Monthly Archives: April 2008

April 30, 2008

The New Media: Time to Merge with Old Media?

Warning, today’s blog is cranky. If you’re not in the mood for moping, turn this channel off. For starters, I am bummed the “new” Wall Street Journal is less business and more politics/world affairs. In my opinion, Rupert Murdoch is killing the brand and the unique WSJ experience. In Monday’s edition, it seemed like only one article in Section A was devoted to business and the other two sections were limited to two pages in length. Looks like a fast – rather than a slow – death for those that read the WSJ for their business updates.

Moving on, I got a chuckle reading Prof. Steven Davidoff’s observation that most of the mainstream media mistook a registration rights offering registered with the SEC by employees of Apollo Global Management as a filing by the fund to go public. As the Professor noted, “it’s nothing of the sort.”

I definitely can relate since I deal with journalists on a daily basis in this job. Understandably, many of them don’t know the intricacies of SEC filings compared to those of us that have lived with them for our entire careers. Nor should they; their jobs force them to become generalists on dozens – if not hundreds – of topics.

The ability of bloggers to provide analysis of developments in their narrow niches is what makes the Web so great – and threatens the viability of mass media. Wearing my journalist’s hat a few months ago, I sat on a panel with major business reporters in New York and had some mild disagreements about whether bloggers could provide real value since they typically aren’t trained as journalists. Clearly some can (and of course, some can’t since there is no barrier to entry to become a blogger). Perhaps proving the point that some can, Professor Davidoff’s blog has recently become part of the NY Times’ DealBook empire. I imagine we will see more of the melding of non-traditional and “real” journalists in the near term…

As one member recently emailed me, we can file this under “Things That Make You Go Hmmm.”

And One More Thing…

Another thing I’ve noticed with old media: As all the traditional newspapers have undergone severe cuts in staffing over the past few years, the number of errors – both large and small – seem to have tripled. Check out this recent – and novel – press release from the SEC. It’s purpose is to point out an error in a NY Times article. It’s a rare type of press release and thankfully so, because if the SEC issued a press release for every error committed by a journalist covering this “space,” I imagine there would be more than a handful of folks in the SEC’s Office of Public Affairs.

Speaking of the NY Times, SEC Enforcement Director Linda Thomsen responded to a recent NY Times article that was critical of the Division’s efforts by delivering this public statement. Given that the SEC likely disagrees with all sorts of things written in the media, I imagine that this response is directed more broadly to the various quarters (including some members of Congress) that have been critical of Enforcement lately.

And speaking of the SEC’s Office of Public Affairs, I wonder who put them up to issuing this odd press release yesterday to announce that Corp Fin has made its recommendations to the Commission regarding proposals on the cross-border tender, exchange offer and business combination rules? That’s a new one – and I doubt we shall see a press release each time a rulemaking is sent to the 10th floor for consideration. Maybe OPA did add some bodies…

Survey: Auditors Asking to Review Board Minutes

Recently, in our “Q&A Forum,” a member asked what is the common practice when an independent auditor asks a client to review their board minutes. I provided my own thoughts on what that practice might be – but I pose the question to you to see if we can build a consensus:

Opinion Polls & Market Research

– Broc Romanek

April 29, 2008

Say on Pay: PIRC Says “Thumbs Down” for Aflac

Hat tip to Jim McRitchie’s for pointing out that PIRC – one of the proxy advisors in the United Kingdom – has issued a research report that recommends that shareholders vote against Aflac on its say-on-pay proposal at the company’s annual meeting. Given that the UK is one of those countries with experience regarding say-on-pay, I believe this is noteworthy for all of us. We have posted a copy of the PIRC report in the “Say on Pay” Practice Area on

So why is this development noteworthy? It probably won’t impact Aflac’s ability to garner majority support at next week’s meeting since it’s reported that RiskMetrics has recommended a vote in favor of Aflac’s pay package – but it might cause some companies that were contemplating allowing this type of non-binding resolution on their ballot to reconsider. And maybe the publicity of the PIRC report will cause Aflac to adjust its pay practices for next year (but I doubt it unless Aflac’s proposal doesn’t get majority support given what the CEO Dan Amos has said in his flurry of recent interviews where he is asked about his executive pay views). Both the RiskMetrics and Glass Lewis policies regarding “say on pay” are posted in the “Say on Pay” Practice Area.

Recently, I blogged my thoughts about “say on pay” – this WSJ article from yesterday quoted a number of governance experts that have similar concerns about unintended consequences from say on pay.

Say on Pay in Europe: Heating Up?

