Not many companies have disclosed the lost corporate tax deductions caused by an executive’s personal use of aircraft, which often can result in some pretty sizable numbers. In this 30-minute podcast, Terry Kelley, Chairman & CEO of Gold Jets, provides some insight into issues related to personal use of corporate aircraft (see this 91Plus brochure and this letter that notes there may be disclosure issues relating to lost tax deductions), including:
– Can you provide a brief overview of the tax issues facing companies when they allow executives to use the corporate aircraft for personal use?
– The new disclosure rules say that you have to present the “incremental cost” of providing a benefit to the executive. I know that you have reviewed numerous proxies – what have you seen?
– What is 91Plus and how does it help companies and their executives?
Climate Change: The Time to Learn How It Impacts Your Practice is Now!
I really encourage you to catch at least one panel from next Tuesday’s complimentary webconference on TacklingGlobalWarming.com entitled: “Tackling Global Warming: Challenges for Boards and their Advisors.” There are quite a few disclosure, due diligence and other fiduciary duty issues raised by climate change – and not many corporate & securities practitioners are very familiar with them. If you can’t catch this program next Tuesday, each panel will be archived indefinitely (and still available for free).
To get a sense of the issues raised by climate change, check out a snapshot of how D&O insurance comes into play, as written up in the The D&O Diary Blog (and here is a follow-on blog). Note that next Tuesday’s Conference includes a panel on “Why You Need to Re-Examine Your D&O Insurance Policy.”
Another View: Why Have Audit Fees Risen So Much?
One of the primary reasons there is a battle over how much to reform the SEC’s and PCAOB’s internal controls rules is the rapid rise in audit fees. I was taken with last Friday’s opinion column by the President and CEO of SVB Financial Group, Kenneth Wilcox, in last Friday’s WSJ.
In his op-ed, Mr. Wilcox wondered: “My company is paying accountants five times more than it did three years ago. Why?” His response: “It turns out that only a diminishing portion of this increase is due to Sarbox.” Other factors driving the cost increase, he said, included “the significantly increased amount of time that audits are taking, and the much larger number of people that they involve.” FEI’s “Financial Reporting” Blog has commented on this op-ed recently.
On Tuesday, SEC Chair Cox testified that AS #5 will reduce internal controls compliance costs for smaller companies; PCAOB Chair Olson testified similarly. I haven’t yet been convinced that costs will drop significantly, as it seems to me that one cause of the high cost results from the dictates of Auditing Standard No. 3 regarding documentation and work papers, which has not been revised. I’m not sure why this standard wasn’t tweaked when AS #2 was replaced with AS #5 as they seem to go hand-in-hand. Then again, I’m not an accountant, so what do I know…
Learn more about what questions that you – and your audit committee – should be asking about the SEC’s and PCAOB’s new internal controls guidance in this upcoming webcast: “Internal Controls Update: AS #5, Management Reports and All that Jazz,” featuring John Huber, Linda Griggs and an expert from a Big Four firm.
Yesterday, IBM settled an enforcement action in which the SEC found that IBM had violated the Form 8-K reporting requirements and Rule 12b-20’s requirement to disclose additional material information so as to make required statements not misleading. Here is the SEC’s press release.
The case focused on a Form 8-K filed under Item 7.01 – regarding Regulation FD disclosure – that included as one of its exhibits some presentation materials used for an analyst conference call and webcast. The SEC found that IBM made materially misleading statements in a chart – included as part of those materials – concerning the impact of IBM’s decision to expense employee stock options in its quarterly and fiscal year results.
According to the SEC’s Order, while the company’s management did not specifically mention the expected quantitative impact of stock option expensing during the course of the conference call, they did encourage analysts to update their models to reflect the accounting change. At the same time, the chart included information suggesting stock option expense numbers that were higher than management’s expectations. Management rejected the idea of providing more specific guidance about the stock option expense numbers during the call, partly due to concerns about how the analysts would factor that information into their forecasts and the potential effect on the company’s projected growth rate.
