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April 2007

Published by RR Donnelley
Editorial Content by LegalWorks
Blake A. Bell, Editor in Chief

In This Issue:

SEC I: SEC Endorses an "Improved Sarbanes-Oxley Implementation To Ease Smaller Company Burdens"

On April 4, the Commission endorsed Staff recommendations "to eliminate waste and duplication in the Sarbanes-Oxley compliance exercise, in a move that will particularly benefit smaller companies." The Commissioners urged the SEC staff to continue to work closely with the Public Company Accounting Oversight Board (PCAOB) to make the internal controls provisions of Section 404 of the Sarbanes-Oxley Act of 2002 more efficient and cost effective.

According to an announcement by the SEC, the Commission's direction to its staff will focus the remaining work in four areas: aligning the PCAOB's new auditing standard (AS-5) with the SEC's proposed new management guidance under Section 404, particularly with regard to prescriptive requirements, definitions and terms; scaling the 404 audit to account for the particular facts and circumstances of companies, particularly smaller companies, encouraging auditors to use professional judgment in the 404 process, particularly in using risk-assessment; and following a principles-based approach to determining when and to what extent the auditor can use the work of others.

The Commission expects the resulting PCAOB standard will be submitted for SEC review by the end of May or early June, in time for the 2007 financial statement audits.



SEC II: SEC Updates Telephone Interpretations for "Rule 144 - Persons Deemed Not To Be Engaged in a Distribution and Therefore Not Underwriters"

On April 2, the Staff of the Commission's Division of Corporation Finance updated telephone interpretations for Rule 144 - Persons Deemed Not To Be Engaged in a Distribution and Therefore Not Underwriters.

The updated interpretations replaced those in the July 1999 Manual of Publicly Available Telephone Interpretations as well as those in the March 1999 Supplement and the November 2000 Current Issues and Rulemaking Project Outline. Because some of the earlier interpretations have been revised, the Commission Staff has included a helpful bracketed date following each interpretation showing the latest date of publication or revision.



SEC III: SEC Announces a Process for Addressing Three Proposals for Handling Securities "Ticker" Symbols

The SEC has before it three sets of proposals for dealing with securities "ticker" symbols. The Commission has received two proposed national market system plans from separate groups of stock exchanges relating generally to securities symbols. Moreover, Nasdaq filed its own proposal to permit a company in certain circumstances to retain its symbol when transferring its listing to Nasdaq from another stock exchange.

According to the Commission's announcement, after publication of these plans and receipt of public comments " the Commission will resolve the conflicts over the allocation of stock symbols as fairly and expeditiously as possible." The Commission quoted its Director of the Division of Market Regulation, Erik Sirri, as saying "Securities symbols are an important part of a listed company's identity and developing a formal process to reserve, select and allocate symbols among listing markets and their companies will help promote a fair and orderly national market system and prevent investor confusion."



SEC IV: SEC Posts Text of Rules Facilitating Foreign Private Issuer Deregistration Under the Exchange Act

As reported in the March issue of the RealCorporateLawyer.com EZine, in its open meeting on March 21, the Commission voted to adopt Exchange Act Rule 12h-6 to "establish a more clearly defined process with a more appropriate benchmark by which a foreign private issuer can terminate its Exchange Act registration and reporting obligations."

On March 27, the Commission posted the Final Rule Release on its Web site. As expected, the Final Rule Release provides that under Rule 12h-6, a foreign private issuer will be eligible to terminate its registration of securities under Exchange Act section 12(g), or its reporting obligations regarding a class of equity securities under Exchange Act section 15(d), if it meets a quantitative benchmark, which is not based on a head count of its shareholders, as are the current exit rules. An issuer of equity securities will be able to terminate its Exchange Act registration and reporting obligations, assuming it meets the other conditions of Rule 12h-6, if the average daily trading volume of the subject class of securities in the United States has been 5 percent or less of the worldwide average daily trading volume of that class of securities for a recent 12-month period.



SEC V: SEC Announces Its Plans Regarding International Financial Reporting Standards

On April 24, the SEC announced its plans regarding the acceptance of financial reporting in International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board. The Commission plans include:

  • Issuance of a proposing release this summer that will solicit comments on rules revisions "which would allow the use of IFRS in financial reports filed by foreign private issuers" registered with the Commission.
  • Proposal of a regime that will allow foreign private issues to choose between IFRS and U.S. GAAP.
  • Issuance of a Concept Release relating to issues surrounding the possibility of treating U.S. and foreign issuers similarly by also providing U.S. issuers the alternative of using IFRS.
  • Proposal to eliminate the current requirement that foreign private issuers who report in IFRS (or any other non-U.S. GAAP) provide a reconciliation of their financial statements to U.S. GAAP.
It is expected that comments on the proposals will be due in the fall.



