For example, I just added this new 21-page checklist from Davis Polk, which includes a variety of sample Section 302 certifications (remember that companies will need to revise what they have used in the past, whether they will be filing 404 management reports for the first time or taking advantage of the transitional 404 deadline relief that the SEC passed last month), a great 404 compliance chart, and more. If you have anything that might be useful to others for this proxy season, please let me know.
SEC Acts on “Reporting Out” Case
Yesterday, the SEC filed civil fraud charges against TV Azteca and three current and former TV Azteca officers and directors for allegedly engaging in an elaborate scheme to conceal the Chair’s role in a series of transactions through which he personally profited by $109 million. The SEC complaint also alleges that the officers sold millions of dollars of TV Azteca stock while the Chair’s self-dealing remained undisclosed to the market place.
You might recall that this situation involves a case of “reporting out” by the company’s outside counsel. Here is what the SEC’s press release states about that:
“TV Azteca filed the false reports with the SEC, concealing Salinas’ involvement in the Unefon debt transactions, despite receiving advice from its U.S. counsel that these transactions were material, reportable transactions under U.S. federal securities laws. While the company provided general disclosure of the transactions, it refused to reveal information crucial to investors: that Salinas was behind the transactions and personally profited from them. TV Azteca’s resistance led to the eventual resignation of its U.S. counsel, who told the company’s board of directors and management that it was resigning consistent with its obligations under Section 307 of the Sarbanes-Oxley Act.”
Below is an interesting summary of Equilar’s analysis of FAS 123 assumptions for how large companies value their options (as disclosed in their proxy filings). As footnote disclosures begin to appear in income statements by mid-2005 (for those companies who haven’t adopted FAS 123 already), focus will turn to their assumptions. Equilar looked at the most recent 3 years of filings for 472 companies in the S&P 500, focusing particularly on expected volatility assumptions as well as expected terms.
Here are the highlights of Equilar’s survey:
a. Expected Term Assumptions
– For expected term assumptions there has been little change in the past three years with the median (5.0 years), the 25th percentile (4.5 years) and the 75th percentile (6.0 years) remaining constant for each of the past three years.
– While there has been little change at the summary level, this masks the fact that over 56.3% of companies have changed their assumptions in the last three years; 28.8% of S&P500 companies increased their terms with a median increase of 17.5% and 27.5% of S&P500 companies decreased their terms with a median decline of 19.1%.
b. Volatility Assumptions
– For expected volatility assumptions, there has been an increase in the median volatility from 35.7% in 2001 to 36.5% in 2003. The 25th percentile and 75th percentile levels were little changed at 29.7% and 47.0% respectively.
– As one would expect, almost all companies (91.3%) had a change in their expected volatility assumptions over this three year period; 46.5% of companies increased their expected volatility assumptions with a median increase of 10.2% and 44.8% of companies decreased their expected volatility assumptions with a median decrease of 10.0%.
Want to Improve Your Internal Controls – Try Not Performing Your Duties?
Who would have thought that internal controls could be improved by
adopting a board-approved policy requiring that officers and employees not
perform their duties? Check out this December Bulletin from California’s Department of Financial Institutions regarding its position that institutions should relieve officers and employees from their duties for two consecutive weeks each year.
While I understand the Department’s logic, it struck me as amusing that a government agency would criticize someone for failing to prohibit its officers and employees from performing their duties. And although this is amusing, it would not be surprising for type of policy to find its way into the internal controls morass at public companies under circumstances for which it might make sense. Thanks to Keith Bishop for pointing this tidbit out and all this analysis!
Perils and Promises of Electronic Data Discovery
In the world we live today, I’m not sure we can learn enough about the perils of electronic discovery. Learn more in this interview with Tom Barnett on the Perils and Promises of Electronic Data Discovery.
