The RR Donnelley Securities Newsletter contains the latest developments and practical guidance for corporate & securities law practitioners. The content is provided by TheCorporateCounsel.net.
The features in this issue include:
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Updated "Proxy Season" Practice Area, New D&O Questionnaires and More
As we do every year, we have updated our "Proxy Season" Practice Area (thanks to Julie Hoffman) - including posting these memos that raise considerations for this proxy season.
In addition, we have posted a new set of D&O questionnaires - as well as a new proxy statement compliance checklist and a mock-up proxy statement (which serves as an aid to help review already-existing drafts). As always, our sample documents come with a disclaimer that you need to make your own legal analysis.
Proxy Season Items and More Meltdown Stuff
We recently sent the Nov-Dec issue of The Corporate Counsel to the printers. This issue includes pieces on:
- Proxy Season Items and More Meltdown Stuff
- Former Executive Officers and Former Directors-Proxy Disclosure Checklist
- Item 404(a)-When Does a Law Firm Partner Have a Material Interest in the Firm's Relationship with the Issuer?
- The Staff's Rule 14a-3 Relief Authority
- Whatever Happened to the Proposed Amendment of NYSE Rule 452 to Ban Uninstructed Broker Voting of Street-Name Shares in Director Elections?
- Meltdown Accounting Issues
- Rule 14a-8 Practice Update
- A Suggested Alternative to Repricing Melted-Down Stock Options
- Updating Risk Factors-Update
Act Now: Get this issue on a complimentary basis when you try a 2009 no-risk trial today.
Corp Fin Releases Updated Accounting Manual
The Staff of Corp Fin's Office of Chief Accountant recently posted an updated version of the Accounting Disclosure Rules and Practices Manual, now renamed the Financial Reporting Manual. The Manual was last updated in 2000, so this has been a monumental effort on the part of the Staff. Even though the Manual is posted on the SEC's website, it still bears that legend "For Division of Corporation Finance Staff Use Only" and includes a disclaimer about its informal nature as guidance.
The Manual has always been a great resource for understanding Staff positions on filing and financial statement matters. It might be a good idea to keep your old copy of the Staff Manual, because the new manual does not cover all of the same topics as the old one.
SEC Updates Oil and Gas Disclosure Requirements
In late December, the SEC announced that it had approved changes to the disclosure requirements applicable to oil and gas companies. The Commission's approval of these rule changes is the culmination of a long running project in Corp Fin to update the antiquated oil and gas disclosure requirements specified in Regulation S-K, S-X and Industry Guide 2. The SEC's announcement indicates that an adopting release is forthcoming.
Noticeably absent from the announcement of the rule revisions is any indication that somehow the changes are tied to resolving the financial crisis - such proclamations have become a fixture in recent SEC announcements, orders, releases and open meeting statements. It is somehow comforting to know that, with projects such as this, life goes on in the world of adopting rule changes that are simply trying to improve disclosure for investors.
Doings at the ABA's Federal Regulation of Securities Committee Fall Meeting - John White's Parting Shots
At the ABA Fall Meeting of the Federal of the Federal Regulation of Securities Committee, Corp Fin Director John White had Chief Counsel Tom Kim and Deputy Director Brian Breheny stand up and affirm their intent to update the portions of the old Telephone Manual into C&DIs by the end of the year. Most recently, Corp Fin published new C&DIs on "Securities Act Sections."
During his last remarks as Corp Fin Director, John reviewed the numerous changes during his two-plus year tenure - including noting that now over 20,000 of the Staff's comment letters have been posted - and he identified big rulemakings that have been teed up for the near future, including:
- IFRS roadmap now proposed, along with proposed timetable
- Further implementation of certain CIFiR recommendations
- Proxy matters, including a reconsideration of shareholder access
- Technology, including XBRL and the "21st Century Disclosure Initiative"
- Beneficial ownership reporting regime, in the wake of the CSX decision and the SEC's short-selling efforts
SEC Mandates XBRL - and Its Website Goes "IDEA"
In mid-December, the SEC adopted mandatory XBRL as expected. Here is Corp Fin's statement - and here is a video of Chairman Cox's opening remarks. The proposed transition schedule got pushed back by six months, so that the first wave of companies required to use XBRL - those with over $5 billion in worldwide market cap - will be required to file XBRL for their first quarterly (or annual report for 20-F/40-F filers) for fiscal periods ending on - or after - June 15, 2009. About 500 companies will be in this first wave.
