Yesterday, it was widely reported that President-elect Obama intends to nominate Mary Schapiro as the next SEC Chair. If indeed nominated and confirmed by the Senate, Mary would be the first female SEC Chair. Mary’s background in regulatory service can’t be matched – SEC Commissioner at the age of 33, former head of the CFTC and she currently serves as the head of FINRA (with this move, she will be taking a huge pay cut – from $2 million to $158k). Not surprising, she was on the short list.
Here are some media articles about this development:
Yesterday, the SEC adopted mandatory XBRL as expected. Here is Corp Fin’s statement – and here is a video of Chairman Cox’s opening remarks. The proposed transition schedule got pushed back by six months, so that the first wave of companies required to use XBRL — those with over $5 billion in worldwide market cap — will be required to file XBRL for their first quarterly (or annual report for 20-F/40-F filers) for fiscal periods ending on – or after – June 15, 2009. About 500 companies will be in this first wave.
A year later, accelerated companies will be in the second wave (ie. first report after June 15, 2010) – and in two years, smaller companies and foreign companies that use IFRS will comprise the third wave (ie. first report after June 15, 2011).
The vote was 4-1 since Commissioner Aguilar dissented, on the grounds that sheltering companies when they first begin using XBRL from some liability is unacceptable. As adopted, machine readable XBRL data will not be subject to antifraud claims – ie. considered “furnished” – so long as the mistake was made with good faith. And as proposed, the human viewable stuff will be considered “filed” (traditional financial statements will still be required to be filed with the SEC and continue to be subject to the “normal” liability provisions). In a change from what was proposed, the limited liability provisions for XBRL will be phased-out over a two-year period for each company, with a blanket termination for all companies on October 31, 2014.
Until we see the adopting release and learn the nitty-gritty details, you can learn more about yesterday’s meeting from FEI’s “Financial Reporting Blog” and the “IR Web Report.” Be careful what you read – particularly from XBRL vendors – as I’m already seeing misinformation about what happened at the meeting.
And the SEC has launched “IDEA,” which is intended to eventually replace Edgar. Do a company search on the SEC’s site and see how different it looks…
CSX Settles Section 16(b) Litigation Over Total Return Swaps
As noted in this Form 8-K filed yesterday by CSX Corporation, the company has settled its Section 16 lawsuit that involved issues related to two hedge funds being deemed beneficial owners, for purposes of Section 13(d), due to underlying cash-settled total return swaps they had entered into (Alan Dye covered this case recently in his “Section16.net Blog“). The settlement is subject to approval by the US District Court – SDNY. If approved, CSX will receive $10 million from TCI and $1 million from 3G – and attorney’s fees and costs of up to $550,000, which will be paid from the settlement proceeds.
Alan Dye and Peter Romeo are wrapping up the next issue of “Section 16 Updates,” which will provide practical analysis of this decision’s implications. As all subscriptions are on a calendar-year basis, please renew your subscription to the “Romeo & Dye Section 16 Annual Service” to receive this newsletter when it’s hot off the presses…
As we do every year, we have updated our “Proxy Season” Practice Area (thanks to Julie Hoffman) – including posting these memos that raise considerations for this proxy season.
Tune in early next month to hear Pat McGurn of RiskMetrics’ ISS Division discuss these new policies in the webcast: “Forecast for 2009 Proxy Season: Wild and Woolly.” Note that the webcast date has been moved up to Monday, January 12th. Since all memberships expire at the end of this month, you will need to renew by January 7th to access any content on TheCorporateCounsel.net, including this webcast.
Doing IPOs in a Troubled Market
In this podcast, Steve Pidgeon and David Lewis of DLA Piper discuss the recent IPO for Grand Canyon Education, including:
– Why was Grand Canyon able to go public in this market?
– How long did it take the company to get to market? In other words, were there delays along the way?
– What sort of celebration ensued when the IPO finally happened?
– What words of wisdom do you have for other companies considering going public in a down market?
– Jeff Karpf, Partner, Cleary Gottlieb Steen & Hamilton
– Deanna Kirkpatrick, Partner, Davis Polk & Wardwell
– Mark Welshimer, Partner, Sullivan & Cromwell
If you’re not a member of TheCorporateCounsel.net, try a ’09 no-risk trial to access this webcast for free. If you are a member, please renew your membership today since all memberships are on a calendar-year basis.
