At the end of the ABA’s Business Law Section meeting in Seattle last Saturday, Giovanni Prezioso, the SEC’s General Counsel, gave a speech that should serve as interesting reading.
Among other topics, Giovanni noted that the SEC still is considering adoption of its outstanding “noisy withdrawal” proposal and that he believed that the SEC’s existing rule pre-empts any state laws that are contradictory. Notably, he warned that the SEC is closing watching how lawyers apply the new standards and monitoring how the state bars address the issue of lawyers’ obligations to clients.
SEC “Notices” PCAOB’s Auditing Standard No. 1
The SEC finally has “noticed” the PCAOB’s Auditing Standard No. 1, which deals with what it means to say your audit complied with the PCAOB’s auditing standards versus GAAS. As you might recall, the PCAOB is required to have all of its rules approved by the SEC before they become effective. It is my guess that odds are low to nil that the SEC won’t approve any of the PCAOB’s rules, but the SEC has been slow to move the PCAOB’s rules through this process so far (e.g. we’re still waiting for the SEC to notice the PCAOB’s Standard No. 2 regarding internal controls).
Imbedded in this notice appears to be a posturing – and important – reminder that “we’re bigger than they are” (ie. that your financials must comply with the PCAOB rules but you’d better never forget the preeminent place of the SEC). The SEC also uses the occasion of this notice to announce that it will be coming out with an interpretive release of its own.
At the ABA Spring Meeting, one hot topic was the growing struggle between counsel and auditors over audit request letters. Recent issues of The Corporate Counsel have analyzed the latest issues arising in this area – and upcoming issues will continue to address these issues as they evolve.
Along these lines, I have received a lot of emails from members rife with horror stories related to auditor request letters – as well as some success stories in pushing back. Please share your stories with me and then I will try to post a comprehensive (and anonymous) analysis of what appears to be happening in the industry.
Here is an example of a recent horror anecdote I received from a member: “Our company just received an audit request letter with the following language: Please confirm that all information brought to your attention indicating the occurrence of a possible illegal act committed by the Company, or any of its agents or employees, has been reported to [the Auditing Firm] and to the Company’s Audit Committee.”
By the way, the new edition of the “AICPA Audit and Accounting Manual” suggests the following key ingredients for engagement letters:
– Identification of the client
– Records retention policy
– Description of the services to be provided
– Responses to subpoenas and outside inquiries
– Staffing of the engagement
– Explanation of how fees and costs will be billed
– Description of client responsibilities
– Payment terms
– Designation of client contacts
– Consequences of non-payment
– Timing of the work
– Alternative dispute resolution
– Consequences of extending completion deadlines
– Withdrawal and termination
– Requests for additional services
– Client signature
– Client communications required by the AICPA
– Provisions to resolve potential ethical conflicts
– Any matter or terms unique to an engagement that are agreed upon in advance of rendering services
March 15 came and went without much fanfare, but it signaled the start of a new disclosure obligation for public companies. Beginning with their first quarterly or annual filing for a fiscal period ending on or after 3/15/04, they must provide a tabular disclosure regarding repurchases of their own securities. This disclosure is set out in Item 703 of S-K and is required by new Items 2(e) of Form 10-Q and 5(c) of Form 10-K.
A number of companies voluntarily complied with this disclosure requirement in their recent 10-Ks. With the 10-Q filing deadline approaching quickly for calendar year companies (for an accelerated filer with a quarter ended March 31, the 10-Q must be filed by May 10 this year), we have posted in our “Disclosure Analysis and Samples” practice area a new “Issuer Repurchases” page with links to some of those early examples.
The Demise of Physical Stock Certificates and T+3?
Last month, the SEC issued a concept release asking for comment regarding various topics relating to securities transaction settlements. In the release, the Commission is seeking comment on shortening the settlement cycle for securities trades from the (in)famous T+3 (so proceeds and securities would have to move more quickly after the trade date, which they often already do in our wired and wireless world) and on the elimination of physical stock certificates, bringing us closer to a paperless world.
