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."
On Thursday, the SEC posted its five-year strategic plan, as required by the Government Performance and Results Act of 1993. The 59-page plan outlines broad strategies to accomplish what could be considered the SEC’s long-standing four goals: (1) enforce compliance with federal securities laws, (2) sustain an effective and flexible regulatory environment, (3) encourage and promote informed investment decision-making, and (4) maximize the use of SEC resources.
Most of the strategies outlined in the plan have been well-publicized over the past year as Chairman Donaldson has been making his mark. For example, the new Office of Risk Assessment is leading the way to implement the “doctrine of no surprises.” Another example is the SEC’s push to eventually utilize XBRL in an effort to upgrade EDGAR.
On the Corp Fin front, the transformation of the disclosure review process – including the criteria used for selection – is mentioned repeatedly. This transformation already has begun and is bound to evolve in the near term.
I am a fool for trivia and love all the factoids spread throughout the plan, such as 600,000 documents are filed annually through EDGAR and 18 million pages are contained in the 12,000 annual reports filed annually.
The SEC University
One of the more notable aspects of the 5-year plan is that the SEC is developing an online and in-person training program called the SEC University. One of the rationales for “SEC-U” (which is the abbreviation that the plan uses on page 48) is that 14% of the SEC’s managers are eligible to retire in 2005 – hence, the need to train new leaders. Corp Fin has conducted in-person training for years – but it will be interesting to see what type of online training the Staff develops.
50 Nuggets III
Join Alan Dye and I as we wind our way through 50 practice pointers in a webcast tomorrow – 50 Nuggets in 50 Minutes III.
If you are not yet a member, take advantage of a no-risk trial to see what you are missing. Here are 10 Good Reasons to try us! And now you can take advantage of our special offer to try a “Rest of 2004” no-risk trial to either TheCorporateCounsel.net or Section16.net for only $315!
Last Wednesday, Google filed a rescission offer in a new registration statement with the SEC (which was then amended on Friday), offering to repurchase more than 23 million shares of its stock and 5.6 million options that were illegally issued to approximately 1,000 of its employees and consultants. This rescission offering is not directly related to the IPO.
According to media reports, some state regulators (e.g. California) are actively investigating violations raised by Google’s prior offerings and these reports claim that Google’s IPO has been postponed due to these investigations. However, the fact that this rescission offering is happening should not have been surprising to the mainstream media since the IPO prospectus – since April – has included a section entitled “Rescission Offer” that revealed these violations and the proposed resolution. This is not something that by itself should hold up the IPO – much less imperil it – since it was clearly planned for from the beginning. Rather, it’s a soft IPO market that likely is forcing a postponement of the IPO.
According to Google’s disclosure, the shares causing the violations are from Google’s option plans. Although there are specific federal and state exemptions for sales of shares underlying options, it is not too uncommon for private companies to technically pop out of those exemptions and be left with no exemptions to rely on and no way to register the sales. The SEC likely will not do anything about Google’s Rule 701 violations unless there was fraud involved, which doesn’t seem to be the case. Remember that under Section 12, purchasers – not the SEC – have a cause of action to seek rescission.
Although it isn’t disclosed, it’s possible that Google crossed the Section 12(g) threshold some time back and was required to register its common stock under the ’34 Act (companies that have more than 500 shareholders and $10 million in assets at calendar year end must register under Section 12(g)). Since it hadn’t conducted a public offering, Google probably never imagined – as is the case for a number of larger private companies – it could possibly be required to file a Form 10 with the SEC.
Now that a IPO appears imminent (despite the postponement), any offerees that accept the rescission offer would be out of their minds as Google’s anticipated IPO offering range is between $108 and $135 a share and the rescission offers are well below those levels; as low as a dollar and change in some cases.
The rescission offer prospectus does include a risk factor that alludes to this disparity: “The amount you would receive in the rescission offer is fixed and is not tied to the fair market value of our common stock at the time the rescission offer closes. As a result, if you accept the rescission offer, you may receive less than the fair market value of the securities you would be tendering to us.” But this risk factor doesn’t mention the anticipated range of the IPO. It will be interesting to see if any rescission offerees tender their shares.
Does a Federal Right of Rescission Survive a Rescission Offer?
