Financial Market Crisis Developments
|See a comprehensive collection of recent Davis Polk memorandums on the market crisis and related issues.|
Shelf Registration Statements Begin to Expire Soon
Rules put in place on December 1, 2005 as part of the Securities Offering Reform provide that most shelf registration statements may only be used for three years. For shelf registration statements that became effective prior to December 1, 2005, this three-year period began to run on December 1, 2005, regardless of the length of time the registration statement had been effective as of that date.
Accordingly, the three-year period applicable to shelf registration statements that became effective before December 1, 2005 will end on November 30, 2008. Under Securities Act Rule 415(a)(6), a company may carry over any unused securities from an expiring registration statement to a new registration statement as long as the new registration statement is filed before the end of the three-year period. The SEC staff has said that because November 30, 2008 is a Sunday, issuers wishing to carry forward securities from shelf registration statements that became effective prior to December 1, 2005 to a new registration statement pursuant to Rule 415(a)(6) must file the new registration statement by Friday, November 28, 2008.
In anticipation of this November 28, 2008 deadline, the SEC has issued guidance to help issuers file replacement registration statements. The guidance addresses the carry forward of previously registered securities, the inclusion of such securities on a replacement registration statement and the use of previously paid fees to offset new fee obligations.
|See the SEC guidance regarding the expiration of existing shelf registration statements|
For shelf registration statements put in place on or after December 1, 2005, the three-year period began to run as of the effective date of the registration statement. Accordingly, automatic shelf registration statements or other shelf registration statements filed shortly after the effective date of the securities offering reforms are also coming up on their three-year anniversary and expiration.
SEC Publishes IFRS Roadmap
The SEC has published the International Financial Reporting Standards (IFRS) roadmap that it voted to issue in August. The roadmap lays out a series of milestones and a schedule that, if met, would eventually lead to the mandatory use of IFRS rather than US GAAP by US issuers.
Under the plan, US issuers that are among the largest within their industry, and whose industry participants predominantly use IFRS, could voluntarily begin using IFRS for filings related to fiscal years ending on or after December 15, 2009 if they receive SEC approval.
The SEC would further assess the status of IFRS in 2011 to determine whether to roll out a schedule for mandatory use of IFRS by US issuers. That schedule, if adopted, would call for the largest US companies to begin keeping books and records in IFRS for fiscal years ending on or after December 15, 2012. Large accelerated filers would being filing in IFRS for fiscal years ending on or after December 15, 2014, accelerated filers would begin filing in IFRS for fiscal years ending on or after December 15, 2015 and all other issuers would begin filing in IFRS for fiscal years ending on or after December 15, 2016.
|See the IFRS Roadmap|
SEC Issues SLB 14D on Shareholder Proposals, Posting Letters as Received
The SEC has issued a new Staff Legal Bulletin (SLB) on Shareholder Proposals. The SLB provides that if a proposal recommends, requests, or requires the board of directors to amend the company's charter, there is some basis for the company to omit the proposal in reliance on Exchange Act Rules 14a-8(i)(1), 14a-8(i)(2), or 14a-8(i)(6) if the company meets its burden of establishing that applicable state law requires the amendment to be initiated by the board and then approved by shareholders in order for the charter to be amended as a matter of law. The staff may request, however, that the proponent be permitted to revise the proposal to provide that the board of directors "take the steps necessary" to amend the company's charter. If the amendment is done within the required timeframe, the proposal would not be excludable under Exchange Act Rules 14a-8(i), 14a-8(i)(2) or 14a-8(i)(6).
The SLB also provides:
- an SEC email address for the receipt of rule 14a-8 requests
- that a notice of defect should be sent if the company's records indicate that the proponent has not owned the minimum amount of securities for the required period of time as set forth in Exchange Act Rule 14a-8(b); and
- that both the company and proponent of the proposal should send copies of their correspondence with the SEC to the other party, preferably by the same method as the correspondence was sent to the SEC (i.e, overnight mail, fax, etc.).
