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."
Alan Beller, Director of Corp Fin, recently noted that the volume of blanket Rule 83 requests did not significantly rise after the LivEdgar development – and that he hoped it would not rise when comment letters begin to be publicly available. If it does, he noted that the SEC would conduct rulemaking to more closely align the availability of Rule 83 relief with its intended purpose. This is the same warning that he gave last year, which seemed to have worked given that Rule 83 wasn’t widely abused.
Greenspan on Hedge Fund Proposal
Federal Reserve Chairman Alan Greenspan gave his semiannual testimony on monetary policy to Senate Banking Committee on Tuesday. During his testimony, he stated his opposition to the SEC’s recent proposal to register hedge fund advisers with the agency.
Greenspan said that the proposal will not accomplish its goal of detecting fraud merely through registration with the SEC and periodic examination of the adviser by the SEC. “Fraud is almost always uncovered through complaints of counterparties or by accident,” he said. Further, Greenspan fears that the proposal will create restrictions that will cause many hedge funds to leave the industry, “to the significant detriment of our economy.”
More on Options Expensing
Also on Tuesday, the House of Representatives passed the Stock Option Accounting Reform Act (H.R. 3574) by a vote of 312-111. As we have previously blogged, the bill would mandate that stock options be counted as an expense on company balance sheets when they are issued to the CEO and the other four highest paid company officers, but not counted as an expense when they are issued to other employees. The bill also says that when a company is calculating the expense of the options issued to the top five, it shall assume that stock prices do not fluctuate. Small business issuers would be exempt.
Next up for the bill is consideration by the Senate.
I’ve had a number of members ask to see the useful 10-Q checklist from Wilmer Cutler Hale & Dorr that we had posted on the home page a few months back. It is contained in our new “Form 10-Q” Practice Area, along with other useful resources (including a link to our “Stock Repurchase” Practice Area which includes Item 703 guidance.
Tally Up Sheets Now Available!
One common question I have received: “Why do you keep emphasizing the need for compensation committees to tally up compensation packages before they approve any additional component or approve the annual pay package? That is such common sense, they must be doing that.”
I agree it is a matter of common sense. But that is a question to pose to the compensation committee(s) that you advise. In speaking to many directors now, it doesn’t appear that the use of tally up sheets is common at all. In fact, we struggled to find a sample for several months – despite access to a remarkable (and large) Task Force comprised of the country’s top compensation consultants and lawyers (note that some Task Force members didn’t want to share their proprietary tally up formulas).
We thank Mike Kesner, who is head of Deloitte’s Executive Compensation practice, for sharing two sample tally up sheets in the change-of-control context. Recall Fred Cook’s advice from his practice pointer that I blogged about a few weeks back: compensation committees are urged to prepare tally up’s in five different termination scenarios.
One challenging aspect of practicing securities law is that there are so many different sources of SEC guidance. The most authoritative are those adopted by Commissioners, including rules and regulations as well as interpretive and adopting releases. Then, there are nearly a half-dozen sources of informal guidance from the SEC Staff, such as no-action letters, staff legal bulletins, FAQs and the Telephone Interpretation Manual.
Probably the least authoritative source of guidance are those informal conversations that each of us have with the SEC Staff, including those conducted in a group. Each Spring, the ABA’s Joint Committee on Employee Benefits (known as the “JCEB”) meets with a number of federal agencies in an attempt to obtain interpretive guidance on various issues, including a meeting with Corp Fin Staff. These meetings can be quite productive and have provided great insight on the latest Corp Fin thinking on a variety of insider-compliance issues.
We are excited to be able to post reports – going back to 1997 – of the JCEB meetings with the SEC staff, with a big thanks to Gloria Nusbacher of Hughes Hubbard & Reed LLP, who acted as Reporter for such meetings. This notes are posted in “Practice Areas,” as well as our home page.
Of course, these reports come with a number of disclaimers and should be read with those in mind (e.gs. the responses reflect the unofficial, individual views of the SEC Staff as of the time of the discussion, and do not necessarily represent the position of the SEC or other Staff members – and the views of the SEC Staff change over time and you should not necessarily rely on the positions reflected in these reports.)
NASD Issues Shelf Offering Proposal
The NASD has proposed rule changes to amend the its rules regarding the filing requirements and regulation of shelf offerings by investment bankers. This is the first activity in this area since the September 2001 proposal in NASD Notice to Members 01-59. The NASD states that significant revisions have been made since that proposal. It is expected that the SEC will put these proposed rule changes out for public comment.
