Author Archives: Broc Romanek

On Thursday, the SEC celebrates its 70th birthday with a small party for members of the SEC Historical Society and current SEC staffers – join the Society now by making a small donation. As part of its 5th Annual Meeting on Thursday, the Society is offering this free webcast with Doris Kearns Goodwin, Pulitzer Prize-winning author, who will discuss Joseph P. Kennedy as the first SEC Chairman.

Some of you might have been at the SEC’s 60th celebration at the National Building Mueseum a decade ago. Boy, that was some bash!

SEC Staffers in Need of a Shrink?

Thanks to Bruce Carton for digging out this gem – I gotta repeat his blog verbatim:

“Attention psychologists! You have just 9 more days to respond to the SEC’s job posting seeking an in-house psychologist to help “improve employee attitudes and satisfaction related to employee retention, job satisfaction, burnout, conflict and stress.”

The SEC’s decision to hire a psychologist for its employees, discussed in this article by Judith Burns of the AP, was reportedly met with a steady stream of one-liners from former SEC officials, including:

Bill McLucas (former Director of the SEC’s Division of Enforcement): “Just one? They should get a couple.” McLucas also figured “it’s going to take more than two years” to buck up morale at the federal securities agency. “This is a long-term job.” McLucas also was quoted as saying said he’d like current Enforcement director Stephen Cutler to get the first appointment once the psychologist is on board so that “he can take out his hostilities with that person instead of my clients.”

David Becker (former SEC General Counsel): “Working for the SEC in the current media climate is enough to drive anybody nuts.” Becker also wondered if the SEC is “about to introduce the group hug as a regulatory technique.”

Harvey Pitt (former SEC Chairman): “The SEC is a great place to work, but it is not for the faint of heart.” Asked if the SEC is a very stressful place to work, he joked: “Certainly, if you’re chairman.”

Laura Unger (former acting SEC Chairman): Asked whether SEC employees would line up to talk to a psychologist, Unger said “I have this picture of Charlie Brown sitting at his window with a ‘doctor is in’ sign and nobody showing up.”

Personally, I don’t know what to make of this other than I predict that a lot of heated discussions with SEC staff are going to end with the following salvo by defense counsel: “I think you need to see the SEC shrink!”

On May 25, the NYSE posted updated versions of its Section 303A Annual Written Affirmation, Interim Written Affirmation and Exhibit G (the updates are not yet marked on the NYSE’s Corporate Governance page – but on the updated forms themselves, they say “Updated May 25, 2004” on the top of the forms).

These updated forms make clear that companies that list only preferred or debt securities don’t have to file the annual CEO certification and that Exhibit G need not be filed by companies that have indicated on Exhibit D that they are exempt from Rule 10A-3 (regarding audit committees). Preferred and debt-only companies still have to file the annual company certification and must either comply with Item E on audit committees or explain their exemption on Exhibit D.

The updated affirmation form also adds business development companies and open-end management investment companies to the types of listed companies and changed the affirmation to apply to such companies. There may be other changes that I didn’t notice.

The Latest on Evolving 10b5-1 Plan Practices

Join us tomorrow for an exciting webcast – The Latest on Evolving 10b5-1 Plan Practices – in which a growing number of panelists will explain how the 10b5-1 market has changed recently – and what you should do now to keep up with the market. Take a look at this all-star panel, including key representatives from three Wall Street firms:

– Sue Morgan, Partner, Perkins Coie LLP
– Sharon Hendricks, Shareholder, Heller Ehrman LLP
– Lou Rorimer, Partner, Jones Day
– Michael David, Executive Director, Executive Services Group, Morgan Stanley
– John Berton, Vice President and Associate General Counsel, Goldman Sachs
– Keith Schnaars, Director, Private Banking & Investments, Merrill Lynch
– Georgia Bullitt, Executive Director and Counsel, Morgan Stanley
– Jeff Mullen, Vice President, Structured Equity Solutions Group, Goldman Sachs

Try a no-risk trial now to TheCorporateCounsel.net to listen to this practical and timely program.

Due to popular demand, we have posted a copy of the complaint filed by Spitzer against Grasso, Ken Langone and the NYSE in NY’s Supreme Court as an “Alert” on our home page.

Real-Time Disclosure Transcript is Up!

We have posted the transcript from last week’s timely – and wildly popular – webcast on “Overcoming the Challenges of Real-Time Disclosure.”

M&A Diligence

In my interview with David Thornquist on Electronic Due Diligence in M&A, David explains why reviewing the electronic records of a target before buying it should become a standard due diligence practice.

We have posted the June E-Minders a little early due to Memorial Day. Check it out!

Compensation Committee Chairs, Watch Out!

