Financial Market Crisis Developments
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See a comprehensive collection of recent Davis Polk memorandums on the market crisis and related issues |
SEC DEVELOPMENTS
SEC Issues C&DIs on Securities Act Rules and Going Private Rules
The SEC recently issued new Compliance & Disclosure Interpretations (C&DIs) related to the Securities Act rules and going-private transactions (Exchange Act Rule 13e-3). Many of the interpretations were previously issued in other forms of SEC guidance, such as the Telephone Interpretation Manual, but the C&DIs also contain noteworthy new and/or revised interpretations, particularly with respect to:
- Rule 144;
- the well-known-seasoned issuer (WKSI) definition and the use of automatic shelf registration statements;
- the communications and other rules put in place as part of the Securities Offering Reform;
- the payment and carry-forward of Securities Act registration fees; and
- Regulation D.
Tom Kim, Chief Counsel of the Division of Corporation Finance, noted at the SEC Speaks conference that he feels that all of the C&DIs, even those previously published or communicated, are noteworthy because the publication of the C&DIs confirms that the SEC staff continues to follow the interpretation. He also noted that the staff is nearing the end of its project of compiling and updating its previous interpretations into C&DIs.
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See the Securities Act Rules C&DIs |
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See the Going-Private Rules C&DIs |
SEC Extends Comment Period on IFRS Roadmap
The SEC has extended, until April 20, 2009, the comment period on its proposed roadmap for the use of International Financial Reporting Standards (IFRS) by US issuers. The roadmap, which was approved by the SEC in August 2008 and published in November 2008, could lead to the mandatory use of IFRS by US issuers beginning in 2014 if certain milestones are met.
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See the proposed IFRS roadmap |
SEC Issues Credit Rating Rules and Republishes Rating Disclosure Proposal
The SEC recently published the text of its new rules for credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs) and re-proposed additional rules for NRSROs. Comments on the re-proposed rules are due March 26, 2009.
The new rules include bans on certain conduct which should be of interest to companies with current credit ratings issued by Standard & Poor's Ratings Services, Moody's Investors Service, Fitch Ratings, or another credit rating agency registered as an NRSRO. Since the consequences of violating one of the new bans are severe—requiring the credit rating agency to withdraw its rating—companies should carefully review their policies and procedures for interacting with credit rating agencies.
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See the DPW Newsflash discussing the final credit rating rules and re-proposal |
SEC Finalizes Changes to Oil and Gas Reporting Requirements
The SEC recently finalized the first amendments to its reserves and other reporting requirements for the oil and gas industry since those rules were first adopted thirty years ago. While it will take time for their impact to be reflected in company reports, the new rules can be expected to shape disclosure across the upstream industry.
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See the Davis Polk memorandum on changes to the oil and gas reporting requirements |
SEC Issues Mandatory XBRL Rules
The SEC recently issued final rules requiring companies to provide financial statements in XBRL format. XBRL is a technology that relies upon the input of data tags to identify and describe information in a company's financial statements. The information can then be searched, downloaded into spreadsheets or reorganized for analytical purposes. XBRL also allows financial statements in foreign languages to be translated into English.
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See a DPW Newsflash describing the new XBRL requirements applicable to US issuers |
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See a DPW Newsflash describing the new XBRL requirements applicable to non-US issuers |
Mary Schapiro Assumes Role as Chairman of the SEC, David Becker to be General Counsel and Other Staff Changes
The SEC has announced the following leadership changes:
- Mary Schapiro has assumed the role of Chairman of the SEC, taking over the position previously held by Christopher Cox. Immediately prior to her new SEC appointment, Chairman Schapiro was CEO of the Financial Industry Regulatory Authority (FINRA);
- David Becker is returning to the SEC as General Counsel and Senior Policy Director. Mr. Becker previously served as SEC General Counsel from January 2000 to May 2002;
- Linda Chatman Thomsen has resigned as Director of Enforcement to return to the private sector;
- Shelley Parratt is acting as Director of the Division of Corporation Finance; and
- James Kroeker is acting Chief Accountant.