Happy New Year! Here is my first annual – and admittedly lame – attempt at an “In/Out” List:
– Internal Controls/Controlling CEOs
– Just Vote No Campaigns/Shareholder Access
– Real-Time Disclosure/Abstaining from Disclosure
– Pay-As-You-Go/Pay-When-Ya-File
– SEC Comments on the Web/SEC Comments by FOIA Request
– Independent Auditors/The Company’s Auditors
– Tally Sheets/Mega-Grants
– Bloggers (voted “Men of the Year” by ABC!)/Weekly Print Newsletters
I know, not really off to a rousing start this year…if you have any suggestions, please email them to me and I will add them to this list.
Time to Renew!
As all our subscriptions are based on a calendar year, some of your subscriptions may have expired over the weekend. You can renew online below for any of these fine print or online publications:
Year in Review for NYSE and NASD – and Looking Forward for PCAOB
Here are memos reviewing what happened in 2004 at the NYSE and the NASD.
Last week, the PCAOB approved a revised budget for 2005 – which includes nearly a 50% increase in staffing. This press release notes that the PCAOB might have to increase its already relatively high wages to attract new hires (fyi, the PCAOB pays considerably more than the SEC to its staffers).
Earlier this week, Corp Fin reversed an earlier decision and is now allowing Disney to exclude a shareholder proposal regarding shareholder access. Disney had appealed Corp Fin’s earlier decision to the full Commission – but Corp Fin reversed its position upon reconsideration before the Commission got a chance to act on the appeal. According to today’s Washington Post, the proponents will still appeal this reversal to the full Commission (to learn more about the appeals process, see this chapter I wrote).
As I blogged about on December 20th, Corp Fin’s original Disney decision was not consistent with positions the SEC staff took last year on proposals submitted to Qwest Communications and Verizon Communications. But Corp Fin appeared justified in their original Disney decision based on a footnote in the proposing release regarding Rule 14a-11.
I’m not sure what tipped the scale to cause the reversal – but I believe that the proponents didn’t qualify under the parameters set forth in footnote 74 of the access proposing release (perhaps the 1% ownership threshold).
Sample Insider Trading Policies
We have tripled the number of sample insider trading policies – now nearly 80 samples! – in our “Insider Trading Policies” Practice Area, including indicating the date on which each policy was last amended.
Here is the SEC proposing release putting out for comment the separate proposals of the NYSE and NASD regarding the allocation and distribution of shares in IPOs. Comments are due 21 days from publication in the Federal Register.
The proposed rule changes respond to several of the recommendations of the NYSE/NASD IPO Advisory Committee, which issued a report with 20 recommendations in May 2003. Topics covered include: Quid Pro Quo Allocations; Spinning; Flipping; and IPO Pricing and Trading Practices – book-running lead manager reports to the issuer’s pricing committee; lock-up agreements; application of returned shares to offset the existing syndicate short position or if no short position exists, to unfilled customer’s orders at the public offering price; and Market Orders.
The NYSE and NASD proposals generally appear to be substantively consistent, with some language and format differences and differences in the Definitions Sections – and they should be read in conjunction with the SEC’s proposed amendments to Regulation M regarding IPOs and other public offerings. The SEC has specifically asked for comments on any differences between its Regulation M proposals and the NYSE and NASD proposals, particularly regarding penalty bids and quid pro quo allocations, which may present compliance or interpretive issues. Thanks to Mike Holliday for all of this analysis!
Environmental Disclosure
We have created a new Environmental Disclosure Practice Area, an area that is likely to become increasingly important as the recent success of social shareholder proposals illustrates how this is becoming a more crucial agenda item for investors – and other entities like the GAO push the SEC to upgrade its disclosure requirements in this area.
Maybe the holidays are taking their toll on me – but I believe this updated Current Accounting and Disclosure Issues Outline was just posted by the SEC even though its dated November 2004. The old one was from 2001.
The False Claims Act and the Beauty Queen
From someone that reads too many law firm memos, I appreciate Fried Frank’s annual gag memo. This year’s memo is about a Beauty Queen – and as always – is based on a true story.
