Just ahead of today’s SEC and PCAOB Section 404 Roundtable, there have been three recent notable commentaries:
1. On Monday, the GAO issued a report entitled “Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies,” which found that there is a disproportionate cost of compliance for smaller public companies to implement Section 404 but expresses concern over the Small Business Advisory Committee’s recommendation that smaller companies be exempt from Section 404.
2. On Monday, SEC Commissioner Cynthia Glassman gave a speech entitled “Internal Controls Over Financial Reporting – Putting Sarbanes-Oxley Section 404 in Perspective.”
3. Last Thursday, PCAOB Board Member Charlie Niemeier gave a speech entitled “Confronting the Challenges of Change in the World of Financial Reporting,” which includes comments on the rise in cost of capital when a company fails to have adequate internal controls as well as some interesting stats on foreign listings by US companies.
The FEI’s “Section 404 Blog” describes comment letters submitted to the SEC for the purposes of today’s roundtable. And yesterday, the SEC and four banking regulators issued a revised draft policy statement on complex structured finance activities of financial institutions – which includes internal controls and risk management procedures – to make it more principle-based, among other changes.
NYSE Proposes to Eliminate Treasury Share Exception
Last Friday, the NYSE submitted a proposal to the SEC that would eliminate the “treasury share exception” from the requirement for shareholder approval under Section 312.03 of the NYSE Listed Company Manual. From reading this blog, it’s clear what the history is on this. The proposal has not yet been published for comment by the SEC and could still be changed.
Although Section 312.03 requires that companies obtain shareholder approval before issuing stock in certain situations or in significant amounts, the calculation of whether the amount of shares issued triggers the shareholder approval requirement doesn’t apply to the reissuance of treasury stock in some cases (i.e., previously issued and listed shares that previously were reacquired by the company). In particular, the NYSE proposal would:
– Eliminate the treasury share exception entirely
– Require that companies notify the NYSE regarding issuances of treasury shares; and
– Clarify that the shareholder approval requirements for issuances to related parties cover a “series of related transactions”
In its proposal, the NYSE clarifies that companies may continue to rely on the treasury share exception until the SEC approves the rule change. But note on page 5 of the proposal: “Issuances effective on or after that date will be unable to utilize the treasury share exception, even if the issuer had contracted for the issuance prior to that effective date.” In other words, the NYSE states that once the SEC approves the rule change, the treasury share exception is not available for any transaction – even if contracted for prior to the rule change.
This could hurt those companies that may have contacted the NYSE and obtained their blessing that shareholder approval isn’t necessary, contracted for the arrangement, and then the arrangement is effected after the SEC approves the rule proposal; in this situation, shareholder approval would still be necessary despite the NYSE’s prior acquiescence.
Developments for LLCs Doing Business in New York
Significant developments for any LLC that does any business in New York. In this podcast, Monica Lord of Kramer Levin provides analysis of changes in the laws – that are effective on June 1st – impacting limited liability companies doing business in New York (here is more information on these new laws), including:
– What are the latest developments for LLCs doing business in New York?
– What are the consequences of noncompliance?
– Can you tell us more about the new requirement to disclose the identity of the top ten members?
– Are there any exemptions?
– What should LLCs do now in anticipation of these changes?
– I hear that a revision to the law is being considered in Albany. Might all this change?
Many members reacted to yesterday’s blog, here is one from an anonymous member: “The last 2 sentences of the Coke disclosure is disclosure that I have seen the SEC Staff object to – in my mind, as long as the forward-looking cautionary statement is there, you don’t need all the stuff they did and simply say “there are no material changes.” Given there is now a specific form requirement that requires disclosure of material changes to risk factors, I believe that, regardless of what one discloses, if there are no new risks included, one is saying there are no material changes. I believe that is okay if true.”
And Stan Keller noted: “Keep in mind that MD&A sometimes is used on a standalone basis, e.g., in the glossy annual report. Thus, a discrete safe harbor statement within MD&A may make sense. Often the safe harbor statement used in the earnings press release will serve the purpose for the MD&A. Also, I counsel against use of “disclaim any obligation” language because of Staff sensitivity and suggest another formulation, such as ‘we do not intend to update.’ But our advice has been consistent with Coke’s – if there is no updating, and the company is comfortable not repeating the risk factors in the 10-Q, to refer to the 10-K risk factors without any statement that there have been no changes.”
