http://www.sandw.com/assets/attachments/CLIENT_ADV._-_What_Public_CO._2007.pdf

 
PLIs "SEC Speaks in 2006"
March 3-4, 2006


Division of Corporation Finance Panel and Breakout Session (3/4/06)
Report from Operations - Shelley Parratt, Deputy Director, Disclosure Operations and Barry Summer, Associate Director

Overview of Division Structure: As was reported at last years SEC Speaks, the Division has over 500 professionals in total. Of those, approximately 400 professionals are in Operations (the remaining professionals are in one of the Support Offices). There are about 250 accountants in the Division. (Eds. Note: For an overview of the structure of the Division, see the January-February 2005 issue of The Corporate Counsel and TheCorporateCounsel.nets Corp Fin Org Chart.)

Selection for Review: The Staff has moved to a risk-based process for review selection. They perform a preliminary review of each filing subject to Staff review in order to determine whether to select the filing for review and what level of review to perform. The preliminary review takes longer than the old screening process, so issuers may not hear from the Staff as quickly as they use to as to whether their filings have been selected for a review. The Division is doing more targeted reviews (formerly known as a monitor) and is emphasizing reviews of financial statements more heavily than in the past.

Securities Act Reform and Recirculation Issues (Rel. No. 33-8591, 7/19/05): One of the changes in the Securities Act Reforms was to ease the restrictions of free writing prospectuses in a securities offering. The jury is still out as to whether issuers and their agents are using FWPs as much as the Staff expected. There appears to be four categories of FWPs: (1) term sheets (the largest category); (2) press information; (3) summaries of changes to prospectuses; and (4) marketing materials. The use of FWPs has not impacted the Staffs review process significantly.
The part of the Securities Act Reform that has had a big impact is Rule 159 as it relates to recirculation issues. This comes up in two different areas: (1) when the prospectus contains materially different information than earlier prospectuses; and (2) when the price or volume changes such that the disclosure in the registration statement is affected. Historically, the Staff has asked the issuer or its agents for a written representation of how they were going to inform the potential investors of the changes. The issuer/underwriter would respond in writing with its plan which often was that the underwriter undertook to call each person who expressed an interest in the offering and orally explain the changes.

Given new Rule 159, the Staff has decided that it will no longer evaluate the issuers/underwriters proposal in how to inform potential investors that changes have occurred to the offering. Going forward, the Staff will only seek assurance that material information has been convened to the purchasers. The Staff no longer cares how, when or why this information is conveyed only that all material information is conveyed to investors at the time of the sale. The Staff also recommends that issuers review the discussion of Rule 159 in the adopting release.

In coming up with this new interpretation, the Staff is trying to balance satisfying the rules of the SEC with ensuring that the Assistant Director that declares the registration statement effective is comfortable and can meet his/her necessary findings.


Non-GAAP Financial Information (Rel. No. 33-8176, 1/22/03): The adopting release was effective in March 2003 for Regulation G and Item 10 of S-K and S-B. Issuers are welcome to use non-GAAP numbers so long as they comply with Regulation G and Item 10.
With the implementation of FAS 123(R), many issuers have presented numbers that eliminate share-based charges from net income. SAB 107 talks specifically about these issues (see Topic 14.G) and issuers should read the SAB before using the non-GAAP measure. Because share-based charges are likely to be recurring charges (see the Staffs Use of Non-GAAP Financial Measures FAQs, Q.8, 6/13/03, discussing when it is appropriate to remove a recurring item from a GAAP number), the burden is on the company to demonstrate the usefulness of the non-GAAP number in this situation and it is a high burden. It is possible to use this measure, but it will be difficult to justify.


XBRL: In February 2005, the SEC adopted changes to its EDGAR system to accept eXtensible Business Reporting Language (XBRL or tagged data) in an attempt to make EDGAR more useful to investors (Rel. No. 34-51128, 2/3/05). In January 2006 (Rel. No. 2006-7, 1/11/06), the SEC announced a pilot program. As an inducement for issuer participation for at least one year in its XBRL pilot program, the Staff is offering participants expedited review of 1933 Act registration statements during their participation in the program, and will advise WKSI participants (who usually wouldnt benefit from expedited 1933 Act review), within 30 days after filing their 10-K, whether the 10-K will be reviewed and, if so, will endeavor to get comments back to the issuer within 45-60 days after filing. The sign-up for the pilot program has been extended to March 10, 2006. Chairman Cox also touched on XRBL in his remarks at SEC Speaks.

Plain English: Plain English is still around. Chairman Cox still thinks it is an important issue.