Survey Results: CEO Succession Planning
We recently wrapped up our Quick Survey on CEO succession planning, an important and often overlooked area. Below are our results:
1. Our company:
– Has a written CEO succession plan in a formal document or policy – 21.4%
– Has a written CEO succession plan in the form of a board resolution or as part of the board minutes – 1.4%
– Has a CEO succession plan, but its not memorialized in writing – 42.8%
– Doesn’t have a CEO succession plan – 34.3%
2. Our company:
– Reviews and updates the CEO succession plan at least annually – 44.3%
– Reviews and updates the CEO succession plan on occasion – 21.4%
– Doesn’t reviews the CEO succession plan (but it does have one) – 1.4%
– Doesn’t have a CEO succession plan – 32.9%
Please take a moment to participate in our new “Quick Survey on Advance Notice Bylaws.”
“Food Fight”: National Lampoon Loses a Battle
Take a gander at yesterday’s “SEC News Digest” – National Lampoon’s stock has been suspended from trading due to lack of current information (and the CEO has been charged with paying folks to buy stock in the company to make it appear there is a market for it; here’s the SEC’s litigation release). This is the first time I ever recognized one of the companies whose stock has been suspended. As one member emailed me, surely there is some pun or (ahem) lampoon that can be skewered here.
What happened to National Lampoon? The first time I took a date to the movies was to see “Animal House.” A true classic. Now a review of their site revewals that their next movie will be “The Beach Party at the Threshold of Hell.” Actually, the trailer for that movie doesn’t look too bad…
Anyways, here is a poll to vote on your favorite quote from “Animal House”:
The SEC has posted speeches made by the Office of Chief Accountant’s Staff at last week’s AICPA National Conference on Current SEC and PCAOB Developments (the Corp Fin Staff speeches have not yet been posted). OCA’s remarks cover a wide range of current accounting topics, including materiality, judgment, risk assessment, IFRS, impairment and, of course, fair value. In one of the speeches, Marc Panucci, Associate Chief Accountant in OCA, provided an interesting (and timely) discussion of how the current economic environment may impact management’s annual assessment and the external audit of the effectiveness of internal control over financial reporting, as well as management’s quarterly evaluation of disclosure controls and procedures. Here is the list of the speeches from the AICPA Conference posted so far:
It is tough to argue with the sentiment expressed by SEC Chairman Cox in an op-ed piece that appeared in the Wall Street Journal last week (and by my count the sixth op-ed piece this year by Chairman Cox posted on sec.gov). He emphasized that now is the time to ponder exit strategies for the government’s investment in private enterprise, in order to ensure that, e.g., our newly nationalized banking system does not live forever in its current incarnation. In this regard, Cox notes “it is incumbent upon federal policy makers to ensure that the extraordinary actions of the past months are understood to be temporary, and constructed so that they are self-liquidating. Since government programs do not on their own go away, there has to be a deliberate design to eliminate them, and a relentless adherence to execution of that plan. Anything short of this will almost certainly guarantee eternal life for these vast new federal roles.”
Cox’s piece doesn’t actually make any suggestions as to how this suggested policy is to be implemented and ultimately accomplished. For the TARP/CPP money, there really doesn’t seem to be an exit strategy in place, other than a vague hope that values will stabilize and ultimately go up in order to provide the US Treasury with a decent return on its investment. There is no doubt that in the rush of getting money into the hands of the automakers (now apparently a task of the White House alone), a focus on the exits will not necessarily be among the highest of priorities.
Perhaps it is a good sign that the dialogue is beginning to focus on how to get out, as opposed to any more on rushing in. It definitely seems like time to stop violating the first law of holes – once you get in one, stop digging.
The Mother of All Ponzi Schemes: Another Bailout Candidate?
The extraordinary story of the alleged multi-billion dollar Ponzi scheme run by Bernard Madoff is fascinating to me – how could so many “sophisticated” investors be misled for so long and with respect to so much money? Well, the obvious answer is a lack of disclosure and oversight, coupled with the inevitable predisposition to not ask questions when returns are positive. Hopefully, Madoff won’t be the tip of an iceberg – I doubt that the economy could stand more well-heeled institutional and individual investors getting wiped out by other funds that they didn’t understand or ask the tough questions about. And there is probably not going to be any sympathy out there for a bailout of institutions that lost large sums of money in the scheme.
