SEC Proposes Significant Changes to Cross-Border Rules
The SEC has proposed significant changes to the cross-border rules originally adopted in 1999 to increase the ability of U.S. investors to participate in foreign transactions. The proposed changes intend to expand and refine the current exemptions and codify existing SEC interpretations of the rules.
|See the Davis Polk Newsflash Describing the Proposed Changes to the Cross-Border Rules|
SEC Issues Mandatory XBRL Proposal
At an open meeting on May 14, 2008, the SEC voted to propose rules that would require companies to file their financial statements in eXtensible Business Reporting Language ("XBRL"). XBRL is an open electronic standard that provides a format for tagging financial information. XBRL allows users to extract, exchange, analyze and display financial information. Many large issuers are already filing financial statements with the SEC in XBRL as part of the SEC's voluntary XBRL filing program.
The SEC proposes to phase-in the requirement to file XBRL financial statements over a three-year period, beginning with fiscal periods ending or after December 15, 2008, as follows:
- In year 1, the proposed rules would apply only to domestic and foreign large accelerated filers that use U.S. GAAP and have a worldwide public float above $5 billion (approximately 500 companies).
- In year 2, all other domestic and foreign large accelerated filers using U.S. GAAP would be subject to the XBRL reporting requirements.
- In year 3, all remaining filers using U.S. GAAP, including smaller reporting companies, and all foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB would be subject to the XBRL reporting requirements.
The XBRL requirements would apply to annual and quarterly reports, as well as registration statements containing financial statements for fiscal periods ending on or after the effective date.
Companies would also be required to post this information on their company website at the same time as filing it with the SEC.
|See the SEC press release announcing the SEC's proposal to require XBRL reporting|
|See the SEC staff statement describing the SEC's proposal to require XBRL reporting|
SEC Announces 2009 Registration Fee Increase
The SEC has announced that the filing fee will increase in the SEC's 2009 year to $55.80 per million dollars of securities registered. The current fee rate is $39.30 per million dollars.
As in prior years, the fee rate increase will be effective as of October 1, 2008 (the first day of the SEC's 2009 fiscal year) or 5 days after the SEC receives its 2009 appropriation, whichever comes later. In prior years, the SEC has not received its annual appropriation until well after October 1, therefore delaying the fee change.
The SEC will issue additional updates as the effective date of the fee increase approaches.
|See the SEC's press release announcing its registration fee increase in 2009|
Commissioner Atkins to Leave SEC, President Bush Nominates Paredes as New Commissioner
The SEC issued a press release earlier this month to announce that Republican Commissioner Paul Atkins intends to leave the SEC following the expiration of his term this year. Commissioner Atkins has said that he intends to stay until a successor is appointed and takes office.
President Bush has nominated Troy Paredes, currently a professor at Washington University Law School in St. Louis, Missouri, to replace Commissioner Atkins for a five-year term beginning on June 6, 2008. Mr. Paredes' nomination must be approved by the Senate.
Earlier this year, President Bush nominated Elisse Walter and Luis Aguilar to fill the Democratic Commissioner seats vacated by Annette Nazareth and Roel Campos but their nominations are still pending Senate confirmation.
|See the SEC press release announcing Commissioner Atkin's departure|
|See the White House press release announcing the nomination of Troy Paredes as SEC Commissioner|
SEC Updates Form 8-K Interpretations
As part of its continuing efforts to update and reorganize the Corporation Finance website, the SEC published Compliance and Disclosure Interpretations regarding Form 8-K in April. The Compliance and Disclosure Interpretations replace the Form 8-K Interpretations in the July 1997 Manual of Publicly Available Telephone Interpretations, the June 13, 2003 Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures and the November 22, 2004 Form 8-K Frequently Asked Questions. While some of the interpretations are new (particularly with respect to executive compensation matters), many were originally published in the sources noted in the previous sentence although they have been revised in some cases.
|See the Form 8-K Compliance and Disclosure Interpretations|
SEC Approves NYSE Rule Change to Allow NYSE Listing of SPACs
The SEC has approved the NYSE's new listing standard for special-purpose acquisition companies, commonly referred to as "SPACs." SPACs are companies with little or no operations that conduct an initial public offering ("IPO") with the intention of using the proceeds to acquire or merge with an operating company. Until now, the American Stock Exchange has been the only national securities exchange to list SPACs.
Because SPACs have no operating history, they have not historically qualified under the NYSE's listing standards that required a certain period of operating history. Under the new NYSE standard specifically for SPACs, Section 102.06 of the NYSE Listed Company Manual, a SPAC seeking to list its securities on the NYSE needs to demonstrate a total market value of at least $250 million and a market value of publicly held shares of at least $200 million (excluding shares held by directors, officers or their immediate families and other concentrated holdings of 10% or more). In addition, SPACs need to meet the same distribution criteria and comply with the same corporate governance rules applicable to all other IPOs.
|See the new NYSE SPAC Listing Standard in Section 102.06 of the NYSE Listed Company Manual|
Nasdaq Proposes Change to Continued Listing Standards
The SEC has published a Nasdaq proposed rule change that would require listed companies to maintain a certain amount of "public shareholders" rather than a certain amount of "round lot holders" as is currently required for continued listing. According to the Nasdaq, for a variety reasons, it is often difficult to determine compliance with the current round lot holder requirements.
