It is now obvious that the Staff has been very busy drafting “Small Entity Compliance Guides” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996. While the requirement to prepare these guides has been in place since SBREFA was originally enacted 12 years ago, the Staff’s efforts on this front seem to have gotten a boost from the enactment of the Fair Minimum Wage Act of 2007, which requires that: (1) the guides be posted on agency websites; (2) they be made available at the same time a rule becomes effective; and (3) they include an explanation of actions a small business must take to comply with the rule. The Fair Minimum Wage Act also requires each federal agency head to report to Congress annually on the status of their agency’s compliance with revised requirements for making the compliance guides available to small businesses. The requirement to prepare a small entity compliance guide is triggered whenever the SEC prepares a Final Regulatory Flexibility Analysis under SBREFA as part of its rulemaking, which is usually found in the “back-end” of the adopting release that folks often skip over.
Each guide makes clear that it is intended to summarize and explain the rules, but should not be looked at as a substitute for the rule itself. Interestingly, SBREFA gave the small entity compliance guide a special status from a litigation perspective. The Act provides that “[a]n agency’s small entity compliance guide shall not be subject to judicial review, except that in any civil or administrative action against a small entity for a violation occurring after the effective date of this section, the content of the small entity compliance guide may be considered as evidence of the reasonableness or appropriateness of any proposed fines, penalties or damages.” For this reason alone, it is probably a good idea to know what these guides say.
Last week, Corp Fin posted a new compliance guide regarding e-proxy, which includes a handy chart comparing key differences between the notice only and full set delivery options. The compliance guide phenomenon is not just limited to Corp Fin, however – the Division of Trading and Markets also recently posted a new page collecting some of its compliance guides that meet the SBREFA requirements.
While these guides don’t include any new interpretive guidance, as I noted in the blog earlier this year, they can serve as a useful resource if you are looking for a quick overview of the rules, or something written in plain English that you can refer to in order to easily explain the rules to clients or others. One guide that I have always found particularly useful (although I don’t think it started out life as a small entity compliance guide) is the Division of Trading and Markets’ Guide to Broker-Dealer Registration, which was last updated in April 2008.
Controlling Person Liability: Joint and Several, Proportional or Both?
Recently, the Eleventh Circuit decided a case of first impression on the issue of whether – following enactment of the Private Securities Litigation Reform Act of 1995 – a controlling person is jointly and severally liable as specified in Exchange Act Section 20(a), or rather is subject to the proportionate liability scheme of Exchange Act Section 21(D)(f) (which was added by the PSLRA). In LaPerriere v. Vesta Insurance Group, Inc. (11th Cir.; Apr. 30, 2008), the Eleventh Circuit reversed the District Court’s conclusion that the proportionate liability regime set out in Section 21(D)(f) “trumps” Section 20(a). Instead, the Eleventh Circuit stated “[r]ecognizing that implicit repeals of statutory provisions are disfavored, we hold that section 21(D)(f) and section 20(a) should be read in harmony to preserve both the PSLRA’s proportionate liability scheme and a controlling person’s derivative liability under section 20(a).”
The court essentially set forth a two-part test in seeking to reconcile the two statutory provisions. In this regard, the court stated:
“Section 21(D)(f) is not superfluous, however. It does have a role to play. As the Conference Committee Report also explained, while the PSLRA did not modify ‘in any manner’ the standard of liability under the securities laws, including section 20(a), it did change the rules for allocating damages among the parties once liability has been established by the fact finder. Before the PSLRA was enacted, if one of those parties was found liable as a controlling person of violating section 20(a), it would have been responsible jointly and severally for the damages to the same extent as the primary violator. Under the proportionate liability provisions of the PSLRA, if a party is found liable as a controlling person under section 20(a), there is a new standard for allocating damages. What has changed is not the standard of liability that applies to controlling persons – the ‘Applicability’ provision states that has not been modified ‘in any manner’ – but their responsibility as liable persons for the damages. The proportionate liability provisions of section 21(D)(f) are applicable only after liability is determined, and liability is governed by the standard set out in section 20(a).”
– M&A Targets Today: Seeking Deal Certainty in an Uncertain Environment
– How to Negotiate an M&A Engagement Letter with Your Investment Banker
– Structuring Portfolio Companies: Director Independence
– Ten Practice Tips for Negotiating the Letter of Intent
– How to Do a Deal Without Shareholder Approval: The “Financial Viability Exception”
– A Moment of Clarity: How to Avoid Ambiguities in Your Advance Notice Bylaws
Try a no-risk trial to get a non-blurred version of this issue for free.
Last week’s ruling permitting plaintiffs to move forward on some claims in a derivative suit against Countrywide Financial Corp. received quite a bit of attention (see, e.g., this NY Times article and this Bloomberg article), but perhaps the most interesting elements of the case detailed in the order were allegations about insiders’ sales of substantial amounts of Countrywide stock right around the time of a company repurchase plan and pursuant to Rule 10b5-1 plans.
