Last week, the SEC brought its first action for a violation of the 1934 Act Section 13(k) prohibition of personal loans to executive officers. The administrative proceeding was brought against the CEO and CFO of Stelmar Shipping, a foreign private issuer. The issuer had claimed that the extensions were mere “advances” and not loans.
In the Fall of 2003, Stelmar’s CEO and CFO authorized interest-free loans from the issuer to themselves – note they were not approved by the board. During the course of the 2003 audit, the outside auditors learned about the loans and concluded that they were prohibited by Section 13(k). In March 2004, Stelmar reported the violation on a Form 6-K containing its proxy. (Interestingly, the issuer also imposed a financial fine of $50,000 and $30,000 on the CEO and CFO, respectively.) Stelmar was acquired early this year, but the CEO and CFO remained employed by Stelmar until (close to) the time of the acquisition.
Ultimately, the CEO and CFO agreed to a cease-and-desist order with the SEC.
PCAOB Member Gradison Named Acting Chairman
On Friday, the SEC named PCAOB Board Member Bill Gradison as Acting Chairman of the PCOAB. At the inception of the PCAOB in 2002, Gradison was named to a two-year term and was reappointed in 2004 to an additional five-year term.
Former PCAOB Chairman William McDonough’s resignation was effective as of last Wednesday, November 30th.
DealLawyer.com’s Webcast Transcript Now Up!
The transcript for the DealLawyer.com’s webcast, “The Latest on Special Negotiating Committees,” is now available.
Mark Borges blogged yesterday about the long-awaited Reg S-K 402 revisions, noting that this article in Wednesday’s St. Louis Post-Dispatch suggests that the disclosure project is back on the front burner and could be expected soon.
The Washington University Law School in St. Louis held a corporate governance conference last week at which Commissioner Roel Campos and Corp Fin Director Alan Beller spoke, indicating that possible areas for revision include pension disclosure, board compensation committee reports and requiring disclosure of a “total compensation” figure. Additionally, as Broc has blogged on September 21 and August 15, Chairman Cox has been voicing his opinion in the last few weeks about the need for change in the executive compensation disclosure area.
Is it possible that the Commission can move quickly enough to update the rules before next proxy season? It’s possible, but it would be very tight. However, as Mark points out, if the Commission proposes changes before the end of the year, the proposals could very well influence companies’ 2006 disclosures, even if they are not yet adopted or in effect.
“New Issue” Rules in Effect Nov. 2
The NASD issued a notice to members this week advising that the “new issue” rules will go into effect November 2, 2005. As Broc previously has blogged about on September 22 and September 19, Rule 2790 replaces the Free-Riding and Withholding Interpretation (IM-2110-1), and is “designed to protect the integrity of the public offering process.” It requires that: (1) NASD members make bona fide public offerings of securities at the offering price; (2) members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to members; and (3) industry insiders, including NASD members and their associated persons, do not take advantage of their insider position to purchase “new issues” for their own benefit at the expense of public customers.
Yesterday, the Treasury Department and IRS issued proposed regulations on deferred compensation under Section 409A of the American Jobs Creation Act. Section 409A governs plans and arrangements that provide nonqualified deferred compensation to employees, directors or other service providers and the proposed regulations provide a framework for implementing those.
The proposed regulations (which are 238 pages) identify which plans and arrangements are covered under Section 409A, outline operational requirements for deferral elections and permissible timing for deferred compensation payments made under the rules. The rules also extend the deadline for documentary compliance with the new rules for one year, to December 31, 2006.
In his Compensation Blog, Mike Melbinger will be providing his analysis on the proposed regulations in the days to come. His initial thoughts on the regs are:
“One of the areas of most interest to many readers will be the discussion of SARs. Recall that SARs issued by private companies and SARs that could be settled in cash came in for harsh treatment under the initial guidance on 409A.
Here the newly released proposed regulations bring good news. The regulations treat stock appreciation rights similarly to stock options, regardless of whether the stock appreciation right is settled in cash and regardless of whether the stock appreciation right is based upon service recipient stock that is not readily tradable on an established securities market. However, because the IRS remains concerned that manipulation of stock valuations, and manipulation of the characteristics of the underlying stock, may lead to abuses with respect to stock options and stock appreciation rights (collectively referred to as stock rights), the regulations contain more detailed provisions with respect to the identification of service recipient stock that may be used to determine the amount payable under stock rights excluded from the application of section 409A, and the valuation of such stock.”
