September 2007
Published by RR Donnelley
Editorial Content by LegalWorks
Blake A. Bell, Editor in Chief
In This Issue:
SEC I: SEC Commissioner Annette L. Nazareth Announces Her Intention to Leave the Commission
On October 2, the SEC announced that Commissioner Annette L. Nazareth has asked President Bush not to re-nominate her as a Commissioner. Her term ended on June 5, 2007. She continues to serve until beyond her term's end until a successor is appointed, up to eighteen months beyond her term's end. Commissioner Nazareth has not announced a departure date, saying only that she intends "to return to the private sector" after nine years with the Commission. The Commission's announcement of her decision reveals little about the current situation at the Commission. Commissioner Nazareth is the only Democrat left on the Commission. Her announced departure follows the recent departure of Democratic SEC Commissioner Roel Campos. Commissioner Nazareth's departure would leave the Commission with three Republican members: Chairman Christopher Cox and Commissioners Kathleen Casey and Paul S. Atkins. Among other things, two Democratic vacancies on the Commission could imperil the ongoing shareholder rights initiative as well as certain Shareholder proxy proposals.
SEC II: Commission Staff Publishes Its Observations in the Review of Executive Compensation Disclosure
On October 9 the SEC's Division of Corporation Finance released a staff report summarizing and addressing the "principal themes" that arose from its initial review of the disclosure of 350 public companies for compliance with the Commission's new and enhanced rules for executive compensation and related disclosure. According to the report, staffers identified two principal "themes" during the review: (1) the Compensation Discussion and Analysis needs to be focused on how and why a company arrives at specific executive compensation decisions and policies; and (2) the manner of presentation matters.With regard to the first "theme," the Commission noted "[t]his does not mean that disclosure needs to be longer or more technical; indeed shorter, crisper, and clearer would often be better. The focus should be on helping the reader understand the basis and the context for granting different types and amounts of executive compensation." With regard to the "manner of presentation" theme, the Commission cautioned:
"[A company should use] plain English and organizing tabular and graphical information in a way that helps the reader understand a company’s disclosure. The executive compensation rules require companies to disclose a great deal of information. Techniques such as providing an executive summary, or creating tables or charts tailored to a company’s particular executive compensation program, can make the disclosure more useful and meaningful. We encourage companies to continue thinking about how executive compensation information — from the big picture to the details — can be better organized and presented for both the lay reader and the professional."
RealCorporateLawyer.com is pleased to make available law firm commentary on these developments. See:
SEC III: SEC Commissioner Nazareth Speaks Out on the Subprime Crisis and the Credit Markets Crunch
On October 19, SEC Commissioner Annette L. Nazareth delivered interesting remarks before the Los Angeles County Bar Association regarding the ongoing subprime crisis and credit crunch. She emphasized that although the "crisis" may have begun in the subprime mortgage market, it now has had "ramifications" in markets that might have seemed distant from those trading subprime mortgage loans.
After outlining the historical events that led to the subprime and credit problems during the summer, Commissioner Nazareth described the Commission's response to the events. She noted the following:
- The Commission is "focusing on the role of credit rating agencies in the development of structured finance projects, how investors use credit ratings, and how securitization has changed the mortgage industry and related business practices".
- The Commission is conducting its analysis of these issues in cooperation with the members of the President's Working Group on Financial Markets, including the Treasury, Federal Reserve Board, and the CFTC.
- The Commission implemented the Credit Rating Agency Reform Act of 2006 beginning last June. According to Commissioner Nazareth, under the authority provided by this statute, it has begun examinations of how credit rating agencies registered as Nationally Recognized Statistical Rating Organizations rate structured products "with particular emphasis on whether they adhere to their published policies and procedures and mitigate any conflicts of interest."
- The Commission has been working with the five largest securities firms that it supervises as "Consolidated Supervised Entities" (i.e., Bear Stearns; Goldman Sachs; Lehman; Merrill Lynch; and Morgan Stanley) to examine risk management issues including liquidity management practices and valuation processes.