The upcoming legal battle over Dick Grasso’s pay package highlights the risks now faced by comp committee members as the NYSE comp committee chair was also named as a defendant in Spitzer’s lawsuit.

Unlike audit committees, comp committees do not have many prescribed rules and regulations about how to perform their jobs. The upcoming May-June issue of The Corporate Counsel, due out in a few weeks, will provide a 12 Step program for responsible compensation practices which might help comp committee members avoid liability. Try a no-risk trial to The Corporate Counsel now to obtain this valuable issue.

A few weeks ago the IPO of Salesforce.com was delayed based on a mutual agreement with Corp Fin. The company pushed back the offering after its Chairman and CEO was interviewed for a story that appeared in the New York Times on May 9th. In this interview, the CEO said that “the SEC prohibits me from making any statements that would hype my IPO,” but then proceeded to discuss the software business and his competitors.

Those who practiced during the Internet boom might recall the delay of Webvan’s IPO. It is clear that Corp Fin will take action if statements are made during the quiet period that are viewed as conditioning the market. Even after waiting it out, the staff often requires that a risk factor be included in the IPO prospectus regarding the potential gun-jumping violation. We have put together examples of these risk factors in our Disclosure Analysis and Samples Practice Area.

SEC Issues 10b-18 FAQs

Last week, Market Reg issued these 10b-18 FAQs. I was waiting to blog about it until I uncovered why it states “modified on May 18th” on the bottom – but I found out that is meaningless. That date is the original issuance date.

Continuing my train of thought from Friday’s blog, look at this 8-K filed by PepsiCo on April 30th under Item 5 that contains a press release announcing that its Frito-Lay subsidiary had received a Wells letter from the SEC alleging involvement by a non-executive employee with documents supposedly used by Kmart in allegedly improper accounting. The SEC claims that a non-executive employee at Pepsi and another at Frito-Lay signed documents in early 2001 prepared by Kmart acknowledging payments in the amount of $3.0 million from Pepsi and $2.8 million from Frito-Lay. Kmart allegedly used these documents to improperly record the timing of revenue from these businesses. There is no claim that Pepsi’s management was involved nor that Pepsi engaged in any improper accounting.

This development lends more credence to the view that third-party liability is an increasingly important topic for the SEC’s enforcement staff, particularly in the food and grocery industries.

Other companies have filed 8-Ks regarding Wells notices and third-parties. For example, back on January 8th, IBM filed a 8-K regarding a Wells notice it received regarding Dollar General Corporation, a customer of IBM’s point-of-sale products. The SEC believes IBM may have aided and abetted Dollar General when it misstated financial results in the fourth fiscal quarter of 2000. The questionable ransaction concerned IBM’s payment of $11 million to Dollar General for used equipment as part of a sale of IBM replacement equipment. IBM disclosed that one of its employees also received a Wells notice.

For those that are not steeped in enforcement matters, the SEC sends a Wells notice to a company or an individual after its staff has completed an investigation and determined that sufficient wrongdoing has occurred to warrant charges to be filed. Under the SEC’s procedures, the recipient then has the opportunity to respond to the staff before it makes a recommendation to the Commissioners regarding whether any formal action should be brought against the recipient.

Learn more about the enforcement process – including when disclosure about an investigation is necessary – in our FAQs posted in the SEC Enforcement Practice Area.

Carl Speaks on Shareholders Agreements

Don’t forget to check out the May installment of Carl’s Corner, where Carl Schneider discusses shareholder agreements.

Last week, the SEC approved the PCAOB’s Auditing Standard No. 1, which is effective for auditors’ reports issued or reissued on – or after – May 24, 2004. Auditing Standard No. 1 requires that an auditor’s report issued in connection with any engagement performed in accordance with the auditing and related professional practice standards of the PCAOB state that the engagement was performed in accordance with “the standards of the Public Company Accounting Oversight Board (United States).” Formerly, such reports referred to Generally Accepted Auditing Standards (known as “GAAS”).

This new standard will impact various SEC rules and guidance, as well as the federal securities laws, that refer to GAAS and specific standards under GAAS, including related professional practice standards. In a related action, the SEC issued an interpretative release on May 14 ordering that, effective immediately, references in SEC rules and staff guidance and in the federal securities laws to GAAS or to specific standards under GAAS, as they relate to issuers, should be understood to mean the standards of the PCAOB plus any applicable rules of the SEC.

Additionally, companies that incorporate by reference a report previously filed with the SEC, rather than including a new report in the filing, would not need to include the otherwise-required reference to the standards of the PCAOB in the report incorporated by reference. The SEC intends to codify this interpretation in the near future.

