Without much fanfare, the SEC Enforcement Division recently brought what could be considered the first “up-the-ladder” case, a settlement with John Isselmann.
As proof that Enforcement Director Steve Cutler was serious in his recent gatekeeper speech that the SEC is setting a high bar for attorneys that represent public companies – and expects to be bringing more actions against lawyers – this case was brought against a general counsel, even though he was the one that blew the whistle against wrongdoing within the company! However, the Staff believed he didn’t blow it soon enough.
Also notable is that the conduct in question occurred in December 2002 – before Part 205 was adopted – so it is a more traditional “causing” violation and not really a true “reporting up” case. This is important because it shows that – with respect in-house counsel who have a direct role in preparing and approving public statements and filings – that the SEC believes that the pre-SOX securities laws have the practical effect of requiring “reporting up.” (I imagine that when – and if – the SEC sues an associate at a company’s outside law firm under Part 205, there’ll be some commotion!)
The bottom line is that this case indicates that the SEC is prepared to seek additional penalties against counsel who do not promptly notify the audit committee upon learning that their client is about to violate the federal securities laws. Thanks to Ken Winer and Tom Kuczajda for the heads-up!
Dilbert Enters Into Excessive Compensation Fray!
During the past few days, Scott Adams has challenged excessive compensation practices through his famous Dilbert comic strips. Here are two from the weekend:
A few weeks back, I blogged about several states that had amended their laws to allow for electronic-only shareholder meetings. Now, California has changed its laws to be more e-communications friendly. Join Keith Bishop, a former California Commissioner of Corporations, who dissects this development in this interview on Taking Care of Business Using Electronic Communications in California.
Filing Fees – It’s That Time of Year Again…
Yesterday, the SEC released Fee Advisory #3 stating that the SEC will operate under a continuing resolution that will extend through November 20th – meaning filing fees remain at their current rates until that time (and at that time, there likely will be another extension). Today is the first day of the SEC’s fiscal year – and it has become an annual tradition for Congress to drag their feet passing the federal budget, which forces the SEC to issue multiple fee advisories to reflect its “continuing resolution” status.
Five days from whenever Congress passes the budget, the SEC will lower registration fees from the current rate of $126.70 per million to $117.70 per million, a 7% decrease. We have experienced lower rates each year for quite a while now.
Yesterday, we posted a practice pointer on CompensationStandards.com from Paul Hodgson of The Corporate Library about a company which has paid a total of $500 million to three separate CEOs over the past decade. Yes, this is an extreme (and our October 20th conference is not about extremes – it is about practical guidance for all the situations that are not extreme) – but it is quite a shocker and makes for interesting reading.
Most importantly – particularly considering the SEC’s interest in this area recently (ie. likely to be more GE-like SEC Enforcement disclosure actions) – Paul notes this amount includes a $21 payment related to the huge $111 million “golden hello” that he previously had not been aware of – the $21 million was paid to a GE subsidiary to buy Wendt out of his confidentiality agreement and it had not been disclosed in the company’s proxy statement or in the filed employment contract. But Paul did manage to dig out a tiny paragraph disclosing the amount in a massive pre-bankruptcy Form 10-K.
NYSE Proposes Procedures for SEC Filing Deficiencies
Yesterday, the SEC proposed an amendment by the NYSE that would codify existing procedures followed by companies that fail to timely file their annual reports with the SEC (i.e. 10-Ks, 20-Ks, etc.; doesn’t apply to the glossy annual reports). According to the proposal, once a company has been notified by the NYSE that it is late:
– Within 5 days of receipt of this notification, the company would be
required to (a) contact the NYSE to discuss the status of the annual
report filing, and (b) if it has not already done so, issue a press
release disclosing the status of the filing.
– If the company fails to issue this press release in a timely manner, the NYSE would itself issue a press release stating that the company has failed to timely file its annual report with the SEC.
– During the 9-month period from the filing due date, the NYSE would monitor the company and the status of the filing, including through contact with the company, until the annual report is filed.