I blogged about reports of the SEC’s interest in Countrywide CEO Angelo Mozilo’s use of Rule 10b5-1 plans last Fall, and his trades under 10b5-1 plans were a topic of great interest during the hearing before the House Committee Oversight and Government Reform earlier this year. Now, with the May 14th Order of Judge Mariana Pfaelzer on the motions to dismiss for In re Countrywide Financial Corp. Derivative Litigation, much more detail about the trading activity of Countrywide insiders in advance of the company’s troubles has come to light.
Among the most notable allegations regarding insider sales were large trades conducted around the time of the announcement of Countrywide’s stock repurchase programs in November 2006 and May 2007. The judge asks regarding these trades: “how could the Board members approve a repurchase of $2.4 billion dollars worth of stock, and nearly contemporaneously liquidate $148 million of their personal holdings just months before the stock dropped some 80-90%?” Ultimately, while noting that these trades appear to be suspicious, the judge didn’t find sufficient detail in the complaint for the allegations to survive a motion to dismiss.
It was a very different story when considering Mozilo’s trades. Noting that Mozilo actively amended and modified his 10b5-1 plans, Judge Pfaelzer states: “Mozilo’s actions appear to defeat the very purpose of 10b5-1 plans, which were created to allow corporate insiders to ‘passively’ sell their stock based on triggers, such as specified dates and prices, without direct involvement…[a]ccordingly, his amendments of 10b5-1 plans at the height of the market does not support the inference ‘that the sales were pre-scheduled and not suspicious.'” The judge rejected claims that inferences of scienter were mitigated by the fact that Mozilo’s trades involved amounts of stock that represented only a small proportion of his substantial holdings, citing a 9th Circuit holding that “where, as here, stock sales result in a truly astronomical figure, less weight should be given to the fact that they may represent a small portion of the defendant’s holdings.” Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1232 (9th Cir. 2004).
While not discussed in the Order, it appears from Countrywide’s filings that the company actually instituted a special kind of repurchase program around the time of the insiders’ sales called an “accelerated share repurchase program,” which usually involves a company purchasing shares of its own stock from a broker-dealer at a set price on one or more specified dates. The broker-dealer borrows the shares that are sold to the issuer and thereby puts itself in a short position, which it then covers by conducting open market purchases over time. From the disclosures, it appears that the company financed the purchase of the stock through the issuance of debt securities.
One thing that makes an accelerated share repurchase program different from the usual buyback program is that companies often complete the buyback all at once or over a very short period of time, rather than entering the market over a long period of time to buy back stock at attractive prices.
SEC Publishes CIFiR Subcommittee Reports for Comment
Last week, the SEC published for public comment the four subcommittee reports that were presented to the Advisory Committee on Improvements to Financial Reporting at its May 2, 2008 open meeting. The Subcommittee Reports largely reflect additional considerations and comment on previously identified proposals.
The “Delivering Financial Information” Subcommittee’s report reflects some further consideration of issues briefly identified in the Committee’s February Progress Report as issues for future consideration. For example, the Subcommittee has developed some “Preliminary Hypotheses” with respect to the use of Key Performance Indicators (KPIs), improvements to quarterly earnings release disclosure and timing and the use of executive summaries in Exchange Act periodic reports (similar to summaries found in offering documents). The Subcommittee’s report outlines some suggestions and considerations that could ultimately result in Committee recommendations in these areas.
In more accounting committee news, the Treasury Department’s Advisory Committee on the Auditing Profession posted a notice regarding the Committee’s activities, along with a request for comment on the Committee’s draft report until June 13.
– What is a “sovereign wealth fund”?
– How are they working with activist investors, particularly in a post-Dubai Ports World politically charged environment?
– What about sovereign wealth fund as activists themselves?
– What are regulators in Washington doing regarding sovereign wealth funds?
Now that the Supreme Court has weighed in against the notion of “scheme” liability in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 128 S.Ct. 761 (2008), the federal courts have begun applying the Stoneridge holding to securities fraud claims against various types of third parties. (In Stoneridge, the Court held that “the private right of action [under Section 10(b) and Rule 10b-5] does not reach the customer/supplier companies because the investors did not rely upon their statements or representations.”)
In Pugh v. Tribune Co., (7th Cir.; April 2, 2008), the first appellate court to apply Stoneridge rejected the notion of finding “scheme liability” in a situation where a company employee was allegedly involved in a scheme to defraud that ultimately led to a securities fraud. Employees of Tribune and its subsidiaries had participated in a scheme to falsely inflate circulation figures for two Tribune publications in order to increase the amounts charged for advertising. Once the fraud was uncovered, Tribune took a $90 million charge to earnings and several employees pled guilty to fraud charges. The plaintiffs sued Tribune Co. and several individual defendants under Exchange Act Sections 10(b) and 20(a) for losses caused by the inflated revenue generated through the fraudulent circulation number scheme. The District Court dismissed the claims with prejudice.