This settlement highlights the importance of ensuring that the total mix of information presented in conference calls and webcasts is complete and accurate – and should no doubt cause folks to take a second look at their powerpoint slides and how they compare to the related script and Q&A responses.
CFOs Catch a Break: IRS Updates Guidance on Section 162(m) Covered Employees
Earlier this week, the IRS issued Notice 2007-49, which provides some much needed guidance on identifying “covered employees” under Section 162(m) in the wake of last summer’s amendments to the executive compensation disclosure rules. It won’t be published until June 18th. Mark Borges has blogged several times about the circumstances under which a chief financial officer may now be considered a “covered employee.”
Below is what Mike Melbinger had to say about this guidance in “Melbinger’s Compensation Blog” on CompensationStandards.com:
Section 162(m)(3) defines a “covered employee” as any employee of the company if, (A) as of the close of the taxable year, such employee is the chief executive officer of the company or is an individual acting in such a capacity, or (B) the total compensation of such employee for the taxable year is required to be reported to shareholders under the Securities Exchange Act of 1934 by reason of such employee being among the 4 highest compensated officers for the taxable year (other than the chief executive officer). Regulations Section 1.162-27(c)(2)(ii) provides that whether an individual is the chief executive officer or among the four highest compensated officers (other than the chief executive officer) is determined pursuant to the executive compensation disclosure rules under the Exchange Act.
When the SEC issued its new rules relating to executive compensation disclosure last year, it altered the composition of the group of executives that are covered by the disclosure rules (“named executive officers”) The definition of covered employee in 162(m)(3) mirrored the definition of named executive officers under the old disclosure rules, but it is not the same as that definition under the amended disclosure rules. The amended disclosure rules increase the number of executives who are named executive officers by virtue of their position from one to two, and reduce the number of executives who are named executive officers based on their compensation level from four to three.
To reconcile this difference, Notice 2007-49 indicates that the IRS will interpret the term “covered employee” for purposes of Section 162(m) to mean any employee of the company if, as of the close of the taxable year, such employee is the chief executive officer (within the meaning of the amended disclosure rules) of the company or an individual acting in such a capacity, or if the total compensation of such employee for that taxable year is required to be reported to shareholders under the Exchange Act by reason of such employee being among the 3 highest compensated officers for the taxable year (other than the chief executive officer or the chief financial officer). Accordingly, the term covered employee for purposes of 162(m) does not include those individuals for whom disclosure is required under the Exchange Act on account of the individual being the company’s chief financial officer (within the meaning of the amended disclosure rules) or an individual acting in such a capacity.
The Art of the Cross-Border Deal
Join us tomorrow for a DealLawyers.com webcast – “The Art of the Cross-Border Deal” – to hear Tina Chalk of the SEC, Frank Acquila of Sullivan & Cromwell, Greg Wolski of E&Y and Peter King of Shearman & Sterling analyze the latest M&A tactics in cross-border deals.
Last week, the SEC announced the settlement of options backdating actions against Mercury Interactive (now a subsidiary of Hewlett-Packard) and Brocade Communications Systems. In these enforcement actions, the SEC reached settlements with the companies themselves for the payment of civil penalties and the entry of permanent injunctions against future violations. In the settlements, Mercury agreed to pay a whopping $28 million penalty, while Brocade agreed to pay a $7 million penalty. Up until now, options backdating settlements have focused on the individuals involved, while the SEC’s Commissioners pondered what sort of penalties should be imposed on the companies where backdating occurred.
Back in January 2006, the SEC published a framework for how it would assess whether and to what extent civil penalties should be imposed on companies. This document resulted from some discomfort among the SEC Commissioners on when to penalize a company (and in turn its shareholders) for wrongdoing. The options backdating cases have proven to be difficult to evaluate from a penalties perspective, as evidenced by this Bloomberg article from January 2007 discussing the delay in consideration of Brocade’s settlement.
