On April 28th, Corp Fin issued a novel no-action response to europrospectus.com limited on some Regulation S issues. This company intends to make available onine prospectuses and related documents for international securities offerings to subscribers.
According to the letter, the company will run a web-based database service that will post prospectuses before distribution is complete for Reg S/144A offerings by non-US issuers. One of the issues addressed is whether the posting will be deemed a “directed selling effort” under Reg S by the issuer of the security.
The database site is password-protected, has legends and you need to be a member to use it but here’s the rub – unlike prior letters like IPO.net, to get a password you don’t need to be a QIB or an IAI. Rather, you only need to be a customer (apparently, there is a high membership fee but still no need to be a QIB or IAI, etc.).
My good friend Walter van Dorn of Thatcher Proffitt explains to me that the over-all utility of this response is likely to be limited since the overwhelming majority of international offerings are combined Reg S and Rule 144A offerings – and because the site here does not need to be password-protected to nonQIBs/IAIs (even though no-action was granted based on the interpretation of some pretty arcane Reg S provisions).
Most issuers still will have problems with the necessary ’33 Act exemption for the 144A/4(2) component of their offering. So for the vast majority of deals that are combined Reg S/144A offerings, this letter may not be of much practical value.
23 Lessons Learned from Disney
I love “lessons learned” articles because they tend to be so practical – that’s why one of my favorite practice pointers on CompensationStandardsConference.com is “23 Lessons Learned from Disney: Director Liability for Excessive Executive Compensation” by Mike Melbinger.
The Wall Street Journal reported last week that the SEC has filed an amicus brief in a Second Circuit Court of Appeals case, arguing that companies and mutual funds are not permitted to omit information not specifically required from disclosure documents and public statements simply because that information is available elsewhere.
In In re Merrill Lynch & Co., Inc. Research Reports Securities Litigation, the plaintiff is a shareholder of Merrill’s Global Technology Fund. Suing under Securities Act Sections 11 and 12(a)(2), the plaintiff contends that Merrill should have disclosed the fact that it performed investment banking services for some of the stocks in the fund and that Merrill’s analysts had written research on certain of the fund’s stocks.
The U.S. District Court for the Southern District of New York dismissed the action in July 2003, holding that Merrill had no obligation to tell investors that its fund owned stocks of companies that had relationships with Merrill because “that information was already public” on the Internet, in the news media and elsewhere.
In its brief, the SEC argued that “[t]he fact that information could be discovered somewhere in the public domain does not mean it can never be materially misleading to omit that information from a disclosure document or other statement.”
Stay tuned for the decision.
Chairman Donaldson Recuses Himself
Last week, a company that Chairman Donaldson had served as a director, EasyLink Services Corporation, disclosed in an 8-K filing that it was being investigated by the SEC Staff. According to the filing, the Staff is “reviewing certain transactions accounting for approximately $3 million of revenue generated by its former advertising network business in 2000, a year in which the Company reported $61.2 million in total revenue.” Chairman Donaldson served on the audit committee in 2000.
The next day, the Commission issued a press release announcing that “Chairman Donaldson has not participated and will not participate in any matter before the Commission involving EasyLink.” Further, the SEC announced that a former Assistant Director of the Division of Enforcement was acting as “Special Advisor” to the four Commissioners.
On May 11 and May 13, Broc blogged about rumors in the mainstream media about where the SEC was heading with its shareholder access proposal. The rumor mill is still working.
On July 1, a New York Timesarticle by Stephen Labaton reported that Chairman Donaldson said that he has been unable to forge an agreement among his deeply divided colleagues. “Right now there is no consensus,” he said. “I’m not sure I agree with what anyone else thinks or anyone agrees with what I think.” The Times article reported that the deadlock “all but dooms” the possibility that new rules would be implemented prior to the next proxy season.
The Chairman’s June 20 speech at the Directors College at Standford lends credence to this report, where the Chairman stated that he remains “committed to responsible and constructive change in this area, and will proceed thoughtfully and carefully. [The SEC’s] goal is the right course, rather than a hasty, less thoughtful course. We will not be forced to act in the face of an artificial deadline.”
Buffett Sounds Off on Options Expensing Bill
In an Op-Ed piece in yesterday’s Washington Post, Berkshire Hathaway CEO Warren Buffett warned that the prize for “mathematical lunacy by a legislative body” may be awarded to the U.S. House of Representatives if it passes the Stock Option Accounting Reform Act of 2003 (H.R. 3574). (The current prize for “mathematical lunacy” is apparently held by the Indiana House of Representatives for declaring, in 1897, that pi would equal 3.2 instead of 3.14159).
