Last week, GSI Online—sponsor of the LIVEDGAR database—rolled out a new product that consists of public access to SEC staff comment letters. The database appears to be comprised of hundreds – if not thousands of – letters that GSI has obtained through a massive FOIA request and includes requests for correspondence between the SEC staff and a wide range of companies (including companies that were part of the SEC’s Fortune 500 review project). This includes public access to both SEC comment letters and the responses.
For TheCorporateCounsel.net members, we have posted an interview with Thad Malik and Bill Tolbert of Jenner & Block on SEC Comment Letters in the Public Domain – including information about what Alan Beller said at this weekend’s ABA meeting on this topic regarding confidentiality requests and more. We also have started posting law firm memos on this topic in E.18 of our “Sarbanes-Oxley Law Firm Memos.”
While SEC comment letters have always been subject to FOIA requests, this facilitated ability to access – and word-search – them may well chill communications between the SEC staff and the corporate community. And Milberg Weiss certainly won’t be opposed to such a development…
Sample MD&As
Although it was against my nature – due to my training on the SEC staff to never endorse specific disclosure – we have posted samples of specific MD&As that we thought were pretty good in certain areas (we included brief notes about what we thought were good about them). This was part of another update of the checklist in our “Proxy Season Resource Center” during which we have added several dozen more factors to consider in drafting a MD&A.
This is all in preparation for tomorrow’s webcast on “The New MD&A”. Tune in to hear Stacey Geer of BellSouth; Karl Groskaufmanis of Fried Frank and Ron Mueller of Gibson, Dunn.
AMEX Governance Listing Standards Approved
Better late than never, the SEC has approved the final AMEX governance listing standards (note that this SEC release is on our site, but not the SEC’s site yet).
Over the weekend, the ABA Federal Regulation of Securities Subcommittee held a meeting – and someone reportedly told the audience that it will now interpret the effective date of its new governance listing standards so that applicable disclosures will not be required in documents before the date on which the company must comply with the amended listing standards – for calendar year companies, their first annual meeting after January 15, 2004 (i.e. disclosures not required in proxy statements because they are filed and delivered before the annual meeting – website disclosures required to be up as of the annual meeting date). This is the position that the NYSE staff took several weeks ago.
This was counter to what we heard Nasdaq was saying before – that proxy statement disclosure in proxy statements sent to stockholders for annual meetings held on – or after – January 15th should include the newly adopted disclosure. We reported this former split in opinion between the NYSE and Nasdaq in our December issue of E-Minders.
Now, on December 10, the Nasdaq has stated that its sticking by its original position as stated in E-Minders above – so the split between Nasdaq and NYSE remains and Nasdaq companies will have to provide these disclosures in the upcoming proxy statements.
Director Education and Orientation
For TheCorporateCounsel.net members, we have launched a “Director Education/Orientation Portal” which includes a sample checklist for director orientation and a list of links to all of the third-party director colleges. More to come in this area.
Don’t forget to vote in our current survey on director education and orientation. So far, the twenty responses have been interesting…
SEC Commissioner Harvey Goldschmid gave a speech before the Investment Company Institute yesterday in which he warned that lawyers could be targeted if they were aware of credible evidence of a material violation of the securities laws and didn’t report it up. There have been no specific allegations against lawyers yet in the mutual fund scandals.
As reported in a NY Times article today, John Villa of Williams & Connolly is reported to state “because the questionable practices uncovered by the mutual fund investigations are not clearly illegal, they present exactly what lawyers feared would result from the SEC’s new rules.”
How many comment letters do you think have been submitted to the SEC on its shareholder access proposal? You gotta take a guess…
Can you believe its easily over 5000 with several weeks left in the comment period. However, 2,898 individuals/entities submitted comments using “Letter Type I” and 1,916 individuals/entities used “Letter Type C.” The Council of Institutional Investors has been very effective in getting out the vote. The SEC has been smart to combine these “cookie cutter” form letters into one submission on its website.
Former SEC Commissioner and Stanford Professor Joe Grundfest offers an interesting alternative to the SEC’s shareholder access proposal. He suggests an “advice and consent” set of procedures, that are modeled after Article II Section 2 of the United States Constitution.
