The NACD’s SEC comment letter takes the following positions on the SEC proposal:

• NACD supports improved disclosure on the board’s role in risk oversight, including compensation matters as they relate to risk, on a limited basis: NACD disagrees with the SEC’s proposal to expand the scope of the CD&A to require disclosure concerning a company’s overall compensation program as it relates to risk management and or risk-taking incentives. NACD supports the idea that compensation information is an important feature of the risk discussion. Companies should be encouraged to provide this information in the most appropriate format, including narrative explanation.
• Whether freshman or long-serving director, we believe that experience and education should be reported so that those shareholders making judgments on a director candidate’s capability to serve are adequately informed.
• NACD supports the principle of an independent board leader.
• NACD supports the disclosure of all additional services provided by the compensation consultant to the company or its affiliates during the last fiscal year, along with an explanation of why these services were sought. However, NACD does not support disclosure of aggregate fees paid for executive pay consulting vs. all additional services.
• NACD does not believe boards need to disclose whether management recommended or screened the engagement of the compensation consultant. NACD does agree that, when the board (or a compensation committee) approves additional services, they should disclosure the nature of these services.
• NACD believes that there should be a separate undertaking by the SEC to review all the current requirements in the proxy statement, item by item, so they all get proper consideration.

To help restore confidence in reporting and in the markets, the Financial Accounting Standards Board (FASB) is rushing out an unusually heavy dose of disclosure requirements. In a flurry of last-minute standard-setting activity, some new requirements were issued or have been proposed, with the expectation that the changes would be applied to calendar- year 2008 financial statements; a second round of disclosure requirements is likely to be issued and implemented this year.

For the most part, the areas targeted by the FASB for more robust disclosures are those where the related risks are neither visible nor well understood by investors, analysts, and regulators. Many of these areas—off-balance sheet entities, derivatives, and retirement plan assets—figured prominently in the news headlines as the aftershock from the large losses reported by major financial institutions reverberated through the world’s economy.

Investors want credible financial reporting, and companies want to provide meaningful data in the notes to the financial statements. Many will find the new FASB disclosure requirements both timely and helpful. But even a cursory review of the extent of the changes made last year and contemplated for this year can’t help but raise a few questions.

The most critical questions are:

• Are the expanded disclosures sufficient to restore confidence in financial reporting and address the deficiencies revealed by the financial crisis of 2008?
• Are all of the additional disclosure costs justified?
• Is the guidance sufficiently specific and standardized so that companies can follow it and investors can locate it easily?

What can be done to ensure meaningful disclosures in the future?

While a complete set of answers is elusive, a few observations seem painfully clear. First, there is little doubt that investors were caught by surprise by unforeseen risks; some major corporations were taken by surprise, too, and didn’t fully understand the extent of the risks they were taking. Second, although these are unusual times and it is understandable that new standards are being rushed out, our instincts tell us a more systematic and comprehensive approach to disclosures would be preferred in the future.

Could the financial reporting community work together to accomplish that goal? Based on our analysis of the disadvantages of piecemeal disclosures, the short answer is “Yes. We can and we should.”

There are three key drawbacks to today’s piecemeal approach to disclosure requirements:

1. Disclosures are no substitute for sound accounting. No matter how extensive, voluminous, and well-intentioned, disclosures are no substitute for good accounting principles. Increasingly, to provide flexibility in scheduling projects, the FASB appears to be using added disclosure requirements as bridges to better accounting that have not yet been agreed upon with the International Accounting Standards Board (IASB). In effect, the establishment of disclosure requirements on an ad hoc, project- by-project basis becomes a temporary measure when time is too tight to promulgate significant accounting changes and allow companies sufficient time to transition to sounder practices. This approach is sub-optimal because the disclosures become a compromise solution and the series of short-term fixes adds up to more changes than necessary.

2. No sunset process. If disclosure requirements must be established on a piecemeal basis, this process would best be accompanied by a sunset process for reevaluating disclosure requirements periodically, and removing the ones that may have been rendered unnecessary by subsequent changes in accounting requirements of related standards. Currently, the FASB does not have a process of this nature. While a full review of all disclosures could be a daunting task, there is a common theme underlying many of the disclosure requirements added in 2008 (i.e., the need for improved transparency of risks and uncertainties). Perhaps this aspect of disclosures could be singled out for special review, similar to the way the board reviewed all references to fair-value measures in connection with the issuance of FASB Statement No. 157. The goal would be to simplify the literature and combine individual requirements into general requirements wherever possible.

3. No 21st Century Disclosure Initiative. Without a periodic review of the FASB’s disclosure requirements, the United States may fall behind other countries in the move toward interactive data as described in the Securities and Exchange Commission staff report, “Toward Greater Transparency.” Prepared as part of the SEC’s 21st Century Disclosure Initiative, the report describes survey results that show many readers already find U.S. disclosure documents too long and wordy; they prefer to get their information another way, such as through a broker or financial analyst.

A more systematic and comprehensive approach to disclosures should, at a minimum, encompass the following steps:

-  Establish objectives and the purpose of disclosure. Who is the target user of the disclosures? Existing disclosure requirements seem inconsistent. Some appear to be providing context for understanding financial statements. Others appear to be patches for underlying bad accounting that the FASB hasn’t been able to fix yet. Still others appear to have become the primary source of information about a particular set of transactions.