NYSE Forms for Non-US Issuers
The NYSE has posted Section 303A Annual Affirmation Forms customized for non-US issuers, including an Exhibit B. These are different than the US forms, because the requirements are different for Foreign Private Issuers.
In this article, Bloomberg reported just before Christmas Eve that the Commission originally was pursuing a claim against Disney CEO Michael Eisner as part of the settlement the company reached with the SEC earlier in that week over disclosure violations. Apparently, Eisner and the Enforcement staff had reached an accord in which he took blame for not disclosing the company had business ties to some directors as well as omitting disclosure of certain compensation.
But the SEC commissioners split on that aspect of the settlement, ending the
case against Eisner and leaving just the case against the company; marking the second time this month the Commission balked at approving a staff recommendation to penalize a company official. On December 9th, SEC Chair William Donaldson and two commissioners rejected a Enforcement settlement with former Global Crossing Chair Gary Winnick. Must be some pretty interesting closed Commission meetings these days…
SEC Posts Adopting Release for Regulation AB
Thacher Proffitt has this analysis of the adopting release for the new asset-backed framework (warning: 495-page PDF!), that was posted late last week: The securitization industry has received a very important benefit under Regulation AB relating to market-making. In the proposing release, the SEC had taken the position that a current prospectus was required in market-making transactions (that is secondary sales by dealers who are affiliated with the depositor). Moreover, the SEC proposed that all pool information in the original prospectus would have to be updated in the market-making prospectus.
A number of comment letters (including letters from The Bond Market Association, the American Securitization Forum and the ABA) argued that the policy reasons for requiring a market-making prospectus did not reasonably apply to ABS. Comments also stated that there were adequate protections under federal securities laws to prevent misuse of information by dealers in these transactions.
In the adopting release for the final Regulation AB, the SEC stated that “we are sufficiently persuaded by these comments such that we will no longer require registration and delivery of a prospectus for market-making transactions” for ABS (see footnote 192).
In other words, there is no longer any requirement in secondary transactions to update the prospectus – or to maintain 1934 Act reporting after it is allowed to be suspended as a means of updating the prospectus – merely because the depositor is affiliated with the dealer. This position applies regardless of whether the dealer is affiliated with the servicer. This position does not apply to registered remarketing transactions, resecuritizations where information must be provided on the underlying ABS, or a delayed or continuous selling shareholder offering. However, these exclusions would not apply to typical market-making transactions.
On Monday, the IRS and Treasury Department issued the first of what they said will be a series of “guidance” notices under Section 409A. Section 885 of the recently enacted American Jobs Creation Act of 2004 added section 409A to the Internal Revenue Code, providing new rules for nonqualified deferred compensation plans.
In Notice 2005-1, the agencies designated all of 2005 as a transition period during which companies and executives will not be penalized if their plans follow a good-faith interpretation of Section 409A. The Notice also provides guidance regarding the termination and amendment of certain nonqualified deferred compensation arrangements and defines a change in ownership or control. In addition, this guidance defines the arrangements that will be considered deferred compensation subject to the new rules – as well as outlines the new reporting and employment tax obligations of employers in connection with section 409A.
The guidance also gave relief to companies that grant stock appreciation rights to employees in ways that “do not present potential for abuse or intentional circumvention.” The NASPP was heavily involved in lobbying to spare stock SARs the death sentence.
Section 409A applies to amounts deferred on or after January 1, 2005, subject to several special effective date rules. Copies of this lengthy guidance are up in the NASPP’s Deferred Compensation Legislation portal. More to come from the NASPP on what this all means in the near future.
The Priorities of What The SEC Posts
Not sure what the purpose of this priority list really is – as most items appear to get posted pretty quickly on the SEC’s site – but the SEC maintains an explanation of why they post particular items on a quicker basis than other items.
Strangely, FAQs and Staff Guidance fall into the lowest priority bucket – below items like Appellate Briefs and the Mutual Fund Fee Calculator. Not addressed in the priority list is the upcoming comment letter/responses database (fyi, the SEC still is working out the kinks of the mechanics of how that database will work).
