc Romanek

October 30, 2007

Court Attacks Applicability of Attorney-Client Privilege to In-House Counsel

Back in August, a federal district court ordered Merck & Co. to produce thousands of internal electronic documents which the company had vigorously argued were protected by the attorney-client privilege, and held that communications by a lawyer acting in a business capacity are not privileged. This ruling may foreshadow a trend that threatens electronic communications between corporate and in-house counsel, as well as the modern role of corporate counsel in heavily regulated industries. For more info, see this memo from our “Attorney-Client Privilege” Practice Area.

Associate Salary Survey Shows Many Top $200K

Typically, we don’t cover this type of topic in this blog (as it’s well-covered in many others) – but this American Lawyer survey is a jaw dropper…

[What in the world are they putting in Snowball’s birdfeed?]

Broccoli Governance? I Kid You Not

Over the past five years, the governance movement surely has grown beyond anyone’s imagination. In fact, it has grown so much that the predictable backlash against Sarbanes-Oxley has gained traction on Capitol Hill. However, governance has grown far beyond the dicates of Sarbanes-Oxley.

“Governance” is now applied to areas far beyond the boardroom. For example, here are a number of Capability Maturity Models that are supposed to represent governance models of various business processes. There even is a reference to broccoli!

This is what has happened to governance. It has become a buzzword – many use the term indiscriminately, attaching adjectives to it (such as IT Governance, Project Governance, etc.). Quite a few governance definitions have started to take on a life of their own, without any connection to the original meaning and usage – so that it gets to the point where one can’t assume that everyone is talking about the same thing, even when using the same term.

This is not happening so much for those of us dealing with corporate board governance; rather, it’s happening in those areas where “governance” really doesn’t exist, yet has become a part of the daily vernacular. I’m not sure this really is all that bad, I just worry about those processing my broccoli are fussing too much over it…

– Broc Romanek

October 29, 2007

For Those Doing E-Proxy: A Sample Affidavit of Distribution

Much thanks to independent election inspector Carl Hagberg, who created a Sample Affidavit of Distribution in Word (that we have posted in our “E-Proxy” Practice Area). This Affidavit can serve as a quasi-checklist of all the things that need to be done to ensure that all classes of shareholders will be covered for those using voluntary e-proxy. It’s a draft sample – any comments are welcome by Carl or myself!

The Latest E-Proxy Examples

I’ve got e-proxy on the mind as I prepare to talk about the topic during the Association of Corporate Counsel’s annual conference in Chicago. With nearly 30 companies trying voluntary e-proxy so far, certain trends are becoming evident – some of these will be discussed during our upcoming November 15th webcast: “Annual Reports: How to Create Them for an Online World.”

Taking a quick swing through the IR web pages of some of those companies doing e-proxy reveals that many of them explain very little to shareholders about what they are doing. Not only is that not fair to shareholders in my opinion, that will not help the company reach quorum.

Here are examples of what some larger companies are doing online to explain e-proxy to shareholders:

– Sun Microsystems issued a press release announcing it is using voluntary e-proxy. Sun’s page about it’s annual reports also explains that it is using e-proxy. So far, this is the best online communication to shareholders I’ve seen.

– SaraLee has two “Order Hardcopy” buttons on its annual meeting web page.

– Nike posted this page that explains e-proxy – the link to this page is called “Electronic Delivery of Shareholder Materials,” in contrast to SaraLee’s “Order Hardcopy.”

– Microsoft does something similar to Nike if you scroll down a little on this page (except I can’t seem to get into that page as the link goes to a .docx file, which is the latest Word format that not many folks have yet – fyi, Microsoft has posted a compatibility pack for XP and 2003 versions of Word, Excel and PowerPoint that allows them to open and read the newest file formats).

Some other companies really confused me – their IR web pages said they are collecting consents for e-delivery; yet their proxy materials indicate they are using e-proxy. Of course, they could be doing both – but if so, they should explain that when they solicit consents.

