Among the important topics that will require up-to-the-minute guidance, the Conference will cover:
– What are the SEC Staff’s latest positions from their recent waves of comment letters – and upcoming Staff Report – such as the Staff’s new expectations for the CD&A, including specific suggestions and examples
– How to overcome the unexpected challenges from the Staff’s comment letters
– What are examples of what companies intend to change in this year’s proxy disclosures
– How to analyze and disclose perks, including how to determine whether something is a “perk”
Upcoming House Hearing on Severance Pay
Rep. Henry Waxman (D-Cal.) has asked Charles Prince, Stanley O’Neal, and Angelo Mozilo to testify at a February 7th hearing on severance pay (here are the letters sent to the executives and other requests for testimony). Until recently, Mr. Prince was the CEO of Citigroup and Mr. O’Neal was the CEO of Merrill Lynch; each took home around $40 million and $161 million, respectively, after being forced to retire after their firms suffered heavy losses from mortgage investments. Mr. Mozilo is the CEO of Countrywide Financial, who is expected to receive a $115 million payout if a planned buyout by Bank of America is completed.
According to RiskMetrics: “You should plan to address how [your severance package] aligns with the interests of … shareholders and whether this level of compensation is justified in light of your company’s recent performance and its role in the national mortgage crisis,” Waxman wrote in his letter to the three executives.
On Jan. 17, Waxman’s committee sent out another round of letters–this time to current employees of the three companies, requesting documents and testimony on the process used to decide on severance packages for O’Neal, Prince, and Mozilo. Waxman called on John Thain, Merrill Lynch’s new CEO; Vikram Pandit, the new CEO of Citigroup; and Mozilo himself, who still serves as CEO at least until the Bank of America takeover, to submit to the committee copies of all documents related to drafting the severance agreements at each company – including the names of outside consultants hired to help the board’s compensation committee draft the agreements. The executives will have until Jan. 25 to submit the documents to the oversight committee, the letter states.
Three additional letters, also sent on Jan. 17, went to the respective chairmen of each company’s compensation committee. Harley Snyder of Countrywide, John Finnegan of Merrill Lynch, and Richard Parsons of Citigroup were asked to appear at the Feb. 7 hearing committee hearing to address how the executives’ severance pay was determined, and “on what basis [the] [b]oard of [d]irectors decided to approve [the] pay package,” Waxman wrote.
Survey Results: Compensation Committees and Compensation Consultants
Speaking of Rep. Waxman, given his keen interest in compensation consultant conflicts, it’s a good time to report the survey results from our most recent Quick Survey, repeated below:
1. Does your compensation committee:
– have a policy that it will not employ any compensation consultants who perform services for management – 16.1%
– not have such a policy, but does not intend to employ any of the same compensation consultants as management – 51.6%
– employ some (or all) of the same compensation consultants used by management – 32.3%
2. In practice, how does your compensation committee go about hiring an expert for making recommendations regarding CEO compensation?
– Management offers up a consultant to the compensation committee that it finds acceptable, subject to committee approval – 44.3%
– Compensation committee left completely on its own to find and hire whatever consultant it wants – 50.8%
– Compensation committee has not hired an expert for setting CEO compensation – 4.9%
3. Assume the company already is using consultant A for general compensation advisory purposes, will your compensation committee:
– Use the same consultant to help set executive compensation – 36.1%
– Use a different consultant to help set executive compensation – 37.7%
– Too early to tell what the compensation committee will do going forward – 26.2%
4. Regarding compensation committee charters, the committee has:
– A charter that states that the compensation committee will be the sole entity in the company to hire compensation consultants specifically related to CEO compensation – 59.0%
– A charter that states that both the compensation committee and management have the authority to hire compensation consultants specifically related to CEO compensation – 18.0%
– A charter that does not address who hires compensation consultants – 23.0%
My Ten Cents on Consultant Conflicts: I think Rep. Waxman’s interest in conflicts is somewhat unfounded. My experience is that the relatively few board advisors on CEO pay within big consulting firms really are walled off from the much larger departments doing more general HR work. There are more important processes broken in the CEO pay area that are more worthy of attention, such as the severance pay area for which Rep. Waxman has called this hearing on…
With a hat tip to RiskMetrics, the New York City Comptroller’s office announced in this press release that Par Pharmaceuticals has agreed to adopt an annual shareholder advisory vote on executive pay. In October, a non-binding proposal received 56.8% support at the company’s annual meeting.