The Stock Option Accounting Reform bill, which passed the House Financial Services Committee on June 15, mandates that stock options be counted as an expense on company balance sheets when they are issued to the CEO and the other four highest paid company officers, but not counted as an expense when they are issued to other employees. The bill also says that when a company is calculating the expense of the options issued to the top five, it shall assume that stock prices do not fluctuate. The bill would exempt small business issuers.
The SEC has announced the selection of Charles A. Fishkin as the Director of the new Office of Risk Assessment. Mr. Fishkin worked most recently for Fidelity Investments in Boston, where he served as vice president of Firmwide Risk.
Chairman Donaldson announced the creation of the Office of Risk Assessment during Congressional testimony last November to better enable the SEC to anticipate, identify and manage emerging risks and market trends. The new office will analyze risks across the SEC’s divisional boundaries, focusing on early identification of new or resurgent forms of fraudulent, illegal or questionable behavior or products.
Not-So-Quiet “Quiet Period”
Goldman Sachs agreed to pay $2 million to settle administrative proceedings for violations of, among other things, Securities Act Sections 5(b) and 5(c), arising from its work as underwriter in four international public offerings.
According to the Order, certain Goldman traders sent illegal written offers to numerous institutional customers during the “waiting period” (in the form of emails describing the public offerings with headings such as “Why You Should Take A GOOOOOOOD Look at PetroChina”). In connection with one of these four public offerings, a Goldman representative made an additional illegal offer when he spoke to the press before the registration statement was filed with the SEC (during the “pre-filing” period) to explain where the proceeds of the offering would be used.
Goldman voluntarily reported one incident of illegal written offers by the traders to the SEC staff when it discovered that the traders had sent emails to 77 hedge fund and institutional clients in the United States. The SEC’s subsequent investigation into this incident revealed that the same traders had engaged in similar conduct in connection with three previous offerings.
This is a good question posed by a number of members yesterday in the wake of the SEC’s action against Siebel. The issue is that disclosure controls are supposed to be designed so that “information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.”
As Ron Mueller points out, before this action, it could have been argued perhaps that Reg FD does not require an Exchange Act filing in order to comply; but that an 8-K is only a safe harbor and the rule can be satisfied by other methods.
But in Paragraph 22 of the complaint against Siebel, the SEC sets forth its theory – that an 8-K is required under FD, and the rule says it’s only not required if disclosure is made through another channel. So the SEC essentially argues that a company needs to have the disclosure controls in place to determine whether there is an FD event that requires disclosure, and determining whether to satisfy the obligation by an 8-K or press release is then only a matter of disclosure implementation.
It seems like a odd first case for disclosure controls, particularly when the SEC is alleging that the FD disclosure was an intentional disclosure. The upshot is that you should ensure that your disclosure controls deal with Reg FD and the fact that you may need to make a disclosure as well as a determination as to the method of dissemination.
FASB May Delay Options Expensing
Yesterday, it was widely reported that FASB Chair Bob Herz was acknowledging that option expensing might be delayed from the beginning of 2005 to 2006 (and the SEC’s Chief Accountant was urging the delay). The rationale was that companies had their hands full this year with implementing more stringent internal controls.
Announcing the Arrival of Julie Hoffman!
I’m excited about our latest hire, Julie Hoffman who worked on the aircraft carrier when she was in Corp Fin back in the day – then worked at Latham & Watkins and Squire Sanders.
Julie will be blogging for me next week, when I am mired in Boston at the annual conference for the American Society of Corporate Secretaries. Julie can be reached at julie@thecorporatecounsel.net.
On CompensationStandardsConference.com, we have posted a working draft of the remaining 12 Steps of responsible compensation practices laid out in the May/June issue of The Corporate Counsel. These steps include some of our more controversial – and responsible – points. The working draft is accessible – like all the other valuable content on CompensationStandardsConference.com – by those that register for the October 20th major compensation conference.
Siebel Systems as Poster Child? First Disclosure Controls Violation Alleged!
When I taught an Executive MBA corporate governance class at George Mason this spring, Siebel Systems was often used by the class as an example of “what not to do.” In addition to having one of the first Reg FD violations, Siebel entered into a “governance by gunpoint” settlement with an institutional investor a year ago.
Yesterday, the SEC announced that it filed an action in the U.S. District Court for the Southern District of New York charging that Siebel Systems violated Regulation FD and a cease-and-desist order issued in November 2002 against the company for a Reg FD violation. The SEC charged the company’s chief financial officer and former IR officer (who still works there in a different capacity) with aiding and abetting Siebel’s violations.
In the first action on disclosure controls, the SEC also charged the company with violating Rule 13a-15, which requires issuers to maintain disclosure controls and procedures.
