Financial Market Crisis Developments
SEC DEVELOPMENTS
Fair Value Initiatives
Recently, the SEC and FASB have taken several steps aimed at addressing concerns about the role of FASB Statement 157, Fair Value Measurements (FAS 157), in the financial market crisis. The SEC is required by the Emergency Economic Stabilization Act to study fair value accounting applicable to financial institutions.
SEC and FASB Fair Value Guidance. First, the SEC has published "clarifications," in the form of five questions and answers, on determining fair value for assets with inactive markets. The Division of Corporation Finance also sent a letter, similar to the letter sent in March 2008, to certain public companies identifying a number of disclosure issues related to fair value measurements for financial instruments with inactive markets.
The FASB has also issued guidance on the application of FAS 157 in the form of a final staff position, FSP FAS 157-3. FSP FAS 157-3 restates certain principles already contained in FAS 157 and provides an illustrative example of how to apply FAS 157 in determining the fair value of a financial asset when the market for that financial asset is not active.
SEC Request for Comment and Roundtable. In addition, the SEC has requested public comment on fair value accounting and recently held a roundtable to discuss the effects and usefulness of fair value accounting. Many of the roundtable panelists, which included investors, accountants and business leaders, asserted that the requirements of FAS 157 have contributed to the current financial crisis, although they differed on the degree of this contribution. Some of the panelists urged the FASB and SEC to suspend the requirements of FAS 157, at least temporarily, while others suggested that FAS 157 is a good standard that has been misapplied. The panelists generally advocated for the SEC and FASB to, at a minimum, issue additional FAS 157 application guidance.
SEC Issues Exchange Act C&DIs
The SEC has issued Compliance & Disclosure Interpretations (C&DIs) for Exchange Act Sections, Rules and Forms. Many of the C&DIs have been previously published in other forms of SEC guidance, such as the Telephone Interpretation Manual. Several of the new entries relate to deregistration, the reporting obligations of voluntary filers (i.e., those that are not required to file Exchange Act reports under either Section 13(a) or 15(d) of the Exchange Act but choose to do so due to covenant obligations or for other reasons), delinquent filers and the extension of the filing date for Exchange Act reports under Exchange Act Rule 12b-25. In particular, issuers may be interested to know that:
- A company must file a Form 12b-25 for a periodic report that is filed after the due date regardless of whether it anticipates filing the report within the extension period allowed for by Rule 12b-25(a) or after the extension period. Exchange Act Rules, Question 135.02 and Exchange Act Forms, Question 107.01.
- An issuer cannot use Rule 12b-25 to extend the due date for the timely filing of information incorporated by reference from definitive proxy materials into Item III of Form 10-K. The Form 10-K must be amended by the 120th day to disclose the Part III information if the definitive proxy statement has not been filed. The proxy statement must still be filed independently to comply with Exchange Act Rule 14a-6. Exchange Act Rules, Question 135.10
- Once a registrant becomes delinquent in its reporting obligations under Section 13(a) or 15(d), it must file all delinquent reports in order to become current in its Exchange Act reporting. Filing the required documents late will not "cure" Section 13(a) or 15(d) violations, and will not make the registrant timely for purposes of eligibility to use certain Securities Act forms, but it will permit the registrant to become current in its Exchange Act reporting. Exchange Act Forms, Question 130.02.
SEC Publishes Final Rule Release for FPI Reporting Changes
Last month, the SEC published the adopting release containing its final amendments to certain Form 20-F reporting requirements. The amendments also modify the timing for testing foreign private issuer status and revise the going private rules. The text of the final amendments is largely as proposed.
SEC SPEAKS
John White Looks Ahead to 2009 Compensation Disclosures
In an October 21, 2008 speech on executive compensation disclosures, John White, Director of the Division of Corporation Finance, said the Division will review the upcoming annual reports of all of the very largest financial institutions in the United States that are public companies, including the nine institutions that have already agreed to participate in the Treasury's capital purchase program. The Division will also be monitoring the Form 10-Q and Form 8-K filings of these institutions.