A year later, accelerated companies will be in the second wave (ie. first report after June 15, 2010) - and in two years, smaller companies and foreign companies that use IFRS will comprise the third wave (ie. first report after June 15, 2011).
The vote was 4-1 since Commissioner Aguilar dissented, on the grounds that sheltering companies when they first begin using XBRL from some liability is unacceptable. As adopted, machine-readable XBRL data will not be subject to antifraud claims - i.e., considered "furnished" - so long as the mistake was made with good faith. And as proposed, the human viewable stuff will be considered "filed" (traditional financial statements will still be required to be filed with the SEC and continue to be subject to the "normal" liability provisions). In a change from what was proposed, the limited liability provisions for XBRL will be phased-out over a two-year period for each company, with a blanket termination for all companies on October 31, 2014.
Until we see the adopting release and learn the nitty-gritty details, you can learn more about yesterday's meeting from FEI's "Financial Reporting Blog" and the "IR Web Report." Be careful what you read - particularly from XBRL vendors - as I'm already seeing misinformation about what happened at the meeting.
And the SEC has launched "IDEA," which is intended to eventually replace Edgar. Do a company search on the SEC's site and see how different it looks. . .
SEC Tweaks Rules on Credit Ratings
The SEC recently adopted a number of changes to its credit rating rules that were originally proposed back in June. Here are the press release and Chairman Cox's remarks.
This latest round of changes largely originated out of the SEC's examination of the NRSRO rating practices for structured finance deals. At the open meeting last Wednesday, the SEC did not consider any of the proposed changes to its rules targeted at eliminating references to credit ratings, and it remains unclear whether those rule proposals will move forward. The SEC did not move forward on proposals to require a change in the symbols used by NRSROs for rating structured finance products.
The SEC adopted a number of new prohibited conflicts of interest for NRSROs and their personnel including: (1) making recommendations to an issuer about obtaining a credit rating; (2) having the same personnel discuss fees and ratings; (3) gifts from rated issuers in excess of $25. The rule changes also call for Internet disclosure of ratings history when the NRSRO follows an "issuer pays" model, and enhanced disclosure of performance measures, verification procedures and credit surveillance policies. Enhanced documentation will be required for model deviations, and credit rating agencies will need to retain complaints about credit analysts.
The SEC also reproposed rules concerning additional Internet disclosure for "issuer pays" NRSROs and public disclosure of data underlying structured finance ratings.
From the AICPA Conference: The SEC Speaks
At the AICPA's "National Conference on Current SEC and PCAOB Developments," held in early December, Chairman Cox delivered a speech that covered a number of current accounting concerns at the SEC.
The SEC has posted speeches made by the Office of Chief Accountant's Staff at the Conference (the Corp Fin Staff speeches have not yet been posted). OCA's remarks cover a wide range of current accounting topics, including materiality, judgment, risk assessment, IFRS, impairment and, of course, fair value. In one of the speeches, Marc Panucci, Associate Chief Accountant in OCA, provided an interesting (and timely) discussion of how the current economic environment may impact management's annual assessment and the external audit of the effectiveness of internal control over financial reporting, as well as management's quarterly evaluation of disclosure controls and procedures. Here is the list of the speeches from the AICPA Conference posted so far:
- Adam Brown, Professional Accounting Fellow
- Muneera Carr, Professional Accounting Fellow
- Jeff Ellis, Professional Accounting Fellow
- Julie A. Erhardt, Deputy Chief Accountant
- Robert G. Fox III, Professional Accounting Fellow
- James L. Kroeker, Deputy Chief Accountant
- Mark Mahar, Associate Chief Accountant
- Robert B. Malhotra, Professional Accounting Fellow
- Liza McAndrew Moberg, Professional Accounting Fellow
- Marc Panucci, Associate Chief Accountant
Corp Fin Issues New Written Consent CDI
As noted above, Corp Fin recently issued a new set of C&DIs on "Securities Act Sections". Question 239.13 addresses the application of the '33 Act to written consents by a target company's shareholders approving a merger or other business combination transaction in which the acquiring company intends to register the transaction securities with the SEC.
In the new CDI, the Staff stated that the approval of such a transaction by written consent in lieu of a meeting of the target company's shareholders involves a private offering of the acquiror's securities that will preclude the acquiror from later registering an offering of the securities on Form S-4. Here is a memo from our "Written Consents" Practice Area on DealLawyers.com that discusses the Staff's interpretive position and its application to stock merger transactions.