Par Pharmaceuticals is the 3rd company to agree to an annual advisory vote on executive pay. On CompensationStandards.com, we are maintaining a list of those companies that have agreed to adopt some form of “say on pay” in the “Advisory Shareholder Vote/Say on Pay” Practice Area.
Deadhead Flights and Incremental Costs
In the CompensationStandards.com “Q&A Forum,” Dave just posted this answer in response to a query about what is the latest thinking about the inclusion of deadhead flights in calculating the incremental cost of personal use of corporate aircraft:
“I think perhaps the most significant development on including deadhead flight costs was John White’s discussion of the issue in his September 6, 2006 “Principles Matter” speech. It was there that he said “[i]n my view, if a deadhead flight leg causes a company to incur incremental costs, those must be included in the calculation of the perk’s value.”
Even with those comments out there, in the 2007 proxy season we saw that few companies disclosed that deadhead flights have been included in the incremental cost calculation. As we noted in the November-December 2007 issue of The Corporate Executive, the inclusion of deadhead costs could increase the reported incremental cost number by as much as two to four times the amount disclosed.
Brink Dickerson of Troutman Sanders did a great presentation on Airplane Perks at our “4th Annual Executive Compensation Conference” back in October. His presentation and materials are archived on CompensationStandards.com, which includes a survey of airplane perks disclosures at many companies. You can also see the “best practice” model disclosure regarding airplane perks in the January-February 2008 issue of The Corporate Executive, where we recommend that deadhead costs and the loss of corporate tax deductions should be factored into the incremental cost calculation.”
– What will be the hot topics for investors in 2008? How do they differ from what was hot this year?
– What changes in governance policies should companies now consider as broker votes may well be gone in 2009?
– What new positions were taken by RiskMetrics in their upcoming 2008 voting guidelines?
Pat always puts together some great course materials – and this year is no exception – please print out these course materials before you listen.
Last week, I was on the road in the Midwest to speak to a few groups about a variety of topics. These topics generally related to what I call the inevitable convergence of a number of disciplines. Before you know it, I believe the IR and corporate governance departments will merge within companies – with disclosure lawyers also becoming a part of that combination. Don’t forget: with the SEC’s e-proxy rulemaking a year ago, the government explicitly recognized that many shareholders will look to corporate websites for information about their investments. I believe many of us will have to develop skill sets that we currently don’t have.
One of these skill sets is broadening our “journalistic eye” and joining the “conversation” that is happening online. I know many of you will chuckle if I predicted that at least 50% of the folks reading this blog will one day be bloggers – but I really feel that’s not too outrageous a statement. (More on all this high-minded theory some other day.)
A case in point is the new “Dell Shares” blog, where members of Dell’s IR department take turns blogging about IR issues. Very interesting and Dell is to be applauded. Taking a page from Sun Microsystems and other tech companies, Dell has a number of employees blogging (and even discussion forums on their site). Here is the popular “Direct2Dell” Blog, which focuses on the company’s products and services (and is available in Spanish, Chinese and Norwegian).
My pet peeve with Dell Shares is the disclaimer that Dell’s IR department forces us to click-through to get to its blog. As I commented on Dell Shares, I find it ironic that the IR department forces us to click through a disclaimer when the other Dell blogs don’t have such a disclaimer – given that Dell’s IR department likely is much more sensitive to what they should or shouldn’t be blogging than others within the company. Don’t let that stubborn lawyer voice within you place unnecessary obstacles to allowing yourself or others to be a part of the growing worldwide “conversation.”
The NYSE’s Annual Letter to Listed Companies
Yesterday, the NYSE sent its annual letter to listed companies to remind them of their of annual compliance requirements (there is a separate letter for foreign private issuers). The letter mentions that the NYSE’s proposed corporate governance rule changes are still pending before the SEC and they continue to discuss them with the Staff.
Wouldn’t it be cool if the FASB codified GAAP? Impossible? No, it’s being done (and I imagine it has to be done if the SEC’s XBRL taxonomy project is to be accurate). On Wednesday, the FASB issued this press release to launch the one-year verification phase of the FASB Accounting Standards CodificationTM (Codification).
