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."
The SEC has announced the selection of Charles A. Fishkin as the Director of the new Office of Risk Assessment. Mr. Fishkin worked most recently for Fidelity Investments in Boston, where he served as vice president of Firmwide Risk.
Chairman Donaldson announced the creation of the Office of Risk Assessment during Congressional testimony last November to better enable the SEC to anticipate, identify and manage emerging risks and market trends. The new office will analyze risks across the SEC’s divisional boundaries, focusing on early identification of new or resurgent forms of fraudulent, illegal or questionable behavior or products.
Not-So-Quiet “Quiet Period”
Goldman Sachs agreed to pay $2 million to settle administrative proceedings for violations of, among other things, Securities Act Sections 5(b) and 5(c), arising from its work as underwriter in four international public offerings.
According to the Order, certain Goldman traders sent illegal written offers to numerous institutional customers during the “waiting period” (in the form of emails describing the public offerings with headings such as “Why You Should Take A GOOOOOOOD Look at PetroChina”). In connection with one of these four public offerings, a Goldman representative made an additional illegal offer when he spoke to the press before the registration statement was filed with the SEC (during the “pre-filing” period) to explain where the proceeds of the offering would be used.
Goldman voluntarily reported one incident of illegal written offers by the traders to the SEC staff when it discovered that the traders had sent emails to 77 hedge fund and institutional clients in the United States. The SEC’s subsequent investigation into this incident revealed that the same traders had engaged in similar conduct in connection with three previous offerings.
This is a good question posed by a number of members yesterday in the wake of the SEC’s action against Siebel. The issue is that disclosure controls are supposed to be designed so that “information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.”
As Ron Mueller points out, before this action, it could have been argued perhaps that Reg FD does not require an Exchange Act filing in order to comply; but that an 8-K is only a safe harbor and the rule can be satisfied by other methods.
But in Paragraph 22 of the complaint against Siebel, the SEC sets forth its theory – that an 8-K is required under FD, and the rule says it’s only not required if disclosure is made through another channel. So the SEC essentially argues that a company needs to have the disclosure controls in place to determine whether there is an FD event that requires disclosure, and determining whether to satisfy the obligation by an 8-K or press release is then only a matter of disclosure implementation.
It seems like a odd first case for disclosure controls, particularly when the SEC is alleging that the FD disclosure was an intentional disclosure. The upshot is that you should ensure that your disclosure controls deal with Reg FD and the fact that you may need to make a disclosure as well as a determination as to the method of dissemination.
FASB May Delay Options Expensing
Yesterday, it was widely reported that FASB Chair Bob Herz was acknowledging that option expensing might be delayed from the beginning of 2005 to 2006 (and the SEC’s Chief Accountant was urging the delay). The rationale was that companies had their hands full this year with implementing more stringent internal controls.
Announcing the Arrival of Julie Hoffman!
I’m excited about our latest hire, Julie Hoffman who worked on the aircraft carrier when she was in Corp Fin back in the day – then worked at Latham & Watkins and Squire Sanders.
Julie will be blogging for me next week, when I am mired in Boston at the annual conference for the American Society of Corporate Secretaries. Julie can be reached at julie@thecorporatecounsel.net.
On CompensationStandardsConference.com, we have posted a working draft of the remaining 12 Steps of responsible compensation practices laid out in the May/June issue of The Corporate Counsel. These steps include some of our more controversial – and responsible – points. The working draft is accessible – like all the other valuable content on CompensationStandardsConference.com – by those that register for the October 20th major compensation conference.
Siebel Systems as Poster Child? First Disclosure Controls Violation Alleged!
When I taught an Executive MBA corporate governance class at George Mason this spring, Siebel Systems was often used by the class as an example of “what not to do.” In addition to having one of the first Reg FD violations, Siebel entered into a “governance by gunpoint” settlement with an institutional investor a year ago.
Yesterday, the SEC announced that it filed an action in the U.S. District Court for the Southern District of New York charging that Siebel Systems violated Regulation FD and a cease-and-desist order issued in November 2002 against the company for a Reg FD violation. The SEC charged the company’s chief financial officer and former IR officer (who still works there in a different capacity) with aiding and abetting Siebel’s violations.
In the first action on disclosure controls, the SEC also charged the company with violating Rule 13a-15, which requires issuers to maintain disclosure controls and procedures.
The SEC’s complaint alleges that, a scant 6 months after the cease-and-desist order was issued, the CFO disclosed material nonpublic information during two private events he attended with the IR officer, a “one-on-one” meeting with an institutional investor and an invitation-only dinner hosted by a banker (and that at both the meeting and the dinner, the CFO made positive comments about the company’s business activity levels and transaction pipeline that materially contrasted with negative public statements the company had recently made). The next day, the company’s stock price rose and trading volume doubled the average.
