Item 308(c) of Regulation S-K requires disclosure of any change in the registrant’s internal control over financial reporting that occurred during the registrant’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. One aspect of the 308(c) requirement that often is overlooked is that positive – as well as negative – changes should be disclosed.
However, a cursory review of recent 10-Qs reveals that there don’t appear to be many of these positive disclosures. So far, we have found six examples that are as close to positive as we could find: the first two relate to new software programs (Intuit and Barnes & Noble); the third is the result of a merger (Sears); the fourth appears to be corrections of weaknesses that were not identified as material weaknesses (Sbarro – they had the same disclosure in their 10-K); the fifth is not a material change, but a change that the company thought should be mentioned anyway (Newport); and the sixth is a result of a restatement, but the company didn’t disclose whether it was a material weakness problem (Origen Financial).
Learn more about the challenges of 308(c) disclosures in this interview with David Miller and Amy Seidel on Evaluating Internal Controls on a Quarterly Basis.
SEC Chair Donaldson’s Last Hurrah?
Reuters reports that the SEC will consider the adoption of ’33 Act reform on June 29th – one day before Chairman Donaldson departs the SEC. The SEC has not yet announced whether – or when – an open Commission meeting is scheduled for consideration of this blockbuster reform.
A Development for “Existing Directors” Change-in-Control Triggers
In late April, Vice Chancellor Noble of the Delaware Court of Chancery rejected a fiduciary breach lawsuit in California Public Employees’ Retirement System v. Coulter, which alleged that an existing director change of control trigger impermissibly granted unauthorized distinctive voting powers to the directors who approved the change-in-control agreements. Learn more about the meaning of this case in this DealLawyers.com interview with Eric Keller on “Existing Directors” Change-in-Control Triggers – and you can read the court opinion too.
9/11 and the Securities Industry
Today is the SEC Historical Society’s Annual Meeting and they are hosting a webcast featuring Harvey Pitt and others for “Crisis and Resolve: The SEC and the Securities Industry Remember September 11, 2001.” You can also share your own remembrances of 9/11 and its aftermath with the Society. These remembrances will be kept in their “Papers” section. A noble effort and cause!
As evident from our blackout/window period survey last year, blackout periods is a topic that folks love to benchmark (see last year’s results). So I just posted another survey on these periods with five questions – please go to the top of TheCorporateCounsel.net home page and take this new survey, which addresses:
– Does your company ever impose a “blanket blackout period” for all or a large group of employees?
– How does your company’s insider trading policy define those employees subject to a blackout period?
– Does your company allow employees (that are subject to blackout) to gift stock to a charitable, educational or similar institution during a blackout period?
– Does your company allow employees (that are subject to blackout) to gift stock to a family member during a blackout period?
– Are your company’s outside directors covered by blackout or window periods and preclearance requirements?
How to Search the SEC Comment Letter Database
The SEC has posted these instructions on how to search the comment letter database. I think the instructions are likely to be tweaked as the database is honed – and don’t forget to listen to next Thursday’s webcast – “How to Navigate Tricky Confidential Treatment Requests” – to hear SEC Corp Fin Deputy Director Shelley Parratt speak about searching the database and related issues.
Award-Winning Blog?
Okay, as we head into the waning days of a close contest, my blog is tied for first place in the “Favorite Practice Area Blog” category. If ya like reading this thing, go ahead and do me a “solid” and vote for the blog. To do so, you will have to first join (at no cost) TechnoLawyer – and then you should send an email to tlballot@peerviews.com (cut and paste this addressee) with this message in the body: “For #5 Favorite Practice Area Blog – I vote for TheCorporateCounsel.net Blog.”
If you can’t bear the thought of joining another free site, send the email anyways and perhaps they will count the vote out of the kindness of their heart. [Note that I have belonged to TechnoLawyer for quite a while and very rarely receive emails from them – so joining shouldn’t hurt your inbox.] Voting ends at the end of this Friday!
