Join us for tomorrow’s webcast – “Drilling Down: Doing an IPO After the ’33 Act Reform” – featuring Justin Bastian of Morrison & Foerster; Steve Bochner of Wilson Sonsini, Goodrich & Rosati; and Michael Wishart of Goldman Sachs. With the help of a banker on this panel, there will be a discussion on recent developments in the IPO market beyond just the impact of the ’33 Act Reform.
As an indication that executive pay will play a prominent role in the majority vote movement, Fidelity Investments opposed the reelection of the board at Clear Channel Communications after the company renewed about $90 million in severance arrangements for the Chair, CEO and CFO.
This action came to light when Fidelity recently disclosed in one of its many Form N-PXs that its mutual funds withheld their votes for all 10 directors at the company’s annual meeting in April (starting last year, mutual funds are required to annually disclose their voting records). Fidelity ranked as the largest shareholder at the time with a 15.5% stake. This resulted in at least 18% of the total votes being withheld for each director.
Many of you will recall that it was not too long ago that Fidelity traditionally sided with management when casting ballots – here they opposed management even though ISS had recommended votes in favor of 9 of the 10 Clear Channel directors!
Fidelity withheld its support for the Clear Channel board after the company renewed employment agreements in March with the founder (who is the board chair) and his sons (who serve as the CEO and CFO). The new agreements retained provisions from their former contracts that provide each officer with a cash severance payment of 7 times their base salary and highest annual bonus during the prior three years, as well as 1 million options. Under its voting policy, Fidelity casts its ballots against directors who permit severance payments exceeding three times annual salary and bonus without obtaining a shareholder vote.
Fidelity also administers Clear Channel’s 401(k) retirement plan – at least three of the funds offered in the Clear Channel 401(k) plan withheld votes for the company’s board. In other words, Clear Channel employees who invested in these funds ended up siding against their own company’s board. The company was not aware of Fidelity’s vote until published reports came out last week.
Besides this obvious lack of communcation between the company and its largest shareholder, there are enough lessons learned in this story to fill up my blog for a week. I will save it for the many experts, who are better qualified than me, who will speak at the “2nd Annual Executive Compensation Conference.” For those of you planning to attend live in Chicago – rather than by video webcast – I understand that the hotel is nearly sold out, so you might want to reserve rooms now.
On Friday, the SEC issued a press release with a statement by Chairman Cox regarding the use of market instruments to value employee stock options, along with a Statement from the SEC’s Chief Accountant and an Office of Economic Analysis Memo.
According to this NY Times article on Saturday, the SEC rejected Cisco’s proposal to issue exchange-traded employee options – but stated that it was open to other ideas about how market instruments could be used to value employee options (and the SEC’s OEA even suggested two alternatives, albeit the SEC’s Chief Accountant expressed skepticism about whether companies would quickly embrace them).
In the article, the Cisco CFO is quoted as saying that the company would continue to explore ways of using market instruments to value its options. Cisco’s dead proposal received investor backlash because it was seen as an attempt to avoid disclosing the true value of options in its financials.
At the NASPP’s “13th Annual Conference,” there will be eight panels – plus an address by the FASB Chair Bob Herz – that will deal with option expensing. Plus the NASPP just announced that it has enhanced its “Option Expensing Portal” to include a FAS 123(R) Q&A Forum that is manned by a special 123(R) Task Force.
Disney Case Appealed
Last week, Milberg Weiss Bershad & Schulman filed a notice of appeal with the Delaware Supreme Court over the August 9th opinion by Delaware Chancery Chancellor William Chandler that the Disney board did not breach its fiduciary duties over the firing of Ovitz and paying a severance package of $130 for the “non-cause” termination.
More on the Meaning of the Federal Court Dismissing the SEC’s Reg FD Lawsuit Against Siebel
In this podcast, Stan Keller, Partner of Palmer & Dodge, explains the implications of the federal court dismissing the SEC’s Regulation FD lawsuit against Siebel Systems and two of its officers, including:
– What is the background of the Siebel case?
– What did Judge Daniels decide in dismissing the SEC’s lawsuit?
