The SEC staff is expected to provide FAQs on Regulation G issues before the March 28th effective date. Here are some conversations we have heard that have taken place with the staff regarding transition issues (although don’t rely on them unless you speak with the staff or the FAQs are issued):
– so long as annual report is mailed before 3/28, providing other copies after 3/28 does not mean the report must comply with Reg G
– if 10-K is filed before 3/28, the fact that its posted and on a website after 3/28 does not mean the 10-K must comply with Reg G (however, if the 10-K is posted after 3/28, it must comply)
– if 10-K filed before 3/28 and annual report is delivered after 3/28 that repeats information from 10-K, the repeated information does not need to comply with Reg G
– shelf registrations filed after 3/28 that incorporate information from a 10-K that does not comply with Reg G would then need to comply with Reg G – this can be done by amending the 10-K or by filing a 8-K or 10-Q that is incorporated by reference and complies with Reg G (note that shelfs filed before 3/28 are not impacted by Reg G)
Yesterday, the SEC took enforcement action against HealthSouth for alleged accounting fraud that included a 2 day trading suspension – that is a fairly stiff sanction by itself for the company and rare for the SEC to impose such a sanction on a large cap company. See http://www.sec.gov/news/press/2003-34.htm.
In its newly posted proposing release, the Public Company Accounting Oversight Board has released its estimates of the levels of fees that companies would pay to fund the Board. As proposed, fees would be based on the relative average monthly market capitalization for the 12 months preceding the fiscal year.
The allocation of the fees is top-heavy. The Board estimates that the largest companies would be allocated $260,000 for every $10 million of accounting support fees. The 1,500th largest issuer would be allocated $500 for each $10 million of fees. To understand the order of magnitude, based on market capitaliztions at the end of 2001, the 5th largest company would pay about 63% of the fee paid by the largest market cap company, the 25th largest company would pay about 22%, and the 50th largest company would pay about 11%. The proposing release is at http://www.pcaobus.org/pcaob1/Rules/Release2003-002.pdf.
For TheCorporateCounsel.net subscribers, we have posted an interview with Mark Bergman of Paul Weiss regarding the impact of the new SEC rules on non-US companies at http://www.thecorporatecounsel.net/member/InsideTrack/03_18_03_Bergman.htm.
At the 75 day mark for 12/31 companies – which will be next year’s 10-K deadline – over 1000 companies have already filed their 10-Ks. Considering that there are slightly less than 10,000 companies with 12/31 year-ends, this is a sizable percentage.
On the SEC’s website – under “Regulatory Actions” there is a new section called “PCAOB Rulemaking.” So far it only includes proposed Bylaws for the Public Company Accounting Oversight Board – not the proposals the PCAOB has issued which is available on its website. The SEC’s PCAOB portal is at http://www.sec.gov/rules/pcaob.shtml. The PCAOB’s website is at http://www.pcaobus.org.
Finally, there is some movement from the NYSE and Nasdaq on their corporate governance listing standards…
The NYSE filed amendments to its proposed listing standards on director independence with the SEC that excerpt their independence proposals from the broader filing made last summer. This will allow the SEC to address and publish them for comment separately.
As proposed, the NYSE’s proposal to require that boards have a majority of independent directors has not been changed. However, the amendments replace the per se independence bar for employees/former employees with a rebuttable presumption. This presumption is that any director who receives more than $100k/yr. in direct compensation from the company (other than director fees or forms of deferred compensation for prior service) is presumed not to be independent for 5 years following the year in which more than $100k was received. Because the presumption is rebuttable, a director may be deemed independent if all the independent directors determine that the compensatory relationship is not material – and this determination is explained in the company’s proxy statement.
The NYSE also added a bright-line standard for determining independence when a director is affiliated with another company that has a business relationship with the company – a director would not be independent if the director is an executive officer or employee of another company and: (1) that company accounts for the greater of 2% or $1 million of the company’s gross revenues; or (2) the company accounts for the greater of 2% or $1 million of the other company’s gross annual revenues. There is a 5-year look-back period. Like the NYSE’s initial proposals, the amended independence standards require the board to make an affirmative determination that a director has no material relationship with the listed company and permit the adoption of categorical standards to assist the board in making independence assessments.
In addition, although the NYSE initially proposed allowing companies 24 months from SEC approval of final listing standards to achieve majority independence, the amendments propose shortening that transition period to 18 months (30 months for companies with staggered boards).
The NYSE expects that its remaining corporate governance proposals will be published for comment separately – but that all proposals will be given final SEC approval and made effective as a whole (with appropriate transition periods for different provisions).
Nasdaq two revised proposals relate to the independence of boards/committees and codes of conduct. The amendments withdraw the earlier proposal to require audit committees to have a “financial expert” – thus, reverting to its existing requirement that at least one member of the audit committee have financial experience). The amendments also clarify that the required codes of conduct must have all of the elements required under Section 406 of Sarbanes-Oxley the SEC’s related rules.
Regarding board/committee independence, the Nasdaq proposals now establish that where a director has a family member who receives annual compensation in excess of $60k in the current or any of the past three fiscal years, the director is not disqualified from being independent unless the family member is an executive officer – as well as require that the audit committee charter set forth the committee’s purpose, which is to oversee the company’s accounting and financial reporting processes and audits of the company’s financial statements.