Q&A on Option Expensing
FAS 123(R) requires companies to recognize compensation expense for all forms of stock compensation, including stock options. Even with the SEC’s delay, the effective date will be here before you know it, yet many practice-related questions remain unanswered.
To help prepare for the transition, here is a panel of experienced practitioners to answer your questions on the standard on tomorrow’s NASPP webcast: “Q&A on FAS 123(R).” You can submit questions in advance for Paula Todd of Towers Perrin and Reginald Oakley of the FASB to answer.
Regarding my blog last week on 404 disclosure examples, a member of our advisory board weighed in to note that the RCN Corp. disclosure technically was not an internal controls issue, but rather a “disclosure controls” issue. This member noted a concern that some companies have gotten so absorbed with 404/internal controls that they have forgotten about disclosure controls.
She noted that it was particularly interesting that RCN’s inability to obtain financial data was listed as a failure of their “disclosure controls”, but it actually doesn’t appear to be classified as a “material weakness” in internal controls. RCN did disclose two material weaknesses in internal controls (i.e. lease accounting and general ledger reconciliation), but they were not related to their inability to get timely financial data for equity investments.
This conclusion is interesting because there have been a lot of questions about how disclosure controls and internal controls differ – and whether a disclosure control failure suggests a per se deficiency in internal controls. It is possible that this was identified a “significant deficiency” in internal controls, which wouldn’t have required disclosure or resulted in an adverse 404 opinion.
Impact of the Arthur Andersen Decision
Many experts are saying the recent US Supreme Court decision regarding the Arthur Andersen indictment should be a real bellringer that echos far beyond the case itself. In this podcast, John Savarese, a Partner of Wachtell, Lipton, analyzes the importance of this decision, including:
– Why did the Supreme Court reverse the Andersen decision?
– What does this mean for document retention practices?
– How should companies fine tune their retention programs in light of this decision?
– Will auditors and other professional service providers continue to be “deep pockets” in the wake of the decision?
Disney CEO Succession Case Headed Towards Trial
Don’t forget tomorrow’s webcast, Wednesday, June 8th – “Managing D&O Departures and Arrivals” – with an added 15 minutes because there is so much ground to cover. This could be the most practical webcast of the year, dealing with a wide range of issues for you to consider each time a officer/director joins or departs the company.
And in light of the fact that the Delaware Chancery Court just allowed the lawsuit filed by Roy Disney over The Disney Company’s CEO succession process to proceed to trial – as noted in this article – it seems like a good time to learn about the nuances of CEO succession! That topic will be covered during the webcast by panelists that have been through many successions.
Astute members were quick to comment on my blog from Friday by noting that the SEC’s Public Reference Room has moved to Station Place (and that all other parts of the SEC relevant to the public have indeed moved). These members were told to use the new address for all purposes – and that is indeed the case, even though the Filing Desk’s address is purportedly the old address according to this web page – that page just hasn’t been updated yet. But this other web page has been updated, as it indicates that the Public Reference Room has moved to the new building.
At this point, it does make sense to disclose the new address in prospectuses and other filings – despite the existing Item 101(e) language that includes the old HQ address – since the Public Reference Room and Filing Desk have moved.
Impact of Flowserve on Investor Relations’ Officers
In this podcast, Mary Beth Kissane, a lawyer who is a long-time investor relations’ advisor and head of NIRI’s NY chapter, analyzes how the IRO profession is reacting to the SEC’s Regulation FD enforcement action against Flowserve, including:
– Were she surprised by the SEC’s censure of the IRO in Flowserve?
– What is the overall reaction of IROs to Flowserve?
– What role should IROs play during private one-on-ones? During investor conferences?
– What role should IROs play on disclosure committees?
– Does she see a trend towards greater empowerment/change in duties of IROs coming in the wake of Flowserve?
Software Licensing Issues in M&A
In this DealLawyers.com podcast, Dan Bricklin schooled me in software licensing issues in M&A, something that I didn’t know much about. It was quite interesting as Dan explains:
– What are the new software licensing copyright issues that companies should be aware of?