Some Progress on the NASD’s Shelf Offering Proposal
Last week, the NASD proposed an amendment to its long-standing shelf offering proposal (it was originally published for comment by the SEC at the beginning of 2004! This is the 4th amendment.). The proposal is intended to clarify the application of the NASD’s filing and substantive underwriting requirements to shelf takedowns – the NASD has revised a number of aspects of the original proposal, including no longer proposing to amend the definition of “underwriter and related person.” Any rule change would not be effective until an approval order is issued by the SEC.
No More Broker Non-Votes? NYSE Advisory Panel Consensus
Somehow I missed this interesting piece a few weeks ago from Phyllis Plitch that ran on the Dow Jones newswire:
“In what would represent a major change in current shareholder voting rights, a committee formed last year by the New York Stock Exchange has reached a consensus that brokers should no longer vote for investors in director elections.
According to a person familiar with the situation, the panel stopped short of scrapping the controversial broker vote altogether, but has reached agreement that such votes shouldn’t be counted in board elections.
A recommendation on the broker voting issue is contained in a draft report circulated to members of the committee Wednesday. Once the report is finalized it is expected to go to the NYSE for approval in June. The recommendation isn’t likely to change as it is supported by most members of the committee, said the person, who requested anonymity.
The NYSE rule, which lets brokers cast votes in place of shareholders who don’t return voting instructions, has been long maligned by some activist investors as a “ballot-stuffing” device. Consideration of the thorny issue was part of the panel’s mandate to undertake a broad review of shareholder communications and proxy voting. The proxy working group’s chairman, Palo Alto, Calif., attorney Larry Sonsini declined comment on the substance of the report, but cautioned that the committee’s work is not yet complete. “There are a number of moving pieces that have to be rationalized,” he said.
The decades-old NYSE rule gives brokers the right to vote shares held in investors’ accounts – so-called street-name shares – on “routine” matters, when shareholders don’t provide voting instructions. What has been particularly vexing to some investor activists is that the NYSE considers director elections a routine matter. To their minds, adding insult to injury, brokers cast their votes with management, under long-time industry practice.
In some cases, without the broker vote being added to management’s tally, the outcome of dissident campaigns could have looked very different. In the high-profile election of Disney board members in 2004, 45% of the votes were cast against, or “withheld,” from the election of former Chairman and Chief Executive Michael Eisner. But hundreds of millions of shares were cast in favor of Eisner, even though the true stockholders never returned their broker-supplied proxies. If the broker vote wasn’t included in the tally, a majority of votes cast would have been withheld.
If the draft report doesn’t change, other shareholder voting issues would still be considered routine for purposes of the broker vote, such as auditor ratifications. The panel is throwing the question of whether the broker vote is needed at all back to the NYSE for further evaluation. A key argument heard from the NYSE and supporters of the rule over the years is that without the broker vote thrown into the mix, it would be harder for companies to reach an annual meeting quorum.
Any rule change would have to be approved by the Securities and Exchange Commission. An NYSE spokesman had no immediate comment.”
With so much going on with hedge funds these days, I am pretty excited about tomorrow’s DealLawyers.com webcast – “How to Handle Hedge Fund Activism” – where Craig Wasserman and Marc Wolinsky just joined a panel of their fellow Wachtell Lipton partners: Marty Lipton, David Katz, Josh Cammaker and Mark Gordon. Talk about an all-star line-up!
To catch this program, try a no-risk trial to DealLawyers.com, where a license for a single user only costs $195. This webcast alone is well worth the price of a license…
House Approves Tying Senior Manager Pensions to Funding Status
Last Wednesday, the US House of Representatives passed a motion – with a vote of 299-125 – that would restrict the pension benefits of senior managers whose companies’ pension plans are less than 80% funded. The bill primarily is aimed at companies switching to cash balance plans.
