Monthly Archives: June 2008

June 16, 2008

Survey Results: Earnings Guidance

Broc and I were at the National Investor Relations Institute Annual Conference in San Diego last week, and among the perennial topics for that group are the issues of how often companies should provide earnings guidance and whether companies should provide guidance at all. Here are the results of our recent survey on these topics:

1. Does your company:

– Provide monthly earnings guidance – 0.0%
– Provide quarterly earnings guidance – 18.3%
– Provide annual earnings guidance – 28.2%
– Provide quarterly and annual earnings guidance – 19.7%
– Provide earnings guidance selectively – 5.6%
– Not provide earnings guidance at all – 28.2%

2. If your company provides earnings guidance, have you considered (within the last 2 years):

– Reducing the frequency with which guidance is provided – 54.3%
– Increasing the frequency with which guidance is provided – 5.7%
– Discontinuing the practice of providing earnings guidance – 40.0%

3. If your company provides earnings guidance, have you considered (within the last 2 years):

– Increasing the detail of the guidance provided – 15.2%
– Decreasing the detail of the guidance provided – 37.0%
– Making no change to the detail of the guidance provided – 47.8%

4. If your company has discontinued earnings guidance, were the results:

– No changes can be attributed to discontinuing guidance – 43.7%
– Increased stock price volatility – 6.3%
– Reduction in analyst coverage – 6.3%
– Shift away from a short-term, quarter-to-quarter focus – 18.7%
– It is difficult to judge the impact of discontinuing guidance – 25.0%

New Survey: Audit Committees and Earnings Releases

We last conducted a survey on audit committees and earnings releases in August 2005 (here are those results). Practices appear to have changed since then; to determine the extent of change, we have repeated many of that survey’s questions in our new quick survey on “Audit Committees and Earnings Releases.” Please take a moment to answer the five survey questions.

The Latest Compensation Disclosures: A Proxy Season Post-Mortem

Join me, Mark Borges and Ron Mueller tomorrow for this webcast – “The Latest Compensation Disclosures: A Proxy Season Post-Mortem” – to hear all the latest about the proxy disclosures filed with the SEC over the past few months. Then, a week later, catch the companion webcast: “The Consultants Speak: How the Latest Compensation Disclosures Impacted Practices.”

– Dave Lynn

June 13, 2008

The CSX Opinion is In!

From the blog: On Wednesday, in CSX Corp. v. The Children’s Investment Fund Management, Judge Lewis Kaplan of US District Court (SDNY) delivered his anxiously awaited opinion finding that the two plaintiff activist funds violated the securities laws by not disclosing their positions and intentions many months before they did.

However, Judge Kaplan also ruled that there was nothing effective that he could do and he didn’t bar the funds from voting their shares at CSX’s upcoming annual meeting. And in his fine analysis, Professor Steven Davidoff notes that it is unlikely the SEC will pursue an enforcement action given the letter submitted to the court from Corp Fin. Here is a NY Times article – and here is a WSJ article.

Here is an additional tidbit – the NY Times’ Andrew Ross Sorkin wrote his column Tuesday about how CSX is a case study in how not to respond to a proxy fight…

COSO Releases Exposure Draft on Internal Control Monitoring

Just in case you haven’t received enough internal control guidance, last week the Committee of Sponsoring Organizations of the Treadway Commission announced the release its exposure draft: Guidance on Monitoring Internal Control Systems. The purpose of this new guidance is to more fully develop the monitoring component of the guidance in COSO’s Internal Control – Integrated Framework.

COSO initiated this project “based on observations that many organizations were not fully utilizing the monitoring component of internal control” – which became much more noticeable as requirements for internal control assessments were implemented around the world. COSO had issued a discussion paper on the ongoing monitoring of internal controls in September 2007, and feedback on that paper was used to develop the concepts in this exposure draft.

The guidance is built around the concept that monitoring involves the key elements of:

– establishing a foundation for monitoring;
– designing and executing monitoring procedures that are prioritized based on risk; and
– assessing and reporting the results, including following up on corrective action where necessary.

The comment period for the exposure draft ends on August 15, 2008.

May-June Issue of The Corporate Executive

We have just mailed the May-June issue of The Corporate Executive, which includes a bunch of follow-up pieces regarding net exercises and analysis of the SEC Staff’s ongoing commenting on executive compensation disclosures. Specifically, the issue includes articles on:

– Your Questions on Net Exercises Answered
– Follow-Up on Net Exercises: Voluntary or Mandatory?
– Cash Flow Issues from Net Exercises
– Technical Questions Related to Exercise Transactions
– ISOs and Net Exercises
– Modifying Stock Options After Termination
– What to Expect from the SEC After the 2008 Proxy Season
– More Comments on the Way: Key Executive Compensation Disclosure Issues

Take advantage of a “Half Price for Rest of ’08” no-risk trial to have this issue sent to you immediately.

