On Friday, the SEC announced that David Becker would be returning as General Counsel in a few weeks. He also will have the title of “Senior Policy Director,” a new position. David served as GC earlier in the decade during Arthur Levitt’s tenure. David is a great lawyer and the SEC gets a big boost for his willingness to take the pay cut and return to the public sector.
It’s also rumored that Kayla Gillan will be joining the SEC Staff (although I’m not certain in what capacity, the rumors don’t say). For the past year, Kayla has been the Chief Administrative Officer for RiskMetrics (she was told to pick her own title) and before that, was one of the PCAOB’s founding board members. Given the heat the SEC is taking, it’s smart for Chair Schapiro to find investor-protection minded experts willing to get paid relative peanuts to join the embattled agency.
On Friday, Chair Schapiro delivered this speech in which she describes some of her first steps in changing the Enforcement Division’s policies & procedures, etc. Here is a good summary of the speech from Gibson Dunn.
I expect this will be the first of many speeches announcing changes. Here’s an example of how Mary gets the urgency of the need to make changes – the title of this article is “SEC chief says agency to act like ‘hair is on fire.'”
Economic Downturn Disclosure
In this podcast, Jason Day of Faegre & Benson discusses periodic disclosures relating to the current economic downturn, including:
– Which areas of periodic disclosure might require additional attention due to economic conditions?
– What types of specific economic-related disclosure should companies be focused on in preparing their MD&A?
– What new risk factors might companies consider?
– How else are you seeing the economic conditions influence disclosures?
Audit Committee Charters: May Need to Review Due to New PCAOB Rule
If you haven’t been checking out our new “Proxy Season Blog,” here is one of the first entries from last month: A recent change to the PCAOB rules on auditor independence may require some companies to revise their Audit Committee charters. Last August, the PCAOB adopted Ethics and Independence Rule 3526, which requires auditors to make independence disclosures before they enter into an initial engagement. Rule 3526 supersedes the PCAOB’s Independence Standards Board Standard No. 1.
Effective September 30th, the SEC made a conforming technical change to Item 407 of Regulation S-K, concerning disclosures that companies must make in their audit committee reports included in their annual meeting proxy statements.
As a result, folks should review their audit committee charters to remove any references to superseded ISB Standard No. 1 – and consider instead stating that the committee receive written independence disclosures required by the PCAOB’s applicable requirements. I doubt that this affects many companies, probably only those who wrote their charters to specifically refer to PCAOB rules.
It’s been a long week, so I decided to alter a popular song for my own amusement (apologies to leopard shoe owners in advance):
You put your right hand in,
You take a bunch of cash out,
You put your right hand in,
And you scoop the rest out.
You do the hokey pokey,
And you tell yourself it’s okay because everyone else is doing it,
That’s what it’s all about.
2. Left hand, with a shovel
3. Right foot, wearing some leopard shoes
4. Left foot, with more of those leopard shoes
5. Head, with ear plugs to drown out the pleas from the poor
6. Butt, wearing some sort of cover
7. Whole self, leaping into a pile of gold coins and jewels
TARP Under Attack: A $78 Billion Shortfall for Taxpayers
Late yesterday, the Congressional Oversight Panel said it would issue it’s third report today on how TARP is being implemented – and it won’t be pretty. The report will show that Treasury put about $254 billion into financial institutions in 2008, but got only $176 billion in value. As noted in this NY Times article, the head of the Panel, Elizabeth Warren, told the Senate Banking Committee that after three months on the job, her panel was still not getting enough answers from Treasury. She described the bailout as “an opaque process at best.” When the report is out, we’ll post it in our “TARP” Practice Area.
How Avvo Works
In this podcast, Mark Britton, CEO and Founder, explains how Avvo works, including:
– How did a corporate lawyer end up launching something like Avvo?
– What are Avvo’s latest developments?
– How do you like blogging? Any lessons learned?
Sights & Sounds of Northwestern’s San Diego Conference
Here are a few videos from my visit last week to San Diego:
Yesterday, on our “Advisors’ Blog” on CompensationStandards.com, I blogged a story about a conversation with a cabdriver about the Wall Street bonuses and how the environment has been altered so much that boards absolutely must change their thinking about executive compensation practices or else face potential societal implications (see this NY Times article).
