SEC Approves "Potential" IFRS Roadmap: D-Day Six Years Hence

Yesterday, the SEC adopted a proposed roadmap for the potential transition by US companies from US GAAP to IFRS at an open Commission meeting. The roadmap provides that the voluntary transition to IFRS for a limited category of US companies could start with reports filed for fiscal periods ending on - or after - December 15, 2009. To be allowed to do that, a company would have to be among the 20 largest companies within its industry in the world - and a large number of its competitors would have to already be using IFRS. The SEC estimates that about 110 companies would qualify for this voluntary movement.

The roapmap entails possibly mandating IFRS for large US companies for their 2014 financial statements, with somewhat smaller ones required to make the move in 2015 and then the smallest companies forced to use IFRS in 2016. The final decision on whether to implement this timetable would be made in 2011.

Here are the related SEC documents:

- Press Release
- Opening Remarks by Chief Accountant
- Videotaped Remarks from Chair Chris Cox
- Speech from Commissioner Elisse Walter

We'll provide more coverage of this big development over the next few weeks. Note that the Big 4 auditors and others will soon be holding webcasts - I've already seen announcements - so there will be "all you can handle" coverage of this topic. Here's more coverage from FEI's "Financial Reporting Blog."

SEC Adopts Tighter Form 20-F Deadline

At its open Commission meeting, the SEC also adopted amendments to the rules applicable to foreign private issuers that file reports with the SEC (here are opening remarks from the Corp Fin Staff; here is the press release). Here are extensive notes from Cleary Gottlieb:

The most important amendment is to accelerate the deadline for filing an annual report on Form 20-F to four months after the end of the fiscal year, an improvement compared to the 90-day deadline the SEC originally proposed for large issuers. Based on the discussion at the open meeting, the final rule will otherwise implement the amendments substantially as proposed in March 2008, with one exception (the full text of the release is not yet available).

Deadline for Filing Form 20-F

Currently an issuer's annual report on Form 20-F is due six months after the end of each fiscal year. The SEC shortened the deadline to four months for all FPIs. It had proposed 90 days for accelerated filers and 120 days for other filers. The change will take effect for fiscal years ending on or after December 15, 2011 – so for a calendar-year issuer, it will take effect for the 2011 annual report filed in 2012.

To justify the shorter deadline, the SEC pointed out that filing deadlines in other countries are generally not longer than four months and that a four-month deadline will ensure more timely disclosure for investors. The SEC apparently rejected the arguments of many commentators that an accelerated deadline will be burdensome for FPIs since their 20-F reports must include more and different information than the home-country report and are often prepared after the home-country report is substantially complete.

The accelerated deadline is particularly significant for FPIs that must reconcile their financial statements to U.S. generally accepted accounting principles, a complex and lengthy process that may be hard to complete within the new deadline. Companies that prepare financial statements under IFRS (as issued by the International Accounting Standards Board) are exempt from this requirement, and the tighter deadline may cause some companies to switch to IFRS, especially if they can use IFRS for home-country reporting. One reason for the three-year delay in effectiveness is to allow time for foreign issuers and regulators to adopt IFRS.

Other Changes Relating to Form 20-F

Most of the changes concern the disclosure requirements of Form 20-F, which FPIs use to file annual reports with the SEC and which forms the basis of the disclosures required for registered offerings.

- An FPI that must reconcile its financial statements to U.S. GAAP will no longer have the option to use the less demanding presentation under Item 17 of Form 20-F. Financial statements of a company other than the issuer – e.g., an acquired company or an equity-method investee – may still be prepared under Item 17.

- Form 20-F will require disclosure of significant differences between the issuer's corporate governance practices and the requirements of U.S. securities exchanges. The rules of the U.S. exchanges already require essentially the same information but permit it to be published on the website instead.

- Form 20-F will require disclosures about any fees and charges relating to an issuer's ADR programs, including payments made by a depositary to the issuer in connection with the programs.

- Form 20-F will require disclosures regarding changes in and disagreements with the issuer's auditors. The disclosures are substantially the same as those that apply to U.S. issuers under Form 8-K, except that under Form 20-F they will only be required annually.

The SEC specified that the change described in the first bullet above will take effect for fiscal years ending on or after December 15, 2011. It did not address the effectiveness of the other amendments, which will apparently be earlier.

