Among the panel's recommendations:
- Require each issuer to establish an IPO pricing committee of its board of directors that must include at least one independent director to oversee the pricing process.
- Require underwriters to provide to the issuer's pricing committee all indications of interest before the issuer determines the IPO price.
- Prohibit, for the first trading day following the IPO, the placing of unpriced orders to purchase an issuer's shares.
- Raise the SEC's threshold requirement for amendment to a prospectus from 20 percent to 40 percent in cases of increases to the IPO offering price or shares offered.
- Eliminate regulatory impediments to the development of alternatives to bookbuilding, such as Dutch auctions.
- Prohibit the allocation of IPO shares 1) to executive officers and directors (and their immediate families) of companies that have an investment banking relationship with the underwriter, or (2) as a quid pro quo for investment banking business.
The committee's report states that its recommendations are intended to complement the numerous recent legislative and regulatory initiatives, including the recent global settlement among regulators and major investment banks.
(To download a PDF file of the full report, click here.)
As CFO.com reported last week, a shareholder lawsuit against John Hancock Financial Services alleges that the life insurer illegally linked the CEO's pay and that of other company officers to the performance of Hancock's 2000 initial public offering.
Report: SEC Says E&Y's Internal Controls Lacking
It's becoming clear that the Securities and Exchange Commission is very serious about policing corporate internal controls.
Last week, the SEC okayed a final rule requiring corporations to make sure their controls over finance were up to snuff and fully reported on. But even before that, the commission was reportedly taking legal action against the one of the Big Four audit firms -- and its apparent lack of good internal controls.
The SEC, in fact, has asked an administrative law judge to ban Ernst & Young from accepting new clients for six months because of alleged lapses in the firm's internal controls, according to The Washington Post.
The commission is reportedly charging E&Y with failing to report on its business relationships with audit clients, particularly PeopleSoft. The SEC also alleges that the firm has failed to supply a clear way for employees to speak out internally about partnerships between E&Y and its audit clients.
In court documents cited by the newspaper, commission lawyers called E&Y's control "woefully inadequate, internally inconsistent, and under-publicized within the firm." The firm was apparently cited for lacking centralized records that could be regularly looked by regulators wanting to trace E&Y's client joint ventures.
In a 128-page court brief, the commission reportedly charged E&Y auditors with "widespread independence cluelessness." For example, the firm's lead partner for its PeopleSoft account, "remained totally unaware" of a joint software venture until 1999, the SEC alleges. That was "four years into his tenure as PeopleSoft's auditor certifying E&Y's independence."
For their part, E&Y executives strongly defend their policies. "Our people know how to raise the issues, and they did," Beth Brooke, an E&Y vice chairperson, told the Post. E&Y's audits of PeopleSoft have never been questioned, she said, noting that the firm has sold its consulting practice.
But the SEC believes the firm maintained an improper relationship with PeopleSoft while the accountancy served as the software maker's external auditor, according to the newspaper. From 1994 through 2000, E&Y and PeopleSoft jointly developed and marketed a software product called "EY/GEMS for PeopleSoft," which incorporated components of PeopleSoft's proprietary source code into software previously developed and marketed by E&Y's tax department, according to the SEC.
The SEC sued Ernst & Young last year, charging the firm with violating commission auditor independence rules and generally accepted auditing standards. According to those allegations, E&Y was serving as PeopleSoft's auditor while simultaneously incorporating the software maker's source code into its product.
E&Y also allegedly agreed to pay PeopleSoft royalties ranging from 15 percent to 30 percent from each sale of the resulting product, with a guaranteed minimum royalty of $300,000.
The SEC also charged that during the period, E&Y earned hundreds of millions of dollars in consulting revenues from implementing PeopleSoft software for third parties.
Citing government sources, the Post reported that while a ban on obtaining new clients is a serious sanction, it may have little lasting impact on firms seeking an auditor. That's because companies tend to review their choice of auditor only once a year.
SEC officials had thought about asking for a longer suspension than six months, according to The Wall Street Journal. But they were worried that it would put too great a limit on the choice of auditors available to public companies.
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