Yesterday, the IRS and Treasury Department issued Notice 2007-86, which generally extends the transition relief for compliance with Section 409A through December 31, 2008. Section 409A affects all types of plans that involve (or are considered to involve) a deferral of compensation.
In the notice, the IRS and Treasury also confirmed that they expect to issue guidance regarding a correction program as soon as possible. This guidance is expected to provide methods by which some unintentional operational failures may be corrected in the same taxable year in which they occurred in order to avoid application of Section 409A, and other methods by which some unintentional operational failures may result in only limited amounts becoming includible in income and subject to additional taxes under Section 409A.
This latest round of transition relief does not affect the guidance provided in Notice 2007-78 regarding predetermined cashout features, or the guidance regarding the application of Section 409A(b), which imposes restrictions on certain trusts and other arrangements.
This much needed extension should give everyone the additional time that they need in order to analyze their plans and complete all of the changes necessary to bring arrangements into compliance with the final regulations issued in April 2007.
No Comprehensive Delay for FASB’s Fair Value Measurement Standard
In more deadline news, the FASB recently rejected suggestions that it delay the effective date of FAS 157, Fair Value Measurements (Sept. 2006). The FASB did, however, direct its staff to analyze whether to delay application of the standard for some items subject to measurement and to specific entities. As it now stands, FAS 157 is effective for fiscal years beginning after November 15, 2007.
As noted in this issue of KPMG’s Defining Issues, the possibilities that the FASB Staff may consider are deferring FAS 157’s requirements for:
– nonfinancial assets and liabilities other than derivatives within the scope of FAS 133;
– private entities; and
– smaller public companies below a yet-to-be determined size.
FAS 157 defines fair value as “the price that would be received for an asset or paid to transfer a liability in a current market transaction between marketplace participants in the reference market for the asset or liability.” The new standard also establishes a framework for measuring fair value.
As a result of the upcoming effective date of FAS 157, companies will be expected to disclose the anticipated effects of adopting the standard in their MD&A, as well as possible disclosure in the notes to the financial statements under SAB 74, Disclosure Of The Impact That Recently Issued Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted in a Future Period.
For more information about FAS 157 and FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (Feb. 2007), check out our “Fair Value Accounting” Practice Area.
Latest Developments in Capital Market Deals
We have posted the transcript from our recent webcast: “Latest Developments in Capital Market Deals.”
It seems to be the season for reports on executive compensation disclosure. Following up on the SEC Staff’s recent report on observations from its review efforts, RiskMetrics Group has published its own evaluation of executive compensation disclosures from the 2007 proxy season.
Mark Borges provides an extensive summary and analysis of the report on his CompensationStandards.com blog. Mark notes: “Less a critique of how companies fared in disclosing their executive compensation programs than the kick off of a dialogue among executives, directors, and investors on the development of a set of disclosure ‘best practices,’ the Report is the first public statement that I’ve seen from the investor community (or at least, one of its leading representatives) commenting on compliance with the new rules.
Like the Staff report, RiskMetrics focuses much of its attention on the Compensation Discussion and Analysis. Nonetheless, the Report should also be read in the context of preparing the tabular disclosure and accompanying narrative discussions. At a high level, the Report addresses seven specific topics:
– Clarity and accessibility for investors and other key reads
– The connection between compensation practices and strategy or other company-specific features
– The role of executives and compensation consultants in the compensation-setting process
– The pay mix
– Performance metrics and peer groups
– Performance results, payouts, and pay-for-performance links
– A holistic picture, in which the whole is greater than the sum of the parts
In many ways, RiskMetrics uses these topics to expand, from an investor’s perspective, on the Staff’s two principal messages: (1) the CD&A should focus on how and why a company arrives at specific executive compensation decisions and policies, and (2) the manner of presentation matters — in particular, using plain English and organizing the tabular information in a way that helps an investor understand a company’s disclosure.”
Business Roundtable Reports on Corporate Governance
Recently, the Business Roundtable announced the results of its Fifth Annual Corporate Governance Survey. For the survey, the Business Roundtable polled it membership, consisting of 160 CEOs of large US companies. Among the most notable trends from the survey is an increase in independent directors (90% of respondents had boards that were at least 80% independent), as well as a significant jump in the number of companies that have adopted majority voting (82% of the responding companies).
The survey results also included the following:
– Sarbanes-Oxley spending continues to decline, with moderate decreases in costs expected with the new SEC/PCAOB internal controls guidance.
– 75% of CEOs serve on no more than one other public company board.