IOSCO I: PCAOB Proposes New Auditing Standard and Amendments Relating to Consistency and the Hierarchy of GAAP And Further Implements Rules Relating to Tax Services and Independence

On April 3, the Public Company Accounting Oversight Board proposed for public comment an auditing standard entitled "Evaluating Consistency of Financial Statements" and a concept release concerning Rule 3523 entitled "Tax Services for Persons in Financial Reporting Oversight Roles". In addition, the PCAOB provided FAQ guidance on Rule 3522 ("Tax Transactions") and Rule 3523. According to the Board's announcement, with respect to consistency and the hierarchy of GAAP:

"The proposed standard and related amendments to the interim standards would update and clarify the auditors' responsibilities with respect to evaluating and reporting on matters relating to the consistency of the financial statements. These updates and clarifications also would enhance auditor reporting on accounting changes and corrections of misstatements by more clearly distinguishing between these events. The Board also proposed to remove the hierarchy of generally accepted accounting principles (GAAP) from its interim auditing standards in light of the proposal by the Financial Accounting Standards Board to place the hierarchy in the accounting standards. Because the GAAP hierarchy identifies the sources of accounting principles and the framework for selecting principles to be used in preparing financial statements, these requirements are more appropriately located in the accounting standards."

With respect to Rule 3523 (Tax Services for Persons in Financial Reporting Oversight Roles), the Board stated that it is "seeking information about the possible effects on a firm's independence of providing tax services to a person covered by Rule 3523 during the portion of the audit period that precedes the beginning of the professional engagement period, and other practical consequences of applying the restrictions imposed by Rule 3523 to that portion of the audit period."

Comments are due on or before May 18, 2007.



IOSCO II: PCAOB Issues Report on Second Year Implementation of Auditing Standard No. 2

On April 18, the Public Company Accounting Oversight Board issued a report summarizing the second year of auditors' efforts to implement internal control standards. The report is based on PCAOB inspections that analyzed about 275 audits of internal control over financial reporting by registered public accounting firms.

The report does not propose changes to any existing standards. Nor does it provide new interpretations of any existing standards. In a statement that accompanied the report, PCAOB Chairman Mark Olson stated:

"Our inspections found that progress has been made in improving the efficiency of internal control audits, but the Board believes that auditors can continue to improve their internal control audits. . . . The report includes discussion of several areas in which auditors may be able to achieve further efficiency, and the Board encourages auditors to use this report to do so."

In its report, the PCAOB emphasized that the most common observations by its staff during the inspections were that: (1) some auditors did not fully integrate their audits; (2) some auditors failed to apply a top-down approach to testing controls; (3) some auditors assessed the level of risk only at the account level and not at the assertion level (thus, those auditors expended more effort than necessary when testing controls for assertions that were lower risk); and (4) some auditors could have increased their use of the work of others. The report also concluded that the following areas present opportunities for review.

  • Some auditors spent a significant amount of time testing management's process, although they did not need to do so in order to support their opinion on management's assessment, and yet did not use that work to reduce their control testing.
  • In performing tests of controls, some auditors did not test automated, rather than manual, controls, where possible, or did not consider benchmarking strategies for automated application controls they were testing for the second or subsequent year.
  • Some firms did not have a monitoring system in place to address whether engagement teams incorporated the May 16, 2005 Policy Statement into their audits or planned and performed their audits to be more efficient.
  • Engagement teams often stated that the issuer's circumstances contributed to the need to do more work to complete the audit of internal control. While the issuer's circumstances can increase the amount of work that the auditor needs to perform, the Board encourages auditors to engage in discussions with issuer clients and their audit committees as early as possible in order to identify and address issuer-specific obstacles to efficiency.


Say on Pay: House Passes Say on Pay Bill

On April 20, the U.S. House of Representatives passed by a vote of 269 to 134 the so-called "Say on Pay" bill. The bill would give shareholders the right to cast non-binding votes on the pay of their companies' top executives. Additionally, the bill would give shareholders a similar right to vote on any "golden parachute" negotiated with company executives in connection with the purchase or sale of a company.

Under the bill, such advisory votes would start in 2009 after the SEC proposes and finalizes rules to implement the legislation.

The principal draftsman of the bill was Barney Frank (Dem. - Massachusetts). Although the bill faces an "uncertain future" in the Senate, some say that the large vote in the House in favor of the bill may give the Democratic proposal some credibility in the Senate.



PRACTICAL GUIDANCE: Courtesy of RealCorporateLawyer.com

RealCorporateLawyer.com provides its readers with free access to a very large collection of law firm memoranda providing practical guidance on current hot topics. Readers are encouraged to visit the frequently-updated "Emerging Legal Issues" area of the home page for such current memoranda, as well as the Expert Analysis: SEC Reform Portal section containing hundreds of other such memoranda. Recent additions include:

Also, don't forget that RR Donnelley's highly acclaimed Executive Compensation Handbook has been newly-revised and reflects the Commission's executive compensation rules announced on December 22, 2006. Additionally, a copy of the Presentation given during the RR Donnelley Executive Compensation Webcast on January 25, 2007 is available for free download by clicking here.



COMINGS AND GOINGS: Who's Doing and Saying What and Where?

