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ABA Meeting Features Dialogue With Director of Corporation Finance

Representatives of the SEC and the PCAOB last week spoke at the ABA Section of Business Law's fall meeting, which included a dialogue with John White, the director of the SEC's Division of Corporation Finance. White reviewed current developments in the Division, including the agenda items for the upcoming meeting on December 13. Looking back on its 2006 activities, White said it will be apparent that the SEC covered a lot of ground, but admitted it is a "little back-loaded" with the December meetings.

The SEC issued a press release in October outlining the matters to be addressed at the December 13 open meeting. The formal agenda for the meeting will be published on December 6. White said the comment letters submitted in response to the concept release on management's reports on internal control over financial reporting were very detailed and very helpful. He noted that one of the amendments to the PCAOB's Auditing Standard No. 2 will remove all of the guidance for management since the SEC has taken that issue back. The format may include both interpretive guidance and rules, he said, but the "guts" of the release will be interpretive.

Companies will not have to comply with the interpretive guidance, according to White. They can continue to follow the processes that they established since they began to comply with the management's assessment requirement of section 404 in 2003. The goal for the management guidance release is to have it proposed and adopted for companies to use in 2007. The PCAOB has the same goal with respect to the amendments to AS2.

White said he hopes for a final release soon on the proposal to postpone compliance with section 404 for nonaccelerated filers. The final rule is likely to be adopted by seriatim, he said. If the SEC has not finalized its guidance for management and the PCAOB has not adopted revisions to AS2, White said the SEC likely will delay the compliance date again.

The comments submitted in response to the foreign deregistration rule proposal recommended a number of revisions that are fairly easy to accommodate, according to White, such as the dormancy period, the reporting period and the primary trading market. The principal issue with which the staff continues to wrestle is the threshold for U.S. holders. The staff is looking at different ways to reset the threshold at a higher number, he said. White added that the Committee on Capital Markets Regulation issued a number of recommendations last week that have given the staff more to think about.

The staff received a lot of comments in response to its proposal on electronic proxies, known as the "notice and access" model. There were a number of objections to the proposal, including concerns about access by seniors. White said the staff also concluded that the post card format, as originally proposed, will not work since shareholders will receive a control number that must be kept private. He said the staff has also come up with a workable answer for delivering the ballot along with the proxy. If adopted, White said the rules will not be effective for this proxy season because intermediaries will need time to adapt their systems.

The shareholder proxy access issue is highly charged, according to White. Under 1934 Act rule 14a-8(i)(8), known as the election exclusion, companies may omit from their proxy materials any shareholder proposal that relates to a campaign for election as a director. White said the staff has not read the rule broadly and most proposals go into the proxy, except for those relating to director nominees and the process for conducting future elections.

White said his first official act upon joining the SEC was to submit the SEC's views to the Second Circuit in AFSCME v. AIG, which failed to convince the court. Until the SEC clarifies its interpretation, White said that proposals relating to the election process for companies under the Second Circuit's jurisdiction may be included in the proxy. The SEC is not happy about having an inconsistent national application of the rule, he said. He added that there has been a constant stream of visitors to the SEC to promote their positions on the matter.

If three out of five of the commissioners agree that the current staff position should be reaffirmed, White said the staff could continue issuing no-action letters saying that none of these election proposals, some of which are awaiting staff action, go into the proxy statement. He also noted that a proposal known as the Donaldson compromise on proposed rule 14a-11 is still "out there." He suggested that interested parties read the agenda for the meeting very carefully.

The staff continues to work on a proposal that has been referred to as the "Katie Couric" rule, which relates to the disclosure of the pay of the three most highly compensated company employees who are not named executives. If the SEC wants to take action in time for the 2007 proxy season, White said there is still time to do that since all that is needed is a final rule. The Division plans to review the implementation of the other executive compensation rules after April or May to see if they require any fixes.

The foreign private issuers that have adopted international financial reporting standards filed their Forms 20-F in July, White said, and are undergoing staff reviews. White said the comment letters relating to IFRS are the same as the staff always issues, and reflect the same kinds of questions about the financials.

White said that former director Alan Beller's idea to post the comment letters online was a brilliant idea, except that, at the time, EDGAR could not accommodate the move. Now that EDGAR has been revamped to permit the posting of the letters, White said there are 7,000 sets of correspondence available. The public posting of the letters puts pressure on the staff and on companies to write good comment letters, he added.

White mentioned the SEC's initiatives relating to XBRL. Do not assume the use of XBRL will remain voluntary, he warned.

In closing, White said the Division plans to review how it communicates interpretive information such as frequently asked questions, current issues outlines, the telephone interpretation manual, staff legal bulletins and staff alerts. There has to be a better way, in his view. White said the information that is posted on the Division's Web site is not up-to-date. The staff needs a mechanism to update little pieces rather than an entire interpretive document, he said. He asked for input on the best way to accomplish this task and whether users want the Division to retain the out-of-date material or get rid of it.

Jacquelyn Lumb