The Seventh Circuit affirmed, most notably applying Stoneridge to plaintiff’s claims against Louis Sito – the Tribune employee allegedly behind the circulation scheme – and finding that he was not liable for securities fraud based on a theory that it was “foreseeable” that that the circulation fraud would lead to an overstatement of the company’s revenues. The court indicated that Sito “had participated in a fraudulent scheme but had no role in preparing or disseminating Tribune’s financial statements or press releases.” The court concluded that the Supreme Court’s holding “indicates that an indirect chain to the contents of false public statements is too remote to establish primary liability.”
In another recent case, In re DVI Inc. Securities Litigation (E.D. Pa.; April 29, 2008), the District Court in the Eastern District of Pennsylvania applied Stoneridge in addressing class certification for claims against a law firm. The plaintiffs had alleged that the firm (Clifford Chance) “initiated and masterminded” a “workaround” that allowed DVI to fraudulently misrepresent the adequacy of the company’s internal controls. The court noted that the misleading 10-Q in which the internal controls disclosure was included “was issued solely by DVI and contains no indication that any statement therein is attributable to Clifford Chance.” Because investors did not rely upon the allegedly deceptive conduct of Clifford Chance and the conduct was not “publicly disclosed such that it affected the market for DVI’s securities,” the court found that the plaintiffs were not entitled to the fraud on the market presumption in establishing reliance on a class-wide basis with respect to the activities of the firm.
These cases may indicate that the lower courts will apply the Supreme Court’s Stoneridge holding relatively broadly – including (somewhat surprisingly) to situations where there is some affiliation between the defendant and the issuer, such as an employee.
Convertible Securities: New Accounting for Cash-Settled Instruments
This WSJ article from last Friday noted that convertible securities are very cheap right now, given the widespread exit from the market earlier this year by those hedge funds pursuing a convertible arbitrage strategy. Financial firms in need of cash have been going to the market with convertible deals, given the attractiveness of convertibles over selling common stock at depressed levels or issuing long-term debt. The article notes that recent issuances have offered relative high yields and some attractive add-ons, such as compensation for changes in dividends or takeovers that come at lower prices.
Companies considering a convertible debt issuance or that have convertibles already on their books should take look at the new FASB Staff Position (FSP) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).” This new position will be effective for fiscal years (and interim periods) beginning after December 15, 2008, and is to be applied retrospectively to all past periods presented – even in those situations where the convertible instrument has matured, converted or has otherwise been extinguished as of the effective date of the FSP.
The FSP will likely have a big impact on the financial statements of companies that have issued the relatively popular flavor of convertible debt securities that, upon conversion, may be settled by the company fully or partially in cash. While today most types of convertible debt instruments are treated as debt securities for accounting purposes, under the new FSP companies will need to allocate between the liability and equity components of the instrument. Splitting up the debt and equity components will inevitably result in a debt discount, which will need to be amortized to interest expense over the expected life of the debt. As a result of the FSP, companies that have issued cash-settled convertible securities will see an increase in interest expense associated with those instruments (and a resulting reduction in earnings and earnings per share), with a decrease in the net carrying amount of debt on the balance sheet along with an increase in the amount of equity.
The Firm, but Fair, Hand
First there was Adam Smith’s “Invisible Hand,” then there was “Slowhand” (aka Eric Clapton), and now apparently we have the “Firm, but Fair, Hand.” I ran across this advertisement on the editorial page of my local newspaper. I can’t recall ever seeing this kind of “campaign-style” ad from an interest group defending the record of the SEC and its Chairman, but then again there have been a lot of things over the past few years that I don’t recall seeing before…
General Electric’s recent high-profile failure to meet its own earnings guidance may well revive the debate over providing quarterly guidance. As noted in this FT.com piece, while some major companies such as Coca-Cola and Google have avoided the quarterly guidance game, the practice still remains entrenched.
In this new “Quick Survey on Earnings Guidance,” we ask about your company’s guidance practices. Please take a moment to complete the four questions.
Disclosing Beneficial Owners of Private Companies
A bill introduced in the Senate earlier this month by Senators Levin, Coleman and Obama would, if enacted, require disclosure about the beneficial ownership of private corporations and LLCs. S. 2956 would set, beginning in fiscal 2011, standards for state incorporation systems that would require the name and current address of each beneficial owner, and if the beneficial owner exercises control of over the corporation or LLC through another legal entity, the identity of the legal entity and each beneficial owner who will use that entity to exercise control over the corporation or LLC. This beneficial ownership information would need to be updated annually if the state requires an annual filing; however, if no annual filing is required, then the information would need to be updated whenever there is a change in beneficial ownership. Additional requirements would apply for any beneficial owner who is not a U.S. citizen or lawful permanent resident.