As many more voluntary e-proxy’ers are expected as we near the calendar year-end, we hopefully will see some more descriptive explanations of what companies are doing – shoot me an email if you see something innovative. I’ll continue to post examples of what companies are doing in our “E-Proxy” Practice Area.

Twenty Years: The ’87 Market Break

This recent NY Times column gave me a chuckle. Joe Nocera recounts where he was when the market sliced 23% off the S&P 500 in a day (do the math to figure out what that means in today’s terms – the Dow dropping 3500 points in a day! About 10x the drop that happened on October 19th this year).

I had a similar flashback because I was on a law school field trip that day, visiting the Philadelphia Stock Exchange. The President of the Exchange was showing us around and began to cry because of the millions he was losing as he talked. Given that I worked at a sandwich shop in addition to a clerkship to make ends meet, I wasn’t moved much – but it still was quite a sight (and I’m sure he made it all back within a few weeks).

A year later, I started my first attorney job as a novice examiner in Corp Fin – and within two weeks of my start date, the SEC held a huge keg party at a local bar to celebrate the anniversary of the market break. That sure don’t happen anymore..

– Broc Romanek

October 26, 2007

A Potential Setback for the SEC’s PIPEs Actions

Over the past few years, the SEC has brought actions against several individuals and hedge funds for federal securities law violations arising from short selling in connection with PIPE (private investment in public equity) offerings. Recently, the SEC Staff has been sending inquiries to hedge funds that invest in PIPEs, requesting the records of client accounts and PIPE transactions – so more actions are no doubt likely. Most of the SEC actions to date have settled, but a few are winding their way through the courts.

As noted in this Bloomberg article and this over-the-top press release issued yesterday by the defendant, one PIPEs case has met with some resistance in the US District Court for the Western District of North Carolina. In the case of SEC v. John F. Mangan, Jr. and Hugh L. McColl, III, the SEC charged Mangan, a former Friedman, Billings, Ramsey & Co. broker, with unlawful insider trading by short selling CompuDyne Corp. securities prior to the public announcement of a PIPE offering, and with engaging in the unregistered sale of securities in violation of Securities Act Section 5. The district court judge dismissed the Section 5 claim, but is allowing the case to proceed on the insider trading allegations.

Mangan was alleged to have shorted some CompuDyne securities after public announcement of the PIPE and prior to the filing or effectiveness of a resale registration statement for the PIPE shares. Mangan did not borrow or otherwise obtain stock to cover at the time of the short sales. Mangan then covered the short sales with shares purchased in the PIPE, after the registration statement was declared effective. The SEC has for many years taken the position Section 5 can be violated in a situation where short sales are made prior to the effective date of a registration statement of securities of the same class as those sold short, and then those short sales are covered (as planned at the time of sale) with shares obtained in the registered offering. [See Release No. 33-5323 (Oct. 16, 1972) and Release No. 34-10636 (Feb. 11, 1974).] In the SEC’s view, the two-step process that Mangan is alleged to have conducted is one unregistered public distribution where the PIPE shares are sold for Section 5 purposes at the time of the short sales.

The SEC Enforcement Staff has indicated that it may appeal the ruling in the Mangan case and that it will definitely proceed with the insider trading portion of the case. This “win” for the defendant on the Section 5 theory may, however, make it harder for the SEC to reach settlements in any other similar cases that are out there.

Shareholder Proposals: Some Helpful Tips for the Upcoming Season

It is hard for me to believe that the shareholder proposal season is rapidly approaching and, for many, is already well under way. This will be the first shareholder proposal season in quite some time where Marty Dunn will not be calling the shots on the Corp Fin no-action letters, and it remains to be seen whether the changing of the guard at the SEC will impact the process and results.