Posting of Comment Correspondence: The Staff continues to post comment letters and responses on EDGAR. Note that foreign private issuers correspondence will also be posted.
Report from the Office of Chief Counsel David Lynn, Chief Counsel

Securities Act Reform: The SEC issued a technical amendment to the Securities Act Reform release (Rel. No. 33-8591A, 2/6/06). The technical amendments relate to four corrections, including applying the S-K Item 512(h) indemnification statement to Form S-3ASR (as had been previously discussed in the TCC.net Q&A Forum see Q.1329).
Issuers have asked whether a WKSI can file a Form S-3ASR after it files its 10-K (without Part III) and before it files its proxy with the Part III information. Telephone Interpretation H.6 addresses a similar situation with Form S-3s (which provides that the Staff will not declare an S-3 effective where the 10-K is filed without Part III information and before the proxy is filed). OCC is advising WKSIs that they may file Form S-3ASR (which will become automatically effective), but that the prospectus is not complete until the Part III information is somehow included either through amending the 10-K, filing the proxy, or putting the information in a prospectus supplement. [Eds. Note: After the SEC Speaks Conference, we heard that the Staff changed their position on this issue. We understand that the Staff's current position is that they will not object to such a filing or a takedown during that period. They have stated that the parties must make their own decisions with counsel as to whether the registration statement and prospectus satisfy applicable requirements. They also stated that their non-objection position regarding automatic shelf registration statements during this period does not change their position as stated in Telephone Interpretation H.6 and they remain unwilling to declare a non-automatic registration statement effective during this period (but, as recently confirmed by the staff, they will not object to a takedown from an already existing non-automatic shelf during this period).]


Incorporation by Reference into a Form S-1: Another question OCC has been asked recently relates to incorporation by reference into a Form S-1. General Instruction VII.C requires that an annual report for the most recently completed fiscal year has been filed before an issuer may incorporate by reference. Issuers have asked whether that really means that the issuer must have filed the annual report for the most recently completed fiscal year. OCC has responded that an annual report must actually be on file with the SEC for the most recently completed fiscal year prior to an issuer being allowed to incorporate by reference into a Form S-1.

Shareholder Proposals: The number of shareholder proposals the Staff has received so far this year is running at slightly below the normal volume they have received 337 since the season began (compared to 411 last year) and are currently averaging a 42-day turn around time. The Staff is seeing less majority vote proposals this year, but these proposals are generally not excludable. One side note to this many companies have instituted director resignation policies, whereby the director will either offer to resign or will resign, subject to the boards acceptance (see our Majority Vote chart for a list of companies with director resignation policies). The Staff said that an Item 5.02 Form 8-K is triggered when a director resigns, even if it is just a conditional resignation. Look for our commentary on this interpretation in an upcoming issue of The Corporate Counsel.
Another shareholder proposal that is not generally being excluded is one regarding reimbursing the expenses of shareholders who run a slate for the board consisting of less than 50% of the board.


Executive Compensation and Related Party Disclosure Proposals (Rel. No. 33-8655, 1/27/06): On January 27, 2006, the SEC released it proposals on executive compensation and related party disclosure. The release does contain interpretive guidance on how to calculate perquisites, but otherwise these are still just proposals. If an issuer would like to provide more information than is currently required by S-K Item 402 or 404, it is permitted to do so. However, remember that the tables and their columns cannot be deleted although they can be supplemented. Thus, an issuer may add additional tables and add columns to required tables, provided that if disclosure is necessary to make the tabular disclosure clear, an issuer needs to add a narrative discussion of those items. Currently, the Staff is thinking that the transition will not require issuers to restate compensation and related party disclosure for the last three years, but would phase it in, starting with just the last fiscal year. There is more on this in the proposing release.

Retrospective Application: Former Commissioner Ed Fleischman asked the Staff a question on retrospective application to underscore an issue raised by the Accounting Panel: Where FASB comes out with a new standard that requires retrospective application and involves a threshold (such as significant subsidiary) will the financial statements be required to be recast to change the information that, for example, shareholders saw when they approved a merger? The answer is yes. FAS 154 which is a result of moving to international convergence requires that an issuer go back and restate information as if the accounting standard had been in effect for the entire period covered by the financial statements (and this may, for example, involve a subsidiary becoming significant where it wasnt before the retrospective application). With retrospective application, no amendments to prior periodic reports are required, if they were correct at the time they were filed. At the time of the next 10-K, an issuer would reflect the change in an audited format.
Report from the Office of Rulemaking Elizabeth Murphy, Chief, Office of Rulemaking

E-Proxy proposal (Rel. No. 34-52926, 12/8/05): The proposals would amend the proxy rules to provide an alternative method for issuers and other persons to furnish proxy materials to shareholders by posting them on an Internet website (other than the SECs website) and providing shareholders with notice of the availability of the proxy materials. Copies would be available to shareholders on request, at no cost. The proposed amendments are intended to put into place processes that would provide shareholders with notice of, and access to, proxy materials while taking advantage of technological developments and the growth of electronic communications. One of the reasons the SEC issued this proposal was the savings available to issuers and other soliciting persons, which would likely reduce the costs of engaging in a proxy contest. The proposals would not apply to business combination transactions. These proposals also would not affect the availability of any existing method of furnishing proxy materials.
The Staff emphasized that the proposed amendments would be an alternative to the current system, it would not replace the current system. The comment period closed on February 13, 2006. The Staff said that comments have been all over the board, with some investors fully supporting the idea and others not favoring its adoption. No word on whether, or when, adopting action will take place on this proposal.


