SEC Proposes Credit Rating Reforms
The SEC has proposed a series of rules and rule changes designed to address what was, in the SEC's view, the role of credit rating agencies in precipitating the ongoing credit crisis. The proposals would significantly alter the roles and responsibilities of participants in the market for structured products (defined by the SEC as a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction), and could have an impact on institutions that hold structured products. Beyond the structured products market, aspects of the proposals could affect all companies that issue rated securities.
The proposals include:
- A broad public disclosure requirement covering all information provided to a "nationally recognized statistical rating organization," or "NRSRO" by issuers, underwriters, sponsors and others involved in offering a structured product, if that information is used by the NRSRO in formulating the product's credit rating or thereafter in monitoring the credit rating. This disclosure requirement would apply regardless of whether the security is issued in a public offering, a private placement, or an offshore transaction.
- A prohibition on rating a security (whether or not a structured product) if the NRSRO (or its associated persons) made "recommendations" to the issuer, underwriter or sponsor of the security about the corporate or legal structure, assets, liabilities or activities of the issuer of the security.
- A requirement, in effect, that NRSROs change their ratings symbols for structured products.
Each of these proposals raises serious concerns; however, the SEC has set a short public comment period (ending July 25), and has announced that on June 25 it will issue additional proposals to scale back reliance on NRSRO ratings in the SEC's own rules.
For more information on these proposed credit rating changes:
|See the Davis Polk memorandum entitled "SEC Proposes New Rating Agency Rules"|
|See the SEC press release announcing the proposed credit rating agency rules|
|See the SEC release proposing new credit rating agency rules|
SEC to Hold Roundtable on Fair Value Accounting
The SEC will be holding a roundtable on Fair Value Accounting on July 9, 2008. The roundtable will be open to the public on a first-come first-served basis. The SEC is welcoming submissions for topics of interest.
The roundtable will be organized as two panels. The first panel will discuss fair value accounting issues from the perspective of larger financial institutions and the needs of their investors. The second panel will discuss the issues from the perspective of all public companies, including small public companies, and the needs of their investors. Panelists will include investors, those involved in financial statement preparation, auditors, regulators and other interested parties.
|See the SEC's press release announcing the roundtable|
SEC Publishes Staff Legal Bulletin on Section 3(a)(10) Exchanges
The SEC recently issued Staff Legal Bulletin ("SLB") No. 3A. The SLB provides the Division of Corporation Finance's views regarding the exemption from registration contained in Section 3(a)(10) of the Securities Act of 1933 (the "Securities Act"). The SLB also discusses the resale status of securities issued in certain Section 3(a)(10) transactions and outlines the issues that commonly arise in "no-action" requests related to the Section 3(a)(10) exemption.
Section 3(a)(10) of the Securities Act contains an exemption from Securities Act registration for offers and sales of securities issued in certain exchange transactions. Before the issuer can rely on the exemption, several conditions must be met, including court approval of the terms and conditions of the exchange.
|See SLB No. 3A|
SEC Extends Auditor Attestation Requirements for Smaller Public Companies
The SEC has announced that it has extended the date by which smaller public companies must provide an auditor attestation report on their internal controls, as required by Section 404 of the Sarbanes-Oxley Act. Smaller public companies will now be required to provide an auditor attestation report on their internal controls for fiscal years ending on or after December 15, 2009. Without this extension they would have been required to file an auditor attestation report on their internal controls in any fiscal year ending on or after December 15, 2008.
The SEC initially proposed this extension in February of this year. Smaller public companies for purposes of this rule are those that are referred to as "non-accelerated filers" because they do not meet the definition of accelerated filer or large accelerated filer under Rule 12b-2 of the Securities Exchange Act of 1934 (the "Exchange Act"). Non-accelerated filers generally have market capitalization of less than $75 million and/or have not been filing Exchange Act reports for at least one year.
|See the SEC press release announcing the extension of SOX 404 requirements for smaller public companies|
Division of Corporation Finance Publishes Overview of Filing Review Process
The Division of Corporation Finance has published a short overview of the filing review process. The overview outlines the organizational structure within the Division of Corporation Finance responsible for filing reviews. The overview also describes the Division's process for preliminary reviews, full reviews and the reconsideration or resolution of comments.
|See the overview of the Division of Corporation Finance filing review process|
SEC Posts E-Proxy Compliance Guide
The SEC has prepared an e-proxy compliance guide for small entities. While geared towards small entities, the guide is a good summary of the e-proxy requirements and includes a helpful table that compares the notice-only delivery option to the full-set delivery option.
|See the e-proxy compliance guide|
New SEC Enforcement Deputy Directors
George Curtis and Scott Friestad have been appointed as the new Deputy Directors in the SEC's Enforcement Division. Curtis and Friestad will assume the positions vacated or to be vacated by Peter Bresnan (who left the SEC earlier this year) and Walter Ricciardi (who will leave the SEC later this month).
|See the SEC's press release announcing the changes within the Enforcement Division|
SEC Publishes XBRL Proposing Rule Release
The SEC has published a proposing rule release outlining its mandatory eXtensible Business Reporting Language ("XBRL") proposal. The proposal would require domestic and foreign private issuers ("FPIs") that prepare their financial statements in accordance with US generally accepted accounting principles ("US GAAP") and FPIs that prepare their financial statements using International Financial Reporting Standards ("IFRS") to file their financial statements in XBRL.