And of course the blame game begins – a Bloomberg story over the weekend noted that Madoff’s operation had not been inspected by the SEC, even though Madoff had subjected his business to SEC oversight two years ago. But the SEC is all over Madoff now, and has directed all investor inquiries to the receiver appointed in this case, Lee Richards of Richards Kibbe & Orbe LLP.
Apparently the apparel choices of Madoff’s auditor are to be construed (in retrospect) as a possible red flag. This Bloomberg story reports that the man who frequents the offices of Friehling & Horowitz, Madoff’s auditor, “wears tight pants and tie-dyed shirts.” Perhaps the person observing the Friehling & Horowitz office has never heard of “casual Friday?”
For those of you out there who were hoping that XBRL might just go away, your hopes have been dashed, because the SEC has announced that it will consider adoption of the interactive data proposals at an open meeting next Wednesday. The SEC received over 80 comment letters on the proposals.
Under the proposals that the SEC will consider adopting, interactive data would be required to be submitted in all Securities Act registrations statements (when financial statements are included directly in the registration statement), Forms 10-K and 10-Q, and in transition reports. The proposals would also require companies to provide the same interactive date on corporate websites. The SEC also solicited comment on whether there should be mandatory XBRL submission of executive compensation disclosure and financial information required in Form 8-K and Form 6-K.
One focus of commenters was on liability for XBRL documents, so that will likely be one significant area of consideration for the final rules. Another big concern for the final rules will be the implementation schedule. The proposals contemplated a two year phase-in, with all issuers required to make XBRL submissions beginning with reports for fiscal years ending on or after December 15, 2010. The first group to be phased in – large accelerated filers (foreign and domestic) that use U.S. GAAP and have a world-wide public float above $5 billion – would be required to include XBRL in their next 10-K under the proposed phase-in schedule, so it will be interesting to see if the SEC sticks to that tight schedule in light of the relatively late arrival of the final rules. Some commenters suggested that the SEC require initial XBRL submissions with a 10-Q rather than a 10-K, to ease the pain.
The final interactive data rules will be a nice holiday present for the financial printers, who are all ready to assist with your XBRL preparedness. I have found that despite the long ramp-up to XBRL, there is still a need for a lot of folks involved in the filing process to come up to speed in this area. For more information, please check out our “XBRL” Practice Area.
Internal Control Survey
The other day at John White’s farewell reception, I was speaking with my favorite SEC economist about the SEC’s internal control survey. The survey is now up and running and the SEC is actively seeking information regarding costs and benefits of the rules implementing Section 404 of the Sarbanes-Oxley Act. By using the web-based survey, the SEC’s Office of Economic Analysis will obtain data on recent experiences of companies with Section 404 compliance. Once the data is collected, OEA will analyze the costs and benefits and the SEC will evaluate the effectiveness of its guidance to management on how to conduct an internal control evaluation and the PCAOB’s Auditing Standard No. 5.
Holiday Remembrances
Beyond lighted trees and wreaths, one sure sign of the holiday season while I was at the SEC was the crush of shareholder proposal no-action requests flooding into the Office of Chief Counsel in the last couple of weeks of the year. A significant portion of the 400+ letters that the Staff gets every year all come in right around the same time, making it tough to process all of that correspondence. This is why the Staff always says to try to get your shareholder proposal no-action requests in as early as possible, so you can avoid the “holiday rush.”
This year, there is at least some potential that the giant holiday stack of no-action letters won’t be piled up in OCC, thanks to the new dedicated electronic submission process. As Broc noted a few weeks back, Corp Fin has launched its new electronic interface, and as part of that you can e-mail your shareholder proposal no-action requests to shareholderproposals@sec.gov.
Comprehensive Price List: Here is a PDF that is a universal order form with the 2009 prices for all of our publications and web sites.
Registered Direct Offerings: An Alternative to Underwritten Deals
As noted in this CFO.com article, the unprecedented turmoil in the capital markets have caused many companies to consider alternatives to traditional underwritten public offerings. In this podcast, Lora Blum of Jones Day discusses registered direct offerings, including:
– What is a registered direct offering, and how is it different from a PIPE?
– Do you need an underwriter or placement agent to do a registered direct offering?
