SEC Developments

SEC Issues Interpretative Guidance on Use of Corporate Websites

Last week, the SEC issued an interpretative release containing guidance on the use of corporate websites as a means of disclosing corporate information.

We expect to distribute a memorandum discussing the release shortly.

SEC Proposes Changes to Rule and Form Requirements Referencing Credit Ratings and Issues Credit Rating Agency Examination Report

In early July, the SEC issued a set of proposals that would replace rule and form requirements under the Securities Act and the Exchange Act that rely on security ratings (for example, Form S-3 and F-3 eligibility criteria) with alternative requirements.  This set of proposals, which is divided amongst three separate releases based on the rules and forms to which the proposed changes relate, is separate from and in addition to, the first set of credit rating proposals issued by the SEC in mid-June.  For a discussion of the SEC's first set of credit rating proposals issued in mid-June:

Among other things, the most recently issued proposals would:

  • Revise the transaction eligibility criteria for registering primary offerings of non-convertible securities on Forms S-3 and F-3.  The proposal would modify Forms S-3 and F-3 so that the instructions to these forms would no longer refer to an investment grade security rating as the basis for meeting the transaction requirements applicable to use of the form.  Instead, these forms would be available to register primary offerings of non-convertible securities if the issuer has issued (as of a date within 60 days prior to the filing of the registration statement) for cash more than $1 billion in non-convertible securities, other than common equity, through registered primary offerings over the prior three years.  This is the same method and threshold by which a debt issuer that does not meet the requisite public float threshold is defined in the Securities Act rules as a well-known seasoned issuer or "WKSI."  These issuers also would have to satisfy the other conditions of the form eligibility requirement.  The proposals would not modify the other transaction requirements that do not rely on credit ratings, such as the market capitalization requirement.
  • Replace several other rule and form requirements that are based on investment grade ratings with the new proposed criteria for Forms S-3 and F-3 eligibility. These forms would include Forms F-9, S-4, and F-4, Schedule 14A, Item 1100 of Regulation AB and Securities Act Rules 138, 139, and 168.
  • Revise Form 20-F so that it no longer refers to an investment grade rating as the basis for complying with the less extensive US GAAP reconciliation requirements under Item 17 of Form 20-F.  As proposed, a foreign private issuer would be permitted to comply with the less extensive US GAAP reconciliation requirements under Item 17 of Form 20-F in a registration statement or private offering document if the issuer would meet the revised Form S-3 or F-3 eligibility requirements (i.e., if the issuer had issued (as of a date within 60 days prior to the filing of the registration statement) for cash more than $1 billion in non-convertible securities, other than common equity, through registered primary offerings over the prior three years).
  • Revise Regulation M to remove the references to investment grade credit ratings as the basis for use of the exceptions in Rules 101 and 102 for nonconvertible debt securities, nonconvertible preferred securities and asset-backed securities.  In lieu of these exceptions, the SEC proposes new exceptions for nonconvertible debt securities and nonconvertible preferred securities based on the WKSI concept in Securities Act Rule 405.  The SEC also proposes to except asset-backed securities from Rules 101 and 102 if those securities are registered on Form S-3.

The SEC is seeking comment on these proposals by September 5, 2008.

The SEC has also issued a report summarizing the results of the SEC staff's examination of Fitch, Moody's and S&P.  The SEC undertook this examination in order to assess whether these agencies' had a role in the subprime mortgage crisis.  In addition to summarizing the SEC's findings from its examination, the report also outlines generally, the remedial actions that the examined rating agencies are expected to take and describes the SEC's proposed reforms to the credit rating system.

SEC Proposes Changes to Oil and Gas Disclosure Requirements

The SEC has published a proposed rule release intended to update and modernize oil and gas reporting requirements.  If adopted, these proposals would:

  • Permit companies to voluntarily disclose "probable" and "possible" reserves in addition to proved reserves.  Many companies already disclose estimates of probable and possible reserves on their websites or in press releases in order to provide more insight into their potential reserves base, but current rules only permit the disclosure of "proved" reserves in SEC filings.
  • Change the price used in calculating reserves from a single-day closing price measured on the last day of the company's fiscal year, to an average price for the 12 months prior to the end of the company's fiscal year.  This price would be calculated as the unweighted arithmetic average of the closing price on the last day of each month in that 12-month period. 
  • Provide for disclosure of reserves from non-traditional sources (i.e., bitumen, shale, coalbed methane).
  • Require enhanced disclosure regarding the qualifications and independence of persons responsible for preparing reserves estimates or conducting reserves audits.

If adopted, the proposal would apply to registration statements filed on or after January 1, 2010, and to annual reports on Forms 10-K and 20-F for fiscal years ending on December 31, 2009, and after.