One risk factor in the Google rescission prospectus raises an interesting issue: “If you affirmatively reject or fail to accept the rescission offer, it is unclear whether or not you will have a right of rescission under federal securities laws after the expiration of the rescission offer. The staff of the Securities and Exchange Commission is of the opinion that a person’s right of rescission created under the Securities Act of 1933 may survive the rescission offer. However, federal courts in the past have ruled that a person who rejects or fails to accept a rescission offer is precluded from later seeking similar relief.”
If Google’s stock price tanked in the aftermarket, could rescission offerees attempt to exercise their rescission rights then (note that the rescission prospectus states that the offer expires in September – most states require that rescission offers remain open for at least 30 days)? E-mail your thoughts (and any materials on rescission offerings) on this topic to me and I will address it later in the week as we are in the midst of building a “Rescission Offerings” Practice Area.
Is a Dutch Auction a Postive Development for Investors?
Yesterday’s Washington Post contained this editorial from Yale School of Management professor Barry Nalebuffon on this hot topic.
• the addition of a fourth checkbox to Form 8-K to allow a company to satisfy the disclosure requirements of Rule 13e-4(c), the Regulation M-A provision for issuer tender offers, by including that disclosure in a Form 8-K;
• revision of the requirement to disclose the source of funding under Item 2.01 of Form 8-K, Completion of Acquisition or Disposition of Assets, if a material relationship exists between the company and the source of funding (instead of if a material relationship exists between the company and the seller of the assets);
• Revision to Item 5.05(c) of Form 8-K, Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics, to provide that a company disclosing an amendment to, or waiver from, its code of ethics on its website must do so within four business days (rather than five);
• amendment to Item 5(a) of Form 10-K (disclosure of unregistered sales) to disallow the exclusion of sales made under Reg S; and
• re-addition of paragraph (b) of Item 5 of 10-Q/10-QSB that was inadvertently deleted.
New “Reg S” Practice Area
We have created new practice area for Regulation S. The Practice Area includes FAQs, recent No-Action Letters and a timeline of Reg S. Take a look!
Under new regs issued Monday by the Treasury Department and the IRS, employee-holders of ISOs have the ability to acquire employer stock without realizing income when the option is exercised. The regulations finalize, with minor changes, regulations proposed last summer.
Capital gains treatment is permitted if the employee holds the stock for a required period, the exercise price for the ISO is no less than the fair market value of the underlying stock on the date the ISO is granted, and the ISO plan was approved by shareholders. Additionally, the amount of ISOs that can be granted to an employee is limited.
The final regulations generally will be effective on the earlier of January 1, 2006 or the first regularly scheduled stockholders meeting occurring at least six months after the publication of the final regulations.
New “Lead Director” Practice Area
We have created a new “Lead Director” Practice Area, including FAQs on board leadership and examples from companies’ corporate governance principles and proxy statement disclosures. Check it out.
An article in yesterday’s L.A. Times reported that actions brought by the Division of Enforcement are down in the current year (which ends Sept. 30). In the nine months ending June 30, the SEC brought 378 enforcement actions against companies and individuals, compared to 443 enforcement actions in the prior year.
Some experts speculate that the decrease is a result of a change in enforcement strategies and an increase in complex cases, rather than a decrease in corporate fraud. There are select areas, however, where SEC enforcement numbers are rising: freezing assets, suspending trades and officer & director bars.
Pitt’s (non) FOIAble Records
The U.S. District Court for the District of Columbia ruled last week that certain records of former Chairman Harvey Pitt are not required by FOIA to be turned over to the media. The ruling encompasses Pitt’s notes on meetings with Wall Street and accounting executives as well as telephone logs and appointment calendars. Bloomberg had made several requests for information during Pitt’s tenure, but the SEC claimed most of the records were not “agency records” subject to the FOIA.
The court also upheld the SEC’s denial of Bloomberg’s request for documents on a November 2001 meeting on conflicts on Wall Street. Bloomberg sought notes taken by the Staff at the meeting with officials from the NYSE, NASD and several brokerage firms. The court agreed with the SEC’s denial, saying that regulators would be hampered if participants didn’t feel free to talk openly at such meetings, or if the thoughts and recommendations of the Staff were “exposed” before a final decision on a policy matter.
