SEC Talks CD&A; Insider Trading; More

The Securities and Exchange Commission has begun sending out much-anticipated comment letters to companies about their disclosures of executive compensation.

Corporate America has waited on the comment letters for months, since this is the first time companies have had to file their proxy statements according to new rules that require much more disclosure of executive pay. In particular, SEC officials have already faulted companies for including Compensation Discussion & Analysis sections that are far more complicated than what the Commission had hoped to see.

SEC spokesman John Nester confirmed last week that comment letters have gone out in the mail. He wouldn’t say how many letters the staff has sent, but said the comments are going “to a cross-section of industries.”

Ronald Mueller, a partner at the law firm Gibson Dunn & Crutcher who has reviewed several of the comment letters, says most have been forward-looking, and the majority have pertained to the CD&A section of the proxy.

White

In recent public remarks, John White, director of the Division of Corporation Finance, has said the staff wants lots of analysis in the CD&A, particularly on the different parts of compensation and on change-of-control and termination payments. Other areas that will be scrutinized are descriptions of pay-for-performance targets, the explanations companies provided for withholding those targets, disclosures of where benchmarking is used, and details about how compensation decisions are made.

Some companies that did not disclose performance criteria, citing competitiveness as a reason, are being asked to tell more about why they believe they satisfied that confidentiality standard, Mueller tells Compliance Week. He also says the staff is asking companies that used benchmarking to set their executive compensation to identify the companies used in their peer groups.

Mueller

“For many comments, it will be appropriate or even necessary to involve the compensation committee,” Mueller says.

He says the staff wants much more detail about how and why compensation was determined for each named executive officer. For example, he says, the staff may ask a company to explain why it chose to use a multiple of two times base pay as the basis for calculating change-in-control payments. “They’re asking companies to expand their analysis and to drill down.”

In some cases, the SEC has made what Mueller describes as “connect the dot” comments, asking companies to explain the logic they used to arrive at certain numbers.

Mueller says companies should take the staff comments seriously, no matter how minute they seem. “Recognize that the staff is learning about executive compensation issues as they go too, so some of their comments may be exploratory,” he says.

It will be months before the staff comments are publicly available, since staff reviews can involve several rounds of comments from the staff and responses from issuers. Comment letters are posted to the SEC Web site no earlier than 45 days after the staff declares a review complete.

Meanwhile, the SEC is preparing a more comprehensive report on the CD&A portion of the proxy disclosures, to be released in time for the 2008 proxy season, to provide guidance to companies that weren’t reviewed this year.

Reminder: Review Insider-Trading Policies

A flurry of enforcement actions against insider trading this summer is a sobering reminder that companies would be wise to review employees’ compliance with Rule 10b5-1 plans.

Rule 10b5-1 was adopted to allow executives to sell company stock under a pre-established plan without fear of running afoul of insider-trading prohibitions. But regulatory crackdowns, Congressional hearings, and the formation of an interagency task force to examine the issue have all demonstrated that even with such plans, companies can expect a bright spotlight these days.

“The repeated focus by Congress and the SEC over the last year on insider trading will no doubt lead to increased emphasis and scrutiny,” states a securities law alert by the law firm Porter Wright Morris & Arthur. “No issuer or executive wants to be the subject of such a review, regardless of the explanation for the trading.”

The SEC prosecuted three high-profile insider-trading cases during the first half of 2007, which Porter Wright describes as “some of the most significant insider trading cases it has filed in years.” In addition, the SEC, the Financial Industry Regulatory Authority, the Options Regulatory Surveillance Authority, and the New York Stock Exchange Regulation have formed a new insider-trading watchdog to share information.

Following a Senate Finance Committee report earlier this summer faulting the SEC’s investigation into insider trading at Pequot Capital Management, “the Commission and its staff may well redouble their efforts in this traditional enforcement area, making it a high priority,” the alert notes.

Gorman

Thomas Gorman, a partner at Porter Wright, says companies should review their insider compliance programs and any 10b-5-1 plans to avoid becoming, inadvertently or not, the target of an insider-trading probe. “The company for example may want to look at the controls and how the plan is administered,” he says. “Executives should carefully review the operations of those plans to make sure that no question can be raised that some how they are controlling those trades to take advantage of inside information.”

The alert recommends issuers and their executives:

carefully review insider-trading compliance plans;

periodically remind employees of trading policies and, especially during significant transactions, the need for confidentiality;

assess Rule 10b5-1 plans and the trading under them;

closely monitor trading under these plans and the filing of the required forms; and

when asked for information by the regulators in an insider-trading inquiry, take the inquiry very seriously and provide thorough responses.

The New Thing in Securities Class Actions?

A law firm recruiting investors for a class-action lawsuit has taken its efforts to new heights, launching a dedicated Web site for the case to attract plaintiffs—while the case is still within the lead-plaintiff deadline.

Plaintiff law firms have created case-specific Web sites for several years, to disseminate information quickly among class members. Such sites were typically created by lead counsel and were often limited to larger cases, such as those of WorldCom and Enron.

Now New York-based boutique litigator Shalov Stone Bonner & Rocco has taken the next logical step, with a Web site dedicated to its lawsuit against American Home Mortgage Investment Corp. That case is still within the lead plaintiff deadline, so essentially, Shalov Stone has gone online looking for some aggrieved investor to be the live person behind the firm’s shareholder litigation.

Savett

“It’s a unique marketing tool,” says Adam Savett, a vice president at proxy advisory firm Institutional Shareholder Services and author of the blog Securities Litigation Watch. “They’re the only one I know of that’s doing it.”

The firm, which filed a class action against AHMI in August, couldn’t be reached for comment. A press release announcing the Web site, www.ahmlawsuit.com, says the firm created it “to address investor interest and to facilitate joining the class action.”

“The traditional case-specific Web sites we’ve seen have been for older or settled cases, those that are beyond the lead plaintiff stage, to distribute information to a class,” Savett says.