The SEC did not adopt one related proposal, under which an annual report on Form 20-F would have had to include target financial statements and pro forma financial information for some large completed acquisitions. The proposal would have affected only a few companies each year, but the burden would have been significant, so the decision not to adopt this requirement provides significant relief.

Changes to "Going Private" Rules

The SEC amended its "going private" rules under Exchange Act Rule 13e-3 to cover share repurchases, tender offers and proxy solicitations that are intended, or would be reasonably likely, to render an FPI eligible to deregister its securities.

Changes to Determination of FPI Status

Under the new rules, an issuer will be required to determine its FPI status under the SEC's rules once a year on the last day of its second fiscal quarter, and the amendments will provide a transition period for a company that loses FPI status. Under current rules, a company must test its status continually and start reporting as a U.S. company immediately upon the loss of FPI status.

SEC Overhauls Registration Exemption for Foreign Companies

At the open Commission meeting, the SEC also voted to adopt amendments to Rule 12g3-2(b), which exempts certain foreign private issuers from registration with the SEC (here are opening remarks from the Corp Fin Staff; here is the press release). Here are extensive notes from Cleary Gottlieb:

Based on the SEC staff's comments at the open meeting, the SEC has accepted the most widely made comment on its original proposal, by eliminating the proposed 20% cap on U.S. trading volume. The final rule will otherwise be adopted substantially in the form proposed in the SEC's February 2008 proposing release (the full text of the release is not yet available).

Under Section 12(g) of the Securities Exchange Act of 1934 and related rules, a foreign private issuer (as defined under the Exchange Act) that has 300 or more U.S. resident holders of a class of equity securities at the end of its most recently completed fiscal year, and 500 or more worldwide holders of record (plus US$10 million or more in total assets), must register that class under the Exchange Act unless an exemption is available. Exchange Act registration requires a company to comply with SEC reporting requirements, and with the Sarbanes-Oxley Act of 2002.

Registration under Section 12(g) is theoretically required even if a company does not list or publicly offer its securities in the United States. However, an exemption is available under Rule 12g3-2(b). Rule 12g3-2(b) currently allows an FPI that has not listed or publicly offered securities in the United States to avoid registration by making an application under the Rule and furnishing the SEC with English-language versions of certain material information that the issuer makes public or is required to file in its home country. For most companies, the information must be submitted to the SEC in paper form.

The amendments will make the exemption automatically available to eligible FPIs, which will no longer have to make an application to the SEC. Under the amendments, in order to maintain the exemption, a company must publish electronically (either on its website or on a publicly available electronic system) English translations of certain key documents, such as annual and interim reports and financial statements, material press releases and certain other significant documents. Paper submission will no longer be required.

The amendments will include two eligibility requirements that an FPI must meet to benefit from the exemption:

- The issuer has no active Exchange Act reporting obligations under Section 13(a) or 15(d) (this means essentially that the issuer has not listed or publicly offered securities in the United States).

- The issuer maintains a listing of the subject securities on one or more non-U.S. exchanges that are its primary trading market (meaning one or two markets that represent at least 55% of its worldwide trading volume, at least one of which must have greater trading volume than the United States).

The amendments do not include the most controversial eligibility requirement from the SEC's February proposal, which would have made companies ineligible if trading in the United States represented more than 20% of the issuer's worldwide trading volume in the most recently completed year. In the open meeting, the SEC's staff indicated that most commenters had opposed the 20% trading volume test, in particular due to the dampening effect it could have had on sponsored ADR facilities and the inclusion of U.S. investors in exempt offerings such as private placements. As the issuer must still meet the primary trading market requirement described above in order to benefit from the exemption, U.S. trading must in any case represent no more than 45% of an issuer's worldwide trading volume.

The result of these amendments is that vast numbers of non-U.S. companies that regularly publish English-language documents will automatically become exempt, without any action (or even any knowledge of the exemption). As a result, their shares will become eligible for unsponsored ADR facilities and Rule 144A resales to qualified institutional buyers. At the same time, some companies, such as unlisted funds or acquisition targets that have delisted but have remaining U.S. shareholders, may be ineligible for the exemption.