With the announcement of last week’s settlements, perhaps the logjam will be broken and more backdating settlements will come closer to resolution in the coming weeks. [Broc’s Ten Cents: “The D&O Diary” Blog has some interesting analysis about these new settlements – such as all 45 of Mercury’s option grants during the period 1997 to April 2002 were backdated; Kevin also has blogged about the emerging backdating case theme of blame the gatekeeper.]
Options: More Congressional Interest
This morning, the Senate’s Permanent Subcommittee on Investigations (which is a subcommittee of the Committee on Homeland Security and Governmental Affairs) will hold a hearing entitled “Executive Stock Options: Should the IRS and Stockholders be Given Different Information.”
Among the things the Subcommittee plans to look into are: the role of stock options in executive compensation, the incidence of stock option abuses, and the difference between GAAP and federal tax reporting of compensation from stock options. Panelists will include, among others, Acting IRS Commissioner Kevin Brown and Corp Fin Director John White. In his testimony to the Subcommittee, John White provides an overview of option compensation trends, a discussion of past abuses and a description of the disclosure, accounting and tax requirements applicable to options.
The Permanent Subcommittee on Investigations has wide-ranging interests that sometimes touch on SEC and IRS regulations. Last summer, the Committee’s Staff put out a report on the abusive use of off-shore tax havens, citing as one of its case studies the activities of the Wyly family in using 58 offshore trusts and corporations to transfer stock option compensation offshore.
Earlier this year, Senator Carl Levin – who serves as Chairman of the Subcommittee – introduced a still pending bill entitled the Stop Tax Haven Abuse Act that would, among other things, create a rebuttable presumption of control for any offshore entities operating in secrecy jurisdictions, and impose a penalty of up to $1 million per violation of U.S. securities law on public companies or their officers, directors, or major shareholders who knowingly fail to disclose offshore holdings that should have been reported to the SEC.
Our June Eminders is Posted!
We have posted the June issue of our complimentary monthly email newsletter. Sign up to receive it today by simply inputting your email address!
Recently, there have been a few examples of why it’s important to know how to recognize an inadvertent investment company. A few weeks ago, the AFL-CIO wrote this letter to the SEC expressing concerns that if the Blackstone Group conducts its IPO, it should be required to register as an investment company.
Then Judge Easterbrook out of the Seventh Circuit Court of Appeals delivered this opinion in National Presto. The case involves some rather unusual facts (and includes some sharp judicial digs at the SEC) raising the issue of whether the company is an inadvertant investment company. National Presto had been ordered by the District Court to register as an investment company. After registering, the company reorganized its assets so that the amount of its assets was below the 40% trigger under Section 3(a)(1)(C) of the ’40 Act – and the SEC would not give its consent to deregistration. It is on this point that Judge Easterbrook takes the SEC to task, with some notable quotes.
I think the case is important beyond its ’40 Act findings because it reminds us that Staff positions (no-action letters and telephone interps and the like) are just that – courts may not necessarily follow them. Thanks to Sheldon Krause for pointing this case out and Keith Bishop for his ten cents!
Learn more in our “Inadvertent Investment Companies” Practice Area – including this new podcast with Rob Rosenblum of K&L Gates, who provides some insight into the issues involved with inadvertent investment companies, including:
– What is an “inadvertent investment company”?
– What are the findings of the National Presto case?
– How are the facts of that case different than what the AFL-CIO is alleging regarding Blackstone in its letter to the SEC?
– What should companies do if they think they might inadvertently be an investment company?
Course Materials: The Nasdaq Speaks – Latest Developments and Interpretations
Confusion Reigns: Has the SEC Decided to Support Investors in “Scheme” Liability Case?