– If the company fails to file the annual report within 9 months from the filing due date, the NYSE would be permitted, in its sole discretion, to allow the company’s securities to be traded for up to an additional 3-month trading period depending on the company’s specific circumstances.
– If the NYSE determines that an additional trading period of up to 3 months is not appropriate, suspension and delisting procedures would commence.
A member emailed me to share the NYSE’s interpretation of Section 303A.07(c)regarding the requirement that the audit committee discuss the annual/quarterly financial statements and MD&A. The comment period for the NYSE’s proposed amendments ends today.
The member asked the NYSE Staff to clarify a concern regarding the proposed change to Section 303A.07(c)(iii)(B) that inserts the phrase “meet to review and” before the current requirement “to discuss” – because he was worried that the audit committee will now be required to “meet” to review specific MD&A disclosures.
In response, the NYSE Staff stated that it interprets the existing standards – not the proposed standards! – to require audit committees to review a “relatively advanced” draft of MD&A at a meeting. These meetings can be held telephonically. This interpretation comes despite the fact that it is probably not readily apparent that the NYSE had always contemplated that audit committees would be holding meetings to review specific MD&A disclosures under Section 303A.07.
As you know, many companies schedule committee meetings (including audit committee meetings) around the regular board meeting schedule. Some companies have board meeting schedules that don’t coincide conveniently with the earnings press release and the Form 10-Q/K filing schedules. Such companies typically schedule two meetings of the audit committee each quarter: one to address the earnings release (including the financial statements) and another to review the Form 10-K/Q drafts. These meetings often are held telephonically.
During their second meeting, audit committees will discuss disclosures to be made under MD&A, but are unlikely to have a draft of the complete Form 10-K/Q filing – including MD&A – available at that meeting because it isn’t ready yet. In such instances, the practice is to discuss disclosures under MD&A generally and instruct management to circulate a draft to committee members as soon as possible. Committee members then are given an opportunity to comment on the draft and discuss it with management, but an additional meeting is not held. Apparently, those days are over and audit committees might have to hold a third meeting to review a “relatively advanced” draft of MD&A – or a more likely solution, push back the second meeting until the MD&A is sufficiently specific.
SEC Issues SAB 106 for Oil & Gas Companies
Yesterday, the SEC issued SAB 106 to express the Staff’s views regarding the application of FASB Statement 143, Accounting for Asset Retirement Obligations, by oil and gas producing companies following the full cost accounting method.
The Coming Non-Qualified Deferred Compensation Legislation
Today is the NASPP webcast – The Coming Non-Qualified Deferred Compensation Legislation – featuring Bill Sweetnam of the U.S. Treasury Department and Max Schwartz of Sullivan & Cromwell, who will explain how this legislation is still very much alive – and the dramatic impact it will have on equity compensation!
Last May, a panel of the Ninth U.S. Circuit Court of Appeals in San Francisco voted 2-1 to reject the SEC’s argument that $37.6 million in termination pay and bonuses to two top officials of Gemstar TV Guide International were extraordinary payments that must be frozen while the executives were under suspicion of cooking the company’s books. This was the SEC’s first attempt to use new Section 1103 of Sarbanes-Oxley to freeze termination payments that it felt was extraordinary.
On Friday, a majority of its 25 judges voted to grant the SEC’s request for a rehearing before an 11-judge panel. No date has yet been set for the rehearing.
The big battle is over what is deemed an “extraordinary payment” – something that some of our Executive Compensation Task Force members have addressed through their practice pointers on CompensationStandards.com.
– What responsible ways (and yardsticks) can be used to structure each component of top executives’ compensation, including cash compensation, bonuses, stock compensation, retirement plans, severance and more
– What types and levels of compensation are now appropriate for CEO pay – and how to identify them
– What should be the role of surveys regarding CEO pay; including how to overcome the problems of defining peer groups
– How to critically evaluate survey data and avoid the pitfalls of benchmarking – red flags and nuggets
– How to implement internal pay equity methodology
The Future is Here – SEC Proposes Voluntary Use of XBRL
Yesterday, the SEC posted both a concept release and a proposing release regarding the voluntary tagging of EDGAR data to make the data more “fungible.” Fungible is probably the best way to describe XBRL – because it is derived from eXtensible Mark-up Language (known as “XML”), a coding language that allows for the creation of individual “tags” for specific elements in structured documents.