Yesterday, the Public Company Accounting Oversight Board met and proposed rules to allocate, assess and collect annual accounting support fees from issuers in accordance with Section 109 of Sarbanes-Oxley. The allocation formula would be used to cover the expenses of both the Board – and the accounting standard setting body.
Fees will be assessed against issuers registered under Section 12 of the Exchange Act, required to file reports under Section 15(d) of the Exchange Act, or that have filed a registration statment under the Securities Act that has not become effective and that has not been withdrawn. This would include foreign private issuers.
Certain classes of issuers will be exempt from the fees (such as who do not file audited financial statements, employee stock purchase savings and similar plans, asset-backed issuers and issuers in bankruptcy). In addition, operating company issuers with an average market cap less than $25 million will not be assessed fees. There was no discussion of exactly how the average monthly market capitalization will be computed.
Fees will be allocated based on a ratio of the issuer’s average monthly equity market capitalization over the 12 months immediately preceding the Board’s fiscal year to the total average monthly capitalization of all covered issuers.
The staff of the Board expects that this formula will result in operating companies paying 95% of the fees – and investment companies 5%. However, the staff was not able to give a ballpark figure on what the largest issuers might expect to be charged. That of course depends in part on the budget of the Board and also the budget for the standard setting body. However, the Washington Post reported that larger issuers would pay fees of about $2 million per year.
Under Sarbanes-Oxley, the registration or annual fees received from public accounting firms registered with the Board will be deducted from the budget expenses of the Board that are required to be paid by issuers. As the staff pointed out, since there were no such fees paid last year, the Board’s budget expenses for fiscal year 2003 will be funded entirely by fees charged to issuers. Under Sarbanes-Oxley, all of the expenses of the standard setting body are to be covered by fees paid by issuers.
Comments are due by April 4th. After the comment period, the Board has to approve final rules and submit them to the SEC – which then puts the rules out for comment and approves them.
The Board hopes to send notices of the fees due to issuers by late May for this 2003 fiscal year – and then going forward, the notice would be sent in late January or February each year. Apparently, the Board is using a calendar year fiscal year.
Before Congress, SEC Chair Donaldson testified that the SEC needs the entire 18% budget increase proposed by President Bush (i.e. $841.5 million) – to improve its technology, crack down on corporate fraud and hire more staff.
It is reported that Schering-Plough is preparing a “Wells notice” in response to a SEC enforcement investigation regarding an alleged Regulation FD violation. This is particularly significant because its a signal that new SEC chairman William Donaldson supports Reg FD (and Donaldson did not support Reg FD when it was initially proposed a few years ago).
FASB commences its discussion of rulemaking to require expensing options today – by now, a number of accounting firms support the move, including E&Y, PwC, Deloitte, Grant Thornton – and allegedly even KPMG. See a related Washington Post article at http://www.washingtonpost.com/wp-dyn/articles/A12710-2003Mar11.html.
The Public Company Accounting Oversight Board has issued a proposing release with proposed registration rules and a proposed form for public accounting firms to register with the Board. Comments are due by March 31, 2003 – and may be filed electronically or in writing. The Release is available on the Board’s website at the following link by clicking on “Proposed Rules” at http://www.pcaobus.org.
The proposed registration rules do not exempt non-US public accounting firms – and would apply to non-US audit firms that play a substantial role (as defined) in the rules in the preparation or furnishing of audit reports (even though they do not issue the report). The Board initially announced plans for a public roundtable on the effect and operation of Board registration and oversight of foreign public accounting firms on March 21st – that date has been changed to March 31st. A list of questions the Board would like addressed by commentators is contained on pages 13-14 of the proposing release.
As reflected in an interview with Pat McGurn, as one of its new policies, ISS will recommend voting against ratification of a company’s auditors – as well as withholding for a company’s audit committee members – if the company does not meet a simple formula regarding the level of the audit and audit-related fees paid to the auditor compared to non-audit fees (ISS separately analyzes the types of fees in the “tax fees” column to determine which side of the equation each fee should go).
The bottom line is that companies should voluntarily comply with the SEC’s new audit fee table (which is adopted but not yet effective) to enable ISS to conduct its analysis. Otherwise, the company faces the prospect of numerous votes against ratification of auditors and withholding for audit committee members – ISS already has recommended this adversarial stance in the first instances it has arisen since ISS’ new policies took effect early last week. TheCorporateCounsel.net subscribers can learn more about all of ISS’ new policies in the Pat McGurn interview posted at http://www.thecorporatecounsel.net/member/InsideTrack/03_10_03_McGurn.htm.
Warren Buffett’s annual letter to shareholders always is interesting reading – this year’s letter criticizes derivatives (page 13), corporate governance, executive compensation and the accounting profession (page 16). You can read it at http://www.berkshirehathaway.com/letters/2002pdf.pdf.
The SEC has pronounced that the new listing standards on shareholder approval of equity compensation plans and broker voting will not go into effect for this proxy season. The current rules will be extended through June.
