(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

Executive Compensation Disclosure An SEC Review Priority For 2007

With new executive compensation disclosure rules in place, the SEC's staff will be closely reviewing filings in the coming proxy season, according to Shelley Parratt, deputy director of the Division of Corporation Finance. She said that the staff will review the filings right away so that it can help set appropriate disclosure standards under the new rules. Ms. Parratt discussed recent disclosure review trends at the Practising Law Institute's recent securities regulation conference.

Another area targeted for review in the coming year is filings that use international financial reporting standards, she said. While the filings will be examined, she noted, the staff is not trying to turn IFRS into GAAP. Alan Beller, former director of the division and now a partner at Cleary Gottlieb, advised that if a company files using IFRS this year, it should expect a comment letter from the staff.

On any filing, the staff will issue a comment letter where it believes it can improve the disclosure, Ms. Parratt said. After the initial letter, there is a lot of back and forth with the company, which continues until the staff is satisfied that the disclosure issues have been cleared up, she said.

Once a company receives a comment letter, it has 10 days to respond, although the staff does not treat this as a firm deadline. There is no penalty box for late responders, she said, but a company should notify the staff when it will respond if it is outside the 10-day window. The staff wants to clear up the issues quickly for the sake of investors, she said.

The Commission has now posted over 7,000 completed filing reviews on its Web site. Ms. Parratt said that the staff does not post a comment file until the matter is resolved. The staff posts all related correspondence, so if a file is posted, you can assume that it is complete, she said. Sometimes companies simply amend their filings, so there is no letter from the company as part of the comment letter file, she added.

She noted that the staff has recently begun to send out letters notifying companies when the review is finished. She encouraged companies to look at the posted comment letters to see the nature of the staff's comments and how the staff handled a competitor.

Sarbanes-Oxley Act Section 408 requires the staff to review companies every three years. Ms. Parratt believes that Congress meant for the Commission to review some companies more than every three years. A company should not assume that if it has been reviewed, it is "off the hook" for two years.

Ms. Parratt said that the staff uses a risk-based selective review process. The staff reviews the disclosure thoroughly, she noted, and decides if it wants to look further at the financial statements and transactional disclosure. She advised that the preliminary evaluation now includes merger and acquisition transactions and initial public offerings, which means that some IPOs may not be reviewed under the selective review process.

Ms. Parratt was joined on the panel by Mary Bernard, global general counsel at Credit Suisse, who discussed disclosure issues for companies with pending investigations. She said the ramifications for companies under investigation are predictable. They begin with the likely restatement of financials, which may cause a company to miss its Exchange Act filing deadlines, which leads to delisting, shareholder suits against the issuer, and the possible indictment and resignation of executives.

The most controversial recent issue is options backdating, she noted, for which 130 companies are now under federal investigation. More than 40 executive officers have resigned or have been dismissed in connection with backdating, including 10 CEOs and eight general counsels, she said.

As counsel for an underwriter deciding whether to finance a company, she looks at whether there is a problem that requires an investigation based on certain red flags that may be present. If there is a problem, but it is not clear if it is material, Ms. Bernard said she begins by looking at the integrity of management. Her firm wants to know if management will survive an investigation, she said, because it does not want to do a road show with one management group only to have it be ousted a week after the offering.

When working with companies that have done an internal investigation, Ms. Bernard said she looks at the quality of the investigation, including who conducted it and who was on the investigation's review committee. She also asks about the status of the investigation and the depth of the problems uncovered.

Management intent is very important in these cases, Ms. Bernard said. It is important to determine if the action was deliberate, because that indicates whether management will survive or not, she noted. 

Mr. Beller said that counsel should try to determine whether there is a whiff of wrongdoing in the air at a company under investigation, or whether it was simply sloppiness that led to the problem. Where there appears to be something intentional, and management was involved, that is "the reddest of red flags," he said.

Reputational issues are very important to Credit Suisse, Ms. Bernard said. The underwriter will stand by a company that has merely been sloppy, she noted, but if there is widespread and systemic wrongdoing, it will back away.