According to this press release, it looks like the SEC is ready to start posting their comment letters – as well as responses – commencing this Thursday, May 12th.
Starting that date, Corp Fin and IM will begin the process of publicly releasing letters relating to disclosure filings made after August 1, 2004, with some of the oldest eligible filings going up first – and as it continues, letters will be released no earlier than 45 days after the review of the disclosure filing is complete.
The comment letters and filer responses will be on EDGAR. As I understand it, you would go to a specific company’s information on EDGAR, and there will be a notation to access the Staff comment letter and one to access the company’s response.
In this Sunday NY Times interview, Jack Welch waxes poetic on serving as a CEO in today’s environment. Here is a question he fielded on serving as a director today:
“Q. These days, directors are personally liable if they make the wrong decision. Has that changed the dynamics of the boardroom?
A. I’m not in boardrooms, but I think it has to have. What we ask is, “What is the role of a director?” We’re picking them for their judgment, their character, their ability to see around corners, to sense whether the strategy is right. But they can’t do that by looking at the books. They can only do that by walking the company. They have to get out and meet people at all levels, and get a feel for what it feels like out there. Are they hearing the same things out there that they’re hearing in the boardroom? Then they have to support the C.E.O. The company has to win. If they don’t have confidence in the C.E.O., they’ve got to make the change. But being timid and being afraid is not what we’re looking for in directors.”
Corporate governance is such a tricky thing. I believe outside directors should conduct plant tours and walk the floors when they can in an effort to boost morale and get a feel for the company.
But realistically they don’t have the time to do this sufficiently to get a complete picture (unless it’s a real small business) – and more importantly, you don’t want outside directors to be interacting with employees and confusing them by giving them directives that are contrary to what their managers instruct. Leave the managing to the managers; it’s not the board’s job to get involved with daily operations.
What I think Mr. Welch is referring to is for boards to gauge employee morale as part of a CEO’s evaluation – which could also include feedback from customers and suppliers (ie. a 360 degree evaluation). Related information can be found in our “Board Access” Practice Area.
The Need for Broad Employee Equity Ownership
There is a lot of concern about the future of ESPPs and other broad-based plans in the wake of option expensing. Learn more in this interview with Corey Rosen on the Need for Broad Employee Equity Ownership. There is more information on the NASPP website – and this topic will be covered during the NASPP’s 13th Annual Conference.
Stars Come Out to Blog
As noted in this Washington Post article, Arianna Huffington has gathered a few hundred of her closest acquaintances to start their own blog city, HuffingtonPost.com. It will be interesting to see where this all goes; my favorite blogs so far are from John Cusack who went to Hunter Thompson’s memorial service and Mark Cuban on the new Enron movie which has gotten rave reviews (need to scroll down a few days in Mark’s blog). I have high hopes for Larry David’s blog, but his initial entry is not so good – even Larry’s wife has a blog…
“I’m sure you saw the latest example of executive excess highlighted in today’s Wall Street Journal . In her article, “Some Visiting CEOs Get Paid to Stay in Residences They Own,” Joann Lublin identifies several chief executives who are reimbursed for staying in their own second homes when traveling on company business.
While this practice doesn’t knock the personal use of corporate aircraft off its perch as the most notorious executive perk, it comes pretty close. Although I can understand the rationale for the payments (the company would incur a hotel expense anyway when the executive was in town), the optics make it an investor relations nightmare.
The article goes on to point out that, until this year, most companies had not previously disclosed these arrangements. [You can see representative proxy disclosures for Time Warner, Disney and Viacom linked from Mark’s blog.]
Apparently, the SEC’s recent admonishments about full disclosure and “best practices” led the companies to include the information as part of their perquisites disclosure. Interestingly, while Time Warner and Disney describe the arrangements, they both go on to expressly state that the amounts are not included in the “Other Annual Compensation” column of the Summary Compensation Table (Viacom included reimbursed amounts in the column).
Not surprisingly, investor group representatives are outraged, with one calling the practice “ridiculous.” I suspect that we haven’t heard the last of this issue.”
