Mitigating Risk: Who’s in the Room?

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The SEC, rightfully so and perhaps long overdue, is flexing its enforcement muscle with regard to Reg FD and how companies disclose material non-public information.
 
We all know the drill by now and what public companies are supposed to do. Yet sometimes at private meetings with analysts and investors, management inadvertently says something it shouldn’t, and violates Reg FD. If there’s any unusual trading the next day, watch out.
 
While it is perfectly acceptable and even good practice for management to meet with analysts and investors from time to time, one way to mitigate the risk of Reg FD violation is to have an IR professional present at every meeting, or at least at the group meetings.
 
I know what you are thinking…”What a self-serving statement.”  Nevertheless, competent, experienced IR professionals know how to counsel management on what to say. More importantly, they can be right there, ready to intercede, when sensitive questions come up or to prepare a press release should the accidental comment be made that should really be disclosed widely.
 
Recently, the SEC began an investigation into Reg FD violation by generic drug maker Mylan, Inc., following a private meeting it held. I do not know if an IR professional was in the room, and even if there was, there would be no guarantee that harmful comments would not be made. However, at least in theory, if an IR pro was there, the risk of a disclosure violation would have been significantly reduced. And mitigating risk is really what it’s all about. Just ask your D & O insurance broker.
 
Reg FD has been around since the year 2000, and up to now, there have been few cases involving its enforcement.  Word on the Street and from Washington D.C., however, is “Beware.”  With financial reform now underway, things are about to change.

 

—Roger Pondel, rpondel@pondel.com
 
 

The Clock is Ticking

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After delaying Section 404 compliance for small companies at least four times since Sarbanes Oxley became law in 2002, the SEC has set a compliance deadline of June 15, 2010 for companies with market caps of less than $75 million. Section 404 requires that companies publicly report on the effectiveness of their internal control over financial reporting.

In a recent public statement, Mary Schapiro, the SEC’s new chairman, commented that, “Since there will be no further commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance.”

Section 404 compliance is both time consuming and expensive, so if you haven’t begun planning with your auditor, there’s no time like the present.

 

— Laurie Berman, lberman@pondel.com

SEC at Your Door? Invite Them In.

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You know that feeling.  A letter sitting on your desk.  Return address, 100 F Street, NE Washington, DC 20549.  Your heart sinks to your stomach.  You open it slowly.  Yup, there it is.  An SEC comment letter.
 
What’s the best way to handle this bit of assumingly unwanted news?  According to Steven Jacobs, an associate chief accountant with the SEC’s Division of Corporation Finance, you should engage the SEC in dialogue to determine exactly what they are looking for rather than rushing to restate your financial results.  At a conference sponsored by the New York State Society of Certified Public Accountants, Jacobs said that picking up the phone makes it easier to “assure that the issuer’s response addresses the staff’s concerns.”
 
For other great tips for dealing with the SEC, check out CFO.com’s recap of Jacob’s speech.  Sarbanes-Oxley calls for an SEC review of the financial filings of publicly traded companies at least once every three years.  Last year, the SEC reviewed the filings of nearly 5,000 issuers, up from the prior two years.  It’s bound to happen sooner or later, so be prepared and don’t be afraid to talk to your friendly neighborhood SEC officer.  It might be easier than you think.

 

— Laurie Berman, lberman@pondel.com
 
 

XBRL – It’s Closer Than You Think

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Within the next month or two, the SEC will finalize rules that mandate XBRL-based submissions for collecting financial reporting information for all domestic and foreign SEC reporting companies.  For those of you wondering, XBRL stands for Extensible Business Reporting Language.  Proponents of  XBRL believe it will allow for more accurate, relevant and scalable analysis of financial information, as well as create greater transparency that can result in a lower cost of capital.  To read more about the SEC’s phase-in plan, view Bowne & Co’s plain English summary of XBRL-based submissions to access Bowne & Co’s plain English summary.

— PondelWilkinson, investor@pondel.com


Are Web Sites a Suitable Disclosure Outlet?

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According to the Securities and Exchange Commission, the answer is…maybe.  The SEC’s new interpretive guidance states that posting material information on a corporate Web site may satisfy Regulation FD, but that the facts and circumstances of each case must be weighed first.
 
