RiskMetrics Group - Risk & Governance Blog
RiskMetrics Group - Risk & Governance Blog

• Agency Rejects Beazer's Request to Omit Mortgage Report ProposalSubmitted by: L. Reed Walton, Publications
  

  The Securities and Exchange Commission has rejected a "no action" request by Beazer Homes to exclude a new proposal by the Indiana Laborers' Pension Fund that seeks a report on the company's mortgage operations and loan-default risks.

  The SEC staff ruling presumably will clear the way for similar shareholder resolutions to appear on the ballot at other builders, mortgage companies, and financial firms. The Laborers' International Union of North America, of which the Indiana union is a part, has filed mortgage report proposals at Washington Mutual, Ryland Group, and Bear Stearns, all of which have seen financial losses because of the subprime credit crisis.

  "It's great that this is going to set a precedent at those other firms," said Jennifer O'Dell, assistant director of the Laborers' office of corporate affairs. "We couldn't be happier for a first-time proposal."

  The Beazer proposal asks the board to make a report to shareholders within 90 days of the annual meeting detailing how many of the company's mortgages are subprime, as well as the regions most reliant on subprime mortgages and the firm's expectations of mortgage defaults. The proposal also asks for the identity of the purchasers buying mortgage loans on the secondary market.

  Representatives of Atlanta-based Beazer did not respond to phone calls by press time.

  The homebuilder asked the SEC for permission to exclude the Laborers proposal from its proxy statement on the grounds that it violates Rule 14a-8(i)(7), which allows firms to omit resolutions that relate to "ordinary business" operations. Lawyers for Beazer also invoked a less-often used exclusion, Rule 14a-8(i)(5), which lets companies exclude proposals that "relate to operations which account for less than 5 percent of the company's total assets … and for less than 5 percent of its net earnings and gross sales."

  In late November, the SEC concluded that it was "unable to concur" with Beazer's arguments to "exclude the proposal under Rule 14a-8(i)(5) ... [and] 14a-8 (i)(7)."

  Though Beazer's exclusion request was denied, a vote on the Laborers' proposal is not entirely certain, O'Dell said.

  "We don't know whether Beazer will be able to hold an annual meeting" in 2008, she said, citing concerns that the company's mortgage troubles may lead to a financial restatement. Under SEC rules, companies that are restating past results cannot hold regular annual shareholder meetings because they do not have current financial information to include in proxy materials.

  Beazer is now under formal investigation by the SEC and by federal prosecutors in North Carolina in connection with past mortgage lending and financial practices. Several employees of the company's mortgage finance division were found during an internal investigation to have broken Department of Housing and Urban Development laws relating to down-payment assistance programs, charges which the firm said it hopes to settle out of court for $15 to $18 million, Beazer said in an October press release.

  The SEC has also begun calling on banks and insurance companies to provide greater disclosure of subprime risks. According to a Dec. 11 Associated Press report, the agency plans to send letters to more than 20 firms that previously disclosed off-the-books purchases in collateralized debt obligations and other investment vehicles.
  

• New RiskMetrics Group Study: Employee Incentive Plans in SwedenSubmitted by: Christel Dumas, Marketing
  

  Incentive plans of listed companies have become increasingly important and certainly more controversial. In a new study published by our Nordic research analysts titled "Employee Incentive Plans in Sweden," we will shed light on some of the specifics of incentive plans encountered in the Swedish market.

  There are generally two categories of equity-based incentive plans in Sweden: option plans and share plans. Among the options plans, we distinguish four instruments – call options, convertible bonds, subscription rights, and stock appreciation rights. Among the share plans are restricted share plans and matching share plans.

  In Sweden, market practice indicates that the conversion price of stock options is at least equal to market value on, or close to, the date of grant. What makes Swedish stock option plans interesting are not so much the conversion price or instruments used, but how the taxation of stock options in Sweden has compelled companies to come up with inventive solutions.

  To access the report, please visit the "What's New" section of RiskMetrics Group's Knowledge Center.

• Investors Voice Concern Over International Accounting StandardsSubmitted by: L. Reed Walton, Publications
  

  International regulators should make sure that companies, auditors, and the European Union do not have undue influence on international financial reporting standards before the U.S. considers adopting them, the Council of Institutional Investors (CII) wrote in a Nov. 9 letter to the U.S. Securities and Exchange Commission.

  "[A]t least three related … issues should be resolved as soon as possible and certainly before the [SEC] considers allowing U.S. issuers to prepare financial statements in accordance with [International Financial Reporting Standards]," CII General Counsel Jeff Mahoney wrote in the letter. These issues include the funding sources for the International Accounting Standards Board (IASB), the European Union's influence over the approval of standards, and the lack of sufficient investor representation on the IASB's 14-member board.

  The SEC is considering allowing U.S. companies to use International Financial Reporting Standards (IFRS), the accounting rules set by the IASB, in addition to, or instead of, the Generally Accepted Accounting Principles (GAAP) that are used in the United States. On Nov. 15, the SEC voted to drop rules requiring foreign firms listed in the U.S. to reconcile their financial reports with GAAP.

  Meanwhile, the European Union, Japan, and other nations have been urging the agency to allow U.S. companies to use the international reporting standards. The SEC received almost 100 letters on the topic between Aug. 9 and the Nov. 13 comment deadline. The commission has announced plans to hold roundtables on the issue on Dec. 13 and Dec. 17.

  
  Most of the funding for the London-based IASB comes from voluntary contributions by fewer than 200 international companies and auditing firms. By contrast, the IASB's U.S. counterpart, the Financial Accounting Standards Board (FASB), is funded by mandatory accounting-support fees from U.S. issuers.

  In the CII letter, Mahoney cited a concern raised by the FASB in its comment letter to the SEC: "We believe the current funding levels and staffing mechanisms of the IASB are not adequate for the tasks it will face if the … IFRS becomes the single set of global accounting standards."

  In response to these concerns, the IASB has announced a "broad-based funding regime" that would give the organization an additional £12 to £16 million per year, beginning in 2008. Money would come from national funding schemes based on gross domestic product in countries such as Australia, the United Kingdom, and the Netherlands, while voluntary giving programs would continue in countries like China, France, India, and South Africa, the IASB said in a Nov. 6 press release.

  Notwithstanding the IASB's new funding approach, the California Public Employees' Retirement System, the largest U.S. state pension fund, wrote in its own comment letter to the SEC on Nov. 14 that it is "not confident at this point that these steps will ensure an independent, well-governed IASB that is free of potential influence."

  That concern was also raised during a Nov. 12 roundtable discussion on accounting convergence at New York University. Participants agreed that the IASB should have a more reliable source of funding as well as board stability.

  The CFA Institute Centre for Financial Market Integrity, a worldwide organization of investment professionals, also told the SEC--in a comment letter on a related rule release--that the financial independence of the IASB is an important concern.

  The CFA Institute also noted that there are "major gaps" in the IFRS that must be addressed before the U.S. could consider adopting those standards. The gaps, the group stated, include accounting for insurance contracts and extraction activities involving minerals, oil, and gas, as well as deficiencies in standards for pension plans and leasing.

  The European Union's close involvement in setting international accounting standards is also cause for concern, the CII letter stated.

  In July 2003, the European Commission, the administrative branch of the EU, voted to begin endorsing the standing IFRS, and any modifications to the standards in the future. The endorsement process is a long one that involves three independent financial standards committees and the European Parliament in vetting each new principle.

  "The EU endorsement process has resulted in several incidents that raise serious questions about whether the process impairs the independenc