As noted in this RiskMetrics article, shareholders in the United Kingdom are challenging executive pay practices more than ever before during this proxy season. BP had 9% voted “against” and another 27% “withheld” – which is a high level compared to what has been happening in the UK during the past few years.

And in March, shareholders of Philips, a Dutch electronics company, rejected an amended executive pay plan; which was the first time that has happened. But it wasn’t a “first” for long as VastNed lost a vote a few weeks later and Corporate Express pulled its plan from the meeting agenda after pressure from shareholders, as noted in this IR Magazine article.

AFL-CIO’s “Executive PayWatch”

In this podcast, Vineeta Anand, Chief Research Analyst for AFL-CIO Office of Investment, talks about the AFL-CIO’s popular online tool “Executive PayWatch,” including:

– What is Executive PayWatch?
– What is the theme this year and what do you hope to accomplish?
– How do people typically use it?

– Broc Romanek

April 28, 2008

Apache Corporation v. NYCERS: Injunction Denied

Recently, I blogged about a case brought in the US District Court, Southern District of Texas, by Apache Corporation, who sought a declaratory judgment supporting its exclusion of a shareholder proposal submitted by the New York City Employees’ Retirement System. The case sought to enjoin a lawsuit brought by NYCERS in the Southern District of New York over the exclusion of a employment-related proposal by the Corp Fin Staff under the “ordinary business” basis of the SEC’s shareholder proposal rule (ie. 14a-8(i)(7)).

A few days ago, Judge Miller of the US District Court, Southern District of Texas ruled from the bench for Apache, granting Apache’s declaratory judgment. We have posted the Order and related Memo – even the trial transcript! – from the court in our “Shareholder Proposals” Practice Area.

Interestingly, Judge Miller’s opinion appears to stake out new territory from a judicial point of view. For the first time, a court has endorsed Corp Fin’s view that a proposal that involves some significant policy matters can nonetheless be excluded under Rule 14a-8(i)(7) to the extent that the proposal also deals with core ordinary business matters; here for example, advertising, marketing, sales and charitable giving. We’ll see if the Second Circuit ultimately follows suit (I believe the Texas case isn’t binding on the SDNY one, but under a res judicata theory, it’s likely the Second Circuit would recognize the SDTX’s decision and rule in favor of Apache).

Also interestingly, the Texas court didn’t take the bait offered by Apache with respect to the appropriate standard of review for SEC Staff no-action: Apache asked the court to find that a company that excludes a shareholder proposal in reliance on a no-action letter is entitled to a rebuttable presumption that such exclusion was proper. The court declined to adopt such an approach, however, concluding that Staff no-action letters are only persuasive – but not binding – authority.

Shareholder Proposals: Debunking a Conspiracy Theory

Recently, RiskMetrics ran a piece entitled “Spike in No-Action Requests Worries Investors.” In the article, Subodh Mishra notes that “issuers had challenged 33% of all governance-related proposals filed this year, compared with just 20% in calendar 2007. Challenges by issuers also are more likely to be successful this year than last. For example, 48% of last year’s requests for no action were granted, while this year’s figure so far stands at 69%, according to RMG’s analysis.”

It is interesting to look at the rate of success for exclusion requests – and I don’t remember seeing this type of analysis conducted for other proxy seasons. It’s good stuff. I do think companies were more willing to fight proposals this year. Anecdotal evidence indicates that more exclusion requests under Rule 14a-8(b) regarding proof of ownership were made compared to year’s past. In other words, companies used to be more willing to overlook the “technicalities” of whether a proponent was eligible to submit a proposal (eg. amount of securities held; length of holding period; proof of ownership). Not this year.

But I don’t buy into the notion that there was some sort of conscious SEC Staff decision to be more pro-management this year, even though that’s where the numbers could lead you. Rather, I would argue that the exclusion rate is a direct product of the types of proposals submitted this year and the types of arguments made. So I would not rush to judgment using a conspiracy theory (which other bloggers and journalists have done).

For example, one reason for the increase of exclusion requests granted likely relates to the fact that more companies implemented shareholder proposals when they were received – thus, quite a few proposals were allowed to be excluded as “moot” under Rule 14a-8(i)(10). So ironically, the number of exclusions may have risen because more companies did what shareholders wanted. Another likely factor for the higher exclusion rate is that Corp Fin granted more exclusions under Rule 14a-8(b) this year because companies were more picky about whether the proponent was eligible as noted above.

