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."
When the SEC granted the extension to non-accelerated filers and foreign private issuers last week – delaying the implementation of Section 404 by one year per my blog of March 3rd – the SEC Staff received several calls on the status of issuers that are not currently accelerated filers, but who become accelerated filers at some point before the implementation date of July 15, 2006.
At PLI’s “SEC Speaks” on Friday, the Staff confirmed that those filers must be in compliance with 404 at the time they become an accelerated filer. In other words, they do not get to take advantage of the delayed implementation date.
Disclosure of Corporate Political Contributions
Over the past few years, a number of bills have been floated on the Hill to require disclosure regarding corporate political contributions – but none of them have gotten the requisite support. The Center for Political Accountability has been fighting for this cause for two years and recently released a report entitled “The Green Canary: Alerting Shareholders and Protecting Their Investments.” Read more in this interview with the Co-Directors of the Center.
For Warren Buffett Fans Only!
Berkshire Hathaway has posted a copy of its 2004 Annual Report, including Warren’s famous letter to shareholders. One oddity is the fact that Warren personally has copyrighted his letter to shareholders – can he do that? If he writes the letter in his capacity as chair of the board, doesn’t his work inure to the benefit of the company?
In his letter, Warren’s sage advice about evaluating a company’s prospects includes asking this question about the CEO: “Is he/she overreaching in terms of compensation?”
Am I a Journalist?
Yesterday’s NY Times carried two interesting items on blogging. One article regarding whether bloggers can be protected under state law to protect their confidential sources. The other article noting that a 23-year old blogger had obtained permission to attend White House press briefings (after extensive attempts to procure the press pass – read about the saga on his blog).
For the first few years of blogging, I didn’t consider myself a journalist in the least. I still don’t think I qualify in the traditional sense – but I sometimes refer to myself as a journalist when I try to explain to relatives what I do or try to distinguish myself in this town chock full of lawyers…
– Disclosure of Previously Unreported Form 8-K Events
– Correct Version of the Certifications Required by Rules 13a-14(a) and 15d-14(a)
– Placement of the Internal Control Reports
– Auditor Consents
So it looks like we can now add “Staff Alerts” to the forms of written informal SEC Staff guidance that are available (joining Staff Legal Bulletins, FAQs, no-action letters, Current Issues Outline, telephone interps, etc.).
SEC Chair Speaks About Executive Compensation
On Friday, SEC Chair Donaldson gave a speech at SEC Speaks and he said this about executive compensation: “Some conflicts are best managed by focusing on how they are disclosed to investors. For example, the executive compensation process presents clear potential conflicts and clear potential for abuse. Yet, as I have said on many occasions, the solution is not to have the SEC or any regulator set compensation. Good disclosure can do a lot to address this conflict. One problem is that there has not been good enough disclosure under current rules.
The Division of Corporation Finance has been looking at this, and the Commission has brought cases in this area. This is an area where I have been disappointed by the contribution of some lawyers, who appear in at least some cases to devise their own narrow interpretations of the rules while disclosing as little as possible, rather than to seek helpful disclosure for investors. A second issue in this area is that our rules may need to be refocused, and the Division of Corporation Finance is exploring how they can be enhanced and clarified.”
In his comments, the Chairman also focused on other areas of attorney responsibilities as borne out in this article in the Washington Post.
NYSE Tweaks 303A FAQs
On Friday, the NYSE changed one of the FAQs that it had released late last week (ie. ones that I blogged about on Friday). In footnote 1 to the FAQs, the NYSE explains how the CEO/CFO cert. disclosure requirement in 303A.12(a) refers to the most recently filed 10-K; not the prior year’s 10-K.
On Wednesday, the SEC announced a settled enforcement action against Titan Corporation alleging Foreign Corrupt Practices Act violations for funneling approximately $2 million towards the election campaign of Benin’s then-incumbent President. The amount of this settlement – $15.5 million in disgorgement and prejudgment interest and a $13 million penalty – is the highest ever paid for FCPA violations.
However, the most significant aspect of this proceeding is a Section 21(a) Report of Investigation that asserts that representations in an agreement filed as an exhibit can be actionable by the SEC if they are materially false. This assertion relates to a FCPA representation made by Titan in a Merger Agreement with Lockheed Martin (my alma mater!), which was also publicly disclosed in Titan’s proxy statement (since the Merger Agreement was in the proxy statement). It is noteworthy that the Report does not allege a violation by Titan of Sections 10(b) or 14(a) – or Rules 10b-5 and 14a-9 – and that the SEC has not charged Titan with such violations.
