SEC Acts On Reconciliation, e-Proxies; More

Two hot topics—eliminating the reconciliation requirement for foreign issuers and mandating online proxy statements—will take center stage at a Securities and Exchange Commission meeting this week.

As promised, the Commission will propose ending the requirement that companies filing financial statements using International Financial Reporting Standards also file a reconciliation report to square those numbers with U.S. Generally Accepted Accounting Principles. SEC officials have said for months that they favor such a change.

A closely related issue, not specifically listed on the meeting agenda but likely to come up in discussion, is whether U.S. companies should also be allowed to file financial statements in IFRS, since foreign issuers essentially will have that choice between IFRS and GAAP. In addition to tomorrow’s proposing release to eliminate the reconciliation requirement, the Commission has promised a concept release this summer seeking input on whether U.S. domestic issuers should get the choice to file in IFRS.

The proposed amendments follow a March SEC roundtable on the topic, where panelists dismissed the reconciliation requirement as outdated and urged the SEC to move more quickly to eliminate it. Meanwhile, U.S. and European accounting rulemakers are forging ahead on efforts to harmonize IFRS and GAAP by the end of the decade. Nearly 100 countries currently use (or have a policy of convergence with) IFRS, and the European Union has required IFRS since 2005.

The SEC will also consider whether to adopt amendments to its proxy rules to provide shareholders the ability to choose the means by which they access proxy materials. Under the amendments, issuers and other soliciting persons will post their proxy materials on a Web site and provide shareholders with a notice of Internet availability. Issuers or soliciting persons can choose to furnish paper copies of the proxy materials along with the notice; however, if they chooses not to do so, shareholders could still request a paper copy for free. Under the proposal floated in January, Universal Internet Availability of Proxy Materials, shareholders would be able to request paper or e-mail copies for a particular meeting or make a permanent request for proxy materials relating to all shareholder meetings.

As Compliance Week has reported, that plan generated unease among critics who say the suggested timeframe for adoption wouldn’t allow enough time to let a voluntary e-proxy program, which becomes effective July 1, reveal any problems that might arise. The SEC had proposed adoption by large accelerated filers by Jan. 1, 2008, and for all other issuers by Jan. 1, 2009—a timeline most commenters suggested is too short to gauge how well electronic dissemination works based on results with the voluntary model.

The Commission meeting is scheduled for June 20, and will be open to the public. For details on how to listen to the meeting via Webcast, see the box at right.

Lesson From IBM Settlement: Watch What You Say

A recent SEC enforcement action against IBM serves as reminder to companies to watch what they say, even when they’re saying it in a chart.

The SEC rapped Big Blue for making materially misleading statements during a 2005 conference call to analysts concerning the effect of a decision to expense employee stock options on its first quarter 2005 and fiscal year 2005 financial results. According to the Commission, the problem was a misleading chart, which ostensibly caused analysts to lower their earnings estimates for the company.

Armonk, N.Y.-based IBM agreed to cease and desist from committing or causing violations of the securities laws without admitting or denying the Commission’s findings. No fine was imposed.

Kaiser

“The problem as the SEC saw it was that people were getting an incorrect view of what short-term earnings were likely to be, and therefore were modeling performance of IBM wrongly,” says Gordon Kaiser, of the law firm Squire Sanders & Dempsey. “The message here is that when you’re talking about information that directly impacts earnings, be particularly sensitive to being accurate.”

SEC Associate Director of Enforcement Scott Friestad said in a statement that IBM misled investors by failing to disclose information that would have allowed them to determine the effect that the company’s decision to expense stock options would have on its financial results.

“The facts here are particularly troubling because the disclosure decision was driven, in part, by management’s perception of how the news would be interpreted by analysts,” Friestad said.

The offending analyst conference happened on April 5, 2005. At the time, IBM expected its options expense would have a $0.10 hit on first quarter earnings-per-share, and estimated a $0.39 effect for full fiscal 2005 EPS. The SEC, however, said IBM included a misleading chart in its presentation that many analysts took to mean as the option expense would be $0.14 for the quarter and $0.55 for the year.

Days later, IBM disclosed earnings of $0.85 per share, $0.05 less than what many analysts were expecting. It also disclosed an equity compensation expense of $0.10 per share for the quarter, $0.04 lower than what many analysts understood the chart had indicated. IBM’s stock price dropped more than 8 percent the next day.

“The SEC probably sees this as the tail wagging the dog, with the anticipated reaction to disclosure driving the disclosure,” says P. Blake Allen, a partner at the law firm Duane Morris.

“Many would think the SEC wouldn’t care about being overly conservative disclosure, but SEC rules and regulations don’t call for conservatism,” says Allen. “They call for an accurate look at the company through the eyes of management, including accurate disclosure about management expectations.” Companies “often have the mistaken belief that a misstatement in a conservative direction is OK,” he says.

California Unclaimed Property Law Hits Wall

California companies must hold on to any unclaimed property, including stock, at least for the time being, under a recent district court preliminary injunction.

The U.S. District Court issued a preliminary injunction that prohibits California’s state controller from accepting or taking possession of any property, including securities and the contents of safe deposit boxes. The injunction remains in effect until the controller promulgates regulations providing for fair notice to the owner and the public, as stipulated under California’s Unclaimed Property Law. The regulations must be approved by the court.

In the June 1 injunction, U.S. District Judge William Shubb wrote that California does not give “constitutionally adequate notice” before accepting or taking title to property, or selling or destroying property under the Unclaimed Property Law. In response, State Controller John Chiang issued a notice instructing all holders of unclaimed property to hold the goods until further notice.

Bishop

Keeping track of unclaimed property is an often-overlooked thorn in the side of corporate compliance officers. Keith Paul Bishop, a partner in the law firm Buchalter Nemer, says companies should continue to account for unclaimed property and be prepared to file reports regarding unclaimed property as required. “They should also monitor the state controller’s Web site to see what happens. And if they have [unclaimed property] report due, they should check with state controller’s office before filing it.”

Bishop says the injunction and resulting notice stem from two appeals to the Ninth Circuit in a lawsuit first filed nearly six years ago by two individuals, each of whom owned shares in their respective former employers that were treated as unclaimed property and taken by the state. The plaintiffs in the lawsuit, Taylor v. Westly, claimed that the state controller didn’t do enough to notify them that their stock was being escheated. The court, in an opinion issued last month, reversed a dismissal in an earlier appeal and concluded that the preliminary injunction should be granted.