Perhaps all of this stuff would make for a fine academic paper that delves beyond the numbers into the specifics…

JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues

Tune in tomorrow for our webcast – “JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues” – during which Professors Elson, Cunningham and Davidoff will analyze the novel Delaware issues presented by the Bear Stearns transaction, including:

– What significant anti-takeover provisions are in the amended merger agreement?
– How does the provision work that calls for the parties to work in good faith to restructure the deal if Bear Stearn’s shareholders turn it down?
– What is the JPMorgan Chase guarantee – and how does it work? How about the NYC building option and the Section 203 provision?
– How valid are the attacks against the fairness opinions delivered in the deal?
– Why was there a discussion of a 39.5% share exchange and what would be the Delaware law on it?
– How about the abandoned, uncapped 19.9% option – was that valid under Delaware law?

To warm up for the program, check out Professor Davidoff’s analysis of the Form S-4 filed for the deal (which the SEC declared effective on Friday) as well as this WSJ article indicating that post-deal details will be announced soon.

– Broc Romanek

April 25, 2008

Parallel SEC/DOJ Proceedings Approved in the Ninth Circuit

It is a fact of life today that securities law violations are often investigated through parallel proceedings – in other words, independent investigations conducted by civil authorities and federal prosecutors relating to the same facts and circumstances. I can remember the days in the not too distant past (at least it seems not too distant) when it was nearly impossible to get the Justice Department interested in a federal securities law case, but Enron pretty much changed all of that.

Parallel proceedings present significant challenges, because the cooperation that is often so critical to a successful resolution of a civil proceeding brought by the SEC may very well increase a company’s (and its officers’ and directors’) exposure to criminal liability. While it is well settled that the government can conduct parallel proceedings, the latitude with which this can be done and the extent to which the SEC or another civil authority could “covertly” funnel evidence to a prosecutor was called into question a few years ago by the Federal District Court decision in U.S. v. Stringer, (408 F.Supp.2d 1083 (D. Or. Jan. 9, 2006). In that decision, the court found that prosecutors had engaged in misconduct by cloaking an ongoing criminal investigation with an SEC investigation, warranting dismissal of the indictment or suppression of the SEC-gathered evidence.

Recently, the Ninth Circuit reversed the District Court’s decision in U.S. v. Stringer, No. 06-30100 (9th Cir., April 4, 2008). The Court of Appeals found that no affirmative deception was involved, principally because the SEC had given each of the defendants a Form 1662 along with the request for evidence. Form 1662 (not to be confused with Form Catch-22) notes that the “Routine Uses of Information” gathered in an investigation include providing the information to state and federal law enforcement, self-regulating entities, foreign authorities, tax authorities, consumer reporting agencies, trustees and receivers, bar associations, and Congress. The form also provides a Fifth Amendment warning.

The Ninth Circuit relied heavily on the language of Form 1662 in finding that the defendants were adequately put on notice as to the potential parallel proceeding. Further, because the Form 1662 included a Fifth Amendment warning, the Court found a waiver of the defendants’ right against self-incrimination in the criminal case – given that the Fifth Amendment was not invoked in response to the SEC’s initial investigative request.

The Stringer decision reinforces the wide latitude that the SEC and prosecutors have in conducting their investigations – and highlights the perils of cooperation with the SEC. For more detailed analysis of the decision, take a look at the memos we recently posted in our “White Collar Crime” Practice Area.

Behind the scenes at the SEC, cooperation can also be a consideration when dealing with Corp Fin while an Enforcement investigation of a company is ongoing or contemplated. While Corp Fin is always sensitive to not being considered a “tool” for Enforcement to access information about the company and the conduct in question, it is still possible that information derived from the comment process, things said on conference calls, etc. could ultimately be shared with the Enforcement Division.

IFRS for U.S. Companies: On the Fast Track for Implementation?

Edith Orenstein noted yesterday in the FEI Financial Reporting Blog that an IFRS implementation plan for U.S. companies is moving along much faster than I would have ever expected. The blog notes: “In announcing the formation of the KPMG IFRS Institute, KPMG Chairman & CEO Tim Flynn stated: ‘The question about whether the world is going to global standards is no longer ‘if,’ but ‘when.’’ Flynn added, ‘The Securities and Exchange Commission (SEC) is expected to issue a rule proposal in the next few weeks outlining the manner, timing, and eligibility for some U.S. public companies to transition from U.S. Generally Accepted Accounting Principles (GAAP) to IFRS.'”

Given that the SEC already put out a concept release last Fall, it is likely that the rule proposals will be pretty well developed and there is probably a good chance that final rules will be adopted by this Fall. Perhaps this will give some larger US companies the joy of implementing IFRS and XBRL at the same time!