The proposal is subject to a comment period ending on September 8, 2008.

SEC Issues and Extends Emergency Order Halting Naked Short Sales

Under an SEC emergency order currently in effect, persons effecting a short sale in the publicly traded securities of certain specified financial institutions must arrange beforehand to borrow the securities and deliver them at settlement.  This requirement is intended to prevent "naked short selling," in which a person sells short a stock without borrowing or arranging to borrow the stock and fails to deliver.  The SEC issued the order in response to concerns that naked short sellers were manipulating the market for the securities of certain financial institutions.  In order to permit market makers to facilitate customer orders, the SEC amended the order so that the borrow and arrangement-to-borrow requirement of the order does not apply to certain market makers engaged in bona fide market-making activities.

The order, which took effect at 12:01 a.m. EDT on Monday, July 21 and was subsequently extended by the SEC, is scheduled to expire at 11:59 p.m. EDT on August 12, 2008.  The SEC has stated that it will not extend the order beyond August 12, 2008, but that it does plan to undertake rulemaking to address naked short selling issues across the entire market.

SEC Extends SOX 404 Compliance Date for Non-accelerated Filers

The SEC has extended the date by which non-accelerated filers must comply with the auditor attestation portion of the SOX 404 requirements.  Non-accelerated filers will now be required to first provide an auditor attestation on their internal controls for fiscal years ending on or after December 15, 2009.  Without this extension, non-accelerated filers would have been required to annually provide an auditor attestion report on their internal controls beginning with their first fiscal year ending on or after December 15, 2008.  Non-accelerated filers began having to provide a management's report on their internal controls in their first fiscal year ending on or after December 15, 2007.

Non-accelerated filers are those that do not meet the definition of accelerated filers or large accelerated filers in Exchange Act Rule 12b-1 because they have not filed at least one annual report, have not been an Exchange Act reporting company for at least a year and/or have an aggregate worldwide market value of voting and non-voting common equity held by non-affiliates of less than $75 million.

Luis Aguilar, Elisse Walter and Troy Paredes Sworn in as SEC Commissioners

Recently, Paul Atkins resigned from his role as an SEC Commissioner and Luis Aguilar, Elisse Walter and Troy Paredes were each sworn in as SEC Commissioners.  All five Commissioner seats are now occupied.

SEC Publishes Updated C&DIs Related to Regulation S-K and Form 8-K

The SEC staff continues its ongoing project of updating and aggregating the guidance that it previously issued in the form of telephone interpretations, FAQs or otherwise into a new form of guidance for each rule or regulation called Compliance and Disclosure Interpretations (C&DIs).  Recently the SEC has published or updated C&DIs for Regulation S-K, Form 8-K and Section 16. 

Regulation S-K C&DIs
The recently published Regulation S-K C&DIs replace the interpretations of Regulation S-K and Regulation S-B published in the July 1997 Manual of Publicly Available Telephone Interpretations; the March 1999 Interim Supplement to the Manual of Publicly Available Telephone Interpretations; the November 2000 Current Issues and Rulemaking Projects Outline; the 2007 C&DIs on Items 201, 402, 403, 404 and 407; and the March 2008 C&DIs on smaller reporting companies.

Many of the C&DIs were previously published in the sources mentioned above or contain only minor clarifications.  There are some new C&DIs however, particularly with respect to executive compensation items.

Update to Form 8-K C&DIs
The SEC has added two new entries, Question 117.01 and Question 117.15, to its "Questions and Answers of General Applicability" section of its Form 8-K C&DIs.  The entries relate to the timing of Item 5.02(b) Form 8-Ks associated with director resignations and the required disclosure therein.

SEC Permits Aggregate Reporting of Same-Day, Same-Way Transactions

The SEC recently issued a no-action letter to the Society of Corporate Secretaries and Corporate Governance Professionals indicating that it is not opposed to the aggregate reporting of same-day, same-way open market purchases or sales on Form 4 and Form 5 under Section 16(a) of the Exchange Act if the reporting person:

  • reports on a single line of the applicable form all such transactions that occur within a one-dollar price range,
  • reports in the price column the weighted average purchase or sale price for the transactions reported on that line,
  • specifies, in a footnote to the applicable form, the range of prices for the transactions reported on that line, and
  • undertakes, in a footnote to the applicable form, to provide upon request by the Commission staff, the issuer, or a security holder of the issuer, full information regarding the number of shares purchased or sold at each separate price.

This is a change in the SEC's position.  It had previously stated that issuers had to report the number of securities transacted at each price on the same day even if they were only slightly different and that it was not acceptable to report the aggregate number of securities and a weighted average price. 