These procedures would effectively force a nominating committee to take action against a director – or the director would be otherwise penalized – if there was a triggering event (and the triggering event would not facilitate the ability of shareholders to place nominees on the ballot in the following year).
So if a regulatory threshold of withheld votes were cast for a particular director, negative consequences would follow (what Joe calls “cure” provisions) – either the nominating committee getting that director to resign/not stand for re-election or if the director was re-elected, the director might not be deemed independent for purposes of listing standards, might be prohibited from voting on any matter required by SEC or SRO rules; or could trigger a rule that prevents a company from insuring or indemnifying the director for violations of federal securities laws.
Joe argues that this advice and consent mechanism has several clear advantages over the SEC’s proposed shareholder access initiative. It greatly reduces the danger that shareholders will resort to the proxy mechanism as a device for promoting special interest agendas. It also greatly diminishes the dangers of factionalization that can arise from the election of dissident directors to a board. The proposal also eliminates the need for the SEC to adopt complex and potentially arbitrary rules defining “trigger conditions” and “qualified shareholders,” and there is far less risk that the mechanism would be subject to a successful legal challenge.
More companies have been naming “Chief Governance Officers” and yet there still is some confusion about what these officers do. In fact, there is a disparity among what these officers actually do, as practice depends on the company’s circumstances.
In my mind, the Chief Governance Officer’s key role is to develop relationships with key constituents of the company, with the most obvious being institutional investors. However, the CGO is not the investor relations’ officer – the CGO’s contacts at these investors are those that vote proxies, which is a different group of folks from those that invest or analyze the company. Another key constituent is the company’s regulators – which means that the CGO should be active in associations that interact with the government regularly.
None of this works if the CGO does not have the ear of the board – that’s why just sticking a new label on a corporate secretary or inhouse securities counsel doesn’t work unless it also means elevating that person’s true status within the company.
On November 18th, the European Union’s Competitiveness Council of Ministers agreed to a weaker version of a proposed pan-European takeover code that would have removed many of the obstacles to cross-border mergers. Instead, the obstacles will largely remain in effect. Fourteen EU member countries voted in favor of the amended code (Spain abstained). If only one country had voted against the amended code, the EU could have rejected it.
Originally, the EU had wanted to enact a bold plan to remove nearly all of the existing barriers to cross-border buyouts. However, strong opposition from Germany and Scandinavia left the barriers in place.
Now, the EU’s Council of Ministers and Parliment must approve the amended code – if so, it is expected to take effect in mid-2005.
We have posted our December issue of E-Minders. If you wish to receive this free email newsletter – a courtesy to our community – sign up by merely plugging in your email address.
Writing on the Wall for Shareholder Approval of Equity Plans?
ISS’ Friday Report runs a story about how five companies recently had trouble trying to obtain shareholder approval for equity-based plans. Charter Municipal Mortgage Acceptance Company has had to reconvene its annual meeting two times so far (to solicit more votes) – and two other companies have scheduled a reconvened meeting. Two other companies – LightPath Technologies and Sysco – also failed to receive approval but did not reconvene their meetings.
All the more reason why the transcript of the NASPP webcast on this topic is so valuable. If you are not a NASPP member, to gain immediate access to the archived audio or transcript, take advantage of the no-risk trial membership (you can obtain a full refund with no questions asked).
Cuts in Analyst Coverage
For those who were still eating turkey, the Friday edition of the WSJ had an interesting article about the cuts in analyst coverage over the past year.
A Greenwich Associates survey revealed that 29% of respondents said they had lost coverage by analysts (respondents were mostly large companies). Most revealing was a Reuters Research survey that indicated that 37% of tech companies had lost coverage – and those are the type of companies with above average trading volume that probably has been the least impacted by reduced coverage.
Today’s WSJ contains an article about a company going public by selling “Income Deposit Securities” or “IDS.” IDS is a new dividend and interest bearing security designed to provide tax benefits to the issuer and investors. Each IDS represents one share of common stock and one portion of subordinated notes (but investors won’t own the underlying shares directly – rather a 3rd-party depository does). The IDS structure is akin to Canadian Income Trusts that are popular in Canada (but aren’t allowed in the US).
