Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Yesterday, the PCAOB adopted Auditing Std. No. 5 (and here is the PCAOB’s press release). It is expected that the SEC will approve the PCAOB’s new standard on an expedited basis.
Memos on the SEC’s and PCAOB’s guidance will be posted in our “Internal Controls” Practice Area. And I am putting the finishing touches on a July webcast to explain all the new internal controls guidance, featuring John Huber and some Big 4 experts…
Corp Fin Issues Section 16 Interps
Yesterday, Corp Fin issued these Section 16 interps. As he has already been doing, Alan Dye will be blogging about the nuances of these new interps on his Section16.net Blog – as well as writing about them in the upcoming issue of Section 16 Updates. Try a no-risk trial to Section16.net today – half-price for the rest of 2007!
A New Staffer Hang-Out?
Congrats to SEC Staffer Amy Starr for founding a groovy coffee shop in Northern Virginia (below is a related Washington Post article): “David A. Starr talks real fast, not because he’s a lobbyist but because he is a professional coffee roaster on the side. He drinks about eight cups of his specialty brew a day.
Starr, a 48-year-old principal at the lobbying law firm Williams & Jensen, is an expert in tax and pension law. His clients include Brooks Brothers and the YWCA Pension Fund. But in recent years he and his wife, Amy Starr, a Securities and Exchange Commission lawyer, developed a passion for self-roasted coffee and this year they made it into a business, Beanetics Coffee Roasters in Annandale.
“We can roast 100 pounds of coffee — from green bean to bag – in an hour,” Starr said proudly. And yes, the beans, whether Costa Rican (his top seller) or Ethiopian, start off green before they are heated in the store’s roaster, which patrons can see through a window.
Starr began 10 years ago with a tabletop roaster in his kitchen and progressed to a bigger roaster in his garage. But his friends wanted more coffee than his hobby could provide them, so in February he opened shop not far from his home. “I scoot over on the way into work to check in,” Starr said, “and also have a great cup of coffee.”
Yesterday, the SEC adopted new guidance for management’s assessment of internal controls over financial reporting, which becomes effective 30 days after being published in the Federal Register. The new guidelines provide a principles-based framework, which is intended to promote a “healthy use of judgment” and provide companies with flexibility to establish an appropriate evaluation method. Here is Corp Fin Director John White’s opening statement, Chief Accountant Hewitt’s opening statement, Deputy Chief Accountant Zoe-Vonna Palmrose’s opening statement and a press release. FEI’s “Financial Reporting” Blog has more extensive notes about the meeting.
Although we don’t have the text of the new guidance yet, the SEC Staff said that the proposed core principles remain unchanged in their final form – but the Staff stated that there are some changes, mainly to align the guidance with what the PCAOB will adopt today at their meeting. The core principles are that management should evaluate whether it has implemented controls that adequately address the risk that a material misstatement in the financials would not be prevented or detected in a timely manner – and that management’s evaluation of evidence about the operation of its controls should be based on a risk assessment.
The SEC stated that its guidance makes clear that management can look to the principles-based guidance for carrying out its responsibilities. The new guidance doesn’t include examples because the SEC wants to avoid the unintended consequence of creating a “one size fits all” box. The SEC Staff stated that many larger companies have developed acceptable procedures for Section 404 reporting that differ from the interpretive guidance and that such procedures may continue to be used.
The SEC amended Rule 12b-2 and Rule 1-02 of Regulation S-X to codify the term “material weakness” substantially as proposed (the Staff stated that the PCAOB will adopt the same definition) to “a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility of leading to a material misstatement that will not be prevented or detected on a timely basis). The Staff explained that most of the material weakness situations seen so far involve accounting related issues within the areas of more complex accounting standards, such as taxes, revenue-recognition and the treatment of derivatives – and the new guidance addresses these areas.
The SEC amended Rules 13a-15(c) and 15d-15(c) to eliminate the requirement that auditors attest to management’s process of evaluating internal controls. In addition, the SEC amended Rules 1-02(a)(2) and 2-02(f) of Regulation S-X to require the expression of a single opinion directly on the effectiveness of internal control over financial reporting by the auditor in its attestation report.
The SEC also proposed a new definition of the term “significant deficiency,” which is intended to clarify those weaknesses that are considered to be less severe than a “material weakness.” Unlike “material weakness,” the proposed “significant deficiency” doesn’t include a probability threshold.
