February 8, 2006

Technical Amendments to the ’33 Act Reform

Yesterday, the SEC posted a release with technical amendments to its ’33 Act reform. The release contains four corrections, including applying the Item 512(h) indemnification statement to automatically effective shelfs (as had been previously noted over a month ago in our Q&A Forum). Look for some big Corp Fin news today…

SEC Approves PCAOB Auditing Standard No. 4

Yesterday, the PCAOB posted the SEC order approving Auditing Standard No. 4 regarding reporting on whether a previously-reported material weakness continues to exist. This PCAOB proposal had been languishing since last Spring.

On page 4 of the order, the PCAOB is directed to publish a “clear and concise outline of the affirmative audit steps set forth in the standard” within 90 days. So more to come here.

Sarbanes-Oxley Under Attack

Yesterday, the Free Enterprise Fund and and Beckstead & Watts filed a federal lawsuit in Washington DC against the Public Company Accounting Oversight Board and the four Board members in their official capacity. The lawsuit challenges Sections 101-109 of Sarbanes-Oxley, with the central argument being that the mere existence of the PCAOB – and the manner in which Board members are appointed and the PCAOB exercises its authority and is overseen by the SEC – violates the Appointments Clause of the U.S. Constitution (ie. Article II, Section 2). Another argument made is that these circumstances cause a violation of the “separation of powers” doctrine in the Constitution.

Since Sarbanes-Oxley lacks a “severability” clause, the entire law could be held unconstitutional if even one part of the Act is found to be a violation. Here is a copy of the complaint and a related white paper.

Congress could step in and pass a technical amendment to fix the alleged appointments violation – but there are many clamoring for a repeal/modification of other sections of Sarbanes-Oxley that might cause Congress to take a deeper look. This is what is urged by today’s opinion column in the WSJ.

I think a more realistic expectation is reflected by the statement in this other WSJ article: “With members of Congress facing re-election in 10 months, it is unlikely that Republican lawmakers will try to gut legislation designed to restore consumer confidence in Wall Street.”

How to Trade Restricted Securities

Last October, I blogged about a new network that allows for trading in restricted securities. In this podcast, Brad Monks, President of Restricted Stock Partners, explains how the Restricted Stock Trading Network operates, including:

– What is the RST Network?
– Who is using the Network so far?
– From a legal perspective, what’s the applicable ’33 Act exemption (Section 4(1 1/2)?) that users rely on?
– In your experience so far, do transfer agents require a legal opinion for each trade since the shares will be legended?
– What other questions are people asking?