The Latest on the SEC’s XBRL Pilot Project
As noted in this recent press release, the SEC continues to encourage participation in its XBRL pilot program. Here are some related remarks by Peter Derby, Chairman Donaldson’s Managing Executive for Operations & Management, before the 11th XBRL International Conference on the topic.
The SEC’s XBRL voluntary filing program received a little help from the US members of XBRL International with this special web page; among the available resources are FAQs, tutorials, an email discussion group, guidelines, and a list of the companies that are voluntarily submitting XBRL documents to EDGAR (five so far). The site also includes links to US GAAP taxonomies, sample XBRL instance documents, and technical background information. Thanks to Allyson Weaver of Electronic Filing Services for pointing this out!
Bullet’s Fever – Happens to Me Every Year!
Moved to the DC area in the late ’70s and became a lifelong Washington Bullets fan after they won a world championship on the backs of Wes Unseld, Elvin Hayes and the gang. Little did I know they wouldn’t win another playoff series for a quarter century – until this weekend! Now I got Bullet’s Fever! DC residents will know this Nils Lofgren song from 1977:
For those of you not interested in b-ball, you can read about “Lawyerpalooza” instead…
The SEC just posted this speech by SEC Commissioner Harvey Goldschmid that was given a few weeks back before the Council of Institutional Investors. A short-timer, due to depart the SEC soon and return to teaching at Columbia University, Commissioner Goldschmid outlines critical issues that he views the SEC as facing over the next year. In his speech, the Commissioner pleads to keep the shareholder access concept alive, which is likely to come in the form of the majority vote movement afoot at the state level. He also pleads that the SEC remain an independent institution, immune from the pressures of partisan politics.
SEC’s Section 16 Amicus Brief
In the ongoing Dreiling v. American Express Travel Related Services case, the SEC has filed this amicus brief in which the SEC urged that it acted within its authority in adopting Rule 16b-3(d) (which exempts certain grants, awards, and other acquisitions of an issuer’s securities by its officers and directors from the short-swing recovery provision in Section 16(b)) – and that, to the extent a person is a director by having “deputized” someone to be a director on its behalf (and is thereby subject to Section 16) exemptive Rule 16b-3(d) also applies to that person – but for that rule to apply, the board approving the transaction must be aware that the deputizing person is a director. Overall, it is important that the SEC acknowledges the possible availability of Rule 16b-3 in deputization situations.
As reflected in this letter from SEC Commissioners Atkins and Glassman to the US Senate Committee Chair on Appropriations, tense relations among the Commissioners continue to fester. The letter starts by stating:
“In voting on whether to send the attached Staff Report on the Exemptive Rule Amendments of 2004: The Independent Chair Condition as required by Consolidated Appropriations Act, 2005, we dissented. We do not believe that the staff report adequately responds to the questions directly posed in the Act. Unfortunately, we were not given at any point in the process an opportunity to provide constructive input on what we would consider a responsive report.”
In my many years following the SEC, I have never seen such disharmony at the SEC’s highest level; if anything, relations among the Commissioners typically were so good that Commission meetings were quite routine and bordered on monotonous. I can’t imagine what closed Commission meetings are like these days! By the way, the Commissioners have not moved to Station Place yet – which is what the new HQ is being called – so they are still on the 6th floor of 450 5th St.
Conflicts of Interest and Dicey Engagements
We have posted the transcript for the DealLawyers.com webcast: “Conflicts of Interest and Dicey Engagements.” I found this to be a fascinating program and some members have pointed out the timeliness of the program in light of the Goldman Sachs conflicts controversy surrounding the NYSE/Archipelago transaction. It was interesting to note this piece in the New York Times last Sunday that even challenged the “back-up” fairness opinions given by others because of ties they had to Goldman.
SEC Guidance May Change How Companies Gauge Accounting Errors
As reflected in my notes from PLI’s “SEC Speaks,” SEC Deputy Chief Accountant Scott Taub talked about a potential summer project that could change how companies determine when accounting errors are large enough to warrant adjusting the company’s books. This project is interesting because it bears on the ongoing “materiality” debate.