Marty and some of his colleagues at O’Melveny & Myers recently offered up some useful guidance on the “don’ts” you want to keep in mind when dealing with proponents and the Staff. These are the types of substantive and procedural things that the Staff sees over and over again each proxy season. Some of the procedural missteps to avoid are:

1. If you are going to argue that the proponent did not satisfy a procedural requirement of Rule 14a-8, don’t send the proponent a notice that will not stand up to Staff scrutiny – there is lots of guidance out there on what serves as adequate notice.

2. If a proponent does not meet the procedural requirements of the rule, but you failed to send a deficiency notice as required by Rule 14a-8(f), don’t argue that Rule 14a-8(i)(3) permits exclusion of the proposal because the failure to meet the procedural requirements of Rule 14a-8 is a violation of the proxy rules.

3. If you have several no-action requests to submit, don’t wait to submit them all at the same time – submitting them collectively will inevitably result in unnecessary delays.

4. If you receive correspondence from a proponent, don’t hold it back from the Staff.

5. If you think that Staff is not going to agree with your request, don’t include language indicating that the request constitutes an automatic right to appeal or that the Staff should contact the company if it does not agree with the argument for exclusion.

6. If you receive a request from the proponent to withdraw the proposal, don’t delay in forwarding that letter to the Staff, along with a letter withdrawing the no-action request.

For more practical guidance, take a look at our “Shareholder Proposals” Practice Area.

What’s in a Name?

I think it is funny that we are starting to see some crazy company names emerging from Silicon Valley these days, as start-ups proliferate and venture capital funding is again flowing freely. This LA Times article notes that, in an effort to get noticed in the Web 2.0 world, entrepreneurs are rolling out names like Abazab, Wakoopa, Squidoo and Xobni. I’m not even sure how to pronounce that last one, but it is “inbox” spelled backwards. In short, everyone wants to be the next Google.

Of course the federal securities laws have to throw cold water on the naming game fun. The instruction to Item 501(b)(1) of Regulation S-K indicates that if you have a name that is similar to a well-known company, or if your name indicates a line of business in which you are not engaged or only engaged to a limited extent, then you have to include disclosure necessary to avoid any misleading inference or, in the worst case, change your name. When I was reviewing filings in Corp Fin, particularly in the late ‘90s, we would raise a comment based on that Instruction more often than you might expect. Fortunately, I don’t think anyone ever had to actually change their name.

– Dave Lynn

October 25, 2007

Treasury Rethinks the SEC’s Role

As part of the continuing efforts to address the competitiveness of the US financial markets, the Treasury Department announced that it is seeking public comment on improving the regulatory structure for the financial system. While a large portion of the request for comments is oriented toward regulation of financial institutions such as banks and insurance companies, some of the questions particularly target the split jurisdiction of the SEC and CFTC, as well as the role of the states in the securities and futures regulatory framework. The specific questions raised on these topics are:

– Is there a continued rationale for distinguishing between securities and futures products and their respective intermediaries?
– Is there a continued rationale for having separate regulators for these types of financial products and institutions?
– What type of regulation would be optimal for firms that provide financial services related to securities and futures products? Should this regulation be driven by the need to protect customers or by the broader issues of market integrity and financial system stability?
– What is the optimal role for the states in securities and futures regulation?
– What are the key consumer/investor protection elements associated with products offered by securities and futures firms? Should there be a regulatory distinction among retail, institutional, wholesale, commercial, and hedging customers?
– Would it be useful to apply some of the principles of the Commodity Futures Modernization Act of 2000 to the securities regulatory regime? Is a tiered system of regulation appropriate? Is it appropriate to make distinctions based on the relative sophistication of the market participants and/or the integrity of the market?

Comments on these and the other broad questions included in the release are due to the Treasury by November 21.

This is obviously not the first time that the jurisdictional divide between securities and futures has been raised as an issue, but I think now more than ever the debate is worth having – and settling. Based on my own experience at the SEC, I know that the uncontrollable march of financial innovation is constantly testing this artificial regulatory divide, making life difficult for those who seek to make real strides in developing potentially beneficial financial products for institutions and consumers.