During the verification period, constituents are encouraged to use the online Codification Research System to research accounting issues and provide feedback on whether the Codification content accurately reflects existing GAAP. The Codification content is not yet approved as authoritative so take it with a grain of salt. And you have to register as a user to try it out (even though its free).
I’m a simple guy, so I dig the Q&A format of this Home Depot proxy statement from last year. For example, I think the Q&A format made it easier for the company’s audit committee report (pages 66-68) to provide more useful information regarding the activities of the committee as compared to the boilerplate-type language that some companies use.
I’ve seen some companies use Q&A in the forepart of their proxy statement, but not many that use it for the entire document. One usability recommendation: don’t use all caps for the questions (since that is hard for humans to read); rather, place the questions in boldface.
AFSCME’s Proxy Solicitation Expense Proposals
As noted in RiskMetrics’ “Corporate Governance” Blog, AFSCME intends (or has) submitted shareholder proposals seeking reimbursement for short-slate solicitation expenses at a handful of companies this coming proxy season. This is an alternative tactic to shareholder access that could render the access movement obsolete if it catches on.
In addition, according to RiskMetrics, AFSCME has now filed (or co-filed) binding proposals seeking shareholder access at four companies: Countrywide Financial; E*TRADE; Bear Stearns; and JP Morgan Chase. Additionally, CalPERS has submitted one to Kellwood.
Marty Dunn and other former senior Corp Fin Staffers will discuss all the latest types of shareholder proposals during our upcoming webcast: “The Former SEC Staff Speaks.”
Analysis of Distressed Debt Survey
In this podcast, Evan Flaschen of Bracewell & Giuliani provides some thoughts about the survey his firm (along with Debtwire) conducted entitled “Survey: Distressed Debt Creditor Insight,” including
– Why was the study undertaken?
– What were the study’s major findings?
– What were the biggest surprises?
– What is the overall outlook for 2008 and are you seeing any evidence so far?
One of the reasons for the popularity of this blog is because it is one of the very few that covers corporate finance law. Perhaps it’s because litigators love to talk more, but there are far more securities litigators blogging than financiers. Boy, do those litigators love a Supreme Court case – particularly one as tantalizing as Stoneridge, which was decided yesterday by SCOTUS. And in record time, the law firm memos started rolling in – we are posting them in the “Aiding & Abetting” section of the “Securities Litigation” Practice Area; here is a copy of the court opinion.
Here is a case summary from Dave: The theory of “scheme liability” as a basis for recovery against third parties in securities class actions bit the dust yesterday, with the Supreme Court’s 5-3 ruling in Stoneridge Investment Partners v. Scientific-Atlanta. Ultimately, as stated in the majority opinion delivered by Justice Kennedy, the Court concluded 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 his dissent, Justice Stevens states that the majority’s view of reliance “is unduly stringent and unmoored from authority.”
Without scheme liability, plaintiffs will find it difficult to reach secondary actors involved in a fraud such as customers, suppliers – or perhaps even investment bankers – since the Supreme Court’s Central Bank decision cut off the ability to sue those third parties as aiders and abettors. Stoneridge represents yet another decision in a line of recent Supreme Court rulings that are hostile to plaintiffs and more favorable to business.
And for more detailed analysis, check out these litigation bloggers:
My Ten Cents: Policies Barring Executives from the Web
A few months ago, Whole Foods took the step to amend and restate the company’s code of business conduct to bar top executives and directors from posting messages about Whole Foods, its competitors or vendors on any online forums (broadly defined to include blogs) that aren’t sponsored by the company (unless approved by the board’s nominating and governance committee). The restated code prohibits comments on third-party Web sites so executives will “avoid the actual and perceived improper use of company information. It not only bars postings that are anonymous, but also those under the person’s real name. The bar applies to “company leadership,” which includes directors, executive team members and regional vice presidents. The restated code (scroll to page 13) was disclosed in this Form 8-K.
I understand why the company took such an action, given the revelations that the CEO posted anonymous messages about the company and its competitors from 1999 through 2006 – and the SEC’s and market’s reactions to such revelations. But I hope that no companies would feel the need to follow Whole Food’s “lead” here, because common sense should rein in company leaders from posting anonymous messages of the type made by the company’s CEO (ie. misrepresenting oneself) and this is one area not crying out for yet another corporate policy.