– What is the meaning of this case for company spokespersons?
– Do you think the SEC will appeal the case?
Many thanks to Robyn Manos and Heather Maples – the dynamic duo in Corp Fin’s Office of Chief Counsel that will be handling interpretive questions on the ’33 Act reform – for joining yesterday’s webcast: “Drilling Down: Doing a WKSI Offering After the ’33 Act Reform.” Of course, Jack Bostleman, John Huber and David Martin did a great job of trying to predict and analyze what WKSI deals will look like after the December 1st effective date. The audio archive of the webcast is available now – a transcript won’t be ready until late next week at the earliest.
You can direct any interpretive questions to Robyn and Heather via the special ’33 Act reform hotline that Corp Fin has established at 202.551.3200.
More on SEC v. Smyth
Following up on Jay Dubow’s “Future of the SEC’s Civil Injunction Authority” podcast, a member had this question: Are “obey the laws” injunctions issued by the SEC for companies residing in the 11th circuit still enforceable?
Jay responds: “Yes, injunctions within the 11th Circuit are enforceable until a court orders them otherwise. Even if the court in Georgia, on remand, issues an order that the specific injunction is not enforceable – until the 11th Circuit issues an order that is not dicta to the contrary – one should assume that other such injunctions are still enforceable.”
Changes to ISS’ CGQ Rating Criteria
Effective Monday, the most recent changes to ISS’s CGQ rating criteria will be used to calculate a company’s CGQ governance rating. These changes were announced in July.
I have endlessly debated in my head whether it was appropriate for me to blog about this terrible tragedy that has impacted all of us; some more than most of course. Even though I will continue to focus on our professional life, I just wanted you to know that I have been affected too and thanks to those members who have shared personal stories and urged me to help (here is a basic list of links). We have donated to the Red Cross as well as more directly to others in need that we know personally or through friends.
I do hope the Administration and the applicable governments now get their act together and spend time helping those that need it rather than wasting resources avoiding blame. The recent stories about how the media is being kept at arms’ length from reporting on what is happening in New Orleans is disturbing to me. The First Amendment is the bedrock of our society.
There are many blogs and other resources to help us understand what has happened and what is happening. I enjoy NBC anchor Brian William’s blog for unbiased coverage and the Technorati blog search tool is useful to find other voices.
– Are there “best practices” for standing delegations of authority? If not, what factors impact the type of delegations a company should adopt?
– How does Section 404 of Sarbanes-Oxley regarding internal controls impact delegation practices?
– How do the standing delegations look like at your company?
– What issues should companies consider as they develop their own standing delegations?
SEC Chief Accountant to Leave
Yesterday, SEC Chief Accountant Don Nicolaisen announced he will leave the Commission in October to return to the private sector after two years in the job. Here is the press release. Not surprising given that Don has a new boss; more of these senior staff positions likely to become open soon.
Closure for the Disclosure Document Folding Controversy
Following up on my blog from July, as noted in this press release, it appears that the National Credit Union Administration has settled its dispute over the folding of disclosure documents. From what I hear, this settlement came after a magistrate determined that the NCUA had acted arbitrarily and capriciously in refusing to certify a vote of the credit union members regarding a mutual-to-stock conversion.
Prepare by reviewing the vast amount of materials available in “Securities Act Reform Memos” – in particular, look at the memos provided by the panelists’ firms:
The Future of the SEC’s Civil Injunction Authority
Lots of talk still about the recent SEC v. Smyth case I blogged about last week. In this podcast, Jay Dubow, a Partner with Wolf, Block, Schorr and Solis-Cohen and former SEC Enforcement Staffer, analyzes the importance and ramifications of this 11th circuit decision, including:
– What happened in the recent 11th Circuit decision in SEC v. Smyth?
– How does the decision question the enforceability of the SEC’s civil injunctions?
– How is this decision different from decisions in other courts?
– What do you think the SEC will do in response to SEC v. Smyth?
September E-Minders is Up!
We have posted the September E-Minders for your reading pleasure. It’s amazing how much change still occurs on a monthly basis. That’s gotta end at some point, right?