Recognizing the need for this change, President Obama yesterday announced a new set of Treasury guidelines for those companies seeking government funds. The fact that the President made the announcement and held a press conference on the topic highlights the importance of this matter. Rather than repeat these new restrictions, read the bullets in this press release.
To explain these new restrictions – and how they impact both companies seeking government funds and all companies generally – we are holding a webcast – “TARP II: The Executive Compensation Restrictions” – next Thursday on CompensationStandards.com. Tune in to learn these new developments!
Jesse Brill lays out below how the latest Treasury guidance still needs to be tweaked to accomplish its goals of reining in excessive executive compensation:
The biggest change under the new Treasury guidelines is a $500,000 salary cap. One key aspect of the new $500,000 cap that has not gotten sufficient attention is the unlimited amount of restricted stock and stock options that still can be granted under the latest “restrictions.” Equity compensation is the pay component that has gotten most out-of-line over the past 20 years. It (as well as severance/retirement/ golden parachutes) has caused the greatest disparity between CEO compensation and that of the next tier of executives (and employees generally).
The new $500,000 cap provision does prevent executives from realizing the gains in their equity compensation until after the government is paid back. But there are two major problems with how this applies:
1. It does not apply to past equity compensation. Warren Buffet imposed a similar cap on Goldman Sachs’ executives, but his restriction applies to all the equity held by the top executives. It is not limited just to future grants, as is the case with the new government restriction. So Buffett’s provision wisely requires that the key decision-makers keep all their “skin in the game” until he gets paid off.
2. Although it may help protect the government’s investment, it is short-sighted and fails to protect the shareholders’ best long term interests. The holding period should be the longer of age 65 or two years following retirement. That will ensure that the key executives make decisions that truly are in the long-term best interests of the company (as opposed to decisions aimed at a shorter period – after which an executive could depart, taking all his marbles with him).Note that holding-through-retirement also addresses the major concern about top executives’ unnecessary risk taking.
Holding equity compensation through retirement is perhaps the single most important—and fundamental – fix to getting executive compensation back on track because it also addresses all the past outstanding excessive option and restricted stock grants. And, by requiring CEOs to keep their skin in the game for the long term, it will go a long way to restoring public trust in our companies and our market, which is so important to restoring stability to the markets.
Needless to say, the fundamental hold-through-retirement fix should apply to all companies – not just TARP financial institutions—and can be adopted at the same time that Congress adopts say-on-pay legislation (if such legislation is adopted). (It will have much greater impact and do more good than say-on-pay.) Learn how to implement hold-through-retirement in our “Hold-Through-Retirement” Practice Area on CompensationStandards.com.
Here are three additional points about the $500,000 cap:
1. Just as the $1 million cap was a major cause for the runaway increase in equity compensation over the past decade, the new unlimited opening for restricted stock will further exacerbate the problem. As an example, the typical time vested restricted stock grant does not qualify for the $1 million cap “performance-based” compensation exemption, thus more companies and shareholders will suffer the cost of the lost tax deductions as these very large amounts vest. (So, once again the top executives will benefit at the expense of shareholders.)
2. One reasonable fix to the tax deductibility problem would be to require real performance conditions (in addition to time vesting) upon the vesting of the equity.
3. To address the “unlimited “ new grants problem, do not permit additional grants in situations where the CEO’s total accumulated equity grants exceed the company’s own historic internal pay equity ratios compared to the next tiers of executives within the company.
SEC Chair Schapiro Lays Out Big Changes
As noted in this Washington Post article from Wednesday, new SEC Chair Schapiro intends to make big changes to the Enforcement Division – and quickly. Among other changes, the article notes:
– Rollback of highly-criticized requirement that the Enforcement Staff receive Commission approval before negotiating to impose penalties. This created a huge bottleneck and fines levied have dropped 85% since it was instituted three years ago.
– Beefing up the number of Enforcement Staffers. The number of Staffers has steadily decreased in recent years.
– Reforming an office to focus on identifying and preventing risk in the market. Earlier this decade, then-Chair Donaldson formed such a group – but it was scarcely staffed (umm, with one person) and shut down not too long after it was created.
