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Hunton & Williams, LLP

Rhode Island Amends Statute to Regulate Rebate Advertising; Bills Pending in Other States
Rhode Island amended its Deceptive Trade Practices statute to prohibit retailers from advertising the net price of an item after a rebate, unless the retailer provides the rebate at the time of purchase. The retailer is then responsible for redeeming the rebate with the manufacturer. In addition, the law mandates that manufacturers or retailers accept photocopies of original sales receipts when consumers submit rebate requests, instead of requiring the original.

08-04-2006

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Haynes & Boone, LLP

New Guidance on Using Debit/Credit Cards with HRAs and FSAs
In 2003, the Internal Revenue Service provided the first guidance regarding use of a debit, credit or stored value card (collectively the "Cards") to access amounts in a health flexible spending account ("FSA") or health reimbursement arrangement ("HRA"). The guidance authorized three methods of automatic substantiation of an expense's eligibility via either co-payment match, recurring expense or real time substantiation (exchange of information at the time of the transaction). The 2003 guidance also required that all other transactions be treated as conditional pending receipt of substantiation that the expense was a valid medical expense.

08-04-2006

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Greenberg Traurig, LLP

Department of Homeland Security Publishes Interim Regulations Relating to Electronic Signature and Storage of Form I-9: What Employers Need to Know
Comprehensive Immigration Reform and worksite enforcement are hot topics in the newspapers, on Capitol Hill, and by employers around the country. What used to be a function reserved for Human Resources departments has now made its way onto the radar screens of general counsels, top management and business owners.

08-04-2006

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Fredrikson & Byron, P.A.

NASDAQ Introduces New Market Structure
On July 3, 2006, NASDAQ introduced the NASDAQ Global Select Market amidst its transition from an interdealer quotation system to a national securities exchange, a change set to occur as early as the third quarter of this year. The new NASDAQ Global Select Market tier is open to public companies listed on NASDAQ that meet the highest listing standards in the world, based on measures of market value, liquidity, and earnings.1 Along with the introduction of the top-tier NASDAQ Global Select Market, NASDAQ renamed the NASDAQ National Market and the NASDAQ SmallCap Market to the NASDAQ Global Market and NASDAQ Capital Market, respectively. This new market structure was created primarily to highlight the increasingly large presence that NASDAQ-listed companies have in the international market.

NASDAQ now offers three market tiers for public companies:

NASDAQ Global Select Market – consisting of approximately 1,200 companies that meet the most stringent listing standards ever set by a stock market;

NASDAQ Global Market – consisting of approximately 1,450 companies, named to more accurately reflect the global focus and leadership of NASDAQ and NASDAQ-listed companies; and

NASDAQ Capital Market – consisting of approximately 550 companies, with the name reflecting the core purpose of this market, which is raising capital.

NASDAQ will apply the same corporate governance standards to the companies in each of the new tiers as were applied prior to the restructuring.

Listing Standards on the NASDAQ Global Select Market 2

Initial Listing Standards
For initial listing purposes, NASDAQ unilaterally designated and transferred companies which were both listed on the NASDAQ National Market and met the initial listing standards for the new NASDAQ Global Select Market tier.

Continued Listing Standards
The continued listing standards are the same for the NASDAQ Global Select Market tier and the NASDAQ Global Market tier. These standards are the same as the standards in place before the NASDAQ National Market was renamed. Beginning in October 2007, NASDAQ will conduct annual reviews of all NASDAQ-listed companies. Those companies meeting the listing standards may be placed on the NASDAQ Global Select Market the following January. While qualifying NASDAQ Global Market companies will be transferred automatically to the Global Select Market tier, NASDAQ Capital Market companies qualifying for the top tier will have the option to remain on the NASDAQ Capital Market or move to the NASDAQ Global Select Market.

Outside of the annual review process, any NASDAQ-listed company may transfer into the NASDAQ Global Select Market provided that it satisfies the initial listing standards and pays the applicable fees.