Comment Letters on Option Expensing
The NASPP has submitted a comment letter to the FASB regarding grant dates (see this blog regarding why). I understand that the Society of Corporate Secretaries & Governance Professionals and other organizations will also be submitting letters on this topic soon.
On an unrelated note, the Council of Institutional Investors has submitted a letter to Thomson Financial regarding the use of option expenses in consensus estimates. Apparently, Thomson Financial is considering providing two consensus estimates, one including and one excluding option expense – and the CII wishes that Thomson Financial only provide consensus estimates including option expense (after an initial transition period) as part of Thomson’s widely-followed First Call estimates.
Last Thursday, on a summary judgment motion, Judge Daniels of the United States District Court for the Southern District of New York dismissed the SEC’s Regulation FD lawsuit against Siebel Systems and two of its officers. This is the first federal court to interpret Regulation FD. Here is a copy of the court opinion.
Back in July 2004, the SEC filed charged Siebel Systems with its second violation of Regulation FD. The SEC also charged Siebel Systems’ CFO and IR Director with criminally aiding and abetting the company’s violation due to their role in disclosing “material, nonpublic information” about the sales pipeline during two separate private meetings with members of the investment community.
The disclosures were alleged to be materially different from prior public statements made by the company in analyst conference calls and at a conference. In his opinion, Judge Daniels disagreed with the SEC’s conclusion that the CFO’s private statements were either material or non-public, a narrow conclusion that is limited to the facts alleged in this case – and the Judge was not happy with the way that the SEC parsed “every particular word used in the statement, including the tense of verbs and the general syntax of each sentence. No support for such an approach can be found in Regulation FD itself, or in the Proposing and Adopting Releases. Such an approach places an unreasonable burden on a company’s management and spokespersons to become linguistic experts, or otherwise live in fear of violating Regulation FD should the words they use later be interpreted by the SEC as connoting even the slightest variance from the company’s public statements.”
The Judge refused to address some broader challenges to Regulation FD, such as whether it violated the First Amendment – and he dismissed the SEC’s allegation regarding inadequate disclosure controls and procedures saying that the complaint had not cited sufficient facts to support this cause of action (other than the claimed violation of Regulation FD). It is not yet known whether the SEC will appeal the case.
What Does the Siebel Case Mean?
First of all, it’s important to remember that Regulation FD remains a valid rule – and the SEC likely will continue to look for instances of selective disclosure. The best way to avoid a Regulation FD problem is to limit private discussions of material information and to keep any such discussions entirely consistent with what was already said publicly. Judge Daniels even acknowledged that Regulation FD could be violated by non-verbal communications. For example, tacit communications such as a wink, nod, or a thumbs-up or -down gesture can trigger a violation.
On the other hand, Judge Daniels strongly suggests that courts are not going to use Regulation FD as a trap for the unwary. In particular, it is unlikely that the courts are not going to second-guess close calls about the materiality of oral disclosure. The Judge noted that the SEC itself has publicly commented that in order for an incorrect assessment of materiality to violate Regulation FD, the conclusion must represent an extreme departure from standards of reasonable care – note that the standard of care may be higher for written disclosure or for prepared remarks compared to spontaneous speech, such as in a Q&A session.
Stan Keller notes that this is an important decision that brings Regulation FD back to where it was supposed to be – and holds the SEC to the promises that were made as to its application. In his opinion, Judge Daniels sends a clear message that enforcement of Regulation FD should occur only in clear cases, as the SEC signaled when the rule was adopted. We will hear more from Stan on this topic soon – and we have posted some law firm memos analyzing the case in our “Regulation FD” Practice Area.
SEC Provides Hurricane Katrina Relief
To help those in need, the SEC has established both telephone and e-mail hotlines to provide immediate responses to questions or to hear from those that want to advise the SEC of their needs, such as relief from the SEC’s reporting and delivery mandates. In fact, the SEC plans to consult with public companies based in the disaster area, to ensure that its mandates do not interfere with any response and recovery.