Rep. George Miller’s (D-Calif.) motion instructs conferees seeking to reconcile differing House and Senate pension reform legislation (H.R. 2830) to adopt provisions that would:
– restrict executive compensation, including nonqualified plans – in companies with pension plans that are less than 80% funded – equal to restrictions that would be imposed on benefits for workers and retirees in those plans, and
– insist that the definition of ”covered employee” include the CEO of the plan sponsor, any other employee of the plan sponsor who is a ”covered employee,” within the meaning of such term specified in the provisions contained in the Senate pension bill, and any other individual who is an officer or employee of the plan sponsor
This press release provides more information. Progress on reconciling the House motion with the Senate has been limited so far.
More on Form 10-Q Risk Factor Disclosure
One of the primary benefits of having an advisory board is receiving their sound counsel, even when they do not fully agree with you. Brink Dickerson of Troutman Sanders was kind enough to send along his thoughts on Coke’s approach to risk factors – which shows that he favors a different approach to the one I favored in this blog from last Monday:
“A well written MD&A will always contain forward-looking statements. They might be triggered by the requirement to discuss “known trends” and “uncertainties,” but they certainly will be triggered by the liquidity disclosure, which is required to address how companies expect to meet future liquidity needs. The safe harbor, as it applies to written statements, requires three things: Identification of the forward-looking statements (which, hopefully, is something more than the verb-to-be buzzword approach), the magic language that “actual results may differ materially,” and, most relevantly, accompaniment by “meaningful cautionary language.”
There now are hundreds of forward-looking statement cases. Few have focused intently on what it means to “accompany.” Two have come up with odd answers on this issue – one suggesting a “truth on the market” approach to counter the judge’s apparent distaste for the “fraud on the market” theory that might suggest that anything in the public domain that is cautionary would qualify (Judge Easterbrook, what were you thinking?) and another who dismissed based upon a safe harbor argument where the cautionary language was in a separate document.
However, the overwhelming majority of the cases involve situations where the meaningful cautionary language was in the same document and the issue did not have to be addressed, but dictum in a number of those cases suggests that is what the law requires. To me, “accompany” means “in the same document, appropriately captioned and not obscure.” Until a court holds clearly otherwise, that certainly is the best practice, if not the only practice that counsel could responsibly advocate.
Thus, a well written From 10-Q is going to contain forward-looking statements and should contain a safe harbor. But remember, safe-harbor disclosure is not required (and the SEC still appears reluctant to admit that the Reform Act is law).
“Risk factors” require the disclosure of risks that make a security “speculative or risky.” See Reg. S-K, Item 503(c). “Meaningful cautionary language” requires a discussion of the most likely reasons, but not necessarily all know reasons, that actual results may differ materially form those suggested by the forward-looking statements. See, e.g., Harris v. Ivax Corp, 182 F.3d 799 (11th Cir. 1999). These requirements are not the same, and good risk factor disclosure probably is a bit more robust than good safe-harbor disclosure.
Technically, a registrant could include Coke-like risk factor language in Item 1A of Part II of their Form 10-Q, i.e., a cross-reference to the Form 10-K risk factors and a statement that there have been no material changes and be fully compliant with their Form 10-Q obligations. But, the MD&A should be accompanied by a good safe harbor, and probably the most common practice is to put the safe harbor at the end of the MD&A section.
But, why not move the safe harbor introductory language – the “identification” plus “magic language” – to the beginning of Part II, Item 1A of the Form 10-Q and then follow it by traditional risk factor language? (And then follow that with language that expressly states that “We disclaim any obligation to update . . . except as required by law.”) This puts the safe harbor language in a readily findable spot and utilizes the, hopefully, good risk factors, and adds only minimal length to the document. We also know that meaningful cautionary language is supposed to be “alive” and change over time (common sense plus Judge Easterbrook, at least if you want him to uphold your motion to dismiss), and risk factor language should as well. So, republishing updated risk factors on a quarterly basis has other value.
I believe that this is the best approach, although I expect it to be the minority approach given the wording of the Item 1A and the fact that most registrants will not focus on the opportunity to combine their safe harbor and risk factors.”