The proposal contains a three-year phase-in period, pursuant to which:
- US GAAP filers with a worldwide public common equity float above $5 billion would be subject to the proposed rules with respect to financial statements for fiscal periods ending on or after December 15, 2008.
- All other large accelerated filers using US GAAP would be subject to the XBRL requirement with respect to filings containing financial statements for a period ending on or after December 15, 2009.
- All remaining US GAAP filers and FPIs that file financial statements prepared in accordance with IFRS as issued by the IASB would be subject to the mandatory XBRL requirement with respect to filings containing financial statements for a period ending on or after December 15, 2010.
The proposal would not require FPIs that file financial statements prepared in accordance with their home country GAAP and reconciled to US GAAP to file financial statements using XBRL.
|See the XBRL proposal|
Chairman Cox Says SEC to Consider Adoption of FPI Enhancements this Summer; No Mention of Proposed Amendments to Regulation D
In a recent speech before the Chartered Financial Analysts Institute Conference
on Next Generation Asset Management, SEC Chairman Christopher Cox told attendees
to "look for the SEC to consider . . . adoption of final revisions to Rule
12g3-2(b) regarding foreign issuers [and] adoption of foreign issuer reporting
enhancements" this summer. The SEC proposed revisions to Rule 12g3-2(b) of
the Exchange Act and certain FPI reporting requirements in February.
In discussing the SEC's summer plans, however, Chairman Cox made no mention of the proposed amendments to Regulation D that have been pending since last year.
|See Chairman Cox's speech|
John White Weighs Options for use of IFRS by US Issuers
In a recent speech, John White, Director of the SEC Division of Corporation Finance, stopped short of definitively announcing when or how he believes US issuers will begin reporting in IFRS but indicated that he believes that they will eventually do so.
Mr. White noted that the SEC is currently "wrestling" with the question of whether IFRS should be rolled out to US issuers on either an optional or mandatory basis. His observations from a recent roundtable and his statement that this is one area "where it may be appropriate for the regulator to lead" suggest that he sees the benefits of a mandatory IFRS requirement for US issuers at some point in the future. He also acknowledged, however, that he "can see the value of a transition, or voluntary, period in a change of this potential magnitude."
|See Mr. White's speech on IFRS and US Companies|
FASB Issues New Loss Contingency Disclosure Proposal
The Financial Accounting Standards Board ("FASB") recently issued proposed Statement of Financial Accounting Standards, Disclosure of Certain Loss Contingencies-an amendment of FASB Statements No. 5 and 141(R).
The proposed statement would:
- Expand the population of loss contingencies required to be disclosed such that all loss contingencies within the scope of the Statement would be required to be disclosed unless the likelihood of loss is remote. Even if the likelihood of loss is remote, disclosure would still be required in the case of contingencies that are expected to be resolved in the near term and which could have a severe impact on the company's financial position, results of operations or cash flows.
- Require disclosure of specific quantitative and qualitative information about those loss contingencies; and
- Require a tabular reconciliation of recognized loss contingencies.
The proposal would, however, permit the omission of certain required information if disclosing that information would be prejudicial to an entity's position in a dispute.
The proposed Statement would be effective for fiscal years ending after December 15, 2008, and interim and annual periods in subsequent fiscal years. Comments on the proposal are due by August 8, 2008.
|See proposed Statement of Financial Accounting Standards, Disclosure of Certain Loss Contingencies-an amendment of FASB Statements No. 5 and 141(R)|
FASB Proposes Amendment to Hedge Accounting Standards and Proposes Additional Disclosures of Credit Derivatives and Guarantees
The FASB also recently issued proposed Statement of Financial Accounting Standards, Accounting for Hedging Activities-an amendment of FASB Statement No. 133. The proposed Statement would eliminate the multiple methods of hedge accounting currently being used for the same transaction. It also would require an entity to designate all risks as the hedged risk (with certain exceptions) in the hedged item or transaction.
The amended hedge accounting requirements would need to be applied to financial statements issued for fiscal years beginning after June 15, 2009, and interim periods within those fiscal years.
Comments are due on the proposed amendments to hedge accounting requirements by August 15, 2008.
In addition, the FASB issued a proposed staff position ("FSP") that would require additional disclosures about credit derivatives and guarantees. The FSP would amend FAS 133, Accounting for Derivative Instruments and Hedging Activities, and FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("Interpretation 45"). The FSP would require disclosure of the current status of the payment/performance risk of the credit derivative. The FSP would also require a seller of credit derivatives to disclose information about its credit derivatives to enable users of financial statements to assess the potential effect of those derivatives on its financial position, financial performance and cash flows.
The FSP would be effective for fiscal years and interim periods ending after November 15, 2008.