If you have such a need, telephone calls should be directed to (202) 551-3300 – and e-mail should be directed to cfhotline@sec.gov
Regarding my apology yesterday for a perceived gaffe, my alter ego here – Keith Bishop – thinks that I have been too hard on myself. Keith says, “I had understood that the issue was screenings to analysts and that is what you wrote in your blog. If the pre-screening was available exclusively to analysts, then that element of Regulation FD would seem to have been met. (In fact, I was inferring, perhaps incorrectly, that the investigation involved pre-screenings given to analysts exclusively.) If others were invited to pre-screen the movie with the analysts, then wouldn’t the issue be whether the presence of the non-FD people resulted in simultaneous public disclosure?”
Keith goes on to note that “even if one gets past the issues of whether there has been (1) disclosure of information to Ref FD listed people; and (2) no simultaneous public disclosure, then one still must deal with the question of whether the pre-screening resulted in disclosure of material, non-public information about the issuer or its securities. I doubt that the SEC could reasonably take the position that it is the movie concept, my guess is that this has been broadly disseminated in trailers and other promotions. Thus, it would hardly fit within the meaning of nonpublic. If it is the actual quality of the movie as revealed by the screening – isn’t this a judgment formed by the analyst and not the disclosure of non-public information? How can the issuer disclose to the analyst what the analyst thinks about how a movie will do?”
The NYSE CEO “Agenda”
Recently, the NYSE released its first annual NYSE CEO Agenda. This “agenda” is based on a survey of the CEOs serving at 100 large companies – and states that 42% of the respondent CEOs said overregulation tops the list of challenges over the next five years.
Liability Issues for Directors of Insurance/Financial Companies Today
In this podcast, Jim Brown, President of Risk Consultants, LLC and former Louisiana Insurance Commissioner, explains how directors of insurance and financial-oriented companies face increasing liability exposure today, including:
– Explain your controversial career in Louisiana as Insurance Commissioner, including the problems you faced and the number of companies you had to shut down.
– What kind of responsibility and exposure do directors of financial institutions, insurance, banking and the like, have under new state and federal laws?
– How do you find the insurance business climate in the U. S. today? Are there numerous foreign investors? How does this climate affect the cost of insurance to business in the US?
I taped this podcast with Jim late last week before the hurricane hit and we all hope he is alright.
The deferred prosecution of KPMG by the U.S. Department of Justice regarding KPMG’s sale of abusive tax shelters to individuals continues to receive quite a bit of press. A “deferred prosecution” agreement is an agreement under which the government can still seek an indictment of the firm until if it violates the settlement during a certain period of time (in KPMG’s case, until the end of 2006). The government is increasingly turning to deferred prosecutions as a means of protecting jobs and businesses.
Interestingly, the PCAOB put out this statement about how it remains confident in KPMG’s ability to perform high quality audits of public companies. In comparison, the SEC Chief Accountant’s statement on KPMG is much more “regulator-like” in tone – notably, it states that KPMG’s prior conduct “does not require or call for Commission action.”
Sorry About that Reg FD Gaffe
As I wrote this Reg FD blog yesterday, I heard this voice call out, “dude, you need a Reg FD refresher.” Sure enough, I received a few emails from astute members providing that refresher. Here is one of them: “You may have slipped down a slope. FD does not prevent all privileged access: only those to the enumerated financial audience. No problem showing a sneak preview to a bunch of movie reviewers, or telling a reviewer that you’ve signed Brad (aren’t the reviewers like any news reporters – ok under FD) or even to showing it to a bunch of randomly selected college students, but if you are showing the movie to analysts, there is only one reason. Yes, they may be taking all of the fun out of the analysts’ jobs, but it doesn’t seem like a stretch.”
FASB Reexamines GAAP Hierarchy
One of the first things I did when I got this job was post an explanation of the GAAP hierarchy, because that was always a confusing concept to me when I began my career as a corporate & securities lawyer – that explanation is posted in our “Accounting Overview” Practice Area.
Now, the FASB is considering changing the GAAP hierarchy, as noted by CFO.com in this article – which I repeat: “These days, it’s rare to find an accounting standard that’s not awash in some type of controversy. But with its latest initiative, the Financial Accounting Standards Board has finally given Corporate America nothing to gripe about.