Yesterday, the WSJ ran this article on the topic – below is an excerpt:
“Companies currently may choose between two different methods, a process the SEC accountants hope to standardize by calling for companies to use both methods, booking an error if either method shows it to be substantial. The idea was recommended in an academic paper to be published this summer.
Although the shift would require companies to revisit previously issued financial results, SEC accountants are expected to allow companies to use a one-time “catch-up” for past errors rather than roil markets with restatements.
The shift could be difficult and even “ugly,” cautioned Scott Taub, SEC deputy chief accountant, but SEC accountants won’t recommend”grandfather” treatment for companies that would protect them from having to correct prior problems found to be material under a two-pronged approach. Taub’s comments were made at an “SEC Speaks” conference last month at which he gave the usual disclaimer that he was speaking for himself, not the SEC.
Companies can’t ignore “material” errors large enough to matter to investors, typically those exceeding 5% of net income. While companies must consider quantitative and qualitative factors, they have a choice of two methods to quantify if errors are big enough to be material.
Since results can vary depending on which method is used, companies are supposed to pick one approach and stick with it. Companies rarely – if ever – divulge which method they use, which critics say gives executives too much leeway to engineer results.
A 2000 panel on audit effectiveness recommended regulators settle on one method to avoid confusion. Yet the choice isn’t clear-cut since there are instances where one method would indicate an error is material while the other method wouldn’t.
The cumulative or “iron curtain” approach compares the total amount of a misstatement at the end of the current period to net income, while the current-period or “rollover” approach compares the amount of misstatement added in the current period to net income. The “rollover” method, thought to be more prevalent, recognizes that prior errors may be offset or reversed in the current quarter or year while the “iron curtain” approach doesn’t allow that.
Under the “iron curtain” method, a company that overstated inventory by $100 million in 2003 and by $150 million in 2004 would tally a $150 million error in 2004. Under the rollover method, the company would calculate it at $50 million. The $100 million difference could make the mistake material under one method but not the other.
Auditors may be influenced by which method is used. Academic researchers questioned hundreds of accountants at Big Four firms and found just 23% would ignore an error that is relatively large under the iron curtain method while 70% would do so when the rollover method showed the effect was near zero.”
With M&A activity heating up, many problems continue to exist with how to deal with stock options. On DealLawyers.com, I have posted this interview with Mike Melbinger – of CompensationStandards.com blogging fame – on Stock Option Problems in M&A Transactions.
More on the Niagara 10-K Blog
A number of members responded to my blog yesterday regarding Niagara’s 10-K reference. Some pointed out that the only time that the words “Form 10-K” appear is in the Cautionary Statement re Forward Looking Statements on page 15 of their annual report, likely an oversight when they copied the statement from the prior year’s Form 10-K.
Sage Keith Bishop noted that even though Niagara is a Delaware corporation, California corporations and foreign corporations having their principal business office in California (or that are governed by Corp. Code Section 2115) are required to send an annual report to shareholders within 120 days after the close of the fiscal year (fyi, corporations with less than 100 shareholders may waive this requirement in the bylaws). The annual report must contain financial statements.
If the company is not subject to the Exchange Act’s reporting requirements – or exempted pursuant to Section 12(g)(2) – under Cal. Corp. Code Section 1501, the report must also contain information concerning transactions between the corporation and its officers and directors involving more than $40,000 and indemnification of officers and directors in the amount of $10,000 or more. Therefore, companies that “go dark” may still have an annual report requirement under California law.
Paul Roye Lands at Capital Research & Management
Paul Roye, who left as Director of the SEC’s Division of Investment Management in March, has been hired by the manager of the American Funds, the 2nd largest mutual fund with $670 billion in assets. Paul will start May 9th as a Senior Vice President at Capital Research doing compliance and legal work.
Paul will not be involved with an SEC investigation that reportedly surrounds portfolio trades at the firm. Federal ethics rules ban former SEC employees from representing private clients in SEC matters for two years after leaving the agency if the employee had direct involvement in the matters.