In fact, I believe Whole Food’s policy is too broad and would limit the company’s leadership to engage in the important online “conversation.” Ironically, Whole Foods is one of the few companies currently contributing to that conversation since it has allowed blogging by its leaders (at least the CEO; here is his blog). In today’s world, the importance of being allowed to learn from like-minded individuals can’t be overstated and the easiest way to do to engage them is through the Internet, either by e-mail or the Web.
One of the more influential books on my career is “The Cluetrain Manifesto,” which essentially foretold the social networking/Web 2.0 craze that is here to stay. When the book was published in the late ’90s, I saw the authors present here in DC at a local “Netpreneurs” event, complete with a guy in a Gorilla suit and beach balls being bounced above the crowd. Ah, those glorious ’90s when I still had hair…
Many of the companies I have spoken with continue to have a “wait and see” attitude about whether they will try voluntary e-proxy this year. The latest e-proxy statistics from Broadridge bear this out. Below is a summary of their findings as of the end of December; a more complete set of stats are posted in our “E-Proxy” Practice Area:
– 69 companies have used e-proxy so far (with 2 having to do a second notice); another 40 have committed to do e-proxy
– Size range of companies using e-proxy varies considerably; all shapes and sizes
– 2/3 of companies using e-proxy had routine matters on their meeting agenda; another 30% had non-routine matters proposed by management and 6% had non-routine matters proposed by shareholders
– Retail vote goes down dramatically using e-proxy (based on 51 meeting results); number of retail accounts voting drops from 17.1% to 4.0% (over a 75% drop) and number of retail shares voting drops from 28.0% to 13.3% (over a 50% drop)
– Real money can be saved; aggregate of $17.5 million net savings for the 69 companies
Foreign Private Issuers: May Try to Exclude US GAAP Even Before March 4th
Yesterday, the SEC posted this notice that it will entertain requests to allow foreign private issuers to file Form 20-Fs without US GAAP reconcilation even before the March 4th effective date of the SEC’s new rules on the topic. The request has to be in writing to the SEC Staff (although they can call the Staff in advance to hash out their circumstances). Here is an excerpt from the SEC’s notice:
In response to questions, the staff has advised companies that until this new rule is effective that they are subject to the existing rules regarding the inclusion of U.S. GAAP information in filings with the Commission. However, the staff is aware that some foreign private issuers with a fiscal year ending after November 15, 2007 that prepare their financial statements using IFRS, as issued by the IASB, will want to file their annual report on Form 20-F before March 4, 2008. These companies also want to exclude U.S. GAAP information from that filing. The staff does not want to discourage companies from filing their 20-F before March 4, 2008. Accordingly, these companies are encouraged to contact the staff in the Division of Corporation Finance to discuss this issue. These companies can contact either Craig Olinger – Deputy Chief Accountant (202-551-3547) or Wayne Carnall — Chief Accountant (202-551-3107) to discuss their particular facts or circumstances.
The staff also noted that this same release provides similar relief from the requirement to provide U.S. GAAP information if the financial statements are filed under Rules 3-05, 3-09, 3-10 and 3-16. Likewise, companies that intend to file financial statements with a fiscal year ending after November 15, 2007 that are prepared using IFRS, as issued by the IASB, that exclude U.S. GAAP information in a filing under the Securities Exchange Act of 1934 before March 4, 2008 are similarly encouraged to discuss their fact pattern with the staff.
M&A: The ‘Former’ SEC Staff Speaks
Catch the DealLawyers.com webcast tomorrow – “The ‘Former’ SEC Staff Speaks” – to hear former Senior Staffers from the SEC’s Office of Mergers & Acquisitions weigh in on the latest rulemakings – and interpretations – from the SEC. This webcast will provide a complete “bring-down” of what’s happening at the SEC – and provide practical guidance about what you should be doing as a result. Join:
– Dennis Garris, Partner, Alston & Bird LLP and former Head, SEC’s Office of Mergers & Acquisitions
– Jim Moloney, Partner, Gibson Dunn & Crutcher LLP and former Special Counsel, SEC’s Office of Mergers & Acquisitions
The grace period for DealLawyers.com has expired. As all memberships are on a calendar-year basis, if you haven’t renewed, you won’t be able to catch this webcast or this upcoming one: “MAC Clauses: All the Rage.” So renew your membership today!