The SEC is now posting shareholder proposal no-action requests on a designated webpage as they are received. Once the staff issues a response, that is also posted on the site.
|See the SEC webpage of shareholder proposal no-action requests and responses|
|See SLB 14D on Shareholder Proposals|
John White, Brian Cartwright and Conrad Hewitt to Leave SEC
John White, Director of the Division of Corporation Finance, will leave the SEC by the end of this year. Brian Cartwright, SEC General Counsel, and Conrad Hewitt, SEC Chief Accountant, have also announced their intent to leave the SEC in the near term.
|See the SEC press release announcing John White's departure|
|See the SEC press release announcing Brian Cartwright's departure|
|See the SEC press release announcing Conrad Hewitt's departure|
Highlights from PLI Securities Regulation Conference
Recently, SEC staffers, mainly from the Division of Corporation Finance, and others spoke at the PLI Securities Regulation Institute. A summary of the SEC staff comments on a variety of topics is below.
Testing the Waters. Several panelists mentioned that many of the follow-on offerings that are being done today include pre-launch offers to "test the waters" or gauge interest in the deal. Typically, these deals involve issuers that have a shelf-registration statement on file. The SEC staff, however, is considering amending Securities Act Rule 163 on a "temporary, interim, final rule basis," to allow underwriters and dealers to test the waters even if the issuer does not have a shelf registration statement in place. Rule 163 currently allows well-known seasoned issuers (WKSIs), but not underwriters and dealers, to make offers before the filing of a registration statement provided all written offers comply with the requirements imposed upon free writing prospectuses.
Central Clearinghouse for Credit Default Swaps. As widely reported, the SEC staff is analyzing the possibility of a central clearinghouse for credit default swaps (CDS). The staff is focusing on the clearinghouse maintaining adequate books and records, risk management, member funds and disclosure. Participation in the clearinghouse would be voluntary but exemptions would be needed under the Securities Act and the Exchange Act-the SEC is working to make that happen.
Corporation Finance Rulemaking Agenda. At an open meeting in early December, the SEC expects to consider finalizing its proposals on the integrity of the credit rating process. It is currently unclear whether the final rules adopted at this meeting will include the portion of the proposal that would have required disclosure of information considered by the credit rating agency in developing structured product ratings and/or the other SEC proposals related to the use of credit ratings in SEC rules and forms.
This year the SEC also plans to finalize the proposal to require use of interactive data or XBRL and also plans to finalize the proposals to amend the Oil & Gas reporting requirements. The SEC will not conduct further rulemaking this year on:
- the recommendations by the Advisory Committee on Improvements to Financial Reporting (ACIFR);
- Section 404 of the Sarbanes-Oxley Act;
- Regulation D. To the extent the SEC decides to act on private offering reform in the future, however, this is likely where they would start.
- Proxy access. The staff indicated that proxy access is a very challenging issue and it has not made too much progress in this area.
- E-proxy. The staff has heard reports that the investors are trying to "vote the notice" required to be sent to shareholders to notify them that a company's proxy materials are available online. In order to address this issue, the staff is considering amending the notice requirements to require less specific information in the notice and allow the inclusion of educational material in the notice. The staff is also looking at shortening the 40-day notice period to 30 days to give issuers more flexibility.
- CSX Beneficial Ownership Issues. The staff and other regulators around the world are thinking about how to handle the beneficial ownership issues raised by the Southern District of New York's decision in CSX v. The Children's Investment Fund Mgmt. (UK) LLP. In that case, the court ruled that an activist hedge fund that had acquired "long" positions in cash-settled equity swaps of CSX Corporation in advance of an upcoming proxy contest was deemed to be a beneficial owner of the shares held by its counterparties under the anti-avoidance provisions of Rule 13d-3(b).
Short Sale Reporting. The staff indicated that the final rules relating to the Form SH short sale reporting requirements may be very different and much broader than the interim, temporary, final rules in place now.
