ABA speech by John White

By Cydney Posner

In a speech on August 14 before the ABA, Corp Fin director John White made several points worthy of note.

• Section 404. There are no further implementation delays planned. Calendar year non-accelerated filers will be required to file their first management assessments at the end of this year, to be included in 2008 filings. The first internal control audits would be required beginning in 2009 filings.
• Review of executive comp disclosures. The SEC is well into the process of reviewing hundreds of proxies (with a focus on larger companies), but has not yet issued comment letters. They are "learning as they go," and are revisiting earlier drafts of comment letters for purposes of consistency. The SEC's report on its targeted review project is expected in the fall. They are looking for:
  • analysis, particularly on the different components of compensation and on change-of-control and termination payments;
  • adequacy of disclosure surrounding performance targets, particularly with respect to the "really vague disclosure" about "individual performance goals and targets" without further discussion;
  • adequacy of justification for withholding targets under the confidential treatment standards;
  • if targets were properly withheld, the adequacy of the alternative disclosure about the difficulty of achieving the targets;
  • clarity of the disclosure regarding benchmarking; and
  • disclosure regarding who makes compensation decisions, including the CEO’s and others’ roles in the decision-making process.

There is no plan to amend the rules in time for this next proxy season, but, if necessary, they could be amended next summer.

• Voting matters. Although there is no timetable for action, the SEC is also considering current issues including NYSE Rule 452, empty voting, over-voting and shareholder communications.
• PIPEs. With respect to PIPE transactions, the staff’s concerns with convertible securities are primarily with securities convertible into a large number of shares of common stock relative to the issuer’s outstanding shares held by non-affiliates or that are otherwise abusive, whether there is insufficient disclosure about the market impact and cost of these transactions and whether the shelf registration system is being used in circumstances not intended to be covered by those rules. The new proposals expanding eligibility to use Form S-3 may provide issuers some relief here as a significant financing alternative.
• Stealth restatements. The SEC is still "still working through the issues" as to whether to enhance transparency by adopting a rule that required the filing of a Form 8-K any time a company has determined to restate its financial statements or to clarify that a Form 8-K must be filed – rather than just including that disclosure in a periodic report – any time a determination is made that the public should not rely on previously filed financial statements.
• Advisory Committee on Improvements to Financial Reporting. This committee was established by the SEC in June to study the causes of financial reporting complexity and advise on several matters:
  • making financial reports clearer and more beneficial to investors;
  • reducing the costs and unnecessary burden for preparers;
  • utilizing advances in technology to enhance all aspects of financial reporting;
  • setting of financial accounting and reporting standards;
  • the process of regulating compliance with accounting and reporting standards; and
  • other factors that drive unnecessary complexity and reduce transparency to investors.

(Keep in mind that the SEC did take action on a number of recommendations of its Advisory Committee on Smaller Public Companies, so the project may actually bear fruit.)