Third-Party Liability Developments

Building on the lessons learned from the Lucent enforcement action that I blogged about on Tuesday, it was quite an interesting development that the SEC brought a third party claim against the officer of a company that was simply a purchaser of software from Lucent. Learn more in my interview with Ken Winer on SEC’s Lucent Enforcement Action and Third-Party Liability.

Proxy Season Trivia Question

What date is considered the peak of the proxy season (i.e. has the most annual meetings scheduled to be held)? Answer: Yesterday, the 20th – all downhill from here…or is it uphill?

I have received quite a few emails about my Tuesday blog from members that said they didn’t get the logic about the internal deficiencies disclosure in Progress Energy’s 10-Q. They asked if the process is substantially dependent on the “human performance” factor – and that performance proved deficient – why wouldn’t that be a “process deficiency”? If one’s disclosure process relies solely on the memory of an employee for compliance, and that employee forgets, gets sick, etc., isn’t that evidence of a weakness in the process – not just a human performance problem?

My guess is that the SEC might view “human factors” as contributing to a disclosure controls process deficiency – but perhaps not an internal controls deficiency. One member asked whether the term “financial reporting” in the context of management’s report on internal control over financial reporting and the related auditor attestation covers proxy statement disclosure (e.g., executive compensation and other non-financial statement stuff).

My two cents is that this term doesn’t include those types of matters – and language in the SEC’s 404 adopting release seems to say the same thing: “Our definition does not encompass the elements of the COSO Report definition that relate to effectiveness and efficiency of a company’s operations and a company’s compliance with applicable laws and regulations, with the exception of compliance with the applicable laws and regulations directly related to the preparation of financial statements, such as the Commission’s financial reporting requirements.” But disclosure controls obviously does cover proxy disclosure – that whole Venn diagram thing…

New GAO Study Targets Shareholder Access and More

The Government Accounting Office issued a new report this week that recommends 12 actions for the SROs to take. GAO had been was asked to discuss 3 matters: the status of the SEC recommendations to the three markets for improving their equity listing programs; the SEC’s oversight of Nasdaq’s moratorium on the enforcement of certain of its listing standards and the status of affected listed companies; and actions the three largest markets have taken to strengthen corporate governance.

Below are the recommended actions that are most relevant to corporate finance folks like us – some are moot or minor; some could be cause for concern:

– ensure that the Division of Corporation Finance place a high priority on establishing and meeting time frames for completing its rulemaking related to shareholder access to the director nomination process and reviewing issuers’ qualitative disclosure requirements related to potential director and director nominee conflicts of interest

– work with Nasdaq and Amex to ensure that the public receives early and ongoing notification of issuers’ noncompliance with their markets’ quantitative continued listing standards—using issuer’s receipt of the initial deficiency notice as the reference point for determining when public notification should begin or, if approved in a manner consistent with our following recommendation, the filing of the revised Form 8-K

– ensure that the SEC expeditiously finalizes the rule requiring that issuers file the Form 8-K after receiving notice of being deficient with their market’s listing standards and include a time frame for doing so that, consistent with its initial proposal, ensures early public notification of issuers’ noncompliant status

– work with Amex, Nasdaq, and NYSE to assess the feasibility of providing early and ongoing public notification of issuers’noncompliance with qualitative listing standards

– work with Amex to ensure that issuers disclose the names of those directors that they have designated as independent

– work with the SROs to further enhance board independence by giving serious consideration to requiring issuers, through listing standards, to establish a supermajority of independent directors and to separate the positions of CEO and chairman, recognizing that a reasonable period of time would be needed to make such changes effective

– work with the SROs to ensure that they have established effective processes for ensuring issuers’ compliance with corporate governance listing standards

NYC Legal Aid in Dire Trouble

One member asked that I use the power of the blog to highlight the troubles faced by the NYC Legal Aid Society that recently issued layoff notices to 254 staffers – more than 20% of their 759 staff attorneys – in a bid to close a $21 million budget shortfall forecast for its fiscal year starting July 1. It’s my pro bono announcement about a worthy pro bono organization.

I really like what Wells Fargo has posted on its website regarding shareholder/director communications and shareholder nominees. They have provided details of how communications might be vetted (including defining “ordinary business matter”) and by whom within the company, as instructed by the board. As you might recall, the NYSE laid out in FAQ D.1 how non-officer employees are allowed to filter shareholder communications, so long as non-management directors have provided instructions as to the nature of the filtering.

I have added this useful example to the others in our “How Shareholders Can Contact Directors” page in our Shareholder Access Practice Area.

