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FROM THE CHAIR
by
Stanley Keller
skeller@palmerdodge.com
Among the most significant activities of our Committee is commenting on SEC and stock
exchange proposals. This has been an extraordinarily busy time for this activity as we have
responded to the flood of rulemaking proposals mandated by the Sarbanes – Oxley Act and
otherwise initiated by the SEC on its own. Over 30 comment letters submitted during the past
year are posted on the Committee’s website at www.abanet.org/buslaw/fedsec/comments.html. I
want to express my sincere appreciation to the many members of the Committee who contributed
to this unprecedented effort.
I thought I would review some of these comment letters, with a focus on how we made a
positive contribution to sound securities law rulemaking.
• On June 4, we commented on the SEC’s proposal to accelerate the times for filing
Exchange Act reports. We expressed concern over the burdens acceleration would
impose and the impact on the quality of disclosure, particularly in the face of
proposed expansion of reporting requirements, not all of which were then known.
We expressed support for more current reporting and suggested this could be
accomplished by providing for electronic submission of earnings releases. The SEC
responded to concerns regarding the burdens of accelerated filing by providing an
extended transition period and limiting accelerated filing to “accelerated filers” as
proposed. Subsequently, with attribution to our Committee, the SEC adopted the
requirement for the electronic submission of earnings releases, although not as an
alternative for accelerated filing as we proposed.
• On July 24, we commented on the SEC’s proposal to require expanded MD&A
disclosure of critical accounting estimates. We expressed concern over the
complexities of the proposed disclosure and the problems associated with the
quantification and sensitivity analyses that would be required. It is clear that our
comments have had an impact because the SEC has indicated that it is considering the
concerns raised and attempting to address them.
• On September 12, we commented on the SEC’s proposal to expand and accelerate
current reporting on Form 8-K. We were generally supportive of a more current
disclosure regime as proposed but commented on the specific triggers that were
proposed and expressed concern over the liability implications of superimposing an
expanded current reporting system on the existing periodic reporting system if the
issues were not carefully considered and addressed. In particular, we noted the need
for more objective criteria for a current disclosure system to work and, to the extent
that subjective criteria with short deadlines were used, the increased need for a safe
harbor from liability to protect good faith judgments. The SEC has not acted yet on
the proposals but the indications are that it has heard and taken seriously our
concerns.
• On August 15, we addressed the SEC’s certification proposals required by §302 of
Sarbanes – Oxley and identified the need for greater clarity for a number of the
statutory concepts including the meaning of “internal controls” and the special
problems of particular types of issuers, such as foreign issuers, asset-backed securities
and investment companies. This has been an ongoing process with greater clarity
emerging in a number of areas.
• Also on August 15, we commented on the SEC accelerated Section 16 filing
proposals to quickly implement §403 of Sarbanes – Oxley, have previously
commented on the SEC’s own proposals to achieve accelerated reporting of insider
transactions through company reporting. We were supportive of the SEC’s approach
to leaving the existing Section 16 exemptive scheme in place except where the statute
mandated changes and suggested additional areas where extensions of time to report
could be accommodated. We supplemented that letter on November 2 to support the
current treatment of stock options under Section 16. We also submitted a letter on
February 26, 2003, suggesting enhancements to the electronic reporting of Section 16
reports proposed by the SEC.
• On a related topic, on December 24 we commented on the proposals to implement the
§306(a) restrictions on insider trading during pension blackout periods. We
supported the SEC’s use of Section 16 concepts and suggested additional transactions
that appropriately should be excluded from the restrictions. The SEC was generally
responsive to our suggestions.
• During 2002, we had a series of letters commenting on the stock exchange proposals
to require shareholder approval of equity compensation plans. Although our efforts
to limit the approval requirements to plans involving officers and directors was
unsuccessful, we suggested the need for a number of exceptions, such as inducement
awards and awards in the context of mergers and acquisitions, to which we believe
the exchanges are being responsive. We await SEC approval of the final rules.