According to law firm, Cravath, Swaine & Moore LLP, several factors must be determined before a Web site can be used as the sole means of disseminating material information.  These include:
 

  • whether the Web site is a recognized channel of information distribution;
  • how, where and when the information is posted and becomes broadly accessible to the public; and
  • the Web site’s capability to meet the “simultaneous or prompt” timing requirements of Regulation FD’s Rule 100 as well as the Web site’s capability to meet reasonable usage demands.

 
At this point, it’s probably a safer more shareholder friendly bet to continue utilizing the wire services to disclose important information.

 

— Laurie Berman, Senior Vice President, lberman@pondel.com
 
 

New SEC Financial Agent

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The U.S. Department of Treasury’s Financial Management Service has designated U.S. Bank of St. Louis, Missouri as the new Financial Agent for General Lockbox Services for the Securities and Exchange Commission. US Bank assumed responsibility from Mellon Bank on February 4, 2008. All fee payments (wires and checks) must be submitted to US Bank on and after this date. No payments should be submitted to Mellon Bank after February 1, 2008.

View general information on filing fee procedures, or refer to 17CFR 202.3a, Instructions for Filing Fees.

For other questions or additional information, contact the Fee Account Services Branch in the Office of Financial Management at (202) 551-8989.

— PondelWilkinson, investor@pondel.com

E-Proxy Timeline for Early Adopters

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According to NIRI, 29% of investor relations officers surveyed said that they expected their companies to adopt a combination of notice and full set delivery of proxy materials in 2008.  22% plan on using the notice only model (also called the notice and access model in which a company sends a notice to shareholders at least 40 days before its annual meeting of shareholders letting them know that proxy materials are available on a public website other than EDGAR), while only 3% plan on sending a full set of proxy materials to all shareholders.  Almost half of those surveyed were still undecided as to how their company’s proxy materials will be delivered this year.

For those companies choosing to blaze the e-proxy path, the following timeline provided by NIRI should prove helpful:
 

  • Immediately – Determine method for proxy material delivery (notice only, full set delivery only or a combination of the two).
     
  • 60-100 days prior to annual meeting – Coordinate proxy delivery plans and important dates with partners, including your IR firm, outside legal counsel, annual report printers, proxy material website builders and proxy solicitors.
     
  • 46+ days prior to annual meeting – Confirm that your proxy website is running properly.  Remember that materials must be in both readable and printable format.  The website must ensure visitors’ anonymity and be capable of handling heavy traffic.
     
  • 45+ days prior to annual meeting – Deliver notice and access cards to all parties responsible for mailing materials to your shareholders.
     
  • 40+ days prior to annual meeting – Mail notice and access cards to shareholders (as well as printed proxy materials if you are adopting a combination delivery strategy).  Remember to file your notice and access card with the SEC.

 
Some additional NIRI pointers:
 

  • Monitor proxy responses regularly.
  • Respond to investor requests for printed materials within three business days.
  • Record requests from shareholders who have opted to receive paper materials on a permanent basis.

 

— Laurie Berman, Senior Vice President, lberman@pondel.com
 
 

To Audit IC or Not to Audit IC

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That is the question.
 
Small public companies with less than $75 million of public equity may get another one-year reprieve from having to comply with one of the provisions of the 2002 Sarbanes-Oxley Act.  The Wall Street Journal (December 13, 2007, page C4) reports that SEC Chairman Christopher Cox is considering submitting a formal proposal in early 2008 that would exempt such companies from the rule requiring that they have their internal accounting controls audited and reported on by an outside auditing firm.  Meanwhile, the SEC will continue conducting a study on the estimated costs of complying with the external-auditor review provision to determine whether to phase in that requirement for small public companies in 2009, or propose a further delay or modification to the Act.
 
The chairwoman of the House Small Business Committee has gone on record in favor of the delay, pending results of the study.  If the delay is approved, most small public companies will likely breath a sigh of relief, while shareholder advocacy groups will likely express their angst at what they perceive to be yet another move to undermine the important shareholder protections called for by Sarbanes-Oxley.
 
Of course, voluntary compliance with the internal control review provisions remains an option for any small business and can help the board and management convey to investors their strong governance values.  A thorough assessment of the costs and benefits (both real and intangible) should precede any such decision.  PondelWilkinson is uniquely qualified, together with legal counsel, to assist your board and management in weighing the available options. 

 

— PondelWilkinson, investor@pondel.com