According to this Saturday Washington Post article, the SEC has decided to throw its weight behind investors in a big-money dispute that could resolve whether shareholders can sue bankers who enabled their corporate clients to engage in fraud (today’s WSJ has a similar article, but as noted below, there is uncertainty as to whether this is true – and if so, exactly which case the SEC has decided to weigh in on). Here is an excerpt from the article:
“The Securities and Exchange Commission has asked the U.S. solicitor general to file court papers supporting investors in an upcoming Supreme Court case, an action that has not been made public. The agency’s decision follows intense lobbying by industry groups, unions and plaintiff lawyers, including well-known California attorney William S. Lerach.
The move is a significant victory for Lerach, who won $7.3 billion in settlements with banks and law firms that helped Enron disguise its financial problems. If the Supreme Court adopts the agency’s position, it could breathe new life into a stalled case filed by Enron shareholders against Merrill Lynch and Barclays Bank. But the SEC backing comes at a bittersweet time for Lerach, whose own future is in question because of government scrutiny.”
As PointofLaw.com points out, the article might be read several different ways (and SEC officials have declined to comment so far). Here is an excerpt from the commentary on that site:
“A reader suggests that the Washington Post article is actually talking about Stoneridge though the article does not mention that case by name. That is a plausible interpretation that would make the Washington Post article make more sense; the reporter may have been limited by the constraints of space and forced to leave out information such as the name of the case the SEC was planning to file a brief in, even as it mentions the larger Enron case. If the Solicitor General does not veto the SEC’s politically-motivated recommendation, the Stoneridge amicus brief would be due June 11.”
Last Tuesday, the US Court of Appeals for the Second Circuit – in Stein v. KPMG, No. 06-4358 (2nd Cir. 2007) – vacated Judge Kaplan’s (ie. the trial court’s) assertion of ancillary jurisdiction over contract claims for attorney fees brought in a criminal tax case against KPMG, a non-party (see my blog on Judge Kaplan’s opinion). If it is found that DOJ violated the appellees’ due process rights by coercing the defendants, it is possible that the indictments will be dismissed. We have posted a copy of the Steinopinion in our “Advancement of Legal Fees” Practice Area.
Here is some analysis from Keith Bishop: The Court of Appeals didn’t reject Judge Kaplan’s Fifth and Sixth Amendment conclusions – but it did not agree with his pro-active attempt to exercise ancillary jurisdiction. Basically, the Second Circuit rejected Judge Kaplan’s exercise of ancillary jurisdiction over the criminal defendant’s implied (and in one case) express claims for payment of legal expenses. The Court of Appeals left open the possibility of dismissal of the claims, stating “Dismissal of an indictment for Fifth and Sixth Amendment violations is always an available remedy.” However, it also suggested other action such as ordering “cessation of such conduct” was possible. The Second Circuit also noted the apparent inconsistency between the Thompson Memorandum’s focus on voluntary payment of legal fees and Judge Kaplan’s assertion of ancillary jurisdiction over claims by the defendants to payment.
By the way, this case emanates from the same type of fishy tax shelters that have now landed Ernst & Young in trouble – see this related article and here is the indictment.
[Friday Funnies – Check out Will Ferrell’s short takes on FunnyorDie.com.]
Failure to Provide Evidence of Loss Causation Precludes Class Certification
Recently, the U.S. Court of Appeals for the Fifth Circuit – in Oscar Private Equity Investments v. Holland – raised the bar in federal securities fraud litigation by requiring plaintiffs to come forward with evidence of loss causation in order to obtain class certification, particularly where investor losses could be attributed to multiple factors unrelated to the alleged fraud. We have posted memos regarding this decision in our “Securities Litigation” Practice Area.
FASB Plans Project to Simplify Hedge Accounting
Recently, the FASB voted to simplify FAS 133, “Accounting for Derivative Instruments and Hedging Activities.” According to this CFO.com article, FASB will replace current assessment and testing mandates with a fair-value approach.
We are honored to welcome David Lynn to our team. Dave left his post as Chief Counsel of the Division of Corporation Finance on Friday, after serving in that capacity for the past four years. This was his second tour of duty in Corp Fin, having spent some time at WilmerHale in between.
