The Securities and Exchange Commission’s five commissioners have adopted a new policy to participate in enforcement matters much earlier—before companies enter into settlement talks with SEC staff lawyers—to help speed the resolution of cases, SEC officials say.
Thomsen
In a statement issued Friday, SEC Division of Enforcement Director Linda Chatman Thomsen said the objective is “to enhance the commission’s negotiating power and to get to appropriate settlements with the full weight of the commission behind them, and to do that in a way that’s effective and efficient.” Thomsen said negotiated settlements “will be fast-tracked with little or no further commission debate.”
Under the pilot program, SEC enforcement lawyers will seek guidance from the five commissioners, including advice on acceptable fines, before starting negotiations with companies, SEC officials tell Compliance Week. The change will bolster the attorneys’ bargaining power going into negotiations, since they will have an idea of what the commissioners would deem acceptable, which could help keep settlements talks from stalling late in the game.
Unger
Laura Unger, a former SEC commissioner, says the policy should give the current commissioners an opportunity “to shape enforcement policy at the beginning of the settlement process rather than at the end.”
Currently, SEC lawyers negotiate with companies first and then bring settlement proposals before the commissioners for approval. Reversing that sequence can help the SEC staff understand what issues and elements of a resolution are paramount concerns to the commissioners, says John Sturc, a partner in the law firm Gibson Dunn & Crutcher and a former associate director of the SEC’s Enforcement Division.
Jeffrey Zuckerman, a litigation partner with the Pillsbury Winthrop Shaw Pittman law firm and a former SEC lawyer, notes that under current policy, the staff doesn’t set penalties, but can agree to recommend that the Commission accept a settlement, which must still then be approved by the commissioners.
Zuckerman
“Hopefully, the staff will continue to engage in meaningful settlement discussions with counsel and these discussions will continue to inform the agency’s decisions on sanctions,” Zuckerman says. “Whatever internal procedures are under consideration will likely be geared to curbing communications that create unreasonable expectations before a matter is put to a vote by the Commission.”
SEC officials say the exact details are still being worked out, but note that the program represents a “timing change,” not a policy change.
Press reports say current disputes over fines have delayed a possible settlement in the SEC’s stock option backdating case against Brocade Communications Systems. Last year, the SEC charged Brocade with violating securities laws based on an alleged stock option pricing scheme. In the first quarter of fiscal 2006, the company reserved $7 million it said was for a proposed settlement based on an offer made to the SEC staff.
Disagreements over financial penalties among the commissioners had marked the tenure of chairman Christopher Cox’s predecessor, William Donaldson, during which sky-high penalties were levied against several companies.
Donaldson, a Republican, sometimes favored fines, along with Democratic commissioners Roel Campos and Harvey Goldschmid. Republican commissioners Cynthia Glassman (who has since been replaced by Kathleen Casey) and Paul Atkins generally opposed them on the grounds that they hurt shareholders.
The SEC issued a statement in January 2006 on its framework for determining whether, and to what extent, to impose civil penalties against a corporation. That document, and related Compliance Week coverage and columns, can be found in the box above, right.
Treasury Dept. Releases Final Rules For Section 409A
The Treasury Department and the Internal Revenue Service have, at long last, issued final regulations on the treatment of nonqualified deferred compensation plans and arrangements under Section 409A of the Internal Revenue Code.
The regulations, which span almost 400 pages, provide guidance about the requirements for deferral elections and payment timing under Section 409A, which was added by the passage of the American Jobs Creation Act in October 2004. Financial reporting executives and compensation specialists have been awaiting final rules since proposed guidance on the regulations was issued in September 2005.
Affected plans and arrangements must comply with documentation requirements established in the final regulations by Dec. 31, 2007. That’s also when the transition relief that enabled companies to amend their arrangements to comply with Section 409A expires. In the meantime, good-faith operational compliance with the requirements is required.
The final regulations generally implement the rules provided in the proposed regulations, with some changes based on public comment.
According to a client update published by law firm Gibson Dunn, some important differences include liberalizations of:
the rules applicable to separation pay, including arrangements with “good reason” provisions;
the rules applicable to stock options and other stock rights;
the treatment of reimbursement and fringe benefit arrangements; and
the determination of when an employee or other service provider has incurred a “separation from service” that is a distribution event under a plan.
Along with the regulations, the agencies published Notice 2007-34, which includes additional guidance regarding the application of Section 409A to split-dollar life insurance arrangements and provides that certain amendments of such arrangements to comply with Section 409A will not be treated as a material modification.
The regulations, guidance, commentary and related coverage can be found in the box above, right.
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