– Why is Open Source an issue? Is this new?
– What is GPL? Who determines the meanings of the terms of the GPL?
– What should be in a corporate software license policy?
– How do you get developers to follow these policies?
– How should the legal department work with developers?
The SEC’s Chief Accountant Speaks
Last Wednesday, SEC Chief Accountant Don Nicolaisen gave this speech on reducing complexity in financials, during which he indicated that a study in the off-balance-sheet area is coming soon (as required by Sarbanes-Oxley) – and provided his views on the latest 404 guidance the Staff provided a few weeks back.
Yesterday, President Bush nominated Congressman Christopher Cox – a former securities lawyer at Latham & Watkins – to be the new Chairman of the SEC. Senate confirmation is still required. Here is the White House press release with the remarks of President Bush and Representative Cox.
A number of members asked me yesterday if Chairman Donaldson was asked to resign by President Bush, as Donaldson consistently sided with the two Democratic Commissioners in 3-2 Commission votes and there has been widespread criticism by many over the costs of implementing internal controls (plus the recent SEC budget crisis didn’t help). Your guess is as good as mine – but the Commission is supposed to be an independent agency and I would hope the President wouldn’t meddle in the SEC’s affairs.
As far as I can tell, this is the first appointment of a sitting member of Congress to the Commission. Here is a Forbes article painting the incoming Chair as pro-business; here is an article from Bloomberg that provides a number of differing opinions on the appointment. The front pages of the NY Times and WSJ also have detailed profiles of the incoming Chair and much commentary about what others think.
More on the SEC’s New HQ Address
Earlier this week, I blogged about the SEC’s new address – but this was for purposes of sending courtesy copies to the SEC Staff. Pursuant to Item 101(e)(2), it is still a specific disclosure item that companies must include the following in various SEC periodic reports and registration statements:
“That the public may read and copy any materials you file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549. State that the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. If you are an electronic filer, state that the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC and state the address of that site (http://www.sec.gov).”
Since the rule still refers to the old address and the SEC hasn’t issued an alert or changed the rule formally, I believe issuers should go ahead and keep using the old address for this and other purposes. There are several examples of companies (at least 40 filings) that have included the new address in filings made in the last couple weeks, but a quick and random review of twenty S-3 filings made yesterday showed that only 1 out of 20 used the new address, while 19 still listed the old address (thanks to Amy Seidel for this data!).
Even though Corp Fin has moved to the new building, other offices still haven’t moved – although the move is now being accelerated in an effort to save money in light of the SEC’s budget crisis.
SEC and DOL Jointly Issue “Tips” for Plan Fiduciaries
The Department of Labor and SEC have jointly published tips to assist fiduciaries of employee benefit plans in reviewing conflicts of interest of pension consultants: “Selecting and Monitoring Pension Consultants: Tips for Plan Fiduciaries.” The tips are questions for plan fiduciaries to ask pension consultants, developed by the DOL and SEC “to assist plan fiduciaries in evaluating the objectivity of the recommendations provided, or to be provided, by a pension consultant.” Also, some guidance is provided following each question.
Bob Woodward on “Deep Throat”
Maybe it’s my “inside-the-beltway” outlook on life, but I was fascinated with this four-page article in the Washington Post yesterday by Bob Woodward, in which he explains – in nitty-gritty detail – how he came to know Mark Felt and the events that led to the series of Washington Post articles that brought down President Nixon.
Last October, I blogged about how Chairman Donaldson was showing all the signs of a being a short-timer. But he hung in there until yesterday, when he announced he was resigning effective June 30th. I believe his legacy will hold up quite well as an incredible amount of rulemaking – impacting all facets of the market – was adopted during his two and a half year tenure. Not bad for a man who never really wanted the job.
