SEC Likely to Kill Proxy Access for ’08; More

The Securities and Exchange Commission will meet this week to vote on amendments to its rules for shareholder access to the proxy, in what is sure to be one of the most highly charged meetings of the year.

The SEC quietly announced last week that it will hold a meeting Nov. 28 to consider whether to adopt amendments to Rule 14a-8(i)(8), which governs whether shareholders can place nominations for the board of directors on the company proxy statement. Business groups vehemently oppose the idea, while shareholder activists favor it just as strongly.

Rumors of just such a meeting have circulated for several weeks. The SEC originally proposed two reforms in July—one to allow shareholder access, another to affirm a long-standing SEC policy against it—but the Commission is split along party lines about which one to adopt.

While details of any rule that’s adopted tomorrow remain to be seen, the rule would likely clarify when companies can exclude shareholder proposals related to director elections. The vote comes despite increasingly loud calls by lawmakers and institutional investors to hold off voting on the matter until all of the commissioner seats are filled. One Democratic slot on the Commission is currently empty.

Casey

Still, the vote is in line with Chairman Christopher Cox’s repeated promise to put a final rule in place before the start of the 2008 proxy season. Cox has also said the SEC plans to revisit the issue next year. That has led many to suspect he and fellow Republican commissioners Paul Atkins and Kathleen Casey will push through a rule against proxy access as a stop-gap measure for next spring’s proxy season, and then have the Commission try to find a permanent solution after that.

Proxy access has roiled the SEC for years. It last tried to grapple with the issue in 2003 and failed to reach a consensus. Things grew considerably more complicated after a federal appeals court decision in September 2006 that said Rule 14a-8 does allow for proxy access, despite the SEC’s previous opinion that it does not.

SEC Seeks Comment on Terrorism Disclosure

The Securities and Exchange Commission is requesting comment on whether to revive a tool that improves access to companies’ disclosures about their business activities in or with countries that sponsor terrorism.

Back in June, the SEC added a feature to its Web site that provided direct access to public companies’ 2006 annual report disclosures concerning past, current, or anticipated business activities in or with one or more of five countries designated by the State Department as state sponsors of terrorism: Cuba, Iran, North Korea, Sudan, and Syria.

The Commission shut down the tool a month later in response to concerns that the tool lacked current information beyond the companies’ most recent annual reports. Critics also said companies could pick up unwarranted bad publicity for legitimate activities (such as a media company reporting news from Iran) or for merely disclosing that the company has no material business in any of the outcast nations.

Federal securities laws don’t impose a specific disclosure requirement that addresses business activities in or with a country designated as a terrorist state. Disclosure is required, however, if the business activity constitutes material information necessary to ensure a company’s statements are not misleading, according to an SEC concept release on the proposal.

Among other things, the 14-page concept release asks whether easier access to information about companies’ business in terrorist states is appropriate; whether providing easier access to those disclosures places undue emphasis on the issue; what unintended consequences might spring from such access; and whether the easier access to disclosure hampers the competitiveness of U.S. financial markets.

The SEC staff is also soliciting views on alternatives for interpreting materiality for disclosure related to business activities in or with a terrorist state.

Comments on the concept release are due 60 days after its publication in the Federal Register.

SEC Gets Clean Opinion, but Ineffective Internal Controls

It is becoming an annual—some would say gleeful—rite of passage for the financial reporting community: snickering at the audit of the SEC’s own accounting and internal controls.

The agency charged with reviewing corporate financial statements and policing against fraud has, yet again, been cited for lousy internal controls of its own financial reporting, according to an audit from the Government Accountability Office. This is the fourth year in a row that the SEC has been cited for such difficulties.

The SEC did get a clean audit opinion for fiscal 2007. But because of a material weakness in its financial reporting controls, the SEC didn’t have effective internal control over financial reporting at the end of its last fiscal year, government auditors said in their most recent report.

The GAO said the SEC improved its controls over the accuracy, timeliness, and completeness of the disgorgement and penalty data, and used an improved database for recording and tracking of the data. But processing of the data for financial reporting purposes is still done manually, and the GAO said the internal controls that compensated for the manual processing weren’t effective.

Other control deficiencies included in the material weakness concerned SEC’s period-end closing process, accounting for transaction fee revenue, and preparation of financial statement disclosures. The GAO also identified significant deficiencies in information security, controls over property and equipment, and accounting for budgetary transactions.

Cox

In a letter responding to the report, SEC Chairman Christopher Cox noted that in 2008, the agency will introduce several IT upgrades designed to eliminate the material weakness in the SEC’s internal controls cited in the draft report, which he said stem in large part from a “lack of integration and comparability in the agency’s legacy automated systems.”

Cox said the SEC intends to remediate the material weakness before the end of fiscal 2008 and to address each of the findings and recommendations identified during the audit.

GAO auditors said their recommendations for corrective action will be included in a separate report.

More Experts Recommend Hard Look at ERM

Companies must pay more attention to their efforts at enterprise risk management, now that credit rating agencies such as Standard & Poor’s are planning to add ERM into their analysis equations, a risk management expert advises.

While insurance companies and financial services firms have already had to provide an overview of their ERM activities to rating agencies, most non-financial companies haven’t taken an enterprise-wide approach to managing risk, says Prakash Shimpi, ERM practice director at Towers Perrin.

S&P is soliciting comments on plans to add ERM to its ratings criteria for non-financial sectors—something already done for financial services and insurance companies, plus a few energy companies. Shimpi says S&P’s proposal to include ERM in its criteria will “undoubtedly place ERM on the list of items that keep CFOs awake at night.”

Additionally, he says, Moody’s has been looking at ERM at the largest companies in 2004, focusing on those companies with significant economic exposure to financial commodity or energy risk.

Shimpi

Shimpi warns that companies should not wait to think about ERM until the ratings agencies start asking about it. “They should have an ERM roadmap, a blueprint of what they’re doing today,” he says. They then can look to see what steps to take next. While different sectors are at different points in their ERM efforts, Shimpi says the majority of companies only focus on compliance.

“There’s been a tendency in some companies to view merely complying as the end point,” he says. “I’d argue that in ERM, it’s only the beginning point.”

Shimpi says its “unquestionable” that at least every company that S&P rates will have to take a look at its ERM-related activities and ask: “How does this stack up against what S&P is asking companies to do?”

If implemented, Shimpi says the addition of ERM to the ratings criteria isn’t likely to have much effect on ratings in the first year. “However, it will allow S&P to gauge where companies in various sectors are, and more than likely, I expect they’ll use that to try to benchmark companies against each other,” he says.

One result may be that “some companies that thought they were far along in their efforts might be surprised to learn that they’re not,” he says. “For a number of companies, particularly those that pride themselves on the quality of management, this might be an eye-opener.”

In the insurance industry, where companies are expected to have a good handle on risk management, less than 15 percent of companies were rated by S&P as “excellent” or “strong.” Similarly, Shimpi initially expects only a small number of non-financial companies to fall into the “excellent” or “strong” categories.