Another great place to learn more about the proposed regs is at the upcoming NASPP Conference in Chicago November 1 – 3.
SEC Not so Free with Information for FOIA Requests
This article by Bloomberg discusses a recent report by the Coalition of Journalists for Open Government that found the SEC turns down more FOIA requests for non-public information than almost every other government agency, including the CIA and the Pentagon. Of the 25 U.S. departments and agencies in the report, only the Small Business Administration and the National Archives turned down more requests.
According to the report, the SEC granted only 34% of the 3,830 FOIA petitions it processed during the 2004 fiscal year and almost 20% of those denials that were appealed were overturned.
And the SEC’s backlog of 8,635 requests (at its 2004 year-end) was bigger than all but four agencies surveyed. The public filed 9,325 requests with the SEC from October 2003 to October 2004. All but 690 of the 3,830 FOIA petitions the SEC ruled on that year were holdovers from fiscal 2003, so when the SEC closed the books on 2004, it still faced 8,635 pending requests.
Christopher Cox became the 28th Chairman of the SEC yesterday when he was sworn in by Federal Reserve Chairman Alan Greenspan. Since its inception in 1934, the SEC’s Chairs have been pretty evenly split between the two major political parties, with 15 Republicans versus 13 Democrats. Here’s a list of all past Chairmen and Commissioners.
Chairman Cox’s first official day is today. He is scheduled to address the Staff in the Commission’s auditorium at 10:30 eastern, which appears will be accessible to non-Staffers by webcast. I like the transparency already!
New Section 16 Adopting Release
The SEC took care of some Section 16 business yesterday, adopting amendments to Rules 16b-3 and 16b-7 in response to the Third Circuit’s ongoing Levy v. Sterling Holding Company case. For the background and current status of the Levy case, check out Alan Dye’s blogs on Section16.net – most recently in June 2005 and July 2005.
As you know, Rules 16b-3 and 16b-7 are exemptive rules, which provide that transactions that satisfy their conditions will not be subject to Section 16(b) short-swing profit recovery. The amendments clarify the regulatory conditions that must be present for the exemptions to apply – and do not represent substantive interpretive changes in the application of the rules.
Additionally, the SEC amended S-K Item 405 to delete the ability, on the part of the issuer, to presume that a Section 16 form it receives within three calendar days of the required filing date was filed with the SEC by the required filing date. The SEC thought that in light of the two-business day due date generally applicable to Form 4 and the requirements of mandatory EDGAR filing (and website posting), this presumption no longer is appropriate.
For more insight into this release and other updates on Section 16 – be sure to check out Section16.net.
Settlement Pipeline Grows
As Broc pointed out in his July 18th blog, class action settlements have soared over the last year. Yesterday, Time Warner said it had agreed to settle its class-action litigation with shareholders for $2.4 billion and Arthur Andersen agreed to pay $25 million to settle a lawsuit brought by investors over its role in the collapse of Global Crossing Ltd. On Tuesday, CIBC agreed to pay $2.4 billion to settle fraud claims by investors who lost money in Enron Corp.
But perhaps even more astounding than these settlements (if that’s possible) was when former Cendant vice chairman E. Kirk Shelton was sentenced yesterday to 10 years in prison and ordered to pay full restitution for his role in an accounting scandal in the amount of $3.27 billion. The $3.27 billion would cover what Cendant spent to settle shareholder litigation, pay its legal fees and conduct audits. The payment schedule will be $15 million by October 2005 and then monthly payments of $2,000 per month once he is out of prison. That will make him approximately 135,685 years old before the debt is paid off (excluding interest).
Following up on Broc’s July 25 blog on the challenges of option valuation under FAS 123R for expensing purposes, Mike Melbinger blogged the following on his CompensationStandards.com blog, which has been getting a lot of attention:
“Apparently one of the Big Four accounting firms is taking the position that under FAS 123R the stock option grant date does not take place when the Board of Directors approves the size of the grant and the grant price, but only when a letter describing grant price, size of the award, and the terms and conditions is received by the employee.
If this extraordinary interpretation holds up, many companies will need to reconsider their current process for making stock option grants, or face negative accounting and tax implications Code Section 409A.
For example, if the Board or Compensation Committee makes a stock option award on day 1 when the price of the stock is $25, but the terms of the award are not reduced to writing and delivered to optionees until day 8 when the price is $27, then for accounting purposes the company will be deemed to have issued a discounted option, according to this Big Four firm – exercise price is $25 but FMV at the date of grant is $27.”