The legislation would define “beneficial owner” as “an individual who has a level of control over, or entitlement to, the funds or assets of a corporation or limited liability company that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the corporation or limited liability company.” The bill would specifically carve-out from the definition of corporation or LLC “any business concern that is an issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781) or that is required to file reports under section 15(d) of that Act (15 U.S.C. 78o(d)), or any corporation or limited liability company formed by such a business concern.”
The text of S. 2956 notes that all countries in the EU require information about beneficial ownership of corporate entities, and that the U.S. has been criticized for the lack of information about the ownership of companies that could potentially be involved in terrorism, money laundering, fraud and other misconduct. The bill has been referred to the Committee on Homeland Security and Governmental Affairs.
This legislation appears to reflect some frustration with the states for not improving their corporate registration systems to capture ownership information, particularly for law enforcement purposes. The bill notes that a person forming a corporation or LLC typically provides a state with less information than is needed to obtain a bank account or a driver’s license!
Third Party Disclosure of Undisclosed SEC Investigations
Last summer, I blogged about varying practices as to when to disclose pending SEC inquiries or investigations of a company or its officers and directors. Various factors may be pushing the timing of disclosure forward, and one recent development may force some companies to make the disclosure sooner than they otherwise might have under the rules.
Disclosureinsight.com is now offering free e-mail updates regarding companies that appear to have undisclosed enforcement activity, based on information derived from FOIA requests. As noted in this article from the Minneapolis-St. Paul Star Tribune, this new site was created by John Gavin, who started his SEC Insight service back in 2000 based on information derived through the FOIA process. Gavin sued the SEC in 2004 over the agency’s FOIA practices, namely the blanket denial of FOIA requests using the “Glomar response” (see Broc’s blog about this litigation from 2005).
As noted on the FEI Financial Reporting Blog last Friday, the White House Chief of Staff recently sent a memorandum to agency heads stating that all rules expected to be finalized by the end of the administration must be proposed by June 1, and that final rules must be adopted by November 1 – except in extraordinary circumstances. This Dow Jones Newswire article (subscription required) notes that the memo probably did not come as a surprise to the agencies, given that the policy had been telegraphed ahead of time. It still appears possible under this policy for agencies to propose rules after the June 1 deadline, but only if the rules are expected to be ultimately adopted (or reconsidered) after President Bush leaves office.
Given this latest directive and the lack of full slate of Commissioners at the SEC, it doesn’t appear likely that we will see much in the way of controversial proposals (e.g., shareholder access) coming up for a vote in the next couple of weeks – but there will no doubt be some proposals trying to “beat the clock.” Will the SEC’s “summer reading” be a bit lighter than it has been in the past couple of years? We will have a better sense in just a couple of weeks…
Survey Results: Rule 144 Practices
In response to some questions we have been asked about Rule 144 practices, we posted a survey – here are the survey results, which are repeated below:
1. If asked to render a legend removal opinion regarding restricted securities of a reporting issuer that is current in filing its 1934 Act reports, where the securities have been held more than six months but less than twelve months, we are:
– Not willing to provide such a legend removal opinion until the end of the twelve month period – 35.1%
– Willing to provide a legend removal opinion – 16.2%
– Undecided regarding what our practice will be – 21.6%
– Depends on the circumstances of each situation – 27.0%
2. Where a pre-February 15, 2008 registration rights agreement provides that a holder of restricted securities may demand registration of the securities until all of the securities may be resold in a single sale under Rule 144(k), we are taking the following position in the case of reporting issuers:
– If the securities have been held for at least six months but less than twelve months, the issuer is not obligated to register the securities so long as the issuer is current in filing its 1934 Act reports – 55.2%
– The issuer must register the securities unless they have been held for at least twelve months – 44.8%
Only One Day Left! Early Bird Discount for Compensation Conferences
Like last year’s blockbuster conferences, an archive of the entire video for both conferences will be right there at your desktop to refer to – and refresh your memory – when you are actually grappling with drafting the disclosures or reviewing/approving pay packages. Here are FAQs about the Conferences.
For those choosing to attend by coming to New Orleans, I encourage you to also register for the “16th Annual NASPP Conference,” where over 2000 folks attend 45+ panels. And if you attend the NASPP Conference, you can take advantage of a special reduced rate for the Exec Comp Conferences.
Register by end of tomorrow for Early-Bird Rates: Whether you attend in New Orleans or by video webcast, take advantage of early-bird rates by registering by May 20th. You can register online or use this order form to register by mail/fax. Note that we have combined both of our popular Conferences – one focusing on proxy disclosures and the other on compensation practices – into one package to simplify registration.