It is also uncertain whether the amended Rule will require that issuers publish full English translations of documents or whether English versions that cover all material information will be sufficient. We had noted in our comment letter that many companies include information in their home country reports (due either to local regulations or to local practices) that is not of interest for U.S. investors, and that some of these companies omit this information from the English versions of these reports.

The amendments will provide for a three-year transition period for FPIs that lose their Rule 12g3-2(b) exemption because they are unable to meet the Rule's new substantive requirements. In addition, the Rule will include a three-month transition period following effectiveness to enable issuers to comply with the Rule's substantive requirements, in particular the electronic publication of English-language documents.

- Broc Romanek

A Sleeper? The SEC's Proposal Limiting the Ability of Subsidiaries to Issue Shelf Debt

Back in early July, the SEC snuck in a proposal - amidst a host of proposals directed at the rating agencies - that has the potential to limit the number of companies that can currently issue debt securities using a shelf registration statement, while at the same time expanding shelf eligibility to less creditworthy issuers. As proposed, the investment grade non-convertible debt securities transaction requirements in General Instruction I.B.2 of Form S-3 would be replaced with essentially the WKSI debt issuer standard - that the company has issued more than $1 billion for cash in registered offerings of non-convertible securites over the prior three years. The comment period for this proposal ends next week, on September 5.

This potentially could be a huge deal. For instance, junk bonds could be offered on Form S-3 under the proposed eligibility criteria, so long as the issuing company meets the $1 billion issuance standard. Further, a company could use S-3 if it met the $1 billion standard, even if some or all of the outstanding debt is in default. The SEC also asked questions about making disclosure concerning ratings mandatory (now it is permissive under Item 10(c) of S-K), including whether ratings and changes in ratings should be disclosed on Form 8-K. Further, in an unusual move, the eligibility standard for issuing asset-backed securities off of Form S-3 would look to, among other things, the status of the investors - namely whether they are QIBs. In its proposing release, the SEC says that only six corporate debt issuers would be kicked off of S-3 if they switched to the $1 billion issuance standard, but it is unclear at this point whether that estimate captures the full impact of the proposed rule change.

Unfortunately, this proposal appears to represent a purely facial change - pulling references to credit ratings out of all of the SEC's rules because it supposedly gives the ratings (and the ratings process) an SEC "stamp of approval" - that could have some far-reaching ramifications for the markets at a time when issuers of asset-backed securities, hybrid instruments and corporate debt are most in need of the quick access to capital afforded by Form S-3 and shelf registration.

- Dave Lynn

Delaware Chancery Court Forces Director Compensation Disgorgement

Good to see more securities law blogs emerge. Joe Wallin's new "Corp Fin Blog" recently ran this item:

In Julian v. Eastern States Construction Service, Inc. (Del. Ch. July 8, 2008), the Delaware Chancery Court ordered the disgorgement of director compensation bonuses after its determination that the bonuses did not pass the entire fairness standard.

"Self-interested directorial compensation decisions made without independent protections, like other interested transactions, are subject to entire fairness review. Directors of a Delaware corporation who stand on both sides of a transaction have “the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the courts.” They “are required to demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain.” The two components of entire fairness are fair dealing and fair price. Fair dealing “embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.” Fair price “assures the transaction was substantively fair by examining ‘the economic and financial considerations.'

SEC Approves PCAOB's "Communication with Audit Committee re: Independence" Proposal

Yesterday, the SEC issued this order approving the PCAOB's proposal regarding communications with audit committees regarding independence.

- Broc Romanek

The PCAOB (and Sarbanes-Oxley) Lives!

Despite indications that the holding would be the opposite, the DC Circuit Court of Appeals delivered an opinion in Free Enterprise v. PCAOB which upheld - by a 2-1 vote - the constitutionality of the Public Company Accounting Oversight Board on Friday. Here is a statement from SEC Chairman Cox - and here is a PCAOB statement.

The Court of Appeals decision upholds a lower court decision from eighteen months ago. The WSJ reports in this article that the plaintiffs intend to appeal either for a rehearing before the full DC Appeals court or to the US Supreme Court.

