• the addition of a fourth checkbox to Form 8-K to allow a company to satisfy the disclosure requirements of Rule 13e-4(c), the Regulation M-A provision for issuer tender offers, by including that disclosure in a Form 8-K;
• revision of the requirement to disclose the source of funding under Item 2.01 of Form 8-K, Completion of Acquisition or Disposition of Assets, if a material relationship exists between the company and the source of funding (instead of if a material relationship exists between the company and the seller of the assets);
• Revision to Item 5.05(c) of Form 8-K, Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics, to provide that a company disclosing an amendment to, or waiver from, its code of ethics on its website must do so within four business days (rather than five);
• amendment to Item 5(a) of Form 10-K (disclosure of unregistered sales) to disallow the exclusion of sales made under Reg S; and
• re-addition of paragraph (b) of Item 5 of 10-Q/10-QSB that was inadvertently deleted.
New “Reg S” Practice Area
We have created new practice area for Regulation S. The Practice Area includes FAQs, recent No-Action Letters and a timeline of Reg S. Take a look!
Under new regs issued Monday by the Treasury Department and the IRS, employee-holders of ISOs have the ability to acquire employer stock without realizing income when the option is exercised. The regulations finalize, with minor changes, regulations proposed last summer.
Capital gains treatment is permitted if the employee holds the stock for a required period, the exercise price for the ISO is no less than the fair market value of the underlying stock on the date the ISO is granted, and the ISO plan was approved by shareholders. Additionally, the amount of ISOs that can be granted to an employee is limited.
The final regulations generally will be effective on the earlier of January 1, 2006 or the first regularly scheduled stockholders meeting occurring at least six months after the publication of the final regulations.
New “Lead Director” Practice Area
We have created a new “Lead Director” Practice Area, including FAQs on board leadership and examples from companies’ corporate governance principles and proxy statement disclosures. Check it out.
An article in yesterday’s L.A. Times reported that actions brought by the Division of Enforcement are down in the current year (which ends Sept. 30). In the nine months ending June 30, the SEC brought 378 enforcement actions against companies and individuals, compared to 443 enforcement actions in the prior year.
Some experts speculate that the decrease is a result of a change in enforcement strategies and an increase in complex cases, rather than a decrease in corporate fraud. There are select areas, however, where SEC enforcement numbers are rising: freezing assets, suspending trades and officer & director bars.
Pitt’s (non) FOIAble Records
The U.S. District Court for the District of Columbia ruled last week that certain records of former Chairman Harvey Pitt are not required by FOIA to be turned over to the media. The ruling encompasses Pitt’s notes on meetings with Wall Street and accounting executives as well as telephone logs and appointment calendars. Bloomberg had made several requests for information during Pitt’s tenure, but the SEC claimed most of the records were not “agency records” subject to the FOIA.
The court also upheld the SEC’s denial of Bloomberg’s request for documents on a November 2001 meeting on conflicts on Wall Street. Bloomberg sought notes taken by the Staff at the meeting with officials from the NYSE, NASD and several brokerage firms. The court agreed with the SEC’s denial, saying that regulators would be hampered if participants didn’t feel free to talk openly at such meetings, or if the thoughts and recommendations of the Staff were “exposed” before a final decision on a policy matter.
Last week, Jim Quigley, CEO of Deloitte & Touche USA, testified before the House Committee on Financial Services at a hearing on Sarbanes-Oxley. In his testimony, Quigley said it is very challenging for companies to comply with both an accelerated filing schedule and the new internal-controls rules in the same year. Quigley said Deloitte planned to send a letter to the SEC asking the agency to delay implementation.
It appears that the SEC may actually be considering a one-year extension for the accelerated filing deadline for Form 10-Ks, according to a July 26th Wall Street Journal article. Under the phase-in as originally established in 2002, for fiscal years ending after December 15, 2004, 10-Ks will be required to be filed within 60 days of the fiscal year end (rather than the 75 days they had this year).
In addition, accelerated filer companies are required to file their 10-Qs within 40 days after each quarter end this year – with this deadline dropping to 35 days next year.
Our New Survey on Accelerated Filer Deadlines!
We have a hunch that meeting a 35-day 10-Q deadline might be even more challenging than a 60-day 10-K deadline. To find out whether this hunch is correct, we have posted a quick survey on the ability of accelerated filers to meet these upcoming deadlines. Please weigh in on this important debate!
You also might want to review the final results from our recent survey on disclosure committees.
I had blogged way back when about a California bill introduced by Judy Chu that went beyond what the controversial SEC proposal. After significant pushback from all quarters – including CalPERS – legislator Chu introduced a resolution in support of the SEC rules, which won overwhelming support in both branches of the Legislature.