The elimination of physical stock certificates has been a long-standing initiative of the Securities Industry Association and could serve to save companies money and administrative headaches if proposed and eventually adopted. Comment letters are due to the SEC by June 16th.
And Now, It’s that Much Easier to Submit Comments to the SEC
Recently, the SEC upgraded its website to allow anyone to submit comments on a proposal by filling out an “EdgarFeed” form. If you go to a proposing release on the SEC’s website and click the link where it says “Click to Submit Comments,” an online form pops up where you can input the relevant contact info as well as your comments – and then just hit “Submit.”
Although submitting comments before was fairly easy, this new form should facilitate the process even more (e.g. the commenter no longer needs to remember to include the file number as it’s handled automatically). It looks like die-hard commenters can use the new form to submit comments on any rulemaking that was proposed in 2004, not just those that still have open comment periods. Perhaps the shareholder access proposal would have had 20,000 comment letters instead of 13,000 with this form…
A week ago Thursday, the SEC’s Enforcement Division filed another lawsuit based on false CEO/CFO certifications as well as other fraud offenses. This complaint is entitled SEC v. Cedric Kushner Promotions.
According to Ken Winer of Foley & Lardner, based on the allegations in the complaint, the conduct at issue was egregious. so the case probably would have been brought even without the Section 302 certification.
Nevertheless, Ken points out that the complaint is interesting in one respect. The SEC charged that the CEO “signed [the annual report] and the Sarbanes-Oxley certification without having read either document and without having taken any steps to determine their accuracy or truthfulness, relying instead on nothing more than Angel’s representation to that effect.” According to the complaint, Angel was a 27-year old executive vice president, whose responsibilities included working hand-in-hand with the issuer’s auditors to ensure that filings are complete and accurate, and to review filings for completeness and accuracy prior to presenting them to the CEO and to the executive vice president who was principal finance and accounting officer.
Thus, the enforcement action signals that a CEO must do more than obtain conclusory assurances from a senior officer of an issuer. Certifying officers should not take comfort from the appearance that this case does not break new ground. Ken fully expects that the SOX certification will result in the SEC bringing enforcement actions against certifying officers that would not have been brought absent the certification.
On Friday, the U.S. Court of Appeals for the Second Circuit unanimously ruled in favor of MONY and directed entry of a preliminary injunction preventing a dissident shareholder, Highfields Capital, from violating the SEC’s proxy rules by mailing proxy material that included reproductions of MONY’s proxy card to stockholders in connection with MONY’s proposed merger with AXA Financial (without complying with the disclosure requirements of the proxy rules). The Court held that “MONY will suffer irreparable harm if [the dissidents] are allowed to enclose duplicates of management’s proxy cards in their solicitations to MONY shareholders without complying with the disclosure requirements” of the federal proxy rules.
As previously blogged about on February 16th, the judicial pendulum has swung back to reversing what had been the SEC staff’s position (the SEC’s now invalid position was that the applicability and scope of Rule 14a-2(b)(1) – the proxy rule that provides an exemption from the filing and disclosure requirements of Rules 14a-3 through 14a-6 – allowed dissidents to include management proxy cards in their mailings without preparing full blown proxy materials of their own).
IASB Issues New Accounting Standards
Last Wednesday, the International Accounting Standards Board (IASB) issued a number of new standards (and amended other standards). As I blogged a few weeks ago, these standards take effect in 2005 for more than 90 countries. Controversial standards regarding derivatives are still subject to change from what is included in these standards.
U.S. companies are still following U.S. rules, but IASB and FASB are working to create a single set of rules that both can use.
Correlation between Corporate Governance and Corporate Performance?
The latest GMI Governance and Performance Analysis study finds a statistically significant correlation between governance and performance when measured across a number of variables over a multi-year period.
Results of the new analysis are consistent with those of GMI’s 2003 report as well as other studies in the field, including “Corporate Governance and Equity Prices” by Paul Gompers, Joy Ishii and Andrew Metrick (Quarterly Journal of Economics, February 2003) and Chapter 5 of The Recurrent Crisis in Corporate Governance by Paul MacAvoy and Ira Millstein (Palgrave MacMillan, 2003).