Similar inconsistency exists with respect to the target audience. Some disclosures appear to be oriented to a reasonably educated reader, while others are more detailed and appear to be oriented to a professional securities analyst. The right audience is the reasonably educated reader of general- purpose financial statements; the additional detail that securities analysts want should be provided in statistical supplements.

-  Integrate related disclosures rather than having them appear in separate notes to the financial statements. Because disclosure requirements are established on a piecemeal basis, standard-by-standard, companies often provide each set of disclosures in a separate note to the financial statements. The FASB should seek to identify relationships among disclosures and encourage companies to integrate disclosures for related transactions, even if the requirements arose in different standards.

-  Streamline existing disclosure requirements, eliminating redundancies and excessive detail. Disclosure requirements are established on a piecemeal basis, so redundancies arise. A comprehensive approach would identify and eliminate redundancies. The level of detail among disclosure requirements also varies significantly. A comprehensive approach would identify areas of excessive (or missing) detail and conform all to a more consistent approach.

-  Consider disclosure requirements for both GAAP (generally accepted accounting practices) and IFRS (international financial reporting standards), with an objective of conforming them. The FASB and IASB have established disclosures on a standard- by-standard basis. A comprehensive review could identify strengths and weaknesses of each set of disclosure requirements and choose the better of the two.

-  Consider current GAAP and SEC requirements with an objective of conforming them and eliminating redundancies. The SEC’s disclosure requirements for Management’s Discussion and Analysis (MD&A) go beyond GAAP in some respects and duplicate GAAP in others. Some registrants duplicate large blocks of text in both MD&A and the notes to financial statements. Redundancies exist between the notes and the Business and Contingencies sections of registration statements.

Given the integration of U.S. GAAP into the SEC’s interactive data rules and the lessons learned from the current financial and economic crisis, the FASB should add a comprehensive disclosure initiative to its agenda and make it a priority.

Ben Neuhausen is national director of accounting at BDO Seidman LLP. Contact him at: bneuhausen@bdo.com.

Among other points of advice, the report suggests that companies disclose the pay of those executives whose compensation exceeds that of the companies’ directors. Such disclosure would not include names.

The report comes from Sir David Walker, a senior Morgan Stanley advisor, who says that “these proposals are designed to improve the professionalism and diligence of bank boards, increasing the importance of challenge in the board environment.”

“If this means that boards operate in a somewhat less collegial way than in the past,” continues Walker, “that will be a small price to pay for better governance.”

The Apple CEO’s notoriously opaque communications in regard to his condition has sparked debate over the role of the board in communicating relevant information to shareholders.

Though the SEC’s investigation is still in its review stage, if the regulator determines that Apple committed wrongdoing by not letting shareholders in on what could have posed a severe impact to shareholders, further action may result.

“The issue here is: Did Apple or Jobs make misleading disclosures, tested by what they knew at the time?” says UC Davis Professor Robert Hillman. “A disclosure could be misleading if it’s a partial truth.”

Jobs, who announced last month that he underwent a successful liver transplant in April, returned to work last week.

Having returned from a six-month medical leave of absence last week, Jobs and Apple have maintained their secrecy regarding the CEO’s medical issues, igniting a debate over to what degree disclosure is required in regards to management health. Jobs underwent a liver transplant in April, information that was only recently revealed.

The Securities and Exchange Commission opened an informal probe into the matter earlier in the year, and Apple’s board has enlisted outside counsel to represent it in the event of a more serious inquiry.

Former SEC Chairman Harvey Pitt criticized Apple’s lack of disclosure, saying, “We haven’t gotten to the point where liver transplants are viewed as routine surgery,” and questioning “what processes [the board] went through in deciding what disclosure to be made.”

According to State Street, the SEC investigated the manager’s disclosures and management of certain fixed-income investments made through 2007. State Street has received a Wells notice—an SEC letter that says the recipient may see enforcement action, and allows the recipient to provide reasons against enforcement.

State Street was already sued by investors for its poor investment on faulty mortgage-backed securities; the manager set aside $618 million in 2007 to settle the legal claims relating to these losses.

Apple and Jobs, who announced in January that he would be taking a six-month leave of absence for unspecified health reasons, have kept investors in the dark regarding the chief executive’s health status, even after the Wall Street Journal broke the news about the transplant.

Questions arise as to what role regulators should take in spurring company officials to disclose health information. John Coffee of Columbia Law School says that the Securities and Exchange Commission “has assiduously avoided giving clear guidance on when the CEO’s health is material.”

Nell Minow of the Corporate Library complains that such weak disclosure demonstrates an unhealthy relationship between Jobs and the Apple board of directors. “The board has proven again and again that it is being treated like an operating division of the company rather than the supervisor of the CEO,” says Minow. “At times like this, you want to be hearing a significant statement.”

What if General Motors was required to disclose much more about which directors possess skills in sustainability, risk management,labor relations,marketing, and other key competencies and attributes required of the auto industry and integral to GM’s strategy?