– A still surprisingly low 38% of companies responding indicated that board members met with shareholders in the past year.
– 71% of respondents expect their non-management or independent directors to meet in executive session at every board meeting.
– 40% of companies responding indicated that they adjusted the pay-for-performance element of senior executive compensation in the past year, in addition to 57% that reported doing so in 2006.
SEC Passes on Zions Bancorp Option Auction
As noted in this article from today’s Wall Street Journal, Zions Bancorp received a letter from the SEC’s Chief Accountant indicating that the Staff had no objection to the bank’s use of results from its ESOARS auction model for computing options expense under FAS 123(R).
As Broc noted in the blog earlier this year, Zions had received a letter in January from the SEC’s Chief Accountant indicating concurrence with their approach, but noting concerns with the auction process. The Council of Institutional Investors then wrote a letter to the SEC expressing concerns about whether market instruments such as ESOARS can appropriately value employee stock options. It appears that the Staff’s latest letter will clear the way for Zions to market its ESOARS to other companies as an alternative option valuation methodology.
Much sooner than I expected, here is the first comment letter uploaded on EDGAR from Corp Fin’s executive compensation review project. Based on a proxy statement that is related to a director election contest with Carl Icahn, this comment letter was sent to Motorola on August 21st and uploaded a mere six days later.
More likely than not, this uploaded comment letter is an outlier given the SEC Staff’s announcement that comment letters won’t be posted until at least 45 days after the review is completed (which really means the review is “closed” since it’s supposed to include the company’s responses) – so I don’t expect other letters from the review project to be publicly available for quite some time. [Note later in the morning: “poof,” the letter has been erased from the SEC’s website.]
By the way, finding these comment letters may be challenging – the Motorola letter doesn’t come up even if you limit your search to all “Uploaded” correspondence within the last six months. Let me know if you see any in your travels!
And one more aside: check out what happens when you click to enter Motorola’s investor relations webpage. You need to click through a disclaimer regarding the lack of a duty to update. Interesting…
Billy Broc’s Dream
Or is it a nightmare? Billy Broc remembers his precious law firm days in this week’s installment of “The Sarbanes-Oxley Report” entitled “Billy Broc’s Dream.” I hate those prickly comma situations…
[I highly recommend the new George Clooney movie entitled “Michael Clayton.” George plays a down n’ out lawyer whose responsibilities in the Big Firm is to serve as the “fixer.” The tagline is “The Truth Can be Adjusted,” but it’s actually a more realistic movie than I expected rather than typical Hollywood fare.
And for those still wishing that there ain’t no climate change, we have a record 34 days without measurable rain here in the DC area…]
Stoneridge Galore!
Last week, the US Supreme Court heard oral arguments in the monumental Stoneridge case dealing with secondary actor liability. Here is a transcript of the oral argument – and here are a bunch of blogs that covered the action:
Yesterday, the PCAOB proposed Staff guidance – in the form of these “preliminary staff views” – on applying Auditing Standard No. 5 to audits of smaller, less complex companies. Here is the related press release. When the PCAOB adopted AS #5 in May, the Board committed to provide additional guidance on applying the standard to audits of smaller public companies.
The New RiskMetrics Group Structure
For me, it’s gonna take a while to get used to saying “RiskMetrics” instead of “ISS” in the wake of the company’s reorganization. In this podcast, Cheryl Gustitus, Head of Global Communications at RiskMetrics, describes how the recently announced reorganization at RiskMetrics Group impacts ISS, including:
– Where does ISS fit into the reorganization of RiskMetrics?
– How is the ISS division of RiskMetrics now organized?
– Will the policy-setting process of ISS change at all?
– How does that policy-setting process work?
Latest Post-Season Proxy Season Report
Recently, RiskMetrics issued its latest “Post-Proxy Season Report.” Among other notables, this report reveals that as of mid-September:
– 656 shareholder proposals had been voted upon this year, up from 581 at the same time last year.
– 107 shareholder proposals have earned a majority of votes cast, down from 116 proposals last year (two years ago, just 85 proposals received majority support).
– Corp Fin had issued 155 no-action responses allowing the exclusion of a shareholder proposal, up from 129.
Another nugget from Keith Bishop, a former Commissioner of California’s Department of Corporations: Recently, the Department of Corporations issued a proposed rule that would require the registration of hedge fund advisers under California’s Corporate Securities Law of 1968 (the “CSL”). As you might expect, there is a bit of history to this new proposal.
