DP&W Corporate Regulatory Report

SEC Developments

SEC Issues Executive Compensation FAQs

On January 24, 2007, the SEC Division of Corporation Finance issued guidance regarding the executive compensation disclosures required by Item 402 of Regulation S-K. The guidance contains two parts. The first part is a series of questions and answers. The second part contains interpretative responses regarding particular situations. The guidance replaces the Item 402 of Regulation S-K interpretations in the July 1997 Manual of Publicly Available Telephone Interpretations and the March 1999 Supplement to the Manual of Publicly Available Telephone Interpretations.

The SEC staff has indicated that it will issue additional guidance soon regarding Item 201(e) of Regulation S-K (requiring an issuer to provide a performance graph comparing the issuer’s stock performance to that of others in its industry); Item 404 of Regulation S-K (requiring disclosure of certain relationships and related party transactions); Item 407 of Regulation S-K (requiring certain corporate governance disclosures) and Item 5.02 of Form 8-K (requiring disclosures of the appointment or departure of directors and officers and the compensatory arrangements of certain officers).

Some of the items noted in the Item 402 of Regulation S-K guidance include the following:

SEC Issues Letter Providing Guidance Regarding Restatements of Financial Statements for Stock Option Issues

On January 16, 2007, the SEC Division of Corporation Finance issued guidance, in the form of a sample letter, regarding financial statement restatements related to option backdating issues. The letter provides that if a company amends its most recent Form 10-K to restate the financial statements therein for errors in accounting for stock option grants, the SEC will not require that the company amend other filings prior to such most recent Form 10-K; provided that the issuer includes certain comprehensive disclosures, including detailed quarterly financial information, in the amended Form 10-K. This SEC position partially retracts the SEC’s earlier guidance that indicated that companies facing restatements as a result of option backdating issues would be required to amend multiple previous filings. Issuers faced with restatements should still consult with the SEC staff, however, prior to concluding that multiple amendments are not required.

SEC Issues Final E-Proxy Rules and Proposal for Additional Rules

On January 22, 2007, the SEC released final rules providing the text of the e-proxy amendments that it adopted on December 13, 2006. The amendments permit, but do not require, companies and other persons conducting proxy solicitations to satisfy the Rule 14a-3 requirement to furnish proxy materials to shareholders by posting those proxy materials on a website and providing shareholders with a paper notice of their availability. Under the final rules, the issuer must meet the following requirements in order to use the notice and access model:

This new notice and access model for proxy statement delivery is not available for proxy materials distributed prior to July 1, 2007. As a result, calendar year-end companies will still be required to distribute paper proxy statements in connection with their upcoming annual meetings.

The SEC also issued a separate proposed rule which would require that issuers and other solicitors make their proxy materials available on the Internet and provide shareholders with a notice of their availability. This proposed rule would be effective for large accelerated filers, not including registered investment companies, on January 1, 2008, and all other issuers, including registered investment companies, on January 1, 2009. Under the proposal, shareholders would have the ability to request paper or e-mail copies for a particular meeting or to make a permanent request for proxy materials relating to all shareholder meetings. The proposal is subject to a comment period which ends March 30, 2007.

SEC Speaks

SEC Chief Accountant Urges Companies to Use Proposed Guidance to Improve SOX 404 Process

On January 22, 2007, in a speech before the 2007 Foundation of Accounting Education SEC/FASB Conference, Conrad Hewitt, SEC Chief Accountant noted that the Public Company Accounting Oversight Board’s proposed new auditing standard for internal controls, AS 5, “should result in significant changes in auditing internal controls.” According to Mr. Hewitt, one of the most significant parts of the proposal is that it does not require the auditors to evaluate management’s assessment of internal controls. This should eliminate management’s need to design their evaluations to satisfy their auditors’ objectives rather than just the assessment objectives. Although the SEC’s guidance and AS 5 are still just proposals and are subject to comment periods ending February 26, 2007, Mr. Hewitt seemed to encourage early adoption of the principles in the proposals, noting “as with our management guidance proposal, I think companies could benefit now from considering this guidance, because there was none before.”

Commissioner Atkins Makes Remarks to Directors Regarding their Role and Shareholder Access

On January 22, 2007, in remarks before the Corporate Directors Forum, SEC Commissioner Paul Atkins encouraged directors to “remain focused on the big picture” and not to let the reforms of the last decade “discourage them from undertaking honest entrepreneurial risk.” According to Commissioner Atkins, while the scandals of this decade have placed directors “under a magnifying glass” and the ensuing regulations have been particularly process oriented, board members are “not intended to be micromanagers or compliance officers.” Commissioner Atkins went on to remind directors that “none of these additional obligations has removed the fundamental obligation of a director to maximize shareholder value or a director’s ability to use business judgment.”

Commissioner Atkins also discussed whether shareholders should be provided better access to the director nomination process and recent developments in this regard such as majority voting and e-proxy. According to Commissioner Atkins, while he recognizes that proponents of shareholder director nominations “argue that majority voting and e-proxy developments do not go far enough,” there is question as to whether the SEC has the authority to mandate the ability of shareholders to make director nominations. One of Commissioner Atkins’ concerns is that any SEC proposal that goes beyond disclosure provisions and imposes substantive rules on the director selection process might “indirectly” preempt state law which “traditionally governs the selection of directors.” Another of Commissioner Atkins’ concerns is that, while he believes “the owners of a corporation should decide for themselves how they wish to govern themselves and choose their representatives . . . untrammeled shareholder access . . . might open the floodgates to special interest groups.”

Commissioner Atkins went on to recognize, however, that uncertainty regarding shareholder proposals relating to the election of directors exists as a result of the Second Circuit decision in September in American Federation of State, County & Municipal Employees, Employees Pension Plan (AFSCME) v. American International Group (AIG). In AFSCME v. AIG, the Second Circuit held that AIG could not use Rule 14a-8(i)(8) of the Exchange Act to exclude from its proxy materials a shareholder proposal that sought to amend AIG’s corporate bylaws to establish a procedure to include shareholder-nominated candidates on AIG’s corporate ballot. Rule 14a-8(i)(8) of the Exchange Act allows a corporation to exclude shareholder proposals that relate to an election for membership on the company’s board of directors. The SEC had previously issued no-action relief to AIG indicating that it would not object if AIG relied on Rule 14a-8(i)(8) to exclude the proposal. Subsequent to the Second Circuit decision in AFSCME v. AIG, the SEC stated publicly that it would propose regulation to address the decision which disagreed with its long standing position. Referring to the AFSCME v. AIG decision, Commissioner Atkins noted that “the Commission has an obligation to the capital markets to remove such uncertainty and articulate a clear policy” on this issue. Accordingly, Commissioner Atkins noted that he “would be happy to support the introduction of any proposal [regarding shareholder access] that Chairman Cox sets forth to get this discussion going and to bring certainty to the marketplace.”

NYSE And NASD Developments

NYSE Issues Annual Corporate Governance Letters

On January 9, 2007, the NYSE issued its annual corporate governance letters to listed companies. The letters provide an overview of the things that listed companies should keep in mind when preparing for their annual meetings and Form 10-Ks or Form 20-Fs. The letters also provide an overview of the changes in NYSE rules over the past year.

SEC Publishes Changes to NYSE and NASD Research Rules

On January 9, 2007, the SEC published the NYSE’s and NASD’s proposed substantive amendments to their research analyst conflict of interest rules.  These proposals, which were filed with the SEC in September, are subject to SEC approval and a comment period that will end on March 5, 2007.

Other Developments and DPW Memos