Corp Fin Issues Compliance Guide for New Cross-Border Rules
Corp Fin recently posted a "Compliance Guide" covering the new rules on cross-border business combinations, exchange offers and rights offering, which are effective today.
Despite the "Small Entity" title, the Guide provides a helpful short summary of the new rules that can be used by all companies. The Guide also highlights the rule changes that apply to domestic transactions, including the expanded availability of early commencement to all registered exchange offers, and the elimination of the old 20-day limit on subsequent offering periods for tender offers.
We've posted a number of memos on the new rules in our "Cross-Border Deals" Practice Area on DealLawyers.com.
What is Your Auditor Thinking About This Year?
The current economic environment will not only influence disclosure decisions for your upcoming 10-K (as we discussed in the September-October 2008 issue of The Corporate Counsel), it will also influence auditors and how they look at companies during 2008 financial statement audits. If you want to get into the mind of your auditor for the upcoming audit season, check out the PCAOB's recent Staff Audit Practice Alert on Audit Considerations In the Current Economic Environment. The Alert does a nice job of highlighting the most significant accounting and auditing issues that companies are now facing in light of the recession and the credit crisis, including:
- Overall audit considerations
- Auditing fair value measurements
- Auditing accounting estimates
- Auditing the adequacy of disclosures
- Auditor's consideration of a company's ability to continue as a going concern
- Additional audit considerations for selected reporting areas
The Audit Practice Alert points out that in planning and performing the audit, auditors need to be particularly sensitive to fraud risk considerations, which may include increased pressure to meet targets or other expectations of third parties, and even the extent to which the personal financial situations of members of management or the board are threatened by their companies' performance. This may be an area that will receive more focus this year as compared to recent audits in periods of an economic upswing.
Auditors may also be paying more attention to disclosures this year, particularly the discussion in MD&A of liquidity, capital resources, results of operations, off-balance sheet arrangements and contractual obligations. The Staff Practice Alert notes that auditors need to read this and other information in the report and consider whether the information, or the manner of its presentation, is materially consistent with information, or the manner of presentation of information, appearing in the financial statements.
CSX Settles Section 16(b) Litigation Over Total Return Swaps
As noted in this Form 8-K filed yesterday by CSX Corporation, the company has settled its Section 16 lawsuit that involved issues related to two hedge funds being deemed beneficial owners, for purposes of Section 13(d), due to underlying cash-settled total return swaps they had entered into (Alan Dye covered this case recently in his "Section16.net Blog"). The settlement is subject to approval by the US District Court - SDNY. If approved, CSX will receive $10 million from TCI and $1 million from 3G - and attorney's fees and costs of up to $550,000, which will be paid from the settlement proceeds
PCAOB's Inspection Retrospective
Recently, the PCAOB published its Report on the PCAOB's 2004, 2005, 2006, and 2007 Inspections of Domestic Annually Inspected Firms. This report summarizes the inspection findings of the eight domestic accounting firms that were subject to annual inspections over the past four years (i.e., the biggest firms).
The press release announcing the report notes:
"The report describes deficiencies observed in these areas, as well as deficiencies in the following additional audit areas: identifying departures from generally accepted accounting principles (GAAP), auditing of management's estimates, income taxes, and internal control, performing analytical procedures and audit sampling, using the work of specialists, and assessing materiality, audit scope and audit differences.
The report also includes information on changes in the quality control systems that firms have described in remediation plans submitted in response to the first years of inspection reports. These include changes to their structure, partner evaluation processes, internal inspection programs, procedures for using the work of foreign affiliates, and processes for compliance with independence requirements."
Last month, the PCAOB proposed its 2009 budget, seeking a modest increase in spending with a budget of $157.6 million, compared to a budget of $144.6 million for 2008.
Nasdaq's New Process for SEC Filing Deficiencies
Nasdaq recently filed a proposed rule change which would provide more lenient treatment for companies that are delinquent in making periodic filings to the SEC. Under current Nasdaq rules, companies receive a delisting letter immediately upon missing a filing due date. Late filers are not given a compliance period in which to make a late filing - nor is the Nasdaq staff permitted to grant the delinquent companies additional time to comply with the filing requirements. Although the rule change has been filed as a proposed rule, Nasdaq has asked the SEC to waive the normal 30-day waiting period and approve the rule change to go effective immediately.
