TheCorporateCounsel.net

An article in yesterday’s WSJ previewed the SEC’s plans for providing shareholder access to the proxy statement. The near-term timing of this proposal should come as no surprise, given that Chairman Cox committed to an aggressive timetable during his appearance before the House Committee on Financial Services last month. Unfortunately, the SEC is already generating controversy around the proposal because it is apparently considering a 5% ownership threshold for those seeking to propose a shareholder access bylaw amendment.

According to the WSJ article (written by Judith Burns):

“Critics of the SEC’s proposal say a 5% ownership stake is so high that it would make the plan usable only by hedge funds. Mr. [Richard] Ferlauto [director of pension investment policy at AFSCME] called that ‘totally irresponsible,’ and predicted that if the SEC sticks with such an approach, it would ‘create a field day for hedge funds.’ Some think the 5% level is meant to be a starting point for discussion and could be lowered to 3%, a level that would still be seen as too high by some pension fund groups and might be viewed as too low by business groups. … Mr. Cox is aiming to have the five-member commission consider floating a proxy-access proposal at a public meeting on July 25, according to individuals familiar with the matter. Final adoption of any changes would require a second vote by the SEC. Even many large institutional investors would have to band together in order to meet a 5% threshold. The SEC proposal calls for such groups to comply with the current disclosure requirements for individual owners holding 5% or more of a company’s shares. Such an approach would require groups seeking to propose proxy-access plans to file reports on their finances, an annual process for passive investors. Requiring shareholders who individually hold less than 5% of a company’s shares to file such reports may be a deterrent to some activists, including hedge funds, say those familiar with the proposal.”

Of course, the SEC’s last attempt at proxy access never made it past the comment stage, as the Commissioners divided over the best approach. Whether the current proxy access efforts devolve into a numbers game remains to be seen, but there is no doubt that – as with 2003 proposals – the SEC is going to have a hard time satisfying the various sides in this debate.

[By the way, whatever happened to the good old “Sunshine Act Notice” for announcing the date of SEC open meetings?]

XBRL for Mutual Fund Risk/Return Summaries

The SEC published an adopting release for rules extending its interactive data voluntary reporting program to the risk/return summary section of mutual fund prospectuses. Under these rules, mutual funds will now be able to voluntarily tag the information included in the risk/return summary. The release notes the SEC’s accomplishments so far in realizing the potential of XBRL, including notable progress toward developing standard taxonomies.

The risk/return summary section of a mutual fund prospectus is largely presented in a narrative format, so the voluntary participants will be breaking some new ground when tagging that type of data. The SEC is relying on a taxonomy developed for this purpose by the Investment Company Institute. The final rules include generous protections from liability for the tagged exhibits, including express protection from liability under Section 11 of the Securities Act.

Now all the SEC needs to do is to sign up some volunteers for the program, and mutual fund investors can start to see XBRL’s potential for disclosures beyond just financial schedules. That potential could be realized for operating companies as well, if interactive data concepts are ultimately deployed to narrative portions of prospectuses, proxy statements and 10-Ks.

SEC Speaks on Recent Private Equity Fund IPOs

Andrew Donohue, Director of the SEC’s Division of Investment Management, provided testimony yesterday to both the House Domestic Policy Subcommittee of the Oversight and Government Reform Committee and the Senate Committee on Finance. Those Committees are considering issues around the recent IPOs of private equity titans Fortress Investment Group and Blackstone Group. In his testimony, Donohue provided very specific information about the SEC Staff’s consideration of whether Fortress and Blackstone are investment companies.

The testimony notes that Corp Fin Staff referred the Fortress and Blackstone registration statements to Investment Management, following the normal procedures when Corp Fin is reviewing a filing. My experience has been that the Corp Fin Staff is always on the lookout for investment company issues, particularly in IPO reviews.

Donohue provides a great primer on what the Staff looks at when determining whether an entity is actually an “orthodox” investment company or an “inadvertent” investment company. In the case of Fortress and Blackstone, Donohue indicated that they do not meet the orthodox investment company test because they “are engaged primarily (and hold themselves out as being engaged primarily) in the business of providing asset management and financial advisory services to others and not primarily in the business of investing in securities with their own assets.” With respect to inadvertent investment company status, the Staff’s analysis apparently turned on the predominance of Fortress’s and Blackstone’s investments in general partnership interests that would not be deemed investment securities for the purposes of the ’40 Act.

For more resources about inadvertent investment companies, be sure to check out our “Inadvertent Investment Companies” Practice Area.

– Dave Lynn