SEC IV: SEC and Other Regulators Deliver Congressional Testimony Regarding International Accounting Standards
- U.S. Securities & Exchange Commission, Testimony of Conrad W. Hewitt, Chief Accountant, and John W. White, Director of the Division of Corporation Finance, Before the Subcommittee on Securities, Insurance, and Investment of the U.S. Senate Committee on Banking, Housing and Urban Affairs (Oct. 24, 2007).American Institute of Certified Public Accountants, AICPA Tells U.S. Senate That Public Companies Should be Allowed to Use International Accounting Standards, News Release (Oct. 24, 2007).Financial Accounting Standards Board, Prepared Statement of Robert H. Herz, Chairman (Oct. 24, 2007).Financial Accounting Standards Board, Testimony of Robert H. Herz (Oct. 24, 2007).
- Senate Banking Committeee Hearing Page with Member Statements, Witness Testimony of Eight Witnesses and Archive of Video of Hearing (Oct. 24, 2007).
On October 24, the Subcommittee on Securities, Insurance, and Investment of the United States Senate Committee on Banking, Housing, and Urban Affairs conducted a hearing on the use of International Accounting Standards by U.S. companies. Senators Jack Reed and Charles E. Schumer delivered member statements, followed by the testimony of eight witnesses: Sir David Tweedie (Chairman of the International Accounting Standards Board); Robert Herz (Chairman of FASB); Conrad Hewitt (SEC Chief Accountant); John White (Director of SEC's Division of Corporation Finance); Jack Ciesielski (President of R&G Associates); Charles E. Landes (AICPA Vice President); Teri Yohn (Associate Professor of Kelley School of Business, University of Indiana); and Lynn Turner (Former SEC Chief Accountant).The regulators generally testified regarding ongoing efforts to develop a single set of high quality international accounting standards including efforts by the SEC and FASB to establish a restructured International Accounting Standards Board with a structure, governance and independence largely modeled on the FASB's. In perhaps the most interesting testimony, the SEC witnesses outlined their views of the 120 comment letters received on the recent foreign private issuer proposal. Noting that the "vast majority" of commenters agreed that "high quality" globally accepted accounting standards would be an important and worthwhile goal in helping the global capital markets, they summarized the most important comments as follows:
- Some commenters stated that IFRS were suitable to be used as an internationally accepted set of standards and that allowing IFRS without a U.S. GAAP reconciliation would be perceived as recognition of the adequacy of the convergence process to date and would not hinder the ongoing convergence process. However, other commenters stated that the time was not yet ripe for accepting financial statements prepared using IFRS without a U.S. GAAP reconciliation. Some of these commenters also expressed concern over the adequacy of the governance and funding for the IASC Foundation and/or that removing the reconciliation requirement would sap momentum from the overall convergence project.
Many commenters stated that the reconciliation information is highly technical, not widely understood and is typically not available on a sufficiently timely basis to be useful. These commenters also generally expressed confidence in the quality of application of IFRS in practice. Others noted the usefulness of both the quantitative and qualitative aspects of the U.S. GAAP reconciliation.
- Many commenters urged the Commission to go further than just accepting without reconciliation financial statements prepared in accordance with IFRS as issued by the IASB. These commenters advocated a number of ideas, including: allowing financial statements prepared pursuant to jurisdictional adaptations of IFRS without a U.S. GAAP reconciliation; allowing financial statements prepared pursuant to jurisdictional adaptations of IFRS if reconciled to IFRS as published by the IASB; and allowing financial statements prepared pursuant to any home country GAAP if reconciled to IFRS as published by the IASB.