Although the rules directly affect NASD members, companies have an interest to insure that the rules would not delay shelf offerings and their ability to take advantage of market opportunities.
Know The Cost Of Golden Parachute Gross-Up Provisions
If you didn’t see the Sunday edition of the NY Times Business section, Gretchen Morgenson’s article about “No Wonder CEOs Love Those Mergers” included a few quotes from Jesse Brill about the need for compensation committees to tally up all the compensation that a CEO is entitled to receive, both annually and in the event of a triggering event (like a merger).
Today, American Seafoods Corp filed Amendment No. 7 to Form S-1 for its IDS offering. This could wind up being the first IDS that the SEC Staff declares effective since the first one late last year – there are another dozen and a half still in the queue – and thus could serve as a model after it goes effective for what other IDS issuers need to disclose.
Yesterday’s Wall Street Journal had a great article on how last month’s US Supreme Court case has wreaked havoc on the ability to judges to sentence in federal courts. But the article missed one important point – that the Supreme Court case really doesn’t change the fact that the new sentencing guidelines impose vastly different compliance criteria on companies.
In other words, it is still important to learn the lessons to be imparted in next Wednesday’s webcast – “How the New Sentencing Guidelines Impact You.” To get up-to-speed before the program, you can check out an excellent article we just posted by one of the panelists, Jeff Kaplan, in our “Compliance Training” Practice Area (which also contains links to a number of law firm memos on the topic at the bottom of that page).
Sample Procedures for Filtering Third-Party Communications to Directors
If you are working on documenting written processes for collecting, reviewing, sorting, “filtering” and summarizing communications from third parties to independent directors – in their capacity as audit committee members and otherwise – you can check out two new documents that we have posted in our “Sample Document” Library.
The Working Draft of the September-October issue of The Corporate Counsel (which is posted on CompensationStandards.com) includes an excellent piece from veteran consultant Fred Cook on the 12 different types of bias that is present in benchmarking conducted by most compensation consultants. This piece is also posted on CompensationStandards.com as a practice pointer called “Compensation Surveys Are Biased” under “Surveys and Benchmarking—What is Wrong.”
I still continue to receive quite a bit of correspondence on the issue of delisting from the Berlin-Bremen Exchange. So we have created a “Berlin-Bremen Exchange” Practice Area, that includes two sample delisting responses from the exchange that explains the Exchange’s side of the story (including an explanation of why they believe there is no such thing as “delisting” for them).
Marching Towards a Paperless World
On Monday, the SEC announced that it has approved a rule change of the NYSE that eliminates the requirement for listed companies to make a paper filing of any Form 8-K or Form 6-K (but only if the Form 6-K was electronically submitted to the SEC via EDGAR). Listed companies are still required to continue to provide hard copies of materials to support a listing application as well as copies of proxy materials. This rule change is effective as of July 8th.
Cost of Deferred Compensation
On CompensationStandardsConference.com,we have posted an excellent practice point by Yale Tauber and Donald Levy on how to best understand the “Cost of Deferred Compensation.”
At last week’s ASCS conference, Marty Dunn, Deputy Director of Corp Fin, indicated that some companies didn’t appear to be properly disclosing their voting results as required under Item 4 of Form 10-Q. Item 4 doesn’t prescribe a specific format for disclosure of voting results.
Here are a few examples of companies that we thought appeared to get it right. Last year, Eastman Kodak’s 2nd quarter 10-Q disclosed how votes were cast for a staggered board. This year, Walt Disney’s 2nd quarter 10-Q has a nice chart to reveal the voting at its controversial annual meeting. Pfizer also has a nice chart in its 2nd quarter 10-Q.
New “Income Deposit Securities” Practice Area
We have created a new “Income Deposit Securities” Practice Area, including links to the 19 registration statements that have been filed registering Income Deposit Securities, Enhanced Income Securities and Enhanced Yield Securities. I believe only one of these registration statements have been declared effective by the SEC Staff so far.
Consider Whether Definition of “Cause” Should Include Failure to Cooperate With Governmental Investigation
On April 28th, Corp Fin issued a novel no-action response to europrospectus.com limited on some Regulation S issues. This company intends to make available onine prospectuses and related documents for international securities offerings to subscribers.
According to the letter, the company will run a web-based database service that will post prospectuses before distribution is complete for Reg S/144A offerings by non-US issuers. One of the issues addressed is whether the posting will be deemed a “directed selling effort” under Reg S by the issuer of the security.