If you have questions or need help registering, please contact our headquarters at info@thecorporatecounsel.net or 925.685.5111 (they are on West Coast, open 8 am – 4 pm).
As noted in this WSJ article last week, SEC Chairman Cox said in a speech that the four largest investment banks are being pushed by the agency to provide better disclosure about their “actual capital and liquidity positions…in terms that the market can readily understand and digest.” According to the article, these disclosures will begin after the second quarter, with additional information about concentrated exposures within the investment banks phased-in later.
Maybe all this Market Reg-type stuff is beyond me, but I don’t understand why the SEC Chairman has to twist arms to get this type of disclosure from the banks? Wouldn’t the banks provide this disclosure under MD&A – Item 303 of Regulation S-K – as part of their liquidity disclosures? This harkens back to my surprise about how the banks were not fully baking the impact of the credit crunch into their risk factors (see this blog). All of this baffles me as I always thought companies perceived their SEC filings as “liability” documents – meaning that they would disclose as much “bad stuff” as possible in them to avoid liability.
Anyways, I chalk up this entire incident as “Exhibit A” for why the prospect of principles-based regulation is scary. Looks like even line-item regulation doesn’t fully work…
Keith Bishop notes: The 11th Circuit recently rendered an interesting decision in US v. HUNT, (11th Cir. 5-5-2008). In that case, a police officer was convicted of making a false false entry into a police incident report with the intent to impede, obstruct, or influence an FBI investigation.
So what does that have to do with securities law? The statute in question is 18 U.S.C. Sec. 1519 which was amended by Section 802 of Sarbanes-Oxley to provide “Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.”
The case is noteworthy because the Court found that the statute was not: (1) limited to corporate fraud or malfeasance even though it was enacted as part of Sarbanes-Oxley and (2) unconstitutionally vague.
SEC Approves NYSE’s New SPAC Listing Standards
Last week, in this order, the SEC approved the NYSE’s rule changes to make it easier for SPACs to be listed on the exchange. In addition to SPAC listings, the rule changes will impact reverse mergers. Recently, DealBook reported on the first SPAC looking to jump from AMEX to NYSE.
Yesterday, the SEC held an open Commission meeting to propose mandatory XBRL. As expected, the SEC proposed a phase-in period for mandatory XBRL – starting with approximately the largest 500 companies (specifically, those with a public float of over $5 billion) filing in XBRL for fiscal periods ending on or after December 15, 2008. So they would start making XBRL-tagged filings as early as the spring of 2009! Umm, that’s not even a year away; the latest April tags can’t even be used for testing yet. Did someone wet their diaper?
Moving on, smaller companies and foreign private issuers would phase-in over a three-year period, with all filing in XBRL by 2011. Year 2 would bring in large accelerated filers (about another 1700 companies) and Year 3 would capture all remaining filers using US GAAP, which includes FPIs that file in IFRS. Here is the SEC’s press release, the Chairman’s opening statement (which quotes “Women’s Wear Daily”) and Corp Fin’s opening statement.
A few more items:
1. “Limited” liability – During the meeting, the SEC was coy about what the proposed liability scheme will be (and who might be on the hook for the tagging). It was mentioned that there would be “limited” liability, but no one mentioned if XBRL data would be considered “furnished” rather than “filed,” as is currently the case under the SEC’s pilot program. This is an issue that likely will be intensely debated during the comment period, regardless of what the SEC actually proposes (and in my opinion, limited liability for the accuracy of the financials is a huge mistake – if investors can’t rely on the numbers tagged in XBRL, what’s the real value of them?).
2. Grace period for first times – XBRL will be considered late if not provided to the SEC – as well as posted on corporate websites! – at the same time as the related report. There are two exceptions: a 30-day grace period would be permitted for a company’s first XBRL filing – and also for the first time they are required to include the footnotes and schedules tagged in detail.
3. Consequences of late filing – If not provided timely, the penalty is that the company would be deemed not current with their ’34 Act reports (hence, not eligible for short form registration or the resale exemption safe harbor under Rule 144).
4. Transition – In the first year, footnotes and schedules would be allowed to be filed in “blocked tags,” which means each item has its own tag and is much easier than the alternative.
5. Costs – In his “IR Web Report,” Dominic Jones blogs some good stuff about the projected costs of XBRL for companies. Put me down as leery of the SEC’s estimate that the average price for an XBRL conversion will be under $30,000 and require less than 40 hours of work.
There is a 60-day comment period that commences once the proposing release is published in the Federal Registrar – meaning that the deadline will land about a week after our July 16th webcast: “XBRL: Understanding the New Frontier.”