– Why might a company consider doing a registered direct offering?
– What kind of company could benefit from doing a registered direct offering, and what are the pitfalls a company considering such an offering should be aware of?
Delaware Court of Chancery Disapproves Class and Derivative Settlement
From Travis Laster: Opinions disapproving settlements are usually worth noting, since no one wants to work out a deal and then have it fail to pass muster. In a recent decision – Off v. Ross (Del. Ch. Ct.; 11/26/08) – Vice Chancellor Parsons disapproved a class and derivative settlement. Several factors led to settlement disapproval:
1. Timing – The case settled four days after the plaintiff moved for expedited proceedings. A blindingly fast settlement often raises questions. I once had a case that settled in a week, and it took us 3 hearings to get it approved.
2. Lack of confirmatory discovery – The plaintiffs did not take any discovery pre-settlement and, amazingly, did not take any confirmatory discovery after settling. In my experience, defendants are sometimes pleased when plaintiffs are willing to forgo confirmatory discovery, particularly the standard 1 or 2 confirmatory discovery depositions. This is penny wise and pound foolish, as it contributes significantly to the risk of disapproval.
3. Minimal consideration for seemingly strong claims – The plaintiffs settled claims that arguably invoked the entire fairness standard in return for an agreement that the company would proceed with a rights offering that the record strongly suggested was what the company planned to do all along. In other words, the value of the settlement was suspiciously weak. This is a recurring issue with disclosure-only settlements, when it’s best to think at least twice.
4. Objectors to the settlement and a competing action in another jurisdiction — The weaknesses of the settlement were laid bare by two objectors to the settlement, one of whom was a plaintiff in a competing action in another jurisdiction. Although the parties tried to carve out the other action from the release, the defendants reserved the right to seek dismissal of the action based on the settlement. The existence of motivated objectors always heightens the risk that a settlement will not be approved.
5. A significant attorneys fee of $800,000.
With this confluence of factors, this was a high risk settlement to present.
Yesterday, the Staff of Corp Fin’s Office of Chief Accountant posted an updated version of the Accounting Disclosure Rules and Practices Manual, now renamed the Financial Reporting Manual. The Manual was last updated in 2000, so this has been a monumental effort on the part of the Staff. Even though the Manual is posted on the SEC’s website, it still bears that legend “For Division of Corporation Finance Staff Use Only” and includes a disclaimer about its informal nature as guidance.
Those who follow the Q&A Forum know that I have cited to the Manual often, because it has always been a great resource for understanding Staff positions on filing and financial statement matters. It might be a good idea to keep your old copy of the Staff Manual, because the new manual does not cover all of the same topics as the old one.
What is Your Auditor Thinking About This Year?
The current economic environment will not only influence disclosure decisions for your upcoming 10-K (as we discussed in the September-October 2008 issue of The Corporate Counsel), it will also influence auditors and how they look at companies during 2008 financial statement audits. If you want to get into the mind of your auditor for the upcoming audit season, check out the PCAOB’s recent Staff Audit Practice Alert on Audit Considerations In the Current Economic Environment. The Alert does a nice job of highlighting the most significant accounting and auditing issues that companies are now facing in light of the recession and the credit crisis, including:
– Overall audit considerations
– Auditing fair value measurements
– Auditing accounting estimates
– Auditing the adequacy of disclosures
– Auditor’s consideration of a company’s ability to continue as a going concern
– Additional audit considerations for selected reporting areas
The Audit Practice Alert points out that in planning and performing the audit, auditors need to be particularly sensitive to fraud risk considerations, which may include increased pressure to meet targets or other expectations of third parties, and even the extent to which the personal financial situations of members of management or the board are threatened by their companies’ performance. This may be an area that will receive more focus this year as compared to recent audits in periods of an economic upswing.
Auditors may also be paying more attention to disclosures this year, particularly the discussion in MD&A of liquidity, capital resources, results of operations, off-balance sheet arrangements and contractual obligations. The Staff Practice Alert notes that auditors need to read this and other information in the report and consider whether the information, or the manner of its presentation, is materially consistent with information, or the manner of presentation of information, appearing in the financial statements.
