At Wednesday’s open Commission meeting, the SEC proposed new rules – Regulation AB – governing registration, reporting and disclosure requirements for asset-backed securities. The SEC intends this new regulatory regime to codify existing staff positions taken in no-action letters and other interpretive guidance. There is a 60-day comment period. Here is the SEC’s press release. We have started posting client alerts in A.11 of our Sarbanes-Oxley Law Firm Memos.
The following are meeting notes from Jenner & Block that indicate that the proposal would:
- provide for asset-backed securities to be registered on Forms S-1 or S-3. Form S-3 would be available for shelf registration of asset-backed securities under certain conditions, including the requirement that the securities be investment grade.
- enhance foreign access to the U.S. asset-backed securities markets by alleviating impediments to shelf registration by foreign asset-backed security issuers. At the same time, increased disclosure would be required regarding the material effect of foreign laws and regulations on the securities.
- emphasize differences between asset-backed and other securities require tailored disclosure requirements that target information that is important to investors in asset-backed securities.
- codify the many exemptive orders and over 200 no-action letters that have been issued to modify Exchange Act reporting requirements for asset-backed security issuers.
- continue to allow asset-backed security issuers to file, in place of quarterly reports on Form 10-Q, distribution reports that detail the performance of pool assets and payments on the securities.
- specify which of the recently adopted Form 8-K events would be applicable to issuers of asset-backed securities and includes events that are specific to asset-backed securities, such as the failure to make a distribution.
- codify the form of certification under Section 302 of the Sarbanes-Oxley Act and would retain current requirements for an annual service or compliance statement and an assessment and report attested to by an accountant as to compliance with particular servicing criteria.
- introduce a new subpart of Regulation S-K consisting of principles-based disclosure items that would form the basis of Securities Act and Exchange Act disclosure for asset-backed securities. The proposed disclosure items are based largely on current industry practice. They further enhance requirements regarding the sponsor, servicer and trustee of the securities and require disclosure of certain statistical information on a static pool basis if material to an offering.
- codify no-action letters issued in the mid-1990s permitting the use of certain written materials about asset-backed securities. These materials may contain information about the structure and asset pool and data regarding potential payouts of the assets under various pre-payment and other assumptions.
- clarify certain interpretive issues addressed by the staff over the past decade, such as the ability to include loan level information. The new rules would also require the filing of these materials.
- place foreign asset-backed offerings on a more comparable footing with domestic issuers. In the past, foreign issuers were required to use Form S-1 until the staff was comfortable with the issuer’s disclosure of its home country’s regulatory environment, particularly regarding bankruptcy, tax and the perfection of a security interest. The staff determined that it could be just as vigilant on these disclosure issues in the shelf context as in the non-shelf context, and that Form S-3 should therefore be more available to foreign issuers.
Who Do Ya Like in the Derby?
If you follow the ponies, you are duty-bound as a card-carrying legal practitioner to bet on “Read The Footnotes,” who a 12-1 entry in the Kentucky Derby on Saturday.
I have heard members complain about a number of snafus related to the new mandatory e-filing of Form IDs that commenced Monday. In hindsight, the SEC might have been better off with a phase-in period to work out the kinks.
The most trouble appears to occur in the area of “notarized authenticating documents.” For example, when you fax in your signed authentication, do not use the print version of the Form ID – you need to use the online version of the form or the SEC’s system will reject it.
Thanks to Ruth Kaufman of RR Donnelley, below is an excerpt of what Donnelley sent to clients regarding notarized authenticating documents:
“The SEC has added one additional step to the Form ID process. The SEC now requires applicants to fax to the SEC (202.504.2474 or 703.914.4240) a notarized authenticating document within two days before/after the
electronic filing of Form ID. The fax must include the accession number of the electronically filed Form ID if the electronic filing preceded the fax.
Examples of how to comply with the authenticating document requirement:
“I [name of applicant] hereby confirm the authenticity of the Form ID [filed on] / [to be filed on] [specify date] containing the information contained in this document.”