It’s a good time to pick up your free book “XBRL for Dummies” from Hitachi – although I haven’t seen it myself, so I can’t vouch for its real-life usefulness…
XBRL and Third-Party Assurance
One issue that wasn’t discussed at the open meeting yesterday, but bound to be commented upon – and considered by the groups that are in the process of making reform recommendations like the SEC’s Advisory Committee on Improvements to Financial Reporting – is third-party assurance. Here is an article by two accounting professors (who were Academic Accounting Fellows at the SEC not long ago) discussing the challenges that XBRL presents for third-party assurance, raising interesting questions like: what to do about “bad” tagging that may be invisible when looked at through a viewer or other rendering tool, but can create errors when end-users try to slice and dice the data?
Although the article doesn’t really provide much in the way of answers – in sum, the authors suggest that software may be able to help automate the assurance process at some point and that academics have a lot to offer – it’s a good capsule of the state of XBRL and some of the conceptual difficulties that it presents for auditors (and lawyers).
The Myth: XBRL is Just Another Edgar
It’s a bummer that Chairman Cox kicked off his opening statement comparing XBRL to Edgar, as I think it will serve to perpetuate the myth that XBRL is essentially another Edgar project. He would have been better served dispelling the myth if he wants to keep us corporate types as part of his audience on this topic. Otherwise, most folks I know will simply roll their eyes and assume this is something that they can pass off to financial printers, etc. and not bother to understand what it’s about.
Simply put, Edgar is about tagging so that a document will be received by the SEC; XBRL is about tagging so that numbers have meaning. An Edgar tagging error is not a big deal compared to an XBRL tagging error, which might cause a company’s stock to drop 20% in the course of an hour.
I’m not saying that printers and others won’t be helpful; you will need them – it’s just that XBRL is much more than the conversion of documents. I’ve blogged about this myth before…
And no, I’m not being critical just because I haven’t been invited to one of the SEC’s “XBRL blogger lovefests.” Although it is a tad strange – plug “XBRL” and “blog” any-which-way into Google and this blog consistently comes up in the Top Ten. Compare the “hard-hitting” analytical reporting from some of the bloggers that did get an invite: ShopYield.com and Cara Community.
FASB’s New House of GAAP
I haven’t mentioned Jack Ciesielski’s “AAO Weblog” much since he limited parts of his fine blog to paying subscribers (I do understand that the man has to make a living), but here is one available to the public:
Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” was issued last week. It’s not a standard that will drive investment decisions – but if you’re an investor who’s in a conversation with a CFO and the subject comes up, it might help to understand what the of “GAAP hierarchy” comes up, it might help to know a little bit about it.
Here’s the background. The American Institute of CPAs had long decided what constituted the strength in various “levels” of generally accepted accounting principles because their constituents – auditors – needed a consistent policy on how to handle conflicts in accounting literature when more than one standard might be found on a single topic. Hence, there were “levels” with in the “house of GAAP,” as it’s frequently called. When the AICPA dictated auditing standards, it mattered that they be the ones to establish the hierarchy – but that right was removed with the establishment of the Public Company Accounting Oversight Board in 2003. The right to set accounting principles was also removed from the AICPA by the Sarbanes-Oxley Act: it required the SEC to appoint a single accounting standard setter for the establishment of accounting standards. And it picked the FASB, not the AICPA.
The FASB has now revised the standards hierarchy; it’s absorbed many AICPA standards into its own domain. They didn’t simply vanish along with the AICPA’s authority. Here’s how the new hierarchy of generally accepted accounting principles shapes up, in descending order of authority:
– FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and American Institute of Certified Public Accountants (AICPA) Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by actions of the FASB
– FASB Technical Bulletins and, if cleared, by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position
– AICPA Accounting Standards Executive Committee Practice Bulletins that have been cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force (EITF), and the Topics discussed in Appendix D of EITF Abstracts
– Implementation guides (Q&As) published by the FASB staff, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry.
The hierarchy still needs to be approved by the PCAOB to be completely effective on the auditing community. When you look at how many sources of accounting principles still exist after the clean-up, you can appreciate the calls for simplicity and the arguments made in favor of International Financial Reporting Standards. Make no mistake however: the more popular they become, the more interpretation and guidance they’ll require. It wouldn’t be surprising to IFRS principles grow at a rapid clip over the next few years.
We all know about globalization in accounting standards, IFRS, etc. We know that the accounting industry is being closely studied for reform, with a series of changes (eg. limiting liability) being kicked around by the SEC’s Advisory Committee on Improvements to Financial Reporting and the Treasury Secretary’s “Blueprint” for a modernized regulatory structure.
But we haven’t heard much about how the Big 4 might be taking action itself. In this podcast, Francine McKenna, CEO of McKenna Partners (and a fellow blogger on re:theauditors.com) discusses some of the new structural developments, including analying Ernst & Young’s announcement to merge its European partnerships and integrate a further 42 countries into a single unit. This is a bold shift by a Big Four firm to overcome the country-level legal and regulatory restrictions that have limited the Big 4 national partnerships and frustrated their efforts to mirror the global reach of their multinational clients.