Unfortunately, as noted in this Wall Street Journal opinion piece authored by William Brodsky of the CBOE, combining the SEC and the CFTC (or creating a new regulator of financial products) has been hampered by Congressional turf battles, given that different committees oversee these agencies. Brodsky notes that the problems with the split jurisdiction are highlighted by a proposal that the CBOE filed with the SEC in June 2005 to trade options on funds that invest in gold, which has gone nowhere as the SEC and CFTC are still trying to decide who should regulate the product.

There is no doubt that Treasury is taking on some big issues with its competitiveness improvement efforts. As the clock ticks down on this Administration, it will be interesting to see if any progress can be made on some of these critically important issues.

Rule 10b5-1 Plans: Countrywide CEO’s Sales in the Spotlight

At our conference entitled “Hot Topics and Practical Guidance: The Corporate Counsel Speaks,” SEC Enforcement Director Linda Chatman Thomsen spoke about, among other things, the SEC Staff’s interest in the use of Rule 10b5-1 trading plans for illegitimate purposes. Her speech was followed by an excellent panel consisting of Linda, Alan Dye and Ron Mueller, who discussed the ins and outs of using Rule 10b5-1 plans. If you missed the conference, it is not too late – you can still register to access the archived video.

At the time of Linda Thomsen’s remarks earlier this month, there was no evidence that the Staff’s interest in Rule 10b5-1 plans had resulted in any active SEC investigations of insider sales through these plans. That has now changed, with reports surfacing of an informal inquiry looking into stock sales by Countrywide CEO Angelo Mozilo. As noted in this NY Times article, an anonymous source confirmed the existence of the inquiry and its focus on Mozilo’s trades. The article notes: “Since October 2006, Mr. Mozilo has twice raised the number of shares that could be sold under his plans. In December 2006, when Countrywide shares were trading at $40.50, he increased the number of shares to be sold each month to 465,000 from 350,000. Then in February, when shares hit a high of $45.03, he increased the number of shares sold each month to 580,000. Shares closed down 74 cents yesterday, to $17.35. This month, the state treasurer of North Carolina, Richard Moore, wrote to the S.E.C. chairman, Christopher Cox, and questioned the changes Mr. Mozilo made to his selling program. ‘The timing of these sales and the changes to the trading plans raise serious questions about whether this is a mere coincidence,’ Mr. Moore wrote.”

Earlier this month, Countrywide put out this unusual press release defending Mozilo’s Rule 10b5-1 trades. The controversy over Mozilo’s stock sales under his 10b5-1 plan is not new – in an earnings call back in July, an analyst questioned Mozilo’s sales under his 10b5-1 plan while Countrywide was buying back its stock at the same time.

Be sure to check out our “Rule 10b5-1” Practice Area for the latest developments in this area.

Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing

We have posted the transcript from our recent webcast: “Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing.”

– Dave Lynn

October 24, 2007

The SEC’s Corporate Penalties Debate Continues with the Nortel Settlement

Disagreement among the SEC’s Commissioners on the topic of corporate penalties appears to continue, despite the recent efforts directed at improving the situation. As Broc noted in the blog earlier this year, the SEC has changed its internal policies so that Enforcement lawyers must seek approval from the Commissioners before they begin settlement talks that involve fining corporations. That shift followed on the heels of a January 2006 policy statement outlining the analytical steps that the SEC follows in deciding whether to levy penalties against companies.

Despite these efforts, the much hoped for unanimity on penalties appears elusive. Along with last week’s announcement of the $35 million penalty obtained in the settlement of proceedings against Nortel Networks came a relatively unusual “real time” dissent from Commission Paul Atkins. As noted in this Bloomberg article, Commissioner Atkins issued a statement calling the $35 million penalty a “public relations gesture” and noting that the settlement “does nothing to further the SEC’s objectives” of protecting investors and maintaining far, orderly and efficient markets. The Commissioner also noted that the penalty “will be paid by Nortel shareholders, many of whom were victims of the financial fraud.”