• We commented on the trilogy of SEC proposals to implement §404 of Sarbanes –
Oxley regarding internal controls reporting and attestation, §406 code of ethics
disclosure and §407 financial expert disclosure. The SEC responded to our concern
over the narrowness of the definition of financial expert by expanding who could be
eligible and recognized the greater flexibility we identified that companies need in
establishing codes of ethics. We identified the need for greater clarity in the 404
internal control rules, particularly as to the meaning of internal controls for purposes
of the report and attestation and the relationship with the 302 certification. The SEC
has not yet acted on this proposal.
• On December 13, we responded to the SEC’s proposal to implement §303(a) of
Sarbanes – Oxley regarding improper influence on the conduct of an audit. We
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expressed serious concern over the SEC’s attempt to expand the conduct that would
violate the rule beyond that contemplated by the statute. We indicated that the
expansion proposed would subject lawyers and others to unnecessary exposure to
liability and interfere with the effectivenss of the audit process. The SEC has not yet
acted on this proposal.
• On December 24, we addressed the SEC’s proposal on non-GAAP financial measures
and electronic submission of earnings releases. The SEC responded to a number of
our comments in the final rule, including by excluding business combination
transactions and permitting furnishing rather than filing of earnings releases.
• On December 31, we responded to the proposals on disclosure in MD&A of off-
balance sheet transactions and contractual obligations by identifying the need for
greater focus and clarity in the disclosure requirements and objecting to the “higher
than remote” standard for disclosure. The final rule is more narrowly tailored and
uses the traditional MD&A “reasonably likely” standard.
• On January 14, 2003, we commented on the auditor independence proposals under
§208(a) of Sarbanes – Oxley. We emphasized the desirability, in view of the short
time frame for comment, of avoiding expansion of prohibited activities and
imposition of specific determination requirements on audit committees, and instead
suggested reliance on the general requirement for audit committee pre-approval of
non-audited services. The SEC generally followed this approach notwithstanding the
controversy in this area.
• On February 25, 2003, we commented on the SEC’s proposal to implement §301 of
Sarbanes – Oxley by requiring the exchanges to adopt listing standards regarding
audit committees. Among the items focused on in our letter is the need for the SEC
to provide sufficient time for compliance, the importance of providing flexibility for
the exchanges to implement the requirements and address specific situations, the
special problems of small businesses, foreign issuers and others, the proper definition
of “affiliated person,” and the proper approach to indirect compensation. The SEC
currently is considering the comments. We view these comments as a forerunner to
commenting on the more general corporate governance listing standards proposals of
the exchanges, which we expect the SEC to publish for comment shortly.
There were also a number of letters dealing with investment company and market
regulation matters that I will not do justice to and therefore have not included. I refer you to our
website to review some of these.
A final letter of great importance that I want to identify relates to the SEC’s proposals to
implement §307 of Sarbanes – Oxley regarding standards of professional conduct for lawyers.
Although the ABA as an association commented on these proposals in its letter dated December
18, 2002, this Committee played a leadership role in formulating the ABA’s response, preparing
the letter and discussing issues with the SEC Commissioners and staff. The SEC responded to
the comments by making significant changes to the reporting up-the-ladder rule it adopted,
including narrowing the persons covered, modifying the reporting trigger, clarifying what
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constitutes an appropriate response, addressing the special problems of investigation and defense
counsel and removing specific documentation requirements. The SEC also responded by
deferring action on reporting out, extending the comment period on the noisy withdrawal
proposal and proposing for comment an alternative for company reporting of the lawyer’s
withdrawal. We will be involved in the ABA’s commenting on these proposals.
This is an impressive record of accomplishment and evidence of the important role our
Committee plays in the rulemaking process. I know that our comments, while not always
embraced by the SEC, especially when we are critical, are valued and appreciated by the
Commission and the SEC staff. We look forward to continuing our constructive role in the
regulatory process through our comment letters as the Donaldson Commission era begins.
I look forward to seeing you at the Spring Meeting at which most of the subjects we
commented on will be discussed.
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