Good Grief: Here Come the Crazy Ideas
It’s a good thing that Chair Schapiro is acting fast. Congress is out for blood, as became quite clear during yesterday’s House Financial Services Committee hearing on the Madoff scandal. Harry Markopolos is a bit too much for me (here is his written testimony, his oral testimony was beyond self-serving – and here is the SEC Staff’s testimony). With his announcement that he’s about to hand off his investigation of a new mini-Madoff fraud to the SEC’s inspector general, I’ve decided to call him the new “Joe McCarthy.” My favorite quote from him: “3,498 people at the SEC were against me.” Paranoid.
More bothersome than Markopolos was the tone and suggestions of some members in Congress about how to fix the SEC. It looks like plenty of bad ideas might get some traction. For example, the suggestions expressed in this NY Times column entitled “What if Watchdogs Got Bonuses?” from Andrew Ross Sorkin were raised. In the column, Sorkin reports from Davos about a recommendation that regulators get paid bonuses so that they are paid more like their private industry counterparts. Here are few reasons why this is not a good idea:
1. The column posits that paying more will attract smarter people to the government. Although I’m sure existing government staffers would like to get paid more, I can assure you that there are many right now in the government that are plenty smart.
In fact, just as smart as the folks in the private sector – why do you think so many securities lawyers start their career at the SEC? To get trained by the best and brightest. But even in the past five years, Corp Fin has essentially stopped hiring folks right out of law school because so many experienced practitioners were willing to take a pay cut and exit out of the madness that is the law firm lifestyle.
2. The government is not having problems finding qualified people. Right now, a record number of resumes are sitting down at the SEC. The level of unemployed professionals is very high and government service appeals to many who feel that their career has been lacking purpose.
3. The bonus recommendation ignores how most criminals are caught. Referrals lead to the bulk of the SEC’s investigations. This is not unusual in the law enforcement area. Cops don’t show up until they are called (unless they accidentally witness a crime). That’s just the way of the world (unless we develop “pre-cogs” ala “Minority Report“).
How would a bonus program be adminstrated when federal agencies would be working mainly from outside referrals? The payment of bonuses may well disturb the comradery and cooperation that is required between SEC Divisions – and among Staffers within a Division – to make the often years-long effort to bring a solid case. If you’ve ever worked on uncovering a financial fraud, you know how complex and difficult it is to tie the ends, etc. Needle in a haystack stuff.
4. Replicating the poor compensation practices of Wall Street in the public sector doesn’t fix the problem. It’s simply incredible that at the same time policymakers and pundits are decrying bonuses as having motivated executives to engage in improper management practices, they are suggesting that the same apply to the government. How is that supposed to promote objectivity in decision-making? What would you do if you were faced with: “I get a bonus if I bring this enforcement action regardless of how ill-founded it is – and don’t get a bonus if I don’t.”
Most people in government service are not there for the money – so paying them more will not necessarily generate better performance. To the extent those in enforcement are after money, it comes from them earning a reputation as a tough cop who brings good cases and then going into private practice.
The reform focus should be on Wall Street and its ethics. Sure, the government staff could stand to earn some more in base salary so there wouldn’t be pressure to leave when the kids hit school age – but paying the Staff a bonus won’t turn on some magical spigot that will enable the SEC to catch the many criminals out there.
And it certainly won’t stop Wall Street from engaging in practices of the sort that led to the current meltdown. We can’t rely on the government to ensure that people act responsibly and ethically. They can help point us in the right direction and remove outliers from the playing field – but if nearly all the players decide to continue to push the grey areas and not think of the bigger picture, chaos results and even cops can’t help us…
Your Ten Cents: The SEC’s Future
Here is a quick poll to anonymously get your views. You’re allowed to select more than one answer if you wish:
Recently, FINRA issued Regulatory Notice 09-05, entitled “Unregistered Resales of Restricted Securities.” This notice seeks to remind FINRA members of their obligations, when they are participating in an unregistered sale of securities, to determine whether the securities are eligible for public sale. This Notice comes out of recent FINRA enforcement actions, where it was observed that firms lacked adequate procedures for determining the status of the securities being resold, resulting in unregistered distributions of large amounts of low-priced stock.
