SEC's Approves 3% Solution For Proxy Access

Earlier today, consistent with the provisions of the Dodd-Frank Act, the SEC approved what I'll refer to as the "three percent" solution for the contentious issue of proxy access. As summarized in detail by James Hyatt of Business Ethics Magazine:

Under the new rule approved by the Commission, shareholders seeking access to corporate proxy materials would:

--have to own at least 3% of the total voting power entitled to vote at the meeting.
--be able to aggregate holdings to meet the 3% requirement.
--be required to have held their shares for at least three years.
--not be able to use the new rule "if they are holding the securities for the purpose of changing control of the company."
--be able to include one nominee or a number up to 25% of the board, whichever is greater. (If a board had three members, shareholders could nominate one; if a board had eight members, up to two nominees could be proposed)....

The SEC said "'smaller reporting companies" would be subject to the rule only after a three-year phase-in period. Commission staff said the three-year delay would enable smaller companies to see how the rule works at larger companies and how it would affect them. It would also let the commission determine whether changes in the rule might be required, the staffers said....

The new rule -- called Rule 14a-11 -- requires shareholders to submit nominees no later than 120 days before the anniversary date of the mailing of the prior year proxy statement. Thus, if the rule becomes effective on Nov. 1, 2010, it would be available at companies that mailed their last annual meeting proxy statement no earlier than March 1, 2010....

As had been widely expected, the SEC acted on a 3-2 vote to adopt the new procedures, with Republican commissioners Troy Paredes and Kathleen Casey voting no.

Here is a link to SEC's press release issued after the open meeting, which includes a link to the 451-page final rule. As noted in the press release, the rule becomes effective 60 days after it is published in the Federal Register.

FASB Chairman Bob Herz Retiring Effective Oct. 1; FASB Board To Return To Seven Members

It's rare that I actually feel saddened by a post but I am a bit shocked and saddened [once again, see disclaimer on the right side of this blog] to see that FASB Chairman Robert Herz has announced he is taking early retirement as of Oct. 1, 2010. FASB Board Member Leslie Seidman will fill the role of Acting Chair until a replacement board member and a chair among those board members is chosen. Herz' term was originally to last until June 30, 2012.

FAF To Return FASB Board To Seven Members From Five
Separately, the Financial Accounting Foundation (which oversees FASB) also announced that the size of the FASB board will return to seven members, thus reversing the decision made by the FAF a few years ago in which they decreased the size of the FASB board to five members. I personally [please note again the disclaimer on the right side of this blog] had discomfort with the decision to reduce the size of the board and the way it was handled, as noted in my June 25, 2009 blog post "FASB and Due Process." Since the majority of comment letters filed when the proposed reduction in size of the board were against the reduction, I personally anticipate most of FASB's constituents will be pleased with this decision to bring the board back to seven members. FEI's Committee on Corporate Reporting and Committee on Private Company Standards were among those who filed comment letters in Feb. 2008 opposing the then-proposed reduction in size of the FASB board.

Here is a statement issued by SEC Chairman Mary Schapiro in response to FASB's announcement.

My Two Cents
I remind you again of the disclaimer on the right side of this blog...I'm sure speculation will abound as to Herz' decision to retire early. In my view, e.g. through listening to webcasts, particularly of the joint IASB-FASB Financial Crisis Advisory Group that met a couple of years ago, and the goings-on relating to Congressional hearings on fair value, and threats to FASB's independence during drafting of the Dodd-Frank Financial Reform Bill, I felt that Herz (and the boards in general) were under a great deal of pressure, as noted here, and that Herz may have found some of his own views evolving over time on the issue of fair value, perhaps from further consideration, perhaps from wider outreach and perhaps a wider definition of 'investors,' as noted here and here.

I choose at this time not to over-speculate, but simply to wish Mr. Herz, Ms. Seidman and the entire board well during this transition. I truly believe that being a FASB board member must be one of the most difficult jobs in the world, including because, to a large extent, the world rests on their shoulders, and I give all the board and staff members credit for dedicating themselves to that.

SEC To Vote On Proxy Access Wed. Aug. 25

As noted in SEC's recent Sunshine Act Notice the Commission will meet tomorrow (Wed. Aug. 25) to:

consider whether to adopt changes to the federal proxy and other rules to facilitate director nominations by shareholders.

In plain English (or perhaps slang), the issue of shareholder nomination of directors has been referred to as 'proxy access.'