What if American corporations assessed their boards, committees, and individual directors, and disclosed with sufficient granularity the key outcomes and processes, in order to inspire confidence in shareholders that a robust self-assessment regime was instituted and the results were acted upon? What if directors were explicitly recruited on the basis of the competencies and skills necessary to direct the company’s strategy and monitor management?

More transparency about skills and backgrounds of corporate directors might not have led us to avoid the financial crisis, but it might have alleviated some of the pressure that directors are now facing.

The answer is that things would be different. More transparency in the way of skills and backgrounds of corporate directors might not have led us to avoid the financial crisis or the collapse of the auto industry, but it might have alleviated some of the pressure that directors now find themselves under. It also might have caused boards to look more closely at their collective skill sets and fill in talent gaps, giving them a better chance at avoiding some of the problems or responding to them more adequately.

To be sure, disclosure in this area is remarkably thin. GM notes in Item 7 of its directors and corporate governance committee charter, only that it will “formally review each director’s continuation on the board every five years.” Exxon Mobil’s corporate governance guidelines, amended last October, include just one sentence under the heading “board self-evaluation,”which reads: “At least annually, the board will evaluate its performance and effectiveness.” It is not clear exactly what that means.

This is not to say that directors at these companies don’t possess the relevant competencies and skills,only that we don’t know, because we simply don’t have the necessary data. However, qualitative data suggests competencies and skills may be lacking in any number of boards. Take the area of risk management,for example. Recent director surveys revealed startling comments on the lack of required skills by some of their director peers:

• “We need a seminar on executive behavior and how to objectively evaluate risk.”
• “Is management overly optimistic?”
• “What’s the link between behavior, results, and action?”
• “For behavioral issues, are we comfortable as aboard versus holding back?”
• “How do we evaluate personalities?”
• “It’s mind boggling. We are not even at zero.We’re probably at minus 40.”
• “No comprehensive understanding at the board level.”
• “We should admit that the training is inadequate.We don’t know what we don’t know.”
• “I have more work to do [in order] to feel more competent.”
• “For risk, we can’t blame management.”
• “Risk management in the company is pretty poor.”
• “We should have had a peer appraisal.”
• “We’re not changing with the times [or] concentrating on the right issues.”

Northern Disclosure
Since 2005, the law in Canada has required the recruitment, education, and assessment of individual public company directors, on the basis of competencies and skills, and disclosure of these activities.Position descriptions are also required for key board leadership roles.

Currently, it is possible in the United States to sit on a risk committee of a public company board and not be risk-literate, or sit on a compensation committee and not possess compensation expertise. It is also possible to sit on these committees without having been recruited for these skills. Regulators do not require boards to disclose whether one or more directors possess such attributes. And the fact that a director may have significant experience—as a former CEO, for example—does not necessarily mean that he or she possesses certain specific competencies. As one director recently remarked: “I believe that our analysis focuses too much on experience and not enough on the actual skills and competencies that directors bring to the table. It may be said that experience and background are a short-cut to determination of skill, but it does not always mean the candidate possesses the skills.”

Chairman Mary Schapiro at the Securities and Exchange Commission is reported to be studying proposals for greater disclosures of the qualifications of board members,particularly those involved in assessing risks and setting executive compensation. Requiring American directors to be recruited and assessed on the basis of the competencies and skills each individual director is expected to bring to the board is probably the single greatest governance reform that Schapiro could make.

Overcoming the Obstacles
The belief that it is problematic, from a collegiality point of view, to assess individual directors is flawed, given the number of significant professions that have managed member assessments effectively,including the unpleasant task of counseling out non-performing members. The notion that assessing directors, from a legal point of view, should not happen (for example, concerns that results may be used as evidence in litigation by the plaintiffs’ bar), is not a reason, in itself, to avoid conducting director assessments. Otherwise,fields would never evolve because of litigation fear. That said, regulators should consider a safe harbor or zone of privilege to promote meaningful director review without directors looking over their shoulders,and require disclosure of the evaluation process only, not the results.

Some of the companies that do conduct board evaluations (New York Stock Exchange companies are required to conduct them each year, according to its listing standards) either do a poor job on the individual evaluations or they conduct a blanket evaluation, without assessing the abilities of individual directors. “Some of the board evaluations I’ve seen don’t even rise to the level of awful,” says Kenneth Daly, CEO of the National Association of Corporate Directors. “Essentially, they don’t evaluate how board members are adding value. Because of collegiality, they don’t want to go to somebody and say,‘Look, you’re no longer productive. You’re a dud.’ So what happens is they evaluate the overall board and not whether theyhave the right composition for the company’s strategic needs. I don’t know what good that does for figuring out problems with individuals and director criteria.”

Many corporations, including Pfizer,GM, JPMorgan Chase, DuPont, ExxonMobil, Home Depot, and Disney, don’t evaluate individual directors, according to published reports in the business media.

Evaluation Improvement
A robust evaluation compels a board to look inward and address issues related to leadership, management relationships,reporting, and oversight. The more an evaluation focuses on non-structural factors(for example, competencies, behaviors,and processes of the board; in short,how it acts or fails to act), the better. To make director assessments more effective, consider the following:

1. Robust criteria
The chairman of the board or lead director and the chair of each principal committee should be assessed against key criteria, such as a publicly disclosed position description.Individual directors should be assessed against the competencies and skills each director is expected to bring to the board.