– Dave Lynn

June 12, 2008

SEC Proposes Credit Rating Reforms

As I noted in this blog from back in April, some major changes have been under consideration for credit ratings. Yesterday, the SEC proposed the first two parts of a three part package of proposals targeted at reforming the credit ratings business. Here is the press release announcing the proposal, Chairman Cox’s opening statement, and the statement of Commission Atkins. The third set of proposals is slated for consideration on June 25th.

One set of recommendations is focused on regulating some troubling practices of the NRSROs, including rules that would:

– prohibit the issuance of ratings on structured products unless information about the assets underlying the products is available;

– prohibit credit rating agencies from structuring the same products that they rate;

– require that credit ratings (and subsequent rating actions) be made publicly available;

– prohibit anyone who participates in determining a credit rating from negotiating the fee that the issuer pays for it;

– ban gifts from those who receive ratings to those who rate them in any amount over $25 (that is a pretty low threshold!);

– require publication of performance statistics over 1, 3, and 10 year periods within each rating category in order to facilitate competitive comparisons across NRSROs;

– require disclosure about reliance on due diligence of others in order to verify the assets underlying structured products;

– require disclosure of how frequently credit ratings are reviewed, whether different models are used for ratings surveillance than for initial ratings, and whether changes made to models are applied retroactively to existing ratings;

– require an annual report of the number of ratings actions, along with an XBRL database of all rating actions maintained on the agency’s website;

– require public disclosure of the information a credit rating agency uses to determine a rating on a structured product, including information on the underlying assets; and

– require documentation of the rationale for any significant “out-of-model” adjustments.

The second set of proposals (approved by a 2-1 vote, with Commissioner Atkins dissenting) is focused on differentiating ratings issued on structured products from those issued on bonds. The SEC proposed that such differentiation might occur either through the use of different symbols – such as attaching an identifier to the rating (maybe they should adopt the “skull and crossbones” approach used by the Pink Sheets) – or by issuing a report that discloses the differences between ratings of structured products and other securities.

The proposals scheduled for consideration on June 25th will focus on revising the broad range of SEC rules that look to credit ratings. The concern expressed by some is that, by referencing the credit ratings in the SEC’s rules, the government’s imprimatur is somehow implied. On the Corp Fin side, this would of course mean looking at things like the use of credit ratings in determining eligibility to use Form S-3.

This first round of proposals is out for a very short comment period – only 30 days – perhaps reflecting the accelerated pace of SEC rulemaking as we rapidly move through 2008. It is hard to imagine that the SEC will be able to get really thoughtful comments on these major proposals within such a short timeframe.

Corp Fin Guidance on the Filing Review Process

The Corp Fin Staff recently posted some helpful guidance detailing its process for reviewing filings, including information about the structure of the Operations offices and how to “appeal” a Staff determination.

You can refer to our SEC Staff Organization Chart for more information on the line-up of Corp Fin’s Staff, as well as the telephone numbers for each of the Offices.

On The Way: Romeo & Dye Section 16 Deskbook

For those of you that subscribe to the popular Romeo & Dye Section 16 Annual Service, you will be happy to hear that Peter and Alan have finished the 2008 edition of the Section 16 Deskbook – and it will be dropped in the mail shortly. If you are not yet a subscriber, try a no-risk trial now (or if you haven’t renewed, it’s time to do so).

– Dave Lynn

June 11, 2008

The Latest Developments for Special Litigation Committee Practice

As Travis Laster notes, a recent decision has significant implications for special litigation committee practice:

In Sutherland v. Sutherland, C.A. No. 2399 (Del. Ch. May 5, 2008), Vice Chancellor Lamb denied a motion to terminate filed by a single-member SLC, despite finding that the SLC member was disinterested and independent, on the grounds that the SLC did not conduct an adequate investigation. By my count, this is only the fourth Delaware decision to reject an SLC’s motion to terminate and only the second to do so on the basis of an inadequate investigation, as opposed to on the basis of lack of independence.

Key practice points include:

1. Vice Chancellor Lamb rejected the argument that the SLC member was not independent because he was paid his hourly rate for conducting the investigation. Questions about SLC member compensation frequently arise, and the Sutherland decision indicates that paying an hourly rate should be acceptable.