Fees 3
Fees for the NASDAQ Global Select Market tier will be the same as the fees for the NASDAQ Global Market generally. There is no application or entry fee for companies transferring to the NASDAQ Global Select Market from the NASDAQ Global Market. Any NASDAQ Capital Market-listed company wishing to be listed on the NASDAQ Global Select Market must pay the same fees that it would be required to pay in order to be listed on the NASDAQ Global Market.

“Covered Securities”
Because the NASDAQ Global Select Market and the NASDAQ Global Market are succeeding the NASDAQ National Market, securities listed on either the NASDAQ Global Select Market or the NASDAQ Global Market will be treated as “covered securities” under Section 18(b) of the 1933 Act.4 In short, classification as a “covered security” preempts the application of state securities laws so that states may not impose standards on registration or offerings of such securities in addition to what the federal law requires.
Benefits of Listing on the NASDAQ Global Select Market

Enhanced Services
Along with the distinction of meeting the highest listing standards in the world, NASDAQ is providing NASDAQ Global Select Market companies with enhanced services in the area of communications, visibility, management, and board support.

Index Visibility
In order to increase visibility for NASDAQ-listed companies, two new indexes have been created to track the NASDAQ Global Select Market and NASDAQ Global Market tiers. An index already exists for the NASDAQ Capital Market. Inclusion in these indexes generates direct and indirect visibility for NASDAQ-listed companies.

Summary
The introduction of the NASDAQ Global Select Market tier demonstrates NASDAQ’s commitment to keep pace with other stock markets as it transitions from an interdealer quotation system to a national securities exchange. The change reflects the importance NASDAQ places on the global marketplace and offers public companies an opportunity to have membership in the market with the highest initial listing standards in the world. However, because the continued listing standards remain the same, there are no additional fees for most companies, and because NASDAQ will be conducting an annual review to determine eligibility for its highest tier, the change is likely to have minimal impact on companies already listed on a NASDAQ market.

08-04-2006

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Fredrikson & Byron, P.A.

SEC Adopts New Rules for Executive Compensation
On July 26, 2006, the SEC adopted new rules requiring public companies to provide a clearer and more complete summary of the total compensation earned by the chief executive officer, the three other highest paid executive officer and members of the board of directors. These rules represent the most extensive changes to executive compensation in 14 years. The new rules are designed to make executive and director compensation and other disclosure regarding insiders more transparent, understandable and complete.

These new rules amend required disclosures relating to executive and director compensation and security ownership, director independence and related party transactions. The new rules will impact disclosure requirements in proxy statements, annual reports, periodic reports and registration statements.

Among other changes, the final rules (i) add a Compensation Discussion and Analysis Section, which describes a company’s overall compensation policies and objectives; (ii) require different disclosures in the Summary Compensation Table; (iii) add more detailed disclosures related to stock option grants and practices; (iv) increase disclosures relating to retirement plans and post-employment benefits; and (v) add disclosures related to director compensation, related person transactions, and director independence.

For Form 10-Ks and Form 10-KSBs, the rules will need to be complied with for fiscal years ending on or after December 15, 2006. The rules apply to any proxy statements filed after December 15, 2006, if such statements include certain disclosures for fiscal years ending on or after December 15, 2006. The new disclosures will also be required in any registration statement filed on or after December 15, 2006, to the extent it relates to executive compensation disclosures in fiscal years ending on or after December 15, 2006. Form 8-K compliance with the rules will be required for triggering events that occur 60 days or more after publication of the new rules in the Federal Register.

08-04-2006

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Fredrikson & Byron, P.A.