The Report recognizes that Titan shareholders were not beneficiaries of the FCPA Representation in the Merger Agreement, but states that the inclusion of the Representation in a disclosure document filed with the SEC, “whether by incorporation by reference or other inclusion, constitutes a disclosure to investors.” The Report goes on to say that disclosures regarding material contractual terms such as representations may be actionable by the Commission. The Commission will consider bringing an enforcement action if it determines that “the subject matter of representations or other contractual provisions is materially misleading to shareholders because material facts necessary to make that disclosure not misleading are omitted.”
NYSE Speaks on 303A Requirements
In response to a number of inquiries regarding the 2005 disclosure requirements in Section 303A of the NYSE Listed Company Manual, the NYSE has posted some FAQs, including:
– All disclosures required by Section 303A and/or Rule 10A-3 must be included in any specified document distributed in 2005.
– Incorporation by reference of any required disclosure is not permitted.
– Failure to include any Section 303A required disclosure in the specified document or inappropriately incorporating a disclosure by reference is considered material non-compliance and as such is a Section 303A.12(b) reportable event of non-compliance. Companies that have inadvertently failed to make the required Section 303A.12(a) disclosure in this year’s annual report should consult their Exchange Corporate Governance specialist regarding necessary action.
– Companies must identify which directors are deemed independent and disclose the basis for that determination.
– Categorical standards of independence, if adopted, must be disclosed, not incorporated by reference.
– The proxy must also include a discussion of any relationships considered by the board in determining a director’s independence, unless the company had adopted categorical standards, in which case, the relationship need only be disclosed if it falls outside of the categorical standards.
– This year’s annual report to shareholders must disclose that the company submitted a Section 12(a) CEO Certification to the NYSE last year. Companies need only reference that the previous year’s CEO Certification was submitted to the NYSE. The text of the certification need not be included in the annual report.
– If the previous year’s CEO Certification was qualified in any way, the company must disclose that qualification.
– Section 303A.12(a) also requires that companies disclose in this year’s annual report whether or not they filed with the SEC the CEO/CFO certification required under Section 302 of Sarbanes-Oxley in the prior year as an exhibit to their Form 10-K. The text of the certification need not be included in the annual report.
To review law firm memos on the NYSE’s latest changes to its standards, go to the “NYSE Guidance” Practice Area.
SEC Commissioners Continue Internal Dissension
Yesterday, the SEC approved the PCAOB’s 2005 budget, but the WSJ reported that over the objections of SEC Chair Donaldson, the two Republican Commissioners, Glassman and Atkins, extended a written invitation to PCAOB Chair McDonough and FASB Chair Herz, to take part in yesterday’s open Commission meeting. Both did not attend.
I agree with the comments of Commissioner Campos – as reported in the WSJ – that having a Q&A with these two chairs doesn’t serve any real purpose. Commissioner Atkins spent quite a bit of time – nearly 45 minutes – going through each item in the proposed budgets, I guess to create a record. And there is no requirement for the SEC to consider the PCAOB and FASB budgets at an open Commission meeting – they can do it seriatim. Probably better done that way…
Following up on my blog of February 24th, I have been hearing from various members that the SEC, PCAOB and Big 4 are still kicking around how to treat the restatements caused recently by the SEC Chief Accountant’s letter on lease accounting for purposes of internal controls (i.e. whether it should be deemed to be a “material weakness” or simply a “significant deficiency.”) The magnitude of the impact of this letter was explored in yesterday’s article in the WSJ regarding the high number of restatements (carried on page B2A in the East Coast edition, but not available online for some reason).
With only a few weeks to go until 10-Ks are due for calendar-year companies, the stakes are high and time is short. Here are examples of the arguments being made by companies as to why their restatements for lease accounting shouldn’t be considered material weaknesses:
– There is no change in net cash flow. Although the balance sheet/income statement impacts of the correction of the “error” frequently aren’t material, auditors have told companies that they should consider the impact on their cash flow statements of the correction of the errors – as cash flow is shifted from one category to another – to be material if it would exceed the imaginary 5% threshold for material (which for a lease-intensive company it readily could).
– This is precisely the type of situation that PCAOB had in mind when it drafted PCAOB Auditing Std. No.2, ¶ 140 to provide that a restatement is only a “strong indicator” of a material weakness rather than an irrefutable presumption. The commentary allows some judgment here – see ¶¶ E95-E98 – but auditors are so intensely risk adverse that they are not exercising their judgments in this (or similar) situations.