2. Vice Chancellor Lamb was not troubled by the fact that the SLC’s counsel and the SLC did not retain their notes from witness interviews. Prior SLC rulings differed on whether notes of interviews should be retained and whether they would be subject to production during discovery, although at least one decision supported the general practice of not retaining notes. The Sutherland case upholds the general practice in this area. However, because the failure to retain interview notes potentially implicates spoliation issues, practitioners should continue to be cautious, particularly if their actions will be reviewed by courts in jurisdictions other than Delaware.

3. Despite his ruling on the underlying interview notes, Vice Chancellor Lamb appeared quite troubled by the cursory nature of the interview memoranda prepared by the SLC’s counsel. The Court noted that the summaries were “perfunctory” and typically recorded only the questions or topics of discussion, but not the interviewee’s answers. The Court remarked that “Without this information, the Court is unable to ascertain the reasonableness of the SLC’s investigation.”

4. Vice Chancellor Lamb reiterated his concern, expressed in an earlier opinion, that the SLC’s report was “wholly devoid of citations to key documents or interview summaries.” (18 n.34). The Court also noted that “the SLC did not enter any of the underlying documents, interview summaries, affidavits, or deposition transcripts into the record until it filed its reply [brief]. … Needless to say, these facts do not enhance the court’s confidence in the SLC. Not only does the lack of a record hinder the court’s, and the plaintiff’s ability to scrutinize the SLC’s good faith, independence, and reasonableness, it also suggests that the SLC has not taken its obligation seriously and has not acted in
good faith.”

5. Vice Chancellor Lamb expressed concern that the SLC report referred to exculpatory evidence for certain expenses that were the subject of the investigation but did not mention other, problematic evidence. The Vice Chancellor noted that the SLC member and SLC counsel both stated that they were aware of the expenses, yet they were not addressed in the report. In the Court’s words, “[t]he incongruity between omitting analysis of the large, possibly suspicious payments, yet referencing the innocent, generally available discount, raises significant questions as to the good faith of the SLC’s work.”

Practitioners advising or considering the use of an SLC should pay careful attention to the Sutherland case. Most significantly, the opinion indicates that interview summaries should contain significant detail and that the SLC report should cite to evidence and underlying documents, and not merely provide an unsupported narrative.

Even More on Special Litigation Committee Practice

More from Travis Laster:

In the wake of Vice Chancellor Lamb’s Sutherland decision rejecting a special litigation committee’s motion to terminate a derivative action, the SLC moved for reconsideration, and the Vice Chancellor denied the motion in this new decision.

Two points are worth noting for practitioners who advise SLCs:

First, the Court stated that “the touchstone of good faith in the context of a special litigation committee report is its demonstrated willingness to deal openly and honestly with all relevant information.” The Court found that the destruction of interview notes by the SLC, after using the notes to prepare cursory and incomplete interview summaries, undermined the Court’s confidence in the SLC’s actions.

In his prior decision, Vice Chancellor Lamb held that it was not improper to destroy interview notes. Nevertheless, the clear lesson is that if an SLC decides not to retain interview notes, the interview summaries should be considerably more detailed than might otherwise be required if notes are retained and produced. This ruling dovetails with Chancellor Chandler’s holding in Ryan v. Gifford, where he required an investigative committee to produce its interview summaries, notes, and communications with counsel where the committee had not prepared a report and there was no other factual record of what the committee did.

Second, the Court stated that “the SLC was required to investigate the claims in the case, not merely the specific allegations [the plaintiff] made in her complaint.” This is significant because it makes clear that an SLC investigation cannot stop with the allegations of the complaint, but must explore more broadly into the merits of the underlying claims. This may require the SLC to investigate issues that the plaintiff did not identify. Although parsing the complaint can be a way to sidestep difficult issues, the Sutherland decision indicates that the Court of Chancery will not look kindly on such an approach.

The fact that an SLC will have a duty to explore beyond the narrow allegations of the complaint reinforces the need for a board of directors to think carefully before creating an SLC. Put simply, it is not always clear when an SLC is created where its investigation will lead or end. While an SLC can be a powerful device to address derivative litigation, it should not be the knee-jerk response to the denial of a motion to dismiss.

The Perils of Naked Short Selling

As Dave recently blogged, the SEC proposed an anti-fraud rule for naked short selling a few months ago. In this podcast, Dave Patch, Founder of, discusses naked short selling, including:

– What do you see as the most important short issues that we face today?
– How is the SEC addressing those issues?
– What do you think the SEC should be doing?

