DPW Corporate Regulatory Report

SEC Developments

SEC Staff Members Discuss International Securities Regulation

At the annual ABA teleconference, Live from the SEC, on October 25, 2007, John White, Chairman, Division of Corporation Finance, and Paul Dudek, Office of International Corporation Finance, among others, discussed recent developments in international securities regulation. Of note is the following:

FPI Reporting Deadlines. Mr. Dudek noted that the SEC has asked in two recent releases whether the reporting deadlines for FPIs should be shortened and is actively thinking about this.

IFRS. Mr. White suggested that the ultimate goal is to have a single set of globally accepted accounting standards. The comment letters received in connection with the SEC's proposal to eliminate the U.S. GAAP reconciliation almost universally support the adoption of one universal set of standards. There are differing views, however, on the timing for such an undertaking.

In considering further IFRS proposals, the SEC is looking at three areas:

  1. the application of IFRS by FPIs in filings to date
  2. the status of convergence, and
  3. a variety of topics related to the structure and operations of the IASB.

Mr. White went on to say that the SEC has completed its review of the second round of IFRS filings (i.e., the Form 20-F filings for fiscal year 2006) to see if the issuers complied with the "futures" comments (i.e., the comments requiring modifications in future filings rather than amendment of previous filings) and was "very pleased."

If the SEC were to adopt its proposal to eliminate the U.S. GAAP reconciliation, the SEC would be looking for a clear unequivocal assertion in the IFRS filings without the reconciliation that the financial statements were prepared in accordance with the IASB version of IFRS. Mr. White would expect a statement to this effect in the accounting policy footnote and in the audit opinion.

Private Offering Reform. Mr. White hopes to finalize at least some and ideally all of the private offering proposals this year. He pointed out that if they reduce the Rule 144 holding period for restricted securities held by non-affiliates to six months as proposed, they plan to make a parallel reduction with respect to Regulation S.

SOX 404. Now that the SOX 404 guidance has been released and Auditing Standard No. 5 has been adopted, Mr. White thinks that the SEC's work is pretty much "done here" in most respects.

Office of Global Security Risk. In light of the controversy surrounding the SEC webpage listing issuers that have made disclosures mentioning state sponsors of terrorism (which was withdrawn shortly after it was launched this past summer), the staff is putting together a Concept Release that will solicit feedback on disclosure of issuer activity in terrorist states.

Deregistration. Mr. White noted that to date approximately 87 companies have filed to withdraw from U.S. registration under the new deregistration rules (14 Canadian companies, 12 U.K. companies, 11 French companies and 9 Australian companies plus various other jurisdictions).

According to Mr. Dudek, the new deregistration rules seem to be "working well." He suggested that now that the SEC has dealt with deregistration, it may consider reviewing the entrance rules. He went on to emphasize that paper Rule 12g3-2(b) submissions are no longer required if the issuer posts the required information, along with full English translations, to its website. Mr. Dudek noted that the SEC is still receiving a lot of paper 12g3-2(b) submissions (which do not require full English translation) and urged people to post this information on an accessible website rather than filing hardcopies with the SEC. Rule 12g3-2(b) provides that certain foreign private issuers may be exempt from registration under Section 12(g) of the Exchange Act provided the issuer provides certain specified information to the SEC.

XBRL. XBRL continues to be a top priority of Chairman Cox. Mr. White reiterated his appeal to companies to consider participating in the pilot program. Voluntary filers and foreign private issuers are welcome and are currently participating.

Oil and Gas Disclosures. The Division of Corporation Finance is looking at the disclosure rules applicable to the Oil and Gas Industry and hopes to undertake a project related to these rules soon. They now have an academic onboard to help with this project. Mr. White urged Oil and Gas industry participants not to worry, though, because before issuing any proposals they would first issue a Concept Release soliciting feedback on the relevant issues.

Proxy Access. Mr. White noted that Chairman Cox has said repeatedly that the SEC intends to take final action on this issue before the upcoming proxy season.