– Companies do not think certain aspects of the SEC Chief Accountant’s letter have clear support in SFAS 13 and its progeny, particularly the concept that pre-occupancy leasehold build-outs always constitute “rent.” A number of companies also were not thrilled with the tone of the WSJ article or the quotes from the SEC. There were so many companies that were accounting for leases inconsistently with the SEC’s interpretation – and all of the Big Four were signing off on that accounting – that clearly they were not doing it intentionally wrong.
Some companies are preparing their draft 404 disclosure both ways in the hope that the SEC/PCAOB will say before the 10-K due date that it is okay for the Big Four to take the position that a “miss” on this issue is not a material weakness.
New 404 Deadline for Non-Accelerated and Non-US Filers
Yesterday, the SEC announced that it is extending the deadline for non- US and non-accelerated filers regarding 404 reports and auditor attestations. The SEC pushed out the deadline by one year, so that these filers now will have to include these documents in their first annual reports filed on – or after – July 15, 2006. For these types of companies, the year-long extension also applies to the rules requiring maintainance of internal control over financial reporting, periodic evaluation of changes in internal controls, and related changes to 302 certifications.
FYI, nearly 200 members have responded to our survey on the location, format and content of 404 reports – see the running results.
Analysis of Latest Compensation Proxy Disclosures
With so many of our members in the thick of drafting and reviewing proxy statement compensation disclosures – particularly compensation committee reports – we have posted this “Special Proxy Disclosures Supplement” on CompensationStandards.com. As can be seen from the table of contents of the special supplement below, members should not miss Mark Borge’s daily commentaries and pointers on good/bad disclosures and practices in “The Compensation Disclosure Blog.”
· The Morgan Stanley Compensation Committee Report – A Reprise
· Goldman Sach’s Aircraft Policy
· Intel’s 10-K Equity Disclosure
· A Model SERP Disclosure
· Do You 162(m)?
· American Express’ Fulsome Disclosure
· Tally Sheets Makes an Appearance
· Disclosing Option Grant Values
Join us tomorrow on CompensationStandards.com – Thursday, March 3rd – for this important webcast – “Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney” – during which an all-star panel will provide specific “how to” practical guidance, including examples of actions companies should consider taking now to protect their directors. Join these experts:
· John Olson, Partner, Gibson Dunn & Crutcher LLP
· Marty Lipton, Partner, Wachtell Lipton Rosen & Katz LLP
· Frank Balotti, Partner, Richards Layton & Finger LLP
· Rich Koppes, Of Counsel, Jones Day and Director of two NYSE-listed companies (Apria Healthcare Group and Valeant Pharmaceuticals International)
CEO/CFO Certification Reminder
I’ve noticed several accelerated filers who recently have filed 10-Ks without the requisite internal control language in paragraph 4 of their certifications (i.e., including a reference to internal controls). Accelerated filers were permitted to omit that paragraph until now – companies that are not accelerated filers can still omit it. For an example of what the 302 certifications should now look like, see our Sample 302 Certifications.
New Global Regulator of Auditing Standards
On Monday, the Public Interest Oversight Board (PIOB) was formed to oversee the public interest activities of the International Federation of Accountants (IFAC). This new global regulator was formed by the International Organization of Securities Commissions (IOSCO), two other international regulators (banking, insurance), the World Bank and the Financial Stability Forum.
Notably absent from the founders is the PCAOB (which oversees auditing standards in the US) – but I believe the PCAOB was asked to provide input. Unlike the PCAOB, the PIOB will not have the authority to enforce its own standards. This was the primary problem with the PCAOB’s ineffectual predecessor, the AICPA – but the PIOB would not be unable to overcome the practical obstacle of enforcing standards in jurisdictions for which it doesn’t have authority.
One of the eight members of the PIOB include Aulana Peters, former SEC Commissioner, former member of the AICPA Public Oversight Board and retired partner of Gibson Dunn.
Here is the March issue of our monthly email newsletter. To receive this newsletter each month by email, input your email address in this form.
Valuation of Personal Usage of Corporate Aircraft and The Jobs Act
In response to questions from many members of CompensationStandards.com, we have added a new practice pointer from Stewart Lapayowker regarding the impact of the Jobs Act on airplane use. Stewart’s pointer specifically addresses:
– did the Jobs Act change the method for computing the value of the perquisite to be included in the employee’s income? and
– did the Jobs Act change the deductibility of expenses associated with the operation of the corporate aircraft for entertainment purposes and, if so, how does one compute the expense subject to the disallowance?