– Broc Romanek

June 10, 2008

The “B” Corporation: Duties to Constitutiencies Beyond Shareholders

From Keith Bishop: A few weeks back, a reporter called me about “B” corporations; if you haven’t heard of them, here is an article about the subject. “B” stands for “beneficial.” Proponents hope that the “B corp.” logo will eventually become a well-known seal of approval for socially responsible businesses.

In California, the proponents of B corporations have introduced a bill – AB 2944 – that would explicitly permit directors to consider other constituencies in considering the best interests of the corporation. I found the bill analysis particularly interesting in its reference to the Chicago Cubs and Rutgers (I believe that the case referred to in the legislative analysis is Shlensky v. Wrigley, 95 Ill. App. 2d 173, 237 N.E. 2d 776 (1968)).

As noted in the article, the use of B corporations would have interesting implications in acquisitions since the board of a B corp. could weigh considerations other than financial ones to accept an offer. Learn more about B corps at

Options Backdating: Cases Now Proceeding

From Adam Savett in the RiskMetric’s “Governance Blog“:

Back in February, we took a quick look at the scorecard in the options backdating litigation, tallying up the settlements and dismissals, among other things. In our earlier review, of the 36 options backdating cases that have been filed as securities class actions, 7 had settled and 3 had been dismissed.

Run the clock for a few months, and 9 of those cases have now been dismissed and 9 have now settled. The nine settlements total $255.58 million, for an average of $28.4 million. As noted earlier, these cases have settled much more quickly on average, than other cases. The nine cases have settled in an average of just 440 days. Removing the outlier, Mercury Interactive, which was filed earlier and added the options backdating allegations in a later
amended complaint, drops the average time from filing of initial complaint to tentative settlement for the remaining 8 cases to 397 days.

And the ratio of settlements to dismissals is somewhat out of line with historical averages as well. Most studies (and a quick check of our database) indicate that the percentage of new securities class actions that are dismissed is between 33-40 percent. With this group of cases, we can look at the data two ways. Dismissals as a percentage of total cases or dismissals as a percentage of cases that have reached a final, or quasi-final resolution.

Under the former analysis, exactly 25% of these cases have been dismissed. That number is artificially low, as not all of the cases have yet had a ruling on the motion to dismiss. Under the latter method, 50% of these cases have been dismissed. This number is artificially high, as a number of these cases have already survived a motion to dismiss. In any event, things remain interesting in the sometimes long-forgotten world of options backdating.

And law firm lawyers need to watch out. As noted in this article, some firms are being named as defendants in these backdating lawsuits.

An Overwhelming Response

Last week, we announced our new upcoming comprehensive treatise of executive compensation disclosures – Lynn & Romanek’s “The Executive Compensation Disclosure Treatise & Reporting Guide” – and the response was overwhelming.

We want to clarify that to obtain the “Conference Attendee” discount for the new Treatise, you need to register for one of the October Conferences before you order the Treatise. And since the early bird discount for the Conference expires on June 30th, you will want to register for those Conferences now:

– “Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference” & “5th Annual Executive Compensation Conference” (10/21-22 in New Orleans or via Nationwide Video Webcast)

– “16th Annual NASPP Conference” (10/22-24 in New Orleans)

– Broc Romanek

June 9, 2008

Disclosing Swaps: SEC Staff Takes a Position in CSX Lawsuit

This is worth repeating from Friday’s Blog: As the conclusion of one of the more closely-watched cases in recent years in the M&A area draws near (see this IR Magazine article for background; Alan Dye also riffed on this Friday in his Blog), a number of amicus curiae filings were made available last week, including a letter from Corp Fin Deputy Director Brian Breheny (as transmitted by the SEC’s General Counsel; this is not a Commission amicus brief). We have posted them in the “M&A Litigation Portal” on, as follows:

SEC General Counsel’s Brian Cartwright Transmittal Letter
SEC Corp Fin Deputy Director’s Brian Breheny Letter
Prof. Bernard Black’s Response to SEC Staff Letter
ISDA/SIFMA Amicus Curiae Brief

Here is some analysis from Cliff Neimeth of Greenberg Traurig: In a pending litigation being watched closely by the public M&A bar, institutional activists and target issuers alike, this past Wednesday, in correspondence submitted by Corp Fin Deputy Director Brian Breheny to U.S. District Court (SDNY) Judge Lewis Kaplan, Brian endorsed the view of activist hedge funds – The Children’s Investment Fund (“TCIF”) and 3G Capital Partners (“3G”) – that they were not required under Regulations 13G or 14A to disclose their approximate 12% economic stake in Jacksonville, Florida-based railroad operator CSX Corp. until months after they entered into these arrangements. The hedge fund defendants previously announced their intention and presently intend to elect a short-slate of their five nominees at CSX’ annual meeting scheduled for later this month.