While it is not surprising that Commissioner Atkins would oppose the terms of this settlement, it is certainly unusual to see this level of public dissent around the time of announcing the Commission-approved deal.

PCAOB Reports on Inspections of Smaller Audit Firms

Earlier this week, the PCAOB released a report on common issues identified in inspections of US audit firms that audited 100 or fewer public companies. The report is based on inspections conducted from 2004 through 2006, and it does not identify any particular firms. In the report, the PCAOB outlines significant areas where it believes firms should seek to ensure compliance with applicable standards and requirements.

The specific areas addressed in the report are:

– Revenue
– Related-Party Transactions
– Equity Transactions
– Business Combinations and Impairment of Assets
– Going-Concern Considerations
– Loans and Accounts Receivable (including allowance accounts)
– Service Organizations
– Use of Other Auditors
– Use of the Work of Specialists
– Independence
– Concurring Partner Review

The PCAOB notes that many of the smaller firms that were the subject of inspections had taken steps to address quality control deficiencies, including improving their methodologies through the use of audit programs and practice aids, arranging for annual technical training, improving the availability of appropriate technical resources, encouraging personnel to make appropriate use of external resources and enhancing their own internal monitoring of audit performance. For more analysis of the PCAOB’s report, check out Kevin LaCroix’s “D&O Diary” Blog.

Separately, the PCAOB announced that it had approved two amendments to PCAOB Rule 4003, which addresses the minimum frequency with which the PCAOB conducts inspections of different categories of registered public accounting firms. Specifically, the amendments would eliminate a requirement that the PCAOB regularly inspect each registered public accounting firm that plays a “substantial role” in audits but does not issue audit reports. Further, the amendments would eliminate the requirement to inspect each registered public accounting firm that issues an audit report, even if the firm does not regularly issue audit reports. These amendments to Rule 4003 will decrease the PCAOB’s inspection burden in low-risk areas, while maintaining the discretion to inspect any firms in these categories if necessary.

Test Your Section 16 Knowledge: Are You a Pro or Troll?

We have posted one of our popular quizzes – “Pro” or “Troll”? Test Your Knowledge – on It will score your answers as you go—and let you know how you compare against your peers.

Simply read each statement and decide whether you agree with it (by clicking “Ah Yes”) or disagree (by clicking “That’s Ridiculous”), except one of the questions offers answers of “Tuesday” or “Wednesday.” Then, you will be told whether you were correct—and we also provide some analysis if you wish to learn more about each answer.

For a Section 16 geek like myself, this one is great fun!

– Dave Lynn

October 23, 2007

Section 409A Deadline Postponed!

Yesterday, the IRS and Treasury Department issued Notice 2007-86, which generally extends the transition relief for compliance with Section 409A through December 31, 2008. Section 409A affects all types of plans that involve (or are considered to involve) a deferral of compensation.

In the notice, the IRS and Treasury also confirmed that they expect to issue guidance regarding a correction program as soon as possible. This guidance is expected to provide methods by which some unintentional operational failures may be corrected in the same taxable year in which they occurred in order to avoid application of Section 409A, and other methods by which some unintentional operational failures may result in only limited amounts becoming includible in income and subject to additional taxes under Section 409A.

This latest round of transition relief does not affect the guidance provided in Notice 2007-78 regarding predetermined cashout features, or the guidance regarding the application of Section 409A(b), which imposes restrictions on certain trusts and other arrangements.

This much needed extension should give everyone the additional time that they need in order to analyze their plans and complete all of the changes necessary to bring arrangements into compliance with the final regulations issued in April 2007.

No Comprehensive Delay for FASB’s Fair Value Measurement Standard

In more deadline news, the FASB recently rejected suggestions that it delay the effective date of FAS 157, Fair Value Measurements (Sept. 2006). The FASB did, however, direct its staff to analyze whether to delay application of the standard for some items subject to measurement and to specific entities. As it now stands, FAS 157 is effective for fiscal years beginning after November 15, 2007.