John White Asks "Where's the Analysis?" as SEC Publishes Report on Executive Compensation Disclosures

On October 9, 2007, the SEC staff published a report discussing the principal themes that emerged from its initial review of the disclosure of 350 public companies for compliance with the SEC's new and enhanced rules for executive compensation and related party disclosure. On the same day, John White gave a speech entitled "Where's the Analysis?" that discussed the SEC report and his views generally on the executive compensation disclosures made during the last Form 10-K and proxy season.

Two principal themes are evident in the report and Mr. White's speech. First, companies should provide more analysis of how and why they made specific executive compensation decisions. This call for better analysis is not a request that the disclosure be longer or more technical, however. In fact, the SEC specifically states that "shorter, crisper, and clearer would often be better."

Second, the SEC is focused on the manner of presentation. In particular, the SEC emphasizes that companies are required to use plain English and suggests that companies consider using techniques such as an executive summary, or tables or charts to make the disclosure more meaningful.

In keeping with these two themes, the report and speech include the following specific suggestions:

CD&A Generally. Companies should de-emphasize and shorten lengthy discussions of compensation and program mechanics in their CD&A and instead emphasize how and why they established compensation levels. In this regard, companies should:

Tabular Presentation. The SEC staff generally encourages the use of charts, tables and graphs not specifically required by the executive compensation rules, provided the presentation is not confusing. When utilizing these presentation techniques, companies should be mindful of the following:

Performance Targets. The SEC staff issued more comments regarding performance targets than any other disclosure topic and was disappointed to find that an analysis of how the targets were used was often missing. In considering what to disclose with respect to performance targets, companies should consider the following:

Benchmarking. Companies should provide a detailed explanation of how they used comparative company compensation information and the nature and extent of its discretion to use such information. The company should be specific about which companies it compared itself with and what compensation components it used in that comparison.

Change-in-Control and Termination Payments.The SEC staff asked many companies to enhance their disclosure related to change-in-control and termination payments. Specifically, companies should:

In addition, the report suggests that the staff generally views tabular presentation of potential payments upon termination or change-in-control favorably.

Related Person Transaction Disclosure. The report notes that the SEC staff issued relatively few comments on related person transaction disclosure but reminds companies that they are required to include a statement that their policies and procedures for review, approval or ratification of related person transactions are in writing and, if not, how they evidence these policies and procedures.

Enhanced Disclosure of Role of Persons Involved in Making Compensation Decisions. The report notes that in many cases, the SEC staff requested enhanced disclosure of who was involved in the compensation decision-making process as is required by Item 407(e)(3) of Regulation S-K. Companies should be aware that they need to specifically disclose the nature and scope of executive officers' and compensation consultants' role in the compensation decision-making process.

Lastly, while applauding the effort made with respect to the compensation disclosures generally last year, Mr. White urged companies to begin with a "clean slate" this year rather than just marking up last year's disclosures. In particular, he urged companies to ask every key participant in the CD&A drafting process to read the report and then prepare a one-page list of the key points of the company's compensation analysis including, as appropriate:

SEC Announces that Commissioner Nazareth Plans to Leave SEC

The SEC announced in early October that Commissioner Nazareth intends to leave the SEC. While it has been widely reported that Commissioner Nazareth did not intend to stay for another term, the SEC's press release makes her intended departure official.

Commissioner Nazareth has not set a date for her departure from the SEC, but has notified President Bush that she does not wish to be re-nominated. Her term ended on June 5, 2007, but SEC Commissioners may remain in their positions for up to 18 months beyond a term's end, unless a successor is appointed sooner. Commissioner Nazareth is currently the only Democratic Commissioner.

FINRA/Nasd Developments

SEC Approves FINRA Fairness Opinion Proposal

In mid-October, the SEC finally approved the Rule 2290 fairness opinion proposal originally made in 2005 by the NASD (now FINRA), which will require member firms to comply with certain disclosure and procedural requirements in rendering fairness opinions. The rule purports to address concerns that shareholders are not sufficiently informed of potential conflicts of interest between the firm rendering the opinion and the parties to the transaction. The final form of the rule differs significantly from that originally proposed and should require only modest changes to most firms' current fairness opinion practice.