The Notice details specific compliance steps that firms need to undertake, as well as some of the red flags that could signal the possibility of an illegal, unregistered distribution. Many of these red flags contemplate the type of issues that often come up with low-priced securities.
While this Notice for the most part serves as a reminder of obligations that brokers already have in serving their very important role in the resale of restricted and control securities, it will no doubt compel most brokers to reevaluate – and in some cases tighten – their procedures around the sale of securities under Rule 144.
How to Implement E-Proxy in Year Two
Tune in tomorrow for the webcast – “How to Implement E-Proxy in Year Two.” Whether your company will be trying voluntary e-proxy for the first time or this is your second time around, you will want the practical guidance from these experts:
– Lyell Dampeer, President, Broadridge Financial Solutions
– Thomas Ball, Senior Managing Director, Morrow & Co.
– Carl Hagberg, Independent Inspector of Elections and Editor of The Shareholder Service Optimizer
– Paul Schulman, Executive Managing Director, The Altman Group
– Keir Gumbs, Covington & Burling LLP
Act Today: Since all memberships are on a calendar-year basis, if you don’t renew today, you will be unable to access this webcast. Renew now for ’09! If not a member, try a no-risk trial for ’09.
Your Upcoming Proxy Disclosures—What You Need to Do Now!
We have posted the transcript from the first part of our popular two-part CompensationStandards.com webconference: “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!” Be sure to review the transcript so that you know all of the “hot spots” in your CD&A and the rest of your compensation disclosure in this tumultuous proxy season.
A Call for Nominations: Regulatory Innovation
With all that has transpired in the past nine months, it seems that now more than ever we need some innovative approaches to financial regulation. Therefore, I am pleased to be a part of Morrison & Foerster’s establishment of the 2009 Regulatory Innovation Award through the Burton Foundation. This award will honor an academic or non-elected public official whose innovative ideas have made a significant contribution to the discourse on regulatory reform in the arena of corporate governance, securities, capital markets or financial institutions. If you know of someone meeting these qualifications who should be considered for the 2009 Regulatory Innovation award, please submit the nomination before February 27, 2009.
Recently, the PCAOB Staff issued updated guidance regarding the audit of internal control over financial reporting for smaller, less complex companies. The purpose of this Staff guidance is to assist auditors in applying the PCAOB’s Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, to audits of smaller companies.
Guidance along these lines was released on a preliminary basis back in October 2007, at which time the Staff solicited comments. After considering the 23 comment letters received, the Staff has now finalized the guidance. The revisions to the preliminary guidance, which are discussed in detail in Appendix B to the document, are principally clarifications rather than a revisiting of the fundamental principles underlying the preliminary Staff views.
The topics covered in the PCAOB Staff Guidance include:
– Scaling the Audit for Smaller, Less Complex Companies
– Evaluating Entity-Level Controls
– Assessing the Risk of Management Override and Evaluating Mitigating Actions
– Evaluating Segregation of Duties and Alternative Controls
– Auditing Information Technology Controls in a Less Complex Information Technology Environment
– Considering Financial Reporting Competencies and Their Effects on Internal Control
– Obtaining Sufficient Competent Evidence When the Company Has Less Formal Documentation
– Auditing Smaller, Less Complex Companies with Pervasive Control Deficiencies
While the PCAOB Staff guidance is obviously geared toward auditors, smaller companies should take the guidance into account in the course of evaluating their controls, because the new guidance will certainly have an influence on how auditors view their internal control over financial reporting.
More internal control guidance is on the way – COSO has announced that it will release its four volume set of guidance on monitoring internal controls tomorrow. This guidance develops the monitoring component of Internal Control – Integrated Framework, in order to help companies “ensure the effectiveness of their financial, operational, and compliance-related internal controls.” COSO has already released the Introduction to this guidance in order to build the “buzz” around this new release!