On Wednesday, Intel caused a stir when it filed its proxy statement which revealed that it included a novel company proposal to replace its expiring shareholder-approved plan and a nonshareholder-approved plan (which still has three years of life in it) with a single equity plan that has a two-year life. The company says that it will seek shareholder approval every year beginning in 2005 to extend the plan for an additional year.
As the analysis on the NASPP’s website reveals, this is a significant development as most companies roll out plans with a ten-year life. In fact, the only company that the NASPP could find with a similar arrangement is Altera.
No-Action ’34 Act Reporting Relief for Bankrupt Companies
As the Corp Fin staff has emphasized for some time – since 1997 with Staff Legal Bulletin 2 – it is hard to obtain no-action relief for modified, reduced ’34 Act reporting for bankrupt or reorganized companies. I bet the staff rejects more requests in this area than it grants.
In fact, as this new no-action letter denying relief reflects, the Chief Counsel’s office will not hesitate to do some sleuthing of its own to rebut a company’s representations that it has few market makers or low trading volume.
Here is an excerpt from the SEC staff’s response: “Specifically, despite the company’s belief that there have been 5 market makers for the company’s common stock, the OTC Bulletin Board reports 17 active market makers for the company’s common stock as of March 22, 2004. In addition, although not included in the company’s letters, the trading volume for the company’s common stock during the months preceding the letters generally ranged in the hundreds of thousands to millions of shares per day.”
By the way, who are these investors that heavily trade a bankrupt company’s securities…
SOX on Sky Radio
So I’m on a cross-country flight yesterday, flipping through United’s radio stations and come across a program on “Corporate Governance and Best Practices.” It featured several vendors (that I never heard of before) who sliced and diced a bunch of Sarbanes-Oxley topics, including internal controls. That’s proof to me that SOX has gone mainstream. [And Michigan won that “other” basketball tourney! Go Blue!]
The FASB’s New Exposure Draft on Options Expensing
As expected, the FASB issued its exposure draft on options expensing yesterday. Comments are due by June 30, 2004. Here is the link to the FASB document that has links to the actual Proposed Statement and Appendices – a total of 229 pages of a pdf document. However, it is in segments consisting of the Proposed Statement (25 pages) and 7 appendices, each of which can be separately downloaded.
Hear what Bob Herz, Chair of the FASB, thinks about the new exposure draft on the NASPP’s webcast – “The FASB’s Expensing Exposure Draft—What it Says and How to Implement It” – on April 19th. In addition to Bob, Paul Munter, Partner, KPMG’s National Office and Ted Buyniski, Principal, Mellon Human Resources & Investor Solutions will discuss the nuances of the exposure draft and explore the various alternatives available to implement the proposed new standards. Try a no-risk trial to the NASPP and catch this exciting webcast!
Upcoming EDGAR Changes
Based on the newly released draft EDGAR manual, Form IDs soon will be required to be filed electronically – and notarized copies faxed to the SEC – before they can be processed by the SEC staff.
In addition, all existing filers will have to create a passphrase before they can continue filing. These passphrases will allow filers to reset passwords, PMAC, and CCC codes (in the past, a Form ID was required to be filed if any of these codes were forgotten or if a password expired). Another change is that the length of company and individual names can now be up to 150 characters.
These changes are scheduled to take effect on April 26th (the draft manual says the 24th, the most recent web notice says 26th). Learn more on Section16.net.
Sarbanes-Oxley to be Repealed!
I couldn’t resist an April Fool’s joke. Now, off to Seattle for the ABA Spring Meeting -and then on a quasi-vacation next week (ie – working at half-speed, but still intend to blog)…
Yesterday, the SEC proposed changes to its rules that would require that SROs submit their rule filings to the SEC electronically. The proposal also would require the SROs to post the rule filings – as well as maintain a current version of their rules – on their own websites.
This should fill many practitioners with joy, as it’s often difficult to obtain SRO rule filings prior to their publication by the SEC (even though such rule changes are considered publicly available once filed with the SEC). Further, it’s sometimes difficult to quickly obtain a copy of the revised rules once a SRO rule is approved.