PCAOB I: PCAOB Issues Staff Guidance on Auditing Internal Control in Smaller Public Companies
On October 17 the Public Company Accounting Oversight Board published for public comment staff guidance on auditing internal control over financial reporting in smaller public companies. The guidance follows the Board's adoption last May of Auditing Standard No. 5 regarding the standards for audits of smaller public companies. The 52-page report of the preliminary views of the PCAOB staff encompasses such topics as entity-level controls, risk of management override, segregation of duties and alternative controls, information technology controls, financial reporting competencies, and testing controls with less formal documentation. Comments are due on or before December 17, 2007. Among the principal questions on which the staff seeks comments are: (1) does the guidance "appropriately consider the environment of the smaller, less complex company - if not, what changes are needed? and (2) are there additional audit strategies or examples that the staff should consider including in its guidance - if so, what?
PCAOB II: PCAOB Releases Report on Issues Identified in Inspections of U.S. Firms that Audited 100 or Fewer Public Companies
On October 22, the Public Company Accounting Oversight Board issued a rather troubling inspection report concluding that there are "significant and frequent deficiencies" in audits performed by many smaller accounting firms that deal primarily with smaller companies. The report is all the more troubling because December 15 is the deadline for nearly 14,000 smaller public companies to begin complying with certain auditing requirements under the Sarbanes-Oxley Act. It is expected that many such companies will turn to such smaller accounting firms for the requisite audit work. PCAOB personnel analyzed the audit and quality-control deficiencies identified during inspections of nearly 500 smaller firms conducted between 2004 and 2006. The PCAOB issued 439 individual inspection report of which 248 flagged single or multiple audit deficiencies. Only 124 of the inspection resulted in findings of no audit performance deficiencies and not negative issues with quality control systems. According to the PCAOB, there were eleven principle areas where auditing or quality control deficiencies were observed:
- RevenueRelated Party TransactionsEquity TransactionsBusiness Combinations and Impairment of AssetsGoing-Concern ConsiderationsLoans and Accounts Receivable (Including Allowance Accounts)Service OrganizationsUse of Other AuditorsUse of the Work of SpecialistsIndependence
- Concurring Partner Review
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:
- SEC Permits Innovative Approach to Valuing Employee Stock Options (10/24/2007)
From: Wachtell, Lipton, Rosen & Katz
- The “Delivery Covenant” Controversy: Divergent Court Opinions Raise Questions Over Boilerplate (09/25/07)
From: Alston & Bird LLP
- IRS Issues Additional Transition Relief Under Section 409A (10/23/2007)
From: Wachtell, Lipton, Rosen & Katz
- SEC Adopts Interim Rule to Provide Limited Principal Trading Relief and Proposes Interpretive Rule Clarifying the Application of the Advisers Act to Broker-Dealers (09/20/2007)
From: Morgan Lewis
- Broker-Dealer Regulatory Update (10/22/2007)
From: Morgan Lewis
- SEC Proposals With Respect to Shareholder Proxy Access (09/19/07)
From: Wachtell, Lipton, Rosen & Katz
- Facilitating Payments Under the FCPA: Questions You Must Ask to Avoid Liability (10/15/2007)
From: Fried Frank
- IRS Issues Limited Relief on Section 409A; Year End Action Still Required (09/17/07)
From: Morrison & Foerster LLP
- SEC Review of Executive Compensation Disclosures (10/15/2007)
From: Morgan Lewis
- IRS Issues Limited Section 409A Documentary Compliance Extension and Other Guidance (09/12/07)
From: Wachtell, Lipton, Rosen & Katz
- New UK Companies Act: Companies Act 2006—Provisions Introduced (10/10/2007)