Comments on the FSP proposing additional derivative and guarantee disclosures are due by June 30, 2008.
|See proposed Statement of Financial Accounting Standards, Accounting for Hedging Activities-an amendment of FASB Statement No. 133|
|See the FSP proposing additional derivative and guarantee disclosures|
Nasdaq Proposes Increase in Director Independence Threshold
The Nasdaq has submitted to the SEC a proposed rule change that would raise to $120,000 the amount of compensation that an independent director could receive from an issuer while still meeting the definition of "independent" under Nasdaq Rule 4200(a)(15)(B). Nasdaq's current rules preclude a director from being considered independent if the director has received more than $100,000 in compensation from the issuer.
Last year, the NYSE filed a similar proposal that is still pending SEC approval. If the SEC approves the proposed amendments to the NYSE and Nasdaq standards, the amount of compensation that a director could receive from an issuer without jeopardizing his or her independence under NYSE or Nasdaq rules would mirror the quantitative threshold for disclosure of related party transactions under Item 404 of Regulation S-K.
|See the Nasdaq proposal to increase the quantitative director independence threshold to $120,000|
|See the NYSE proposal to increase the quantitative director independence threshold to $120,000|
NYSE Extends Pilot Programs to Adjust Listing Earnings Standards
The NYSE has extended for three months two pilot programs that amend the earnings standard of Section 102.01C(I) of the NYSE's Listed Company Manual.
The first pilot program enables the NYSE to adjust the earnings of companies by reversing the income statement effects of changes in fair value of financial instruments classified as liabilities, provided such financial instruments are either being redeemed with the proceeds of an offering occurring in conjunction with the listing or converted into or exercised for common stock of the company at the time of listing.
The second pilot program enables the NYSE to adjust the earnings of companies for purposes of its pre-tax earnings standard by excluding gains or losses recognized in connection with the extinguishment of debt prior to its maturity.
FINRA Proposes or Makes Changes to Existing Supervisory and Options Rules
The Financial Industry Regulatory Authority ("FINRA") has recently made and proposed changes to existing options rules and supervisory rules. For more detailed information about these changes and proposed changes:
|See the Davis Polk Memorandum "FINRA Proposes Amendments to Supervisory Rules"|
|See the Davis Polk Memorandum "FINRA Updates Options Rules Requiring Firms to Modify Compliance and Supervisory Policies and Procedures"|
Court Requires Activist Hedge Fund to Disclose Swaps in CSX
A federal district court in New York recently found that, because an activist hedge fund had acquired "long" positions in cash-settled equity swaps of CSX Corporation in order to evade the Section 13(d) beneficial ownership reporting requirements, the fund should be deemed to be a beneficial owner of the shares held by its counterparties. For further discussion of this case:
|See the Davis Polk Newsflash "Court Requires Activist Hedge Funds to Disclose Swaps in CSX"|
Delaware Court Ruling Puts a Spotlight on Indemnification/Expense Advancement Bylaws
A recent Delaware Chancery Court decision upholding a company's retroactive repeal of a former director's right to advancement of expenses in defending against fiduciary duty-based claims has, not surprisingly, generated concern that the indemnification provided to directors and officers by corporate bylaws may not be sufficient to protect them fully—particularly once they leave office. For a discussion of the implications of this case:
|See the Davis Polk Newsflash "Delaware Court Ruling Puts a Spotlight on Indemnification/Expense Advancement Bylaws"|
Climate Change: California Agency Imposes Novel Greenhouse Gas Emissions Fee
Recent events highlight the increased focus on, and rapid development of, climate change regulatory schemes. From the recent debate in the Senate on the federal cap-and-trade system to last month's action by a Californian agency to recover the costs of implementing climate change legislation, it is becoming clear that emitters of greenhouse gases will face governmental oversight from multiple regulators with various goals.
The Bay Area Air Quality Management District ("BAAQMD") recently approved a fee on greenhouse gas emissions by all stationary sources (including supermarkets, apartment complexes and other minor emitters) in the San Francisco Bay area. Effective July 1, 2008, all facilities with air permits within the BAAQMD's jurisdiction will pay an annual, quantity-based fee for greenhouse gas emissions. The BAAQMD will calculate emissions based on data it already collects from individual facilities. It anticipates collecting approximately $1.1 million in fees in the first year. The vast majority of the approximately 2,500 impacted facilities will pay nominal fees while the top seven emitters (five petroleum refineries and two power plants) will pay over $50,000 each.
The express intent of the fee is to recoup the costs of implementing climate change programs rather than to encourage emissions reductions, although the regulators are likely hoping to accomplish both goals (as well as perhaps send a message to the state and federal governments that their carbon control actions to date have been insufficient). Accordingly, the BAAQMD asserts that, although its action comes on the eve of the expected release of a statewide proposal for reducing greenhouse gas emissions, the fees should not conflict with or preempt any state or federal action and can co-exist with anticipated market-based mechanisms (such as cap-and-trade) that aim to reduce greenhouse gas emissions. The concept that new fees are necessary to address added burdens on agencies could obviously apply to other regulators and jurisdictions, some of which may adopt similar funding mechanisms.
Greenhouse gas emissions will continue to be subject to increasing public and regulatory scrutiny. This recent action suggests that potential costs to emitters may only be limited by the creativity of the agencies with the authority to impose such costs.