Risk Factors. The staff is starting to see a lot of "kitchen sink" and "boilerplate" risk factors, particularly with respect to the financial crisis. They feel that these boilerplate risk factors take up a lot of space and can be a distraction from the real risks. Some of the information that the staff is seeing in risk factors is better off in the Business section or MD&A. The best risk factors are crisp, focused and specific to the company.
MD&A Disclosure. The staff urged people to review the MD&A guidance issued by the SEC in December 2003 and then look at their MD&A disclosure anew. The staff noted that while economic conditions are very different now, the 2003 release is still very applicable.
|See the SEC's 2003 Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations|
The SEC has sent two "Dear CFO" letters about fair value disclosures in MD&A. These letters are an attempt by the staff to be more proactive in describing to people what they are looking for rather than providing comments after the submission of a filing. These letters should be used to help focus senior management and audit committees on fair value disclosure issues.
|See the September 2008 Fair Value Disclosure Letter|
|See the March 2008 Fair Value Disclosure Letter|
Executive Compensation Disclosure. John White repeated his previous comments that all companies, not just those subject to the Troubled Asset Relief Program (TARP), should consider the extent to which their executive compensation arrangements incentivize significant risk taking. To the extent considered, this should be disclosed in the company's CD&A if material to an understanding of the company's compensation.
While the SEC will not undertake a targeted review of executive compensation this year as they have in the past and will not publish a report with their findings, the staff remains focused on performance targets and still thinks that the CD&A analysis needs to be improved upon.
Accounting Disclosure & Interpretation Manual. The Office of the Chief Accountant in the Division of Corporation Finance is planning to publish its financial reporting and disclosure interpretations in a manual on December 9, 2008. The publication will document the practices that have been in place at the Division for years but which have never been officially published (although some of the information will update the 2000 Accounting Disclosure Rules and Practices Training Material that has been floating around).
Rule 144. The staff is working on new Rule 144 CD&Is, which should be out by the end of the year.
Unsponsored ADR Programs. The staff acknowledged that as a result of the amendments to Rule 12g3-2(b), close to 1000 unsponsored ADR programs have been created but went on to say that it does not have a view on this.
Rule 10b5-1 Plans. Linda Thomsen, SEC Director of Enforcement, said that she thinks that people have paid attention to the increased scrutiny of Rule 10b5-1 plans and they are now better than they were. While SEC staff will continue to monitor selling under these plans, she feels that practices in this area have greatly improved.
FAS 5 Proposal. The FASB is having a hard time convincing companies to share their internal data for purposes of field testing a revised FAS 5 proposal but really wants feedback from companies on the issues raised by the proposal issued last year. It is not clear whether the FASB will issue an exposure draft for a revised proposal or will go straight to final rulemaking.
NASDAQ AND NYSE DEVELOPMENTS
Nasdaq Modifies Delinquent Filer Procedures and Suspends Bid Price & Market Value Requirements
Nasdaq has modified the procedures applicable to listed companies that are late in filing a required periodic report with the SEC. Under the modified rules, delinquent companies may submit a plan to regain compliance to Nasdaq staff and may be allowed up to 180 days from the due date for a periodic report (as extended by Exchange Act Rule 12b-25, if applicable) to regain compliance. Previously, when a Nasdaq-listed company was late in filing a required periodic report, Nasdaq would immediately send the company a delisting letter.
|See the SEC notice of the change to the Nasdaq's Delinquent Filer Procedures|
Nasdaq has also suspended, through January 19, 2009, 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.
As a result of the suspension, companies will not be cited for new bid price or market value of publicly held shares deficiencies during the suspension period. In addition, the compliance period and the hearings process for securities already deficient at the time the suspension took effect has been tolled with respect to those requirements.
|See the SEC Approval of the Nasdaq's Suspension of its Bid Price & Market Value Requirements|