For the Volume Services America Holdings IPO, the IDS will trade on the AMEX with underlying shares of common stock trading on the Toronto Stock Exchange. Another IPO of IDS is forthcoming (from American Seafoods). The IRS has not ruled on whether the structure is kosher yet – so it is possible that Volume Services could lose the ability to deduct some, or all, of its interest payments.
More about the New NYSE Governance Standards
For TheCorporateCounsel.net members, we have posted an interview with David Martin and David Engvall on the New NYSE Governance Listing Standards.
I have received a number of inquiries as to what precisely was the NYSE’s follow-up guidance regarding transition – below is the exact text the NYSE staff emailed to listed companies:
“We have received numerous inquiries regarding 2004 disclosures required pursuant to our new corporate governance standards. We would like to clarify as follows:
· The existing audit committee and outside director requirements provided for in Section 303 of the Listed Company Manual continue to apply to listed companies pending transition to the new rules.
· If a company used the exception permitted by 303.02(D) during the preceding year, the requisite disclosure will be required in the 2004 annual meeting proxy.
· Companies have until the earlier of their first annual meeting after January 15, 2004, or October 31, 2004 to comply with the new standards, as expressed in Section 303A. Please see Section 303A of the Listed Company Manual for other transition requirements that may apply.
· Both sets of standards are currently available in the online version of the Listed Company Manual on www.NYSE.com.
Section 303A contemplates disclosure as to certain matters in a company’s proxy statement, annual report to shareholders, SEC filings and the company’s corporate web site. Such disclosures encompass independence determinations and matters relating to governance documents, such as committee charters, Corporate Governance Guidelines, the Code of Business Conduct and Ethics and the CEO Certification to the NYSE. The NYSE mandated disclosures are not required in any documents that predate the applicable 2004 compliance date.
However, once the 2004 shareholder meeting is held, or by October 31, 2004, whichever is sooner, companies are expected to be in compliance with 303A and to have appropriately updated web sites with the committee charters, the Code of Business Conduct and Ethics and the Corporate Governance Guidelines.
303A.06 disclosures will be required as set forth in the SEC’s Final Rule relating to audit committees. (SEC Release No.34-47654)
We will continue to require submission of a Written Affirmation in 2004 approximately 30 days subsequent to the 2004 shareholder meeting that demonstrates compliance with 303A. The new form of Affirmation and other requirements will be distributed prior to year-end.”
At the end of the summer, the SEC announced a policy change so that defendants who settle injunctive proceedings with the SEC – in which they neither admit nor deny the allegations – will be deemed by the SEC to admit the allegations for purposes of subsequent SEC administrative proceedings.
For TheCorporateCounsel.net members, learn how the D&O insurance industry has reacted – among other new developments in this industry – in my interview with Joseph Monteleone of The Hartford on D&O Insurance Developments.
2004 PCAOB Budget – and List of Non-Delinquent Companies
Yesterday, the PCAOB approved a $103 million budget for 2004, a 51% increase from 2003, including $26 million for information technology, $48 million for salaries and benefits, and $8.2 million for travel. Much of the increase is to add 100 new inspectors.
For the most part, the PCAOB is funded by fees charged to public companies – and the PCAOB has begun publishing a weekly list of which companies have paid their fees. It would probably be a more effective collection mechanism if the PCAOB published a list of delinquent companies. In fact, the list notes that the omission of a name does not mean that the omitted company is delinquent: “Just because an issuer does not appear on this list does not mean that the issuer has outstanding a past-due share of the accounting support fee.”
No word if the novel collection mechanism of prohibiting independent auditors from issuing “clean” opinions to any clients that are delinquent in paying the PCAOB is in effect yet. Gobble, gobble!
For TheCorporateCounsel.net members, we have posted the transcript from last week’s popular webcast with John Huber and Teri Iannaconi on internal controls and attestations.