2. Effective leadership
The chair of the nominating and governance committee, in collaboration with the board chair or lead director, should lead or oversee the director-assessment process in a manner acceptable to the board. This could start with some form of shared expectations and an annual one-on-one discussion with the board chair for the purpose of a self and peer review. Competencies, skills,contribution to teamwork, and developmental needs of the individual members should be addressed. The board chair or lead director should also be assessed on key criteria, including leadership and the ability to hold members accountable.

3. Effective follow-through
Boards should be committed to act on the results. An individual director’s peer results should not be shared with other directors,other than the chair or lead director for development and feedback purposes.

The chair of the board should discuss with each director their appraisal and what actions, if any, should be taken. The chair should report back to the board on the process and outcomes. The board and each committee should have a similar discussion on each of their assessments and fashion action plans to address shortcomings,if any, for the following year. Nominating and governance committees should consider linking director evaluation with continued director tenure and hold individual chairs responsible for implementing reforms from the previous year.

4. Effective disclosure
Lastly, reporting on director evaluation to shareholders should be disclosed in a meaningful and reasonably detailed manner to demonstrate that a strong and viable assessment program is in place and the board holds itself, its committees, its chairs, and other individual directors accountable for performance. Best practices include a disclosure of a comprehensive narrative on the process, dimensions of assessment, general outputs, action taken, and what governance improvements, if any, were made over the preceding year. Companies are even beginning to disclose some of the assessment results, scores received, and the number of directors who possess skilled and expert application in the competencies the board deems necessary to oversee the company.

A number of innovative boards have risen to the challenge and have renewed and fundamentally transformed their governance practices. The key for these boards is leadership, transparency,accountability, a commitment to have the best directors possible, and a sincere desire to be proud of their governance and to say to all of their shareholders: “Welcome—this is who we are.” More boards in the United States need to take up this challenge.Great boards don’t just happen. They are designed by great directors.

A Checklist for Assessing Director Leadership, Competencies, and Effectiveness

- THE BOARD CHAIR HAS AN EFFECTIVE PERSONAL LEADERSHIP STYLE

Sets a good example; is courteous, inclusive,sensitive, yet decisive; and establishes,inspires, and holds directors and management accountable to high standards

- THE BOARD CHAIR CARRIES OUT THE ROLE WELL

Sets agendas; ensures appropriate information is available;marshals resources and expertise;and ensures that the boundaries between board and management responsibilities are clearly understood and respected and that relationships between the board and management are conducted in a professional and constructive manner

- THE BOARD CHAIR HAS A CONSTRUCTIVE WORKING RELATIONSHIP WITH THE COMPANY’S CEO

Is supportive and collaborative, yet is independent

- THE BOARD CHAIR CONDUCTS AN EFFECTIVE DECISION-MAKING PROCESS

Ensures that, for crucial decisions, alternatives are generated, a thorough discussion and analysis ensues,relevant perspectives are brought to bear, the best decision is made, and the decision is supported

- THE BOARD CHAIR BUILDS HEALTHY BOARDROOM DYNAMICS

Relates well with directors and management,deals effectively with dissent, and works constructively towards consensus

- THE COMPETENCIES (FINANCIAL LITERACY, EXPERIENCE, SKILLS,KNOWLEDGE OF THE BUSINESS) OF ALL MEMBERS OF THE AUDIT COMMITTEE ARE APPROPRIATELY MATCHED WITH THE REQUIREMENTS OF THE COMMITTEE

All members, at a minimum, have a full understanding of how the company earns income and how these transactions impact the accounting judgments made by management

- THE FINANCIAL EXPERTISE ON THE AUDIT COMMITTEE AS A WHOLE MATCHES THE COMPANY’S FUTURE FINANCIAL OVERSIGHT NEEDS

Capital and balance sheet management,accounting, financial control and assurance, financial markets, treasury,funds management, investment banking,taxation, and risk management, as required

- INADEQUATE PERFORMANCE OR LACK OF COMMITMENT BY DIRECTORS IS PROMPTLY ADDRESSED BY THE BOARD CHAIR

Takes appropriate action, including developmental suggestions,peer remediation, member rotation or retirement, and other timely,corrective action as required

- RIGOROUS SUCCESSION PLANNING OCCURS FOR ALL MEMBERS OF THE COMMITTEE

Includes, with due consideration by the nominations committee,a formal and transparent process,identifying gaps between current member competencies and skills and committee requirements, a pool of directors possessing desirable qualifications to serve on and chair the committee,and, where appropriate, retaining a search firm to identify such a director

Richard Leblanc, a professor of corporate governance at York University, can be reached at rleblanc@yorku.ca. He is the author of the chapter, “Getting the Right Directors on Your Board,” from Boardroom Realities: Building Leaders ACross Your Board (Jossey-Bass, 2009).

“Offshore accounts harbor billions of dollars, and people should take notice that the secrecy surrounding these deals is rapidly fading.”

IRS Commissioner Doug Shulman, 2008

Even individuals and businesses which do not intentionally use foreign bank accounts to maintain assets secretly should take note of increasingly stringent disclosure requirements in the United States for such accounts and should be mindful that the civil and criminal penalties associated with noncompliance have increased in both likelihood and magnitude. A perfect storm of recent factors – increased cooperation from foreign banks known for secrecy and aggressive legislation strengthening the Internal Revenue Service arsenal – has elevated foreign bank accounts into a topic that cannot be ignored.