Props to Broc Romanek of TheCorporateCounsel.net blog part of the TheCorporateCounsel.net dynasty) who reported on this previously here, and whose award-winning blog follows SEC developments closely.

In that same post, Romanek noted that FASB extended the comment period for its proposal on disclosure of loss contingencies - including litigation (which we previously noted here), and he posted a link to a WSJ editorial by the U.S. Chamber of Commerce and the Chamber's comment letter filed on Aug. 11 on FASB's proposal.

On this subject, a comment letter was filed by one of FEI's Committees last week (see the letter filed by FEI's Committee on Private Company Standards), and an additional letter from another committee(s) is expected to be filed later this week; we will update this post to add a link to the additional committee(s) letter after it is filed.

Watch the live webcast of the SEC open meeting at which the Commissioners discuss and vote on proxy access, beginning at 10am on Aug. 25; here is the agenda which goes into a bit more detail than the Sunshine Act Notice. The SEC generally issues press releases on major rulemaking items late in the day or next-day following a Commission vote, watch for a press release here.

The Problem With a Non-CPA CFO - GUEST POST by Francine McKenna

NOTE: While I am on vacation, I invited some guest posts from popular bloggers. Following is our second guest post from Francine McKenna, managing editor of Re:The Auditors. She is also a popular speaker, and will be on a panel at the New York County Lawyer's Association on Sept. 15. Her guest blog post follows.

There’s been quite a bit of press about American Apparel’s financial troubles. It’s now three weeks since the company announced that its auditor, Deloitte, had resigned. (See also the company's Form 8-K and the auditor's response.) Shares plunged almost 25% on that news.

It’s not often that we see the details behind a high profile auditor resignation. It’s even more unusual to see that auditor resignation investigated by the U.S. Attorney's Office. Further, if a company goes bankrupt, we may learn more about how the auditor relationship deteriorated via a bankruptcy examiner’s report.

New Century Financial Corp. creditors have asked a federal judge for permission to investigate KPMG LLP's relationship with the bankrupt subprime mortgage lender…New Century's official committee of unsecured creditors said it wants to obtain documents from KPMG, and question current and former officers concerning its accounting, auditing and other services for New Century. KPMG resigned as auditor on April 27, 25 days after New Century filed for Chapter 11 bankruptcy protection from creditors.

Part of the problem with American Apparel may be its thirty-one year old CFO Adrian Kowalewski. It’s beyond my ken how a listed, public company with a history of accounting issues can get away with naming an investment banker with no CPA or even a hint of hands-on accounting experience to CFO.

“In his new role as Chief Financial Officer, Mr. Kowalewski will also have oversight over financial management, accounting, and financial reporting, including Sarbanes-Oxley compliance… Mr. Kowalewski began his career in investment banking at CIBC World Markets in mergers & acquisitions. He also worked at Houlihan Lokey Howard & Zukin and Lazard Frères & Co., both investment banking firms, where he was involved in mergers & acquisitions and financial restructurings. Mr. Kowalewski received a bachelor’s degree with honors in economics from Harvard University, and an MBA from the University of Chicago Graduate School of Business.”

Do you remember the last time we had a high-profile non-CPA CFO trying to sort out serious accounting issues?

Does the name Erin Callan mean anything to you?

“In retrospect, it is easy to see the error of her ways for taking the job and of Lehman’s management for appointing her. What public company, of the size and stature of Lehman, in trouble already, can afford to have a CFO who is not an accountant? Have we not seen what happens when a CFO has no interest or aptitude for GAAP? A seasoned CPA CFO – not Mr. Kowalewski - would have known that an auditor resignation over “controls” could lead to lots of questions. Auditor resignations also eventually lead to lots of litigation if there’s a sudden stock price drop that accompanies them. [Editor's note (EO): Long-term experience and other credentials in place of or in addition to a CPA certificate per se may also help qualify a CFO, but there is a lot to be said for holding a CPA certificate and a fair amount of CPA experience to fulfill the role of CFO, including practicing professional skepticism, understanding testing of accounts, significant experience reviewing external reporting and internal controls, etc.]

“I don’t think there is any fire there,” Schey [American Apparel attorney] said. “Most of the smoke revolves around weak internal controls, being worked on as we speak. They may not be the most seasoned Wall Street players, but when it comes to ethics and integrity, they have it in spades.”

In spite of their lawyer’s exhortations, I’m afraid the U.S. Attorney's Office thinks ethics and integrity may be the bigger issue.