Auditors’ Access to Board Minutes: Results of Our Quick Poll
A few weeks ago, I blogged a poll about auditors asking to review board minutes. The poll results indicated:
– 40% allowed auditors to read them, but not copy them
– 18% provided auditors with a copy to take, with privileged parts redacted
– 36% provided auditors with a full copy to take
– 7% don’t allow auditors to review minutes
On her blog, Francine McKenna discussed these results:
I have answered the poll as I believe one of my former clients would have. This former client, still completing several years of restatements, having made a fairly recent change in auditors, subject of internal and SEC investigations, defendant in more than a few lawsuits, and the recipient of assorted Sarbanes-Oxley material weakness and significant deficiencies, has no choice but to do whatever their new auditor asks. I believe their auditor has them by the short-hairs.
However, it looks like there are more than a few companies, more than 65% of the respondents to the poll, that believe that keeping information from their external auditors, perhaps under the guise of privilege, is ok and good policy. Who, in heck’s name, are their auditors?
Advance Notice Bylaws: Delaware Supreme Court Affirms Jana Partners
Yesterday, the Delaware Supreme Court issued this Order affirming the decision of the Court of Chancery in the CNET/Jana matter.
JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues
Today, join DealLawyers.com for the rescheduled webcast – “JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues” – as Professors Elson, Davidoff and Cunningham analyze a host of novel provisions in the JPMorgan Chase/Bear Stearns merger agreement.
On his “Proxy Disclosure Blog” on CompensationStandards.com, Mark Borges continues to report on proxy disclosures as well as other items. For example, here is a recent entry from him:
I was doing some research on “Say on Pay” today when I stumbled across a piece of legislation that was introduced in the US Senate earlier this month that has potential implications for, among other things, executive compensation disclosure.
S. 2866, the “Corporate Executive Compensation Accountability and Transparency Act,” was introduced by Senator Hillary Clinton (D-NY) on April 15th and referred to the Senate Committee on Finance for consideration. The bill aggregates a number of pay-related proposals and ideas that were in the news last year and consolidates them under a single executive compensation heading. Among other things, the bill would:
– Amend Section 409A of the Internal Revenue Code to impose a $1 million cap on the amount of compensation that can be deferred each year
– Amend Section 304 of the Sarbanes-Oxley Act of 2002 (the provision providing that, where a company is required to restate its financial statements as a result of misconduct, the CEO and CFO must reimburse the company for bonus or other incentive or equity-based compensation, or any trading profits, received during the 12-month period following the filing of the financial statements) to extend the 12 month period to 36 months and define what constitutes “misconduct” for purposes of the statute
– Add a provision to the Securities Exchange Act of 1934 mandating that reporting companies give their shareholders an annual advisory vote on their executive compensation programs (a provision that essentially mirrors the bill that passed the House of Representatives in 2007)
– Require the Securities and Exchange Commission to promulgate rules “clarifying and strengthening” the disclosure requirements concerning the compensation paid to compensation consultants and other advisors to the board compensation committee. Further, these rules would be required to (i) prohibit compensation consultants to the compensation committee from performing any other work for the company if its presents a conflict of interest or otherwise compromises the consultant’s independence and (ii) contain an independence standard that would preclude a consultant from working with a compensation committee if it had a noncompensation-related business or financial relationship with the company during the previous 18 months
Finally, in an area that’s close to my heart, the bill directs the SEC to promulgate rules requiring the disclosure of the full grant date fair value of equity awards in the Summary Compensation Table. While this provision wouldn’t require the Commission to scrap its December 2006 interim final rules on the reporting of equity awards, that is essentially what it’s intended to do.
At this point, it’s difficult to know whether Senator Clinton is serious about advancing this bill, or whether it’s just a campaign tactic. (Earlier this month, when the excessive executive compensation issue reared its head on the campaign trail, Senator Obama urged the Senate to take up his Say on Pay bill.) Either way, it’s a strong indication of the type of legislation that may be coming next year when a new Administration is installed in Washington.
Our New “Compensation Consultant’s Blog”: A Baker’s Dozen Now Blogging!
We’re pretty excited that thirteen compensation consultants have agreed to contribute to “The Consultant’s Blog” on CompensationStandards.com. If you’re a member of the site, input your email address on the blog to get new entries pushed out to you.
Only One Week Left! Early Bird Discount for Compensation Conferences
Like last year’s blockbuster conferences, an archive of the entire video for both conferences will be right there at your desktop to refer to – and refresh your memory – when you are actually grappling with drafting the disclosures or reviewing/approving pay packages. Here are FAQs about the Conferences.
For those choosing to attend by coming to New Orleans, I encourage you to also register for the “16th Annual NASPP Conference,” where over 2000 folks attend 45+ panels. And if you attend the NASPP Conference, you can take advantage of a special reduced rate for the Exec Comp Conferences.