Using XBRL, each item in a financial statement is individually tagged based on a “taxonomy,” or agreed-upon system of classification. With the tags working behind the scenes, companies can create financial statements that investors can easily manipulate. In other words, investors will be able to more easily compare “apples” to “apples” when comparing the financials of different companies.
Even before this voluntary program – that the SEC hopes to launch early next year – Microsoft, Morgan Stanley and Reuters have made their financials available in XBRL. Here are some FAQs that I drafted about XBRL back on my old site.
It is important to recognize that the Fannie Mae and Computer Associates stories that filled Friday’s papers effectively boil down to the same root problem – senior management massaging earnings to enable them to hit targets that create bigger payouts for themselves. To illustrate this point, the Friday NY Times contained a table that displayed the millions of dollars that Fannie Mae managers would not have earned if they hadn’t tweaked their numbers.
Notably, on Thursday, Fannie Mae filed a Form 8-K explaining how the employment agreements with its senior managers had been amended to refine the definition of “cause” in the event of termination – and that upon a termination for cause, a manager is only entitled to accrued base salary.
From a shareholder perspective – and the executive’s own fiduciary perspective, as highlighted in the Sept-Oct issue of The Corporate Counsel – more companies should be revisiting existing employment agreements to alter cause definitions and severance payment calculations. And not wait until the roof falls in to do so! Remember, by showing they sought to protect shareholders, making such changes now will help directors avoid personal liability and reputational harm.
– Obligations to re-examine, modify existing arrangements
– Fixing and adding “cause” provisions and clawbacks
– Ways to address current excessive compensation and how to have a difficult conversation about rolling back pay
– How to implement meaningful holding periods for outstanding equity compensation
– How to avoid traps for the unwary director when negotiating employment contracts and other compensation arrangements
8-Ks and Director Compensation
The Sunday NY Times contains an article about how 8-Ks are now providing executive compensation details sooner – but as noted by Ron Mueller on Thursday’s webcast, even director compensation details are being disclosed in 8-Ks. For an example, see this Form 8-K filed by Quidel Corp.
As for the Sunday NY Times article, my cursory review of those “sooner” disclosures doesn’t necessarily reveal any “fuller” disclosures…
Right before yesterday’s popular 8-K webcast (audio archive available now; transcript in about a week), we posted a new 30-page inhouse 8-K policy. Among other features, it includes a description of the roles for each member of the disclosure committee and a great process flowchart.
SEC Brings Enforcement Action over GE Compensation Disclosures
Picture proof that you don’t want to miss Alan Beller’s lunchtime speech at the October 20th Executive Compensation Conference – and hear how the SEC is getting tough over compensation disclosures – is yesterday’s settlement with GE over the failure to fully describe the substantial benefits it had agreed to provide Jack Welch under an employment and post-retirement consulting agreement.
If you read – and you should read it! – the administrative proceeding release, you will get the sense of how Enforcement appears to be upset with disclosure counsel’s role in this action. In addition, Enforcement doesn’t appear happy with how the GE board of directors accepted the lowball estimate of the value of Welch’s retirement benefits.
On CompensationStandards.com, we have many practice pointers devoted to perks and retirement benefits (not to mention our Model Section for the Compensation Committee Report) – but one of the most provocative is a chapter on Plane Perks written by David Kay Johnston, a NY Times reporter (we thought so highly of this chapter that we paid the publisher for the rights to reproduce it) and that chapter starts off with a discussion of GE.
