April 10, 2006

“Time of Sale” and Recirculation

Off on vaca this week after taking in the ABA Business Law Section Spring Meeting late last week in Tampa. [No worries, Julie will be adding to some blogs I have pre-written for the remainder of this week.]

At Friday’s session with Corp Fin Director John White and Deputy Director Marty Dunn, there was discussion regarding the “time of sale” when adverse developments come to light after pricing – after investors originally make an investment decision – but before the offering closes. These are those situations when companies and their underwriters would like a new “time of sale” because the new information would then be part of the disclosure package that the investor considered in making the investment decision (thereby reducing the likelihood of liability for misleading or omitted disclosure).

For these situations. John and Marty emphasized that when investors are approached with the new information, the investors have to be advised that they have two choices, either: (i) keep the existing sale and retain rights attached to that original sale or (ii) mutually agree to terminate and enter into a new sale. In other words, a company and its underwriter cannot change the time of sale unilaterally by canceling the old contract and entering into a new contract.

The key here is a mutual decision; the investor can’t be told that “we can keep you in if you take the new offer or else you are no longer in the offering.” Marty made an analogy to “good” and “bad” rescission offerings where investors must be given a choice along the same lines.

Recirculation: Corp Fin Assistant Directors Won’t Weigh In

John and Marty also noted that the Division’s Assistant Directors no longer will be calling the shots as to how – and when – recirculation is necessary when new information arises after pricing. As also discussed during the recent “SEC Speaks” conference, new Rule 159 provides that conveyance of information is a facts and circumstances analysis as to whether information was conveyed at the time of sale.

In light of the new rule, Assistant Directors will no longer use their delegated authority to declare registration statements effective to inquire as to the details of how new information was conveyed. Rather, to serve as a reminder of the company’s obligation in selected circumstances, the Assistant Directors might ask for a straight-forward representation that the information will indeed be conveyed. This representation can be provided orally.

This new approach will take quite an adjustment for both Assistant Directors and those of us familar with the SEC Staff leading the way in these sticky situations. This new approach will end the ability for practitioners to try to come as close as possible to a line drawn by the Staff. Or as Marty more artfully put it, practitioners will not be able to ask “can you hear me now?” – we are on our own.

The State of Corp Fin’s Review Process

In rare form, Marty gave a snapshot of Corp Fin today, noting that the Division just dipped below 500 Staffers down to 485, including 180 lawyers and 250 accountants – with this number not likely to go up anytime soon under existing budget conditions. Marty wistfully noted that the Staff was having a lot of “going away” parties once more (I remember in the mid-90s when there was at least one such party each and every week; hard to see your friends go off into the black hole of law firms – never to see them again).

Marty also explained how the Staff looked at the filings of 6000 companies last year, many of them in the form of a “preliminary review.” Unlike the former – more cursory – “screening” process, a preliminary review takes significant more time and the disclosure is partially reviewed as part of this exam. A company may be the subject of a preliminary review and never know it. Corp Fin still also conducts full and targeted reviews. All of this also was discussed during the “SEC Speaks” conference.

Board and Chair Independence: SEC Loses Mutual Fund Court Decision (Again)

Perhaps the most amusing sight at the ABA conference was watching a panel regarding hedge fund regulation as they got the news from a Blackberry – in the midst of the panel discussion – that the SEC had again lost a court challenge to the US Chamber of Commerce over rules regarding mutual fund board and chairman independence. The panel was neither surprised nor sorrowful.

The U.S. Court of Appeals for the District of Columbia Circuit has given the SEC 90 days to collect comments on the cost of implementing the new rules, as the court faulted the SEC for relying on a non-public survey of compensation in the mutual fund industry as a basis for implementing the rules.

As I blogged about before, the Chamber first sued the SEC in September 2004 – and the same court temporarily blocked the rules from taking effect last August. Here is a copy of the court opinion.