Accelerated Filer adopting release (Rel. No. 33-8644, 12/21/05): The SEC adopted amendments to the accelerated filing deadlines in December so that a Large Accelerated Filer (an Exchange Act reporting company with a float of $700 million or more) will become subject to a 60-day Form 10-K annual report filing deadline, beginning for its fiscal years ending on or after December 15, 2006. Until then, Large Accelerated Filers will remain subject to a 75-day annual report deadline. Accelerated Filers will continue to file their Form 10-K annual reports under a 75-day deadline, with no further reduction scheduled to occur under the revised rules. Accelerated filers and Large Accelerated Filers will continue to file their Form 10-Qs on a 40-day deadline, rather than the 35-day deadline that was scheduled to apply next year under the previously existing rules. The amendments also revised the definition of the term Accelerated Filer to permit an Accelerated Filer that has a float of less than $50 million to exit Accelerated Filer status at the end of the fiscal year in which its equity falls below $50 million and to file its annual report for that year and subsequent periodic reports on a non-accelerated basis. Finally, the amendments permit a Large Accelerated Filer that has a float of less than $500 million to exit Large Accelerated Filer status at the end of the fiscal year in which its equity falls below $500 million and to file its annual report for that year and subsequent periodic reports as an Accelerated Filer, or a non-accelerated filer, as appropriate. The amendments were effective on December 27, 2005.

Nasdaq Becoming an Exchange: Almost five years after Nasdaqs initial application to become a national securities exchange, the SEC approved the Nasdaqs amended application on January 13, 2006 (Rel. No. 34-53128, 1/13/06). All that remains is for Nasdaq to satisfy the five conditions set out in the SECs approval, which is expected to occur in early April 2006. Issuers with Nasdaq-quoted securities have securities registered under Section 12(g) and have an Exchange Act number beginning with 0-. On February 24, 2006, Nasdaq filed a proposed rule with the SEC (SR-NASD-2006-028) to adopt Rule 4130 to allow Nasdaq to file an application with the SEC on behalf of its issuers to register their listed securities under Section 12(b) of the Act. The Staff reported that Nasdaq issuers will not change their Exchange Act numbers as a result of the switch from 12(g) to 12(b) (so they wont get a 1- number). CIK numbers will also stay the same. After Nasdaq begins operating as an Exchange, issuers will need to list their securities as registered under 12(b) on the cover page of Form 10-K.
Report from the Office of International Corporation Finance Paul Dudek, Chief, Office of International Corporation Finance

Accelerated Filers: Foreign Private Issuers can be Accelerated Filers/Large Accelerated Filers, even though the Form 20-F deadline has not been changed.

Exchange Act Deregistration (Rel. No. 34-53020, 12/23/05). The SEC proposed to amend the rules allowing a foreign private issuer to terminate the registration of a class of equity securities under 1934 Act Section 12(g) and to cease its reporting obligations regarding a class of equity or debt securities under 1934 Act Section 15(d). Under the current rules, foreign private issuers have difficulty terminating their Exchange Act registration and reporting obligations despite the fact that there is relatively little interest in the issuer's securities among U.S. investors. Also, a foreign private issuer can currently only suspend, and cannot permanently terminate, a duty to report arising under Section 15(d).
The proposed rules would permit the termination of Exchange Act reporting regarding a class of equity securities under either Section 12(g) or Section 15(d) by a foreign private issuer that meets specified criteria designed to measure U.S. market interest for that class of securities. The proposed rules would also permit a foreign private issuer to terminate, and not merely suspend, its Section 15(d) reporting obligations regarding a class of debt securities as long as it meets conditions similar to the current requirements for suspending its reporting obligations relating to that class of debt securities. Finally, the proposed rules seek to provide U.S. investors with ready access through the Internet to material information about a foreign private issuer that is required by its home country on an ongoing basis after it has exited the Exchange Act reporting system.

The comment period closed on February 28, 2006. The Staff said that they are aware that the 404 requirements will be rolling in for foreign private issuers and are working to act on these proposal as soon as practicable although no schedule has been set.


Adoption of IFRS (Rel. No. 33-8567, 4/12/05): Last April, the SEC adopted amendments to Form 20-F to provide a onetime accommodation relating to financial statements prepared under International Financial Reporting Standards (IFRS) for foreign private issuers registered with the SEC. This accommodation applied to foreign private issuers that adopt IFRS prior to or for the first financial year starting on or after January 1, 2007.
The accommodation permits eligible foreign private issuers for their first year of reporting under IFRS to file two years rather than three years of statements of income, changes in shareholders' equity and cash flows prepared in accordance with IFRS, with appropriate related disclosure. The accommodation retains current requirements regarding the reconciliation of financial statement items to U.S. GAAP. In addition, the Form 20-F requires certain disclosures of all foreign private issuers that change their basis of accounting to IFRS.

The Staff, in its review of the 20-Fs being filed under the new rules, will be looking at the disclosure of use of exceptions under IFRS and the reconciliation under IFRS 1.

Executive Compensation and Related Party Disclosure Proposals (Rel. No. 33-8655, 1/27/06): Currently, a foreign private issuer will be deemed to comply with Item 402 of Regulation S-K if it provides the information required by Items 6.B. and 6.E.2. of Form 20-F, with more detailed information provided if otherwise made publicly available. The proposals would continue this treatment of these issuers and clarify that the treatment of foreign private issuers under Item 402 parallels that under Form 20-F.
The proposals would also amend the exhibit instructions to Form 20-F under which foreign private issuers would be required to file any employment or compensatory plan with management or directors (or portion of such plan) only when the foreign private issuer either is required to publicly file the plan (or portion of it) in its home country or if the foreign private issuer had otherwise publicly disclosed the plan.