Yesterday, the WSJ reported that CalPERS, the biggest U.S. pension fund, is reconsidering its bright line voting policy that led to it voting against audit committee members at 83% of its portfolio companies this proxy season. This season’s policy led CalPERS to withhold votes for any audit committee members at companies whose auditors performed any non-audit services, regardless of any other circumstances. CalPERS will consider changes at a trustee meeting in July.
CalPERS to Create First Exec Comp Focus List
CalPERS also announced that it would create its first focus list for companies that it believes pays excessive executive compensation beginning this Fall. CalPERS has established an annual focus list identifying non-performing companies for years and will continue to do so.
The new, updated US sentencing guidelines – which promise to force companies to make dramatic changes to their compliance programs over the next few months – came under fire after last Thursday’s U.S. Supreme Court 5-4 decision that invalidated a Washington state law as unconstitutional. The US Supreme Court’s ruling invalidates sentencing guidelines in at least 9 states.
Learn more about this development – as well as what you need to be doing now in the wake of the updated US sentencing guidelines – on our July 21st webcast – “How the New Sentencing Guidelines Impact You.”
PCAOB Chairman Warns of Significant Issues at the Big 4
Late last week, PCAOB Chairman William McDonough testified on the Hill that the PCAOB identified “significant audit and accounting issues” in its preliminary inspections of the Big 4. While these initial inspections were more limited than the full inspections will be next year, McDonough said the PCAOB “learned a great deal about quality control in the largest firms.”
Under Sarbanes-Oxley, the PCAOB will be inspecting the Big 4 annually and launched its inspection program in 2003 with “limited procedures” inspections of these firms. McDonough said the latest inspection reports have been made available to the Big 4, which now have 30 days to respond. Once the firms respond, the PCAOB will finalize its reports and deliver them to the SEC. While certain portions of the reports will be made public, Sarbanes-Oxley limits the PCAOB as it must keep any potential defects in a specific firm’s quality-control system confidential, as long as the firm corrects the problems within 12 months.
Reasons Why Executives Should Want A Sound Compensation-Setting Process
Yesterday, the SEC issued a press release stating that it would begin posting Corp Fin and IM comment letters and filer responses on its own website. No more FOIA requests – and no more using paid subscription services to dig these out.
This process will commence for any filings made after August 1st that are selected for review – and no correspondence will be posted until after 45 days of a completed review. Based on the language in the press release, it seems fair to expect that the Staff will now routinely seek Tandy letter representations.
And of course, confidential treatment requests are more important than ever. The SEC is interested in receiving “suggestions on how to make the transition and process work efficiently, and ask that any comments be provided promptly.”
Yesterday, the SEC and PCAOB issued interpretive guidance regarding internal controls. The SEC’s guidance came in the form of 18 FAQs from the Office of Chief Accountant and Corp Fin. The PCAOB’s guidance came in the form of 26 FAQs.
3-2 Commission Vote on Mutual Fund Reform
At yesterday’s open Commission meeting – by a 3-2 vote – the SEC adopted mutual fund reforms now require that independent directors comprise 75% of mutual fund boards and the chair of such boards be independent. Commissioners Atkins and Glassman dissented – the same holdouts on shareholder access.
As pointed out by my good friend John Penn, although this result isn’t surprising in light of all the chatter before the formal vote, the Commission’s willingness to effectuate an action of such import based on a 3-2 vote may be bad news for those opposed to the shareholder access proposal. Perhaps to soothe the pain of the split vote, Chairman Donaldson pointed out during the meeting that since he took his post, the Commissioners had voted over 1,600 times and only 16 dissents had been registered.
More on the May/June Issue of The Corporate Counsel
As I blogged yesterday, we have posted a free version of the latest issue of The Corporate Counsel on CompensationStandardsConference.com that lays out the first 7 steps of a 12-step program to responsible compensation practices. We have received an amazing amount of feedback already (and keep those coming) and a few questions about when the next 5 steps will be available.
Those last five steps will be laid out in our September/October issue – but to satisfy those that can’t wait, we intend to post a working draft on CompensationStandardsConference.com next week (but that working draft will only be available to those that register for our October 20th compensation conference, which also gives you access to all the resources on CompensationStandardsConference.com). Some of the remaining steps will require more backbone than the first seven to implement – and it still is a working draft…
Due to our strong beliefs in the message contained in the just-published May/June issue of The Corporate Counsel, we have decided to post a free, electronic version of it on our new website, CompensationStandardsConference.com – complete with links that will take you directly to a wealth of important supporting materials, such as responsible practice pointers that have been submitted by members of our Task Force. This special issue provides a roadmap for compensation committee, laying out a 12-Step Program for responsible compensation practices.