What the SEC Didn’t Do? Extend the Smaller Company Deadline Again
The SEC didn’t extend the deadline for smaller companies (those with less than $75 million in market capitalization) to comply with Section 404 since the new guidance provides scalable and flexible ways for these companies to meet the December 31st deadline. So unless the SEC reverses itself – which is still possible since Commissioners Atkins and Casey said they are still considering it – three delays was the charm. Following the SEC meeting, Senators Kerry and Snowe issued a press release saying it was a mistake not to adopt a fourth delay.
By the way, the SEC has announced the agendas and panelists for today’s and tomorrow’s proxy process roundtables (Evelyn Davis is on the Friday agenda; that alone should make it worthwhile). And the SEC adopted rules yesterday related to the Credit Rating Agency Reform Act of 2006.
The SEC’s Proposed Overhaul of Smaller Company Capital-Raising
Yesterday, the SEC also proposed a new framework for smaller company capital-raising. Here is an opening statement from the Corp Fin Staffers who shepparded this project. According to this press release, the proposals would include:
– A new system of securities regulation for smaller public companies that would make scaled regulation available to a much larger group of smaller companies (ie. up to $75 million in public float; up from $25 million), including killing the S-B system by integrating Regulation S-B into Regulation S-K and rescinding the SB Forms
– Modified eligibility requirements so companies with a public float below $75 million can use shelf registration
– A new Regulation D exemption from ’33 Act registration requirements for sales of securities to a newly defined category of “Rule 507 qualified purchasers” for which limited advertising would be permitted
– Shortened holding periods under Rule 144 for restricted securities (ie. reduced from one year to six months, unless a short sale is involved) and a few changes to Rule 145
– Two new exemptions for compensatory employee stock options so ’34 Act registration requirements would not be triggered solely by a company’s option granting practices
– Electronic filing of Form Ds
Hewlett-Packard’s Boardroom Leak: SEC’s Enforcement Brings a Form 8-K Case
So I guess filing those director resignation 8-Ks do matter after all. According to this press release, the SEC yesterday filed settled administrative charges with a cease and desist order (no fines or penalties) against Hewlett-Packard for failing to disclose the reasons for a director’s abrupt resignation in the midst of H-P’s controversial investigation into boardroom leaks.
The SEC found that several months before the public revelation of the company’s leak investigation, an H-P director objected to the company’s handling of the matter and resigned from the Board, yet H-P failed to disclose the reasons for his resignation as required under Item 5.02(b) of Form 8-K. Here is the SEC’s administrative release.
A few weeks ago, Rep. Henry Waxman (Ca.-D) sent letters to a number of compensation consultants seeking information about potential conflicts, ahead of a likely hearing on the topic. Here is an excerpt from a recent NY Times article:
“Members of Congress are looking into the potential conflicts among executive compensation consulting firms that do other lucrative work for the companies whose pay they help devise. The chairman of the House Committee on Oversight and Government Reform has asked the largest companies in the industry for details on their client relationships and the revenues these ties have generated over the last five years.
The companies — Hewitt Associates; Mercer Consulting, which is a unit of Marsh & McLennan; Towers Perrin and Watson Wyatt Worldwide — confirmed yesterday that they had received a letter dated May 8 from Henry A. Waxman, the California Democrat who is chairman of the oversight committee.
Mr. Waxman asked the consulting firms to identify which companies among the nation’s 250 largest they had provided both executive pay consulting and other services for and to disclose total revenues received for each type of service. Mr. Waxman asked that the companies supply the information by May 29.”
Personally, I’m not convinced that these consulting conflicts are “real” since the folks that advise on exec comp are not the same as those that consult on other HR stuff (ie. general workforce pay, retirement and health benefits) within these consulting firms – but perception often can be as important as real conflicts. Of course, as noted in the D&O Diary blog, there can be instances where a consultant can be implicated in some shenanigans…
Executive Compensation Disclosure Proposal: Et Tu, Canada?
Last month, Canadian regulators proposed an overhaul of their executive compensation disclosure rules, including a new CD&A and a total column in their Summary Compensation Table. Similar to last year’s overhaul in the US, the Canadian proposal would be the first update of these rules since 1994. Learn more in CompensationStandards.com’s “International” Practice Area.