At issue, among many other aspects of the litigation, is the fact that TCIF and 3G were parties to elaborate “swap” and cash-settle derivative arrangements with investment bank counterparties, and that the nature of these contracts did (and do) not confer upon TCIF and 3G any shared or sole voting power over the underlying equity securities. Accordingly, in their view, such arrangements fall outside of the ambit of Section 13(d) and Regulation 13D thereunder until such time as these arrangements are converted into beneficial voting positions.

Although TCIF and 3G, on numerous occassions, announced to the investment community and to CSX directly that they were parties to the swaps and, in fact, made H-S-R (pre-merger notification) filings with the FTC, the absence of a detailed Schedule 13D filing (and subsequent amendments) allegedly enabled them to conduct (over a period of months) a broad range of “coordinating activities” with other institutional holders of CSX, to execute various plans, arrangements and understandings relating to control of CSX, and to otherwise engage in undisclosed “group” activities.

Brian Breheny (expressing the Staff’s position of the appropriate interpretive legal standard and not the position of the SEC’s Commissioners) stated in his letter to Judge Kaplan that “the presence of economic or business incentives that the [swap counterparty] may have to vote the shares as the other party wishes” is insufficient to create the beneficial acquisition of voting power in respect of such shares.

If Judge Kaplan agrees with TCIF’s and 3G’s (and indirectly, Breheny’s amicus) interpretation of the legal standard for disclosure, this would have significant implications for hedge fund activist transaction planners and target companies. If he rules in this direction, it is not unlikely that this may prompt the SEC to accelerate its current assesment of whether Regulation 13D should be amended to broaden its reach to cover these cash-settled (synthetic) arrangements that have become more commonplace over the past several years.

Coupled with the SEC’s e-proxy regime, the current slowdown in traditional economic M&A activity, and the recent Delaware Supreme Court and Delaware Chancery Court decisions in Openwave-Harbinger Capital, Jana Partners-CNET, Levitt Corp.-Office Depot and TravelCenters-Brog (with respect to the efficacy of the advance notice by-laws in those cases), this continues to help fuel an unprecedented level of institutional activism and control contest activity for the forseeable future. This also underscores the need for corporate issuers to examine their “shark repellents” and defensive arsenal.

Broadridge’s Latest E-Proxy Stats

In our “E-Proxy” Practice Area, we have posted the latest e-proxy statistics from Broadridge. As of April 30th:

– 566 companies have used voluntary e-proxy so far (a big leap from 283 at the end of March – understandable since proxy season is in full swing)

– Size range of companies using e-proxy varies considerably; all shapes and sizes (eg. 30% had less than 10,000 shareholders)

– Bifurcation is being used more as the proxy season progresses (but still not all that much); of all shareholders for the companies using e-proxy, now over 10% received paper initially instead of the “notice only” (up from 5% at the end of February)

– 0.85% of shareholders requested paper after receiving a notice; this average is up from 0.45% at the end of March

– 57% of companies using e-proxy had routine matters on their meeting agenda; another 30% had non-routine matters proposed by management; and 13% had non-routine matters proposed by shareholders. None were contested elections.

– Retail vote goes down dramatically using e-proxy (based on 164 meeting results); number of retail accounts voting drops from 21.2% to 5.4% (a 75% drop) and number of retail shares voting drops from 34.3% to 15.8% (a 54% drop)

For the next few days, Dave and I are out speaking in San Diego at the NIRI Annual Conference. My panel deals with e-proxy and I’ll be doing my “usability” bit again – particularly regarding how the proxy card/VIF looks. Take a gander at how this sample (posted in our “E-Proxy” Practice Area) looks like for registered holders. Not too bad. And I’ll be discussing all the other e-proxy related developments that I haven’t yet had a chance to blog about…but will do so in the next few weeks.

And even though he can’t be there himself, Dominic Jones is helping collect Web 2.0 thoughts from conference attendees as it happens. Pretty wild.

Winning the World Series: Cubs Worth More? Or Less?

Friday’s Deal Journal from the included an interview with an economist about how much more the Chicago Cubs would be worth if they won the World Series this year (they are red hot and it’s been 100 years since they last won).