Of course, now the rumor-mill begins about his successor, who will step into a tenuous situation as the Commission has been divided over numerous crucial rulemakings in recent months? According to numerous media reports, the answer is Congressman Chris Cox (R-Cal.) and that the President will announce the appointment this morning. So much for suspense! This Washington Post article talks about how some of Donaldson’s reforms might be revisited by a Chairman who is more in line with President Bush’s themes.
Analysis of Delaware Court Decision re: Reach of California Law
More podcasts on the way, including this new podcast with Keith Bishop who analyzes – and provides insight into the ramifications of – the recent Delaware Supreme Court VantagePoint Venture Partners decision, including:
– Why is the Delaware Supreme Court interpreting the California Corporations Code?
– In what situations does California Corporations Code Section 2115 purport to apply?
– Is this a problem for all public companies?
– Now that the Delaware Supreme Court has spoken, can counsel safely forget about California’s reach-out statute?
– Should we expect any other fall-out from the Delaware Supreme Court’s decision?
Get Ready to Understand the SEC’s Comment Letter Database (and How to Best Couch Confidential Treatment Requests)
I am excited that a pair of key SEC Staffers, Corp Fin Deputy Director Shelley Parratt and Branch Chief Suzanne Hayes, has joined the panel for the June 16th webcast: “How to Navigate Tricky Confidential Treatment Requests.” Shelley will open the program to discuss the new SEC comment letter database – and Suzanne will join a group of practitioners that specialize in confidential treatment requests to deconstruct how to best prepare CT requests – which is an art more important than ever now that SEC comment letters and responses are posted on the SEC’s website.
This blog is the first evidence I have seen that members of the general public will be picking apart comment letters.
Looking for more water-cooler fodder? From Bob Dow of Arnall Golden, here are a few more interesting 404 disclosures:
– RCN Corp. has a weakness because it has equity investment for which it cannot obtain financial data
– Kelly Services did a restatement (related to lease accounting) but satisfied itself that this was not a material weakness
– Foster Wheeler also had a restatement, decided the restatement was not a material weakness, but had other material weaknesses leading to an adverse opinion (this one has one of the better set of control-related risk factors (2 of them) because they have some specific content; not just the usual boilerplate)
– Brightpoint initially gave a plain vanilla “clean” SOX 404 report; but after it filed its 10-K, it discovered errors and material weaknesses in its overseas operations – and in this 10-K/A it gave an updated, adverse SOX 404 report
Corp Fin’s New Address
For packages and other hard copies going to Corp Fin Staff, they can now be sent to Station Place, located at 100 F St. NE, Washington DC 20549.
June Eminders is Up!
We have posted the June Issue of Eminders, our free email newsletter. Sign up to receive it today by simply inputting your email address!
Arthur Andersen Case Reversed
Yesterday, the US Supreme Court unanimously reversed the conviction of Arthur Andersen and remanded the case, concluding that the jury instructions were flawed in important respects. Here is the Supreme Court list of slip opinions. Click on the Arthur Andersen LLP v. United States case to access the opinion.
On Friday, the Treasury issued the long-awaited guidelines on how companies can (and can’t) take deductions for executives’ private use of company aircraft. The guidelines implement Section 274(e) of the JOBs Act. Get hard-hitting analysis on private jet use in the upcoming May-June issue of The Corporate Counsel.
SEC Has Its Own Material Internal Control Weaknesses
Last Thursday, GAO (i.e. Congress’ Government Accountability Office) released this report that found “material internal-control weaknesses” in the SEC’s internal controls. The weaknesses primarily relate to the recording of fines and restitution to investors that it wins in settlements with companies and individuals, the preparation of the SEC’s financial statements and the security of information. As a result, the report says that the SEC “did not maintain effective internal control over financial reporting as of Sept. 30, 2004.”
In response, the SEC will add new staff to handle financial reporting and establish an internal committee – similar to a boards’ audit committee – to monitor and correct deficiencies. The business media had a field day generating creative titles for articles on the GAO’s report, such as the Washington Post’s “What’s Good for the Goose.”