– Trends in the design and usage of stock options, restricted stock, performance-based awards, and ESPPs for overseas employees
– Changes in stock compensation for overseas employees as a result of 123(R)
– Worldwide participation in ESPPs and changes in these plans post-123(R)
– Policies and procedures for tax withholding on both stock options and restricted stock
– Common practices for monitoring compliance with local laws, grant documentation and employee education, and compliance with data privacy laws and the EU prospectus directive
And just yesterday, the SEC announced a roundtable of five SEC Chairs that will take place today. Not too much in the way of advance notice for this program – and the announcement doesn’t indicate what the topics will be (and this roundtable will convene at 5 pm, well after this morning’s open Commission meeting that includes 8 agenda items). The CFO.com blog speculates as to what the topics might be…
Glass Lewis suffered a blow when it was announced over the weekend that two of its key staffers – Lynn Turner and Jonathan Weil – have resigned (Jonathan has already left; Lynn leaves in two weeks). This article indicates the flap is over a dispute involving Glass Lewis’ parent company, China-based Xinhua Finance Media Ltd. The dispute revolves around inadequate disclosures regarding the Chinese parent’s CFO in the parent’s IPO prospectus (which has led to a class action lawsuit). This WSJ article indicates the flap is generally over the parent’s conduct (and the article raises questions about ISS’ and Glass Lewis’ new ownership; Glass Lewis’ parent went public last year and ISS’ parent may go public soon).
Lynn was the Managing Director of Research and a former SEC Chief Accountant and Jonathan was Managing Director and Editor of Financial Research and a former WSJ reporter who broke the Enron scandal wide open. I believe Barron’s first reported on this development in this article.
Nasdaq Seeks to Reestablish PORTAL as a 144A Trading Market
Recently, Nasdaq has filed a proposal with the SEC seeking to reestablish PORTAL as a facility for broker-dealers to publish quotes for qualified Rule 144A securities and trade these securities, among themselves and with QIBs.
This is similar to how PORTAL was originally intended to operate when it was launched many years ago. PORTAL never thrived as a marketplace – and NASDAQ’s current role with PORTAL (which it assumed when it separated from the NASD and commenced operations as a national securities exchange) is limited to the review of whether an issue of privately placed securities meets the eligibility requirements of Rule 144A. This role would change if the proposal is adopted.
A month ago, the Financial Times published this article: Financial regulators yesterday gave the first official recognition of intensifying City concern about the impact some overseas listings are having on the standards and reputation of London.
The Financial Services Authority said it will canvass opinions in the City about how to clarify the regulations to make clear whether companies have chosen light-touch listing methods, which can offer investors less protection. It said it was calling for formal debate about the balance between attracting new flotations and maintaining quality.
The decision comes a day after John Thain, chief executive head of the newly merged NYSE Euronext exchange group, took a thinly veiled swipe at the London Stock Exchange, criticising corporate governance and inadequate protection for minority investors offered by some Russian companies. There has been a steady flow of Russian and Kazakh companies seeking to raise capital in London.
The FSA’s decision to formalise an already rumbling debate followed private pressure brought to bear by a group of large shareholders this year. There are widespread worries among institutional investors about the ability of companies with weak corporate governance standards to raise capital on the LSE. In February, a group of important investors, including Hermes, Fidelity, State Street, Royal London, Barclays Global Investors and M&G, warned the FSA the quality of the market was under threat. “In a less benign [economic] environment some decisions being taken now might come back to haunt the regulators,” a fund manager told the FSA.
Hector Sants, managing director for wholesale business at the FSA, said new issues from non-traditional markets and European regulations designed to open up competition made it important to consider the balance: “This is a very important debate because of the changing nature of capital markets.” Peter Montagnon, head of investment affairs at the Association of British Insurers, said investors were concerned about confusion between different types of London listings. These include primary, with traditional corporate governance standards; secondary, which need no primary listing elsewhere and have minimum regulation; and global depositary receipts, only available to professional investors.
The LSE also operates the Aim junior market with weaker regulation. “There’s a risk of confusion here, and there’s a risk that if we are not careful we could sacrifice some of London’s reputation for quality and with it one of the reasons it is an attractive market,” he said. Even some investment bankers – who make large fees from listings – are concerned. A senior industry figure said: “Has it gone too far? Not yet, but we’re close.”