The interview is short and perhaps not complete – but in my opinion, the Cubs would be worth less in the long run if they won. Part of their national mystique is that they are perennial losers. “Maybe next year” is the fan mantra. As someone who grew up down the street from Wrigley Field at a time when they “had it in the bag” – the late ’60s/early ’70s – I personally don’t want to see the streak end…

Speaking of sports, I was bummed to discover in this WSJ article that “Gino” is dead. The “Gino dance” is all the rage at Boston Celtics games this year, based on a clip from a ’70s American Bandstand episode that shows a dancer wearing a “Gino” T-shirt. I went to a game in Boston this year to experience it for myself, but I had seen this clip on YouTube before I went. It’s a classic.

– Broc Romanek

June 6, 2008

Welcome to Dan Greenspan!

We’re excited that Dan Greenspan has left the SEC to join our staff! Dan spent five years at the SEC, spending the bulk of his time in Corp Fin, including a lengthy stint in the Office of Rulemaking. During the past six months, he toiled as Senior Special Counsel in the Office of the General Counsel. Dan was one of the key players during the SEC’s executive compensation disclosure rulemaking in ’06. He worked for seven years in private practice before his time at the SEC.

Dan nailed his interview when he showed up wearing an Elvis wig and holding a fake cigarette. A lesson for you kids out there. Dan is up and running in his new work clothes – and you can congratulate him at dan (remove the space after “dan” before sending).

The PCAOB’s Newest Board Member: A History Lesson

Several days ago, the SEC appointed Steven Harris to the PCAOB’s board. Steven was a former long-time Senate Banking Committee official, who more recently served as Senior Vice President and Special Counsel of APCO Worldwide.

Steven is the first Hill person to be named to the Board. However, that is not a foreign concept for SEC Commissioners. Current SEC Commissioner Kathy Casey was Staff Director and Counsel for the Senate Banking Committee when she was appointed last year. And the Commissioner I worked for a decade ago – Laura Unger – also came directly from the Senate Banking Committee.

Going back further, Rick Roberts was a former Hill staffer (although technically he left Senator Shelby’s office and went to a law firm for a short while before becoming a Commissioner in the early ’90s). In the ’80s, Lindy Marinaccio was an aide to Senator Proxmire when he was appointed by Reagan. In the ’70s and early ’80s, John Evans served two terms after coming from the Senate.

Then there are the Commisioners who were White House aides when appointed: Joe Grundfest, Richard Breeden and Paul Carey. Given Congress’ intense interest in the markets lately, any of this is not a bad background to have, as navigating Capitol Hill can be tricky. Thanks to Jack Katz for his endless knowledge of SEC history!

Closing Time: When the Founder is Ready to Sell

We have posted the transcript for the webcast: “Closing Time: When the Founder is Ready to Sell.”

– Broc Romanek

June 5, 2008

Lynn & Romanek’s “The Executive Compensation Disclosure Treatise & Reporting Guide”

Okay, you now know why Dave and I haven’t been making silly videos lately – we have been busy jamming on a comprehensive treatise of executive compensation disclosures – Lynn & Romanek’s “The Executive Compensation Disclosure Treatise & Reporting Guide” – so that we can get it into your hands by Labor Day. This thing will be massive: over 1000 pages and is full of explanations, annotated sample disclosures, analysis of possible situations that you may find yourself in, etc.

After you order the Treatise, you will also receive quarterly Update newsletters – so that we can give you the latest practice tips at the crucial moments you need them. And once the Treatise is done, those that order the hard copy also get access to an online version of the Treatise (and newsletters). We haven’t yet figured out the URL for the online version – suggestions are welcome. Here are FAQs about the Treatise.

Order your Treatise now so we can rush it to you right after Labor Day; there is a reduced rate if you are attending any of our Conferences. Order online – or here is an order form if you want to order by fax/mail. If at any time you are not completely satisfied with the Treatise, simply return it and we will refund the entire cost.

Completed the Set: The SEC Staff’s Executive Compensation Comment Letters

As the Corp Fin Staff has nearly finished uploading the 350 comment letters from its executive compensation review project last Fall, we have put the finishing touches on providing links to all the comment letters and responses in the “SEC Comments” Practice Area. Thanks to Dave for the heavy lifting on this one. Note that it might be missing one or two…

RiskMetrics’ “Explorations in Executive Compensation”

Recently, RiskMetrics has put out a draft – and lengthy – set of white papers entitled “Explorations in Executive Compensation.” The project is intended to spark constructive dialogue about executive pay issues and I really encourage you to read their papers and provide comments.