On Wednesday, in the midst of providing testimony on the Hill, Chairman Cox announced that the SEC would drop fee rates considerably for the next fiscal year – the registration filing fee rate will be reduced by 71.3%! The rate would decrease to $30.70 per $1 million worth of securities registered from the current rate of $107.00.
This new rate will be effective at the beginning of the SEC’s next fiscal year, October 1, 2006 or 5 days after the date on which the SEC receives its regular appropriation, whichever date comes later (and based on past experience, as evidenced by my blogs from prior years, it’s always the latter as Congress inevitably drags its feet in approving the federal budget).
I characterize my response as “indirect” because it is difficult to take Mr. Jenkins too seriously because I believe he will hold onto his views despite his lack of command over the subject matter. For example, Mr. Jenkins blasts pay-for-performance because Mr. Jenkins contends: “Pay for performance” is paying for the past, not the future, which is what stock prices care about.”
As far as I know, that’s not anyone else’s definition of “pay-for-performance.” In fact, pay-for-performance is precisely the opposite of what Mr. Jenkins believes it to be. A company enters into a CEO pay arrangement today with specified future performance targets that need to be triggered in order to earn the pay. But I thought posting my response could be useful to other journalists who need to get up-to-speed on responsible pay practices in the midst of so much misinformation out there on the topic.
Analysis: Comment Letters on the SEC’s Executive Compensation Disclosure Proposal
Last week, Jesse Brill submitted his second comment letter on the SEC’s executive compensation disclosure proposal. This second letter contains analysis of other interesting comment letters and reiterates some of the points made in his first comment letter. Check them out!
Since the December 1st effective date of Securities Act reform, lawyers have been more careful about what constitutes the “disclosure package” as more writings are being considered a potential offer and filed as a free writing prospectus. Take our new survey on how many pieces typically constitute the “disclosure package” as well as the largest disclosure package you have worked on to date.
Free Writing Prospectuses: The Fun Stuff
As noted in our “Analysis of Free Writing Prospectuses” – which includes samples of the various types of FWPs filed so far – approximately 3000 FWPs have been filed with the SEC since December 1st. As part of the survey noted above, we have included a question asking which of six notable FWPs you find the most interesting. Check it out and have some fun.
If you are aware of other interesting FWPs not on this list, please drop me an email and let me know.
Survey Results: Trading Policies for Outside Directors
Our June 2005 survey on blackout practices ended with a question as to whether outside directors were subject to restrictions. Our most recent survey followed up on that theme with the following results:
1. Are outside directors at your company subject to restrictions on trading in company securities?
– Yes – 100%
– No – 0%
2. If yes, are they subject to the same restrictions as senior management?
– Yes – 93.7%
– No – 6.3%
3. Are outside directors free to trade at any time when there are no restrictions or must they also preclear their trades (eg. with the compliance or legal department)?
– Must always preclear- 88.8%
– Only needs to preclear in limited circumstances – 6.3%
– Never needs to preclear – 5.0%
4. If preclearance is required, how long is the preclearance valid?
– Less than 3 trading days – 35.5%
– 3-5 trading days – 28.9%
– 5-10 trading days – 18.4%
– More than 10 trading days – 17.1%
During his testimony last week before the US House Appropriations Subcommittee regarding the SEC’s budget, Chairman Cox discussed how the SEC has made “great strides in increasing participation” by Staffers in the Commission’s telework program. He noted that “during the first half of this year, we increased our telework participation to more than 1,100 employees. This represents an increase of 532 over the level at the start of fiscal 2005.”
He also noted that “our evaluation to date of our Virtual Workforce pilot program within the Division of Corporation Finance, we are considering options for expanding the program to other divisions and offices within the agency.” This pilot program consists of Staffers who work from home 100% of the time; whereas the telework program consists of Staffers who work from home one or two days per week. Both efforts are part of an overall initiative within the federal government to encourage more teleworking (which saves $ on office space, etc.). I’m sure there are lots of ex-Staffers out there wishing they had never left…
Comments from Corp Fin’s Office of Global Security Risk
During his testimony, Chairman Cox noted that the Office of Global Security Risk issued comments to 137 companies over the past year. I believe these comments often come in this form:
“We note the several references to your operations in ___. Please identify for us the __countries in which you have operations. If any of these operations are in a country identified by the U.S. State Department as state sponsor of terrorism, or if you have other contacts with any such country, identify each such country for us. Advise us also whether your __subsidiary is in __, a country identified by the U.S. State Department as a state sponsor of terrorism.