From: Morgan Lewis
- Liabilities Under the Federal Securities Laws (09/12/07)
From: Wachtell, Lipton, Rosen & Katz
- Advance Planning for 2008 Proxy and Annual Report Season (10/10/2007)
From: Mayer Brown LLP
- Second Circuit Reinstates Fraudulent Inducement and Breach of Warranty Claims Against Seller of Business (09/06/07)
From: Wachtell, Lipton, Rosen & Katz
- Staff Observations Regarding Executive Compensation Disclosure (10/10/200)
From: Wachtell, Lipton, Rosen & Katz
- Court Allows Claim for Breach of Merger Agreement "No Shop" Clause to Proceed (09/03/2007)
From: Wachtell, Lipton, Rosen & Katz
- Recent Courts of Appeals Decisions Affirming Dismissal of “Stock Drop” Suits, Whether Brought on Securities Law or ERISA Theories (10/04/2007)
From: Wachtell, Lipton, Rosen & Katz
- Corporate Governance Update: SEC Revisits Shareholder Access To Director Nominations (08/30/2007)
From: Wachtell, Lipton, Rosen & Katz
- Decision in Recent Westborough Case Provides Guidance on Fiduciary Duties of Directors of Mutual Holding Companies (09/28/07)
From: Thacher Proffitt & Wood LLP
- SEC Comment Letters on 2007 Proxy Disclosure (08/28/2007)
From: Wachtell, Lipton, Rosen & Katz
- Corporate Governance Update: Market Shifts Offer Reprieve From Hedge Fund Activism (09/27/07)
From: Wachtell, Lipton, Rosen & Katz
- E-Proxy: Understanding the New Delivery Options for the 2008 Proxy Season (08/24/2007)
From: Mayer, Brown, Rowe & Maw
- European Court of First Instance Holds Communications by Company Executives With In-House Lawyers are Not Privileged (09/27/07)
From: Wachtell, Lipton, Rosen & Katz
- Are SEC Filings Subject to ERISA Fiduciary Standards? (08/23/2007)
From: Alston & Bird
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 October 26, the SEC announced that Steve Korotash has been named Associate Regional Director for Enforcement in the Commission's Fort Worth Regional Office. See U.S. Securities and Exchange Commission, Steve Korotash Named Associate Regional Director for Enforcement in the SEC's Fort Worth Regional Office (Oct. 26, 2007).
The AICPA announced on October 23 that Randy Fletchall, a partner with Ernst & Young LLP, was elected as Chairman of the Board of Directors of the organization. See American Insttitute of Certified Public Accountants, Randy Fletchall Elected Chairman of AICPA (Oct. 23, 2007). The same day the AICPA announced that it has awarded Kathy Eddy and Gary John Previts the 2007 Gold Medal for Distinguished Servce. The award recognizes those whose influence on accounting as a whole is especially notable in comparison to other profession leaders. See American Institute of Certified Public Accountants, Kathy Eddy and Gary John Previts Receive AICPA Gold Medal for Distinguished Service (Oct. 23, 2007).
On October 18 the Commission announced that San Francisco Regional Office Director Helane Morrison plans to leave the SEC. See U.S. Securities and Exchange Commission, San Francisco Regional Office Director Helane Morrison to Leave SEC (Oct. 18, 2007).
On October 15 NYSE Euronext announced that Tarak Achiche, its Head of Information Systems who is also a Member of its Management Committee, was leaving that day "to pursue new career options". See NYSE Euronext, Tarak Achiche to Pursue New Career Options (Oct. 15, 2007).
The Commission's Chief Accountant, Conrad W. Hewitt, also announced on October 10 that Paul A. Beswick has been named to serve as a Senior Advisor in the Office of the Chief Accountant. He previously was a partner with Ernst & Young LLP and also served as a FASB Practice Fellow. See U.S. Securities and Exchange Commission, Paul Beswick Named as Senior Advisor to the Commission's Chief Accountant (Oct. 10, 2007).
On October 2, SEC Commissioner Annette L. Nazareth announced her intention to leave the Commission to return to the private sector. See U.S. Securities and Exchange Commission, Commissioner Nazareth Announces Intention to Leave SEC (Oct. 2, 2007).