If the SEC approves the proposal, Nasdaq would generally require 300 public shareholders for continued listing on the Nasdaq Capital Market, and 400 public holders for continued listing on the Nasdaq Global and Global Select Markets. In the case of preferred stock and secondary classes of common stock, 100 public shareholders would be required for continued listing on the Nasdaq Capital, Global and Global Select Markets. As proposed, the definition of public holder would include both beneficial holders and holders of record, but would not include any holder who is, either directly or indirectly, an executive officer, director, or the beneficial holder of more than 10% of the total shares outstanding. Under this definition, Nasdaq would consider immediate family members of an executive officer, director, or 10% holder to not be public holders to the extent the shares held by such individuals are considered beneficially owned by the executive officer, director or 10% holder under Exchange Act Rule 16a-1.
No change is proposed to the Nasdaq's initial listing requirements that also require a certain number of round lot holders because the majority of initial listings are IPOs, where a certain number of round lot holders is already required by SEC rules in order to avoid being subject to the penny stock rules and the number of round lot shareholders can be easily determined by the underwriter when distributing the offering. Nasdaq does propose, however, to clarify that the definition of round lot holders includes beneficial holders in addition to holders of record, consistent with current practice.
|See the Nasdaq proposal to require a certain amount of public shareholders rather than round lot holders for continued listing|
FASB Issues Staff Position on Accounting for Convertible Debt
The FASB has issued FASB Staff Position ("FSP") No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). The FSP clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. The FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.
The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The FSP shall generally be applied retrospectively to all periods presented.
|See FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)|
FASB Publishes Primer on Fair Value Accounting
The FASB has published a short primer on fair value accounting. The article acknowledges that there has been considerable media coverage recently on the subject of fair value accounting but goes on to say that the purpose of the article is not to debate the pros and cons of fair value accounting but rather to provide some basic facts about fair value accounting that are important to understanding the debate.
The SEC is reportedly planning a roundtable on fair value accounting but has not announced a date.
|See the FASB Primer on Fair Value Accounting|
FASB Issues Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles
The Financial Accounting Standards Board ("FASB") has issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. The Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States ("the GAAP hierarchy"). According to the FASB, the GAAP hierarchy is directed to a company rather than a company's auditors (unlike the previous standard) because it is the company (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP.
The FASB notes within the text of Statement 162 that it does not expect Statement 162 to change current practice. Statement 162 will be effective 60 days following the SEC's approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.
|See the FASB press release announcing the issuance of Statement 162|
|See FASB Statement 162|
PCAOB Issues Rule that Would Require Auditors to Make Independence Communications Before Accepting Engagement and Amends Tax Services Independence Rule
The PCAOB has adopted a new rule, Rule 3526, that will require a registered public accounting firm, before accepting an initial engagement pursuant to the standards of the PCAOB, to describe in writing to the audit committee all relationships between the firm or any of its affiliates and the issuer or persons in a financial reporting oversight role at the issuer that may reasonably be thought to bear on the firm's independence. Under the new rule, audit firms will also be required to discuss with the audit committee the potential effects of any such relationships on the firm's independence. The rule will also require firms to make a similar communication annually for continuing engagements.
Rule 3526 is subject to approval by the SEC. If approved, the rule will supersede the PCAOB's interim independence requirement, Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, and two related interpretations and would be effective on the later of September 30, 2008, or 30 days after the date the SEC approves the rule.
In conjunction with adopting Rule 3526, the PCAOB also adopted an amendment to Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles. The amendment excludes from the scope of the rule tax services provided during the portion of the audit period that precedes the beginning of the professional engagement period. The amendment is consistent with the PCAOB's previous deferrals of the portion of the rule that applied to the audit period preceding the beginning of the professional engagement period in order to address concerns that providing tax services to such a person during that period did not necessarily impair a firm's independence.
The SEC must approve the amendment to Rule 3523. The amendment will become effective immediately upon the SEC's approval.
|See the PCAOB press release announcing Rule 3526 and the Amendment to Rule 3523|
|See the PCAOB rulemaking release related to Rule 3526 and the Amendment to Rule 3523|
Other Developments and DPW Memos
FINSA Proposed Regulations
On April 21, 2008, the U.S. Department of the Treasury issued proposed regulations to implement the Foreign Investment and National Security Act of 2007. That law amended the "Exon-Florio" statute and made significant changes to the process for reviewing foreign acquisitions of U.S. businesses for national security risks. The proposed regulations retain many of the basic features of the existing regulations, but they also implement changes mandated by the new law and incorporate some of the current practices of the Committee on Foreign Investment in the United States ("CFIUS"). Proposed changes include, among other things, expansion of the concept of a "covered transaction," new and/or broader definitions of key terms, a significant increase in the amount of information required in a voluntary notice and new rules and procedures governing the review process.
|See the Davis Polk memorandum describing the FINSA proposed regulations|
Recent Delaware Cases Highlights Need to Include Advance Notice for Board Nominations in Bylaws
Recent Delaware court decisions in Levitt Corp. v. Office Depot, Inc., No. 3622-VCN (Apr. 14, 2008) and Jana Master Fund, Ltd. v. CNET Networks, Inc., No. CIV.A 3447-CC, 2008 WL 660556 (Del.Ch. Mar. 13, 2008) highlight the need for companies to review their "advance notice" bylaw provisions to make sure that they cover both stockholder-proposed board nominations as well as stockholder-proposed business generally. Advance notice bylaws generally require that any stockholder intending to propose business and/or nominate candidates to a company's board give timely notice (and related information) concerning the proposal, including information regarding the stockholder making the proposal.
For more information on these cases and advance notice provisions generally:
|See the Davis Polk Newsflash "Delaware Case Highlights Need to Include Advance Notice for Board Nominations in Bylaws"|
|See also the Davis Polk Newsflash "Delaware Court's Narrow Reading of CNET Bylaws Clears the Way for JANA Proxy Contest|
Early Proxy Season Roundup
For a discussion of some trends observed during the 2008 proxy season:
|See Davis Polk Memorandum entitled "2008 Early Proxy Season Roundup"|