The Fight Goes On: The Sarbanes-Oxley Act and the PCAOB
As noted earlier this month in the SCOTUS Blog, the fight over the validity of the PCAOB has now made it to the Supreme Court. The Free Enterprise Fund and Beckstead and Watts, LLP have filed this petition for writ of certiorari, arguing that the high court should consider the separation of powers issues raised in their dispute. As Broc noted in the blog last summer, the DC Circuit Court of Appeals upheld – by a 2-1 vote – the constitutionality of the PCAOB. Much remains at stake with the challenge, given the Sarbanes-Oxley Act’s lack of a severance clause.
Snowball: The Gathering Executive Pay Reform Efforts
Things are undoubtedly moving quickly on the pay reform front. Mark Borges noted yesterday in his Compensation Disclosure Blog:
“Hardly a day (or even an event) goes by anymore without some new revelation about corporate excess. (See this story about profligate spending by TARP participants at the Super Bowl.)
Today (Monday, February 2nd), The Wall Street Journal is reporting that the Obama Administration is expected to announce this week tougher executive pay standards for some of the companies receiving government aid (see “Treasury to Outline Bank Plan Next Week“). While the details are still sketchy, the standards are likely to ban companies receiving “exceptional” aid from making any severance payments. In addition, bonus pools for their top 50 executives will be scaled back by at least 40%. (Interestingly, the cut back would be based on 2007, rather than 2008, levels, resulting in a steeper drop than would be the case if more current figures were used). We’ll have to wait and see if the proposals actually mirror these rumored provisions, and what qualifies as “exceptional” aid.
Things are a lot less fuzzy in Congress, where, on Friday, Senator Claire McCaskill introduced legislation that would limit the total compensation of executives at firms receiving government funds to no more than the salary of the President. The Cap Executive Officer Pay Act of 2009 provides that no employee of any private company that accepts federal funds because of the economic downturn would be able to make more than the President (approximately $400,000) until the company is self-reliant again. For these purposes, “compensation” would include salary, bonuses, and stock options.
Wow – and it’s only Monday”
If you would like to check out more of Mark’s blog in these critical times for executive compensation issues, consider a no-risk trial for CompensationStandards.com or renew your subscription today.
Last Friday, the SEC posted the adopting release for its new interactive data rules. This project has been an enormous effort on the part of the Corp Fin Staff under an extraordinarily tight timeframe. Under the new rules, filers will be required to provide a new exhibit containing the financial statements and any applicable financial statement schedules in interactive data format with certain Securities Act registration statements, quarterly reports, annual reports, transition reports, and current reports on Form 8-K or Form 6-K that contain revised or updated financial statements. The new requirements will be phased in as follows:
1. Domestic and foreign large accelerated filers that use U.S. GAAP and have a worldwide public common equity float above $5 billion (as of the end of the second fiscal quarter of their most recently completed fiscal year) must provide the interactive data exhibit beginning with their periodic report on Form 10-Q, Form 20-F or Form 40-F containing financial statements for a fiscal period ending on or after June 15, 2009.
2. All other domestic and foreign large accelerated filers using U.S. GAAP will be subject to the interactive data reporting requirements beginning with their periodic report on Form 10-Q, Form 20-F or Form 40-F containing financial statements for a fiscal period ending on or after June 15, 2010.
3. All remaining filers using U.S. GAAP (including smaller reporting companies), and all foreign private issuers preparing their financial statements in accordance with IASB IFRS, will be subject to the interactive data reporting requirements beginning with their periodic report on Form 10-Q, Form 20-F or Form 40-F containing financial statements for a fiscal period ending on or after June 15, 2011.
Once the phase-in is complete, then companies becoming subject to the reporting requirements for the first time will be required to submit an interactive data file with their first periodic report on Form 10-Q or first annual report on Form 20-F or Form 40-F.
The tagging of financial statement footnotes and schedules is also subject to a phase-in schedule. While footnotes and schedules initially will be tagged individually as a block of text, after a company has tagged them in this manner for a year, then the company must begin tagging the quantitative disclosures – and may permissibly tag each narrative disclosure.
The interactive data exhibit is required for Securities Act registration statements containing financial statements, so it typically will not be required for a Form S-3 that incorporates the financial statements by reference. No interactive data exhibit will be required for initial public offerings registered under the Securities Act, nor will it be required as an exhibit to Exchange Act registration statements, such as Form 10 or 20-F.