One way to satisfy the authenticating document requirement after electronic filing, would be to use a print-out of the Form ID application acknowledgment generated by the EDGAR Filer Management website. To use the printout to satisfy the requirement, the applicant must notarize the printout and add an authenticity confirming statement. Before faxing the printout, the applicant also should make illegible the passphrase that appears on it (as it should be kept highly confidential).
The adopted amendment, unlike the proposed, also includes a requirement to place in the notarized authenticating document the accession number of the related electronic Form ID filing when electronic filing occurs first.”
Yesterday, the WSJ ran an article that contained criticism of the fact that some controlled companies have taken advantage of the exceptions in the new SRO governance standards regarding director independence. I’m not convinced the criticism is warranted in all cases – rather, true independence is what counts regardless of relationships, etc.
Last week, the OECD Council approved these updated corporate governance principles after much deliberation and changes. The original OECD priniciples were established in 1999. It is expected that these principles will be ratified by the OECD Ministers at a meeting on May 12.
Some of the final principles are bound to be controversial in the US, such as:
- shareholders should have more say in nominating directors and deciding their pay
- shareholders should be able to express their views about compensation policy for board members and executives
- all equity components of an executive pay package, such as options or share incentives, should be subject to shareholders’ approval
- boards should make a clear link between pay and performance when disclosing remuneration policy
- rating agencies, banks, brokers and information providers should disclose and manage conflict of conflicts of interests that may arise in the course of close contacts with a company
The BRT has been one of the more outspoken opponents of the SEC’s shareholder access proposal – and the BRT recently filed a petition for rulemaking asking the SEC to allow companies to have direct access to beneficial owners. In addition to saving money, this would provide companies with greater opportunities to communicate with their “true” owners in the mini-contested elections that would be part of a shareholder access world.
In its petition, the BRT requests that the SEC “take steps to make the system of shareholder communications more efficient.” Specifically, the petition seeks:
- companies be able to obtain a list of all beneficial owners so that they can communicate directly with beneficial owners rather than through brokers, banks and ADP
- brokers and banks be required to execute proxies in favor of their customers so that beneficial owners can vote directly rather than through “voting instructions”
- companies be permitted to transmit proxy materials directly to beneficial owners, and not have to go through brokers and banks
The petition asks the SEC to begin the process with a concept release to solicit public comment.
FOIA Flap over Shareholder Access Rulemaking
Speaking of the BRT, Gibson Dunn (which has represented the BRT for some time) recently filed a letter as part of the shareholder access rulemaking record regarding a recent denial of a FOIA request. For what I can gather from this letter, the original FOIA request sought data that ADP provided to the SEC staff – this data was prominently noted when the 35% withheld vote trigger was proposed (egs. see footnotes 78 and 84 – and related text – of the proposing release).
It appears that the SEC staff has denied this FOIA request so far. From my dwindling memory of rulemaking, under the Administrative Procedures Act, a federal agency is required to publicly state what it relied upon when proposing a rule because it can’t base its rulemaking on secret evidence.
Suzanne Rothwell of Skadden Arps has put together a “bible” on new NASD Rule 2710. This 60-page memo – entitled “A New Approach to the Regulation of Underwriting Agreements” – follows up on her February interview with me, plus much more. It is available as a link from that interview as well as a link on the home page (until I create an “Underwriting Arrangements” Practice Area next week).
Updating Governance Practices
Learn how Nextel – a Nasdaq company – has coped with new governance obligations by forming a new department and more from my interview with their Corporate Secretary/Head of Governance & Corporate Responsibility Office, Christie Hill.
Today, You Need a New Passphrase to Make an EDGAR Filing
Starting today, you will not be able to make an EDGAR filing without a new passphrase. I blogged about this last week (and before that). If you have any questions about how to do this, look at the two Q&A Forums on Section16.net as Alan Dye has been answering hordes of questions there. Me, I ain’t no EDGAR expert…
Last Friday, the SEC filed an amicus brief in a 2nd Circuit court appeal from a district court decision certifying a class of investors who alleged that they were defrauded in purchasing WorldCom, Inc.’s securities based in large part upon misrepresentations contained in defendants’ analyst reports.
