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 April 1, the SEC is holding an open meeting to adopt the audit committee of exchange-listed companies rules. This comes a day after the PCAOB holds a roundtable at the SEC’s HQ in Washington to discuss registration of foreign audit firms (and for which the SEC issued a press release making a big deal of the fact that the SEC Commissioners would also attend the roundtable).
The SEC’s test website for Section 16 filings is up and running – don’t get confused if you play around on the site and it issues warnings that you are about to make a “live” filing. It really doesn’t mean it. The test site is at https://www.onlineforms.edgarfiling.sec.gov/.
We have also posted sample disclosure committee charters and D&O questionnaires under “Special Features” on the home page – as well as a more recent edition of the SEC Telephone Directory (Sept. 2002 version) at http://www.thecorporatecounsel.net/member/SEC/SEC2002PhoneBook.pdf.
In his second speech, SEC Chair Donaldson talked about corporate governance and going slow in mandating specific governance structures – but also railed about excessive executive compensation – see http://www.sec.gov/news/speech/spch032403whd.htm.
We have posted the April issue of E-Minders at http://www.thecorporatecounsel.net/E-minders/. In addition, we have announced two timely webcast programs – one on April 8th for Section16.net subscribers on “Comparing the Section 16 Filers – What You Need to Know Now.” This features key SEC staffers discussing the new test site – and nine service providers explaining how their products add value to what the SEC’s site will do. See http://www.section16.net/webcast0403/.
Late Friday, the SEC proposed amendments that would require certifications provided under Sections 302 and 906 of Sarbanes-Oxley be included as exhibits to the reports to which they relate. The purpose of the proposal is to make it easier for investors and regulators to locate the certifications.
The current rules require 302 certifications to be included at the end of the report immediately following the signature block. Companies have more flexibility for their 906 certifications, using one of the following methods: including them after the signature block, filing them as exhibits to the related reports or submitting them as paper or electronic correspondence, or “furnishing” them under Item 9 of Form 8-K.
As proposed, the 302 certification exhibits would be considered “filed” – but the 906 exhibits would merely be considered “furnished” (and thus not subject to Section 18 liability and not incorporated in registration statements unless the company took steps to include the certification in a registration statement). Both the new 302 and the 906 certification exhibits would be subject to Rule 302 of Regulation S-T – so companies would be required to retain originals of manually signed certifications.
Until the proposals become final, as interim guidance, the SEC is encouraging companies to submit the 906 certifications as exhibits to the periodic reports to which they relate. The guidance states how this should be handled in electronic filings, including a specific legend that should be inserted with the certification -and asking that companies retain a manual signature page or other authenticating document for each certification. A 906 certification submitted in the manner specified in the interim guidance will be treated as “accompanying” the periodic report to which it relates rather than being “filed.”
Yesterday, the SEC announced that it will soon have a new website for making test filings of Forms 3, 4 and 5 (the test site likely will be up and operational on Monday or Tuesday next week). The new filing system will allow filers to create and file a report directly on the SEC’s website – or to make filings through the new website using third-party software that has been adapted to conform to the new reduced content format.
We expect the test period to last for approximately one month, during which time the existing EDGARlink system will exist side-by-side with the new system. After the test period expires, the SEC will convert to the new system as the exclusive means for filing Forms 3, 4 and 5.
Electronic filing will remain voluntary for a period of time thereafter, but it is likely that by June (well ahead of the July 30 deadline imposed by Section 403 of the Sarbanes-Oxley) the SEC will make electronic filing mandatory for all Section 16 filers. The SEC’s announcement is at http://www.sec.gov/info/edgar/ednews/ownerfilesite.htm.
For Section16.net subscribers, there is a webcast program on “Comparing the Section 16 Filers” on April 8th. Learn how to best use the SEC’s test site from key SEC staffers and hear the pros and cons of nine different third party web filers. More information is at http://www.section16.net/webcast0403/.Those who are not yet Section16.net subscribers can access the webcast (or the transcript) by taking advantage of the no-risk trial at www.section16.net.