After all of the build-up to XBRL, the question many are likely asking themselves is “what do I do now?” If you are in the first group to be phased-in, you are probably already well under way in preparations for the first interactive data filing. But for the second and third phase-in groups, the final rules should serve as a wake-up call to start preparing for the inevitable. A few pointers are:
– Familiarize yourself with the process and the output – Much of the nervousness around interactive data can be addressed by gaining a better understanding of what goes into producing it and how users may potentially utilize the data. The place to start is our “XBRL” Practice Area on TheCorporateCounsel.net. There are also lots of online tools and training sessions available for you to get up to speed. In addition, a number of issuers have participated in the SEC’s voluntary XBRL program, so they can be a great resource to consult.
– Consider whether you will use a service provider – The financial printers and others are all geared up to assist you with preparing your interactive data file, so you should visit with them to see what services they offer and how much it will all cost.
– Assemble your team – Preparing interactive data will require a team that includes accounting, finance, SEC reporting and legal personnel, among others critical to the process. While this same team is already in place for preparing the SEC reports, it may be helpful to have a smaller subgroup focused on interactive data implementation.
– Focus on quality control – As with any reporting issues, the key is having adequate procedures and controls in place to make sure that what gets included in the interactive data file is appropriate and will come out correctly when accessed through an interactive data viewer. A thorough familiarity with the applicable taxonomy and plenty of testing can go a long way on this front.
The NYSE’s Annual Corporate Governance Letter
The NYSE has sent its annual corporate governance letter, highlighting considerations for NYSE-listed issuers as the annual shareholders’ meeting season approaches.
Among the recent changes noted in the letter was the recent modification of Section 203.01 of the Listed Company Manual (effective December 16, 2008), under which listed companies subject to the proxy rules (or which, while not subject to the proxy rules, provide audited financial statements in accordance with the US proxy rules), are no longer required to issue the press release or post the undertaking on their website regarding the ability to receive audited financial statement free of charge.
In the letter, the NYSE also noted that SEC staff has indicated that it is still considering changes to NYSE Rule 452 to eliminate discretionary broker voting in connection with director elections. Further, the NYSE notes that it is considering an amendment to its timely alert policy in Section 202.06 of the Listed Company Manual to conform to the SEC’s guidance last summer on the use of corporate websites. No timetable was provided for either of these initiatives.
Alan Dye on the Latest Section 16 Developments
Tune in tomorrow for the Section16.net webcast: “Alan Dye on the Latest Section 16 Developments.” This is always one of our most popular webcasts, as Alan answers many of the more common queries he has been receiving lately.
Act Now: As all memberships are on a calendar-year basis, renew now – or if you’re not yet a member, try a ’09 no-risk trial today.
In our Winter ’09 issue of Proxy Disclosure Updates, we included a short piece on “Four Key TARP Fixes” that relate to executive compensation. With Congress likely to act very soon on fixing TARP – and executive compensation excesses – we hope that this short article will influence those that will be making these regulatory changes.
We have posted the article on a non-member page so that anyone can access it. Please tell your friends in Congress!
The Shameful Bonus Pool
President Obama had harsh assessment yesterday of reports that bonuses on Wall Street topped $18.4 billion in 2008. As noted in this New York Times article, he called the bonuses “shameful” and stated: “There will be time for them to make profits, and there will be time for them to get bonuses. Now’s not that time. And that’s a message that I intend to send directly to them, I expect Secretary Geithner to send to them.”
I believe that the President’s words evoke the theme that I and others have been talking about for the past several months – an extraordinary level of public anger over pay excesses. While the anger, rightly or wrongly, has largely been directed at Wall Street as a whole, the spillover effect is unquestionably going to impact other companies that have nothing to do with the credit crisis.
For some recent examples of how companies are dealing with salary and bonus in light of the economy – and in the face of public anger and scrutiny – be sure to check out Mark Borges’ Compensation Disclosure Blog on CompensationStandards.com. Try a no-risk trial or renew your subscription today.