Also on October 2, the American Institute of Certified Public Accountants announced that its CEO, Barry C. Melancon, has been appointed to the U.S. Treasury Department's new Advisory Committee on the Auditing Profession. See American Institute of Certified Public Accountants, U.S. Treasury Names AICPA CEO Barry C. Melancon to Advisory Panel On Future of Auditing Profession (Oct. 2, 2007).
NYSE Euronext announced on September 28 that Thomas D. Sloan has joined it as Vice President, International Security Operations. Mr. Sloan previously served as Vice President of Physical Security for Western Union. See NYSE Euronext, Thomas D. Sloan Joins NYSE Euronext as Vice President, International Security Operations (Sep. 28, 2007).
On September 18 the Public Company Accounting Oversight Board announced that founding PCAOB Board member Kayla Gillan will leave the board by the end of January, 2008. See Public Company Accounting Oversight Board, PCAOB Board Member Kayla Gillan To Step Down (Sep. 18, 2007).
What Are the Commissioners and Commission Staffers Saying?
SEC Commissioner Kathleen L. Casey delivered an "Address to the Institute for Legal Reform's Annual Legal Reform Summit" in Washington, D.C. on October 24. SEC Chairman Christopher Cox delivered an address on "The Role of Government in Markets" on October 24 and the "Welcoming Address to the AICPA Governing Council 2007 Fall Meeting" on October 22. On October 19, SEC Commissioner Annette L. Nazareth delivered "Remarks Before the Los Angeles County Bar Association 40th Annual Securities Regulation Seminar". Commissioner Paul S. Atkins spoke on October 16 regarding "The SEC's Role in Globalization of the Capital Markets" and, on October 15, regarding "American Society and the SEC's Mission". Chairman Cox spoke in Washington, D.C. on October 12 regarding "Plain Language and Good Business". Commissioner Atkins delivered "Remarks at the Eighth Annual A.A. Sommer, Jr. Corporate Securities and Financial Law Lecture" on October 9. The same day, Commissioner Casey delivered "Remarks at the Institute of International Bankers Fall Membership Luncheon" while Chairman Cox delivered a "Keynote Address to the 2007 US-EU Corporate Governance Conference". The previous day (October 8) Chairman Cox spoke in Florida regarding "How Technology Can Improve Life for Investors". Commissioner Nazareth spoke on October 4, delivering "Remarks Before the Security Traders Association's 74th Annual Conference and Business Meeting". On October 1, Commissioner Casey gave an "Address at the North American Securities Administrators Association Annual Conference" and on September 28 she delivered "Remarks Before the Global Financial Reporting Convergence Conference". Finally, Chairman Cox gave "Welcoming Remarks to the SEC's Annual Forum on Small Business Capital Formation" on September 24.
Commission Staffers also have been busy on the lecture circuit. The SEC's General Counsel, Brian G. Cartwright, spoke on "The Future of Securities Regulation" on October 24. On October 19, the Director of the SEC's Division of Investment Management, Andrew J. Donohue, gave the "Keynote Address at the 2007 Managed Account Solutions Conference". The previous day Mr. Donohue delivered "Remarks Before the Investment Company Institute 2007 Operations and Technology Conference". On October 15, Ethiopis Tafara, Director of the Commission's Office of International Affairs, spoke in Montreal regarding "Trading Places: Mobility and the New International Financial Regulation". Andrew J. Donohue also spoke on October 11, delivering the "Luncheon Address at the 2007 ICI Closed End Fund Workshop". The SEC's John W. White, Director of the Divison of Corporation Finance, spoke at the 2nd Annual Proxy Disclosure Conference on October 9 regarding "Where's the Analysis?" Andrew J. Donohue also spoke on October 1, delivering the "Luncheon Address at IA Week's 7th Annual Fall Compliance Conference". Finally, Julie A. Erhardt, Deputy Chief Accountant in the SEC's Office of the Chief Accountant, spoke on September 24 regarding "Implementation and Enforcement of IFRSs".
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