Last week, Jim Quigley, CEO of Deloitte & Touche USA, testified before the House Committee on Financial Services at a hearing on Sarbanes-Oxley. In his testimony, Quigley said it is very challenging for companies to comply with both an accelerated filing schedule and the new internal-controls rules in the same year. Quigley said Deloitte planned to send a letter to the SEC asking the agency to delay implementation.
It appears that the SEC may actually be considering a one-year extension for the accelerated filing deadline for Form 10-Ks, according to a July 26th Wall Street Journal article. Under the phase-in as originally established in 2002, for fiscal years ending after December 15, 2004, 10-Ks will be required to be filed within 60 days of the fiscal year end (rather than the 75 days they had this year).
In addition, accelerated filer companies are required to file their 10-Qs within 40 days after each quarter end this year – with this deadline dropping to 35 days next year.
Our New Survey on Accelerated Filer Deadlines!
We have a hunch that meeting a 35-day 10-Q deadline might be even more challenging than a 60-day 10-K deadline. To find out whether this hunch is correct, we have posted a quick survey on the ability of accelerated filers to meet these upcoming deadlines. Please weigh in on this important debate!
You also might want to review the final results from our recent survey on disclosure committees.
I had blogged way back when about a California bill introduced by Judy Chu that went beyond what the controversial SEC proposal. After significant pushback from all quarters – including CalPERS – legislator Chu introduced a resolution in support of the SEC rules, which won overwhelming support in both branches of the Legislature.
At that time, Chu also agreed to amend her bill to require that companies provide a process in which shareholders could merely “recommend” candidates for election as directors and that they file the process with the secretary of state. In June, the bill went through yet another round of tweaking in the California Senate Judiciary Committee, which eliminated the “recommend” clause and turned it into simply a disclosure bill. This disclosure bill would require publicly traded companies to file a copy of their corporate election procedures – or those portions of the company’s articles of incorporation and bylaws that related to nominating and electing directors – with the secretary of state.
The bill will be heard by the Senate Appropriations Committee on August 2nd. Now only the state Department of Corporations remains opposed to the bill because it believes the issue should be addressed by the SEC.
Crying in My Spilt Milk
As I head off for a vacation next week, I need to get my “moving da office” woes off my chest…no Internet access for two weeks…cross-talk from a radio station on my phone…losing my wallet in a cab…I need a vacation. Julie Hoffman will be blogging next week for your entertainment.
The FASB has released a draft abstract of a Tentative Conclusion of the Emerging Issues Task Force (EITF) that contingently convertible bonds should be included in calculating diluted earnings per share regardless of whether the contingent feature has been met.
As an example of contingently convertible debt, the debt might provide that it is not convertible into common shares until the stock price has exceeded some percentage threshold for some specified time period (e.g., 20% above the conversion price for a 30-day period). Presently, most issuers exclude the potential dilutive effect until the market price contingency is met. The FASB staff has reported that more than $100 billion in contingently convertible debt has been issued, with more than $90 billion currently outstanding.
In addition to contingently convertible debt, the Task Force is inviting comments on whether other instruments with similar contingencies should be included. Comments are due on September 3, 2004. If the Task Force reaches a decision, this guidance will require FASB Board ratification before it becomes effective.
The proposed effective date would be reporting periods ending after December 15, 2004, and prior period EPS amounts presented for comparative purposes would have to be restated. Thanks to roving reporter Mike Holliday for this heads-up!
Calling All Accountants!
According to a GAO report issued yesterday, the SEC faces ongoing challenges filling many of its newly created positions, particularly accountants, due to competition from the private sector. In 2004, Corp Fin received funding for 175 new accountants and attorneys, but Corp Fin had filled only about 30% of its vacancies through the first half of the year.
The report also noted that in 2003, Corp Fin reviewed only 23% of all reporting issuers, falling short of its goal of 33% (mandated by SOX Section 408). Ultimately, the report made no recommendations.
Don’t forget tomorrow’s NASPP webcast – “Employee Stock Purchase Plans and Expensing: What Now?” – during which Renee Deming of Heller, Ehrman, White & McAuliffe; Paula Todd of Towers Perrin and Ellie Kehmeier of Deloitte & Touche will discuss the potential impact of the FASB’s option expensing proposal on ESPPs and what alternatives you should consider now. New course materials were posted today – a powerpoint in a PDF file that you should print off before the program.