The proposed revision to the exhibit instructions to Form 20-F is intended to be consistent with the existing disclosure requirements under Form 20-F relating to executive compensation matters for foreign private issuers. In the same way that executive compensation disclosure under Form 20-F largely mirrors the disclosure that a foreign private issuer makes under home country requirements or voluntarily, so too the public filing of management employment agreements as an exhibit to Form 20-F would under the SECs proposal mirror the public availability of such agreements under home country requirements or otherwise.

Report from the Office of Chief Accountant Craig Olinger, Deputy Chief Accountant

Financial Statement Classification Issues: Trouble with financial statement classification has been an increasing trend over the last couple of years, especially with respect to the statement of cash flows (correctly categorizing between operations, investing and financing). One example is the classification of discontinued operations. Many people break it out separately, even though that is not required. Presentation of discontinued operations as its own caption is not appropriate, since only operations, investing and financing captions are permitted on the statement of cash flows. It also doesnt work to dump it all into one of the three categories when it has elements of each of the three. The AICPA has guidance on this topic on their website. [Eds. Note: We understand that the AICPA has posted information to the password-protected portion of its website that indicates that the SEC will permit issuers to revise their cash flow presentation retrospectively (without needing to refer to the correction of an error) on a one-time basis in the first periodic report after February 15, 2006.]
Balance Sheet Classification Issues: Statement 95 was issued in November 1987 and establishes standards for cash flow reporting. This Statement requires that a statement of cash flows classify cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category. The Staff reminds issuers that certain things cannot be listed as cash, every though they may appear to be cash at first blush. For example, restricted cash does not meet the definition of cash and cant be listed there.

Loans and Receivables Held For Sale: Be aware of the broad scope of EITF 01-6, which covers companies that lend to or finance the activities of others. In addition to banks, savings institutions, credit unions, finance companies, etc., 01-6 will also apply to manufacturers, retailers, wholesalers, and other businesses that provide financing for products and services. If a company sells its receivables, it probably falls under this umbrella and must comply with EITF 01-6 by valuing the assets at the lower of cost or fair value and categorizing them as such at the time the decision is made.

Income Statements: There are a number of EITF topics in recent years addressing the classification of income statements. Think about the fundamental principle of classification when preparing income statements.


Operating Segments: This topic still remains a frequent source of Staff comment. The two categories of comments are whether the segments are identified in the first place and the starting point for that analysis is based on the information that the chief decision maker sees and whether the segments can be aggregated in disclosures. Correctly identifying segments is important because it often affects measurement amounts in financial statement (e.g., goodwill impairments are measured at that level) and if you arent using the right number to measure off of, that disclosure will also be wrong.

Financial Statement Presentation in IPOs: The issue here is what is the appropriate historical financial statements to show? There are a couple different ways issuers try to do this: present the business being sold or present the historical track record of management in running the business. The Staff encourages issuers who have questions in this area to consult with the Staff prior to filing the financial statements.

Predecessor Financial Statements: Some issuers have recently tried to present predecessor financial statements that were less than a full set of financial statements. The Staff thinks it would be a very unusual case where this would be the appropriate presentation.

IFRS: In Rel. No. 33-8567, the SEC amended Form 20-F to provide four options for foreign private issuers that are first-time adopters of IFRS, that are or will be eligible to use the two-year financial statement accommodation and that are required to provide interim period financial statements in Securities Act or Exchange Act documents used after nine months from financial year end: the previous GAAP option, the IFRS option, the U.S. GAAP condensed information option, and the case-by-case option. A couple of issuers have used the U.S. GAAP condensed information option and the Staff warns that the issuers have over condensed the information below Article 10 standards (mostly an income statement issue).
The Staff expects approximately 300 issuers to be filing IFRS statements in the coming months and will be focusing on the quality and completeness of IFRS financial statements, including the quality of the reconciliation.

Report from the Office of Small Business Policy - Gerald Laporte, Chief, Office of Small Business Policy

The SECs Advisory Committee on Smaller Public Companies was established to examine the impact of the Sarbanes-Oxley Act and other federal securities laws on smaller companies. The Committee has been meeting, and has held hearings in various parts of the country, since April 2005. The Committee has 21 members with three official observers from the PCAOB, NSAA and FASB.

The Advisory Committee has now published for public comment an exposure draft of its final report and proposed recommendations to the Commission. The Committee will consider the comments received before finalizing the recommendations in the report, which is due to be submitted to the Commission by April 23, 2006. The comment period ends April 3, 2006.

There are 32 proposed recommendations in addition to the two prior recommendations, submitted to the Commission in August 2005 due to their time-sensitive nature (i.e., deferring 404 and non-accelerated filer deadlines). Within the 32 recommendations, there are many sub-recommendations. Note that these are the recommendations of the Advisory Committee and that the Staff doesnt necessarily agree with all of the recommendations.

The recommendations are listed in order of priority, with 14 primary recommendations and 18 secondary recommendations. The vote to recommend each individual recommendation was unanimous in all but four cases. Separate dissents from three members are included in the exposure draft.