House Democrats Don’t Like Exclusion of Shareholder Access Proposals
In response to Corp Fin allowing the exclusion of three shareholder proposals that parallel proposed Rule 14a-11 – in a February 24th letter to the SEC Chairman – six Democrats, including Rep. Barney Frank (D-Mass.) and Rep. John Dingell (D-Mich.) questioned whether the SEC was backing away from its proposed shareholder access framework. According to the WSJ, the letter says: “We are writing to express our disappointment about the recent decision made by the staff. We are concerned that this decision may indicate the commission’s lack of commitment to passing a proposal that would empower shareholders by giving them the limited ability to nominate directors.”
Better Than Splitting the Baby?
On Sunday, the Washington Post reported, “SEC Chairman Donaldson handed down his decision in the most contentious issue dividing members of the Securities and Exchange Commission. No, it’s not executive compensation or the accounting treatment of stock options. It is which commissioner, Cynthia A. Glassman or Roel C. Campos, will get the only other office with the Capitol view when the agency moves into its new digs next to Union Station next month. Neither, it turns out. Donaldson decreed the space will serve as a common conference room.” Probably a little smarter than my idea to have the Commissioners share the coveted space (and here is Bloomberg’s more extensive article on the resolution).
As we recently wrote about – in great detail – in the Jan-Feb issue of The Corporate Counsel, understanding Form 12b-25 in advance of this year’s Form 10-K filing deadline is particularly recommended because of the uncertainty many companies are facing with respect to their ability to get their internal control reports finalized and filed by the Form 10-K due date. This is likely to result in an increased number of Form 12b-25 filings and more detailed disclosure than what is typically found in those filings.
Bearing that in mind, it’s probably a good time to understand what is involved with a Form 12b-25 filing – particularly since the SEC Enforcement Division just brought a case against FFP Marketing (and the two employees responsible for preparing the 12b-25 filing) for deficient 12b-25 disclosure. If the independent examiner’s report in the Spiegel case didn’t drive the point home that Form 12b-25s are disclosure documents, this case certainly does. Learn more in this interview with Tom Hanley on SEC Enforcement’s Interest in Form 12b-25 Filings.
Siebel’s 1st Amendment Fight Against Reg FD
Today, CFO.com is carrying this article about Siebel Systems’ upcoming court fight – on March 15 – during which the company will argue that the First Amendment’s right to free speech protects its CFO and an investor relations officer against a SEC complaint that alleges the company—for the second time—violated Regulation FD. This case is the first contested action ever brought by the SEC seeking to enforce Reg FD; the other five have settled.
IPO Litigation Opinion Now Available
On TheCorporateCounsel.net in the “Securities Litigation” Practice Area, we have posted the opinion and order of the District Court regarding In re Initial Public Offering Securities Litigation, which grants preliminary approval of the proposed settlement of plaintiffs with issuers and individual defendants in 298 coordinated cases involving IPOs of technology stocks, contingent on certain modifications.
The proposed settlement was opposed by the underwriter defendants on various grounds. The court conditioned its preliminary approval on modification of the proposed bar order – which the court found was broader than authorized under the Private Securities Litigation Reform Act. The opinion has a discussion of various PSLRA provisions, including proportionate liability (pp. 36-38); settlement discharge (pp. 38-43); and judgment reduction (pp. 43-46). Thanks to Mike Holliday for tracking this down!
At its conference in October, members of the International Corporate Governance Network discussed the advantages of changing state laws to move from pluarality to majority voting, rather than have the SEC adopt its shareholder access framework.
Now, the ABA has formed the “Majority/Plurality Voting Task Force” – headed up by former Delaware Supreme Court Chief Justice Norman Veasey – to examine the possibility of updating the ABA’s Model Act in this area. The Model Act serves as a framework for corporate law in more than 30 states.
Investors clearly are interested in this topic. So far this year, IRRC reports that over 80 companies have received shareholder proposals that seek to have a majority vote standard implemented – and Corp Fin has been allowing the inclusion of these proposals. Last week, Corp Fin rejected Citigroup’s no-action exclusion request over this type of proposal.