One of the four key TARP fixes suggested in the piece noted above is that bonuses to the top five Senior Executive Officers of participating institutions should not be permitted in the event the company recently had layoffs of, e.g., 3% or more of the workforce over the past two or three years. In addition, all institutions would be subject mandatory disclosure of any bonuses granted to top executives while employees were laid off.
Our February Eminders is Posted!
We have posted the February issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
The recent federal district court decision in Roth v. AON Corporation (N.D. Ill. Jan. 8, 2009) serves as a good reminder of best practices for preserving the attorney-client privilege for drafts of SEC filings and related communications. As this Dorsey & Whitney memorandum notes, the court in Roth held that preliminary language in a draft 10-K and related communications that were sent to in-house counsel and other company employees for comment were protected by the attorney-client privilege, even though the Form 10-K was ultimately filed with the SEC. The court also held that the presence of non-lawyers on the distribution did not waive the privilege, because all of the other recipients were AON employees. Also notable was the court’s holding that the draft disclosure was protected even though it related to an operational matter, as opposed to a legal matter – the fact that the in-house legal counsel was consulted for legal advice was enough to maintain the privilege in this case.
The Dorsey & Whitney memo offers up these helpful tips to keep in mind when trying to protect draft SEC filings and the related communications:
1. Legal judgments and considerations are pervasive in producing most SEC filings. In-house or outside counsel should play a pivotal role in a public company’s disclosure controls and procedures and should be a party to all significant or sensitive communications and drafts. Courts will not extend the privilege shield to correspondence simply because it is addressed to a lawyer, but the shield can only apply if a lawyer is an addressee.
2. Communications to be shielded must only be exchanged among in-house or outside counsel and company employees. Including outsiders, such as the company’s outside auditors or other consultants, as recipients would generally waive the privilege.
3. Documents containing draft disclosures or discussion of related issues should be labeled “Preliminary Drafts” and “Confidential/Attorney-Client Privilege.” Such labeling will not necessarily mean that a court will ultimately find such documents to be protected, but it will evince an intent to apply the shield. These labels should also help to prevent unintended delivery to opposing parties in litigation discovery (as originally occurred in the Roth case).
4. E-mails relating to such drafts and discussion of related issues should also be so labeled.
Creating Plain English Disclosure
In preparing annual reports and proxy statements this year, I think that plain English will be more important than ever. As companies struggle to explain the fallout from the economy on their businesses, executive compensation programs and other matters, it will be important to focus on delivering the message in a way that investors, the press and the public can easily understand.
My colleague, Julie Hoffman, recently caught up with Lois Yurow, President of Investor Communications Services, in this podcast to discuss how to create securities disclosure documents in plain English, including:
– What is plain English?
– When does the SEC require public companies to provide disclosure in plain English?
– Why do some companies exceed plain English requirements?
– How much time and expense is involved in converting a document into plain English?
– Do you have any practice pointers for how companies can easily improve the readability of their disclosure?
This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Time to Install a Pill? Dealing With Rights Plans in a Down Market
– How the New Accounting Standards Will Impact M&A
– Lessons from the Meltdown: MAE Clauses
– Increasing Use of – and Great Opportunities – for Exchange Offers
– Portfolio Company Debt: “Loan to Own” to “Buying Your Own”
– The In-House Perspective: What We Want from Outside Counsel
– A 2008 Review: M&A and Proxy Fights
As all subscriptions are on a calendar-year basis, please renew now to receive this issue. If you’re not yet a subscriber, try a 2009 no-risk trial to get a non-blurred version of this issue for free.
Dave just completed a Special Supplement to the Jan-Feb ‘09 issue of The Corporate Executive. Since we expect many will be borrowing extensively from Dave’s excellent, up-to-the-moment model disclosures – inserting them into current drafts of proxy statements – we have posted the issue so that ’09 renewers can access the issue now (the full issue, including the Supplement, will be mailed to current ’09 subscribers later this week).
Renew Now: Those that renewed for ’09 received a link to the Supplement yesterday with instructions on how to access it; if you haven’t renewed yet, renew now to receive it immediately.