If any of your operations or other contacts is with a country identified as a state sponsor of terrorism, please advise us of the materiality of those contacts to the Company, and give us your views as to whether those contacts constitute a material investment risk for your security holders.
If you have contacts with more than one such country, provide the requested information with respect to your contacts with the countries individually and in the aggregate. In preparing your response, please consider that evaluations of materiality should not be based solely on quantitative factors, but should include consideration of all factors, including the potential impact of corporate activities upon a company’s reputation and share value, that a reasonable investor would deem important in making an investment decision.”
On a related note, last Thursday, the SEC jointly released this special study with the Federal Reserve and Office of the Comptroller regarding sound practices to strengthen the resilience of the US financial system.
Grasso Pay Package ‘Shocked’ Board
Couldn’t resist this short article from Friday’s WSJ describing the NYSE Board’s “Holy Cow” moment: “A newly surfaced document calls into question whether the board of the New York Stock Exchange fully understood the scope of the pay package being offered to former Big Board boss Dick Grasso. That $188 million pay package is the subject of a lawsuit against Mr. Grasso by New York state’s attorney general, Eliot Spitzer, whose case argues that such compensation was inappropriate for the head of a what was then a nonprofit organization.
The NYSE’s board “did not receive detailed information from the compensation committee,” according to internal notes prepared by former New York Stock Exchange Compensation Committee Chairman H. Carl McCall and his assistant in 2003. Mr. McCall’s notes said he realized that the board was in the dark when he started chairing the NYSE’s compensation committee in June 2003. The NYSE is now part of publicly listed NYSE Group Inc.
The notes became public by court order Wednesday after they came up during Mr. Spitzer’s deposition of Linda Scott, Mr. McCall’s assistant. They indicate that many board members were “shocked” when Mr. McCall gave them a “heads up” on the size of Mr. Grasso’s pay package.”
da Vinci Code Judge Embeds Own Code in Ruling
Who says that lawyers don’t have a sense of humor? UK Judge Peter Smith, who decided the case brought against Dan Brown involving “The Da Vinci Code,” embedded a coded message in his ruling: smithcodeJaeiextostpsacgreamqwfkadpmqz. This coded message has now been cracked. Judge Smith’s clerk confirmed that the judge is a “humorous type of person.”
Last Monday, I blogged about the new risk factor disclosure requirement to consider for the 10-Qs being filed over the next few days. A subsequent question was asked in our “Q&A Forum” about what to do if a company has no material changes to the risk factors described in its last Form 10-K (see #1712 in the Forum).
I like the approach that Coke took to this issue. As reflected in its Form 10-Q filed recently, Coke directs readers to its 10-K without expressly stating that there was “no material change.” This is the best approach I’ve seen so far. Here is what Coke disclosed:
“In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.”
More from the PCAOB on Inspections and Internal Controls
Possibly in response to the rising internal control audit costs, the PCAOB issued a statement yesterday on the approach it intends to take with regard to inspections of internal control audits during this year’s inspection cycle, which commences this month. The key emphasis will be on the efficiency of the auditors’ performance of internal control audits and the inspectors will be delving into whether the auditors have achieved the objectives of Standard No. 2 with the least expenditure of effort and resources. This will include an examination of how well auditors implemented the PCAOB’s guidance from last May (which was supplemented by the November 30, 2005 Report on the Initial Implementation of PCAOB Auditing Standard No. 2.)
This year’s inspection cycle will include the annual inspections of the nine firms – eight U.S. and one Canadian – that audit more than 100 public companies (as required per SOX Section 104). Additionally, the PCAOB will continue its three-year cycle of inspections of firms that audit 100 or less public companies.