The Advisory Committee would create two new categories of issuers to which their recommendations would apply. The first category would represent the smallest 1% of equity market capitalization, called microcap companies. Microcap companies would have an equity capitalization of approximately $128 million or less. The second category would include issuers with the smallest 1% - 6% of equity market cap and be called smallcap companies. Smallcap companies would have equity capitalizations of approximately $128 million to $787 million.


For notes relating to the comments made by Brian Breheny, Chief of Corp Fin's Office of Mergers & Acquisitions, go to DealLawyers.com's "Conference Notes" Practice Area.



PLI's 38th Annual Institute on Securities Regulation


Public Offering Developments (11/10/06)
Panelists:

Shelley E. Parratt, Deputy Director, SECs Division of Corporation Finance
David M. Lynn, Chief Counsel, SECs Division of Corporation Finance
Gary Goldsholle, Vice President & Associate General Counsel, Regulatory Policy & Oversight, NASD
Leslie N. Silverman, Partner, Cleary Gottlieb Steen & Hamilton LLP
Norman D. Slonaker, Partner, Sidley Austin Brown & Wood LLP
A. SEC Hot Buttons and Review Priorities

Mr. Lynn observed that equity lines and PIPE transactions are evolving and the Staff is working with issuers through the comment process. The Staffs most current guidance regarding equity lines can be found in the March 31, 2001 Update to the Current Issues Outline, which overrides some older telephone interpretations. The Staffs guidance for PIPEs can be found in 3S of the March 1999 Supplement to the Telephone Interpretations Manual.

Mr. Lynn provided a list of equity line issues being raised by the Staff
the equity line position does not extend to affiliates of the issuer (the Staff takes the position that 4.9% or 9.9% caps are not indicative of affiliate status);
escrow proceeds;
the Staff will object to the ability of the investor or the issuer to waive a floor, ceiling or collar on price;
the Staff will object to the ability to reject a put or otherwise delay;
the Staff wont permit equity lines that are transferable;
dont like investors getting convertible securities with a put because it is an additional investment decision;
has to be a market for the issuers securities, which includes pink sheets;
disclosure about fees will be scrutinized;
use of proceeds disclosure will also be scrutinized (e.g., investor lends $ to the issuer); and
in cases where equity line represents a significant % of securities being issued compared to the # outstanding the Staff will require the purchasers/selling shareholders to be identified as underwriters.
Ms. Parratt identified common comment areas issued to SPACs

the nature and extent of pre-IPO industry research;
steps taken to locate and evaluate potential targets;
whether a business combination must take place within a given time period and whether that period can be extended;
financial statement issues include classification of warrants (see EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, which may have the effect of classifying the convertible equity securities as debt in some cases); and
subsequent business combination transactions (e.g., if an issuer files a registration statement for a business combination very soon after its IPO, but told the Staff there were no potential targets during the IPO review, the Staff may be concerned and issue comments focusing on this area).
B. Correcting Time of Sale Disclosure

Messrs. Silverman and Slonaker walked through the steps to take, including options available, to correct time of sale disclosure
make corrective disclosure contact each of the investors and put out a free writing prospectus (FWP) disclosing the new information;
sales force should be well-scripted under these circumstances;
postpone closing if necessary and assess market impact;
the underwriters will have to assess whether to breach the contract they have with investors, enter into a new contract or stop the sale altogether. This will include analyzing their potential liability under federal and state law; and
a new contract of sale will have additional effects, such as establishing a new time of sale, impact on hedging arrangements entered into by investors, new/different settlement dates and Regulation M distribution period.

 

 
PLI's 38th Annual Institute on Securities Regulation


Q&A Picnic Lunch (11/10/06)
Speaker:

John White, Director, Division of Corporation Finance, SEC
Agenda for the December 13 Open Meeting
What items are on the agenda for the December 13 Open Meeting? This will be the Division of Corporation Finances meeting, and it will be a very long meeting. At this time, the Division will present 4 rulemakings to the Commission, but Mr. White emphasized that plans can change. During another panel on Thursday (11/9), Mr. White had said that the Staff could present the Katie Couric rule to the Commission on the December 13 meeting, he did not say that they would. Instead, he identified the same 4 rulemaking projects listed in the SECs Sunshine Act notice


Management guidance for internal controls over financial reporting under Section 404 of SOXA;
Foreign private issuer deregistration (ownership thresholds will be one of the matters under consideration, e.g., exclusion of QIBs from determination of number of U.S. holders);
Electronic proxy materials, including delivery by posting online; and
Amending Rule 14a-8 (shareholder access to proxies and ballots).
With respect to the Rule 14a-8 rulemaking, the 2d Cir. decision in the ASCME v. AIG case could, if not addressed, result in different applications of Rule 14a-8(i)(8) in different jurisdictions, which the Commission hopes to avoid.


Executive Compensation
Are there any exemptions from the requirement to provide a CD&A, and what about the CD&A for controlled companies, publicly traded partnerships and similar types of entities? How would the CEO and CFO certifications cover this disclosure? No exemptions from the CD&A requirement. Foreign private issuers do not have to comply, but the CD&A requirement is not included any of the FPI reporting forms or other requirements. With respect to controlled companies and entities that are not structured in the same manner as traditional corporations, there should not be an issue providing a CD&A because it is the companys own disclosure, not that of the compensation committee. In that regard, the company or entity needs to discuss the factual information for investors, and does not need to discuss the compensation committees deliberations. Accordingly, the certifications provided by the PEO or PFO (or persons performing similar functions) will cover the CD&A and shouldnt be effected otherwise.