Farewell to Carol McGee

I want to send a “shout out” to my former Deputy Chief Counsel Carol McGee, who just left the SEC after 10 years in Corp Fin to become a Partner at Alston & Bird LLP. In my time at the SEC, Carol always provided me with truly wise counsel on every imaginable issue. I first met Carol when she was interviewing for a job in Corp Fin, and during the interview we began debating the relative merits of certain twentieth century philosophers – her preference being for Wittgenstein and mine for Sartre. Well, you can just imagine where that went…

Opinion Polls & Market Research

– Dave Lynn

April 24, 2008

Second Circuit Agrees Rule 16b-3 Available to Directors by Deputization

From Alan Dye’s “ Blog“: The U.S. Court of Appeals for the Second Circuit has affirmed the holding of a judge in the Southern District of New York that a director by deputization, including one that also is a ten percent owner, may rely on Rule 16b-3 to exempt its transactions with the issuer in Roth v. Perseus. Here is the opinion (the facts of the Roth case are described in this blog.) The Ninth Circuit had previously held that Rule 16b-3 applies to a director by deputization in Dreiling v. American Express Co..

The SEC filed an amicus curiae brief with the court, just as it did in Dreiling, arguing that Rule 16b-3 is available to directors by deputization. The court agreed, holding that the Commission’s view is neither inconsistent with Section 16(b) nor plainly erroneous and therefore is entitled to deference under Chevron U.S.A Inc. v. Natural Resources Defense Council. The court also upheld the validity of Rule 16b-3, holding that the rule is not arbitrary, capricious, or manifestly contrary to the statute.

The court was persuaded that the SEC had a legitimate rationale for the rule: a director’s or officer’s transactions with the issuer are subject to the fiduciary duties of the insider and the gatekeeping function served by the board or committee of non-employee directors. The plaintiff-appellant had argued that a director by deputization doesn’t owe the same fiduciary duties to the corporation that an elected director does and therefore should not be protected by Rule 16b-3. The court declined to address the extent of the fiduciary duties of a director by deputization, holding instead that the SEC could reasonably have concluded that the fiduciary duties of the director(s) appointed by the director by deputization were sufficient to justify the SEC’s position.

Alan’s blog has a new functionality: you can now input your email address (it’s the second box on the left side of the blog) so that you will be notified as soon as Alan has posted something new. Members of should sign up for this nifty service.

And yes, this notification service is available for this blog too. We’ve had this functionality for quite some time and thousands get this blog pushed out to them every day. Simply input your email address in the box to the left of this very text…

Time to Tune-up Your Insider Trading Policy: The RSA 21(a) Report

Last month, the SEC issued an Exchange Act Section 21(a) Report regarding Enforcement’s investigation of the Retirement Systems of Alabama (RSA). The “message” of the Report is one that likely seems obvious to all of us: have the policies, procedures, training and personnel in place to ensure compliance with the federal securities laws, including insider trading prohibitions. This is apparently a message that the SEC thinks warrants repeating through the unusual venue of a Section 21(a) report, which is probably enough to prompt most responsible companies to take a hard at their insider trading policies and procedures – and more importantly the actual understanding of those policies and procedures by employees, directors, etc. – in order to make sure that everything is operating effectively.

The situation described in the 21(a) Report is somewhat astonishing. The RSA, with more than $30 billion in assets under management, had no policies, procedures, training or compliance officer in place to make sure that it was complying with the federal securities laws in general or insider trading prohibitions in particular. The activities of the RSA’s employees, including its CEO (who has held that position for 30 years), showed a profound lack of knowledge – or judgment for that matter – when purchasing the shares of an acquisition target of one of their portfolio companies while confidential negotiations regarding the acquisition were ongoing. These trades were unusual in that the CEO directed them even though he was rarely involved in equity trading decisions and the target’s market capitalization was well below the RSA’s investment guidelines.

I think this Report points out something that it is often easy to forget for securities law practitioners – issues that seem completely obvious to us like the potential for insider trading violations may never even occur to others, including experienced business people. This is why policies and procedures are important, but perhaps more important is the process of educating employees about the law, the policies and procedures – and the serious implications arising from insider trading and other securities law violations.

This Report should give everyone responsible for compliance – no matter how big or small a company – an excuse to dust off that insider trading policy manual (or create on if you don’t have one) and figure out a way to refresh everyone’s memory about insider trading issues. An annual training exercise and reminder memoranda are always a good baseline, but you may need to do more to really reach people within the organization and leave a lasting impression.

For more information, check out our “Insider Trading Policies” Practice Area.

Why a Section 21(a) Report?