At that time, Chu also agreed to amend her bill to require that companies provide a process in which shareholders could merely “recommend” candidates for election as directors and that they file the process with the secretary of state. In June, the bill went through yet another round of tweaking in the California Senate Judiciary Committee, which eliminated the “recommend” clause and turned it into simply a disclosure bill. This disclosure bill would require publicly traded companies to file a copy of their corporate election procedures – or those portions of the company’s articles of incorporation and bylaws that related to nominating and electing directors – with the secretary of state.
The bill will be heard by the Senate Appropriations Committee on August 2nd. Now only the state Department of Corporations remains opposed to the bill because it believes the issue should be addressed by the SEC.
Crying in My Spilt Milk
As I head off for a vacation next week, I need to get my “moving da office” woes off my chest…no Internet access for two weeks…cross-talk from a radio station on my phone…losing my wallet in a cab…I need a vacation. Julie Hoffman will be blogging next week for your entertainment.
The FASB has released a draft abstract of a Tentative Conclusion of the Emerging Issues Task Force (EITF) that contingently convertible bonds should be included in calculating diluted earnings per share regardless of whether the contingent feature has been met.
As an example of contingently convertible debt, the debt might provide that it is not convertible into common shares until the stock price has exceeded some percentage threshold for some specified time period (e.g., 20% above the conversion price for a 30-day period). Presently, most issuers exclude the potential dilutive effect until the market price contingency is met. The FASB staff has reported that more than $100 billion in contingently convertible debt has been issued, with more than $90 billion currently outstanding.
In addition to contingently convertible debt, the Task Force is inviting comments on whether other instruments with similar contingencies should be included. Comments are due on September 3, 2004. If the Task Force reaches a decision, this guidance will require FASB Board ratification before it becomes effective.
The proposed effective date would be reporting periods ending after December 15, 2004, and prior period EPS amounts presented for comparative purposes would have to be restated. Thanks to roving reporter Mike Holliday for this heads-up!
Calling All Accountants!
According to a GAO report issued yesterday, the SEC faces ongoing challenges filling many of its newly created positions, particularly accountants, due to competition from the private sector. In 2004, Corp Fin received funding for 175 new accountants and attorneys, but Corp Fin had filled only about 30% of its vacancies through the first half of the year.
The report also noted that in 2003, Corp Fin reviewed only 23% of all reporting issuers, falling short of its goal of 33% (mandated by SOX Section 408). Ultimately, the report made no recommendations.
Don’t forget tomorrow’s NASPP webcast – “Employee Stock Purchase Plans and Expensing: What Now?” – during which Renee Deming of Heller, Ehrman, White & McAuliffe; Paula Todd of Towers Perrin and Ellie Kehmeier of Deloitte & Touche will discuss the potential impact of the FASB’s option expensing proposal on ESPPs and what alternatives you should consider now. New course materials were posted today – a powerpoint in a PDF file that you should print off before the program.
An audio archive and transcript will be posted following the live webcast. The non-member fee for this special webcast is $495. If you wish to access this valuable program without paying this fee, you may simply take advantage of a no-risk trial.
Increase in O&D Bars
In addition to disclosing a range of $108 to $135 for its IPO, Google disclosed yesterday (in its Amendment No. 4 to the S-1) that the SEC staff intends to seek a civil injunction against David Drummond, Google’s VP of Corporate Development, Secretary and General Counsel, alleging violations of federal securities laws.
The Staff’s action arises out of Drummond’s prior employment as CFO of SmartForce, and involves certain disclosure and accounting issues relating to SmartForce’s financial statements. SmartForce’s successor had discovered “several accounting issues” in SmartForce’s past financial statements and, earlier this year, agreed to pay more than $30 million to settle class-action lawsuits related to the accounting problems.
The SEC also instituted O&D proceedings yesterday in D.C. federal court against Capital One Financial Corp.’s former CFO, David Willey. The SEC suit alleges that Willey made $3 million in profits on the material, nonpublic information that the Federal Reserve Board was considering downgrading the company in 2002.
As Enforcement Director Stephen Cutler noted in his speech to the D.C. Bar in February, the SEC is making more frequent use of its Officer and Director bar powers. In fiscal year 2003, the SEC sought 170 O&D bars, compared to only 38 in fiscal year 2000.
SEC Continues to Clean House
On June 9, we blogged that the SEC instituted two separate public administrative proceedings against 31 companies to determine whether to revoke the registration of their securities under the ’34 Act. The Staff continues to clean house, as evidenced by the recent proceedings with EVTC, Inc. (7/26), Spiegel Inc. (7/23), Ocumed Group, Inc. (7/7), Pinnacle Business Management (7/6) and IDT Venture Group, Inc. (6/25), to name a few.