In addition to helping implement the record amount of rulemaking that occurred in the wake of Sarbanes-Oxley, Dave was one of the key point persons on the SEC’s proxy disclosure rules and, most recently, has been primarily responsible for the overhaul of the SEC’s Telephone Interpretations Manual. Dave and I worked together at the SEC a while back and I couldn’t imagine a better partner to spend the next few decades churning out the news and analysis for you on this site.
The “Skinny” on Dave
So what will Dave be doing? Initially, Dave will be providing badly needed help on TheCorporateCounsel.net, serving as an Editor of the site along with me – and even splitting blogging duties starting next week. Dave actually ran an internal blog in Corp Fin so he is not afraid to stick his neck out. Dave also will be helping out on CompensationStandards.com, run our secret special project division and weigh in with his ten cents on some of our print publications, like The Corporate Counsel.
As evident from his biography, Dave is a man of multiple talents. Who else could come up a “going away” speech in the form of a CD&A (actually, several CD&As). And Dave will be able to help all of us decipher some of the more interesting comment letters that get filed with the SEC. Dave can be reached at dave@thecorporatecounsel.net. Let him know how much you want to love him…
The Rise of the “B’s”
In our “Credit Ratings, Arrangements, & Facilities” Practice Area, we have posted a report on the rise in numbers of companies in the US with “B” credit rated debt. It notes the dramatic decline in percentage of companies with AAA/AA rated debt, as well as the percentage of companies with “B” rated debt that have filed for bankruptcy.
Recently there has been some movement in the NYSE’s rulemaking to amend Rule 452 to eliminate broker non-votes in the director election context. First, there was some discussion on the topic during last week’s proxy process roundtable at the SEC. Jim McRitchie does a good job of summarizing what the roundtable participants’ positions have been, noting on CorpGov.net that the recommendations on broker voting appear to have broken into three categories:
– Stick with NYSE’s proposal to eliminate broker voting for directors – One variation would only eliminate it where there is an active no-vote campaign.
– Proportional voting – Where the broker uses voting instructions given by other retail investors to determine how to vote uninstructed shares. There were several variations on this theme.
– Client-directed voting – Under this framework from American Express’s Stephen Norman, retail investors would give general voting instructions to their broker when signing brokerage account agreements.
Second, as noted in this WSJ article, the mutual-fund industry got its wish and the NYSE has amended its proposal so that mutual funds would be excluded from any change in its rules (according to the article, after reviewing information supplied by the fund industry, the NYSE said its advisory panel concluded that mutual funds are different enough “that it was appropriate to treat such companies differently”).
Finally, some investors are demanding that this rulemaking go forward. Below is an excerpt from the ISS “Corporate Governance Blog” on this topic:
A close director vote at CVS/Caremark is fueling investor demands for the Securities and Exchange Commission to approve a New York Stock Exchange rule change to bar brokers from casting uninstructed investor votes in board elections.
“I think this vote will be Exhibit A in the deliberations of the NYSE and the SEC in the coming weeks,” said William Patterson, executive director of the CtW Investment Group, which has urged CVS/Caremark to request the resignation of director Roger Headrick. The Council of Institutional Investors (CII) plans to hold a conference call on May 29 to address the issue, Patterson said.
Headrick received 606.585 million “for” votes and 453.175 million “against” votes at company’s May 9 meeting, CVS/Caremark said in a regulatory filing. Based on those numbers, Headrick received a 42.7 percent negative vote. However, the vote results for five other proxy items reveal that 264.762 million “broker non-votes” were cast. If those broker votes are subtracted from Headrick’s “for” total, then the “against” votes would amount to 57 percent of the remaining votes.
The stakes are higher at CVS/Caremark, because the company, like scores of other large firms, now requires that board nominees receive a majority of votes cast in uncontested elections to be elected. “Before this proxy season, all of this was theoretical,” Patterson told Governance Weekly. At CVS/Caremark, “the broker votes were decisive and that’s clear.”