Congressional Report on Mandatory Rotation of Auditors
On Friday, the GAO submitted its report to Congress (as required by SOX) regarding the potential effects of mandatory rotation of auditors. Based on surveys of large accounting firms and public companies (as well as interviews with other stakeholders), the report states that more experience with SOX reforms is needed before the full effect of SOX’s requirements can be assessed – and therefore the SEC and PCAOB should monitor and evaluate the effectiveness of existing requirements.
In my mind, mandatory rotation of audit partners is what is needed (and what we now have under new SOX rules) and that rotation of the firms themselves could very well lead to more opportunities for corporate fraud as auditors will have less incentive to work hard near the end of their rotation – and not possess an abundance of knowledge about clients at the beginning of rotations.
The Debate Over Shareholder Access
Last month, Harvard Law School sponsored six panels – with very notable participants – that debated various aspects of shareholder access. Two transcripts of these debates are now available (the first three panels – and the second three panels). We have added these transcripts to our rapidly growing “Shareholder Access Portal.”
Note that the SEC posted its adopting release on disclosure of nominating committees/shareholder communications late yesterday – and that I amended yesterday’s blog about “effective date” issues for 9/30 companies.
NASD Proposes IPO Rules
Following up on some of the recommendations of NYSE/NASD IPO Advisory Committee issued in May, the NASD proposed rules yesterday that would:
– Require the lead managing underwriter to disclose indications of interest and final allocations to the issuer’s pricing committee;
– Prohibit acceptance of market orders to purchase IPO shares in the aftermarket for one trading day following an IPO;
– Impose procedures designed to ensure that reneged IPO allocations are not used to benefit favored clients of the underwriter;
– Require that any lock-up that applies to shares owned by the issuer’s officers and directors also applies to shares they purchase in “friends and family” programs; and
– Impose new notification requirements when underwriters waive lock-ups.
The NASD also proposed additional regulatory steps that would promote transparency in IPO pricing, such as requiring underwriters to:
– Retain an independent broker/dealer to opine that the initial IPO price range at which the offering is marketed and the final offering price are reasonable and to require that the independent broker/dealer’s opinion is disclosed in the prospectus;
– Use an auction or other system to collect indications of interest to help establish the final IPO price; or
– Include a “valuation disclosure” section in the prospectus with information about how the managing underwriter and issuer arrived at the initial price range and final IPO price, such as the issuer’s one-year projected earnings or P/E ratios and share price information of comparable companies.
At the ASCS Issues Update conference last Thursday, Corp Fin Director Alan Beller talked about the need for the SEC staff to act as referee for the “opt-in” shareholder proposals that companies are receiving now (“opt-in” proposals are those that act as a trigger under the SEC’s proposed shareholder access framework – i.e. submitted by a 1% shareholder and asking shareholders whether they want a shareholder nominee to be added to the ballot the following year).
Alan was uncertain when the staff would provide written guidance in this area (my guess is it will come through no-action letter responses) and pointed out that the staff could act as referee at 3 different points in time: when a company receives a proposal, when the company delivers proxy materials, and when shareholders vote. It did not appear that Alan was too concerned about the ABA’s assertion that the SEC doesn’t have the authority to retroactively apply triggering events that occur before a proposal is finalized.
By the way, Alan did confirm that the newly adopted disclosure rules on nominating committees/shareholder communications would indeed apply to 9/30 companies – in fact, the adopting release just came out and states that the rule is effective January 1, 2004, and that the disclosures will apply to proxy or information statements that are first sent or given to security holders on – or after – January 1, 2004. The disclosures will apply to 10-Qs and 10-Ks for the first reporting period ending after January 1, 2004.
Senate Bill Seeks to Expense Options Only for Top 5 Officers
On November 19, a bipartisan group of senators – Senators Mike Enzi (R-Wyo.), Harry Reid (D-Nev.), John Ensign (R-Nev.), Barbara Boxer (D-Calif.) and George Allen (R-Va.) – introduced a bill that would require that a company expense the options of only the CEO and the next four most highly compensated executive officers. The stated purpose of the bill was to be a compromise aimed at convincing the FASB to back down from making companies expense all options.
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