FASB Developments

FASB Announces Codification of GAAP to be Issued Shortly

In mid-October, the FASB announced that it plans to release its FASB Accounting Standards Codification in late 2007 or early 2008. The codification, which will be subject to a one-year comment or "verification" period, will reorganize thousands of authoritative U.S. accounting pronouncements issued by multiple standard-setters, including those of the FASB, the American Institute of Certified Public Accountants (AICPA), and the Emerging Issues Task Force (EITF) into a single source with a consistent structure. Once approved by the FASB, the codification will become the single source of authoritative U.S. GAAP, and will supersede existing FASB, AICPA, EITF and related literature. Also to be included is relevant SEC guidance.

PCAOB Developments

PCAOB Issues Study on Restatements

In connection with its Standing Advisory Group meeting in mid-October, the PCAOB released a study of the market reaction to restatements post Sarbanes-Oxley. According to the PCAOB working paper, the research indicates that, in the post-Sarbanes-Oxley Act period, the degree of change in a company's stock price (either up or down) has narrowed following the company's announcement that it plans to restate its financials. The working paper notes that on average there is still a net loss in market capitalization following a company's announcement to restate its financial statements. However, in the post-Sarbanes-Oxley Act period the net loss in market capitalization is smaller on average by $207 million dollars per restatement announcement, or $74 billion dollars in total for the restatement announcements, compared to the pre-Sarbanes-Oxley Act period in the study. Additionally, the working paper provides that following the market's initial reaction to the restatement announcement the average volatility in the stock price is lower. The working paper suggests that, in the post-Sarbanes-Oxley Act period, investors behave as if they believe restatement announcements convey more timely and higher quality information, leaving them with less uncertainty about companies that are restating their financial statements, which may have resulted in an increase in investor confidence.

Other Developments and DPW Memos

Delaware Court Refuses to Enjoin Merger Based on Failure to Disclose Internal Projections

On November 1, 2007, the Delaware Court of Chancery denied a motion for a preliminary injunction against the $4.4 billion all-cash merger of CheckFree and FiServ over CheckFree's failure to include management's financial projections in the company's definitive proxy statement. Reiterating the In re Pure Resources frame of analysis for disclosure of financial data, Chancellor Chandler held that the CheckFree proxy statement contained a "fair summary" of the work its financial advisor did to come to its fairness opinion and that there was no per se rule requiring disclosure of management forecasts.

IRS Extends Transition Relief for Deferred Compensation Arrangements Subject to IRS Section 409A

On October 22, 2007, the IRS issued Notice 2007-86, which generally extends transition relief for compliance with the final regulations under Section 409A of the Internal Revenue Code for one year. Compliance with the final regulations under Section 409A will not be required until January 1, 2009.

This means that bringing plans into written compliance with Section 409A is not required until January 1, 2009. Nevertheless, plans and other employment arrangements subject to Section 409A must continue to operate in good faith compliance with the statute, even though written plan amendments that comply with the final regulations are not required until the end of 2008.

New DOJ Settlement for Violation of HSR Act

In mid-October, the Department of Justice ("DOJ") fined Iconix Brand Group $550,000 for its failure to submit 4(c) documents with its required HSR notification for its acquisition of assets from Rocawear.

The fine was near the maximum amount for violations of the HSR Act. The HSR Act requires pre-merger notification to the Federal Trade Commission and DOJ of mergers and acquisitions which exceed certain jurisdictional thresholds.

Public Law 110-96 IEEPA Enhancement Act

On October 16, 2007, the President signed into law S. 1612, the "International Emergency Economic Powers Enhancement Act." The law amends the International Emergency Economic Powers Act ("IEEPA"), to greatly increase civil and criminal penalties for its violation. The legislation is Public Law 110-96. IEEPA is the statutory authority for sanctions administered by the Treasury Department's Office of Foreign Assets Control other than those against Cuba, North Korea and certain offshore strategic trade. IEEPA is also the current authority for dual-use export controls administered by the Commerce Department's Bureau of Industry and Security contained in the Export Administration Regulations.