Taxpayers with foreign bank accounts aggregating more than $10,000 at any time during the year must disclose the existence of such accounts on Form TDF 90-22.1 (Report of Foreign Bank and Financial Accounts or “FBAR”). While the FBAR originated in 1970 from the Bank Secrecy Act, significant revisions to the form and associated penalties for noncompliance have garnered attention. In addition, the FBAR is not filed with a tax return. Instead, the FBAR must be filed by June 30 (no extensions are available) each year. The general purpose of the FBAR is to provide disclosure of financial or other interests (e.g., signatory authority) in financial accounts located in foreign jurisdictions.

First, recent revisions have expanded the FBAR in terms of coverage. Previously, the FBAR was required to be filed by any United States person. The term “United States person” encompassed a citizen or resident of the United States, a domestic partnership, a domestic corporation, or a domestic estate or trust. Now, with the recent revision, “United States person” includes “a person in and doing business in the United States.” Hence, a foreign person in and conducting business in the United States may now be required to file an FBAR. The definition of “financial account” has also been broadened to include mutual funds, deficit card and prepaid credit accounts in addition to any bank, securities, securities derivatives or other financial instruments accounts.

The expansion in FBAR coverage permeates the area of pass-through entities as well. In general, a United States person (as defined more broadly above) must file an FBAR if owning more than 50% of the total value of the shares of stock in a foreign corporation with a financial account abroad. This applies to a partnership or S corporation but, in addition, any partner or shareholder directly or indirectly owning more than 50% of the foreign corporation will be required to file an FBAR individually. To illustrate, consider a domestic partnership that owns 60% of a United Kingdom limited company. If a domestic partner owns a 90% interest in the partnership, both the partnership and the partner must file an FBAR separately. Hence, taxpayers should closely scrutinize their interests in partnerships and S corporations to gauge their reporting obligations.

Second, penalties associated with the FBAR have increased in recent years. In general, absent a willful violation, the maximum penalty is $10,000. By contrast, civil penalties for willful violations have increased to the greater of $100,000 or 50% of (1) the amount of the transaction for a violation involving a transaction or (2) the underlying account’s balance at the time of violation. Criminal violations of FBAR requirements may result in a $250,000 fine and five years of imprisonment. Additionally, if the FBAR violation is in tandem with another violation of law, the fine is potentially $500,000 and 10 years’ imprisonment. These penalties can be illustrated as follows:

For a limited time, taxpayers may avoid potential criminal prosecution by participating in a voluntary disclosure program reporting offshore bank accounts and assets. The six-month program was initiated on March 23, 2009. Taxpayers that participate in this program will be subject to pay back taxes and interest for the previous six years and a special 20% penalty in addition to other penalties that may apply. (For a further description of this program, please visit http://www.eisnerllp.com/Nep/News.aspx?id=4021.) Taxpayers should also take note of the recent cooperation stemming from foreign jurisdictions known for protecting accountholder identities and the Internal Revenue Service. For example, the Internal Revenue Service recently successfully uncovered the identities of individuals with bank accounts in Switzerland. In general, there is an overall movement toward transparency of foreign bank accounts.

As demonstrated above, the requirements for foreign account reporting have become complex and an increasingly aggressive Internal Revenue Service has taxpayers with foreign accounts within its sights. Taxpayers with foreign bank accounts should be aware of the general trends mentioned above to avoid damaging consequences such as civil and/or criminal penalties for noncompliance. The risks associated with noncompliance far outweigh the inconvenience of reporting these accounts.

If you wish to discuss this topic, please contact Jon Zefi at jzefi@eisnerllp.com or Aninda Dhar at adhar@eisnerllp.com.

Any tax advice in this communication is not intended or written by Eisner LLP to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer, or (ii) promoting, marketing, or recommending to another party any matters addressed herein. With this alert, Eisner LLP is not rendering any specific advice to the reader.

“Offshore accounts harbor billions of dollars, and people should take notice that the secrecy surrounding these deals is rapidly fading.”

IRS Commissioner Doug Shulman, 2008

Even individuals and businesses which do not intentionally use foreign bank accounts to maintain assets secretly should take note of increasingly stringent disclosure requirements in the United States for such accounts and should be mindful that the civil and criminal penalties associated with noncompliance have increased in both likelihood and magnitude. A perfect storm of recent factors – increased cooperation from foreign banks known for secrecy and aggressive legislation strengthening the Internal Revenue Service arsenal – has elevated foreign bank accounts into a topic that cannot be ignored.

Taxpayers with foreign bank accounts aggregating more than $10,000 at any time during the year must disclose the existence of such accounts on Form TDF 90-22.1 (Report of Foreign Bank and Financial Accounts or “FBAR”). While the FBAR originated in 1970 from the Bank Secrecy Act, significant revisions to the form and associated penalties for noncompliance have garnered attention. In addition, the FBAR is not filed with a tax return. Instead, the FBAR must be filed by June 30 (no extensions are available) each year. The general purpose of the FBAR is to provide disclosure of financial or other interests (e.g., signatory authority) in financial accounts located in foreign jurisdictions.