Lessons Learned from Lucent’s Non-Cooperation Enforcement Settlement

There are a host of lessons learned – and interesting questions – from Lucent’s settlement with the SEC on Monday which resulted in Lucent paying a $25 million penalty and 10 persons being charged with fraud (3 of the 10 have settled; the other 7 will go to court – one of the 10 had worked for Winstar). It is notable that earlier announcements of the settlement didn’t include a penalty against Lucent – so non-cooperation appears to have cost them $25 million.

The non-cooperative actions that led to the $25 million penalty were:

– “incomplete” and untimely document production
– comments from outside counsel, which according to the SEC “undermined both the spirit and letter of [Lucent’s] agreement in principle with the staff”;
– expanding the scope of employees that could be indemnified against the consequences of the SEC’s enforcement action without being required to do so by state law or corporate charter. The SEC’s press release labeled such conduct “contrary to the public interest.”

In his blog yesterday, Bruce Carton laid out a nice analysis of the non-cooperation aspect of this settlement. He noted that the third element of Lucent’s “lack of cooperation” should be a real eye-opener for public companies in similar situations. He noted that an SEC official was quoted as saying that with respect to Lucent’s offer to pick up the legal tab for employees who would not normally be covered by such benefits, “these people would basically be given a blank check to litigate with us, with no consequences” – and that the SEC has been reiterating in speeches “that to enhance deterrence and accountability, the Commission recently has adopted a policy requiring settling parties to forgo any rights they may have to indemnification, reimbursement by insurers, or favorable tax treatment of penalties.”

Bruce noted that the Lucent case takes that a step further, revealing the SEC’s apparent position that companies indemnifying employees that they are not required to indemnify are (a) outright failing to cooperate with the SEC, (b) acting contrary to the public interest, and (c) subject to stiff fines.

One interesting point is that the Monday article in the Wall Street Journal noted that indemnification of legal fees also was a factor in the non-cooperation – but the SEC’s complaint was silent on that point. More on that later.

Congrats to Barry Summer, Dennis Muse and Paul Belvin for being named new Associate Directors in Corp Fin yesterday. Barry (a lawyer) and Dennis (an accountant) are long-time – and well deserving – staffers. Paul is rejoining the staff for the third time from Akin Gump – Paul was in Corp Fin a few decades ago and also served as Counselor to Commissioner Norm Johnson in the late ’90s (Paul gives hope to guys like me who also would like to resurface on the SEC’s steps for a 3rd time someday).

It took the staff quite a while to find a replacement for Bill Tolbert – much less three replacements! Bill serves on tomorrow’s 8-K webcast panel. Speaking of which…

8-K Questions?

Tomorrow’s highly anticipated webcast – “Overcoming the Challenges of Real-Time Disclosure” – has elicited so many questions from members that we have extended the time allotted to it. Now, it will run from 4:00 until 5:15 pm eastern.

Join Ron Mueller of Gibson Dunn; David Martin of Covington & Burling, Bill Tolbert of Jenner & Block and Stacey Geer of BellSouth Corporation as they analyze a host of open interpretive issues – as well as how different disclosure determinations will be made going forward; what diligence, documentation and processes should be used when making these new determinations, and whether the new safe harbor is really “safe.”

If you have been grappling with an issue related to this rulemaking, please send me an email at broc.romanek@thecorporatecounsel.net – and I will try to have the panel address it.

“You Are the Weakest Link” Disclosure

If you handle SEC filings for your company, here is some internal control deficiency disclosure from Item 4 of the recent 10-Q filed by Progress Energy that should wake you up – the ole “human performance error”:

“Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, Progress Energy carried out an evaluation, with the participation of Progress Energy’s management, including Progress Energy’s President and Chief Executive Officer, and Chief Financial Officer, of the effectiveness of Progress Energy’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, Progress Energy’s President and Chief Executive Officer, and Chief Financial Officer concluded that Progress Energy’s disclosure controls and procedures are effective in timely alerting them to material information relating to Progress Energy (including its consolidated subsidiaries) required to be included in Progress Energy’s periodic SEC filings.

These officers noted that after the end of the period covered by the report, Progress Energy was late in filing a Form 8-K pursuant to Item 11 of that Form (Temporary Suspension of Trading Under Registrant’s Employee Benefit Plans). The filing relates to notice to Section 16 insiders informing them of the prohibition of trading in the Company’s securities during an upcoming 401(k)blackout period. Notice was given to all Section 16 insiders regarding these trading restrictions well before the blackout period commenced. The President and Chief Executive Officer, and Chief Financial Officer have confirmed that procedures were in place identifying this filing requirement and allocating responsibility for notification to the appropriate personnel, and that this late filing was the result of a human performance error, not a process deficiency.

There has been no change in Progress Energy’s internal control over financial reporting during the quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, Progress Energy’s internal control over financial reporting.”