The database site is password-protected, has legends and you need to be a member to use it but here’s the rub – unlike prior letters like IPO.net, to get a password you don’t need to be a QIB or an IAI. Rather, you only need to be a customer (apparently, there is a high membership fee but still no need to be a QIB or IAI, etc.).
My good friend Walter van Dorn of Thatcher Proffitt explains to me that the over-all utility of this response is likely to be limited since the overwhelming majority of international offerings are combined Reg S and Rule 144A offerings – and because the site here does not need to be password-protected to nonQIBs/IAIs (even though no-action was granted based on the interpretation of some pretty arcane Reg S provisions).
Most issuers still will have problems with the necessary ’33 Act exemption for the 144A/4(2) component of their offering. So for the vast majority of deals that are combined Reg S/144A offerings, this letter may not be of much practical value.
23 Lessons Learned from Disney
I love “lessons learned” articles because they tend to be so practical – that’s why one of my favorite practice pointers on CompensationStandardsConference.com is “23 Lessons Learned from Disney: Director Liability for Excessive Executive Compensation” by Mike Melbinger.
The Wall Street Journal reported last week that the SEC has filed an amicus brief in a Second Circuit Court of Appeals case, arguing that companies and mutual funds are not permitted to omit information not specifically required from disclosure documents and public statements simply because that information is available elsewhere.
In In re Merrill Lynch & Co., Inc. Research Reports Securities Litigation, the plaintiff is a shareholder of Merrill’s Global Technology Fund. Suing under Securities Act Sections 11 and 12(a)(2), the plaintiff contends that Merrill should have disclosed the fact that it performed investment banking services for some of the stocks in the fund and that Merrill’s analysts had written research on certain of the fund’s stocks.
The U.S. District Court for the Southern District of New York dismissed the action in July 2003, holding that Merrill had no obligation to tell investors that its fund owned stocks of companies that had relationships with Merrill because “that information was already public” on the Internet, in the news media and elsewhere.
In its brief, the SEC argued that “[t]he fact that information could be discovered somewhere in the public domain does not mean it can never be materially misleading to omit that information from a disclosure document or other statement.”
Stay tuned for the decision.
Chairman Donaldson Recuses Himself
Last week, a company that Chairman Donaldson had served as a director, EasyLink Services Corporation, disclosed in an 8-K filing that it was being investigated by the SEC Staff. According to the filing, the Staff is “reviewing certain transactions accounting for approximately $3 million of revenue generated by its former advertising network business in 2000, a year in which the Company reported $61.2 million in total revenue.” Chairman Donaldson served on the audit committee in 2000.
The next day, the Commission issued a press release announcing that “Chairman Donaldson has not participated and will not participate in any matter before the Commission involving EasyLink.” Further, the SEC announced that a former Assistant Director of the Division of Enforcement was acting as “Special Advisor” to the four Commissioners.
On May 11 and May 13, Broc blogged about rumors in the mainstream media about where the SEC was heading with its shareholder access proposal. The rumor mill is still working.
On July 1, a New York Timesarticle by Stephen Labaton reported that Chairman Donaldson said that he has been unable to forge an agreement among his deeply divided colleagues. “Right now there is no consensus,” he said. “I’m not sure I agree with what anyone else thinks or anyone agrees with what I think.” The Times article reported that the deadlock “all but dooms” the possibility that new rules would be implemented prior to the next proxy season.
The Chairman’s June 20 speech at the Directors College at Standford lends credence to this report, where the Chairman stated that he remains “committed to responsible and constructive change in this area, and will proceed thoughtfully and carefully. [The SEC’s] goal is the right course, rather than a hasty, less thoughtful course. We will not be forced to act in the face of an artificial deadline.”
Buffett Sounds Off on Options Expensing Bill
In an Op-Ed piece in yesterday’s Washington Post, Berkshire Hathaway CEO Warren Buffett warned that the prize for “mathematical lunacy by a legislative body” may be awarded to the U.S. House of Representatives if it passes the Stock Option Accounting Reform Act of 2003 (H.R. 3574). (The current prize for “mathematical lunacy” is apparently held by the Indiana House of Representatives for declaring, in 1897, that pi would equal 3.2 instead of 3.14159).
The Stock Option Accounting Reform bill, which passed the House Financial Services Committee on June 15, mandates that stock options be counted as an expense on company balance sheets when they are issued to the CEO and the other four highest paid company officers, but not counted as an expense when they are issued to other employees. The bill also says that when a company is calculating the expense of the options issued to the top five, it shall assume that stock prices do not fluctuate. The bill would exempt small business issuers.