The Audit Committee Disclaimer
I was fascinated with this article in last Thursday’s Washington Post article because of its extensive discussion of the disclaimer about audit committee activities included in AIG’s 2001 and 2002 proxy statements. The article surmises that the disclaimer should have been a red flag to AIG’s independent auditor, PwC, that something was amiss at the company. According to the article, the disclaimer stated that the audit committee’s oversight did “not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles” and that it couldn’t assure that the audit had been carried out according to normal standards or even that PWC was in fact “independent.”
As the article notes, those types of disclaimers became far less common after Sarbanes-Oxley – but it will be interesting to see if AIG’s disclaimer helps the company’s audit committee avoid liability.
Note that an August 2001 article by Amy Goodman and Mike Scanlon of Gibson Dunn (entitled “Survey of Audit Committee Charters and Audit Committee Reports in 2001 Proxy Statements”) from Insights found that a majority of audit committee charters had disclaimers in them way back in 2001. These disclaimers normally qualified the responsibilities and actions of audit committee members, such as the audit committee members:
– neither performed nor certified the auditing work
– are not responsible for preparing the company’s financial reports and relied on the statements of management
– are not accounting experts and provided no expert or professional assurances
– have no duty to resolve conflicts between management and independent auditors
– are not deemed to have accepted a duty of care greater than the other directors
Let me know if you have conducted (or seen) a more recent study, as it would be helpful to see how far disclaimers have changed.
On Tuesday, the PCAOB brought its first enforcement action – and it was a big one, revoking one firm’s registration and disciplining three accountants for their “failure to cooperate.”
As discussed in this press release, the PCAOB “found that the partners, after learning of the imminent inspection, formulated and carried out a plan to create and back-date certain documents and place them in the firm’s audit files. The Board found that Messrs. Morris, Goldberger, and Postelnik took these steps to conceal from the Board the firm’s failure to comply with certain auditing standards.” The Board barred the former managing partner from auditing public company – and also censured two other former partners, finding that they participated in the misconduct but noting that they promptly alerted the PCAOB and cooperated in the Board’s investigation. Lesson learned: don’t interfere with the PCAOB inspection process!
Meanwhile, there are some interesting tidbits in this response from the PCAOB to questions raised by SEC Commissioner Paul Atkins (these questions were raised a few months ago during an open Commission meeting over the PCAOB’s budget).
SEC Facing Budget Shortfall
On Tuesday, a number of media outlets carried the news that the SEC’s budget is tight and, as a result, non-critical travel is restricted and hiring will be limited until the new fiscal year that commences in the fall. Here is an article about this from the Financial Times:
“A US spending watchdog has been asked to investigate budget problems at the Securities and Exchange Commission, the chief financial regulator.
The Government Accountability Office has been urged to look at how the SEC faces a budget shortfall of about Dollars 50m over three years because of problems stemming from the financial management of projects to provide new offices in Washington, New York and Boston.
Frank Wolf, chairman of the House appropriations subcommittee that monitors the SEC budget, told the GAO in a letter yesterday that he was “troubled” by the problems and asked it to investigate.
“This is very damaging to the SEC,” said Mr Wolf after speaking to William Donaldson, SEC chairman. “The SEC polices other people’s books yet they themselves have huge overruns. I am very disappointed.”
The potential budget shortfall has been put at Dollars 48m by senior SEC officials, and its impact will be felt during 2005, 2006 and 2007.
The costs of the new SEC headquarters in Washington are set to increase by Dollars 19m partly because no provision was made for security measures in the original 2000 estimates.
The Dollars 25m move of the SEC New York office from the Woolworth building to World Financial Center was never included in the regulator’s 2006 budget.
The costs of a new SEC building in Boston are set to increase by up to Dollars 2m. The SEC is to set aside a further Dollars 2m to deal with other potential issues.
Senior SEC officials are confident the regulator can deal with the budget shortfall by finding savings elsewhere. Some posts at the SEC will not be filled, and curbs are to be placed on staff travel. The enforcement division is not expected to be affected by the austerity measures.