By the way, the SEC revised its website so that when you access “SRO Rulemaking,” there are separate webpages for each SRO – thereby making it easier to monitor each SRO’s rule proposals as they are published for comment and approved by the SEC. Thanks to Suzanne Rothwell of Skadden Arps, who always has her finger on the pulse of the SROs!
Nominating Committee Functions and Shareholder Recommendations regarding Director Nominees
This interview includes a number of link to sample documents, policies and disclosures that Kramer Levin has put together. And we have posted even more of their useful samples in the Nominating/Governance Committee Portal and the Shareholder Access Portal. This includes:
Today, the NY Times has a story about how more companies are requiring their directors to attend shareholder meetings – and holding their meetings in more convenient locations (see above for sample website disclosure on director attendance). The article erroneously attributes the director attendance trend to SOX – rather, the SEC adopted disclosure regs on director attendance on its own volition. So don’t always believe what you read (including this blog – let me know if you ever see an error!).
Got a chuckle about the anecdote of the former Dana Corp. practice of holding its shareholders’ meeting at its outside counsel’s law firm in Richmond, VA (the company is based in Ohio) – and management not even attending. And you wonder why shareholders are mad…
Today, the Wall Street Journal has an interesting cover story about how the SEC is considering enforcement action regarding the timing of option grants – whether grants are made just before market-moving information is released. This arguably also would have the effect of understating the level of executive compensation, since the market-moving information would quickly put the options “in-the-money.” The article doesn’t identify any companies nor indicate whether SEC action is imminent.
As the article points out, coincidences may arise because a board might grant options at the same meeting as approving the release of quarterly earnings. This obviously is a practice to avoid going forward.
As has been reported earlier in The Corporate Counsel (see the Jan/Feb ’04 and Sept/Oct ’03 issues), the SEC’s Enforcement Division has been requesting documents related to executive compensation arrangements from a number of companies over the past year – and this likely is just one of various possible enforcement theories they are considering to tackle perceived executive compensation abuses.
Last of the SEC Speaks Notes
From PLI’s “SEC Speaks,” notes from the enforcement panel and from the accounting workshop.
The Compensation Consultants Speak Out!
If you didn’t catch the NASPP’s webcast on March 18th, the transcript is now posted regarding “What The Top Compensation Consultants Are NOW Telling Compensation Committees.”
Reliving the webcast through the transcript bore out how useful the program was in this time of transitioning beyond what is legally required in the exec comp area.
Last week, the NYSE updated its corporate governance forms that were first made available last month. In addition, there are two new forms: one for affirming the audit committee’s composition at the time a IPO company lists on the NYSE and another to report any change of the audit committee’s composition.
The NYSE also has tweaked the instructions to Section 303A Annual & Interim Affirmations – and point out (in questions 6 and 7) that companies must submit the pdf version of the Section 303A Written Affirmations without modification, but that they can type the exhibits to the Affirmation on company letterhead.
Overcoming the Challenges of Real-Time Disclosure
On May 19th, we will hold a webcast – “Overcoming the Challenges of Real-Time Disclosure” – during which David Martin of Covington & Burlin, Ron Mueller of Gibson Dunn, Bill Tolbert of Jenner & Block, and Stacey Geer of BellSouth Corporation will discuss how to identify and overcome the challenges inherent in the SEC’s new disclosure framework.
In B.26 of our “Sarbanes-Oxley Law Firm Memos,” we now have more than 25 law firm memos on the topic!
Revision to OECD Principles of Corporate Governance Delayed
As pointed out to me by Mike Holliday, on Saturday, the NY Times reported on page C3 that a dispute has arisen that has delayed the announcement of a final version of the revised OECD Principles of Corporate Governance. The dispute is about France wanting to insert “encouraged” in place of “permitted” in the provision about employee participation in corporate governance, such as employee representation on boards.
This dispute illustrates how difficult it is to obtain agreement among numerous nations on any set of principles – it has been amazing that there has been so much global cooperation recently, particularly in the accounting arena.
