The SEC Staff has issued the long-awaited 8-K FAQs! There are 30 FAQs – plus an interesting introduction about the purpose of the 8-K rules and a warning to ensure that companies have implemented appropriate disclosure controls and procedures to handle the new rules.
PCAOB Issues More Internal Control FAQs
Yesterday, the PCAOB issued FAQs 30-36 to assist in the implementation of PCAOB Auditing Standard No. 2. Among the topics addressed in the new FAQs are audits of multi-national companies that involve the work of more than one auditor; audits of federally insured financial institutions; the timing of auditors’ communications to management and audit committees regarding material weaknesses or significant deficiencies in internal control; evaluations of deficiencies in information technology general controls; and the ability of outside auditors to use internal auditors to provide direct assistance in the audit of internal control over financial reporting.
Amendment of California’s Corporation Disclosure Act
The original California Corporate Disclosure Act was adopted in the aftermath of Sarbanes-Oxley and required public companies doing business in California to file various corporate data with the California Secretary of State’s office. The intent of the Act was to provide people with access to key public information without having to scour voluminous SEC filings. Unfortunately, the original Act’s disclosure requirements exceeded those required by the SEC and required the expenditure of additional resources by companies complying with the Act.
Governor Schwarzenegger recently approved a law amending California’s Corporation Disclosure Act. Regrettably, this Act continues to diverge from SEC disclosure requirements in some material respects and California remains the only state in the nation to impose such a duplicative and burdensome filing requirement upon its businesses – and the Act still applies both to public companies incorporated in California and to companies that are simply qualified to do business in California. Learn how the Act has changed in my interview with Jason Slater on Changes to California’s Corporate Disclosure Act.
And Even More Notes from the PLI Securities Law Institute
Here is our last batch of notes from PLI’s Securities Law Institute from the “SEC Review Developments” and “Follow-Up On Recent Disclosure Initiatives” panels.
On Saturday, at a panel from the ABA’s Committee of Federal Regulation of Securities’ Fall Meeting, Corp Fin Director Alan Beller stated that the SEC Staff is considering taking action regarding the ability of accelerated filers to comply with the internal controls deadline – and is thinking of whether a category of smaller accelerated filers should be given more time.
Alan expressed the view that to the extent that a company has financials that the company stands behind – but the company cannot complete its 404 report timely to include in the 10-K – he would prefer that the company file the 10-K without the 404 report and auditor’s attestation, so at least there is the 10-K information available to investors (but the 10-K would nonetheless be considered deficient). Alan stated that SEC Staff is considering whether such a company would be deemed deficient in its filing obligations for purposes of Form S-3 eligibility. We should hear relatively shortly from the SEC Staff whether they will take such action.
More PLI Notes
Speaking of internal controls, we have posted notes from PLI’s Securities Law Institute from the internal controls panel as well as the popular Q&A Picnic with Alan Beller.
Reporting Up and Shopping Around for Legal Advice
Our February e-minders described an example of reporting up at TV Azteca (because the company’s Chair didn’t want to disclose one of his related party transactions) – yesterday, Pat McGheehan wrote a column in the NY Times with many more details, illustrating how TV Azteca continued to shop around for the specific legal advice that they desired.
[Personal note– took the kids to SpongeBob Squarepants this weekend; took a pass on “Seed of Chucky.” On the NBA brawl, I agree completely with Michael Wilbon’s column.]
Yesterday, the SEC adopted its proposed release to postpone the final phase-in period for acceleration of periodic report deadlines that apply to “accelerated filers.” Under the amended rules, the deadline for accelerated filers will remain at 75 days after year end for annual reports and at 40 days after quarter end for quarterly reports. The accelerated filing phase-in will resume for reports filed for fiscal years ending on or after Dec. 15, 2005, when an accelerated filer will have to file its annual report within 60 days after year end and file its quarterly reports within 35 days after quarter end.
The SEC said that the primary purpose of the postponement is to allow additional time and opportunity for accelerated filers and their auditors to focus their efforts on complying with new requirements regarding internal control over financial reporting that were mandated by Section 404 of SOX.
The PCAOB is Making Its List
At its meeting with its Standing Advisory Group yesterday, the PCAOB revealed an ambitious agenda for developing auditing standards in 2005.