For the subset of the 350 companies that were both reviewed by Corp Fin as part of the executive compensation review project and have received one of these “all clear” letters from the Staff, you will soon find your comment letter and response posted on the SEC’s website. It looks like the Staff hung pretty close to the timeline of “45 days since the Staff started informing companies that they were clear,” which is earliest that the Staff can post letters/responses pursuant to its own policy (which was confirmed in the Staff’s Report on executive pay).
I just took a cursory swing through the SEC’s database over the weekend and found these:
There’s a few more out there and we’ve posted a more comprehensive list on CompensationStandards.com in a new “SEC Comments” Practice Area. Hopefully, somebody can prove me wrong – but it’s quite challenging to run searches on the SEC’s comment letter database – as well as the third-party providers’ databases – to find these letters. The good ole boolean-type searches don’t seem to work for these particular batch of letters…
Why the Blogosphere is Putting the “Hurt” on Mainstream Media
As everyone knows, mainstream media is in trouble, particularly daily newspapers. For example, the Washington Post has reduced its staff to such a degree that the “Business” section regularly runs a list of product recalls on its front page (and a majority of the Post’s revenue stream now comes from its Kaplan Training enterprise; not its newspaper).
Here is a case in point why bloggers with greater knowledge in their niche can outdo the mainstream journalists. In this article from Saturday’s Post, the reporter tries to make a story out of a fairly bland comment issued by Corp Fin last August asking how Berkshire Hathaway handles director nominations submitted by shareholders (comment letter and response are linked to above; note the article is written by a Bloomberg reporter, reaffirming how scantily the Post is devoting resources to business).
Here an excerpt from the article, which is entitled “Berkshire Hathaway to Formalize Director Nomination Procedure”:
“The nominating committee does not have a formal policy by which shareholders may recommend director candidates,” the SEC wrote in a letter to Hamburg dated Aug. 21. “Please state why it has no such policy, as required. Hamburg responded that company policy “will provide that Board of Director candidates recommended by shareholders will be evaluated using the same criteria as are applied to all other candidates.” Hamburg didn’t return a call seeking comment. A subsequent SEC letter to Hamburg, dated Nov. 27, said its review of Berkshire was complete, with no further comments.
A few years ago, the SEC added Item 7(d)(2) of Schedule 14A to require companies to disclose in their proxy statements if they have a “nominating or similar committee” and “whether the committee will consider nominees recommended by security holders” and, if so, “describe the procedures to be followed by security holders in submitting such recommendations.” Apparently, Berkshire Hathaway forgot to include a description of their procedures in their proxy statement. From their response, it seems like the company will simply codify their existing procedures in a policy. These procedures – that all candidates are considered based on their qualifications – are pretty much the same as 99% of Corporate America.
These typical procedures are the backdrop of the ongoing extensive battle over proxy access. Very few companies receive nominations from shareholders (and I mean very few) because it’s unlikely that their candidates will have the skill sets that boards are looking for – and of course, because they haven’t gone through the board’s recruiting process that often takes as long as six months. Most shareholders realize its a futile exercise and don’t bother to submit nominations.
So the fact that Berkshire Hathaway will add this disclosure to their proxy statement is not really news at all. Rather, my opinion is that it’s a reporter’s lack of understanding about how the Corp Fin comment process works. Not surprising since it would be hard for an industry outsider to know…
The Latest on Fairness Opinions
We have posted the transcript from our recent DealLawyers.com webcast: “The Latest on Fairness Opinions.”
We just mailed a Special Supplement to The Corporate Counsel, highlighting a potential trap for those in the process of preparing their CD&As. When seeking to justify compensation amounts, companies may be lulled into saying that they pay those amounts “to be competitive” – which may, in fact, become a red flag to highlight compensation decisions that were made without critical analysis. In this regard, it is not enough to merely describe analytical tools such as tally sheets – issuers need to provide the critical analysis and what is done in response to that analysis. Take a look at our final copy of the January-February 2008 issue of The Corporate Executive for examples of how the necessary analysis – and the actions taken in response to that analysis – can be described in your CD&A.