The SEC staff is expected to provide FAQs on Regulation G issues before the March 28th effective date. Here are some conversations we have heard that have taken place with the staff regarding transition issues (although don’t rely on them unless you speak with the staff or the FAQs are issued):
– so long as annual report is mailed before 3/28, providing other copies after 3/28 does not mean the report must comply with Reg G
– if 10-K is filed before 3/28, the fact that its posted and on a website after 3/28 does not mean the 10-K must comply with Reg G (however, if the 10-K is posted after 3/28, it must comply)
– if 10-K filed before 3/28 and annual report is delivered after 3/28 that repeats information from 10-K, the repeated information does not need to comply with Reg G
– shelf registrations filed after 3/28 that incorporate information from a 10-K that does not comply with Reg G would then need to comply with Reg G – this can be done by amending the 10-K or by filing a 8-K or 10-Q that is incorporated by reference and complies with Reg G (note that shelfs filed before 3/28 are not impacted by Reg G)
Yesterday, the SEC took enforcement action against HealthSouth for alleged accounting fraud that included a 2 day trading suspension – that is a fairly stiff sanction by itself for the company and rare for the SEC to impose such a sanction on a large cap company. See http://www.sec.gov/news/press/2003-34.htm.
In its newly posted proposing release, the Public Company Accounting Oversight Board has released its estimates of the levels of fees that companies would pay to fund the Board. As proposed, fees would be based on the relative average monthly market capitalization for the 12 months preceding the fiscal year.
The allocation of the fees is top-heavy. The Board estimates that the largest companies would be allocated $260,000 for every $10 million of accounting support fees. The 1,500th largest issuer would be allocated $500 for each $10 million of fees. To understand the order of magnitude, based on market capitaliztions at the end of 2001, the 5th largest company would pay about 63% of the fee paid by the largest market cap company, the 25th largest company would pay about 22%, and the 50th largest company would pay about 11%. The proposing release is at http://www.pcaobus.org/pcaob1/Rules/Release2003-002.pdf.
For TheCorporateCounsel.net subscribers, we have posted an interview with Mark Bergman of Paul Weiss regarding the impact of the new SEC rules on non-US companies at http://www.thecorporatecounsel.net/member/InsideTrack/03_18_03_Bergman.htm.
At the 75 day mark for 12/31 companies – which will be next year’s 10-K deadline – over 1000 companies have already filed their 10-Ks. Considering that there are slightly less than 10,000 companies with 12/31 year-ends, this is a sizable percentage.
On the SEC’s website – under “Regulatory Actions” there is a new section called “PCAOB Rulemaking.” So far it only includes proposed Bylaws for the Public Company Accounting Oversight Board – not the proposals the PCAOB has issued which is available on its website. The SEC’s PCAOB portal is at http://www.sec.gov/rules/pcaob.shtml. The PCAOB’s website is at http://www.pcaobus.org.
Finally, there is some movement from the NYSE and Nasdaq on their corporate governance listing standards…
The NYSE filed amendments to its proposed listing standards on director independence with the SEC that excerpt their independence proposals from the broader filing made last summer. This will allow the SEC to address and publish them for comment separately.
As proposed, the NYSE’s proposal to require that boards have a majority of independent directors has not been changed. However, the amendments replace the per se independence bar for employees/former employees with a rebuttable presumption. This presumption is that any director who receives more than $100k/yr. in direct compensation from the company (other than director fees or forms of deferred compensation for prior service) is presumed not to be independent for 5 years following the year in which more than $100k was received. Because the presumption is rebuttable, a director may be deemed independent if all the independent directors determine that the compensatory relationship is not material – and this determination is explained in the company’s proxy statement.