The SEC said: “We have been investigating the budget situation and are in regular communication with Congress as to how we will be proceeding.”
The SEC budget was boosted to deal with the spate of corporate scandals led by Enron, but President George W. Bush proposed cutbacks in February.
Yesterday, Mr Wolf’s sub-committee approved the SEC budget of Dollars 888m for 2006, which compares to Dollars 913m for 2005. The SEC had asked for a budget of Dollars 983m for 2006.”
60 Sites in 60 Minutes
The highlight of the ABA’s Techshow is the panel that reviews “60 Sites in 60 Minutes.” Here are a set of links to the sites presented at this year’s program. My favorite site are the oddball ones they present, such as the “World Beard Championships” and “How to Keep an Idiot Busy” [Not quite sure I understood “Googlism.”] Who said lawyers are no fun…
Thanks to Penny Somer-Greif of Arnold & Porter LLP, here are notes from the PLI’s “PCAOB Speaks” held a few weeks ago – the notes are written from the perspective of how the PCAOB’s activities impact public companies. There were a number of provocative points made during the conference, such as whether independent auditors were using enough skepticism in their evaluation of audit committees.
Personal Plane Perks
Today’s WSJ carries a front-page article on personal plane perks. This topic isn’t going away. The upcoming May-June issue of The Corporate Counsel will deal with this topic in detail, that issue should be out in about two weeks.
Example of Reporting-Up Obligations at Work
From a few weeks back, this press release from Theragenics Corporation describes how the company’s CFO and General Counsel reported up alleged violations caused by the CEO – and how they then resigned after the audit committee determined that there were no violations. I wonder what the back-story is there!
Here is an excerpt from the press release:
“James MacLennan and Tracy Caswell, the Company’s Chief Financial Officer and General Counsel, respectively, recently reported to the Board of Directors allegations regarding actions taken by the Company’s Chief Executive Officer that they viewed as inappropriate. The allegations did not relate to the accuracy of the Company’s financial statements or prior public disclosure by the Company. A subcommittee empanelled by the Company’s Board of Directors consisting solely of independent directors, with the assistance of special legal counsel, has investigated the allegations and presented its report to the Board. Following receipt and evaluation of the subcommittee’s report, the Board of Directors has determined that no violation of law or rule or regulation applicable to the Company or of any duty owed to the Company has occurred.
“Theragenics has been and remains committed to high ethical standards and this was confirmed by our investigation,” said Patrick Flinn, Chairman of Theragenics’ Audit Committee. “We take allegations of misconduct very seriously. The process worked the way it should have and is now complete with no violations found.”
Mr. MacLennan and Ms. Caswell have informed the Company that they will not participate further in the preparation of the Company’s public disclosure. Accordingly, the Board of Directors has accepted their resignations today. Mr. MacLennan, through counsel, has assured the Board in writing that he is not aware of any facts or circumstances that would cause the financial information contained in the Company’s earnings announcement issued April 22, 2005, to be inaccurate.”
An E-mail Retention Scare
A few days back, Reuters ran this disturbing article about the Morgan Stanley case and related e-mail perils. The disturbing part was the second sentence of this excerpt:
“Banks and broker-dealers are obliged to retain e-mail and instant messaging documents for three years under U.S. Securities and Exchange Commission rules. But similar requirements will apply to all public companies from July 2006 under the Sarbanes-Oxley corporate reform measures.”
Chuck Ragan of Pillsbury Winthrop Shaw Pittman confirms that he is unaware of any measures likely to be enacted that would extend the broker-dealer retention mandates of SEC Rules 17a-3 and 17a-4 to all records of all public companies.
Chuck notes that Sarbanes-Oxley imposes liability for failure to preserve records in the face of pending or reasonably anticipated litigation, but not all records at all times, as this sentence would suggest – and in the absence of a duty to preserve for litigation, there is no generally applicable obligation to retain all documents, e-mail and instant messaging, and organizations may still adopt policies to manage their information and records in accordance with sound business practices and other legal rules.