The LSE has been successfully promoting itself in Russia but is keen to head off investor criticism, which surfaced last year when several big groups attacked the listing of Rosneft, Russian oil producer. The LSE welcomed the debate. “We are particularly keen to have clear labelling of the different forms of listing, giving investors the choice but making sure it is very clear exactly what they are being given,” it said.
Google’s transferable option program has gone “live” and it’s readily apparent that Google and Morgan Stanley have put a great deal of thought into the program. The May-June 2007 issue of The Corporate Executive – which was just mailed – is dedicated to analyzing every aspect of this program, from the ’33 Act registration issues to the insider trading blackout issues, and much more.
Treasury Department Announces Accounting Industry Task Force
On Thursday, Treasury Secretary Hank Paulson announced the formation of a non-partisan task force, headed by former SEC Chair Arthur Levitt and former SEC Chief Accountant Donald Nicolaisen, to examine the world of auditing, including tackling key issues such as firm concentration and how to strengthen the industry’s financial soundness and enhance its ability to attract and retain qualified personnel. It sounds like the task force’s work won’t be done for at least a year; they won’t even begin deliberations until the Fall.
This task force serves as the first step in the Treasury Department’s capital market plan to enhance the US markets competitiveness. Hank’s plans were fleshed out in this Financial Times opinion column (which doubled as a Treasury press release).
A Mid-Season Proxy Review
If you’re wondering how various types of shareholder proposals are faring at the polls this proxy season, check out ISS’s “mid-season proxy review.”
From Lyle Roberts’ “10b-5 Daily” Blog: A recent decision by the U.S. Court of Appeals for the Second Circuit offers some interesting clarifications on the scope of accountant liability for securities fraud. In Lattanzio v. Deloitte & Touche LLP (2d Cir. Jan. 31, 2007), the court addressed whether Deloitte could be held liable for statements in audited and unaudited financial filings.
As to the company’s unaudited financial filings, the court found that Deloitte’s regulatory obligation to review the company’s quarterly statements did not turn those statements into accountant’s statements. Even if the public understood that Deloitte was engaging in these reviews, the accountant’s “assurances were never communicated to the public.” The court also rejected plaintiffs’ argument that the reviews created a duty to correct the quarterly financial statements if false and that a breach of this duty amounted to a misstatement by Deloitte. The court noted that there is a distinct difference between the duties and liabilities created by a review of interim financial statements and those created by an audit of annual financials.
As to the company’s audited financial filings, the court dismissed the relevant claims based on a failure to adequately plead loss causation. The court held that the “plaintiffs had to allege that Deloitte’s misstatements [in the company’s annual reports concerning accounts payable and inventories] concealed the risk of [the company’s] bankruptcy.” Given that Deloitte had issued a going concern warning – along with the disclosed (if understated) collapse in the company’s value – the risk of bankruptcy was apparent. Accordingly, the court found that the plaintiffs had not alleged facts showing that Deloitte’s misstatements were the “proximate cause of plaintiffs’ loss; nor have they alleged facts that would allow a factfinder to ascribe some rough proportion of the whole loss to Deloitte’s misstatements.”
Holding: Dismissal affirmed.
Quote of note: “Public understanding that an accountant is at work behind the scenes does not create an exception to the requirement that an actionable misstatement be made by the accountant. Unless the public’s understanding is based on the accountant’s articulated statement, the source for that understanding – whether it be a regulation, an accounting practice, or something else – does not matter.”
More on Auditor Liability
Recently, the Second Circuit reversed a lower court decision and held – in Overton v. Todman – that an auditor has a duty to correct prior certified opinions and may be held liable under Rule 10b-5 if it fails to do so. In other words, once an auditor knows their opinion is wrong, they ought to do something about it and tell people they should no longer rely on it. We have posted a copy of the opinion (and memos that analyze it) in our “Auditor Liability” Practice Area.
More specifically, the court holds that “an accountant violates the ‘duty to correct’ and becomes primarily liable under § 10(b) and Rule 10b-5 when it (1) makes a statement in its certified opinion that is false or misleading when made; (2) subsequently learns or was reckless in not learning that the earlier statement was false or misleading; (3) knows or should know that potential investors are relying on the opinion and financial statements; yet (4) fails to take reasonable steps to correct or withdraw its opinion and/or the financial statements; and (5) all the other requirements for liability are satisfied.”