The NYSE also added a bright-line standard for determining independence when a director is affiliated with another company that has a business relationship with the company – a director would not be independent if the director is an executive officer or employee of another company and: (1) that company accounts for the greater of 2% or $1 million of the company’s gross revenues; or (2) the company accounts for the greater of 2% or $1 million of the other company’s gross annual revenues. There is a 5-year look-back period. Like the NYSE’s initial proposals, the amended independence standards require the board to make an affirmative determination that a director has no material relationship with the listed company and permit the adoption of categorical standards to assist the board in making independence assessments.
In addition, although the NYSE initially proposed allowing companies 24 months from SEC approval of final listing standards to achieve majority independence, the amendments propose shortening that transition period to 18 months (30 months for companies with staggered boards).
The NYSE expects that its remaining corporate governance proposals will be published for comment separately – but that all proposals will be given final SEC approval and made effective as a whole (with appropriate transition periods for different provisions).
Nasdaq two revised proposals relate to the independence of boards/committees and codes of conduct. The amendments withdraw the earlier proposal to require audit committees to have a “financial expert” – thus, reverting to its existing requirement that at least one member of the audit committee have financial experience). The amendments also clarify that the required codes of conduct must have all of the elements required under Section 406 of Sarbanes-Oxley the SEC’s related rules.
Regarding board/committee independence, the Nasdaq proposals now establish that where a director has a family member who receives annual compensation in excess of $60k in the current or any of the past three fiscal years, the director is not disqualified from being independent unless the family member is an executive officer – as well as require that the audit committee charter set forth the committee’s purpose, which is to oversee the company’s accounting and financial reporting processes and audits of the company’s financial statements.
Yesterday, the Public Company Accounting Oversight Board met and proposed rules to allocate, assess and collect annual accounting support fees from issuers in accordance with Section 109 of Sarbanes-Oxley. The allocation formula would be used to cover the expenses of both the Board – and the accounting standard setting body.
Fees will be assessed against issuers registered under Section 12 of the Exchange Act, required to file reports under Section 15(d) of the Exchange Act, or that have filed a registration statment under the Securities Act that has not become effective and that has not been withdrawn. This would include foreign private issuers.
Certain classes of issuers will be exempt from the fees (such as who do not file audited financial statements, employee stock purchase savings and similar plans, asset-backed issuers and issuers in bankruptcy). In addition, operating company issuers with an average market cap less than $25 million will not be assessed fees. There was no discussion of exactly how the average monthly market capitalization will be computed.
Fees will be allocated based on a ratio of the issuer’s average monthly equity market capitalization over the 12 months immediately preceding the Board’s fiscal year to the total average monthly capitalization of all covered issuers.
The staff of the Board expects that this formula will result in operating companies paying 95% of the fees – and investment companies 5%. However, the staff was not able to give a ballpark figure on what the largest issuers might expect to be charged. That of course depends in part on the budget of the Board and also the budget for the standard setting body. However, the Washington Post reported that larger issuers would pay fees of about $2 million per year.
Under Sarbanes-Oxley, the registration or annual fees received from public accounting firms registered with the Board will be deducted from the budget expenses of the Board that are required to be paid by issuers. As the staff pointed out, since there were no such fees paid last year, the Board’s budget expenses for fiscal year 2003 will be funded entirely by fees charged to issuers. Under Sarbanes-Oxley, all of the expenses of the standard setting body are to be covered by fees paid by issuers.
Comments are due by April 4th. After the comment period, the Board has to approve final rules and submit them to the SEC – which then puts the rules out for comment and approves them.
The Board hopes to send notices of the fees due to issuers by late May for this 2003 fiscal year – and then going forward, the notice would be sent in late January or February each year. Apparently, the Board is using a calendar year fiscal year.
Before Congress, SEC Chair Donaldson testified that the SEC needs the entire 18% budget increase proposed by President Bush (i.e. $841.5 million) – to improve its technology, crack down on corporate fraud and hire more staff.
It is reported that Schering-Plough is preparing a “Wells notice” in response to a SEC enforcement investigation regarding an alleged Regulation FD violation. This is particularly significant because its a signal that new SEC chairman William Donaldson supports Reg FD (and Donaldson did not support Reg FD when it was initially proposed a few years ago).