We are excited to announce that John Reed will be kicking off our major “2nd Annual Executive Compensation Conference.” In addition to serving as the Chairman of the NYSE until recently, John Reed served as the distinguished CEO of Citigroup for many years.
As many of us may be aware, John Reed and a distinguished group of leaders are spearheading an effort to “Restore Trust in American Business.” With executive compensation in everyone’s crosshairs – from regulators to plaintiffs’ lawyers to shareholders and the American public – we could not think of a more respected and responsible person to kick off this responsible-minded conference. This year’s conference will have an even greater emphasis on the practical guidance that directors (and their advisors) now need to implement in order to meet the new standards – and avoid personal liability – and to restore trust in our system.
A number of other former CEOs and respected directors will be participating in the conference – including Ken West, Sam Skinner, Warren Batts, Ed Brennan, Michele Hooper and Jim Crown – with more to be announced shortly.
We urge our members to sign up – and schedule your directors’ calendars – NOW for this critical conference. As you might recall, SEC Corp Fin Director, Alan Beller, gave his major address on compensation proxy disclosures at last year’s Conference. Learn more in this “Ten Good Reasons To Register for the Conference Now!”
Advance Notification Bylaws
With annual shareholder meetings being held in droves, it felt like a good time to conduct this interview with Marc Weingarten on Advance Notification Bylaws.
I have been following an interesting flap between Niagara Corporation and one of its large shareholders over Niagara’s deregistration from the ’34 Act. In a press release, the shareholder claims that the company recently circulated an “annual report” that indicated it was a 10-K, yet the company had deregistered its securities in April 2004. The company responded to these allegations in its own press release later that day.
I haven’t investigated the circumstances behind the flap to determine their veracity, but if the company erroneously identified its annual report as a 10-K – that seems misleading because it represents that the filing contains all the information required by a 10-K, even if the report was not filed with the SEC. On the other hand, I think there would have to be 10b-5 scienter for the statement that it’s a 10-K to have much consequence though. Just musing…
In anticipation of today’s webcast – “The Latest Regulation FD Practices” – take a gander at the running results from our Reg FD survey below:
1. Our company has a written policy addressing Reg FD practices:
– 9%: Yes, and it is publicly available on our website
– 64%: Yes, but it is not publicly available on our website
– 11%: No, but we are in the process of drafting such a policy
– 16%: No, and we do not intend to adopt such a policy in the near future
2. Regarding reaffirmation of earning announcements, our company uses one of the following rules of thumb regarding private reaffirmations:
– 70%: We do not allow private reaffirmations
– 6%: Rule of thumb allowing for private reaffirmations of one week or less
– 5%: Rule of thumb allowing for private reaffirmations of one to two weeks
– 6%: Rule of thumb allowing for private reaffirmations of two weeks or longer
– 13%: We permit private reaffirmations – but never use a rule of thumb, instead we require confirmation of no material change with CEO, GC, etc.
3. At our company, our CEO and other senior managers (note more than one answer permitted):
– 6%: Are not permitted to meet privately with analysts
– 41%: Are only permitted to meet privately with analysts so long as someone else accompanies them (such as general counsel or IR officer)
– 50%: Are permitted to meet privately with analysts after briefing by IR officer, general counsel, etc.
– 33%: Are only permitted to meet privately with analysts during certain designated times
Please note that we have had a last minute substitution on the panel of today’s webcast as John Huber unfortunately can’t make it – but we gain the inhouse perspective of Michael Cahn of Textron and Stacey Geer of BellSouth.
Update on the Berlin-Bremen Stock Exchange
Last June, I blogged about how some members had success getting their clients delisted from the Berlin-Bremen Exchange. Now, I am hearing that this exchange has taken a more harsh position and is not willing to delist companies (remember that the Exchange lists companies without their knowledge or consent).
I would be interested in hearing from anyone that has had dealings with this Exchange recently, as this problem appears to be worse than ever. Then, I will update our “Berlin-Bremen Exchange” Practice Area.