Our Executive Compensation Task Force consists of over 80 of the top compensation lawyers and consultants – and these practice pointers have just started to roll in and many more will be posted in the coming days leading up to the Major 10/20 Compensation Conference, which is co-sponsored by the NASPP, The Corporate Counsel and The Corporate Executive.
Although the issue is posted in the publicly accessible section of CompensationStandardsConference.com – note that many of the links are to materials and memos that can only be accessed by those that sign up for the October 20 Major Compensation Conference – you can register to attend the live conference in San Francisco or you can register for webcast access to the conference. Either type of attendance will entitle you to access all of the “one-stop” resources on CompensationStandardsConference.com. (And we have special rates for those that are NASPP members or those at a firm/company that register more than one person).
You should note that in drafting this issue of The Corporate Counsel, some of our colleagues reviewed early drafts and thought that the standards we espouse are too high (but they all believed that the message still needed to be made). After careful consideration, we decided to stand by these standards – as we believe that high standards are absolutely necessary in the wake of so many past compensation excesses.(And early reactions to the issue support our decisions – one esteemed colleague called it our most crucial issue in 30 years.)
Part of our reasoning is that without high standards, Congress and regulators will implement standards that make ours look weak – just look at the non-qualified deferred compensation legislation that has already been passed by the House and the Senate (it would impose stringent standards on deferred comp arrangements that would result in ALL deferrals being immediately taxed and penalized if a single violation within the plan occurred). Note that this legislation is being extensively covered on both CompensationStandardsConference.com and Naspp.com.
SEC Proposes Section 16(b) Rulemaking
Yesterday, the SEC proposed amendments to Rules 16b-3 and 16b-7 to address the Third Circuit opinion in Levy v. Sterling Holding Company, LLC (Cert. denied by the Supreme Court). The SEC also proposed to amend Item 405 of Regulations S-K and S-B to harmonize it with recent changes in the Section 16 area (ie. shorter Form 4 due date, mandated electronic filing and web site posting of Section 16 reports).
Alan Dye will blog more about this important development in his Section16.net Blog.
We have wrapped up our survey on blackout and window period practices, with a healthy response of 159. Three-quarters have not changed their periods, while 15% expanded them and 8% reduced them. 10% intend to change their periods soon, while 21% are mulling it over (and 20% did it recently) – and 50% are comfortable with what they have. There also are stats on what types of blackout and window periods are currently being used – so check out the results!
New Survey on Disclosure Committees!
With “real-time” disclosure bearing down on us, I expect many companies will be rethinking the composition of their disclosure commmittees – answer 4 simple questions in our new survey on disclosure committees and we shall see if I am right or wrong…
Google Revises S-1 Again
I don’t know why but I get a chuckle out of today’s mainstream business press that theorizes on what type of Corp Fin comments led to Google filing an Amendment No. 2 to S-1, where it revised its risk factors and moved the founders’ letter (regarding why its business is so unique) to the middle of the prospectus. My favorite risk factor essentially states retail investors don’t know what they are doing and will be buying a majority of the shares issued in this IPO, so the stock price might tank afterwards…
Chairman Donaldson Speaks
Last week, SEC Chairman Donaldson gave a speech at the Directors College at Stanford Law School, where he spoke about various Commission initiatives and accomplishments, including the controversy over the shareholder access proposal.
Late last week, the SEC issued a release that approved PCAOB Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements.
In a related press release, the SEC said that guidance would be forthcoming from both the SEC and PCAOB staffs. The new Auditing Standard is effective for audits of fiscal years ending on or after Nov. 15, 2004 for accelerated filers – or July 15, 2005 for other companies.
SEC Chief Accountant Blunt on Contingency Fees
Last week, SEC Chief Accountant Donald Nicolaisen held a private meeting with the 7 largest auditors to reinforce the SEC’s position that accepting contingency fees for doing tax work for the companies they audit is not allowed – and he requested that the firms disclose any arrangements that may violate the rules to the client’s audit committee.
Bloomberg also reported that Nicolaisen even told the firms they may face SEC enforcement investigations if they accept contingency fees from companies they also audit.
Governance for the Family-Owned Business
Family-owned businesses pose unique governance issues, as reflected in this interview with Jack Moore on Governance in a Family Business.