FASB insists that its proposed standard, The Hierarchy of Generally Accepted Accounting Principles, should have little or no impact on the practice of preparing financial statements, in part because it has been effective for decades under the American Society of Certified Public Accountants. The AICPA established the five levels of hierarchy in 1975 in Statement on Auditing Standard No. 69, which defines GAAP and provides accountants with guidance on where to turn for answers to certain questions: FASB standards, the Emerging Issues Task Force, and so on.
FASB and many other practitioners, however, have maintained that the board should issue its own standard, directed at companies and other reporting entities — which, after all, are responsible for selecting the accounting principles used in their financial statements — in place of the current standard, which is directed at auditors. In FASB parlance, its proposal “moves the GAAP hierarchy for nongovernmental entities from the auditing literature to the accounting literature.”
Former FASB chairman Dennis Beresford observes that after all the “earth-shattering changes” introduced over the past couple of years, the business community will likely welcome the board’s latest statement with a sigh of relief. Beresford, now an accounting professor at the University of Georgia, recalls that during his tenure at FASB, accountants would often joke with him that every once in a while, the board should “do something that isn’t controversial.” The hierarchy project comes pretty close, he says.
Last Wednesday the board reexamined certain areas of its exposure draft; for the most part, the board members stood by their conclusions and the staff recommendations. The one big issue that arose, as it did last November, concerned the elimination of an exception to Rule 203 of the AICPA Code of Professional Conduct. That exception allows auditors to deviate from the GAAP hierarchy in unusual circumstances — essentially, only when adhering to the GAAP pronouncements would render a company’s financial statements misleading.
Beresford, for one, cannot remember a case where the exception has been invoked. The issue has disappeared over the years, he says, “in part because accounting firms didn’t want to stick their neck out” and risk legal backlash.
Although 8 of the 32 respondents to FASB’s exposure draft on the GAAP hierarchy argued that the Rule 203 exception should be retained, FASB board member G. Michael Crooch says that, in the end, “we determined that we would stick to our guns” and eliminate the exception. It “was almost never used,” maintains Crooch, adding that it’s very hard to come up with those “unusual circumstances” that would make financial statements misleading and the GAAP literature inappropriate.
Under the proposed rule, FASB’s statement on the GAAP hierarchy will be effective for periods beginning after September 15. The date was chosen to coordinate with the effective date of literature from the AICPA and from Public Company Accounting Oversight Board that will be amended as a result of FASB’s statement.”
A number of members have sent me emails over the past few months about how Hollywood is being investigated by the SEC. After Friday’s WSJ article about how the SEC has allegedly launched an informal inquiry into Pixar’s recent DVD sales troubles of the “The Incredibles,” I thought it was time to weigh in.
This latest development follows disclosure by DreamWorks a few months back that the SEC is looking into whether that company should have informed investors earlier of the problems it was facing regarding sales of “Shrek 2” DVDs. From the article, you get a sense that both companies are having trouble adapting to being publicly held and staying consistent on “message.” In other words, the company’s PR machines are saying optimistic things about DVD sales – but SEC filings are saying something else (and more realistic).
This important change in communication practices is always hard for newly public companies, but I gotta believe it’s even harder for companies in the Hollywood spotlight.
When Do You Disclose That You Are Being Investigated?
The WSJ article highlights the fact that DreamWorks has disclosed the fact it is being informally investigated by the SEC, while Pixar has not. The end of article notes: “The question of whether companies are under obligation to inform the market if they are under investigation is a gray area: companies are under obligation to report matters they believe to be material events. After the wave of recent corporate scandals, some companies have been more conservative in assessing what constitutes a material event, however.”
– Is there a duty to disclose the commencement of an SEC investigation?
– Will the SEC make public the existence of the investigation on its own?
– When do companies typically disclose the existence of an SEC investigation?
– What should the company do once it decides to disclose the existence of an SEC investigation?