First, recent revisions have expanded the FBAR in terms of coverage. Previously, the FBAR was required to be filed by any United States person. The term “United States person” encompassed a citizen or resident of the United States, a domestic partnership, a domestic corporation, or a domestic estate or trust. Now, with the recent revision, “United States person” includes “a person in and doing business in the United States.” Hence, a foreign person in and conducting business in the United States may now be required to file an FBAR. The definition of “financial account” has also been broadened to include mutual funds, deficit card and prepaid credit accounts in addition to any bank, securities, securities derivatives or other financial instruments accounts.

The expansion in FBAR coverage permeates the area of pass-through entities as well. In general, a United States person (as defined more broadly above) must file an FBAR if owning more than 50% of the total value of the shares of stock in a foreign corporation with a financial account abroad. This applies to a partnership or S corporation but, in addition, any partner or shareholder directly or indirectly owning more than 50% of the foreign corporation will be required to file an FBAR individually. To illustrate, consider a domestic partnership that owns 60% of a United Kingdom limited company. If a domestic partner owns a 90% interest in the partnership, both the partnership and the partner must file an FBAR separately. Hence, taxpayers should closely scrutinize their interests in partnerships and S corporations to gauge their reporting obligations.

Second, penalties associated with the FBAR have increased in recent years. In general, absent a willful violation, the maximum penalty is $10,000. By contrast, civil penalties for willful violations have increased to the greater of $100,000 or 50% of (1) the amount of the transaction for a violation involving a transaction or (2) the underlying account’s balance at the time of violation. Criminal violations of FBAR requirements may result in a $250,000 fine and five years of imprisonment. Additionally, if the FBAR violation is in tandem with another violation of law, the fine is potentially $500,000 and 10 years’ imprisonment. These penalties can be illustrated as follows:

For a limited time, taxpayers may avoid potential criminal prosecution by participating in a voluntary disclosure program reporting offshore bank accounts and assets. The six-month program was initiated on March 23, 2009. Taxpayers that participate in this program will be subject to pay back taxes and interest for the previous six years and a special 20% penalty in addition to other penalties that may apply. (For a further description of this program, please visit http://www.eisnerllp.com/Nep/News.aspx?id=4021.) Taxpayers should also take note of the recent cooperation stemming from foreign jurisdictions known for protecting accountholder identities and the Internal Revenue Service. For example, the Internal Revenue Service recently successfully uncovered the identities of individuals with bank accounts in Switzerland. In general, there is an overall movement toward transparency of foreign bank accounts.

As demonstrated above, the requirements for foreign account reporting have become complex and an increasingly aggressive Internal Revenue Service has taxpayers with foreign accounts within its sights. Taxpayers with foreign bank accounts should be aware of the general trends mentioned above to avoid damaging consequences such as civil and/or criminal penalties for noncompliance. The risks associated with noncompliance far outweigh the inconvenience of reporting these accounts.

If you wish to discuss this topic, please contact Jon Zefi at jzefi@eisnerllp.com or Aninda Dhar at adhar@eisnerllp.com.

Any tax advice in this communication is not intended or written by Eisner LLP to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer, or (ii) promoting, marketing, or recommending to another party any matters addressed herein. With this alert, Eisner LLP is not rendering any specific advice to the reader.

The documents include personal testimony from Lewis as well as minutes from BofA board meetings, which demonstrate that former Treasury secretary Henry Paulson and Fed chairman Ben Bernanke pushed the deal in spite of misgivings about Merrill’s 2008 losses. The acquired investment bank revealed $15.8 billion in Q4 losses only after the deal had been approved by shareholders at both companies.

According to Cuomo’s letter, both Paulson and Bernanke attempted to prevent public disclosure of the losses resulting from the acquisition. “I was instructed that ‘We do not want a public disclosure,’” testified Lewis. The decision to disclose “wasn’t up to me.”

“What we have uncovered about the Bank of America acquisition of Merrill raises fundamental questions about the interaction of regulators and those they regulate, as well as important issues of corporate responsibility and shareholder rights,” said Cuomo.

On April 14 the European Sustainable Investment Forum released a call to the European Commission to adopt disclosure rules of environmental, social, and governance issues, according to Global Proxy Watch.

The group made recommendations also backed by the U.S. effort: Walden Asset Management, the U.S. Social Investment Forum, and Ceres. These include requiring companies to use key performance indicators for ESG factors, including sector-specific ones.

Eurosif wants institutional investors held accountable by requiring them to adopt a mandatory statement of investment principles.

Not an easy task, Eurosif also wants shareholders to retain voting rights when they lend shares. It also wants custodians to give issuers up-to-date lists of all shareholders—a tough sell.

During an address to a conference hosted by the Council of Institutional Investors, Shapiro emphasized the need for regulatory reform. “Standards deteriorated and financial activity moved away from regulated and transparent markets and institutions, into ’shadow markets.’ Regulatory and enforcement resources, most notably at the SEC, declined,” she said.