Section 21(a) Reports like the RSA report are a funny thing. It seems odd for the SEC to use a specific fact pattern – particularly where it did not feel it was appropriate to impose penalties – to communicate some broad policy statements, but that is usually what these reports are all about. In some instances, the purpose of the 21(a) Report is to put everyone on notice that the SEC is interested in pursuing Enforcement actions in a particular area in the future. There have only been a handful of 21(a) Reports over the past few years – you can see them all on this page at

In the RSA case, the SEC decided to not impose penalties because (1) RSA essentially sought to rescind the transactions with the sellers who sold RSA the stock while it was in possession of material nonpublic information; (2) any penalty would be paid out of the retirement system assets to the detriment of state and local employees; (3) a compliance program was established; (4) RSA and the CEO cooperated in the investigation; and (5) no individual profited from the conduct.

Instead, the 21(a) Report says that it seeks to “remind investment managers, public and private, of their obligation to comply with the federal securities laws and the risks they undertake by operating without an adequate compliance program.” But the lessons of the report should not be limited to investment managers, because just like RSA (which is not subject to SEC regulation as a broker-dealer or investment advisor), all public companies face the same risks – and potential liability under Exchange Act Section 21A – as a controlling person who fails to prevent insider trading. For this reason, I think that it is best to read the report broadly and use it as a catalyst for revisiting the effectiveness of insider trading compliance programs.

– Dave Lynn

April 23, 2008

Next Steps on the Credit Rating Fiasco

At yesterday’s hearing of the Senate Committee on Banking, Housing and Urban Affairs entitled “Turmoil in U.S. Credit Markets: The Role of the Credit Rating Agencies,” Chairman Cox defended the SEC’s implementation of the Credit Rating Agency Reform Act of 2006 and spelled out some possible new rulemaking efforts on the credit rating front.

In his testimony, Chairman Cox outlined the SEC Staff’s efforts in conducting ongoing examinations of the nationally recognized statistical rating organizations (NRSROs). Those efforts have included the review of thousands of pages of internal records and emails, public disclosures and rating histories by around 40 Staff members. While the examinations are not yet complete (a report is expected by early summer), Cox noted that the Staff has found so far that there was a substantial surge in ratings for structured finance deals from 2004 – 2006, with those deals involving increasingly complex products. The examination Staff’s preliminary observations have been that the “ratings process used to rate these products may have been less quantitatively developed, particularly as the products became more complicated and involved different types of loans, than was generally believed.” While the SEC is trying to avoid engaging in substantive regulation of the ratings process, it is interested in the adequacy of the NRSRO’s disclosure about their procedures and methodologies, and whether such factors as a desire to maintain or increase market share may have caused the NRSROs to be “less conservative” than their disclosed methodologies.

Now that the SEC’s NRSRO registration system is in place and other rules implementing the 2006 legislation are effective, the SEC is looking at other areas of rulemaking within its authority. Chairman Cox outlined the following possibilities:

1. Enhanced disclosure about ratings performance – this would include disclosures that allow market participants to better compare the ratings of one NRSRO with another.

2. Accountability for managing conflicts of interest – new rules might prohibit certain practices, as well as establish requirements that address potential conflicts that could impair the process for rating structured products (e.g., consulting services provided by NRSROs to issuers).

3. Annual reporting – new rules could required the NRSROs to furnish the SEC with annual reports describing internal reviews and how well the firms adhere to ratings procedures, manage conflicts of interest and comply with securities laws.

4. Enhanced disclosure of underlying assets – new rules may require disclosure of information about the assets underlying MBS, CDOs and other structured products so market participants could better analyze creditworthiness without the benefit of ratings (and to enhance the availability of data – and thus level the playing field – for subscriber-based NRSROs as compared to the “issuer pays” NRSROs).

5. Enhanced disclosure about ratings – new rules could also mandate enhanced disclosures about how the NRSROs determine their ratings for structured products, as well as ratings information that will make it possible for investors to distinguish between ratings for different types of securities.

6. Access to information – potential rules may seek to eliminate advantages (including access to information) that NRSROs following the “issuer pays” model may have over subscriber-based NRSROs.

7. SEC reliance on ratings – The SEC is revisiting its own reliance on ratings throughout its rules. This could be a big shift in the SEC’s rules, including those related to corporation finance.

These new rules could substantially change the ratings landscape, and most likely for the better. It certainly can’t get much worse.

For a great breakdown of the history behind securities ratings and what went wrong with the ratings on mortgage backed securities, check out Roger Lowenstein’s piece entitled “Triple-A Failure” which will be published in this Sunday’s New York Times Magazine.

PCAOB Adopts Audit Committee Communications and Tax Services Rule

Yesterday, the PCAOB announced that it had adopted new Rule 3526, Communication with Audit Committees Concerning Independence, and an amendment to Rule 3253, Tax Services for Persons in Financial Oversight Roles. The adopting release for these rules was posted shortly after the PCAOB’s open meeting. The rules changes are now off to the SEC for final action.