I know that I prattle on about the October 20th Conference – but if you are disclosure counsel, you should realize that this conference is for you; it is not just for benefits counsel. Evidenced by the SEC’s GE action and the pending Tyson Foods action (not to mention the judiciary and the IRS activity in this area), the regulatory and liability standards in this area are changing right now – and you are at risk.
It is akin to how we all became corporate governance experts two years ago – compensation is what truly drives the governance bus and this conference (along with the CompensationStandards.com resources) will bring you up-to-speed quickly. So join the 400+ that have already registered for the conference – in person or by webcast – by registering now and gain immediate access to CompensationStandards.com!
A common question these days is what should my Section 404 management report look like? I hear that the national offices of the Big Four are working on forms for what they would like to see from their clients – but they have not released these forms yet. In the meantime, we have posted some sample management reports that companies have voluntarily filed as well as model forms from the AICPA (these are posted in our Sample Document Library and Internal Controls Practice Area). Thanks to Bob Hayward of Kirkland & Ellis for the heads up!
From what I’ve gleaned from the PCAOB releases, these reports should be pretty short and conclusory – more like an auditor’s letter than a full-blown, detailed report, as Auditing Standard No. 2 does not seem to contemplate a detailed discussion of what happened during management’s assessment and testing.
Perhaps a more interesting question is whether the Big Four will develop checklists of the types of issues they will seek during their assessment process, or what type of records they will create to evidence the diligence performed to support their attestations.
Today’s 8-K Webcast
Thanks for the scores of questions for “Reality Bites: More on the New 8-K Rules” – I hope to extend the program beyond the hour slated for the webcast and have the panel answer as many as we can. Had one good suggestion to change webcast title to “Real Time Bites”!
I finally changed my blogging software – so that my blog entries are now word-searchable and you can also register to receive emails when I blog. Still tweaking the “look and feel” for the next few days. Kool Aid Man says “Oh yeah!”
Tackling This Year’s Auditor Engagement Letter
I am receiving lots of questions regarding strong-arming from the Big Four (aka the “Mighty Big Four”) during negotiations over auditor engagement letters, including issues regarding:
– Getting auditors to agree that their providing materials to the PCAOB or the SEC does not constitute a waiver of any privileges or doctrines available to the company or its counsel
– Getting clients comfortable with the dispute resolution mechanism
– Getting notice from auditors if the PCAOB requests documents relating to the audit of the client
Please let me know if you have any thoughts on these subjects – there appears to be a real need to share on this one…
Although putting together a tally sheet is not as simple as it sounds in theory (i.e. adding up the various components of a senior managers compensation package), we are excited to add a very practical tool to CompensationStandards.com – an Excel spreadsheet to use as the basis for your tally sheets. This Comprehensive Tally Sheet was contributed by Task Force members Matt Ward of Aon Compensation Consulting and Joshua Lurie of eComp Data Services Groups.
Yesterday, the Corp Fin provided its first update to the Telephone Interpretations Manual in years – when the Office of Mergers & Acquisition addressed the topic of unbundling under Rule 14a-4(a)(3). This update is in the fifth supplement to the Telephone Interpretations Manual.
The Staff decided to provide this interp after watching companies throw the kitchen sink into merger proposals – including significant corporate governance and anti-takeover provisions. Apparently, the straw that broke the camel’s back was an attempt by Comcast/AT&T Broadband to include what was referred to as an “atypical governance proposal” – a provision that eliminated the election of directors for three years – in their merger proposal.
The new interp lays out when unbundling is required (and when it’s not mandated). According to the interp, unless immaterial, matters should be unbundled on a ballot if:
– the provisions in question were not previously part of the company’s charter or bylaws;
– the provisions in question were not previously part of the charter or bylaws of a public acquiring company; and
– state law, securities exchange listing standards, or the company’s charter or by-laws would require shareholder approval of the proposed changes if they were presented on their own.
Comparison of Rights of First Refusal and First Offer
If you can’t get enough of Carl’s wisdom – he was an advisor to Corp Fin in the early ’60s – you should review the interesting interview with him that is posted on the SEC Historical Society’s site.