SEC SPEAKS
SEC Chairman and Commissioners Outline Priorities
SEC Chairman, Mary Schapiro, as well as SEC Commissioners and staff members recently spoke at the annual “SEC Speaks” conference and gave some insights into their priorities for the year ahead. A summary is below:
- Improve the credit rating system. Chairman Schapiro and Commissioner Casey each mentioned that they think further improvements to the credit rating process are essential. Specifically, Schapiro said the necessary improvements include “addressing the inherent conflicts of interest credit rating agencies face as a result of their compensation models,” which is consistent with her prior statements that the issuer pays model for ratings should be eliminated. Casey would like to see final action on the proposal issued last spring which would eliminate references to credit ratings in the SEC’s rules and forms. She also would like to see final action on the recent re-proposal that would require disclosure to other rating agencies of information provided to a rating agency in connection with its formulation of a structured product rating.
- Provide proxy access and say-on-pay. Schapiro suggested that she will consider proposals that would give “shareholders a greater say on who serves on corporate boards, and how company executives are paid.” Commissioner Aguilar also called for “swift and bold” action to give shareholders proxy access and said that the 5% ownership in the Commission’s last proxy access proposal was “too high” to permit the effective exercise of shareholder power.
- Centralized clearinghouse for credit default swaps. Schapiro indicated that a centralized clearinghouse for credit default swaps is needed to reduce systemic risk to investors and markets. Aguilar has echoed this sentiment and called for more regulation of derivatives generally.
- Enhance enforcement program. Schapiro announced that she has ended the two-year “penalty pilot” program which had required the SEC enforcement staff to seek special approval from the Commission in cases involving monetary penalties for public companies as punishment for securities fraud. Staff members have said that this program has caused significant delays in corporate penalty cases and discouraged the staff from bringing these cases. Schapiro is also putting in place programs that will speed the approval process for investigations. Aguilar commended Schapiro for these actions and said that more needs to be done to “empower” the SEC enforcement and examination staff.
- More scrutiny of broker-dealers. Schapiro also seeks to strengthen risk-based oversight of broker-dealers and improve the quality of audits for nonpublic broker-dealers. Aguilar also suggested that broker-dealers may be subject to additional regulation, particularly those that provide investment advice to their clients.
- Reconsider e-proxy. Staff members of the Division of Corporation Finance have indicated in the past that they are considering how to improve the e-proxy rules in light of concerns that e-proxy has reduced proxy voting by retail investors. Aguilar seemed to take this one step further by suggesting that the Commission move quickly to improve or repeal e-proxy, if necessary, to restore investor participation.
SEC Staff Members Offer Disclosure Suggestions
SEC staff members were also among the presenters at the recent PLI SEC Speaks conference. The staff offered the following disclosure observations and suggestions:
- Shareholder Proposals. The staff is posting no-action requests related to shareholder proposals on the Corporation Finance website as they are received and is also posting the staff responses. As a result of this new practice, the staff has received a lot of letters from third parties seeking to weigh in on proposals pending at companies at which the third party does not have an interest. The staff will not consider these third party letters in reviewing and responding to the proposal.
- Executive compensation disclosure. As they have in the past, the staff urged companies to start with a blank slate when preparing their executive compensation disclosures this year and to ask themselves the following questions:
- Are officers still eligible for performance bonuses? What is the impact of declining stock prices?
- What is the company doing differently this year in comparison to last year?
- What is the company doing to make sure executives are not incentivized to take excessive risks?
- If the company is omitting performance targets from its disclosure, has it prepared a competitive harm analysis? As the staff has said in the past, companies must do this analysis before omitting the target disclosure, not once they receive a staff comment.
- Liquidity and Capital Resources Disclosure. Staff members suggested that a company consider the following questions when drafting its liquidity disclosures:
- Does the company have the ability to raise capital in the current markets?
- Has the company contemplated or is the company contemplating a sale of assets?
- Are the company’s customers paying or delaying payments? Is the company losing customers?
- Are goodwill or other long-term assets impaired? If an asset is impaired, what is important is not the non-cash charge but the reason for the impairment. The staff wants to know the “story” behind the impairment.
- Is the company meeting its debt covenants?
- What is the impact of current market conditions on the company’s pension plans?
- Are there material uncertainties about the company’s ability to continue to operate as a going concern?
- What other stresses or trends are impacting the company’s ability to meet its operating needs? For example, does offering zero percent financing substantially impair the company’s liquidity?