SEC Fees Going Down Again for 2006
On Friday, the SEC issued this fee rate advisory indicating that – effective October 1, 2005 (or 5 days after the date on which the SEC receives its fiscal year 2006 regular appropriation, whichever date comes later, and it always comes later!) – the Section 6(b) fee rate applicable to registration of securities will decrease to $107.00 per million from the current rate of $117.70 per million, which is about a 9% reduction! Over the past few years, this rate has been steadily dropping.
Yesterday. the SEC charged Tyson Foods with inadequate proxy disclosures as well as with failing to maintain adequate internal controls in connection with its former Chair’s perks. The company settled by paying a $1.5 million civil fine – and the former Chair, Don Tyson, will pay an additional $700k since he caused and aided the company’s violations of disclosure rules for benefits that he, his friends and family members received while he was Chair and after his retirement in October 2001. Mr. Tyson is still a consultant to the company and sits on its board.
Reading through the list of perks that Mr. Tyson received, you can understand why companies might be loathe to disclose the perks that their senior managers receive. There is some incredible stuff disclosed in this press release: from $80,000 in lawn maintenance fees and $200,000 in housekeeping fees – to $1 million to cover the personal income tax liability associated with his receipt of the numerous benefits!
One aspect of the SEC’s order that Mark Borges blogged about yesterday was that the SEC found that the company’s use of the phrase “travel and entertainment” misleading to describe the continuation of Mr. Tyson’s perquisites under his retirement agreement. To Mark and me, this really underscores one of the conclusions from the earlier GE enforcement proceeding: executive perks have to be described with sufficient specificity so that shareholders can understand the nature and scope of these benefits.
In the May/June issue of The Corporate Counsel – which will be mailed in early June – there will extensive analysis of perk use and disclosures.
FASB Proposes New GAAP Hierarchy
Good for both accountants and us lawyers alike – in connection with its effort to improve the quality of financial accounting standards and the standard-setting process – the FASB yesterday published an exposure draft on “The Hierarchy of Generally Accepted Accounting Principles.”
The GAAP hierarchy, which currently resides in the AICPA’s Standard No. 69, ranks the relative authority of accounting principles issued from multiple standard-setters. The FASB’s codification and retrieval project will integrate existing US GAAP into a single authoritative retrievable source, thereby creating a single authoritative codification of GAAP.
Remember that we have a set of FAQs that explains all the basics of accounting and auditing in our “Accounting Overview” Practice Area.
My Beef with the DC Bar
Just finished reading an article in the Legal Times about how eight former DC Bar Presidents – including former Deputy Attorney General Jamie Gorelick – filed an amicus brief supporting a DC Bar member (who is a senior DOJ staffer) that was suspended from the Bar for not paying his dues. The brief was filed because the DC Bar is essentially saying he can’t rejoin the bar – even though he wants to pay what he retroactively owes – due to an arcane DC Bar rule.
The DC Bar’s GC doesn’t sound responsive as he is quoted is saying, “It is a mandatory bar, not a club” and explains how the rules limit retroactive reinstatement only where the DC bar makes a mistake. Got news for the GC – his staff made a mistake with my membership last year and they still refuse to acknowledge it despite multiple appeals. It is the most rigid organization I have ever dealt with – so I am glad to see this article and know I ain’t crazy. Trust me, the members don’t come first with the DC Bar!
Note that the senior DOJ staffer has a more complex situation, as he is being sued for malpractice as he has been trying cases for two years without a license in DC. Me? I just sit in my home office in pajamas and post stuff on websites all day – so I really don’t need to give my money to the DC Bar anyways. As you probably can tell, I had to get that off my chest…
I’m excited about my first podcast – and it’s a timely one as Lou Rorimer and Lisa Kunkle explain “What’s Next after the Annual Meeting.” Let me know if you have trouble getting it to play.
For those expecting podcasts captured at the ABA Spring Meeting in Nashville, I confess I didn’t have the nerve to whip out the microphone and start asking questions – still making the conversion from lawyer to journalist after all these years. But now that I got my feet wet, I think I will be podcast-happy. Let me know if you have a topic you want addressed – or want to be interviewed yerself! This one was done over the phone and the audio quality seems fine.