This case appears to be the first in the Second Circuit to hold that an auditor has such a duty and may be primarily liable under the federal securities laws. The Second Circuit noted that its holding did not conflict with Central Bank of Denver v. First Interstate Bank of Denver, the 1994 Supreme Court case which held that there was no secondary aiding and abetting liability under Section 10(b), as the auditor in Overton had acted in a primary capacity.
PCAOB Report: The Auditors’ Duty to Uncover Fraud
Way back in late January, the PCAOB issued a report that discusses auditors’ implementation of PCAOB interim standards regarding the auditor’s responsibility regarding fraud. The PCAOB issued the report to nudge auditors to be more diligent about their responsibilities vis a vis uncovering fraud and providing information that audit committees may find useful in working with auditors.
In the report, the PCAOB notes a number of deficiencies in the performance of audits, where audit procedures required to enhance the detection of fraud have not been performed, or have failed to measure up to professional standards, not unlike problematic audits of the past – and the report provides a list of areas for audit committees to probe the auditor on regarding how a particular audit is being conducted.
[I’m on the road for a few days so I took the liberty of posting some blogs I had drafted long ago but had never posted…plenty more of those in the cellar.]
In addition to hosting two more proxy process roundtables next week, the SEC will hold an open Commission meeting next Wednesday with lots of Corp Fin stuff going on, including whether to:
1. adopt interpretive guidance for management regarding its evaluation and assessment of internal control over financial reporting
2. adopt rule changes that would make it clear that an evaluation that complies with the Commission’s interpretive guidance would satisfy the annual management evaluation required by those rules.
3. adopt rule changes to require the expression of a single opinion directly on the effectiveness of internal control over financial reporting by the auditor in its attestation report.
4. make rule proposals addressing the registration and disclosure requirements for smaller companies, as well as private offerings, including:
– increase the number of companies eligible for the scaled disclosure and reporting requirements for smaller reporting companies;
– expand the eligibility requirements of Form S-3 and Form F-3 to permit registration of primary offerings by companies with a public float of less than $75 million, subject to restrictions on the amount of securities sold in any one-year period;
– create exemptions from the registration requirements of the ’34 Act for grants of compensatory employee stock options by non-reporting companies;
– create a new Regulation D exemption for offers and sales of securities to a newly defined subset of “accredited investors,” as well as to propose revisions to the Regulation D definition of “accredited investor,” disqualification provisions, and integration safe harbor and to provide interpretive guidance regarding integration;
– make revisions to Form D and mandate electronic filing of Form D; and
– amend Rule 144 to revise the holding period for the resale of restricted securities, simplify compliance for non-affiliates, revise the Form 144 filing thresholds, and codify certain staff interpretations, as well as to propose amendments to Rule 145.
5. adopt rules to implement provisions of the Credit Rating Agency Reform Act of 2006
And according to this Washington Post article, the House Financial Services Committee hearing with the five SEC Commissioners testifying on whether they are too soft on business is likely to be held during the week of June 25th.
Next Thursday: PCAOB to Act on Internal Controls
Next Thursday, the PCAOB will vote on a new standard – Auditing Standard No. 5 – that will supersede the Board’s existing internal controls standard, Auditing Standard No. 2. The PCAOB also will vote on two recommendations to amend the Board’s rules on the frequency of inspections – to remove the requirement that the Board regularly inspect each registered public accounting firm that plays a “substantial role” in audits but does not issue audit reports and whether to keep Rule 4003(d) in place beyond the June 30, 2007, tentative sunset date. Neither amendment would affect the annual inspection cycle for firms that audit more than 100 issuers.
Yesterday, FEI published a summary of survey results showing that internal control costs for accelerated filers dropped 23% from 2005 to 2006 (and 35% since 2004, which was the first year of implementing Section 404). Audit fees were essentially unchanged between ’05 and ’06. This CFO.com article notes that audit fees could drop by 10% under new AS #5.
Posted: May-June issue of Deal Lawyers print newsletter
We have just sent our May-June issue of our new newsletter – Deal Lawyers – to the printer. Join the many others that have discovered how Deal Lawyers provides the same rewarding experience as reading The Corporate Counsel.
To illustrate this point, we have posted the May-June issue of the Deal Lawyers print newsletter for you to check out. This issue includes pieces on:
– Wake Up and Smell the E-proxy Coffee: Changes Ahead for Online Solicitations
– Lessons Learned: A Practical Look at the Caremark Trilogy
– Understanding the Real Meaning of Deal Certainty: Debunking a Few Myths and Suggesting a Few Solutions
– What’s in a Choice of Law Clause?