The SEC’s complaint alleges that, a scant 6 months after the cease-and-desist order was issued, the CFO disclosed material nonpublic information during two private events he attended with the IR officer, a “one-on-one” meeting with an institutional investor and an invitation-only dinner hosted by a banker (and that at both the meeting and the dinner, the CFO made positive comments about the company’s business activity levels and transaction pipeline that materially contrasted with negative public statements the company had recently made). The next day, the company’s stock price rose and trading volume doubled the average.
Yesterday, the WSJ reported that CalPERS, the biggest U.S. pension fund, is reconsidering its bright line voting policy that led to it voting against audit committee members at 83% of its portfolio companies this proxy season. This season’s policy led CalPERS to withhold votes for any audit committee members at companies whose auditors performed any non-audit services, regardless of any other circumstances. CalPERS will consider changes at a trustee meeting in July.
CalPERS to Create First Exec Comp Focus List
CalPERS also announced that it would create its first focus list for companies that it believes pays excessive executive compensation beginning this Fall. CalPERS has established an annual focus list identifying non-performing companies for years and will continue to do so.
The new, updated US sentencing guidelines – which promise to force companies to make dramatic changes to their compliance programs over the next few months – came under fire after last Thursday’s U.S. Supreme Court 5-4 decision that invalidated a Washington state law as unconstitutional. The US Supreme Court’s ruling invalidates sentencing guidelines in at least 9 states.
Learn more about this development – as well as what you need to be doing now in the wake of the updated US sentencing guidelines – on our July 21st webcast – “How the New Sentencing Guidelines Impact You.”
PCAOB Chairman Warns of Significant Issues at the Big 4
Late last week, PCAOB Chairman William McDonough testified on the Hill that the PCAOB identified “significant audit and accounting issues” in its preliminary inspections of the Big 4. While these initial inspections were more limited than the full inspections will be next year, McDonough said the PCAOB “learned a great deal about quality control in the largest firms.”
Under Sarbanes-Oxley, the PCAOB will be inspecting the Big 4 annually and launched its inspection program in 2003 with “limited procedures” inspections of these firms. McDonough said the latest inspection reports have been made available to the Big 4, which now have 30 days to respond. Once the firms respond, the PCAOB will finalize its reports and deliver them to the SEC. While certain portions of the reports will be made public, Sarbanes-Oxley limits the PCAOB as it must keep any potential defects in a specific firm’s quality-control system confidential, as long as the firm corrects the problems within 12 months.
Reasons Why Executives Should Want A Sound Compensation-Setting Process
Yesterday, the SEC issued a press release stating that it would begin posting Corp Fin and IM comment letters and filer responses on its own website. No more FOIA requests – and no more using paid subscription services to dig these out.
This process will commence for any filings made after August 1st that are selected for review – and no correspondence will be posted until after 45 days of a completed review. Based on the language in the press release, it seems fair to expect that the Staff will now routinely seek Tandy letter representations.
And of course, confidential treatment requests are more important than ever. The SEC is interested in receiving “suggestions on how to make the transition and process work efficiently, and ask that any comments be provided promptly.”
Yesterday, the SEC and PCAOB issued interpretive guidance regarding internal controls. The SEC’s guidance came in the form of 18 FAQs from the Office of Chief Accountant and Corp Fin. The PCAOB’s guidance came in the form of 26 FAQs.
3-2 Commission Vote on Mutual Fund Reform
At yesterday’s open Commission meeting – by a 3-2 vote – the SEC adopted mutual fund reforms now require that independent directors comprise 75% of mutual fund boards and the chair of such boards be independent. Commissioners Atkins and Glassman dissented – the same holdouts on shareholder access.
As pointed out by my good friend John Penn, although this result isn’t surprising in light of all the chatter before the formal vote, the Commission’s willingness to effectuate an action of such import based on a 3-2 vote may be bad news for those opposed to the shareholder access proposal. Perhaps to soothe the pain of the split vote, Chairman Donaldson pointed out during the meeting that since he took his post, the Commissioners had voted over 1,600 times and only 16 dissents had been registered.
More on the May/June Issue of The Corporate Counsel
As I blogged yesterday, we have posted a free version of the latest issue of The Corporate Counsel on CompensationStandardsConference.com that lays out the first 7 steps of a 12-step program to responsible compensation practices. We have received an amazing amount of feedback already (and keep those coming) and a few questions about when the next 5 steps will be available.
Those last five steps will be laid out in our September/October issue – but to satisfy those that can’t wait, we intend to post a working draft on CompensationStandardsConference.com next week (but that working draft will only be available to those that register for our October 20th compensation conference, which also gives you access to all the resources on CompensationStandardsConference.com). Some of the remaining steps will require more backbone than the first seven to implement – and it still is a working draft…