SEC Posts 2008 Proxy Season No-action Letters

The SEC has created a page within the Division of Corporation Finance website where it has posted the no-action letters the Division of Corporation Finance issued under Exchange Act Rule 14a-8 after January 1, 2008.

NASDAQ and NYSE Developments

SPACs Now Eligible for Listing on Nasdaq

After recently receiving SEC approval, the Nasdaq modified its listing standards to allow the listing of special purpose acquisition companies commonly referred to as SPACs. 

In order to be listed on the Nasdaq, a SPAC must meet applicable initial listing requirements as well as the following conditions:

  • At least 90% of the gross proceeds from the initial public offering and any concurrent sale by the company of equity securities must be deposited in a "deposit account" as defined in the rule.
  • Within 36 months of the effectiveness of its IPO registration statement, or such shorter period that the company specifies in its registration statement, the company must complete one or more business combinations having an aggregate fair market value of at least 80% of the value of the deposit account (excluding any deferred underwriters' fees and taxes payable on the income earned on the deposit account) at the time of the agreement to enter into the initial combination.
  • Until the company has satisfied the condition in paragraph (b) above, each business combination must be approved by a majority of the company's independent directors.
  • Until the company has satisfied the condition in paragraph (b) above, each business combination must be approved by a majority of the shares of common stock voting at the meeting at which the combination is being considered.
  • Until the company has satisfied the condition in paragraph (b) above, public shareholders voting against a business combination must have the right to convert their shares of common stock into a pro rata share of the aggregate amount then in the deposit account (net of taxes payable and amounts distributed to management for working capital purposes) if the business combination is approved and consummated. A company may establish a limit (set no lower than 10% of the shares sold in the IPO) as to the maximum number of shares with respect to which any shareholder, together with any affiliate of such shareholder or any person with whom such shareholder is acting as a "group" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), may exercise such conversion rights.

In addition, until the company completes a business combination where all conditions in paragraph (b) above are met, the company must notify Nasdaq on the appropriate form about each proposed business combination.  Following each business combination, the combined company must meet the requirements for initial listing.

SEC Approves Streamlined SRO Process

The SEC has announced changes to the rulemaking process for self-regulatory organizations (SROs), such as the Nasdaq and NYSE.  Under the new rules, the SEC will publish any proposed rule change filed by an SRO within 15 business days, unless the Director of the SEC Division of Trading and Markets makes an exception due to unusually complex or novel issues in the filing.

SROs are required to submit their proposed rule changes to the SEC for publication and approval.  Most of the rule changes are required to be approved or disapproved by the SEC within 35 days of the SEC's publication.  Under the SEC's current procedures, however, the SEC sometimes takes months to publish the SRO rule change proposals and there is no way of telling when publication will occur.  The new publication deadline should expedite the SEC review and approval process and bring some clarity to those wondering when an SRO proposed rule change filing will be addressed by the SEC.

Other Developments and DPW Memos

Delaware Supreme Court Rules Proxy Expense Reimbursement Proposal Invalid

The Delaware Supreme Court recently ruled that a shareholder-proposed bylaw requiring a company to reimburse dissidents for reasonable expenses incurred in a successful "short-slate" proxy solicitation (i.e., for less than 50% of the board seats) violated Delaware law.  The Court held that proxy reimbursement is a proper subject for action by shareholders since it relates to the process for the election of directors, but found that the bylaw in question was invalid because it mandated reimbursement by the board of directors even in circumstances where the directors, in the exercise of their fiduciary duties, might consider reimbursement to be inappropriate.

Proposed Amendment to FASB Statement No. 5 Expanding Disclosures for Loss Contingencies

On June 5, 2008, in an effort to enhance disclosures about loss contingencies, the FASB published an exposure draft of a proposed new statement of financial accounting standards that would amend the disclosure requirements for loss contingencies currently governed by FASB Statement No. 5, Accounting for Contingencies (FAS 5), and loss contingencies recognized in a business acquisition covered by FASB Statement No. 141, Business Combinations (FAS 141). The proposed statement would apply only to loss contingencies that are or would be recognized as liabilities, such as those related to pending or threatened litigation.  The proposed statement would not change the recognition and measurement guidance for loss contingencies.

Voting Trends by Registered Investment Companies on Shareholder Proposals

The Investment Company Institute recently released the broadest study ever conducted on proxy voting by registered investment companies covering more than 3.5 million proxy votes cast by 160 of the largest fund families. The study focused on fund voting for management and shareholder proposals at Russell 3000 companies with annual meetings from July 1, 2006 to June 30, 2007, examining the impact on almost 20,000 proposals.