Try a No-Risk Trial Now: To have this Special Supplement rushed to you via email so you receive it today, try a no-risk trial for ’09 now – as the Supplement includes pieces on:
– Timely “Best Practice” Disclosures for Your Compensation Discussion and Analysis
– Implementing “Hold Through Retirement” for Equity Awards
– Our Hold-Through-Retirement Policy
– Revisiting Perquisites
– Reassessment of Our Perquisites
– Making the Most of Clawback Provisions
– Revisiting our Compensation Recovery Policy
– Evaluating the Need for Pensions and SERPs
– Our Review and Analysis of Pensions and SERPs
– Tax Implications
– Deductibility of Compensation for Tax Purposes
TARP’s Special Inspector General: Time for Disclosure
As noted in this Washington Post article, TARP’s Special Inspector General Neil Barofsky reportedly will request that each of the 300-plus companies receiving TARP funds provide disclosure as to how they have used those funds. These companies will also be requested to describe any oversight measures taken to comply with the newly revised executive compensation limitations (they were tweaked back on January 16th – too much going on to keep current on this blog!). The companies will have 30 days to respond – and they can be subpoenaed if they fail to comply.
This is not surprising given that it follows a similar disclosure deal that Barofsky cut with Citi and the automakers earlier this month when they got funds, limited attempts from banking regulators to wrestle disclosure from companies. More importantly from a political perspective, it follows two scathing reports from TARP’s watchdog about how the funds aren’t being tracked by Treasury, which led to questions from Congress – and an Obama representative responded last week two weeks ago with this letter to Congress promising more transparency in the TARP process.
– What is the goal of your board-shareowner communications paper?
– What type of comments did you receive on the draft? What changes were made?
– Which board-shareholder communication model do you think is the most feasible in the near-term?
– What about the long-term?
Last week, the U.S. Circuit Court of Appeals for the First Circuit issued its highly-anticipated decision regarding work papers and privilege in US v. Textron. We have posted the decision and related memos in our “Attorney-Client Privilege” Practice Area.
Here are some thoughts from Stan Keller of Edwards Angell Palmer & Dodge:
The decision involves whether Textron’s tax accrual workpapers were
protected from discovery from the IRS as work product. From a lawyer’s perspective, the importance of the decision is whether work product protection was waived as a result of disclosure of the workpapers to the auditors.
The First Circuit decision may amount to an illusory victory for Textron with mischievous consequences. The Court holds that the tax accrual workpapers are entitled to work product protection, giving a broad reading to the requirement that they be prepared in connection with litigation, and that sharing them with the auditor does not automatically constitute a waive. So far so good.
However, the court then reasons that the auditor could be a conduit for the workpapers or their substance being turned over to an adversary, there being no auditor’s privilege and thus the auditor’s workpapers are subject to discovery, with the result that the work product protection could be waived. The case was remanded to the District Court to consider this further.
Couple this limitation with the audit documentation requirements of AS #3 and you have illusory work product protection.
Corp Fin Issues Updated Interpretations for Going Private Transactions and ’33 Act Rules
Close enough to getting them out by the end of the year as promised, Corp Fin issued two sets of new Compliance & Disclosure Interpretations yesterday – a ’33 Act set and a “going private” transaction set.
The ’33 Act set includes new interps as well as revised interps that were published just a few months ago. The going private set is the first update in that area since ’01. The bracketed date following each interp in both sets is the latest date of publication or revision.
More Regulatory Reform Ideas
Last week, as noted in this press release, the President’s Working Group on Finanical Markets issued two reports on the hedge fund industry: this report from the Asset Manager’s Committee and this report from the Investors’ Committee. The reports lay out best practices and recommendations for the hedge fund industry. We have been posting recommendations for reform of the financial regulatory structure in our “Regulatory Reform” Practice Area. By the way, here is Obama’s “American Reinvestment & Recovery Plan.”
The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!
Given the heightened importance of executive pay right now – and the high likelihood that Congress will pass “say-on-pay” legislation, this year’s compensation disclosures will receive unprecedented scruntiny by investors, employees, customers and the media.
Act Now: As all memberships are on a calendar-year basis, you will not be able to access these webcasts if you haven’t renewed for ’09 – so please renew today. If you aren’t a member, try a no-risk trial for ’09.