In eighteen parts, Professor Jay Brown has some analysis of the decision in his "Race to the Bottom" Blog. And here is an excerpt from a Washington Post article:

"Writing for the appeals court panel's majority, Judge Judith W. Rogers said the plaintiffs lost the bulk of their case more than 70 years ago when the Supreme Court upheld the constitutionality of independent agencies. In addition, the SEC, whose members are nominated by the president and confirmed by the Senate, has broad authority over the board, including the power to change its rules, limit its operations and block any sanctions it proposes against auditors, she said.

The Sarbanes-Oxley Act "vests a broad range of duties" in the accounting oversight board, but the board's "exercise of those duties is subject to check" by the SEC "at every significant step," Rogers wrote. She was joined in the majority by Judge Janice Rogers Brown.

In an impassioned dissent, Judge Brett M. Kavanaugh wrote that the Sarbanes-Oxley Act renders the PCAOB "unaccountable and divorced from Presidential control to a degree not previously countenanced in our constitutional structure." The majority sided with U.S. District Judge James Robertson, who threw out the suit last year, asserting that its legal theories did not merit a trial."

The SEC's Big "End of Summer" Rulemaking Binge

On Wednesday, the SEC will hold an open Commission meeting to consider:

- proposing an IFRS roadmap

- adopting rule amendments regarding the circumstances under which a foreign private issuer is required to register equity securities under Section 12(g)

- adopting amendments to foreign private issuer form/rules that are intended to enhance the information that is available to investors

- adopting an expansion of the cross-border business combination transactions and rights offerings exemptions and adopting changes to the beneficial ownership reporting rules to permit certain foreign institutions to file reports on a shorter form (as well as issuing interpretive guidance related to cross-border transactions)

- Broc Romanek

Analyst "Quiet Period Practices Survey

It's gonna be light blogging from here until Labor Day. To amuse yourself, take a moment and participate in this Quick Survey on Analyst "Quiet Period Practices. This will help us all gauge how analyst quiet periods differ from insider trading blackout policies as well as Regulation FD policies.

And also take a moment to fill out this Quick Survey on CEO Succession Planning.

Harvey Pitt and His Naked Short Selling Compliance Role

On the heels of the news that former SEC Chairman Harvey Pitt is one of the forces behind a new web-based electronic stock lending and location service, the State of Alabama tapped Harvey to become a Deputy Attorney General so that he can investigate naked short selling activities that impact companies in the state. Here is a column from NY Times' Floyd Norris.

I have all the respect in the world for Harvey (I believe his work as SEC Chair in the wake of SOX and 9/11 is unparalleled in the history of the SEC) - so I hope he isn't getting in over his head here. Criticism for his role in short selling (as well as the identity of one of his partners in his new venture) has started and may not abate. Here is a blog about possible conflicts from DealBreaker.

- Broc Romanek

Connecticut Treasurer Obtains Better Internal Pay Equity Disclosure

Recently, the Connecticut Treasurer - through the Connecticut Retirement Plans and Trust Funds - issued this press release to announce that it has withdrawn shareholder proposals at Abercrombie & Fitch and Supervalu after the companies pledged to disclose information relating to pay differences among top executives. Although it's unknown whether these two companies will adopt all of the requested elements sought by the withdrawn shareholder proposals (their proxy statements have vague statements about use of internal pay equity), here are the four pieces of the internal pay equity policy that the Connecticut Treasurer proposed:

- The Committee should receive data on internal pay equity at peer group companies at least annually.
- The Committee should consider internal pay equity in (a) the establishment, modification and termination of senior executive pay plans and programs and (b) making specific awards under those plans and programs.
- The Committee should provide the internal pay equity data it receives, as well as any analysis performed by it or its outside advisors, to the board as a whole (or an appropriate Board committee) at least annually to assist in evaluating succession planning.
- The Company should disclose to stockholders on its website or in its proxy statement the role of internal pay equity considerations in the process of setting compensation for the CEO and other NEOs.

It will be interesting to see how more shareholders demand changes in board's benchmarking practices in the near future. We have posted copies of the internal pay equity shareholder proposals in our "Internal Pay Equity" Practice Area on CompensationStandards.com.