As Mike noted, companies may well want to contact their outside audit firm to determine the audit firm’s view on this issue.
The questions are categorized in the following areas: general impact of SOX; SOX 404/Internal Controls; Accounting/Auditing; Corporate Governance/Listing Requirements; and the Disclosure System. Comments are due by August 31, 2005. The Advisory Committee will use the responses as it prepares its recommendations to the Commission, to be delivered by April 2006. Next up for the committee is its meeting on August 9-10 in Chicago, which will be webcast on the SEC’s website.
For more on the Committee’s work to date, check out our July-August 2005 issue of The Corporate Counsel.
Securities Act Reform in Federal Register
Today, the Securities Act Reform Release (33-8501, July 19, 2005) was published in the Federal Register, making December 1, 2005 official as the effective date. For those of you who have been carrying around the release in your briefcase waiting for a chance to read it, you may want to print out the Federal Register PDF version. If you can live without the Cost-Benefit Analysis, Regulatory Flexibility Analysis, etc., you can get the release down to 102 pages (print pages 1-68 and 78-111), unlike the 468 pages from the SEC’s pdf version.
This article discusses a new study (posted on CompensationStandards.com) issued by Moody’s that examines the empirical relationship between executive compensation and credit risk. Moody’s took three components of CEO compensation – salary, bonus, and stock option awards – to discover compensation that deviates substantially from expected pay based on firm size, past performance, etc. (described as “unexplained” compensation). They then took the “unexplained” compensation and related it to the risk of default and large rating downgrades between 1993 and 2003.
Ultimately, Moody’s found that large, positive, unexplained bonus and option awards are predictive of both default and large rating downgrades. Variations in salaries, however, do not appear to be predictive of credit risk. Moody’s concludes that high levels of unexplained compensation may indicate that board oversight is lax and, as a result, management has insufficient pressure to deliver good financial performance. Large performance-based compensation packages, in particular, may induce managers to: deliver strong short-term financial results and obscure longer-term structural problems, and pursue high risk strategies with very strong positive, but also very adverse, potential payoffs.
Shooting Fish in a Barrel ….
Last week, the SEC filed a complaint against two stock promoters in an alleged scam designed to mislead investors into believing they had inadvertently received a confidential stock tip faxed from a stockbroker to his client. The handwritten fax (available here) had the appearance of an urgent message from a financial planner intended only for his client, urging the purchase of a stock that was about to “tripple” in price. The fax was sent to more than one million recipients across the country – including the SEC’s San Francisco Office! – by stock promoters who made over half a million dollars unloading their shares on duped investors.
Inside Track with Broc Posted
Check out Broc’s interview on the return of the IPO market with M. Ridgway Barke, Chair of the Corporate Finance and Securities Practice Group at Kelley Drye & Warren, and Randi-Jean G. Hedi, Partner in the Corporate Finance and Securities Practice Group at Kelley Drye & Warren.
On Friday, the full Senate voted to confirm Rep. Christopher Cox as Chairman of the SEC and Roel C. Campos and Annette L. Nazareth to the two open Democratic seats. Cox’s term will run until June 2009; Nazareth’s expires in June 2007 and Campos’s expires in June 2010.
In this rather lengthy press release, Rep. Cox says he intends to resign his House seat on Tuesday, August 2 at 6 pm PDT and hopes to be sworn in as Chairman of the SEC on Wednesday, August 3. That would make Thursday, August 4 his first day on the job.
Securities Act Reform Effective December 1, 2005
The SEC’s website is reporting that the Securities Act Reform rules become effective December 1, 2005. As adopted, the rules were set to go into effect 120 days after publication in the Federal Register. By my calculations, December 1 is 122 days away from today, so that means we can expect the Federal Register publication to be this Wednesday.
The Federal Register is the official publication place for rules, proposed rules, and notices of Federal agencies and organizations, as well as executive orders and other presidential documents. Whatever gets printed in the FR is the official text of the rules. The FR is published on all Federal work days and is available online (usually available by 6 a.m. each day).
The Staff has been saying that early compliance with the newly adopted rules will not be allowed. No word on the particular implementation of some of the rules, such as whether current shelf registration statements will be grandfathered or subject to the new three year life rule.
Carl’s Corner Posted
In this latest edition of “Carl’s Corner,” Carl Schneider, Of Counsel to Wolf, Block, Schorr and Solis-Cohen in Philadelphia, is discussing the sometimes tricky issue of how to identify your client.