In 1971, the Department issued Policy Letter No. 151 (the “1971 Letter”) indicating that a general partner of a single limited partnership would not have to be licensed as an “investment adviser” under the CSL. The basis of the 1971 letter was the Department’s view that a general partner is, in effect, giving advice to itself rather than to “others” as required under Section 25009 of the CSL. The 1971 Letter had generally been relied on by California-based general partners of venture capital companies (“VCCs”) seeking an exemption from licensing in California as an investment adviser.
In April 1998, the Department issued Release No. 110-C (the “1998 Release”), which essentially revoked the 1971 Letter. In the 1998 Release, the Department indicated that the position taken in the 1971 Letter was contrary to the treatment of investment advisers by the SEC under the Investment Advisers Act of 1940.
I was no longer Commissioner and objected strongly to the Department’s revocation of the 1971 Letter on a number of grounds. In particular, I was concerned with the effect on general partners of VCCs. At my urging, the Department in 2002 adopted Rule 260.204.9 which exempts any investment adviser that:
– Does not hold itself out generally to the public as an investment adviser;
– Has fewer than 15 clients;
– Is exempt from registration under the Federal Advisers Act by virtue of Section 203(b)(3) of that act; and either has “assets under management” of not less than $25 million or provides investment advice to only “venture capital companies,” as defined in the rule.
In 2004, the SEC adopted a new rule (Rule 203(b)(3)-2) and rule amendments to require advisers to certain private investment pools (aka “hedge funds”) to register with the SEC under the Advisers Act. Prior to that time, these hedge fund advisers relied upon the so-called “private adviser” exemption set forth in Section 203(b)(3) of the Advisers Act. That section exempts advisers who (i) has had fewer than fifteen clients during the preceding twelve months, (ii) does not hold itself out generally to the public as an investment adviser, and (iii) is not an adviser to any registered investment company.
Two years later, the DC Circuit in Goldstein v. Securities and Exchange Commission vacated the regulatory framework for hedge fund advisers established by the SEC through its adoption of Rule 203(b)(3)-2 and related amendments. As a result hedge fund advisers can now rely again on the Section 203(b)(3) exemption from the federal registration requirements. The DOC’s rule currently exempts these advisers if they have assets under management of not less than $25 million (i.e., above the threshold for federal registration).
The Department’s proposal represents an attempt to refill the lacuna in regulation that resulted from the Goldstein decision. For those advisers that deregistered under the Advisers Act or who have not registered with the SEC since the Goldstein decision, the Department’s rule would require state-level registration. The comment period for the Department’s proposal ends on November 26, 2007. Here is the Department’s notice, proposed text and initial statement of reasons.
Remember that the SEC adopted IA Rule 206(4)-8 in August. This rule prohibits advisers to pooled investment vehicles from making false or misleading statements to, or otherwise defrauding, investors or prospective investors in those pooled vehicles.
FINRA/NASD’s Fairness Opinion Proposal: Finally Final
After a long wait – and four amendments – the SEC has issued an Order approving FINRA (formerly NASD) Rule 2290 on an accelerated basis (this rule was first proposed in mid-’05). As noted in Amendment No. 4, Rule 2290 addresses disclosures and procedures in connection with the issuance of fairness opinions by a broker/dealer firm. In that amendment, FINRA stated that it will announce an effective date for the new rule in a Notice to Members to be published no later than 60 days following the SEC’s approval and that the effective date will be 30 days following publication of the Notice, so we should know that date soon. Look for a DealLawyers.com webcast on fairness opinions coming soon…
Rep. Barney Frank Opposes a SEC Vote on Shareholder Access
Here is an excerpt from a Tuesday Dow Jones article: “The Securities and Exchange Commission should not vote this year to finalize a rule on a controversial shareholder-democracy issue, and it runs the risk of being overturned by Congress if it does, House Financial Services Committee Chairman Barney Frank said Tuesday.
Frank, Democrat-Mass., said it would be ‘a great mistake’ for the SEC to act on such issues without a full complement of Democrats on the five-member commission. He added that it’s possible Congress could act this year to suspend any SEC action on proxy access.
SEC Chairman Christopher Cox last week reiterated plans to have the commission vote this year to clarify whether shareholders should be able to propose proxy-access measures, allowing them to place the names of their own candidates for corporate boards on company proxy ballots.”