CtW, which manages funds for the Change to Win labor federation, targeted Headrick and a second former Caremark Rx board member over their handling of the pharmacy benefits company’s recent sale to CVS, the largest U.S. drug-store chain. In its regulatory filing, CVS/Caremark said “votes ‘against’ a director’s election count as a vote cast, but ‘abstentions’ and ‘broker non-votes’ do not count as a vote cast with respect to that director’s election.”
However, the vote results suggest that some of those broker votes were counted in Headrick’s election. The company’s filing indicates that a total of 1,059.76 million shares were cast either “for” or “against” Headrick. CVS/Caremark also reported that the total votes cast at the meeting were 1,091.671 million, or 31.91 million more. The vote results for five other proxy items indicate that there were 264.762 million broker votes, so it appears that 232.852 million broker votes were counted in Headrick’s election for his vote total to reach 1,059.76 million. Those 232.852 million votes exceed the 153.41 million difference between the “for” and “against” votes that the company reported that Headrick received.
Company spokeswoman Carolyn Castel told Dow Jones Newswires that the “broker votes were spread among the votes cast for and against the directors.” However, Patterson and other investor advocates contend that broker votes are routinely cast in favor of management nominees in uncontested elections. The Council of Institutional Investors has said these votes “taint the integrity of the proxy voting process by stuffing ballot boxes for management.”
Goldman Launches an Unregistered Stock Trading System
As noted in this recent WSJ article, Goldman Sachs has joined the ranks of those launching an unregistered securities trading exchange with its “GS TRue” platform. Here are one blogger’s thoughts on this development – and here are two excerpts from the WSJ article:
“Goldman Sachs Group Inc. ranks as the most profitable securities firm on Wall Street — reflecting its mastery of trading on the world’s public markets. Now Goldman is turning that franchise on its head, creating its own private system to trade the stocks of companies that don’t want the scrutiny and regulatory burdens of going public.
The new system, GS TRuE — short for Goldman Sachs Tradable Unregistered Equity — was announced two weeks ago and made its debut on Monday with an $880 million sale of a 15% stake in Oaktree Capital Management LLC, an alternative-investment manager. It is the first of several new, private exchanges like these being considered by Wall Street firms and others. Nasdaq is also planning its own new market for smaller, unregistered securities.
These markets will generally be closed to individual investors. For instance, Goldman’s market is open only to large institutional investors with assets of more than $100 million. That is because the stocks traded on GS TRuE aren’t registered with the Securities and Exchange Commission and issuers aren’t subject to SEC regulations designed to protect individual investors.
It represents the latest step in the creeping exclusion of individual investors from a growing proportion of financial-market activity. For instance, giant private-equity firms are busy buying public companies and delisting them from stock exchanges. The growing importance of hedge funds — which are generally limited to wealthy investors, institutions and endowments — also excludes individuals.”
“Bankers at rival firms — many of which are developing similar systems — predict that there will be consolidation among the different platforms. “History in other markets would indicate that this will converge into a single platform,” said Daniel Simkowitz, a managing director in capital markets at Morgan Stanley, which advised Oaktree on the issue.
Indeed, Nasdaq Stock Market Inc. is in the home stretch of getting approval for a similar unregistered trading facility for smaller companies called Portal. Another securities firm, Friedman, Billings, Ramsey Group Inc., has sold unregistered stock for numerous companies in real estate, energy and lodging.
Goldman executives said one reason they launched their own system solo, without asking other rival securities firms to participate, was to insure control over the number of investors in any particular security. That is crucial, they said, because any company that goes over 499 investors must register as a public company.
That 499-investor limit, said one executive of a top private-equity firm, is one reason why such buyout firms aren’t likely to rush pell-mell into this type of new issue for their portfolio companies. The buyout firms want to attract far more investors to make sure they get the best prices for their stock, he explained.”