Study: Leadership Pay Disparities

While we're on the topic of internal pay equity, here is an interesting excerpt from Professor Lisa Fairfax posted on the "Conglomerate Blog":

I recently ran across a 2007 study conducted by the Institute for Policy Studies, a progressive research center, which published figures on the pay disparities of various people in leadership positions. Based on 2005 and 2006 data, the study focused on the median salaries for the twenty highest paid individuals in various sectors. It found the following:

- Congress members: $171,720
- Military leaders: $178,542
- Federal executive branch: $198,369
- Heads of non-profit organizations: $968,698
- Heads of publicly held companies: $36.4 million

Recently, I posted this same blurb on "The Advisor's Blog" on CompensationStandards.com and received quite a variety of responses. Some criticized the way the study was prepared - some had a visceral reaction to the stats...

CEO Pay Remains in the News

Warning signs over excessive pay and those who won't stand for it anymore continue to pop up all around us. For example, recently - as noted in this Washington Post article - the Maryland Insurance Commissioner cut in half the $18 million severance package paid to a former CareFirst BlueCross BlueShield CEO, saying the CareFirst board failed to restrain his compensation.

It's also noteworthy that UnitedHealth Group has settled the two class action lawsuits over its options backdating for the unbelievable amount of $912 million (this is on top of the more than $600 million the former CEO has proposed to repay to settle the lawsuit against him). Shortly afterwards, the company announced it was laying off 6% of its workforce.

- Broc Romanek

Alas, EDGAR R.I.P.

As Dave gave us the heads up yesterday in this blog, the SEC held a press conference yesterday to announce that EDGAR will be succeeded by a new filing platform called "IDEA," which is short for "Interactive Data Electronic Applications." As noted in this press release, this new platform is based on the SEC's XBRL initiative and IDEA will at first supplement and then replace EDGAR.

In his "IR Web Report," Dominic Jones reports that SEC Chairman Cox said that IDEA won't be fully mature for five years - and he noted that the press conference didn't reveal anything all that newsworthy. The thing that struck me when I read Dominic's blog is he notes the likely motivation for the SEC to hold a press conference with nothing really new to report: an attempt to wake up companies to the fact that XBRL is coming. Dominic notes: "I guess I’m just not attuned to the idea of regulators as marketers."

The big news out of the press conference is that the SEC intends to kill off its most valuable brand by choosing to rename EDGAR. In my opinion, it's a horrible marketing move for the SEC even if the underlying architecture is being completely replaced. If there is one thing that all investors - large and small - know about the SEC, it's that they can find information about public companies on "EDGAR." Everyone knows what the term means; it has a twenty-year plus history and the term is unique. "IDEA" will need to be branded anew and my guess is that this term is so common in our language that folks will come up with a nickname for it (or simply continue to call it "EDGAR") to distinguish it from the common use of the term "idea."

Note that I'm not being critical because Dave and I were once again left out of the group of bloggers invited to the SEC's press conference. We already had another party to go to. Besides I would have moaned that I’m really getting sick of the incredibly poor animation and voice-over at the top of the SEC's home page - and it’s only been one day! I'm surprised that there isn't an IDEA mascot, maybe a duck or a bear - something preferably with an extra large head...

Our "3rd Annual Proxy Disclosure" Conference: Hotel Nearly Full

All of our Conferences - "Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference"; "5th Annual Executive Compensation Conference" and "16th Annual NASPP Conference" - will be held during the week of October 20-24th at the Hilton New Orleans Riverside.

Note that the Hilton New Orleans Riverside is almost sold out - so act today by registering for the hotel online or call them at 504.561.0500. If you are unable to secure a room at the Hilton New Orleans Riverside, we have secured additional rooms at the Loews New Orleans Hotel (which is two blocks away from the Hilton), which you can obtain by calling 866.211.6411. We also have secured rooms at the Embassy Suites New Orleans - Convention Center, where you can register online or by calling 800.362.2779.

At any of these hotels, be sure to mention the "NASPP Annual/Executive Compensation Conference" to obtain the special Conference rate. If you have difficulty securing a room, please contact our HQ at naspp@naspp.com or 925.685.9271.

FindLaw: Not Playing By Google's Rules? And Law Firms Pay...

Some pretty interesting stuff from Kevin O'Keefe's LexBlog in this blog - FindLaw appears to have been caught gaming Google by selling links to lawyer websites and, in the words of one blogger, possibly scamming their lawyer customers. Here is Kevin's follow-up blog expressing disbelief that FindLaw and its parent, Thomson Reuters, has not done anything in the way of damage control with its law firm clients.

- Broc Romanek