As noted in this issue of KPMG’s Defining Issues, the possibilities that the FASB Staff may consider are deferring FAS 157’s requirements for:

– nonfinancial assets and liabilities other than derivatives within the scope of FAS 133;
– private entities; and
– smaller public companies below a yet-to-be determined size.

FAS 157 defines fair value as “the price that would be received for an asset or paid to transfer a liability in a current market transaction between marketplace participants in the reference market for the asset or liability.” The new standard also establishes a framework for measuring fair value.

As a result of the upcoming effective date of FAS 157, companies will be expected to disclose the anticipated effects of adopting the standard in their MD&A, as well as possible disclosure in the notes to the financial statements under SAB 74, Disclosure Of The Impact That Recently Issued Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted in a Future Period.

For more information about FAS 157 and FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (Feb. 2007), check out our “Fair Value Accounting” Practice Area.

Latest Developments in Capital Market Deals

We have posted the transcript from our recent webcast: “Latest Developments in Capital Market Deals.”

– Dave Lynn

October 22, 2007

Executive Compensation Disclosure Best Practices from RiskMetrics Group

It seems to be the season for reports on executive compensation disclosure. Following up on the SEC Staff’s recent report on observations from its review efforts, RiskMetrics Group has published its own evaluation of executive compensation disclosures from the 2007 proxy season.

Mark Borges provides an extensive summary and analysis of the report on his blog. Mark notes: “Less a critique of how companies fared in disclosing their executive compensation programs than the kick off of a dialogue among executives, directors, and investors on the development of a set of disclosure ‘best practices,’ the Report is the first public statement that I’ve seen from the investor community (or at least, one of its leading representatives) commenting on compliance with the new rules.

Like the Staff report, RiskMetrics focuses much of its attention on the Compensation Discussion and Analysis. Nonetheless, the Report should also be read in the context of preparing the tabular disclosure and accompanying narrative discussions. At a high level, the Report addresses seven specific topics:

– Clarity and accessibility for investors and other key reads
– The connection between compensation practices and strategy or other company-specific features
– The role of executives and compensation consultants in the compensation-setting process
– The pay mix
– Performance metrics and peer groups
– Performance results, payouts, and pay-for-performance links
– A holistic picture, in which the whole is greater than the sum of the parts

In many ways, RiskMetrics uses these topics to expand, from an investor’s perspective, on the Staff’s two principal messages: (1) the CD&A should focus on how and why a company arrives at specific executive compensation decisions and policies, and (2) the manner of presentation matters — in particular, using plain English and organizing the tabular information in a way that helps an investor understand a company’s disclosure.”

Business Roundtable Reports on Corporate Governance

Recently, the Business Roundtable announced the results of its Fifth Annual Corporate Governance Survey. For the survey, the Business Roundtable polled it membership, consisting of 160 CEOs of large US companies. Among the most notable trends from the survey is an increase in independent directors (90% of respondents had boards that were at least 80% independent), as well as a significant jump in the number of companies that have adopted majority voting (82% of the responding companies).

The survey results also included the following:

– Sarbanes-Oxley spending continues to decline, with moderate decreases in costs expected with the new SEC/PCAOB internal controls guidance.
– 75% of CEOs serve on no more than one other public company board.
– A still surprisingly low 38% of companies responding indicated that board members met with shareholders in the past year.
– 71% of respondents expect their non-management or independent directors to meet in executive session at every board meeting.
– 40% of companies responding indicated that they adjusted the pay-for-performance element of senior executive compensation in the past year, in addition to 57% that reported doing so in 2006.

SEC Passes on Zions Bancorp Option Auction

As noted in this article from today’s Wall Street Journal, Zions Bancorp received a letter from the SEC’s Chief Accountant indicating that the Staff had no objection to the bank’s use of results from its ESOARS auction model for computing options expense under FAS 123(R).