The topics include:
• Auditor independence and tax services.
• Detection of and reporting on financial fraud.
• The relative authority of auditing guidance in the Board’s interim auditing standards.
• Communications with audit committees.
• Engagement quality review, also known as concurring or second partner review.
• Auditing related-party transactions.
• Consistency of application of generally accepted accounting principles.
• Use of confirmations in an audit.
• Auditing fair value measurements and disclosures.
• Elements of quality control for registered firms.
• Assessing audit risk.
The Staff of the PCAOB acknowledged that it may not be possible to address all of the above issues in 2005, so it may need to focus on the topics with the highest priority.
To get a better understanding for how The Corporate Library administers its governance ratings, here is an interview with Paul Hodgson on Role of Compensation on Governance Ratings.
I have posted 12 questions that audit committees should consider asking themselves when they negotiate this year’s engagement letter with their independent auditor – as well as analysis of some of the new provisions that auditors are sticking in their letters (all of this resides in our “Audit Committees” Practice Area).
More important now than in the past, audit committees should attempt to negotiate these letters as auditors are attempting to pass off as much potential liability as possible. As indicated in the analysis, some audit committees are finding success in pushing back in certain areas. If you have had a different experience with your auditor than what is described in this analysis, please let me know.
Why Would the SEC Deny the Withdrawal of a Registration Statement?
Proving that you learn something new each day, I couldn’t figure out why the SEC would bring this enforcement action to deny withdrawal of a registration statement. I presumed that even if a company withdrew and there had been fraud, the SEC could still act because they have jurisdiction if the fraud has occurred – or is likely – to reoccur.
But I learned that the SEC takes action to deny withdrawal once in a blue moon – because if the company withdraws before they sell anything, the SEC apparently loses jurisdiction (although don’t ask me how – got this answer from an old timer and I would think 10b-5 and Section 5 could help against a fraudulent offer). Gotta get those fraudulent red herrings!
During last week’s PLI Securities Institute, members of the SEC Staff gave an update on the status of some pressing matters, including:
– Corp Fin Associate Director Paula Dubberly indicated that written guidance on the new 8-K rules would be forthcoming shortly, possibly this week
– Corp Fin Director Alan Beller said that the SEC would act on its outstanding proposal to delay the accelerated filer deadline for periodic reports “sooner rather than later”
– Alan closed his Picnic Q&A by strongly urging the audience to read his speech about compensation disclosures that he delivered at our 10/20 conference (in fact, Eliot Spitzer wrapped up his keynote speech by admonishing investors for not taking a stronger stance in the comp area)
– Chief Accountant Donald Nicolaisen vaguely addressed the potential to delay the 404 deadline further by noting the SEC might consider something in a few weeks (but wasn’t clear what was being considered and definitely didn’t promise anything)
During the course of this week, we will be posting more detailed notes from this conference on TheCorporateCounsel.net.
Deferred Compensation: Ten Things You Need to Do By Year-End!
I recently spoke at the ASCS Chicago Annual Chapter meeting and heard a great panel of in-house lawyers providing 8-K tips – and they have reprised their tips in this interview!
Julie Hoffman and I will be manning our booth in NYC over the rest of the week at PLI’s annual securities law institute. Come on by and say hello!
By the way, here are some quotes from me in the context of the SEC’s proposal to have the SROs improve their own governance.
Survey on Code of Ethics for Directors
We have posted a Quick Survey on codes of ethics for directors, regarding whether companies have a separate code for directors – and why – and more.
Here are the final results from our past survey on earnings releases and 10-Qs.
The Launch of DealLawyers.com
We have launched a new site for M&A practitioners – DealLawyers.com. The key resources on this new site will be a series of regular webcasts – as well as practical contributions from a highly regarded advisory board.
The first webcast deals with the “Impact of Internal Controls on M&A” – featuring the SEC’s Deputy Chief Accountant Andy Bailey, John Huber of Latham & Watkins, Teri Iannaconi of KPMG, and Mary Korby and Gil Friedlander of Weil Gotshal. We also have a “30 Nuggets” webcast scheduled with some of the sharpest and wittest M&A legal minds in the biz.
We have posted the transcript from last week’s webcast, “Another Wild Proxy Season? Forecast for 2005.”