Perhaps I am too close to it (yes, way too close), but what is the appropriate measure to determine whether a conference was worth its salt? To me, the most important measure is the feedback we receive from attendees. So far, feedback from our three Conferences has been very positive – but we’re always looking to improve; please feel free to email me with any criticism you might have. [I feel the same way about our sites; we can only improve if we know what you are looking for.]
Another measure – albeit far less important than the attendee’s experience – is whether the conference received any media coverage. In this category, some of our speakers indeed created some news – the NY Times ran an article based on coverage of our Conferences on no less than three days! And other reporters told me that our Conferences continue to be on their “must attend” list for the content they hear and contacts they make. Here are links to the NY Times articles:
– Comp consultant Ira Kay and our own Jesse Brill discussed a variety of executive compensation practices during several panels of the “4th Annual Executive Compensation Conference”: see Saturday’s article entitled “What if C.E.O. Pay Is Fair?”
– SEC Enforcement Director Linda Chatman Thomsen discussed 10b5-1 plans during her keynote and the succesive panel on those plans: see Thursday’s article entitled “Stock Sales by Chief of Lender Questioned”
– SEC Corp Fin Director John White’s keynote analyzed executive compensation disclosures under the new SEC rules: see Wednesday’s article entitled “S.E.C. Finds Fault on Pay Disclosures”
Of course, the sheer number of attendees is another indicator of a conference’s success. In that department, the result continues to be overwhelming. We had over 2400 in San Francisco (we pulled off a nice wave cheer before Wednesday’s plenary session), with another 3500 online.
Status of Shareholder Access: Open Commission Meeting Soon?
With over 20,000 comment letters in (many of them “form” letters), the SEC appears to be set to hold an open Commission meeting sometime in November to consider at least some of the shareholder access ideas floated this summer. According to a Dow Jones article from last week, SEC Chairman Cox wants some rules in place for next proxy season – here is an excerpt from that article:
“Cox has said that he favored the second approach, under which investors with a 5% stake in a company for at least one year could propose changing bylaws in a way that would allow shareholder-backed candidates to appear on corporate proxy ballots. But the departure of one Democratic commissioner and the planned departure of the other may complicate matters.”
Here is a NY Times article from Sunday – and here is an article from the RiskMetric’s Governance Blog about the future on nonbinding proposals.
An Opportunity to Comment on RiskMetric’s ’08 Proxy Policies
Yesterday, RiskMetrics (formerly known as ISS) put up its “Request for Comment” tool for a number of potential modifications to its policies for 2008. Take advantage of this opportunity to influence these important proxy voting policies through an easy-to-use online form. This year, the topics include:
– Aggressive Accounting Practices (U.S.)
– Cumulative Voting (U.S.)
– Director Attendance (Japan)
– Independent Chair (U.S.)
– Non-Employee Director Limit on Equity Plan Participation (Canada)
– Stock Options for Non-Executive Directors (Belgium and the Netherlands)
– Poor Pay Practices (U.S.)
– Stock Option Overhang in ISS Governance Services’ Binomial Option Pricing (“SVT”) Model (U.S.)
– Say on Pay – Principles for Evaluating Remuneration (U.S. and International)
– Product Safety (U.S.)
When I saw Peggy Foran at our Proxy Disclosure Conference last Tuesday, I was excited to hear that Pfizer planned to unveil a mock proxy statement that had been made more “usable” during Friday’s Center for Plain Language Symposium; Pfizer took its most recent proxy statement and reformatted it. Here is a keynote speech from SEC Chairman Cox at the Symposium.
I was excited because I believe not enough attention has been paid to the usability of disclosure documents. In fact, this is the subject of our next webcast on November 15th: “Annual Reports: How to Create Them for an Online World.” Of course, substance is king – but format plays a role in how investors learn more about a company too. And as I’ve written before, in this new era of e-proxy, etc., the art of writing usable is a skill set that we all need to learn. Studies show that humans read differently online than in paper.
Anyways, I was dumbfounded to see this NY Times article on Saturday that poked Pfizer for creating a mock usable document. From reading the article, it appears that Pfizer was approached to volunteer to create this example – Pfizer was a logical choice because the company has long led the league in trying to push the envelope and serve as this country’s governance leader, particularly under Peggy’s leadership.
True, the Pfizer board made a misstep with its former CEO’s post-retirement pay package – but you still have to give Peggy and company credit for all they have done over the past decade. Today’s hot topic might have been majority vote legislation without Pfizer leading the way in voluntarily adopting a director resignation policy for majority withheld votes. There are numerous other examples of innovation, both big and small. I hope criticism in the press doesn’t stop Pfizer or any other company from trying to do the right thing, particularly something as benign as mocking up last year’s proxy to make it more usable.