In order to keep this sort of essential guidance on your proxy disclosures coming, be sure to renew your subscriptions to The Corporate Counsel and The Corporate Executive today. If you are not yet a subscriber, we encourage you to take advantage of a no-risk trial.
GAO Study on the Audit Market: No Immediate Action Required
The Government Accountability Office has released another study of the market for audit services (the last study was mandated by the Sarbanes-Oxley Act), and this time the GAO reports that while there is significant concentration of auditors for large public companies, there is no need for Congress to step in at this point.
The GAO noted that 82 percent the Fortune 1000 saw their choice of auditor as limited to three or fewer firms, and about 60 percent viewed competition in their audit market as insufficient. Smaller companies, on the other hand, reported that they were satisfied with the auditor choices available to them. The study noted that concentration in the audit market for large companies is likely to continue, particularly given the challenges faced by those smaller accounting firms seeking to audit more public companies. The GAO also considered steps that have been suggested to increase competition – such as capping auditors’ liability – but it did not recommend that any such steps be pursued at this time.
The GAO’s findings will be food for thought for Treasury Department’s Advisory Committee on the Auditing Profession (discussed in this blog), which is expected to issue a report this summer.
All Quiet on the Corp Fin Front?
After such a huge push in rulemaking during 2007, it is understandable (and perhaps welcome) that Corp Fin has not announced any significant rulemaking projects over the next six months. The recently released Unified Agenda (also known as the Semiannual Regulatory Agenda) – which summarizes the rules and proposed rules that each Federal agency expects to issue during the next six months – doesn’t list any new rulemakings on Corp Fin’s plate in the coming months. On some outstanding rule proposals and solicitations of comment, such as proxy access, the next action is listed as “to be determined.” For the executive compensation rules, the agenda lists a projected final action in May 2008, so it remains to be seen what is contemplated on that front.
Absent from the latest Unified Agenda are some of the potential rulemaking initiatives that the Staff has been talking about over the past year or so, including rules regarding voluntary filers, amendments to Item 4.02 of Form 8-K, and the roll-out of mandatory interactive data. But the fact that a rulemaking doesn’t make it to the Unified Agenda is by no means a signal that it is not going to happen in the near future, because plans can change pretty quickly at the SEC these days.
A few months ago, I blogged about the case of SEC v. John F. Mangan, Jr. and Hugh L. McColl, III, where the court dismissed the SEC’s allegations that Mangan violated Section 5 by shorting PIPE shares before the resale registration was declared effective, and then covering the short sales with the PIPE shares after the resale registration statement was effective. As if that ruling wasn’t bad enough for the SEC, last week a judge in the Southern District of New York issued this opinion reaching the same unfortunate result in the case of SEC v. Edwin Buchanan Lyon, IV and his Gryphon Partners entities.
You can read more about these decisions (including our take) – and what the SEC intends to do about them – in the just-mailed November-December issue of The Corporate Counsel. Since all of our publications are on a calendar-year basis, renew your subscription to The Corporate Counsel today. If you are not yet a subscriber, we encourage you to take advantage of a no-risk trial, so you can get the latest analysis on topics such as this in The Corporate Counsel.
NASDAQ Rewrites its Rulebook
Recently, NASDAQ unveiled a proposed rewrite of the NASDAQ Marketplace Rules applicable to companies listed on the NASDAQ Stock Market. NASDAQ’s goal is to make the rulebook clearer and easier to understand by simplifying the organization and presentation of the rules, as well as the language of the rules themselves. This commendable effort does not appear to be directed at changing the substance of the initial and continued listing standards, but rather to present those standards in a more user-friendly way.
NASDAQ has put the proposed rulebook out for public comment until February 1, 2008, and it plans to file the proposed rule changes with the SEC by the end of the first quarter.
SAB 108 Implementation
Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, was issued to address the diversity in practice concerning the quantification of errors that arose in prior years, and it was effective for fiscal years ending after November 15, 2006. The SAB requires companies to use both the “iron curtain” and “rollover” approaches when quantifying misstatement amounts. SAB 108 does not require previously filed reports to be amended when companies correct prior-year financial statements for immaterial errors – rather, the errors may be corrected the next time the company files the prior year financial statements.