None of these cases appears to be newsworthy in and of itself; although the consistency with which these types of cases are brought is interesting. This is especially true given Corp Fin’s review burden under Section 408 of Sarbanes-Oxley (i.e. each ’34 Act filer must be reviewed once every 3 years).
On July 14, the GAO issued a report on environmental disclosure in SEC filings. The report addresses (1) market participants’ views on how well the SEC has defined the requirements for environmental disclosure, (2) the extent to which companies are disclosing such information in their SEC filings, (3) the adequacy of the SEC’s efforts to monitor and enforce compliance with disclosure requirements, and (4) suggestions for increasing and improving environmental disclosure.
As you might expect, the GAO found that market participants vigorously disagree about whether the SEC’s existing disclosure requirements are adequate. Also, the GAO was unable to determine the extent to which companies are disclosing environmental information without access to companies’ records because no disclosure on environmental issues could mean that a company does not have existing or potential environmental liabilities, has determined that such liabilities are not material, or is not adequately complying with disclosure requirements. Consequently, the GAO couldn’t determine the adequacy of the SEC’s efforts to monitor and enforce compliance with environmental disclosure requirements without more information.
Ultimately, the GAO recommended that the SEC “take steps to improve the tracking and transparency of information related to its reviews of companies’ filings” by increasing the amount of information available within the SEC and to the public on the results of the SEC’s filing reviews (e.g., public availability of comment letters) and by improving the level of coordination between the SEC and EPA.
Introducing XBRL
The SEC announced last week that it is pursuing a rulemaking project to permit public companies to file financial reports using XBRL technology, which tags data for easier online searches. Unlike HTML (hypertext mark-up language), XBRL (extensible business reporting language) allows for ready comparisons and analysis of financial results.
The relatively new XBRL software reportedly makes it easier for companies to prepare quarterly and annual financial reports because it creates a single document that is able to be converted to different formats, reducing duplication, inefficiencies and errors.
Last summer, the FDIC, Federal Reserve and the OCC launched a project to create a shared data repository of Call Reports (a quarterly financial statement filing made by banks) that would be submitted via the Internet in XBRL. It is expected that banks will file their 3rd quarter 2004 Call Reports via the new system.
This year, TSX Group, Inc. (listed on the Toronto Stock Exchange) became the first public company to publish annual financial results in XBRL. To learn how to view those financial statements, click here. To learn more about XBRL, click here.
Alan Beller, Director of Corp Fin, recently noted that the volume of blanket Rule 83 requests did not significantly rise after the LivEdgar development – and that he hoped it would not rise when comment letters begin to be publicly available. If it does, he noted that the SEC would conduct rulemaking to more closely align the availability of Rule 83 relief with its intended purpose. This is the same warning that he gave last year, which seemed to have worked given that Rule 83 wasn’t widely abused.
Greenspan on Hedge Fund Proposal
Federal Reserve Chairman Alan Greenspan gave his semiannual testimony on monetary policy to Senate Banking Committee on Tuesday. During his testimony, he stated his opposition to the SEC’s recent proposal to register hedge fund advisers with the agency.
Greenspan said that the proposal will not accomplish its goal of detecting fraud merely through registration with the SEC and periodic examination of the adviser by the SEC. “Fraud is almost always uncovered through complaints of counterparties or by accident,” he said. Further, Greenspan fears that the proposal will create restrictions that will cause many hedge funds to leave the industry, “to the significant detriment of our economy.”
More on Options Expensing
Also on Tuesday, the House of Representatives passed the Stock Option Accounting Reform Act (H.R. 3574) by a vote of 312-111. As we have previously blogged, the bill would mandate 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. Small business issuers would be exempt.
Next up for the bill is consideration by the Senate.
I’ve had a number of members ask to see the useful 10-Q checklist from Wilmer Cutler Hale & Dorr that we had posted on the home page a few months back. It is contained in our new “Form 10-Q” Practice Area, along with other useful resources (including a link to our “Stock Repurchase” Practice Area which includes Item 703 guidance.
Tally Up Sheets Now Available!
One common question I have received: “Why do you keep emphasizing the need for compensation committees to tally up compensation packages before they approve any additional component or approve the annual pay package? That is such common sense, they must be doing that.”
I agree it is a matter of common sense. But that is a question to pose to the compensation committee(s) that you advise. In speaking to many directors now, it doesn’t appear that the use of tally up sheets is common at all. In fact, we struggled to find a sample for several months – despite access to a remarkable (and large) Task Force comprised of the country’s top compensation consultants and lawyers (note that some Task Force members didn’t want to share their proprietary tally up formulas).
We thank Mike Kesner, who is head of Deloitte’s Executive Compensation practice, for sharing two sample tally up sheets in the change-of-control context. Recall Fred Cook’s advice from his practice pointer that I blogged about a few weeks back: compensation committees are urged to prepare tally up’s in five different termination scenarios.