As the NY Times noted in an article earlier in the week, the SEC’s brief supports the lead plaintiff – New York State Retirement Fund – by arging that analysts like Jack Grubman affect the price of a company’s stock and bonds and may be held accountable for misrepresentations they may make. Citigroup, the parent of Grubman’s employer, is contending that his unrelenting enthusiasm for WorldCom securities had no impact – and therefore investors were not harmed when they relied on his reports. Here is more from the NY Times’ article:
“At issue is a bedrock concept in securities law known as the fraud-on-the-market theory, used in many securities fraud cases. Under this concept, all widely disseminated information about a publicly traded security is reflected in its market price, and investors rely on the integrity of this price when deciding whether to buy or sell a security. Therefore, any information about the company that is false or misleading is reflected in the market price and can harm investors who buy or sell relying on that market price.
Lawyers at Paul, Weiss, Rifkind, Wharton & Garrison in New York, representing Citigroup in the class action, argue in their brief that this legal theory should apply neither to analysts in general nor to Mr. Grubman in particular. Their brief states that institutional investors ignore analysts’ reports and that analysts’ opinions – including that of Mr. Grubman – are simply part of a conglomeration of information and do not have a distinct effect on securities prices.
There is no reason to believe that Mr. Grubman’s opinions, which relied on WorldCom’s disclosures, had any distinct price impact “over and above the price consequences of WorldCom’s massive ongoing fraud,” Citigroup’s lawyers said in their brief. As such, each investor should have to prove that he was harmed by Mr. Grubman and Salomon in individual cases, not as a class action.
But lawyers at the S.E.C. countered that economic studies showed that analysts’ reports affect securities prices and that their very purpose was to provide information upon which investors base their decisions.
In arguing that Mr. Grubman’s opinions did have an impact on WorldCom’s stock and bond prices, lawyers for the New York State fund noted in their brief the “unusually close relationship” between Mr. Grubman and WorldCom, citing the analyst’s attendance at board meetings where acquisitions were discussed.
Mr. Grubman’s influence was so pervasive that Salomon specifically solicited prospective investment banking clients by promising them that Mr. Grubman would “support” the stock with favorable research reports if they retained Salomon as their investment banker, the brief stated.
The brief also noted that the New York fund has uncovered new evidence showing that Mr. Grubman “fraudulently manipulated the underlying financial analyses he used to value WorldCom stock to maintain falsely inflated target prices for the stock and justify a buy rating, even though WorldCom’s performance did not satisfy Salomon’s own criteria to earn such a rating.”
It is unclear what prompted the WorldCom filing. But the brief seems to be evidence of continued vigilance by the S.E.C. on issues related to brokerage firm research even after its historic settlement with Citigroup and other Wall Street firms over analyst conflicts more than a year ago.”
SEC to Propose New Asset-Backed Registration & Reporting Framework
The SEC will consider proposing an overhaul of registration, disclosure and reporting requirements for asset-backed securities at an open Commission meeting on April 28th. The proposals will relate to four primary regulatory areas: ’33 Act registration; disclosure requirements; communications during the offering process; and ongoing reporting under the ’34 Act.
This has been in the works in Corp Fin for about a decade as the ABS market has grown enormously and is quite a complicated project as ABS issuers have been putting a “square peg through a round hole” for quite some time. Hats off to the staffers who slugged this one! If all the staffers who had ever worked on the project were named, I would imagine they would number about 2 dozen. I even worked on the project as a staffer briefly back in ’97, didn’t I Knute?
Yes, Private Companies Also Getting the “Treatment” from Auditors
One member – who is at a law firm – forwarded a legal opinion request from one of the Big 4 in connection with a new audit of a privately held company. Even though the private company was seeking just a routine audit – there was no registration statement or offering involved – E&Y asked the CFO to obtain a legal opinion from outside counsel that the company is duly organized, what the capitalization is, etc. Any other interesting stories to share?
I’m excited to report that Alan Dye has started blogging on Section16.net regarding Section 16 matters in “Alan Dye’s Section16.net Blog.” With larger and larger Section 16 lawsuits making their way through the courts – including one seeking over $600 million – this blog should quickly become a morning ritual for Alan’s many fans.