As expected, Evelyn Davis was all entertainment during the SEC’s third proxy process roundtable on Friday. She is a “must see” on the video archive (her panel kicks off at the 1:22 mark; Evelyn starts at 1:27, but its worth hearing the calm voices of the other speakers before her for context). Note that the SEC upgraded the display of its open meetings from audio to video recently.
Marty Dunn did a fair job of keeping Evelyn under control – but she did get a few good ones in, such as screaming that she is prettier than Nell Minow. The SEC has posted a transcript of the first roundtable as well as briefing papers and panel statements for all three.
Private Equity M&A Nuggets
We have posted a transcript from the popular DealLawyers.com webcast: “Private Equity M&A Nuggets.”
Subprime Lending Developments
In this podcast, Stephen Ornstein of Thacher Proffitt & Wood provides some insight into what is happening in the subprime lending market, including:
– What are the latest developments in the subprime lending area?
– How bad is this market right now?
– For those companies that originate, purchase and underwrite securitizations with subprime loans, what is their respective primary exposure in today’s markets and how do these parties mitigate risk?
Yesterday, the PCAOB adopted Auditing Std. No. 5 (and here is the PCAOB’s press release). It is expected that the SEC will approve the PCAOB’s new standard on an expedited basis.
Memos on the SEC’s and PCAOB’s guidance will be posted in our “Internal Controls” Practice Area. And I am putting the finishing touches on a July webcast to explain all the new internal controls guidance, featuring John Huber and some Big 4 experts…
Corp Fin Issues Section 16 Interps
Yesterday, Corp Fin issued these Section 16 interps. As he has already been doing, Alan Dye will be blogging about the nuances of these new interps on his Section16.net Blog – as well as writing about them in the upcoming issue of Section 16 Updates. Try a no-risk trial to Section16.net today – half-price for the rest of 2007!
A New Staffer Hang-Out?
Congrats to SEC Staffer Amy Starr for founding a groovy coffee shop in Northern Virginia (below is a related Washington Post article): “David A. Starr talks real fast, not because he’s a lobbyist but because he is a professional coffee roaster on the side. He drinks about eight cups of his specialty brew a day.
Starr, a 48-year-old principal at the lobbying law firm Williams & Jensen, is an expert in tax and pension law. His clients include Brooks Brothers and the YWCA Pension Fund. But in recent years he and his wife, Amy Starr, a Securities and Exchange Commission lawyer, developed a passion for self-roasted coffee and this year they made it into a business, Beanetics Coffee Roasters in Annandale.
“We can roast 100 pounds of coffee — from green bean to bag – in an hour,” Starr said proudly. And yes, the beans, whether Costa Rican (his top seller) or Ethiopian, start off green before they are heated in the store’s roaster, which patrons can see through a window.
Starr began 10 years ago with a tabletop roaster in his kitchen and progressed to a bigger roaster in his garage. But his friends wanted more coffee than his hobby could provide them, so in February he opened shop not far from his home. “I scoot over on the way into work to check in,” Starr said, “and also have a great cup of coffee.”
Yesterday, the SEC adopted new guidance for management’s assessment of internal controls over financial reporting, which becomes effective 30 days after being published in the Federal Register. The new guidelines provide a principles-based framework, which is intended to promote a “healthy use of judgment” and provide companies with flexibility to establish an appropriate evaluation method. Here is Corp Fin Director John White’s opening statement, Chief Accountant Hewitt’s opening statement, Deputy Chief Accountant Zoe-Vonna Palmrose’s opening statement and a press release. FEI’s “Financial Reporting” Blog has more extensive notes about the meeting.
Although we don’t have the text of the new guidance yet, the SEC Staff said that the proposed core principles remain unchanged in their final form – but the Staff stated that there are some changes, mainly to align the guidance with what the PCAOB will adopt today at their meeting. The core principles are that management should evaluate whether it has implemented controls that adequately address the risk that a material misstatement in the financials would not be prevented or detected in a timely manner – and that management’s evaluation of evidence about the operation of its controls should be based on a risk assessment.