Yesterday, the SEC settled enforcement proceedings against The Walt Disney Company for failing to disclose certain related party transactions between Disney and its directors, and for failing to disclose certain compensation paid to a Disney director.
In particular, Disney failed to disclose that the company employed three children of its directors, who received annual compensation ranging from $60k to more than $150k. In addition, Disney did not disclose that the spouse of another director was employed by a subsidiary 50% owned by Disney and received compensation in excess of one million dollars annually. Further, Disney failed to disclose that it made regular payments to a corporation owned by a Disney director that provided air transportation to that director for Disney-related business purposes. Finally, Disney failed to disclose that it provided office space, secretarial services, a leased car, and a driver to another Disney director, services valued by the company at over $200k annually.
A number of media reports state that the Justice Department is investigating a member of the SEC’s Office of Compliance, Inspections and Examinations for a bribery allegation. Apparently, this was disclosed in a report by the SEC’s inspector general: “An office investigation developed evidence that a staff member had solicited a gratuity from an officer of a firm registered with the commission, after the staff member had conducted an examination of the firm and closed the examination without any findings.” OCIE conducts on-site investigations of brokers, investment companies and investment advisors.
My burning question is how much could a SEC staffer possibly ask for in a bribe(that is worth burning a career)?
Last week, it was widely reported that Disney submitted an appeal to the Commissioners seeking an overturn of Corp Fin’s decision to not exclude a shareholder proposal. The shareholder proposal – co-filed AFSCME, Calpers, Illinois State Board of Investment and the New York State Common Retirement Fund – requests that Disney essentially becomes subject to proposed Rule 14a-11, which could allow shareholder groups that have held more than 5% of Disney’s outstanding common shares for more than two years to nominate up to a specified number of candidates who are independent from both the nominating shareholder and from Disney for election to the board.
Among its arguments, Disney notes that Corp Fin allowed the exclusion of similar proposals at Qwest Communications and Verizon Communications based on the exclusion basis in Rule 14a-8(i)(8) (that basis permits the exclusion of shareholder proposals if they “relate to the an election for membership on the company’s board of directors or analogous governing body”).
However, the Commissioners might be able to distinguish those no-action responses from last year – because the proponents in those instances did not closely mirror the procedures set forth in proposed Rule 14a-11. As proponents in later years typically do based on experience, the proponents in Disney could have made the necessary tweaks to the procedures in their proposal to avoid exclusion – particularly in light of footnote 74 in the shareholder access proposing release (which states that the Commission intends to amend Rule 14a-8(i)(8) so that proposals that make companies subject to the Rule 14a-11 framework are specifically non-excludable).
SEC Forms Advisory Committee on Smaller Public Companies
Late last week, the SEC formed an Advisory Committee on Smaller Public Companies to examine the impact of Sarbanes-Oxley and other aspects of the federal securities laws on smaller public companies. Heading this committee up will be Katten Muchin partner Herb Wander and Jim Thyen, CEO of Kimball International, with between 11 and 21 members to be named soon (representing the varied interests affected by the range of issues to be considered).
Trivia – Here is the process by which the SEC can form such a committee – an advisory committee can be established 15 days after publication of a notice in the Federal Register by then filing a committee charter complying with the Federal Advisory Committee Act with Congress. I learned something today!
Waxing Nostolgic About 450 5th Street
After Friday morning’s ASCS Securities Law meeting with the Corp Fin staff, I decided to hang around for the annual SEC holiday party. As I chatted in Room 1C30, I couldn’t help but reflect on all the good times at 450 5th Street as the SEC prepares to move into its new quarters sometime next year.
When I was a SEC Staff, I recall old-timers talking about the locations where the SEC used to reside – and me not caring all that much. I’m sure that’s how it will be for the hundreds of new staffers that now grace the SEC’s halls.