– Unauthorized Management Buyout Proposals: It’s Time to Reevaluate Corporate Policies
Try a no-risk trial today; we have special “Rest of 2007” rates, which includes a 50% discount – and a further discount for those of you that already subscribe to The Corporate Counsel. If you have any questions, please contact us at info@deallawyers.com or 925.685.5111.
Interestingly, Exxon Mobil has a new web page that facilitates the ability of shareholders to e-mail questions in advance of its May 30th annual meeting. There is a May 15th cut-off for shareholders to send their questions in. I don’t believe this is a first (IBM and BHP Billiton have done it before).
I’m not sure if many companies would be willing to encourage more questions, although it may be a way to get more diverse questions – or at least more questions related to the business of the company. But since Exxon Mobil doesn’t promise to answer all questions submitted, it doesn’t seem like there is too much potential for harm (from the corporate secretary’s and senior management’s perspective) and this type of web page provides another avenue to get potentially valuable shareholder feedback.
By the way, there is no mention in Exxon Mobil’s proxy statement that shareholders can e-mail the board because this particular function was only added to the website after the proxy statement was mailed. However, the following paragraph can be found on page 9 under “Shareholder Communications”:
“Electronic Communications: You may also send e-mail to individual non-employee directors or the non-employee directors as a group by using the form provided for that purpose on our Web site at exxonmobil.com/directors. These communications are sent directly to the specified director’s electronic mailbox. E-mail can be viewed by staff of the Office of the Secretary, but can only be deleted by the director to whom it is addressed. More information about our procedures for handling communications to non-employee directors is posted on the Corporate Governance section of our Web site.”
AFL-CIO’s Key Votes Survey
Last week, the AFL-CIO posted its 2007 AFL-CIO Key Votes Survey. This is a preliminary scorecard of how the AFL-CIO believes that shareholders should vote at selected shareholder meetings.
– This is the second time you’ve produced this study. What made you revisit it and were you surprised to see some of the same companies reappear?
– Did you find any new problems within compensation structure and policy with the new companies or was it the same old issues?
– What do you think can be done to solve some of these problems?
Come join us in San Francisco or via Nationwide Video Webcast for three special Conferences in mid-October:
– “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
– “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
– “4th Annual Executive Compensation Conference” (10/11)
Among many other luminaries, the SEC’s John White, Linda Chatman Thomsen and Paula Dubberly will be speaking. Here is a combined agenda for the three conferences – and here is a brochure.
“Member Appreciation Package”: Three Conference Bonus for those Attending by Video Webcast – Early Bird Rate Thru June 30th
If you plan to attend by video webcast, take advantage of our special “Member Appreciation Package” to get access to all three of these Key Conferences for a single reduced rate for our members. And if you act by June 30th for this Member Appreciation Package, you will get $300 off as an Early Bird Discount.
And a Bonus for those Attending in San Francisco
Those who come to San Francisco to attend live in person are able to take advantage of a special reduced rate to attend the three-day NASPP 15th Annual Conference (with over 40 panels!) from October 10-12, which includes the “4th Annual Executive Compensation Conference” and the “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks.” With over 2000 attendees year after year, many advisors find this to be the most practical conference available all year.
Act Now: You can register online by clicking any of the links above – or use this order form. If you wish to register for the “Member Appreciation Package,” you merely have to go to the online registration form for any of the three conferences or use this order form.
If you need help, please contact us at info@thecorporatecounsel.net or 925.685.5111 (8 am – 4 pm West Coast time).
Saturday’s WSJ included a cover story about how the FASB and IASB are considering radical changes to how financials are cobbled together as part of its joint Financial Statement Presentation project. The article’s title says it all: “Profit as We Know It Could Be Lost With New Accounting Statements.”
Here is an example of what financials might look like in the future. And here is an excerpt from the article:
“Pretty soon the bottom line may not be, well, the bottom line. In coming months, accounting-rule makers are planning to unveil a draft plan to rework financial statements, the bedrock data that millions of investors use every day when deciding whether to buy or sell stocks, bonds and other financial instruments. One possible result: the elimination of what today is known as net income or net profit, the bottom-line figure showing what is left after expenses have been met and taxes paid.