Shareholder Proposals for Shareholder Access
With the SEC’s shareholder access proposal stalled, a coalition of CalPERS, NY State Common Retirement Fund, AFSCME and Illinois State Board of Investment have submitted shareholder proposals to Walt Disney and Halliburton to give shareholders the right to nominate up to two directors. Last year, AFSCME submitted a similar proposal to Marsh & McLennan, but the proposal was withdrawn after the company appointed a former federal prosecutor to its board.
The Disney shareholder proposal asks if the company would become subject to the shareholder right of access included in the SEC’s proposed proxy access Rule 14a-11, which would allow shareholder groups that have held more than 5% of Disney’s outstanding common shares for more than two years to nominate up to a specified number of candidates who are independent from both the nominating shareholder and from Disney for election to the board. In the case of Disney, the rule would allow a shareholder to nominate up to 2 directors because Disney’s board currently has 11 members.
It should be noted that the shareholder proposal at Disney could be withdrawn as the company asked for names of potential independent directors to be added to the board – and is now considering the candidates submitted by the coalition.
Free Email Alerts for New Cases
There is a new free weekly service – Federal Filings Alert – that reports on new cases filed in U.S. district courts in selected areas of the law including antitrust, copyright, equal employment, products liability – but unfortunately not in corporate & securities.
In our “Qualified Legal Compliance Committees” Practice Area, we have posted a survey from Skadden Arps regarding QLCCs. The survey canvassed the disclosure of nearly 7,000 companies and found that 2% have established a QLCC (plus other factoids listed in the survey).
Pay Madness Even in Montana
This article from the Billings Gazette describes how employees at Blue Cross Blue Shield in Montana are ashamed to work there because the CEO gets paid so much.
This illustrates what is at the heart of executive compensation – it sets the tone for a company’s culture. If a CEO is receiving all types of lavish perks, how can anyone be surprised when rank and file employees make inappropriate decisions when a gray issue arises? For most of us, our behavior is principally driven by our environment – and in today’s society, the bling is king.
Six Degrees of Jack Nicholson
Don’t ask, but in a prior life I liked to tell people that Jack Nicholson was my uncle. Uncle Jack stories were a big hit. Here is one from the family album.
Yesterday, the SEC posted Alan Beller’s outstanding speech from our October 20th conference – and if you are involved with proxy disclosures, it is must reading. On CompensationStandards.com, the video archive of Alan delivering the speech is still available, as well as the Q&A afterwards that flushes out some of Alan’s comments.
Right now, we are offering a special catch-up offer to those that missed the conference – this offer includes access to CompensationStandards.com for 2005 at a special reduced rate. This offer expires on December 15th.
SEC Slams Wachovia for Merger Proxy Disclosure Violations
Yesterday, the SEC’s Enforcement Division settled an action with Wachovia in connection with its 2001 merger with First Union. The SEC alleged that Wachovia failed to disclose – in quarterly reports and a joint proxy statement-prospectus – that it had purchased $500 million of First Union stock during the period when there were competing bids for the target.
In levying a $37 million penalty – which is pretty hefty for a disclosure violation – the SEC singled out Wachovia’s lack of cooperation during the SEC’s investigation.
SEC Approves NYSE’s Revised Governance Standards
Yesterday, the SEC approved the NYSE’s revised proposed changes to its governance listing standards. Among other modifications, the amended standards change the independence ‘bright-line’ standard that addresses a director’s relationship with the listed company’s auditor. The look-back provision was modified to impact only individuals who actually worked on the company’s audit while employed by the audit firm – but the standard will now disqualify any director who has an immediate family member who is a current partner at the audit firm. Previously, a director was disqualified only if the immediate family member was with the audit firm in a “professional capacity.”
Since there may be directors who were independent under the previous
standard – but will not be independent under the revised standard – the
rule provides a transition period: companies will have until their first annual meeting after June 30, 2005 to remedy any independence issue resulting from this change. If a director’s independence status changes, the company must file an Interim Written Affirmation promptly – utilizing the transition period will not mean that a company is out of compliance, but the company must indicate reliance on the transition period on Exhibit A or E, as appropriate.
We have begun posting law firm memos related to these changes in Section D.13 of our Sarbanes-Oxley Law Firm Memos.