The first white paper – “Considerations” – defines and puts into context the basic elements of U.S. executives’ pay packages, with special attention paid to emerging key considerations for investors in evaluating pay and equity plans in particular. The second one – “Innovations” – offers a pair of new methods of looking at critical issues in executive pay: peer group benchmarking and and the degree of alignment between the risks borne by investors and by shareholders.

SEC Petition: Disclosure about Consultant Conflicts

As I prepare to speak at a director’s college next week on executive pay, I read this recent petition from a group of 21 large institutional investors to the SEC that seeks to require companies to disclose all fees associated with consultant engagements for a single company and any ownership interest a consultant working for the compensation committee may have in the parent consulting firm. This disclosure would be made in proxy statements.

I’m still not convinced that consultant conflicts routinely impact CEO pay levels – and I definitely believe there are many other areas in the CEO pay process that are in greater need of fixing, with a much higher priority. Here is some food for thought – a recent study that concludes that potential conflicts of interest between companies and consultants are not a primary driver of excessive CEO pay (note there are studies that have opposite findings).

– Broc Romanek

June 4, 2008

More on Healthcare Shareholder Proposals

Back in March, I blogged about Corp Fin’s new position on health care proposals. Now, the NY Times has caught up with this development in this recent article. The article is pretty good and discusses the Staff’s willingness to allow these types of proposals in the proxies this year, but it neglects to mention the instances where the staff granted no-action relief and allowed their exclusion.

The AFL-CIO has been one of the primary proponents in the health care area. In this podcast, Rob McGarrah of the AFL-CIO’s Office of Investment explains the evolution of shareholder proposals related to health care, including:

– Why did the AFL-CIO choose this topic for its proposals?
– What was the SEC Staff’s historical position for this type of proposal?
– What happened this proxy season regarding these proposals?

Half-Price for “Rest of 2008”

As our site memberships and print publications are on a calendar-year basis, we have reduced our prices for all of our websites and most of our print publications so that they are half price for the rest of this year. Take advantage of these reduced rates in our “No-Risk Trial Center.”

Two New Deputy Directors for SEC’s Enforcement Division

Congrats to Scott Friestad and George Curtis for their promotions to Deputy Director in the Division of Enforcement (and Chief Counsel Joan McKown, who gained additional responsibilities). I dig the related press release, which includes an embedded video from the news conference.

Scott and George replace Peter Bresnan, who left last year, and Walter Ricciardi who “retires” at the end of this month (I put retires in quotes because Walter only served on the Staff for four years and starts at Paul Weiss when he leaves the Commission).

Nasdaq Proposes Change to Continued Listing Standards

From Davis Polk: The SEC has published a Nasdaq proposed rule change that would require listed companies to maintain a certain amount of “public shareholders” rather than a certain amount of “round lot holders” as is currently required for continued listing. According to the Nasdaq, for a variety reasons, it is often difficult to determine compliance with the current round lot holder requirements.

If the SEC approves the proposal, Nasdaq would generally require 300 public shareholders for continued listing on the Nasdaq Capital Market, and 400 public holders for continued listing on the Nasdaq Global and Global Select Markets. In the case of preferred stock and secondary classes of common stock, 100 public shareholders would be required for continued listing on the Nasdaq Capital, Global and Global Select Markets. As proposed, the definition of public holder would include both beneficial holders and holders of record, but would not include any holder who is, either directly or indirectly, an executive officer, director, or the beneficial holder of more than 10% of the total shares outstanding. Under this definition, Nasdaq would consider immediate family members of an executive officer, director, or 10% holder to not be public holders to the extent the shares held by such individuals are considered beneficially owned by the executive officer, director or 10% holder under Exchange Act Rule 16a-1.

No change is proposed to the Nasdaq’s initial listing requirements that also require a certain number of round lot holders because the majority of initial listings are IPOs, where a certain number of round lot holders is already required by SEC rules in order to avoid being subject to the penny stock rules and the number of round lot shareholders can be easily determined by the underwriter when distributing the offering. Nasdaq does propose, however, to clarify that the definition of round lot holders includes beneficial holders in addition to holders of record, consistent with current practice.