Under the modified rules, late filers would have 60 calendar days after receiving a Nasdaq notice of delinquency to submit a plan to regain compliance. The plan would have to address the reasons for the late filing, the likelihood of making the filing within the exception period, the company's past compliance history, corporate events that might occur within the exception period, and disclosures to the market. After reviewing this (and other relevant information), the Nasdaq Staff may grant the company up to 180 calendar days from the date of the first missed filing to fulfill the filing requirement and regain compliance.
Nasdaq's rationale for the proposed change is a recognition of the fact that, when a company delays a filing, the formal procedures required to investigate the underlying issues causing the delay and, if necessary, to restate its financial statements, can be a laborious time-consuming process. In these situations, companies often publish whatever financial information they can and inform investors of the reasons for the delay. Nasdaq believes that delisting a company that is taking all appropriate steps to regain compliance and file financial statements - while keeping the public informed - is not in the best interest of the company or its investors.
Fall Issue of Compensation Standards Print Newsletter
With so many important action items impacting your proxy disclosures right now, you will want to read the Fall 2008 Issue of the Compensation Standards print newsletter that covers some key issues regarding proxy disclosures to consider now.
As a bonus, the issue includes a feature entitled "The Box" that provides an important "heads-up" regarding insiders' margin accounts and a related D&O questionnaire pointer - which alone are examples of the invaluable, timely preventive guidance that this newsletter provides.
Since members of CompensationStandards.com get a free subscription to the Compensation Standards print newsletter, we have posted the Fall issue online. If you're not a member, try a '09 no-risk trial and get this issue rushed to you today.
And since all memberships are on a calendar-year basis, members should renew for '09 today to continue getting this guidance.
Registered Direct Offerings: An Alternative to Underwritten Deals
As noted in this CFO.com article, the unprecedented turmoil in the capital markets has caused many companies to consider alternatives to traditional underwritten public offerings. In this podcast, Lora Blum of Jones Day discusses registered direct offerings, including:
- What is a registered direct offering, and how is it different from a PIPE?
- Do you need an underwriter or placement agent to do a registered direct offering?
- Why might a company consider doing a registered direct offering?
- What kind of company could benefit from doing a registered direct offering, and what are the pitfalls a company considering such an offering should be aware of?
The FASB's "Alternative Model" for FAS 5 Loss Contingencies
In late December, the FASB issued its long-awaited "alternative model" for disclosures of loss contingencies under FAS 5. Described in this handout from a meeting of the FASB Advisory Council, the model is characterized as "a collection of ideas that the staff would like to field test" - and is not intended to represent either the FASB Staff's or the Board's proposal for a final statement.
Meanwhile, the SEC issued a 211-page report on fair-value accounting as required by EESA. The report recommends developing additional guidance for determining the fair value of investments in inactive markets. In other words, the study says to improve, not suspend fair-value accounting.
People: Who's Doing What and Where
At the SEC, it has been widely reported that President-elect Obama intends to nominate Mary Schapiro as the next SEC Chair. If indeed nominated and confirmed by the Senate, Mary would be the first female SEC Chair. Mary's background in regulatory service can't be matched - SEC Commissioner at the age of 33, former head of the CFTC and she currently serves as the head of FINRA (with this move, she will be taking a huge pay cut - from $2 million to $158k). Not surprising, she was on the short list.
Here are some media articles about this development:
In addition, Charles Boucher has been named the SEC's Chief Information Officer, a role in which he will direct the Commission's information technology programs and systems. Susan Markel, Chief Accountant for the Division of Enforcement, is leaving to become a Managing Director in the Corporate Investigations practice of AlixPartners.
Here is news regarding the SEC's "restacking" project. As noted in this recent Washington Post article, the SEC will be spending the next six months reshuffling the offices in its new building (price tag = $4.1 million). When the SEC moved into its new building a few years ago, someone in charge of such things had a not-so-brilliant idea - mix up Staffers from the various Divisions on each floor rather than maintain the Divisions on their own floors. End result of that: folks from the same Division communicated far less with each other because they rarely saw each other (and communication already had been reduced due to the popularity of working from home).
Some of the Corp Fin Operation groups are already moving - and this project likely will change the Mail Stops for some of them in the near future. We think this "restacking" is a great idea, but the timing of it puzzles me given that there is some likelihood of the SEC merging with the CFTC (or other agencies), but I'm sure they have their reasons.
In Corp Fin, Betsy Murphy, currently the head of Corp Fin's Office of Rulemaking, has been named the new Secretary of the Commission. Shelley Parratt has been named Acting Director and will serve in that role until John White's permanent successor is named.
TheCorporateCounsel.net Conference Calendar
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(c) 2008 Executive Press.
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