December 14, 2006

The SEC’s Big Day

Yesterday, at a loooong open Commission meeting, the SEC:

adopted e-Proxy

re-proposed foreign private issuer deregistration rules

proposed interpretive guidance for management reports that evaluate internal controls

proposed higher net worth threshold for “accredited investor” definition and antifraud rule for advisers to pooled investment vehicles

At the meeting, there were only a few surprises (but note that reading the releases – whenever they’re posted – often brings more surprises). Most people already had a head’s up regarding the change to a single trading volume test for purposes of FPI deregistration and there were no real surprises in connection with internal control guidance (other than that the SEC didn’t address the status of the August 2006 proposal to extend the 404 compliance deadlines for non-accelerated filers and create a SOX 404 transition period for IPO filers; apparently that will be approved seriatim by the Commissioners soon). By seriatim approval, the SEC re-opened the comment period on proposals to enhance the independence and effectiveness of investment company directors (and the proposing release will include economic analyses of mutual fund governance and independence issues by the SEC’s Office of Economic Analysis).

In this speech, Commissioner Campos identified some of the changes that the PCAOB is expected to make in the new standard to replace AS #2 next week:

– Scalable (meaning that smaller companies can scale the standard to meet their facts and circumstances)

– Streamlined (meaning intended to achieve maximum efficiency and cost effectiveness)

– Organized to make clear that management should perform their assessment from the top down (not bottom up)

– The new standard is supposed to be about 1/3 of the length of AS #2

– Supposed to be in plain English

Quite a few law firm memos have already emailed notes on the internal controls aspect of this meeting, including this one from Sidley Austin, and we will be posting them in the “Internal Controls” Practice Area.

The Adoption of E-Proxy – and a Proposal to Make It Mandatory

For me, the most surprises came in the e-Proxy initiative. It was no surprise that the earliest that companies and other persons can use e-Proxy is the compliance date of July 1, 2007 – but it was surprising that the SEC went on to propose that e-Proxy be mandatory. After speaking to a handful of companies about whether they would take advantage of e-Proxy, a few smart ones had calculated the thresholds for when its cheaper to continue to mail in paper (using bulk mail rates) rather than mail first class (to meet the “3 business day” requirement) to those that request paper (and incur the administrative headaches of maintaining a separate list for those shareholders who request paper). The thresholds were quite a bit lower than they had assumed before they went through this exercise. Companies should conduct their own calculations and see if it’s worth submitting a comment letter on this proposal.

Under the adopted e-Proxy framework, a company may deliver online to satisfy proxy material obligations if it:

– Posts its proxy materials on a website, and

– Provides a plain English notice at least 40 days before the shareholder meeting, which includes the URL of where the proxy materials are posted and a toll free number and email address to enable shareholders to request paper copies.

Brokers, banks and similar intermediaries can deliver proxy materials using e-Proxy, with the notice and paper delivery provided through them.

Here are a few changes from what the SEC had originally proposed:

– A proxy card may not accompany the notice – but a proxy card may be delivered 10 days after delivery of the notice if accompanied by a second copy of the notice

– Shareholders can request paper delivery just one-time that would apply to all future meetings; they don’t have to request it on a per-meeting basis

– Once a shareholder requests paper, the must send the proxy materials within 3 business days after receiving the request (the proposal had been 2 business days)

– Third-parties who use e-Proxy must send a notice by the later of 40 days before the meeting or 10 days after the company filed its proxy materials – and must honor shareholder requests for paper delivery

Commissioner Campos stated that he viewed e-Proxy as a first step toward shareholder access. Commissioner Nazareth stated that while she was supportive of e-Proxy, she wanted further study of its impact before moving to shareholder access. No one else commented on the interplay between e-Proxy and shareholder access.

John W. Jones Legal Education Fund

In memory of my good friend and former Corp Fin Staffer, John Jones, Radio One and Minority Media and Telecommunications Council have created the “John W. Jones Legal Education Fund.” Donations, which are fully tax deductible, should be made to the “John W. Jones Legal Education Fund” and sent to:

Minority Media and Telecommunications Council
3636 16th Street, NW
Suite B-366
Washington, DC 20010