On April 20, the United States Small Business Administration honored Jim Metzler, Vice President of Small Firm Interests for the American Institute of Certified Public Accountants. Mr. Metzler received the SBA New York District Office's 2007 Financial Services Champion of the Year Award for his contributions in assisting small businesses to obtain accounting services they need. See AICPA, Jim Metzler Honored by the U.S. Small Business Administration, News Release (Apr. 20, 2007).

On April 12, the Commission issued two statements on the deaths of former Commissioners J. Carter Beese, Jr. and James J. Needham . See U. S. Securities and Exchange Commission, Statement of the Securities and Exchange Commission on the Death of Former Commissioner J. Carter Beese, Jr., News Release 2007-66 (Apr. 12, 2007); U. S. Securities and Exchange Commission, Statement of the Securities and Exchange Commission on the Death of Former Commissioner James J. Needham, News Release 2007-65 (Apr. 12, 2007)

On April 11, the Public Company Accounting Oversight Board announced that its Deputy Chief Auditor, Laura Phillips , will leave the Board later this year. See PCAOB, Deputy Chief Auditor Laura Phillips to Leave PCAOB, News Release (Apr. 11, 2007).

On April 9, the Financial Accounting Standards Board announced that the Financial Accounting Foundation has appointed Lawrence W. Smith to a five-year term as a member of FASB. Mr. Smith will replace Edward W. Trott who will retire from FASB on June 30. Mr. Smith currently is FASB's Director of Technical Application and Implementation of Activities and Chairman of the Emerging Issues Task Force. See FASB, Financial Accounting Foundation Appoints Lawrence W. Smith to the FASB, News Release (Apr. 9, 2007).

On April 3, the Commission announced that Richard Sennett has been named the Chief Accountant of the Division of Investment Management. He has served as an Assistant Chief Accountant in the Division since 2002. See U.S. Securities and Exchange Commission, Richard Sennett Named Division of Investment Management Chief Accountant, News Release 2007-61 (Apr. 3, 2007).

On March 29, the SEC announced that Carol A. Stacey , Chief Accountant of the Division of Corporation Finance, will leave the Commission after eleven years on the Commission Staff. She has been the Division's Chief Accountant since 2002. See U.S. Securities and Exchange Commission, Carol Stacey, Chief Accountant, Division of Corporation Finance, to Leave SEC (Mar. 29, 2007).

On March 26, the Commission announced that its Office of the Chief Accountant has selected four professional accounting fellows for two-year terms beginning this summer. They are: (1) Robert B. Malhotra , currently a senior manager in KPMG LLP's Department of Professional Practice based in New York, N.Y.; (2) Muneera Carr , currently a Senior Vice President in the Accounting Policy department of Bank of America Corporation in Charlotte, N.C.; (3) Liza McAndrew Moberg , currently a senior manager in PricewaterhouseCoopers LLP's National Office based in Florham Park, N.J.; and (4) Jeffrey E. Ellis , currently a senior manager in Deloitte & Touche LLP's Global Offerings Services group based in New York, N.Y. See U.S. Securities and Exchange Commission, Office of the Chief Accountant Selects Four Professional Accounting Fellows, News Release 2007-54 (Mar. 26, 2007).

What Are the Commissioners and Commission Staffers Saying?

SEC Commissioner Paul S. Atkins delivered "Remarks at the Operation Hope 15th Anniversary Bankers Bus Tour" on April 23. Commissioner Atkins also spoke on April 20 regarding "Is Excessive Regulation and Litigation Eroding U.S. Financial Competitiveness" and delivered "Remarks Before the Security Traders Association of New York 71st Annual Conference" on April 19. On April 17, SEC Commissioner Kathleen L. Casey spoke regarding "The Euro and the Dollar: Pillars in Global Finance". SEC Chairman Christopher Cox delivered "Remarks Before the Mutual Fund Directors Forum Seventh Annual Policy Conference" on April 13. On April 12, Commissioner Roel C. Campos delivered "Remarks Before the IOSCO Annual Conference". The same day, Commissioner Annette L. Nazareth delivered "Remarks Before the Mutual Fund Director Forum Seventh Annual Policy Conference". SEC Commissioner Annette L. Nazareth delivered "Remarks Before the SIFMA Compliance and Legal Conference" on March 26. The same day Commissioner Paul S. Atkins delivered "Remarks at Finance Dublin".

On the Commission Staff side of things, Chief Economist Chester S. Spatt spoke on April 12 regarding "Public Plan Investment and the Role of Indexing". Linda Chatman Thomsen , Director of the Commission's Division of Enforcement, delivered "Remarks Before the Mutual Fund Directors Forum 7th Annual Policy Conference" on April 12. Andrew J. Donohue delivered the "Keynote Address at the Practising Law Institute Investment Management Institute" on April 12. On March 26, Mr. Donohue delivered the "Keynote Address at 2007 Mutual Funds and Investment Management Conference". James L. Kroeker, Deputy Chief Accountant in the Office of the Chief Accountant, delivered "Remarks Before the 2007 Conference on Principles-Based Accounting and the Challenges of Implementation" on April 4.



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