As Broc noted in the blog earlier this year, Zions had received a letter in January from the SEC’s Chief Accountant indicating concurrence with their approach, but noting concerns with the auction process. The Council of Institutional Investors then wrote a letter to the SEC expressing concerns about whether market instruments such as ESOARS can appropriately value employee stock options. It appears that the Staff’s latest letter will clear the way for Zions to market its ESOARS to other companies as an alternative option valuation methodology.

– Dave Lynn

October 19, 2007

SEC Staff Uploads First Executive Compensation Comment Letter

Much sooner than I expected, here is the first comment letter uploaded on EDGAR from Corp Fin’s executive compensation review project. Based on a proxy statement that is related to a director election contest with Carl Icahn, this comment letter was sent to Motorola on August 21st and uploaded a mere six days later.

More likely than not, this uploaded comment letter is an outlier given the SEC Staff’s announcement that comment letters won’t be posted until at least 45 days after the review is completed (which really means the review is “closed” since it’s supposed to include the company’s responses) – so I don’t expect other letters from the review project to be publicly available for quite some time. [Note later in the morning: “poof,” the letter has been erased from the SEC’s website.]

By the way, finding these comment letters may be challenging – the Motorola letter doesn’t come up even if you limit your search to all “Uploaded” correspondence within the last six months. Let me know if you see any in your travels!

And one more aside: check out what happens when you click to enter Motorola’s investor relations webpage. You need to click through a disclaimer regarding the lack of a duty to update. Interesting…

Billy Broc’s Dream

Or is it a nightmare? Billy Broc remembers his precious law firm days in this week’s installment of “The Sarbanes-Oxley Report” entitled “Billy Broc’s Dream.” I hate those prickly comma situations…

[I highly recommend the new George Clooney movie entitled “Michael Clayton.” George plays a down n’ out lawyer whose responsibilities in the Big Firm is to serve as the “fixer.” The tagline is “The Truth Can be Adjusted,” but it’s actually a more realistic movie than I expected rather than typical Hollywood fare.

And for those still wishing that there ain’t no climate change, we have a record 34 days without measurable rain here in the DC area…]

Stoneridge Galore!

Last week, the US Supreme Court heard oral arguments in the monumental Stoneridge case dealing with secondary actor liability. Here is a transcript of the oral argument – and here are a bunch of blogs that covered the action:


The Race to the Bottom


The Volokh Conspiracy

SEC Actions

D&O Diary

10b-5 Daily

– Broc Romanek

October 18, 2007

PCAOB Proposes Internal Controls Staff Guidance for Smaller Companies

Yesterday, the PCAOB proposed Staff guidance – in the form of these “preliminary staff views” – on applying Auditing Standard No. 5 to audits of smaller, less complex companies. Here is the related press release. When the PCAOB adopted AS #5 in May, the Board committed to provide additional guidance on applying the standard to audits of smaller public companies.

The New RiskMetrics Group Structure

For me, it’s gonna take a while to get used to saying “RiskMetrics” instead of “ISS” in the wake of the company’s reorganization. In this podcast, Cheryl Gustitus, Head of Global Communications at RiskMetrics, describes how the recently announced reorganization at RiskMetrics Group impacts ISS, including:

– Where does ISS fit into the reorganization of RiskMetrics?
– How is the ISS division of RiskMetrics now organized?
– Will the policy-setting process of ISS change at all?
– How does that policy-setting process work?

Latest Post-Season Proxy Season Report

Recently, RiskMetrics issued its latest “Post-Proxy Season Report.” Among other notables, this report reveals that as of mid-September:

– 656 shareholder proposals had been voted upon this year, up from 581 at the same time last year.

– 107 shareholder proposals have earned a majority of votes cast, down from 116 proposals last year (two years ago, just 85 proposals received majority support).

– Corp Fin had issued 155 no-action responses allowing the exclusion of a shareholder proposal, up from 129.

– Broc Romanek