By the way, DreamWorks’ disclosure is simple (first disclosed in this 8-K and repeated in this recent 10-Q): “In July 2005, we announced that we had received a request from the staff of the SEC and are voluntarily complying with an informal inquiry concerning trading in our securities and the disclosure of our financial results on May 10, 2005. The SEC has informed us that the informal investigation should not be construed as an indication that any violations of law have occurred. We are cooperating fully with the inquiry.”
Regulation FD at the Movies
One curious item in the WSJ article is a mention that the SEC reportedly is exploring “industrywide topics such as whether showing a gathering of analysts a prescreening of a movie constitutes disclosure of material information to a group of select people.” I guess the concern is that analysts attending sneak previews would have a leg up on whether a movie might be a blockbuster.
In my mind, this is a bit of a stretch – and if it came full circle, I guess all sneak previews would be shut down going forward. But if you followed the logic of that slippery slope, I would imagine a lot of Hollywood gossip could be actionable if attributable to the company – isn’t the leak that Brad Pitt has signed on for a movie more material than seeing a sneak preview? Wrong – as I explain in tomorrow’s blog.
Last Thursday, the WSJ ran this article regarding the recent 11th Circuit decision in SEC v. Smyth. Russ Ryan, a former Assistant Director of the SEC’s Enforcement Division, who is now at King & Spalding LLP explains further:
“In a startling footnote 14 at the very end of the opinion, the court dropped a bombshell that questions the enforceability of just about every injunction the SEC has obtained in recent memory. The court essentially said an injunction can’t be just a broad prohibition against future violations of a statute or rule, because all that does is tell the defendant to “obey the law” without specifying what particular acts are prohibited.
Although the footnote is dictum in a technical sense, the case could have far-reaching consequences for the SEC’s enforcement program. The injunctions in Smyth were no different than any other SEC injunction, at least as far as settled cases go. That is, they simply tracked the language of the relevant statutes and rules, and told the defendants and their cohorts not to violate them again.
At a minimum, district courts within the 11th Circuit presumably won’t be signing off on future settlements with similarly worded injunctions. So unless the 11th Circuit somehow retracts it criticism of such language, the SEC is going to have to get more specific in any injunctions it seeks within that circuit, or it will have to file its cases elsewhere. And, of course, if other federal courts are persuaded to follow Smyth’s logic, they won’t sign off on the usual form of SEC injunctive language either, and will probably dismiss any SEC contempt proceedings that are based on injunctions already out there.
But beyond forcing the Commission to reassess the breadth of its typical injunctions, I hope Smyth will get people thinking about whether the SEC should even be seeking injunctions in a lot of its cases. When many enforcement cases are filed, there is no ongoing misconduct or realistic threat of repetition, and the SEC can achieve adequate punishment and deterrence through monetary penalties, yet the Commission invariably insists on an injunction anyway, often tanking potential settlements. Smyth presents a good opportunity to consider whether that approach still makes sense in every case.”
Believe It or Not: Sarbanes-Oxley for Dummies
A small blurb in Friday’s WSJ alerted me to the upcoming publishing of a “Sarbanes-Oxley for Dummies” book, due sometime in February. A few immediate thoughts: Is there really a market for this stuff outside our small niche of compliance practitioners – and ain’t it a little late?
By the way, if you are new to SOX and want to “one-stop” it (rather than drill down through the 200+ Practice Areas on our site) – we have highlighted some comprehensive memos about SOX in our “Sarbanes-Oxley” Practice Area. Surely, the Latham Watkins and Fried Frank memos posted there – both over 200 pages – will serve you better than a “Dummies” book…
KPMG Avoids Death Penalty
It is reported that KPMG has finalized an agreement that will not include an indictment for the firm itself – although indictments against some former KPMG partners, as well as members of investment banks and law firms who helped structure the deals, which is rumored to be announced separately today.
Apparently, there is a detailed and lengthy statement of facts in the agreement, in which KPMG admits to developing and selling questionable tax deals to hundreds of wealthy clients – and KPMG agrees to pay $456 million and submit its tax unit and compliance efforts to a stringent 16-month review by former SEC Chair Richard Breeden.