Also yesterday, the SEC and PCAOB announced the panels for their May 10th joint roundtable on the second year of internal control reporting. A related briefing paper and agenda were also issued by the SEC.
Last Friday, the NYSE updated its Section 303A Annual and Interim Written Affirmations and Section 303A Annual CEO Certification for domestic companies. The changes appear to be minor, and include adding the company’s ticker symbol, eliminating references to the transition period for classified boards that expired last year and simplifying text.
Here is a full comparison of the 2006 forms to the 2005 forms. Note that if your company has already submitted its 2006 Section 303A Annual Written Affirmation, a new submission is not required.
According to ISS’ “Corporate Governance Blog,” the Executive Council of the Delaware State Bar Association’s Corporate Law Section has endorsed draft legislation to amend the Delaware General Corporation Law to enable shareholders to introduce an irrevocable change of bylaws on director elections, as well as provide for an irrevocable resignation of directors who fail to get a requisite number of votes. The proposal does not modify the default plurality standard.
The proposal would amend paragraph 216 of Section 5 of the DGCL to provide that a company bylaw adopted by a vote of stockholders that prescribes a required vote for director elections cannot be altered by the board without shareholder consent.
Another proposed revision seeks to get around the restrictions of Delaware’s “holdover” rule by adding a new provision that a director resignation may be made effective upon the occurrence of a future event or events, coupled with authority granted in the same section to make certain resignations irrevocable.
The proposed bill will be submitted to the Delaware legislature in the next week or two – and then it must be endorsed by the full Bar Association and then passed by the Delaware legislature before becoming law.
49% Support for Binding Majority Vote Proposal
Here is another item from ISS’ “Corporate Governance Blog“: This season’s first binding proposal seeking majority voting received more than 49% of votes cast at Honeywell this week, according to the proponent, AFSCME.
That showing was significantly higher than the 20% vote received by a binding AFSCME proposal at Paychex in October. The Honeywell vote is also noteworthy, because the company had adopted a director resignation policy. Before the April 24 vote, the best showing for a majority vote resolution at a company with a resignation policy was the 45% support at Hewlett-Packard in March for a non-binding proposal by the United Brotherhood of Carpenters and Joiners.
Majority Vote Standards in Articles of Incorporation?
And one last item from ISS’ “Corporate Governance Blog“: “Progress Energy filed in its proxy materials what is believed to be the first management proposal to change a company’s articles of incorporation to require a majority vote for the election of directors. Management is also proposing a resolution to hold annual board elections. The North Carolina utility’s annual meeting is May 10.
More than 20 companies have adopted a majority vote standard this year, primarily by revising their bylaws. Progress Energy appears to be the first to seek to make the change in its articles of incorporation. In North Carolina, as in most jurisdictions, articles of incorporation can only be amended if the change is proposed by the board and endorsed by shareholders, whereas bylaws can generally be revised by the board alone.
The Progress Energy proposal requires a majority of votes cast to pass, and abstentions and broker non-votes will not count as votes cast or against, the proxy statement notes. If approved, the new standard would apply for the company’s 2007 annual meeting. To overcome the North Carolina “holdover rule” which requires a director to serve until his or her successor is elected, the company adopted a director resignation policy in its corporate governance guidelines, which would become effective upon filing of the amended articles of incorporation.
Action on the resignation is left up to the governance committee, but if its members fail to gain majority support, the independent directors who did get elected can appoint a committee of independent directors to make a recommendation on the tendered resignation.”
May E-minders is Up
The May edition of our monthly newsletter is now available – sign up today to receive it on a complimentary basis.
Can anyone make heads or tails of this amended Form 8-K filed by National Presto Industries on April 25th (original filing date was April 13th). Appears that the company tried to set aside instructions from the SEC’s Division of Investment Management Staff, after which things got stranger and stranger…check out the 13 exhibits consisting of correspondence – including emails – between the SEC Staff, the company and the company’s independent auditor. This is not the company’s first scrape with the SEC; see this press release from 2002.
SEC Chairman Cox Testifies About Disclosure on the Hill
On Tuesday, Chairman Cox testified before the US Senate Banking Committee on the broad topic of improving financial disclosures. Here is a copy of his written testimony – and the FEI “Section 404 Blog” has notes about his oral comments, some of which address internal controls.
