Corporate Securities Law Blog

In widely publicized enforcement actions against Tyson Foods and General Electric Company, and recent speeches by members of the staff, the SEC has emphasized the need to accurately and clearly identify, characterize, value and disclose executive perquisites and other personal benefits.

On May 31, 2005, the United States Supreme Court reversed Arthur Andersen's 2002 conviction for evidence tampering. That vindication does not alter the core lesson of the Andersen prosecution: a document retention policy must be drafted and implemented carefully to serve its purpose of protecting a company against a charge of evidence tampering. Prudent companies should adopt document retention policies that halt document destruction in the face of government investigations, train employees about document retention policies routinely rather than in response to crisis situations, and exercise caution in email content.

On May 12, 2005, the SEC began releasing comment letters of the staff relating to filings reviewed by the Division of Corporation Finance and the Division of Investment Management, as well as the responses of the filers. The process commenced with filings made after August 1, 2004. Comment letters and responses will be released through the EDGAR system no earlier than 45 days after the review of the filing is complete. These documents are a valuable resource both for determining the comments likely to be raised in the staff's future reviews and for providing potential responses. A filer may request confidential treatment for portions of its written response. Confidentiality may also be maintained by submitting the confidential information in paper form as supplemental material and, thereafter, requesting the return of that material or by discussing the information verbally with the staff rather than submitting it in writing. The SEC will require all filers being reviewed to represent in writing that they will not use the SEC's comment process as a defense in any securities related litigation.

The SEC recently settled an enforcement action against Flowserve Corporation, its CEO and Director of Investor Relations for reaffirming the company's previous earnings guidance in a private meeting with analysts, near the end of a reporting period. Companies should ensure that their Regulation FD policies are enforced and that their investor relations professional cautions analysts in a private setting about topics that are off-limits. Companies should be wary about changing or confirming any earnings guidance in a non-public forum, especially near the end of a reporting period.

A recent survey from the National Investor Relations Institute ("NIRI"), accessible at http://www.niri.org/irresource_pubs/alerts/ea050330.cfm, shows that more companies now offer less guidance, and that companies are moving towards the practice of annual guidance rather than quarterly guidance. Some companies believe that providing guidance is important for maintaining analyst coverage, and that analyst coverage is important for attracting institutional investors. One problem with providing guidance is that once you provide it you may have an obligation to correct or update it. For a small company, one major customer win or loss could radically change the results for a quarter. By omitting quarterly guidance, the company does not have to worry whether events are material enough to merit additional guidance.