Inspection Retrospective
While on the topic of the PCAOB, it is hard to believe that the Board has been around so long that it is already putting out its “greatest hits.” Last week, the PCAOB published its Report on the PCAOB’s 2004, 2005, 2006, and 2007 Inspections of Domestic Annually Inspected Firms. This report summarizes the inspection findings of the eight domestic accounting firms that were subject to annual inspections over the past four years (i.e., the biggest firms).
“The report describes deficiencies observed in these areas, as well as deficiencies in the following additional audit areas: identifying departures from generally accepted accounting principles (GAAP), auditing of management’s estimates, income taxes, and internal control, performing analytical procedures and audit sampling, using the work of specialists, and assessing materiality, audit scope and audit differences.
The report also includes information on changes in the quality control systems that firms have described in remediation plans submitted in response to the first years of inspection reports. These include changes to their structure, partner evaluation processes, internal inspection programs, procedures for using the work of foreign affiliates, and processes for compliance with independence requirements.”
Last month, the PCAOB proposed its 2009 budget, seeking a modest increase in spending with a budget of $157.6 million, compared to a budget of $144.6 million for 2008.
Last week, the SEC adopted a number of changes to its credit rating rules that were originally proposed back in June. Here is the press release and Chairman Cox’s remarks.
This latest round of changes largely originated out of the SEC’s examination of the NRSRO rating practices for structured finance deals. At the open meeting last Wednesday, the SEC did not consider any of the proposed changes to its rules targeted at eliminating references to credit ratings, and it remains unclear whether those rule proposals will move forward. The SEC did not move forward on proposals to require a change in the symbols used by NRSROs for rating structured finance products.
The SEC adopted a number of new prohibited conflicts of interest for NRSROs and their personnel including: (1) making recommendations to an issuer about obtaining a credit rating; (2) having the same personnel discuss fees and ratings; (3) gifts from rated issuers in excess of $25. The rule changes also call for internet disclosure of ratings history when the NRSO follows an “issuer pays” model, and enhanced disclosure of performance measures, verification procedures and credit surveillance policies. Enhanced documentation will be required for model deviations, and credit rating agencies will need to retain complaints about credit analysts.
The SEC also reproposed rules concerning additional internet disclosure for “issuer pays” NRSROs and public disclosure of data underlying structured finance ratings.
From the AICPA Conference: Cox on the SEC’s Fair Value Study
The AICPA’s “National Conference on Current SEC and PCAOB Developments” kicked off in Washington yesterday, and Chairman Cox delivered a speech that covered a number of current accounting concerns at the SEC.
Among the things covered in Cox’s speech were some insights into the SEC’s EESA-mandated study on fair value accounting. His preliminary observations seemed to confirm what was reported in an article in yesterday’s WSJ, which noted that sources indicate that the SEC plans to keep fair value accounting in place, while seeking to refine its application.
Cox noted these preliminary findings from the study:
“First, for many financial institutions, investments marked-to-market through earnings on a quarterly basis represent a minority of their total investment portfolio. A larger portion of investment portfolios consists of available-for-sale securities or loans. As you know, investments in loans and available-for-sale securities are not marked-to-market through earnings each period. Rather, these securities are subject to (in some cases, difficult) judgments on other-than-temporary impairments.
Second, most investors, and many others, agree that fair value is a meaningful and transparent measure of an investment for financial reporting purposes. Financial reporting is intended to meet the needs of investors. While financial reporting may serve as a starting point for other users, such as prudential regulators, the information content provided to investors should not be compromised to meet other needs.
Third, accounting standards have served our capital markets well, but we must endeavor to continue to develop robust best practice guidance for auditors and preparers — particularly for fair value measurements of securities traded in inactive or illiquid markets. Education efforts and the development of application guidance must provide a path for auditors and preparers to reach a common ground on these difficult issues.”
I’ll have more from the AICPA conference later this week.
TARP Update: Is There Progress?
Yesterday, Interim Assistant Secretary for Financial Stability Neel Kashkari delivered remarks at the OTS Annual National Housing Forum. In assessing the progress to date of the TARP program, Kashkari stated:
“People often ask: how do we know our program is working? First, we did not allow the financial system to collapse. That is the most direct, important information. Second, the system is fundamentally more stable than it was when Congress passed the legislation. While it is difficult to isolate one program’s effects given policymakers’ numerous actions, one indicator that points to reduced risk of default among financial institutions is the average credit default swap spread for the eight largest U.S. banks, which has declined more than 200 basis points since before Congress passed the EESA. Another key indicator of perceived risk is the spread between LIBOR and OIS: one-month and three-month LIBOR-OIS spreads have each declined about 100 basis points since the law was signed and about 180 basis points from their peak levels before the CPP was announced.“
With so many important action items impacting your proxy disclosures right now, you will want to read the Fall 2008 Issue of the Compensation Standards print newsletter that covers some key issues regarding proxy disclosures to consider now.