Don’t Forget to Obtain New EDGAR Passphrases Starting Monday
Reminder that beginning Monday April 26th, the SEC will start requiring companies to obtain a new passphrase before they can make any filings on a newly updated EDGAR. Here is information from the SEC on how to create a passphrase. For more information, see Alan Dye’s blog from Tuesday.
Note that the Romeo & Dye Section 16 Filer has been updated for EDGAR’s new changes – but users of this Filer will not be able to use the Filing Wizard until they create a passphrase. For more information about updated EDGAR, see yesterday’s SEC Digest.
PCAOB Names Its Advisory Board
The PCAOB has established its 30-member advisory board, which includes 3 lawyers that represent companies (one of whom is a former SEC Commissioner). It is intended that this board will provide input into the PCAOB’s standard-setting.
Who is the Most Frequently Noted Governance Pundit?
Someone once did a Nexis search to ascertain who is the most popular source of quotes on governance for the mainstream media. Far and away, the top three – in this order – were Professor Charles Elson, Nell Minow and Pat McGurn. Not that I am in their league, but I was delighted to be quoted in this recent CNN Money article regarding Grasso’s pay along with Nell and Pat. Gotta toot my horn once in a while…
During tomorrow’s webcast – “The Many Faces of Director Independence” – our panel will be analyzing over three dozen fact patterns in six different topic areas. In addition to analyzing these fact patterns, the panel will discuss a number of other important issues related to independence determinations, such as how frequently should the assessments take place!
These sample fact patterns are now available – you should print these off before the webcast to facilitate your understanding of the analysis.
Shareholder Access Framework to be Revised?
Yesterday’s WSJ contained an article with rumors that the SEC might narrow the eligibility standards to submit a triggering proposal to reduce the likelihood that “narrow interests” could dominate use of the triggers. In addition, the article intimated that the SEC might increase the 35% withheld threshold to 50%.
An Interesting Way to Go Private
Yesterday’s Washington Post carried an article about how IBW Financial Corp. had filed a preliminary proxy statement to conduct a 1-for-101 reverse stock-split, which would be followed by 101-for-1 stock-split – which would restore the stock to where it was to begin with. [I believe the company has given up on these transactions for now because its definitive proxy materials deleted these transactions - the Post reporter appears to have missed that...]
The purpose of the transactions was to eliminate 280 shareholders that hold less than 100 shares – enabling the company to have less than the requisite 300 shareholders for deregistration from the company’s ’34 Act obligations. The article notes that the company currently spends $150 per shareholder to makes its SEC filings (and pays dividends of 45 cents per share).
One big change is the new Item 703 stock repurchase tables that I blogged about a few weeks back, when I noted our compliation of sample tables that had already been voluntarily filed. We also have two dozen law firm memos in Section B.23 of our Sarbanes-Oxley Law Firm Memos on this topic.
At the ABA Spring Meeting a few weeks ago, Alan Beller fielded a few questions in the Item 703 area and indicated that, for purposes of this table, “repurchases” would not include common stock surrendered to a company in connection with a cashless exercise. Alan noted that this was his own opinion and referred the audience to check with the SEC staff (but I have spoken to some people that have checked in with the Chief Counsel’s office and gotten confirmation of this position – let me know if you hear differently).
E&Y Banned from Obtaining New Public Clients for 6 Months
On Friday, SEC Chief Admin Law Judge Brenda Murry – in this 69-page initial decision - barred E&Y from obtaining new public company clients for a 6-month period.
The initial decision found that E&Y violated the SEC’s rules on auditor independence during E&Y’s audit of PeopleSoft, which caused PeopleSoft to violate the securities laws by filing financial statements that were not audited by an independent accountant. Interestingly, the 6-month bar is not unprecedented as three of them were levied by the SEC back in the ’70s – but each of these prior instances involved fraudulent audits. In this case, the SEC didn’t allege that PeopleSoft had incorrect financials.
In addition to the 6-month bar, E&Y was hit with a cease and desist order and must disgorge $1.7 million (equal to the fees for auditing PeopleSoft) – as well is required to retain an independent counsultant acceptable to the SEC to help implement better controls. E&Y reportedly will not appeal this decision to the Commissioners.