Stock Option Granting Practices: Lessons to be Learned
In May 2006, the Wall Street Journal published a series of articles which uncovered disturbing practices among several publicly traded companies in which executive stock options were backdated or timed to precisely coincide with their lowest annual share price. In some cases, the Wall Street Journal reported that the odds were one in 300 billion that the grant dates had not been manipulated. Consequently, the Wall Street Journal articles led to a major public outcry and spearheaded the recent investigations by the SEC, Department of Justice, and IRS into the stock option granting practices of over 60 public companies. Additionally, the fallout has included shareholder suits, internal investigations, executive resignations and firings, forfeiture of stock options, and the restatement of financial reports. This article examines the practices at issue, outlines the consequences of potential violations, and provides suggestions for improving stock option granting practices.

Backdating, Spring-loading, and Bullet-dodging: The Newest Forms of Corporate Fraud?

To this date, federal investigators have focused primarily on violations occurring before 2002, when the SEC decreased the disclosure period for stock option grants to two days as part of the Sarbanes Oxley Act. Prior to Sarbanes Oxley, companies did not have to report stock option grants until 45 days after the end of the fiscal year. This enabled companies to backdate stock option grants to the lowest stock price during the year. While the majority of violations occurred before this law change in 2002, companies are still advised to monitor their stock option grants for the following questionable and potentially illegal practices:

Backdating: Governmental investigations have focused primarily on the practice of backdating, which arises when companies set a grant date that occurs before the actual date that corporate action is taken. While backdating is not illegal per se, problems occur when companies fail to disclose or account for backdating practices in their financial statements. Federal investigators have also targeted companies which have backdated their option grants by manipulating record dates of board actions and option agreements.

Spring-loading and bullet-dodging: Research indicates that many public companies have coordinated stock option grants with upturns and downturns in the market. For instance, “spring-loading” happens when a company grants stock options to executives immediately before a positive event. Conversely, “bullet-dodging” arises when companies postpone stock option grants due to an anticipated negative event. Both spring-loading and bullet-dodging raise significant concerns over the misuse of inside information.

Blanket board approval: This occurs when a board of directors grants “blanket” approval to management to set option dates for a specified period. This practice allows management to wait and grant stock options to an executive at the lowest stock price during that period, potentially by misusing inside information.

Special treatment and agreements with executives: Federal investigators have also focused on companies that have provided their executives with special treatment, such as reduced exercise prices, as compared to rank-and-file employees.

New hire start dates: Some companies have manipulated the start dates of newly-hired executives in order to help the executives capture lower prices on their introductory stock options. Some companies and executives have agreed to hire dates which occur days or even weeks before the executive actually starts working for the company.

Consequences of Questionable or Illegal Practices

Questionable or illegal stock option practices may expose a company to a wide range of liability. In addition, if a company’s stock is publicly traded, the company may impair investor confidence and depress its share value. The following is a list of some of the other consequences of engaging in questionable or illegal stock option practices:

Accounting issues: A company may have to restate its financial statements if it fails to account for “in the money” options, stock options exercisable at a profit at the time the stock option grant decision is made. The IRS has found that these stock options constitute income to executives and represent a current compensation expense to the company. Therefore, a company must record them as deferred compensation on its financial statements.

Criminal issues: The Department of Justice may prosecute a broad variety of crimes relating to illegal stock option granting practices, such as mail fraud, securities fraud, income tax evasion, and false certification of financial information with the SEC. Prosecutors may also seek other remedies such as civil penalties, disgorgement, injunctions, disbarment from senior management, and expulsion from the securities markets.

Securities issues: Federal securities laws require publicly-traded companies to disclose executive compensation in their proxy statements. If a company fails to disclose a stock option properly, it may be in violation of Regulation 14a-9 because of a material misstatement or omission in its proxy statement. Additionally, Section 16 of the Securities Exchange Act of 1934 requires executives to accurately report their stock option grants.

Shareholder suits: If federal agencies investigate or the media scrutinizes a company’s stock option practices, the company will likely face shareholder derivative claims and class action suits for alleged securities law violations. Shareholders will often seek to recover lost profits from executives and damages from the company and its directors for these violations.