The CD&A and related tables are now covered by the CEO and CFO certifications. Must this disclosure be in the 10-K itself in order to ensure coverage by the certifications? In the 2002 adopting release regarding certifications and in the executive compensation disclosure adopting release, the Commission made clear that certifications cover the Part III information that is filed subsequent to the 10-K and incorporated by reference.

What if, on the 10-K due date, the company knows that it wont file its proxy statement within 120 days? Do you have to provide the executive compensation disclosures in the 10-K or may the company still have the benefit of the additional 120 days? Mr. White said that he and the other Staff members discussed this issue and agreed that companies should still be able to have the additional time, noting in particular that this will be the first time these companies will be providing this disclosure. Companies may still have 120 days to complete their executive compensation disclosure by amending the 10-K to add the information if their proxy statement will not be filed at that time. Even if the company knows that it wont be able to file its proxy statement within 120 days of its fiscal year end on the 10-K due date, it may still take advantage of the additional time.

An employee stock purchase plan allows certain employees to purchase company stock at a discount to market price. Must this be reported in the Summary Compensation Table or other tables? It depends. This type of compensation would be captured in the All Other Compensation column of the Summary Compensation Table unless the discount is available either to all security holders or to all salaried employees.


Materiality
If a company becomes aware that revenue and/or income are overstated by a quantitatively immaterial amount, must the company also perform a qualitative analysis? Yes see SAB 99.


Comment Letters
What is the turnaround time for the issuance of the initial comment letter and review of amendments? The goal for the first round of comments in an IPO remains 30 days, but Mr. White said he believes the Staff has been averaging about 27 days. With respect to amendments, the goal is 10 days, but that depends on the magnitude of the comments. [Ed. Note: One suggestion, made by John Bostelman during another panel, was to reply to the comments that could be readily answered up front and discuss a timetable with the Staff for the more difficult comments.]

In light of the required disclosure of outstanding Staff comments, how does a WKSI and/or accelerated filer know whether comments have been resolved? The Staff has begun sending letters to registrants that state the review has been completed. The SEC uses the date of that letter to determine when 45 days has passed for purposes of posting the correspondence on EDGAR.


Shareholder Advisory Groups
Shareholder advisory groups, such as ISS, make recommendations to shareholders based on their own criteria. Will the SEC consider issuing rules governing these recommendations and requiring these groups to disclose the criteria on which they rely and the basis for their recommendations? No. The relationship between shareholder advisory groups and shareholders is a contractual one and not subject to SEC regulation.


Effect of U.S. Regulation on U.S. and Foreign Listings
The number of new U.S. listings on the London AIM has increased. Do you think this is the result of U.S. regulation? The growth of foreign markets is a good thing. The December 13 rulemaking will address this and related issues.


Staff Conference Calls
Does the Staff have transcripts of the conference calls they make, and do they archive them? No.


2000 Electronic Interpretive Release
Are there plans to update the 2000 electronic interpretive release in light of Securities Act Reform? He is not aware of anything imminent. Any updating of those positions in connection with Securities Act Reform were addressed in the related rulemaking.


Rulemaking - Guidance for Management under SOXA 404
What will be the effect of the upcoming guidance for management under SOXA 404 for both companies that are non-accelerated filers that must first comply in 2007 and accelerated filers that are already subject to 404 compliance? The SEC hopes to propose and adopt the management guidance in time for first-time 404 companies so that they will have it in 2007. For other companies that are already subject to 404 and so already have their processes in place, the goal of the guidance is not require them to revisit these processes if they are already working well. The management guidance is expected to be advisory only, but there is no way to know for sure what the Commission will do on December 13.


Employee Stock Options
What are the SECs plans with respect to market valued options for employees? According to Carol Stacey, Chief Accountant for the Division of Corporation Finance, there are no proposals announced, but the Staff is always willing to consider proposals submitted to them.


Disclosure Committees
Is it permissible for a company to have its outside consultant on its disclosure committee for purposes of complying with the disclosure controls and procedures requirements? There are no requirements to have a disclosure committee, much less as to who must be on that committee. Companies are free to set up these committees or not, and do so however they want.

However, there are new disclosure requirements in the executive compensation rules regarding interactions between compensation consultants and management, but that should not be a problem because it is appropriate for the company to have a consultant on its disclosure committee.


Staff Guidance Regarding Executive Compensation Disclosure
Will the Staff issue transition FAQs for the executive compensation rules, which became effective on Nov. 7? The Office of Chief Counsel is keeping a list of the questions asked and will issue guidance either in the form of telephone interpretations or FAQs. Mr. White did not provide any timeframe for the issuance of this additional guidance.

The effectiveness of the new rules picks up calendar year-end companies so that they must comply in 2007. However, companies with a different FYE that are not required to comply until next year, such as companies with a 9/30 FYE, may comply early or they may continue to use the old rules. However, whichever set of rules they decide to use, they must accept the full package. If those companies decide to use the old rules, but to also add some of the disclosure from the new rules, they should consider carefully and make sure their disclosure is not misleading because it lacks material facts and/or has material omissions.