- Fair Value Disclosures. The staff issued “Dear CFO” letters in March 2008 and in October 2008 that contain suggestions on how to improve fair value disclosures. These letters are not rules per se, but the staff has been reviewing the fair value disclosures of the companies that received the letters to see if they have taken the suggestions provided in the letters.
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See the "Dear CFO letter" issued by the SEC staff in March 2008 |
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See the "Dear CFO letter" issued by the SEC staff in September 2008 |
- SAB 99 Materiality. A SAB 99 memo for submission to the staff in connection with a materiality issue should analyze the specific fact pattern applicable to the company’s situation rather than just running through the points in SAB 99. The staff has seen a few circumstances where a quantitatively material item was not qualitatively material.
NASDAQ AND NYSE DEVELOPMENTS
Nasdaq Extends Suspension of Bid & Ask Price and Lengthens Compliance Period Related to Market Capitalization Requirement
Nasdaq has extended, until April 19, 2009, its suspension of its bid price and market value requirements. Without this suspension, a security listed on Nasdaq would be considered deficient if it failed to achieve at least a $1 closing bid price and a specified minimum market value of publicly held shares, for a period of 30 consecutive business days. Once deficient, a company is allowed an additional period to regain compliance and undergoes a hearing process prior to delisting.
Nasdaq has also increased the time allowed for listed companies to regain compliance with Nasdaq’s market capitalization requirement. Under prior rules, if a listed company’s market capitalization fell below the required level for 10 consecutive business days, Nasdaq would notify the company that it had 30 days to regain compliance. Under the modified rule, a listed company has 90 days to regain compliance.
NYSE Temporarily Lowers Continued Listing Market Capitalization Requirement
The NYSE has temporarily modified its continued listing criteria to require a listed company to have an average market capitalization of at least $15 million over any 30-day period (previously, the NYSE required an average 30-day market capitalization of at least $25 million). The rule change is operative for the period from January 22, 2009 through April 22, 2009, although the NYSE will consider extending it if turbulent market conditions continue to exist.
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See the SEC's publication of the NYSE's change to its market capitalization requirement |
NYSE and Nasdaq Modify Rules Regarding Annual Report Distribution
The NYSE and Nasdaq have amended their rules regarding a listed company’s distribution of an annual report—in the case of the NYSE, the amendment simply codifies existing practice. Under the new rules, in order to meet the annual report distribution requirement, a listed company may choose one of the following three alternatives:
- Comply with the US proxy rules (including those providing for electronic delivery of an annual report);
- Distribute a paper copy of their annual report; or
- Post their annual report on their website along with an undertaking to deliver a paper copy upon request and issue a press release upon filing their Form 10-K or Form 20-F to notify investors that the report is available online and will be provided in paper form upon request.
NYSE to Allow Fee for Paper Stock Certificates
In an effort to further discourage the use of paper stock certificates, the NYSE has modified its rules to allow transfer agents to charge investors a fee for issuing paper stock certificates. Listed companies that want their investors to continue to be able to receive new paper certificates for free may make contractual arrangements to this effect with their transfer agent.
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See the SEC’s publication of the NYSE’s modification of its rules to permit transfer agents to charge fees for paper stock certificates |
OTHER DEVELOPMENTS
Insurance Coverage for Climate Change Risks
Companies face increasing risks from climate change and should carefully assess whether those risks are or should be covered by insurance. Some insurers recently announced that they will be expressly excluding coverage for damages arising out of carbon dioxide or other greenhouse gas emissions from general liability and D&O policies and, due to some recent Supreme Court and other decisions determining that carbon dioxide is a “pollutant,” other insurers may begin to argue that the existing general pollution exclusion clauses already have that effect.
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See further discussion regarding insurance coverage for climate change risks |
Recent DPW Memos
Considerations for Drafting the 2009 Proxy Statement
For a memo that outlines several disclosure considerations for the 2009 proxy statement:
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See Considerations for Drafting the 2009 Proxy Statement |
Environmental Disclosure in SEC Filings
For an outline of accounting and securities rules and case law most relevant to the disclosure of environmental liabilities and a discussion of recent developments impacting environmental disclosure:
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See the Davis Polk memorandum on environmental disclosure in SEC filings |