It is the item many investors look to as a key gauge of corporate performance and one measure used to determine executive compensation. In its place, investors might find a number of profit figures that correspond to different corporate activities such as business operations, financing and investing.
Another possible radical change in the works: assets and liabilities may no longer be separate categories on the balance sheet, or fall to the left and right side in the classic format taught in introductory accounting classes.
The overhaul could mark one of the most drastic changes to accounting and financial reporting since the start of the Industrial Revolution in the 19th century, when companies began publishing financial information as they sought outside capital. The move is being undertaken by accounting-rule makers in the U.S. and internationally, and ultimately could affect companies and investors around the world.
The project is aimed at providing investors with more telling information and has come about as rule makers work to one day come up with a common, global set of accounting standards. If adopted, the changes will likely force every accounting textbook to be rewritten and anyone who uses accounting – from clerks to chief executives – to relearn how to compile and analyze information that shows what is happening in a business.”
SEC’s Filing Fees: Demystifying How They Are Set
Have you ever wondered how the SEC’s filing fees are set every year? I have – and finally did a little research. I always knew that the SEC has no discretion over how much it collects in registration fees – but beyond that, it has been a black box for me. And I erroneously mused in this blog last week that the higher rates for 2008 might have something to do with funding the war.
The reality is that the fees are determined by a law passed by Congress a few years ago, the “Investor and Capital Markets Fee Relief Act of 2002.” Under that law, the SEC must adjust the fee rate each year to a rate that is reasonably likely to produce a target fee collection amount set in the statute. The SEC must determine the new fee rate by dividing the target fee collection amount by an estimate of the aggregate offering prices for securities registrations during the year.
Significantly, the target collection amounts set in the statute vary by year; thus, witness the sharp swing in rates the past few years. The targets in the law fell substantially between 2006 and 2007 (from $689 million to $214 million), but then they rose modestly for 2008 (to $234 million) and will continue to do so in the near future.
The new fee rate reflects the fact that the target for 2008 is $20 million higher than the target for 2007. But, even at this increased level, total fee collections in 2008 will still be dramatically reduced compared to just two years ago, when they were nearly three times larger…
Proposed Amendments to the Delaware General Corporation Law
On Harvard Law School’s “Corporate Governance Blog,” Professor Lawrence Hamermesh of Widener University School of Law made the following entry last week:
This year’s round of proposed amendments to the Delaware General Corporation Law, introduced on May 8, unquestionably falls a little short in the excitement department, at least compared to last year’s amendments (particularly those relating to director elections and retirement policies).
In the current crop, the most notable changes are to the appraisal statute. Under these proposed amendments:
– Petitions for appraisal can be filed by beneficial owners, rather than only by stockholders of record (although demands for appraisal must still be made by record owners). The Depository Trust Company will surely be relieved not to have to serve as a nominal petitioner in every public company appraisal suit.
– Reference to a “national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc.” has been deleted from the so-called “market out,” in light of last year’s reorganization of the NASDAQ stock markets.
– Most notably, there is to be a presumptive approach to awarding interest in appraisal proceedings. Ordinarily, interest is to “be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment.” This has been Delaware’s default legal rate of interest for some time, and has frequently been the basis for awards of interest in recent appraisal cases. By making it the presumptive approach to awards of interest in such cases, however, it is hoped that unproductive litigation efforts on the interest issue can be avoided. Under the proposal, however, the Court of Chancery still retains discretion, for “good cause,” to choose a different approach in awarding interest.
These amendments to the appraisal statute are to apply only with respect to transactions consummated pursuant to agreements entered into after August 1, 2007.
Two other proposed amendments would clarify voting rights in two specialized situations, as described in the synopsis accompanying the legislation:
– An amendment to Section 141(d) clarifies that when a provision of the certificate of incorporation endows some directors with greater or lesser voting power than other directors, that differentiation of voting power applies both in voting by the board of directors and in voting by committees and subcommittees of the board, unless otherwise provided in the certificate of incorporation or bylaws.
– An amendment to Section 216(4) clarifies that, unless otherwise provided in the certificate of incorporation or the bylaws, a plurality vote (and not a majority of the quorum) is the vote required to elect directors where one or more classes or series of stock votes as a separate class or series on the election of directors. Last year’s amendments relating to the ability to provide in the bylaws for majority voting in the election of directors remain unaffected.
