SEC Developments

SEC Sends Letter to CFOs Regarding Fair Value Disclosures

The SEC recently sent a letter to the CFOs of companies that reported a significant amount of asset-backed securities, loans carried at fair value or the lower of cost or market, and derivative assets and liabilities in their financial statements in their recent Form 10-K.  The letter discusses disclosure issues that such companies might want to consider in preparing their MD&A for their upcoming Form 10-Qs in light of Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”).  FAS 157, which establishes a framework for measuring fair value and expands disclosures about fair value measurements, is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, although earlier application is encouraged. 

President Bush to Nominate Two Democratic Commissioners

The White House issued a press release on Friday, March 28, 2008 confirming that, as rumored in the past few months, President Bush intends to nominate Luis Aguilar and Elisse Walter to become SEC Commissioners.  If confirmed by the Senate, Mr. Aguilar and Ms. Walter would fill the Commissioner positions vacated by Democratic commissioners Roel Campos and Annette Nazareth last year.  Mr. Aguilar is currently a partner at McKenna, Long & Aldridge, LLP in Atlanta, Georgia.  Ms. Walter is currently Senior Executive Vice President for Regulatory Policy & Programs at the Financial Industry Regulatory Authority.

Electronic Shareholder Forums Take Effect

New rules under the Securities Exchange Act of 1934 (the “Exchange Act”) regarding online shareholder forums became effective on February 25, 2008. According to the SEC, the new rules are intended to facilitate innovation and use of the Internet to further shareholder communications. The adopting release for the rules suggests that the rules may pave the way for shareholders or companies to discuss a variety of subjects with each other and the company in online forums. The SEC also seems to envision that the shareholders might use such forums as a polling mechanism to elicit the sentiments of the company’s managers or other shareholders on various potential actions or to determine what percentage of shareholders are represented in a discussion with the company.

According to the SEC, it has received feedback that shareholders and companies alike may have been reluctant to establish, maintain, or operate electronic forums for shareholder communications due, in part, to uncertainty over liability for statements made by others participating in the forum and concerns that statements made in the forum could be considered proxy solicitations. In order to address these concerns, the new rules exempt from the proxy rules any communication made in an electronic shareholder forum more than 60 days before the date announced by the company for its next annual or special meeting, or not more than two days following the announcement of such a meeting if the announcement occurred fewer than 60 days before the meeting date. The new rules also provide that a shareholder, company, or third party acting on behalf of a shareholder or company that establishes, maintains or operates an electronic shareholder forum will generally not be liable for statements made by another party participating in the forum. Participants in the forum will remain liable, however, for the content of their own communications in the forum under traditional liability theories in the federal securities laws.

The new rules have no impact on existing shareholder proposal processes under Rule 14a-8 of the Exchange Act or advance notice bylaw provisions.

SEC Issues Compliance and Disclosure Interpretations Regarding Smaller Company Reporting Requirements

The SEC has posted Compliance and Disclosure Interpretations (the SEC's new term for the type of interpretative guidance that it previously issued in the form of frequently asked questions and telephone interpretations) regarding the new smaller company reporting requirements.  The rules apply to companies with less than $75 million market capitalization as of the end of their second quarter.

SEC Proposes Amendments to Foreign Private Issuer Reporting Requirements

The SEC has proposed amendments to the reporting requirements applicable to foreign private issuers (“FPIs”) including amendments that would:

  • Accelerate the reporting deadline for annual reports filed on Form 20-F by FPIs from six months to 90 days after the issuer's fiscal year-end in the case of large accelerated filers and accelerated filers, and to 120 days after the issuer's fiscal year-end for all other issuers, after a two-year transition period; and
  • Permit reporting foreign issuers to assess their eligibility to use the special forms and rules available to FPIs once a year on the last business day of their second fiscal quarter, rather than on a continuous basis, which is currently required.

The rule proposal also solicits comment on other possible amendments that the SEC is “seriously considering” but has not yet proposed.  The SEC has encouraged issuers, their advisors and others to submit feedback on the rule proposal by May 12, 2008. 

In a separate proposing release, the SEC has also proposed amendments to Exchange Act Rule 12g3-2(b), which exempts certain FPIs from Exchange Act reporting requirements.  The SEC is seeking comments on this proposal by April 25, 2008. 

NASDAQ and NYSE Developments

Nasdaq Eliminates US GAAP Reconciliation Requirement for FPIs Filing IFRS Financial Statements Consistent with SEC rules

Nasdaq has amended its rules so that FPIs that are not required to file a US GAAP reconciliation with the SEC because their financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) will also not be required to file a US GAAP reconciliation with Nasdaq.  This will allow FPIs that are listed on Nasdaq to take full advantage of the SEC's recent rule change that eliminated the US GAAP reconciliation requirement for issuers filing financial statements prepared in accordance with IFRS as issued by the IASB.

Nasdaq Files Proposal to Allow Internet Disclosure of Code of Conduct Waivers

Nasdaq has filed a rule change proposal that would permit Nasdaq-listed companies to choose to disclose waivers of their code of conduct via a press release or on their website rather than by filing a Form 8-K (or in the case of FPIs, rather than by filing a Form 6-K or including disclosure in their next Form 20-F) as is currently required under Nasdaq rules.  The rule change proposal is subject to publication and approval by the SEC.  If the SEC approves the rule change, the Nasdaq requirements would be more comparable to the requirements in Item 5.05 of Form 8-K and the NYSE rules, which already permit website disclosure of waivers (rather than a Form 8-K filing) as long as certain conditions are met. 