Among the many proposals the SEC is considering are a few that could have a profound impact on the process by which directors are chosen and elected and possible new disclosures about the qualifications of directors. Schapiro said that in June the Commission will consider whether to enhance disclosure around director nominee experience, qualifications, and skills. “The current rules only require a very brief description of a candidate’s business experience over the past five years,” she said. ”That may not be sufficient in today’s complex business environment. I want to make sure that shareholders have the information needed to make sound proxy voting decisions.”

Also on the table could be new disclosures around corporate governance. Schapiro said that the commission is considering new disclosure requirements that would force boards to provide more detail about their governance structure. “We’ll also be considering whether boards should disclose to shareholders their reasons for choosing their particular leadership structure — whether that structure includes an independent chair, a non-independent chair, or a combined CEO/chair,” she said.

Also on the disclosure front, Schapiro said the Commission will revisit compensation disclosure to assess its effectiveness and will look at what disclosures should be required on risk assessment.

“I have asked our staff to develop a proposal for Commission consideration that looks to providing investors, and the market, with better insight into how each company and each board addresses these vital tasks, said Schapiro.

Perhaps the the biggest issue that the SEC will take on, and one that is bound to be controversial, is proxy access. “Next month, the Commission will consider a proposal to ensure that a company’s owners have a meaningful opportunity to nominate directors, said Schapiro. ”We are looking at what the Commission considered in both 2003 and 2007; and we’re also considering the potential impact of proposed changes to Delaware’s corporate law.”

The details on these agenda items will be coming forth in the next weeks and months. Just how much of it the SEC can move forward remains to be seen. But the fact that changes to some vital board processes will be made is undeniable.

]]> http://www.directorship.com/sec-chair-outlines-ambitious-agenda/feed/ 0 http://www.directorship.com/the-secs-bad-rx-for-boards/ http://www.directorship.com/the-secs-bad-rx-for-boards/#comments Wed, 01 Apr 2009 04:00:00 +0000 Dennis Carey http://www.directorship.com/?p=4072 Amid all the chatter surrounding Apple CEO Steve Jobs’ ill health, one thing is clear to me: the Securities and Exchange Commission is also unwell.

After striking out on rogue financiers Bernie Madoff and R. Allen Stanford, the SEC’s unprecedented probe into whether Apple’s board of directors failed to disclose material information about Jobs’ health may be considered a form of playing catch up. But the Commission’s priorities are wrong, and its inquiry is misguided. Considering that in the Madoff case, the SEC failed to close in even after receiving tips for more than 10 years, it seems to me that its resources should be spent on ensuring that there are no other Madoffs at large, not hunting for a paper trail about Jobs’ physical condition.

Regulation governing CEO health disclosure is unnecessary and impractical—and wasting our resources in this futile attempt won’t do anything to prevent another Madoff-like scandal. Even former SEC Commissioner Joseph Grundfest said recently that Apple crossed no line if it failed to provide thorough disclosures about Jobs’ health, unless company insiders traded on the knowledge before it was disclosed publicly. “One of the hallmarks of a complex medical condition is a diagnosis can change over time,” Grundfest said. “If the board has told the truth, then they’ve handled it best as they could.”

If the SEC brings a case against Apple, it would set an alarming precedent and open the floodgates to frivolous lawsuits from shareholders curious about a CEO’s health and personal life.

If the SEC brings a case against Apple, it would set an alarming precedent and open the floodgates to frivolous lawsuits from shareholders curious about a CEO’s health and personal life. The possibilities for abuse are endless. What if a CEO has a condition which is treatable and not immediately life threatening? Worse, what if the condition is generally not life threatening, but the CEO dies—would this constitute a failure of disclosure? Will we be appointing physicians to boards of directors next?

The Board’s Job
The answer to this issue is simple: The responsibility of determining whether a CEO is able to continue in his or her role and what, if any, health issues should be disclosed rests squarely on a company’s board of directors. Boards have a fiduciary responsibility; they are elected by shareholders to oversee management’s performance and are directly responsible only to them. They have the ability and the authority to balance the competing needs of public disclosure and private matters. The board’s principal charge is to ensure that the company’s leadership is fully capable of running the enterprise and that includes physically, emotionally, and intellectually. This is the bright line that boards use when determining what kind of disclosures and actions they are required to take.

With regard to health matters, there are too many gray and sensitive areas to make regulatory scrutiny appropriate. We know this from the manner in which we have been told (or not told) of health issues affecting United States presidents throughout history. Health issues often are not cut and dry. Tests and second opinions take time. People may recover completely, even after a debilitating illness. In all likelihood, Jobs was unsure of his health issues and any determination of his condition was evolving and neither clear nor final. His bout with and recovery from pancreatic cancer is a good example: While others with the same diagnosis might be incapacitated, in Jobs’ case, Apple’s great successes occurred during and after the time he suffered from this illness. Shouldn’t a CEO and his or her board be allowed to deal with this time of uncertainty—taking the right amount of time and heeding professional advice to fully understand the implications? CEOs may shoulder greater responsibilities, so their health is a fair subject for inquiry, but they deserve the same respect for due process as the rest of us.

Most importantly, why should CEOs disclose personal health details when they do not interfere with their performance? Even in the face of personal adversity, Steve Jobs has been a stellar CEO. He has fulfilled his duty to deliver shareholder value. Apple’s board has done a pretty good job, too. It did not panic when Jobs had surgery for cancer five years ago and it allowed him to come back and drive extraordinary value for shareholders. Another example: Carol Bartz, who has been tapped to be CEO of Yahoo, was diagnosed with breast cancer the same week she became CEO of Autodesk. She worked through her treatment and went on to grow Autodesk’s revenue by almost five times and increased the share price nearly tenfold.