Rule 3526 will – if adopted by the SEC – supersede Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, and two related interpretations. The new rule will require registered audit firms – at the time of the initial engagement – to provide a detailed written description of all relationships between the firm and its affiliates and the issuer or persons in a financial reporting oversight role that may reasonably be thought to bear on independence. Registered audit firms will also be required to discuss the potential effects of these relationships with the audit committee. Similar communications will then be required annually.

The amendment to Rule 3523 will – if adopted by the SEC – exclude from the scope of that rule any tax services that are provided during the portion of the audit period that precedes the beginning of the professional engagement period. Under this change, tax services provided to persons in a financial reporting oversight role prior to the beginning of the professional engagement period would not necessarily impair a firm’s independence.

In other PCAOB news, earlier this week it was announced that Sharon Virag, Director of Technical Policy Implementation, will be leaving the PCAOB at the end of the month. Sharon was the project leader for the development of AS No. 5 and she recently participated in our webcast “The PCAOB Speaks: Latest Developments and Interpretations.” Best wishes for Sharon in her new position.

Options Backdating: Broadcom Settles

Last month the SEC settled an Enforcement action against Nancy Tullos, the former Vice President of Human Resources of Broadcom, for her involvement in the company’s five-year-long options backdating scheme – which resulted in Broadcom’s January 2007 restatement to include a whopping $2.22 billion of unreported compensation expense in its financials. I believe that was the largest restatement in the short and sordid history of options backdating.

Now the SEC has settled with Broadcom itself, and interestingly enough the SEC extracted only a $12 million civil penalty in addition to a permanent injunction. While this penalty is higher than the $7 million civil penalty paid by Brocade Communciations in its settlement of backdating charges, it is significantly lower than the $28 million civil penalty paid by Mercury Interactive. A number of the other companies charged with backdating-related violations paid no penalty whatsoever. It is still hard to say how the Commission arrives at these penalty amounts (even with the added transparency about the process issued a couple of years back), but certainly I think the Commissioners have not historically been big fans of imposing monetary penalties on corporations.

As noted in this article, the former CFO of Mercury Interactive Corp., Sharlene Abrams, was indicted on charges related to Mercury’s options backdating scheme. Abrams was charged with one count of income tax evasion and two counts of aiding and assisting in the preparation of false tax returns for two other Mercury executives. This is the third time an executive has been charged with tax evasion arising from options backdating.

– Dave Lynn

April 22, 2008

Auditor Liability Caps: Now Available in the UK

A persistent issue for auditors, public companies and their regulators in the wake of the 2002 collapse of Arthur Andersen is how do we prevent the Big 4 from becoming the Big 3 due to a catastrophic liability event? For some time now, auditors have called for the imposition of liability caps, and that approach has been debated by policymakers examining the issue. For instance, in 2006, the Treasury Department’s Committee on Capital Markets Regulation considered whether Congress should look into the possibility of protecting audit firms from catastrophic loss, either by creating a safe harbor for specified auditing practices or by setting a cap on auditor liability in some circumstances. Currently, the Treasury Department’s Advisory Committee on the Auditing Profession is considering the impact of auditor liability on the profession and whether any potential changes should be made to auditor liability regimes, with recommendations expected this summer. The European Union has also been studying the issue of auditor liability, and practices vary considerably among EU member states.

While the question of auditory liability protection is debated in the US and the EU, the UK has recently moved forward with changes to the Companies Act that permit auditor liability limitation agreements. As noted in this memo from Edwards Angell Palmer & Dodge, provisions effective earlier this month now permit auditors to enter into agreements with their clients that cap the auditor’s liability exposure to the company, so long as (1) the agreement does not limit the auditor’s liability to less than a “fair and reasonable” amount, and (2) the agreement is approved by the company’s shareholders. Under proposed guidance from the UK’s audit oversight body – the Financial Reporting Council – these types of agreements could be for a fixed limit based on a specified amount or formula, a proportionate share based on the auditor’s responsibility for a loss, or a mix of fixed and proportionate caps. The agreements may only cover one fiscal year, so they would be subject to shareholder approval on an annual basis.

While the UK approach is certainly interesting, I don’t think that it is likely to change the direction of the debate in the US. The first quarter of 2008 has come and gone without the roundtable on securities litigation reform that the SEC promised last summer, and it seems unlikely in the near term – particularly considering the ongoing sub-prime crisis and election year politics – that the issue will be taken up by Congress or the SEC.