Audit Analytics recently published a study of companies adopting SAB 108 for years ended from November 15, 2006 to June 30, 2007. The study notes that a relatively small number of companies (296) have adopted SAB 108 in their 10-Ks. The companies making adjustments under the SAB were concentrated in a few industries, with finance and insurance companies comprising the largest sector. Clients of KPMG accounted for almost 40% of the total companies adopting SAB 108. Audit Analytics indicates that the relatively low number overall – and the concentration in some industries – may be accounted for by the lack of restatements among those companies or industries, where immaterial errors would have likely been corrected in the course of restating the financials. The study indicates that errors affecting liabilities and reserve accounts and tax accounting errors made up bulk of corrections under SAB 108.
The U.S. Department of Labor recently issued Advisory Opinion 2007-07A to the U.S. Chamber of Commerce, responding to the Chamber’s concerns about “the use of pension plan assets by plan fiduciaries to further public policy debates and political activities through proxy resolutions that have no connection to enhancing the value of the plan’s investment in a company.”
Mike Melbinger notes in his CompensationStandards.com blog: “By way of background for those not familiar with ERISA, the DOL has long considered the right to vote proxies related to a retirement plan’s stock holdings as a valuable asset of the plan. In Advisory Opinion 2007-07A, the DOL said:
‘Under section 404(a)(1)(A) and (B) of ERISA, plan fiduciaries must act solely in the interest of participants and beneficiaries and for the exclusive purpose of paying benefits and defraying reasonable administrative expenses. In our view, plan fiduciaries risk violating the exclusive purpose rule when they exercise their fiduciary authority in an attempt to further legislative, regulatory or public policy issues through the proxy process when there is no clear economic benefit to the plan. In such cases, the Department would expect fiduciaries to be able to demonstrate in enforcement actions their compliance with the requirements of section 404(a)(1)(A) and (B).
* * *
Consistent with these various pronouncements, the use of pension plan assets by plan fiduciaries to further policy or political issues through proxy resolutions that have no connection to enhancing the value of the plan’s investment in a corporation would, in the view of the Department, violate the prudence and exclusive purpose requirements of section 404(a)(1)(A) and (B).’
Those of us familiar with ERISA’s fiduciary requirements were sometimes curious as to how some union plan fiduciaries could square their proxy activism with ERISA. Apparently, the DOL was too.”
An Uptick in Securities Fraud Class Action Lawsuits
The latest study from Stanford’s Securities Class Action Clearinghouse and Cornerstone Research finds that the number of companies sued in securities fraud class action lawsuits rose 43 percent between 2006 and 2007, up from 116 in 2006 to 166. The current level of litigation activity still remains well below the ten-year historical average of 194 companies sued per year.
The study attributes the 2007 jump in cases to the subprime mortgage mess and increasingly choppy market conditions. Lawsuits against companies in the finance industry more than quadrupled to 47 in 2007, with 25 of those cases involving subprime issues.
In a demonstration of longevity, the study finds that of the 2,218 securities class action cases filed since 1996, 19 percent are continuing – primarily those filed in the past few years. Among the 81 percent of cases that have been resolved, 41 percent were dismissed and 59 percent were settled.
Among the other notable 2007 class action litigation developments cited in the study were:
– William Lerach’s guilty plea;
– The JDS Uniphase trial, notable in that the case actually went to trial and the defendants won; and
– The Supreme Court’s decision in Tellabs v. Makor
It now appears that the two-year lull in class action activity is over, and continued market volatility (like the day we had yesterday) seems likely to help propel the upward trend for the time being.
Heads Up on New Rule 144 Changes
Protect your company (and your key executives and clients) by learning what you need to know by catching our January 30th webconference – “New Rule 144: Everything You Need to Know – And Do NOW.” The conference will be archived in case that date doesn’t work for you.
Jesse Brill, Bob Barron and Alan Dye are busy working on the Key Conference Materials, which will provide the specific procedures, new memos, legends, representation letters, etc. that you will need to protect yourself. Take advantage of reduced rates for those of you that use the TheCorporateCounsel.net and The Corporate Counsel by registering online or via this order form.