What standards will be used by the Staff to determine whether a company has complied with principles-based disclosure? What do you think will be the effect of a good faith application of these types of rules on SEC enforcement and private litigation?n? A company is in the best position to make its own disclosure based on its facts and circumstances. The company is responsible for its own disclosure. The Staff understands that it must be principles-based on its own side, too, and is being trained on this.

Mr. White said he met with Linda Chatman Thomsen, Director of the Division of Enforcement, before he gave his series of Principles Matter speeches. He said Ms. Thomsen is on board and appreciates how this needs to work and is not interested in a gotcha approach. [Ed. Note Hopefully this will be the case, I note that during the panel, SEC Enforcement Trends and Priorities, Ms. Thomsen made the remark that . . . every time there is a restatement every time there is a violation of the securities laws . . . . However, her remark was made in the context of explaining that the Division of Enforcement does not go after every single securities law violation, but pursues the most egregious cases. She also noted during that panel that every enforcement case is vetted by the Commission.]

With respect to private litigation, Mr. White said he hopes that statements in speeches (both his speeches and others, such as Commissioner Nazareths opening remarks on Thursday, 11/9, of this conference) will be given some consideration in the private litigation side as well. He also noted that the Commissions views on principles-based disclosure are in the releases, too.

Why did I (John White) give 5 speeches on executive compensation with 1 more coming next week? To assist attorneys in providing counsel to their clients in connection with the new executive compensation rules, which are principles-based and so do not have a rule for every disclosure issue that might arise. If a client asks where does it say I have to do this?, disclosure counsel will have a tool to use when dealing with clients facing difficult disclosure issues. Counsel should point to the speech and tell the client this is what the SEC Staff says on how it is supposed to work.

The Staff is planning to undertake a review of the executive compensation disclosures next year.


PLI's 38th Annual Institute on Securities Regulation


New Proxy Disclosure Rules (11/9/06)
Panelists:

John W. White, Director, SECs Division of Corporation Finance
David B. Harms, Partner, Sullivan & Cromwell LLP
Natalia Delgado, Vice President, General Counsel and Corporate Secretary, Huron Consulting Group
A. Compensation Discussion & Analysis (CD&A)

Mr. White began his remarks by observing that the key theme to responding to executive compensation disclosure requirements is that principles matter and counsel should use Mr. Whites series of speeches (Principles Matter) as a tool to show clients what the SEC Staff expects in terms of disclosure.
In that same vein, he noted that even though the Instruction to the CD&A states that the narrative, principles-based discussion cover the most recent fiscal year, the company may need to address items or events that occurred before or after that year, such as adoption or implementation of new or modified policies, decisions, etc., if needed to give context to the compensation covered by the CD&A.
B. The Role of Compensation Committee

Ms. Delgado said that the new executive compensation disclosure requirements would cause the role of the compensation committee to change. Instead of just setting policy, the comp committee now must recommend including the CD&A in the companys proxy statement or 10-K. This means committee members will need to read and question the disclosure and be more actively involved in drafting that disclosure.
C. Total Compensation

Amended Item 402 requires companies to disclose a dollar amount for total compensation for the NEOs (PEO, PFO, and three other highest paid executive officers). This amount could be an issue if a company compensates someone extraordinarily in one year, but then does not do so the following year. In other words, there may be a lot more movement from year to year as to who is in the Summary Compensation Table.
Mr. Harms noted another good example where the total compensation may affect who is listed as a NEO would be the case where an executive officer retires and receives a great deal more compensation as a result of that than he or she would have in any other ordinary year.
Mr. White observed that a number of items have been taken out of the calculation of the total amount of compensation for purposes of determining NEOs.
D. The Katie Couric Proposal

Mr. White said that this provision has not been re-proposed, but the proposal has continued so that the SEC could receive more comments. The Staff is now evaluating the comments and hopes to have a recommendation for the Commission shortly. He noted that if the Staff wants to complete this rulemaking in time for next proxy season, they could because the December 13 Open Meeting is a Corporation Finance meeting he did NOT say that they would.
E. Perks and Personal Benefits

The panelists discussed the SECs test for determining whether an item is integrally and directly related to an executives job a narrow concept. Mr. White said that if the item is necessary to performing the job, then that is the end of the analysis. [If it isnt, then the next step in the analysis is to determine whether the item provides a direct or indirect benefit that has a personal aspect even though provided for a business reason or for the companys convenience.] For example, is using a private jet to get to a meeting necessary? Yes, you need to fly to the meeting and though commercial aircraft are available you dont have to choose the lowest cost alternative.
Mr. Whites speech, Principles Matter, 9/6/06, provides a number of examples of how to think about incremental cost.
F. Plan Awards Tables and FAS 123(R)

Ms. Delgado said that FAS 123(R) requires companies to start taking charges once all conditions have been met even though the award may not have been granted, e.g., the grant date and start date of employment may not match. These types of timing issues need to be reviewed so that the company can make sure it doesnt have numerous grant dates.
According to Ms. Delgado, ministerial actions are not deemed a condition under FAS 123(R) that has to be met. Some auditors are taking the position that board approval, if it is the last thing that must happen, may be ministerial if they always approve the grant.
G. Director Compensation Table