Register by May 20th for Early-Bird Rates: Whether you attend in New Orleans or by video webcast, take advantage of early-bird rates by registering by May 20th. You can register online or use this order form to register by mail/fax.
Note that we have combined both of our popular Conferences – one focusing on proxy disclosures and the other on compensation practices – into one package to simplify registration.
If you have questions or need help registering, please contact our headquarters at info@thecorporatecounsel.net or 925.685.5111 (they are on West Coast, open 8 am – 4 pm).
As I’ve mused before, I believe the day will come when more of you will be either a contributor to a blog or otherwise participating in some form of “expressing yourself online” activity. A perfect example is an IRO who gets the word out about a company’s investor relations through a blog.
In this podcast, Lynn Tyson, VP-Investor Relations of Dell and a co-blogger of “Dell Shares,” provides tips and insights into how investor relations officers can blog for their companies, including:
– What was the genesis for launching the “Dell Shares” blog?
– What types of internal approval did you need to obtain?
– Have there been any surprises from blogging?
– What changes have you made to your blogging style since you started?
Fyi, since I blogged about my pet peeve regarding the use of a click-through disclaimer on the “Dell Shares” blog, it has been removed. Bravo!
More on the SEC’s Staffing Levels
Last week, SEC Chair Chris Cox gave this testimony regarding the SEC’s ’09 budget before the US Senate’s Appropriations Subcommittee on Financial Services. On the same day, ten Senators sent this letter to the head of that subcommittee requesting more funding for the SEC – in the amount of $50 million – than the Bush Administration is seeking.
This Bloomberg article from last week – entitled “SEC’s Bear Stearns Oversight Points to Fund Shortage” – argues that more money is necessary for the SEC to adequately do its job. Here is an excerpt:
SEC staffing levels peaked in 2005 at 3,851 full-time employees, including 1,232 in its enforcement division, which investigates fraud. The agency had 3,465 full-time employees in the fiscal year ended last September and staffing in the enforcement unit dropped to 1,111.
“Staffing levels haven’t kept pace with the urgent work needing to be done,” Arthur Levitt, a former chairman of the SEC, said today in a Bloomberg Television interview. “We need more people in enforcement and more people at the commission. Those budget cuts have got to be restored.”
Under Cox, who became chairman in August 2005, the SEC has left money on the table. The 2007 budget included $14 million in “available balances from prior years,” according to the SEC’s 2009 funding request. The $906 million Congress granted the SEC in 2008 includes $63.3 million in unspent money from earlier years.
“This is akin to the fire department laying off people as the house burns down,” said Lynn Turner, a former SEC chief accountant. Nester said more than 90 percent of the money carried over to the 2008 budget from earlier years can’t be used for staff salaries. Most of the $63.3 million represents funding intended
for contract work such as technology upgrades that wasn’t spent, he said.
In re infoUSA: Special Litigation Committee Stay Granted In Backdating Case
Lots still going on with options backdating. For example, the SEC has settled/brought several actions during the past month, like this action brought against Marvell Technology and its COO last Thursday.
And there is this Delaware development from Travis Laster: In Ryan v.
Gifford, Delaware Chancellor Chandler held that an investigatory board committee (but not a formal SLC) had waived the attorney-client privilege in connection with an investigation into stock option backdating by reporting on its
findings to the full board. That opinion and the Chancellor’s subsequent denial of the application for interlocutory appeal have attracted well-deserved practitioner attention. Some have expressed concern that Delaware’s traditional deference to the SLC process may have ebbed, particularly in the stock option backdating context.
In this opinion, issued in the option backdating case involving infoUSA, Chancellor Chandler applied traditional Delaware deference to an application by an SLC to stay the derivative litigation to investigate the underlying allegations and claims. The opinion confirms that traditional principles of Delaware law continue to apply to SLCs, even in the sensitive area of stock option backdating.
Here are a few highlights:
1. The Chancellor granted the stay even though the defendants previously had moved to dismiss the complaint under Rule 23.1 and the Court had found demand was futile. The Court rejected the argument that the SLC was formed “too late,” noting specifically that under Delaware law, even a conflicted board has the power to appoint an SLC: “The fact that I have already determined demand is excused demonstrates why the board must act by means of a committee; it does not in any way explain why it cannot act through an SLC.” (Page 3).
2. The Chancellor granted a stay of 150 days, towards the high end of the traditional 3-6 month range routinely granted by Delaware courts.
3. The Chancellor rejected an argument, based on Ryan, that the Committee was not sufficiently empowered to address the litigation.
4. The Chancellor held that any challenge to the independence of the SLC was premature and would be addressed at the same time the Court considered the bases for the SLC’s conclusion.
Note that the infoUSA SLC was comprised of 5 directors, three newly appointed directors and 2 whom the Court previously had deemed disinterested.