The SEC stated that its guidance makes clear that management can look to the principles-based guidance for carrying out its responsibilities. The new guidance doesn’t include examples because the SEC wants to avoid the unintended consequence of creating a “one size fits all” box. The SEC Staff stated that many larger companies have developed acceptable procedures for Section 404 reporting that differ from the interpretive guidance and that such procedures may continue to be used.
The SEC amended Rule 12b-2 and Rule 1-02 of Regulation S-X to codify the term “material weakness” substantially as proposed (the Staff stated that the PCAOB will adopt the same definition) to “a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility of leading to a material misstatement that will not be prevented or detected on a timely basis). The Staff explained that most of the material weakness situations seen so far involve accounting related issues within the areas of more complex accounting standards, such as taxes, revenue-recognition and the treatment of derivatives – and the new guidance addresses these areas.
The SEC amended Rules 13a-15(c) and 15d-15(c) to eliminate the requirement that auditors attest to management’s process of evaluating internal controls. In addition, the SEC amended Rules 1-02(a)(2) and 2-02(f) of Regulation S-X to require the expression of a single opinion directly on the effectiveness of internal control over financial reporting by the auditor in its attestation report.
The SEC also proposed a new definition of the term “significant deficiency,” which is intended to clarify those weaknesses that are considered to be less severe than a “material weakness.” Unlike “material weakness,” the proposed “significant deficiency” doesn’t include a probability threshold.
What the SEC Didn’t Do? Extend the Smaller Company Deadline Again
The SEC didn’t extend the deadline for smaller companies (those with less than $75 million in market capitalization) to comply with Section 404 since the new guidance provides scalable and flexible ways for these companies to meet the December 31st deadline. So unless the SEC reverses itself – which is still possible since Commissioners Atkins and Casey said they are still considering it – three delays was the charm. Following the SEC meeting, Senators Kerry and Snowe issued a press release saying it was a mistake not to adopt a fourth delay.
By the way, the SEC has announced the agendas and panelists for today’s and tomorrow’s proxy process roundtables (Evelyn Davis is on the Friday agenda; that alone should make it worthwhile). And the SEC adopted rules yesterday related to the Credit Rating Agency Reform Act of 2006.
The SEC’s Proposed Overhaul of Smaller Company Capital-Raising
Yesterday, the SEC also proposed a new framework for smaller company capital-raising. Here is an opening statement from the Corp Fin Staffers who shepparded this project. According to this press release, the proposals would include:
– A new system of securities regulation for smaller public companies that would make scaled regulation available to a much larger group of smaller companies (ie. up to $75 million in public float; up from $25 million), including killing the S-B system by integrating Regulation S-B into Regulation S-K and rescinding the SB Forms
– Modified eligibility requirements so companies with a public float below $75 million can use shelf registration
– A new Regulation D exemption from ’33 Act registration requirements for sales of securities to a newly defined category of “Rule 507 qualified purchasers” for which limited advertising would be permitted
– Shortened holding periods under Rule 144 for restricted securities (ie. reduced from one year to six months, unless a short sale is involved) and a few changes to Rule 145
– Two new exemptions for compensatory employee stock options so ’34 Act registration requirements would not be triggered solely by a company’s option granting practices
– Electronic filing of Form Ds
Hewlett-Packard’s Boardroom Leak: SEC’s Enforcement Brings a Form 8-K Case
So I guess filing those director resignation 8-Ks do matter after all. According to this press release, the SEC yesterday filed settled administrative charges with a cease and desist order (no fines or penalties) against Hewlett-Packard for failing to disclose the reasons for a director’s abrupt resignation in the midst of H-P’s controversial investigation into boardroom leaks.
The SEC found that several months before the public revelation of the company’s leak investigation, an H-P director objected to the company’s handling of the matter and resigned from the Board, yet H-P failed to disclose the reasons for his resignation as required under Item 5.02(b) of Form 8-K. Here is the SEC’s administrative release.