[Editor's note (EO): In the guest post above, McKenna writes about the importance of ethics and integrity. Ethical leadership and Integrity have been among the pillars of FEI's mission since its founding, over 75 years ago. Additionally, FEI members sign a Code of Ethics annually, which states, among other things, that all FEI members will "Share knowledge and maintain skills important and relevant to constituents' needs," and "Proactively promote ethical behavior as a responsible partner among peers, in the work environment and the community." To keep up on the latest issues, read more about our upcoming conferences, webcasts, research and advocacy activities. FEI, an international organization, also has local chapters where you can network with peers.]

FASB Releases Proposals On Pensions, Leases

Earlier today, FASB released proposals relating to pensions and leases.

The Proposed Accounting Standards Update—Plan Accounting—Defined Contribution Pension Plans (Topic 962): Reporting Loans to Participants by Defined Contribution Pension Plans, represents a consensus of FASB's Emerging Issues Task Force, and carries a comment deadline of Sept. 7.

Separately, the broad-ranging Proposed Accounting Standards Update—Leases (Topic 840), has a comment deadline of Dec. 15.

Loss Contingency Comment Deadline Extended By FASB; Feedback Sought on Disclosure Framework Criteria

FASB announced earlier today that it has extended the comment period on its proposal on Loss Contingencies. The original comment deadline was this Friday (Aug. 20); the extended deadline is now Sept. 20.

The board reached this decision, noted FASB Chairman Robert Herz, after considering initial feedback on the proposal and the related original 30-day comment deadline.

Props to FEI Senior Manager Lorraine Malonza who listened to the webcast of today's FASB board meeting and gave me a heads up while I am on vacation (no, I am not at the Jersey Shore!)

Disclosure Framework Criteria
Also at today's meeting, the FASB noted they are considering the following criteria for disclosures under their Disclosure Framework project, i.e. that disclosures should:

1. Add relevant information that is essential for primary users to understand the entity’s financial position including liquidity and financial flexibility, and changes in financial position, including financial performance and cash flows.
2. Be a faithful representation of the phenomena the information purports to represent.
3. Provide benefits that justify the costs of reporting that information.

Further, as noted in FASB's Summary of Board Decisions:

The Board directed the staff to seek input on the potential criteria from members of the project’s resource group and other interested constituents to determine whether the criteria function as intended or might have undesirable consequences.

Are You Ready for Global Sustainability Reporting - GUEST POST by Tom Hood, Exec. Dir. & CEO, MACPA

NOTE: While I am on vacation, I invited some guest posts from popular bloggers. Following is a guest post from Tom Hood, Executive Director and CEO of the Maryland Association of CPAs (MACPA). Together with Bill Sheridan of MACPA, in addition to the many other hats he wears in the MACPA and national acccounting community, Tom is coauthor of various MACPA Blogs, including CPA Success. Tom's guest post follows.

On Monday 2nd August 2010, the formation of the International Integrated Reporting Committee (IIRC) was announced. Led by Prince Charles and The Prince’s Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI) in an attempt to add a globally accepted set of standards for accounting for sustainability. The website http://www.integratedreporting.org/ states the intent of this new organization as follows:

“The IIRC has been created to respond to the need for a concise, clear, comprehensive and comparable integrated reporting framework structured around the organization’s strategic objectives, its governance and business model and integrating both material financial and non-financial information.

The objectives for an integrated reporting framework are to:
a. support the information needs of long-term investors, by showing the broader and longer-term consequences of decision-making;

b. reflect the interconnections between environmental, [NOTE A] social, governance and financial factors in decisions that affect long-term performance and condition, making clear the link between sustainability and economic value;

c. provide the necessary framework for environmental [NOTE A] and social factors to be taken into account systematically in reporting and decision-making;

d. rebalance performance metrics away from an undue emphasis on short-term financial performance; and

e. bring reporting closer to the information used by management to run the business on a day-to-day basis.”

This is clearly another form of global convergence as the European community has led the world in “sustainability reporting”.

NOTE A (Editor's note - see also front page story by Justin Gillis in Sunday Aug. 16 New York Times: In Weather Chaos, A Case for Global Warming.)

NOTE B: (Editor's note: see also our Jan. 27 post: SEC Votes to Issue Interpretive Guidance on Climate Change Disclosures)

If you are interested in being considered as a guest blogger during my vacation in August, please contact me at eorenstein@financialexecutives.org