Regulatory Distractions
Increased government intervention in boardroom affairs does not necessarily make things better and I would argue it makes things worse. Unnecessary interference by the government on this issue distracts CEOs and boards from the real imperatives: guiding a company through tough economic times, getting the strategy right, and executing.

They might not have been corporate CEOs, but Abraham Lincoln’s depressive episodes, John F. Kennedy’s battle with back pain, John McCain’s fight with melanoma, and Lance Armstrong’s cancer diagnosis should all serve notice to the SEC and to shareholders that health issues and company performance are not necessarily correlated.

Clearly, we shouldn’t turn a blind eye to the issue of CEO health. But private health matters should not become public spectacles. The board of directors, with its clear roles and responsibilities, can and should make the call when a CEO’s health becomes a material issue.

Editor’s note: Opinions expressed in Viewpoint are those of the author only and do not represent the views of Directorship or the National Association of Corporate Directors.

Bridges alleges that McDonald’s bookkeepers concealed a number of perks it gave to Tim Fenton, the company’s president of Asian operations. These perks include two country club memberships worth $3,000 and the misrepresentation of almost $100,000 in “home leave” expenses for Fenton.

Bridges also says that McDonald’s “disguised” more than $10 million it paid to former president Mike Roberts, reporting the payment as if Roberts was a transitional employee and not in fact a former executive.

The former McDonald’s compensation director claims she was fired on April 6, 2007, just one day before the company released its annual proxy statement. Bridges says that she had attempted to resolve the matter both within McDonald’s and through “administrative remedies” before filing the suit.

McDonald’s rebuffed the allegations, saying, “This case has absolutely no merit and the claims are baseless. We will vigorously defend against these claims and we remain confident that the court will rule in our favor.”

“The individual rates of return have no direct impact on our financials and therefore we question the relevance to our investors,” said Blackstone CFO Laurence Tosi in a letter to the SEC last December. Peer Fortress Investment Group was also solicited by the SEC, but agreed to “augment [its] disclosure” in its annual report.

Both Blackstone and Fortress are private firms that began selling shares to the public in 2007. Their disclosure of returns is purely voluntary, as evidenced by the SEC not pushing Blackstone beyond their initial request.

Because private-equity funds earn their returns bypurchasing and then selling companies over a seven- to 10-yearperiod, annual performance figures can be misleading,particularly in the early life of the partnership, MarcBonavitacola, who analyzes and examines buyout funds for Boston-based SVG Advisers, told Bloomberg.

Analysts agree that private-equity funds operate on a longer timeline than do other public companies, and that a given financial statement therefore can be misleading. “I understand why Blackstone doesn’t want to [disclose],” said Jefferies & Co. analyst Daniel Fannon. “These are points in time and the private-equity funds have a much longer life.”

Merrill’s top earner was investment banker Andrea Orcel, who took home $33.8 million in a combination of cash and stock. Overall, 11 executives were paid more than $10 million, with 149 more taking home more than $3 million for the year.

Much criticism has been heaped on Merrill following the investment bank’s takeover by Bank of America late last year, after it was announced that the company had suffered net losses of $27.6 billion in 2008, losses that may have been intentionally concealed from shareholders until the merger was approved. In spite of the massive losses, Merrill paid out $3.6 billion in bonuses in the days leading up to its acquisition.

New York Attorney General Andrew Cuomo has set Merrill in his sights, issuing subpoenas for information related to the company’s bonus payouts. Bank of America is attempting to keep this information concealed, arguing that if it would hurt the bank’s recruiting competitiveness if made public.

“Merrill Lynch was an independent company for the three-year period covered [by the subpoena], and made the decisions on compensation,” said a spokesman for Bank of America. “Bank of America continues to be concerned about the right of privacy of any employee.”

The Millstein Center calls on institutional investors to be more transparent about the way they act as owners of public corporations by disclosing how they vote, what ownership policies they follow, and what resources they put into engagement efforts.

Fund recommendations and the code of conduct are among a number of improvements to proxy voting systems and decision-making outlined in the Millstein Center policy briefing Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry, which will be presented tomorrow at the International Corporate Governance Network mid-year meeting in Amsterdam.

“The economic crisis has highlighted as never before that the capital market’s health hinges on a reliable, open and efficient proxy voting system to keep corporate boards accountable,” said Ira M. Millstein, senior associate dean for corporate governance at the Yale School of Management. “The time has come for practical fixes.”

The briefing goes on to recommend that the U.S. Securities and Exchange Commission empanel an independent blue ribbon commission to modernize the U.S. share voting system; and that regulators should work with counterpart bodies in other markets to supervise the seamless integration of national systems to enable accurate and efficient cross-border voting.

Voting Integrity is based on independent research and insights from a roundtable of major U.S. and European institutional investors and proxy advisors convened by the Millstein Center on January 29, 2008 and chaired by Lynn Turner, former chief accountant to the SEC and former executive of Glass, Lewis & Co.