More on the Art of Minute-Taking
Boy, look at the focus on minutes in this article in the Boston Globe. The article is about how – in the takeover of Gillette by Procter & Gamble – the Massachusetts Secretary of State (and future gubernatorial candidate) is “investigating” the takeover, to see if the Gillette CEO’s severance package may have motivated him to sell the company.
The article notes that the Secretary of State “said the minutes of the directors meeting the company provided him are too skimpy to reflect what he said is the magnitude of the deal combining the two consumer product giants. ‘There’s no evidence of extensive deliberations,” Galvin said. “I find it hard to accept that these are the actual minutes of what occurred.'”
Next week, the panel will discuss how to take minutes in the current environment on CompensationStandards.com – “Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney” – featuring John Olson of Gibson Dunn; Marty Lipton of Wachtell Lipton; Frank Balotti of Richards Layton; and Rich Koppes of Jones Day.
On CompensationStandards.com – in the “WorldCom Settlement Analysis” page in the “Hot Topics” box – we have posted the order of the Southern District of Texas District Court that preliminarily approves the proposed settlement with outside directors that includes $13 million of their personal funds. As you may recall, this amount is based on 10% of their net gain on sales of certain Enron stock including certain stock options.
Learn what this all means for director’s pocketbooks on next Thursday’s webcast on CompensationStandards.com – “Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney” – featuring John Olson of Gibson Dunn; Marty Lipton of Wachtell Lipton; Frank Balotti of Richards Layton; and Rich Koppes of Jones Day.
Judge Orders Reinstatement for 1st Sarbanes-Oxley Whistleblower
An article on Law.com reports that a DOL judge ruled last week that Cardinal Bancshares is required to reinstate a former employee who had blown the whistle on its accounting practices and pay him nearly $65k in back pay/damages and $108k in legal fees. Last year, this whistleblower was the first person to win protection under Section 806 of Sarbanes-Oxley.
The DOL opinion sets out specific terms and conditions, and rebuts point-by-point arguments by Cardinal Bankshares that bringing the whistleblower back would be too onerous. The bank plans to file an appeal with the DOL Administrative Review Board over the next week. If that board decides not to take up the case, then the bank will consider whether to appeal it to a federal court.
Since Sarbanes-Oxley took effect, whistleblowers have filed 144 claims with the Department of Labor. The Cardinal Bancshares whistleblower is one of just three workers to win protection so far. Another 16 cases have ended in settlements.
Impact of SEC’s Letter on Lease Accounting
Today’s Washington Post carries an article that notes the dramatic impact of the letter on lease accounting from the SEC’s Chief Accountant on some retailers, causing restatements. The letter was issued two weeks ago. I have heard a number of complaints from members on how the letter is wreaking havoc on their 404 plans.
Yesterday, the IRS announced a settlement initiative for executives and companies that participated in an abusive tax avoidance transaction involving the transfer of stock options or restricted stock to family controlled entities. Under this scheme, executives – often facilitated by their employers – transferred options to family controlled partnerships and other related entities typically created for the sole purpose of receiving the options and avoiding taxes on compensation income normally taxed to the executive. The tax objective was to defer for up to 30 years taxes on the compensation and, in many cases, resulted in the corporation deferring a legitimate deduction for the same compensation.
To date, the IRS has identified 42 companies, many more executives and unreported income of more than $700 million involved in this scheme, which was aggressively promoted by financial advisors about 5 years ago. The IRS still is looking to find other companies that engaged in this practice.
Executives who engaged in these transactions will have until May 23rd to accept an IRS settlement offer to resolve their tax issues. The offer also extends to companies that issued the options to executives and directors as part of their compensation. Proof that the SEC is paying attention to compensation issues; Chairman Donaldson issued a statement praising the IRS’ action.
On CompensationStandards.com, we have posted a host of materials related to this IRS initiative in the “Hot Topics” Box on the home page under “IRS Stock Option Settlement Offer.”
Status of Disney Trial
Many members have asked me about the status of the Disney trial. The parties have just begun briefing, which is scheduled over the next two months. Then there may be oral argument, so the decision is not likely to occur until sometime in June. And of course, there are all sorts of factors that can delay it further.
SEC Sets of Date of Internal Controls Roundtable
The SEC has set the date of its internal controls roundtable for April 13th in its HQ in Washingto DC. Panelists have not yet been selected. The SEC seeks comments on internal control issues by April 1st so that they can be considered for discussion. As an aside, by the time of the roundtable, the SEC’s HQ likely will be half-empty as the HQ move should be well underway – last chance to visit 450 5th Street!