Nasdaq Submits Reorganized Rules to SEC for Approval

Nasdaq has submitted a rule change proposal to the SEC that would reorganize the rules applicable Nasdaq-listed companies, which are currently contained in the Rule 4000 Series of the Nasdaq manual.  According to Nasdaq, the reorganization is necessary because over time the current Nasdaq’s rules have become very complex and can be difficult to navigate, especially for those who are unfamiliar with their structure.  The Nasdaq proposal would remove the listing rules from the Rule 4000 Series and restate them in a manner that Nasdaq believes is simpler, more transparent and reader-friendly in the Rule 5000 Series, which is presently unused.  Nasdaq has stated that it is not its intent to make any substantive changes to the listing rules through this proposal.

Nasdaq Submits Proposal to Clarify Notification Requirements for the Listing of Additional Shares

Nasdaq has submitted a proposed rule change to the SEC that would clarify the process concerning notification to the Nasdaq of a listed company's listing of additional shares.  The Nasdaq will implement the proposed rule upon the SEC’s approval.

Nasdaq Rules 4310(c)(17)(D) and 4320(e)(15)(D) currently require a company to provide 15 days notice to Nasdaq prior to “entering into” a described transaction.  However, Nasdaq has treated this requirement as being satisfied if the company files the required notification 15 days before issuing the securities, which is not transparent from the rule.  As such, Nasdaq proposes to revise these provisions such that notice will instead be required prior to “issuing” the securities, consistent with the requirements in paragraphs (B) and (C) of Nasdaq Rule 4310(c)(17) and 4320(e)(15).

In addition, Nasdaq proposes to modify the timing requirement contained in Rules 4310(c)(17)(A) and 4320(e)(15)(A) as it relates to companies relying on the exception to shareholder approval for inducement grants to new employees contained in Rule 4350(i)(1)(A)(iv).  Because these grants can be made at the time the employment offer is accepted, companies may not be able to provide 15 days advance notice. Instead, the proposed rule would require notification no later than five calendar days after entering into the agreement to issue the securities.

NYSE and Nasdaq File Proposals to Permit Listing of SPACs

Each of the NYSE and Nasdaq has filed a proposal with the SEC that would permit the exchange to list securities issued by special purpose acquisition vehicles (“SPACs”).  SPACs are companies with little or no operations that conduct a public offering 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.

The SEC has published the NYSE proposal for comment but has not yet published the Nasdaq proposal.  Each of the proposals contemplates a comment period and must be approved by the SEC. 

FASB Developments

FASB Issues Invitation to Comment on FAS 157

In response to the recent controversy surrounding fair value accounting for financial instruments required under FAS 157, the FASB has issued an invitation to comment (“ITC”) on whether the FASB needs to simplify and improve standards for measurement of financial instruments and, if so, what kind of projects or approaches should be considered.

Specifically, the FASB seeks comment on:

  • whether measurement requirements for financial instruments are really as significant a problem as the FASB has been led to believe;
  • how measurement complexity rates in importance and urgency relative to other areas of financial reporting that need simplification and improvement; and
  • how, if at all, to proceed with simplification and improvement in the near term.

The FASB acknowledges in the ITC that opponents of fair value accounting say that fair value measurement is inappropriate for financial instruments traded in illiquid markets and reporting such financial instruments at fair value may exacerbate the effects of market declines on enterprises holding significant portfolios of those instruments.  The FASB also points out, however, that proponents of the fair value approach say that fair value measurement provides timely information about the effects of changes in market prices on business enterprises.

The FASB requests comments by September 19, 2008.

FASB Issues Statement No. 161 Requiring Enhanced Disclosures About Derivative Instruments and Hedging Activities

The FASB has issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities.  Under the new standard, entities are required to provide enhanced disclosures about:

  • how and why an entity uses derivative instruments,
  • how derivative instruments and related hedged items are accounted for under FASB Statement 133 and its related interpretations, and
  • how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows.

The statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 although early application is encouraged.  The statement also encourages, but does not require, comparative disclosures for earlier periods at initial adoption.

Other Developments and DP&W Memos

Treasury Secretary Paulson Proposes Financial Regulatory Overhaul

Treasury Secretary Henry M. Paulson, Jr. has proposed a sweeping overhaul of the US financial regulatory system that, for the first time, would bring insurance companies, hedge funds, private equity funds, venture capital funds and mortgage originators under direct federal supervision. The proposals, contained in a Blueprint for Financial Regulatory Reform officially released on March 31, 2008, would also reorganize the existing financial regulatory infrastructure in ways more fundamental than the United States has seen since the enactment of the Glass-Steagall Act of 1933 and the Securities Exchange Act of 1934.

Delaware Court's Narrow Reading of CNET Bylaws Clears the Way for JANA Proxy Contest

In a case decided on March 13, 2008, JANA Master Fund, Ltd. v. CNET Networks, Inc., No. 3447, the Delaware Chancery Court ruled that an advance notice provision in the bylaws of CNET applies only to stockholder proposals under Rule 14a-8 of the Securities and Exchange Act of 1934 and not to a stockholder-financed proxy contest.  In handing down this ruling, the court declined to address the more provocative issue posed by the CNET bylaws: whether a company may validly impose a one-year stock holding requirement on the rights of stockholders to conduct a proxy contest, clearing the way for a JANA-led proxy contest.  Because the opinion rested on specific aspects of the CNET bylaws, wholesale changes to advance notice provisions that have been otherwise properly drafted are not likely necessary. However, we recommend that companies take this opportunity to review their advance notice provisions in light of the CNET ruling. CNET has appealed the decision.