Last Thursday, the SEC finally approved the PCAOB’s auditor independence and ethics rules, which had been adopted by the PCAOB in final form last July (subject to the SEC’s blessing). In addition to addressing, pre-approval of tax services to audit clients, the new rules prohibit contingent fee arrangements for services provided to audit clients.
As noted in the Gibson Dunn memo posted in our “Auditor Independence ” Practice Area, the PCAOB’s new rules include several important matters for issuers to consider. As noted in this memo, “the PCAOB’s new rules include specific guidance regarding the manner in which audit committees are to pre-approve permissible tax services to be performed by the outside auditor. The rules also restrict an outside auditor from providing tax services to persons at an audit client who perform a “financial reporting oversight role” (other than directors). In addition, the PCAOB’s new rules provide that an auditor will not be deemed independent if the auditor (1) plans, markets or opines in favor of certain types of tax transactions for the audit client, or (2) provides tax services to an audit client for a contingent fee.”
According to this press release, Corp Fin’s long-standing practice of executing effectiveness orders in triplicate is going the way of the dodo bird. For those not doing deals, these orders are executed by Assistant Directors in Corp Fin, pursuant to delegated authority from the Commission, to officially declare a registration statement “effective.”
The orders are printed on old-fashioned triplicate paper, the kind you have to type up on a manual typewriter – and the typing permeates through the three layers, although the last layer is always a little hard to read. One copy is sent via regular mail to the issuer, one layer goes into some type of permanent record and one copy is probably sold on e-Bay (I am obviously in a joking mood today).
I have to be honest here, it saddens me to see this development as I view the time-honored ritual of typing up an effectiveness order and cornering an Assistant Director to sign it as one of the last remaining vestiges of the “old days.” Alas, no more microfiche, no more mimeograph. The SEC Historical Society should take a snapshot of a junior Staffer leaning over an Assistant Director’s desk with the multiple pages of an effectiveness order flapping in the wind.
As for the notion of a registration statement “going effective,” it has always struck me as odd that a deal could be held up on Wall Street because a junior Staffer was down at Starbucks throwing down a double latte rather than shepparding the proper papers through this process. In other words, unless the registration statement is on a form that allows for automatic effectiveness, a deal can’t go forward until the order is officially executed (even though all comments already are cleared by the Staff – or the registration statement was selected for a “no review” in the first place!). A very mechanical process – and one that will partially remain after this new development; now it will just be an electronic process rather than a paper one.
For you former (and current?) Staffers out there, remember shopping for an Assistant Director that might be amenable to signing your order if your own AD was out of the office? Some ADs had the reputuation of being difficult, such as quizzing you on the contents on the registration statement even though it was just a no-review! In hindsight, they probably were the smart ones – they just wanted the reputation of being unapproachable so that they weren’t hassled…
SEC Still Has Its Own Material Weaknesses
Last Friday, the GAO released this 29-page report covering the SEC’s financials for fiscal years ’05 and ’04 and noting that the SEC still has material weaknesses in its internal controls. The report concluded that many of the material weaknesses carried over from an earlier GAO report that I blogged about many moons ago. In the report, the GAO made 14 recommendations about how the SEC could improve its internal controls.
CalPERS Demands Meeting with UnitedHealth Group’s Compensation Committee
Wow! I was quite surprised to read – in this WSJ article and otherwise – that CalPERS had sent a letter to the head of UnitedHealth Group’s compensation committee to demand a telephonic meeting before the company’s annual meeting (which is next week – should be a humdinger) to learn more about the details of the company’s alleged options backdating practices. I know that activist funds have demanded meetings with directors before, but I can’t quite recall one soley over compensation pay practices nor one that was reported in the mainstream press.
Perhaps this is the start of a new practice by large shareholders? Of course, this is one of the more egregious examples of pay practices, as the lawsuits already have been filed – and UnitedHealth Group is making governance changes as fast as it can. [Speaking of UnitedHealth Group, read my reply contained in Saturday’s WSJ Online to last week’s Alan Murray column.]