Ms. Delgado said that the directors need to be shown what this table will look like before they see it in the proxy statement. She thinks these tables will lead to more comparative analysis between peer companies and more focus on the value of the shares reported rather than the number of shares granted.
Mr. White added that directors need to know there will be a single number for their total compensation, including perks, in this table.
H. Form 8-K Changes

Mr. Harms stated that the SEC changed the standard of materiality so that not every piece of compensation is necessarily material. He pointed out that what is material in the executive compensation context, however, is measured not against the company, but whether it is material to an investor.
I. Related Party Transactions

Mr. White discussed the SECs revised related party transactions requirements, which are now principles based. In particular, he called attention to the new disclosure trigger that the company need only be a participant in the subject transaction, and no longer must be a party to the agreement itself. The use of participant (instead of party) makes clear that the disclosure is intended to pick up any company involvement in a related party transaction. He advised against applying the disclosure rule in a technical manner (e.g., getting technical with the terms in the rule to avoid disclosure of certain transactions on that basis).
Mr. Harms affirmed that the new related party disclosure requirements retained the safe harbor that there is not a deemed material interest solely because there is less than a 10% interest. For example, if a company enters a contract with a company in which a director owns less than a 10% interest, but the terms of the contract are ordinary, this may or may not be a material interest subject to disclosure it will depend on a facts and circumstances analysis.

 

Current Disclosure Issues (11/9/06)
Panelists:

Shelley E. Parratt, Deputy Director, SECs Division of Corporation Finance
Alan L. Beller, Partner, Cleary Gottlieb Steen & Hamilton LLP
Mary A. Bernard, Global General Counsel, Credit Suisse
John T. Bostelman, Partner, Sullivan & Cromwell LLP
Staffing and Review Programs

Currently, the Division has 450 people. Of the 350 people working on the disclosure side of operations, 230 are accountants. The number of Corp Fin employees is down overall through attrition of both attorneys and accountants.

Ms. Parratt said there will be a review program for the new executive compensation disclosures. Currently, the Staff has review programs for asset-based issuers in connection with Regulation AB and company filings with IFRS. Mr. Beller noted that foreign private issuer clients should expect to receive a comment letter.

The Office of Global Security Risk continues to be involved in the review and comment process. This Office may work with review staff in the industry offices in issuing comments or may issue comments independently. The Staff bases these comments on the companys own filings and other sources of public information (information on the companys website, press releases and analysts reports). Ms. Parratt made clear that the Staff does not have and does not have access to non-public information collected by the government about these companies.

The review process has changed for small business issuers. The first stop for the filings made by these companies is the Office of Emerging Growth Companies, which then assigns these filings to one of the other 10 industry offices based on industry group. They have begun to farm out the small business filings because of the volume of IPOs, Form 10s and S-B filings. The OEG is reviewing the high volume of blank check company filings.

Review and Comment Process

Ms. Parratt noted that 12,000 companies file annual reports every year, 2,000 of which are asset-backed issuers. Under Section 408 of SOXA, the Division is required to review each of these companies at least once every three years, although some companies may be reviewed more often. The Staff uses a risk-based selective review to evaluate the companys disclosure and then determine whether to undertake further review, i.e., targeted review.

Ms. Parratt noted a recent John White speech explaining what a Staff review isnt it is not a review of the companys financial health or a blessing of the quality of its disclosure.

Once a review has been completed and comments cleared, the Staff will send a letter to the registrant stating that there will be no further comments. [As noted by John White during the Q&A Picnic Lunch, the date of this letter will determine when 45 days has passed for purposes of posting the correspondence on EDGAR.]

Mr. Beller asked whether the statement at the end of comment letters asking companies to respond to Staff comments in 10 days was a firm deadline. Ms. Parratt said that this was the Staffs way of telling companies that they try to limit comments to the material issues and there is no penalty box if the company does not respond within the 10-day period. However, the company should tell the Staff approximately how long they believe it will take to respond to the comments. Mr. Bostelman suggested answering right away the comments that could easily be responded to and then establishing a timetable with the Staff for the more difficult issues.

Recurring Transactional Disclosure Issues

Ms. Bernard and Mr. Beller discussed the types of stock option backdating issues that underwriters may raise in connection with due diligence in preparation for an offering. Some of the key diligence issues include

the quality of the investigation (who is investigating and their experience level, if a committee is leading the investigation who is on the committee and, in addition to independence as defined by applicable listing standards, do they have any personal ties or financial relationships with management)

the status of the investigation (how much of the options program has been reviewed and to that extent, how much, if anything, has been found wrong - e.g., 10% of program reviewed, but every option issuance has been problematic so far.)

what disclosure can be made about the investigation (can the problem be defined even though you may not yet know the outcome).

Mr. Beller added that these issues are relevant for companies even without going to market because they must consider these disclosure problems in connection with their Exchange Act reports.

Ms. Bernard noted that even though there may be backdating issues that have been discovered the underwriters may not necessarily walk away from the transaction. There is a little more risk tolerance in a bond deal than an equity deal. Mr. Beller said it depends on whether there is a whiff of wrongdoing something intentional as opposed to just sloppy recordkeeping or simple mistakes. Ms. Bernard added that if there is intentional wrongdoing, the underwriters will want to know whether it was an isolated event or was it systemic and ongoing for a long period of time.