Halloran to Leave the SEC

Yesterday, the SEC announced that Chairman Cox’s Deputy Chief of Staff and Counselor Mike Halloran will be leaving the SEC in May to return to private practice. Mike has had quite a bit of influence on the regulatory agenda at the SEC over the last one and a half years, perhaps most notably on the Commission’s and the PCAOB’s efforts to revisit the implementation of Section 404 of the Sarbanes-Oxley Act.

New 3rd Edition: Romeo & Dye Treatise

Peter Romeo and Alan Dye just wrapped up the 3rd Edition of their “Section 16 Treatise” and we have been mailing this two-volume set with thousands of pages to the many of you that ordered it. For me, it felt kind of like Christmas in April when a copy of the Treatise arrived at my door yesterday!

If you didn’t order this essential body of work, you can still have it rushed to you – try a no-risk trial to the Treatise today.

– Dave Lynn

April 21, 2008

Postponed: SEC Open Meeting on XBRL Proposals

Late last Friday, the SEC issued a notice postponing the Open Meeting previously scheduled for this morning. Now, the SEC will consider the use of interactive data in financial statements filed by public companies on May 14th at 10:00 a.m. Even with the postponement, the Staff will still meet its “Spring” deadline to have these proposals considered by the SEC, with expected adoption of implementing rules and a timetable still likely this Fall.

I can’t recall the last time an Open Meeting for a rule proposal was postponed on the business day before the meeting – generally I think that is a pretty extraordinary action. Perhaps the proposals were not quite “ready for prime time.”

Now that the Open Meeting has been moved to May, we are rescheduling our webcast – “XBRL: Understanding the New Frontier” – to July 16th.

Paulson Blueprint: An Orphaned Public Company Regulatory Function

One thing that struck me when reading the Treasury Department’s “Blueprint for a Modernized Financial Regulatory Structure” was that in the long term plans for financial regulation, the SEC’s current responsibilities over corporate disclosure, corporate governance, accounting and similar issues would be left behind in a “corporate finance regulator,” rather than being swallowed up into the Conduct of Business Regulatory Agency (“CBRA”) where most of the SEC’s other functions will go. [When naming this proposed new regulator, the drafters of the Blueprint obviously didn’t think too long and hard about the acronym they were creating, because usually reference to an undergarment in a new agency’s name is to be avoided.] This approach appears to be necessitated by the CBRA’s focus on financial services – the markets and financial intermediaries like brokers, investment advisers and mutual funds – rather than the reason for the existence of all those intermediaries, namely capital-raising for companies and liquidity for their shareholders. Under the Treasury proposals, the “legacy” SEC would continue to perform the function of corporate finance regulator in the optimal regulatory structure (perhaps just called the SC then, since exchanges would be regulated by the CBRA).

While the chances of these long-term proposals coming to fruition may be slim to none at this point, I still think that it is particularly troubling that corporate finance regulation is treated as an afterthought in the Blueprint, only five and half years after corporate governance, disclosure and accounting was front and center following enactment of the Sarbanes-Oxley Act. The proposals are short-sighted in that they largely ignore the fact that issues with respect to corporate finance are often integrally related to the financial services that the SEC regulates, and setting corporate finance regulation off in a tiny, orphaned agency that doesn’t have a “seat at the table” of the proposed “Big Three” regulators is doomed to failure.

To add further insult to injury, the proposals suggest that the Federal Reserve, in consultation with the corporate finance regulator, should be able to mandate additional public disclosures for federally chartered financial institutions that are publicly traded or part of a publicly traded company. The Treasury contemplates that such public disclosures could be included as a separate section of public reports, or embedded within an existing section such as Management’s Discussion and Analysis.

Hopefully, as the Treasury proposals and legislative proposals are hashed out over the next several years, the long term regulatory structure will be crafted around some solid principles of regulatory cooperation that focus on the “big picture,” rather than just regulating for the scandal du jour.

Securities Act Offering Integration

Test your skills with our new game – “Pro or Troll #8: Securities Act Offering Integration” – to see if you are up to speed on all of the lore and latest developments with every securities lawyer’s favorite topic – integration.

– Dave Lynn

April 18, 2008

Posted: Sample Advance By-Laws

In the wake of the two Delaware cases I blogged about Wednesday, companies need to review their advance by-law provisions. I have posted several samples of what they may look like in the wake of the new cases in our “Annual Stockholders’ Meetings” Practice Area.

Analyzing the DOJ’s Morford Memo

Last week, the NY Times ran this critical article about the growing use of deferred criminal prosecutions. It reminded me that I hadn’t yet blogged about the new Morford Memo, distributed internally by the Department of Justice a month ago. The Morford Memo provides guidance on corporate monitoring (eg. selection critieria, scope of responsibilities, terms). Here is the Morford Memo – and memos about it are posted in our “White Collar Crime” Practice Area.