As a bonus, the issue includes a feature entitled “The Box” that provides an important “heads-up” regarding insiders’ margin accounts and a related D&O questionnaire pointer – which alone are examples of the invaluable, timely preventive guidance that this newsletter provides.
Since members of CompensationStandards.com get a free subscription to the Compensation Standards print newsletter, we have posted the Fall issue online. If you’re not a member, try a ’09 no-risk trial and get this issue rushed to you today.
And since all memberships are on a calendar-year basis, members should renew for ’09 today to continue getting this guidance.
Smaller Company Governance
Man, I’ve never seen so many good people get laid off in our field. One of them is Steve Shapiro, who has been in-house counsel for four companies. I recently caught up with Steve in this podcast to learn the corporate governance challenges that smaller companies face, including:
– What are the particular challenges of being a GC/CS at a smaller company?
– What could be easier?
– What resources are helpful?
– Are there differences in dealing with other executives? Boards? Outside advisors like accountants and counselors?
FINRA Issues Guidance on Broker/Dealer Obligations regarding SPACs
Recently, FINRA issued Regulatory Notice 08-54, which provides guidance on the structure, trends and broker/dealer conflicts of interest associated with SPACs. The Notice discusses broker/dealer suitability and disclosure obligations in connection with a SPACs’ IPO, after-market trading and any subsequent acquisitions. The Notice also refers to compliance with NASD Rule 2720, the NASD conflict-of-interest rule, in connection with an acquisition by a SPAC.
As noted in this recent Washington Post article, the SEC will be spending the next six months reshuffling the offices in its new building (price tag = $4.1 million). When the SEC moved into its new building a few years ago, someone in charge of such things had a not-so-brilliant idea – mix up Staffers from the various Divisions on each floor rather than maintain the Divisions on their own floors. End result of that: folks from the same Division communicated far less with each other because they rarely saw each other (and communication already had been reduced due to the popularity of working from home).
Some of the Corp Fin Operation groups are already moving – and this project likely will change the Mail Stops for some of them in the near future. This “restacking” is a great idea, but the timing of it puzzles me given that there is some likelihood of the SEC merging with the CFTC (or other agencies), but I’m sure they have their reasons.
– Why was this survey undertaken?
– What were the major findings of the Survey?
– Were any findings surprising?
– What advice do you have for companies in the wake of the Survey?
Nasdaq’s New Process for SEC Filing Deficiencies
Recently, Nasdaq filed a proposed rule change which would provide more lenient treatment for companies that are delinquent in making periodic filings to the SEC. Under current Nasdaq rules, companies receive a delisting letter immediately upon missing a filing due date. Late filers are not given a compliance period in which to make a late filing – nor is the Nasdaq staff permitted to grant the delinquent companies additional time to comply with the filing requirements. Although the rule change has been filed as a proposed rule, Nasdaq has asked the SEC to waive the normal 30-day waiting period and approve the rule change to go effective immediately.
Under the modified rules, late filers would have 60 calendar days after receiving a Nasdaq notice of delinquency to submit a plan to regain compliance. The plan would have to address the reasons for the late filing, the likelihood of making the filing within the exception period, the company’s past compliance history, corporate events that might occur within the exception period, and disclosures to the market. After reviewing this (and other relevant information), the Nasdaq Staff may grant the company up to 180 calendar days from the date of the first missed filing to fulfill the filing requirement and regain compliance.
Nasdaq’s rationale for the proposed change is a recognition of the fact that, when a company delays a filing, the formal procedures required to investigate the underlying issues causing the delay and, if necessary, to restate its financial statements, can be a laborious time-consuming process. In these situations, companies often publish whatever financial information they can and inform investors of the reasons for the delay. Nasdaq believes that delisting a company that is taking all appropriate steps to regain compliance and file financial statements – while keeping the public informed – is not in the best interest of the company or its investors.