How Not to Conduct An Annual Meeting
Speaking of annual meetings, in this Sunday’s NY Times, this article points out how some companies still don’t quite get “it” about corporate governance in the meeting context. Look at what the article says Weyerhaeuser did:
“At its annual meeting last Thursday, the company’s board and management broke with their longstanding tradition of taking shareholder questions from an open microphone on the floor. Instead, they required that shareholder questions be submitted in writing, either before or during the meeting. And Steven R. Rogel, the company’s chief executive, announced that his directors and managers would devote just 15 minutes to answering the written questions.
It’s a disturbing precedent to abolish the single spontaneous interaction that executives — who, after all, are hired help — have with their owners every year. But Weyerhaeuser went even further, according to an investment manager who attended the meeting, by gaveling down several shareholders who tried to ask questions from the floor. And when management cut short the answer period and a proxy holder stood up to make a point of order and ask why, a beefy security guard removed him from the meeting.”
And in the article, here was the response from Weyerhaeuser:
“Frank Mendizabal, a spokesman for Weyerhaeuser, said: ”What we were trying to do was ensure the meeting was orderly and that as many questions as possible were answered. It’s a business meeting, not a forum for special interest groups.”
He said the company answered 12 of about 30 questions that were submitted and that it planned to communicate its responses to the remaining queries, though he said he did not know how it would do this. He added that Weyerhaeuser had not decided whether it would stick to the written-question format at next year’s meeting, but that more questions were answered this year than in previous years when they came from the floor.”
Anyone surprised that Weyerhaeuser recently made the focus list of CalPERS (and that was even before the annual meeting was held!) of corporate laggards? Apparently the Weyerhaeuser spokesperson was surprised – here is another quote: ”We were certainly surprised and disappointed that Calpers took that action,” he added. ”We pride ourselves on our ethics and corporate governance.” Lots of other gems in the article…
May Issue of Eminders is Available
We have posted our May issue of our monthly email newsletter – sign up for this free newsletter today!
Last week, someone posted the overvoting question below in our “Q&A Forum” – note that overvoting reportedly occurs at 95% of shareholder meetings – and I couldn’t help but have Julie conduct this interview with me to delve deeper into this unexplored topic. For the answer to the question below, see #879 in our Q&A Forum:
“Apparently it is relatively common that at proxy time, ADP and the broker community don’t properly reconcile votes. Very often brokers transmit voting instructions through DTC for more shares than they really have, in some cases substantially more. The transfer agent and ADP both wash their hands of the problem, and all point fingers at the brokers having multiple account numbers at DTC returning votes with the wrong account flagged. In years past, we haven’t heard about this problem. This year, the transfer agent explained the problem and wants us (the issuer) to tell them how to tabulate the overvotes. The transfer agent will either (a) not tabulate the vote of a broker’s shares unless the votes correspond to the broker’s DTC position or (b) tabulate the shares in such a manner as to “subtract” the over votes from management’s recommendations. Unbeknownst to us, option (b) has been used in years past. Any reaction on the choices, other alternatives and what others are doing? Have others heard of this problem?”
D&O Insurance Transcript is Posted!
We have posted the transcript from the webcast: “D&O Insurance Today.”
SEC Approves Prohibition of Analysts from Participating in Road Shows
Last week, the SEC approved a NYSE and NASD rule that prohibits analysts from participating in road shows. The 10 largest investment banks have already been subject to such a ban since a 2003 settlement with Eliot Spitzer.
Besides barring analysts from appearing at road shows, the new rules preclude analysts from any communication with current/prospective banking customers while bankers are present. Similarly, the rules forbid bankers from directing analysts to take part in sales or marketing efforts related to investment banking deals.
Under the new rules, analysts will be allowed to “educate” investors about investment banking deals, provided their presentations are fair, balanced and not misleading. Analysts may communicate in writing or make oral presentations – but only if investment banking personnel and company managers aren’t present.