In this 15-minute podcast, Gary DiBianco of Skadden, Arps provides some insight into the Morford Memo, including:

– What is the Morford Memo?
– What do the principles outlined in the Memo seek to address? What specific practices?
– What are the DOJ’s views on the duties of a monitor as expressed in the Memo?
– What does the Memo say about the monitor’s reporting obligations to the company and the government?
– What happens when a company disagrees with a monitor’s suggestions?

Congress remains skeptical of the DOJ’s unfettered discretion in this area. Rep. Frank Pallone (D-NJ) introduced legislation in January that would establish requirements for entry into deferred prosecution agreements.

The Treasury’s Restatement Study

Last week, Treasury Secretary Henry Paulson released a study on restatements that the Department commissioned last May when it began its look into reforming the capital markets. The study – “The Changing Nature and Consequences of Public Company Financial Restatements” – conducted by Professor Susan Scholz confirms what other studies have shown, that the number of restatements has soared over the past decade (although the restatements associated with fraud and revenue has declined since Sarbanes-Oxley was passed).

The numbers of restatements have dropped since the implementation of the requirement for an independent audit of internal controls of public companies, that provide reasonable assurance with respect to the accuracy of financial statements.

You can pluck out statistics from the Treasury’s study in this press release – and have a look-see at other studies about restatements in our “Restatements” Practice Area.

As noted in this article, a key focus for the SEC’s Advisory Committee on Improvements to Financial Reporting is restatements – some changes are bound to be recommended and ultimately acted upon by the SEC.

– Broc Romanek

April 17, 2008


I just put the finishing touches on our new newsletter – “” – which is a quarterly online publication. This newsletter is free, as well as all the issues for the rest of ’08. You simply sign-up online to be notified when the next issue is available (you also need to sign-up to be e-mailed an ID and password in order to access future issues).

Why this new newsletter? As you can see from the article titles in the Spring ’08 issue listed below, I felt there was a dearth of practical guidance on the cutting-edge – as well as the “bread ‘n butter” – issues confronted by those involved in investor relations, shareholder services and corporate governance today. Take a look and let me know what you think:

– The E-Proxy Experience: Practice Pointers and Pitfalls to Avoid
– The Coming Online IR Campaigns: The Future of Director Elections
– The Regulation FD Corner
– Ten Steps to a Clawback Provision with “Teeth”
– Notables: All the Latest

Washington Mutual: Case In Point

The jaw-dropping results from the Washington Mutual annual meeting this week are timely in that they bolster my argument that companies need to learn how to “campaign” during the proxy season cycle. These arguments – and specific recommendations about how to campaign – are in my piece entitled “The Coming Online IR Campaigns: The Future of Director Elections” (sign-up to obtain your free copy).

So what happened at the WaMu meeting? Here is what has been reported so far:

– One director resigned, Mary Pugh, who was the Chair of the company’s Finance Committee.

– Some reports state that all director nominees received majority support (eg. see this article); others are reporting that three nominees failed to reach a majority. Change to Win’s press release states that one director had 51.2% withheld, another had 50.9% withheld and Ms. Pugh had 61.9% withheld.

– Change to Win called on the WaMu board to immediately release full election results and demand the resignation of any directors who failed to win majority shareholder votes. WaMu then issued this press release that contains preliminary results – notice the paragraph at the bottom that leads one to believe that the difference in the three challenged nominees getting majority support was the presence of broker non-votes.

– With a vote of 51%, shareholders supported a precatory proposal to appoint an independent director as chair.

– In February, WaMu revised its incentive program in a way so that mortgage-related credit losses and foreclosure costs could have been cast aside when awarding management’s performance bonuses. Shareholders were not pleased – and WaMu’s CEO announced at the annual meeting that the board would soon revise the pay program to hold management more accountable for credit-related losses.

The campaign against WaMu has been intense during the past month, fueled by plenty of online tactics. For example, Change to Win launched this blog that targeted the company. Yes, the future is now. Read the Spring ’08 issue of today to learn how to protect yourself. ] I also recommend reading this new memo from Davis Polk about how the ’08 proxy season is faring so far.]

Corp Fin’s New M&A Chief: Michele Anderson

Congrats to Michele Anderson, who was promoted to Corp Fin’s new Chief of the Office of Mergers & Acquisitions. Most recently, Michele served as a Legal Branch Chief in the Office of Telecommunications – but she spent time in OM&A a few years back. She replaces Brian Breheny, who was promoted to Deputy Director a few months ago.

– Broc Romanek