Mr. White went on to say that companies not participating in the Treasury's Troubled Asset Relief Program ("TARP") should also be carefully considering how recent economic and financial events affect their compensation programs and disclosures. While the TARP limits on compensation arrangements apply on their face only to TARP participants, Mr. White suggested that other companies also consider the impact of compensation arrangements that incentivize significant risk taking. These considerations should be disclosed in the company's CD&A if material to the company's compensation decision making.
Mr. White also commented that the Division continues to be dissatisfied with compensation disclosures overall, particularly disclosure of performance targets and benchmarks. He urged companies to reread the SEC's previously published compensation disclosure guidance and start over this year with a blank piece of paper.
NASDAQ AND NYSE DEVELOPMENTS
NYSE No Longer Requires Legal Opinions for Listing
The NYSE has changed its rules so that it no longer requires the filing of a legal opinion addressed to the NYSE in connection with an initial listing or a supplemental listing application. In lieu of a separate opinion to the NYSE, issuers will, however, be required to provide the NYSE a copy of the legal opinion filed with the SEC as Exhibit 5 to the registration statement or a certificate of goodstanding.
FASB DEVELOPMENTS
FASB Issues Going Concern Exposure Draft
The FASB has issued an exposure draft that would require management of a reporting entity to consider "all available information about the future, which is at least, but not limited to, 12 months from the end of the reporting period" when assessing whether a going concern assumption is appropriate. This new standard would be consistent with the comparable International Financial Reporting Standard but broader than the existing US GAAP standard, AU Section 341. AU Section 341 currently requires evaluation of an entity's ability to continue as a going concern "for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited."
FINRA DEVELOPMENTS
FINRA Proposes Changes to Research Rules
FINRA has issued and is requesting comment on proposed research and conflict of interest rules. The proposed rules, if ultimately submitted to and approved by the SEC, would replace the existing NYSE and NASD Rules governing research analyst conflicts of interest and would also supersede the proposed changes to those rules published by the SEC in January 2007.
Significantly, the proposed rules would shorten, and in some cases eliminate, the "quiet period" during which a member firm participating in a securities offering cannot publish or distribute research reports about the issuer, and the firm's research analyst cannot make public appearances relating to the issuer.
OTHER DEVELOPMENTS
Time to Check Your Shelf Registration Statement
Recent Stock Market Declines Have Caused Many Issuers to Lose WKSI Status
The recent precipitous decline in stock market valuations has caused the market capitalization of many issuers to fall near or below the $700 million held by non-affiliates required to be a "well known seasoned issuer" or "WKSI." WKSIs are the only class of issuer whose registration statements (and amendments thereto) are automatically effective without risk of SEC review. Accordingly, issuers in jeopardy of losing their WKSI status should insure that they currently have a broad-based universal shelf registration statement in place to provide financing flexibility should they lose that status at a later date. Most importantly, issuers whose market capitalization has recently fallen below $700 million may still have time to file an automatic shelf registration statement since an issuer need only meet the market capitalization test on at least 1 day in the 60 days preceding the filing of the registration statement. Finally, issuers whose registration statements are approaching the end of their three-year life (or December 1, 2008 for registration statements filed before December 1, 2005) should consider putting a new automatic shelf registration statement in place early.
RiskMetrics Group's 2009 Proposed Proxy Voting Policy Updates
RiskMetrics Group (RMG, formerly ISS) has issued its 2009 proxy voting policies for comment. While final positions will not be released until November 20th, new or revised policies are often adopted in the form prepared for comment. The 2009 proxy voting policies, including any updates, will apply to annual meetings that occur after February 1, 2009.
Delaware Court Orders Hexion to Pursue Financing of Huntsman Acquisition; Rules Huntsman Has Not Suffered an MAE
On September 29, the Delaware Chancery Court ruled that Hexion Specialty Chemicals, Inc. must specifically perform its covenants under its merger agreement with Huntsman Corporation and take all actions necessary to consummate the financing of the transaction and to satisfy antitrust regulators. The Court stopped short, however, of requiring Hexion, a portfolio company of Apollo Global Management, to consummate the transaction. The Court rejected Hexion's claim that Huntsman had suffered a "Material Adverse Effect," or MAE, and found that Hexion deliberately breached its obligations under the merger agreement and that any damages caused by such breach will not be subject to the $325 million liquidated damages cap in the contract.