Tax issues: Improper deductions and insufficient withholdings may force a company to amend its income taxes returns. Even worse, the IRS may impose tax penalties and interest on a company for failing to comply with tax laws and regulations. Under Section 409A of the Internal Revenue Code, the IRS may treat an “in the money” stock option grant as deferred compensation. If an executive fails to treat a stock option grant in this manner, it may lead to a 20% tax penalty plus any interest accumulated. A company may also face tax liability in this circumstance for failing to withhold taxes properly.

Best Practices for Granting Executive Stock Options

The responsibility of granting stock options ethically and legally ultimately falls on a company’s board of directors. At the recent International Corporate Governance Conference in Washington D.C., SEC Commissioner Paul Atkins stressed this point to directors when he stated, “The shareholders have entrusted you and the rest of the board with a fixed number of shares to allocate with options. You ought not simply hand out options with abandon. Your job is to use these options, as you use any other corporate resource, to maximize shareholder value.” Unfortunately, this message may have been lost upon many corporate boards since the early 1990s. In order to ensure compliance with the law, companies should consider implementing the following procedures and best practices for their stock option grants:

Conduct internal reviews: Companies should examine their past and current stock option granting practices. First, it is important to review carefully all documents relating to stock option grants, corporate actions and authorizations, stock option agreements, proxy statements, and Section 16 filings. Second, it may be worthwhile to examine the timing of grants in relation to a stock’s historical trading prices. Since federal investigators have been focusing on stock option grants during the 1990s, companies should at least review their practices over a 10 to 15 year period. If irregularities are discovered, a company should inform its compensation committee and work with outside counsel to implement a remedial strategy. Some remedies may include: strengthening internal controls, disclosing and cooperating with investigators, and reimbursing parties for damages.

No backdating or discounting: Companies should not backdate stock options. The best practice, especially with the current two-day disclosure requirement, is to grant stock options contemporaneously. In addition to backdating, companies should also refrain from discounting options. To avoid negative tax consequences, stock options should have an exercise price equal to the stock’s fair market trading price on the day of the grant.

Monitor grant delegations: Even though most state laws permit a board to delegate its stock option granting powers, the board of directors should be careful to ensure that all delegations comply with state laws and plan requirements. In addition, officers and other management who receive delegations should know legal and regulatory requirements before granting stock options.

Regularize timing and procedures of grants: Another best practice is for companies to establish a predetermined schedule for granting stock options to executives. Regularizing the timing of stock options will eliminate the appearance of impropriety. Companies should also avoid written consents and instead vote contemporaneously on stock options at meetings. Lastly, it is important to maintain a precise documentary record of stock option grants and corporate actions. Companies in compliance with the law which take care to maintain proper documentation will likely be able to dispose of investigatory inquiries quickly and efficiently.

08-04-2006

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Duane Morris, LLP

H-1B Master's Cap Has Been Reached
On July 28, 2006, USCIS announced that the H-1B Master's Cap has been reached for FY 2007. USCIS announced that the final receipt date for H-1B petitions subject to the Master's Cap was July 26, 2006. In addition, USCIS confirmed that petitions ""received on July 26, 2006, will be subject to the random selection process.

The H-1B Master's Cap provided 20,000 H-1B visa numbers to those workers who graduated from a U.S. university with the minimum of a master's degree.

USCIS previously announced that the general H-1B cap was reached as of May 26, 2006.

What Does This Mean For You?
This means that unless an employee qualifies for one of the exemptions listed below, no H-1B visa numbers are available until October 1, 2007. Certain employees are exempt from the cap, such as those individuals who are directly employed by, or work at, institutions of higher education or related or affiliated nonprofit entities; employees of nonprofit research organizations and government research organizations; or employees who have recently been counted toward the cap and are seeking to extend their stay or change employers. In addition, physicians who previously held J-1 status, who received a waiver of the two-year home residence requirement, may be able to work in H-1B status for three years in a medically underserved area.

What Can You Do?
There are a variety of other employment visa options that may be viable for you or for your organization. Please contact our Immigration Group if you would like to explore options for yourself or your company's employees.

08-04-2006

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