[Pfizer hasn’t made it publicly available yet. I intend to post it when I get it and will blog when it’s up so you know since I’ve had so many requests.]
President Bush Attacks CEO Pay (Again)
On Thursday, President Bush attacked CEO pay in an interview, according to this WSJ article. He had first broached the topic in a speech on Wall Street back in February.
I also heard that Hillary Clinton spoke out about the pay disparity between CEOs and the work force while she was stumping in Iowa last week. Clearly, this issue could become one of the issues used to attract voters next November.
Jackpot for History Buffs: Old NY Times Articles Now Free
Recently, the NY Times made its archive of old articles – going back to 1851 – available to the public for free (despite the fact that it says you must pay when you search their archives, it indeed is free). For example, check out this 1935 article about the then new incoming SEC Chairman James Landis. Pretty cool stuff…
Tune in today for more of the same with: “4th Annual Executive Compensation” Conference. The Conference opens with a keynote from John Olson and then gets right into the practical “nitty gritty” of what boards and advisors should be doing vis a vis CEO pay. Plenty of implementation examples, such as how companies have implemented internal pay equity, wealth accumulation analyses, “walk away” number calculations and clawback provisions with teeth.
To watch, come to the home page of either TheCorporateCounsel.net or CompensationStandards.com and click the prominent link that says “Enter the Conference.” Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or RealPlayer) and the speed of the connection that you have.
Here’s an agenda for today’s Conference; note that times are Pacific/West coast. Panels will be archived a day after they are shown live.
COSO Releases More Internal Control Guidance
A few weeks ago, the Committee of Sponsoring Organizations of the Treadway Commission released its latest Guidance on Monitoring Internal Control Systems. Called a discussion document, the guidance is the first phase of COSO’s attempt to improve the understanding of internal control system. COSO is taking comments this latest guidance.
Ten Years: It Goes By Fast…
It’s hard to believe that a decade has passed since the SEC submitted this Study to Congress about how technology – in particular, the Internet – impacts the securities markets. If my memory serves, I believe the SEC was required to produce a study as mandated by a provision of NSMIA.
Yours truly did the leg work on the Corp Fin chapter of the study; some of the more interesting stuff is in the footnotes, as they describe the pioneers that leveraged the Web. I had a box of really cool stuff that documented those examples (and many more that didn’t make it into the final cut of the Study), but a flood in my basement wiped them out a while back…
Lots of big doings yesterday for our “2nd Annual Proxy Disclosure” Conference. Tune in today for more of the same with: “Hot Topics: The Corporate Counsel Speaks” Conference. The Conference opens with a blockbuster keynote from SEC Enforcement Director Linda Chatman Thomsen.
To watch, come to the home page of either TheCorporateCounsel.net or CompensationStandards.com and click the prominent link that says “Enter the Conference.” Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or RealPlayer) and the speed of the connection that you have.
Here’s an agenda for today’s Conference; note that times are Pacific/West coast. Panels will be archived several hours after they are shown live.
John White’s Speech, Etc.
I did some real-time blogging during yesterday’s “2nd Annual Proxy Disclosure” Conference, noting this speech by Corp Fin Director John White (fyi, here is the Cleary Gottlieb memo on performance targets mentioned during a few panels). The archived panels from that Conference are being uploaded soon and will be accessible from a link at the top of the home pages of TheCorporateCounsel.net and CompensationStandards.com. Today’s NY Times ran this article on John’s speech and other remarks made at yesterday’s Conference.
Problems with our Online CLE Tracking Tool
If you have registered for video webcast attendance to any our three Conferences this week, please be aware that we are experiencing some difficulties with our new online tracking tool. Rest assured that you can still earn CLE credit if your state bar has accredited our program (most states have).
If you are experiencing problems, simply send us (1) the name(s) of any lawyers who watch the Conference, (2) list which Conferences were watched (and number of hours attended), (3) the state bars for which CLE is sought, and (4) the bar numbers for those states. You can send these to info@naspp.com. We will be sending out CLE certifications out in about a month or so. We apologize for any inconvenience. Sometimes I truly despise technology…
Fictitious? Fishy 409A Guidance
This fictitious IRS notice about death and 409A made the rounds recently…
Here is text of the speech from Corp Fin Director John White that he is delivering right now at our Conference. It’s entitled “Where’s the Analysis?” and I urge everyone to read it (and watch the video, live or archived)…