An audio archive and transcript will be posted following the live webcast. The non-member fee for this special webcast is $495. If you wish to access this valuable program without paying this fee, you may simply take advantage of a no-risk trial.
Increase in O&D Bars
In addition to disclosing a range of $108 to $135 for its IPO, Google disclosed yesterday (in its Amendment No. 4 to the S-1) that the SEC staff intends to seek a civil injunction against David Drummond, Google’s VP of Corporate Development, Secretary and General Counsel, alleging violations of federal securities laws.
The Staff’s action arises out of Drummond’s prior employment as CFO of SmartForce, and involves certain disclosure and accounting issues relating to SmartForce’s financial statements. SmartForce’s successor had discovered “several accounting issues” in SmartForce’s past financial statements and, earlier this year, agreed to pay more than $30 million to settle class-action lawsuits related to the accounting problems.
The SEC also instituted O&D proceedings yesterday in D.C. federal court against Capital One Financial Corp.’s former CFO, David Willey. The SEC suit alleges that Willey made $3 million in profits on the material, nonpublic information that the Federal Reserve Board was considering downgrading the company in 2002.
As Enforcement Director Stephen Cutler noted in his speech to the D.C. Bar in February, the SEC is making more frequent use of its Officer and Director bar powers. In fiscal year 2003, the SEC sought 170 O&D bars, compared to only 38 in fiscal year 2000.
SEC Continues to Clean House
On June 9, we blogged that the SEC instituted two separate public administrative proceedings against 31 companies to determine whether to revoke the registration of their securities under the ’34 Act. The Staff continues to clean house, as evidenced by the recent proceedings with EVTC, Inc. (7/26), Spiegel Inc. (7/23), Ocumed Group, Inc. (7/7), Pinnacle Business Management (7/6) and IDT Venture Group, Inc. (6/25), to name a few.
None of these cases appears to be newsworthy in and of itself; although the consistency with which these types of cases are brought is interesting. This is especially true given Corp Fin’s review burden under Section 408 of Sarbanes-Oxley (i.e. each ’34 Act filer must be reviewed once every 3 years).
On July 14, the GAO issued a report on environmental disclosure in SEC filings. The report addresses (1) market participants’ views on how well the SEC has defined the requirements for environmental disclosure, (2) the extent to which companies are disclosing such information in their SEC filings, (3) the adequacy of the SEC’s efforts to monitor and enforce compliance with disclosure requirements, and (4) suggestions for increasing and improving environmental disclosure.
As you might expect, the GAO found that market participants vigorously disagree about whether the SEC’s existing disclosure requirements are adequate. Also, the GAO was unable to determine the extent to which companies are disclosing environmental information without access to companies’ records because no disclosure on environmental issues could mean that a company does not have existing or potential environmental liabilities, has determined that such liabilities are not material, or is not adequately complying with disclosure requirements. Consequently, the GAO couldn’t determine the adequacy of the SEC’s efforts to monitor and enforce compliance with environmental disclosure requirements without more information.
Ultimately, the GAO recommended that the SEC “take steps to improve the tracking and transparency of information related to its reviews of companies’ filings” by increasing the amount of information available within the SEC and to the public on the results of the SEC’s filing reviews (e.g., public availability of comment letters) and by improving the level of coordination between the SEC and EPA.
Introducing XBRL
The SEC announced last week that it is pursuing a rulemaking project to permit public companies to file financial reports using XBRL technology, which tags data for easier online searches. Unlike HTML (hypertext mark-up language), XBRL (extensible business reporting language) allows for ready comparisons and analysis of financial results.
The relatively new XBRL software reportedly makes it easier for companies to prepare quarterly and annual financial reports because it creates a single document that is able to be converted to different formats, reducing duplication, inefficiencies and errors.
Last summer, the FDIC, Federal Reserve and the OCC launched a project to create a shared data repository of Call Reports (a quarterly financial statement filing made by banks) that would be submitted via the Internet in XBRL. It is expected that banks will file their 3rd quarter 2004 Call Reports via the new system.
This year, TSX Group, Inc. (listed on the Toronto Stock Exchange) became the first public company to publish annual financial results in XBRL. To learn how to view those financial statements, click here. To learn more about XBRL, click here.