– Broc Romanek

June 3, 2008

Parsing the SEC’s XBRL Proposing Release: Two Liability Standards and More

Late on Friday, the SEC posted a 143-page proposing release for its mandatory XBRL rulemaking. Based on a quick glance, here are some additional thoughts to the ones I blogged a few weeks ago based on what was said at the open Commission meeting:

1. The Proposed Liability Framework – During the open Commission meeting, it was unclear what liabilities might attached to filing in XBRL – giving the impression that this important issue had not been fully worked out yet. Now that we have the proposing release, we can see on page 60 that the SEC is proposing two very different standards – (i) that the interactive data be considered “furnished” as it is under the pilot program versus (ii) that it be considered “filed” as the “viewable interactive data as displayed through software available on the Commission’s Web site… would be subject to the same liability under the federal securities laws as the corresponding portions of the traditional format filing.” I guess this was a compromise to get the proposal out of the building.

Some of you may be asking – what did he just say? I know that this is confusing. The SEC’s proposal has different liability standards for the XBRL data itself and for the “viewable” data. The former is what the machines read; the latter is what humans read (yes, there is a difference – a big difference; more on this later). So, in other words, the raw XBRL data (the “non-viewable” XBRL data) would essentially carry forward the pilot program’s liability regime (but note that no liability for Section 12 has been added – the voluntary filers program didn’t have this immunity) – and the “viewable XBRL data” would have the same type of liability as the official HTML or ASCII filings have today (and so viewable data would be considered “filed”).

2. Late Filers and “Springback” of Current Status – Under the proposal, the financials in XBRL would be filed as an exhibit under Item 601 of Regulation S-K and be considered part of the company’s “official” filing, rather than as a supplement as is the case in the pilot program. Even though a company would lose its Form S-3, etc. eligibilty if it was late in filing its XBRL data, it could regain its current status once the XBRL information was filed. This is a new concept under the SEC’s regulatory framework. (And there is a proposed pair of 30-day grace periods for the first two years.)

3. Possible Alternative Regulatory Frameworks – As with most SEC proposing releases, the Staff does a great job of posing questions to help solicit comments. In the proposing release, I particularly like the list of questions beginning on page 26. Read them to help you better understand what XBRL is all about.

4. Costs – As Dominic Jones notes in his “IR Web Report,” costs are expected to go up significantly in Years 2 and 3 (when “deep-tagging” will be required) and then will decrease rapidly as each company develops its own customized templates that can be re-used.

5. Foreign Private Issuers – As Dominic notes, the proposed rules would not require foreign private issuers that prepare their financial statements in accordance with a variation of IFRS as issued by the IASB to provide XBRL. Foreign private issuers that provide financial information on Form 6-K or any financial information prepared with non-US GAAP that must be reconciled to US GAAP in the foreign private issuer’s ’34 Act reports will not have to be provided in XBRL.

Just added! We are excited that David Blaszkowsky, Chief of the SEC’s Office of Interactive Disclosure, has joined the panel for our July 16th webcast: “XBRL: Understanding the New Frontier.”

By the way, I’ve learned that the Bush Administration’s moratorium on rulemaking doesn’t apply to the SEC because the agency is considered “independent.” So it shouldn’t impact the SEC’s ability to propose and adopt rules whenever it sees fit (although the SEC may voluntarily decide to abide by the Administration’s edict).

XBRL: A New Enforcement Tool?

This recent Reuters article claims XBRL will help uncover suspicious trading and accounting patterns. The example in the article is the option backdating scandal which was based on a study of the information filed in Form 4s (note that Section 16 forms are not being proposed by the SEC to be tagged in XBRL; they already are tagged in XML). If you recall, uncovering backdating practices gathered steam after Professors Randall Heron and Erik Lie’s study, which gathered Form 4 data starting in ’96 – well before Section 16 reports were required to be electronically filed. The professors relied on the Thomson Financial Insider Trading database to obtain the datapoints necessary for their study (and Thomson filled its database manually until Section 16 reports were required to be filed electronically after SOX).

But if memory serves, the SEC’s Enforcement Staff has to work hard to break open a financial fraud case; it’s not typical that the Staff can discern that numbers are “funny” on their face – rather, the fraud is uncovered by digging beyond the information in the SEC filings. So I don’t think that just running the numbers in XBRL is gonna help much. Most analysts (and I presume the SEC Staff) have long had the technology to crunch numbers using computers. In fact, you can access 10 years worth of financials tagged in XBRL right now for all public companies on

Anyways, I worry that this type of promise about XBRL benefits adds to the boatload of misinformation already swirling around XBRL – but maybe someone can give me some concrete examples to show otherwise? I am certainly not an XBRL expert.

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– Broc Romanek