June 21, 2007

SEC Issues Internal Controls Guidance and Rulemakings

Yesterday, the SEC posted its management report guidance regarding Section 404 of Sarbanes-Oxley – as well as its adopting release regarding amended rules. The SEC also posted the proposing release regarding the definition of a “significant deficiency.”

The SEC also has posted the proposing release regarding the Smaller Company Capital-Raising Reform, which will be analyzed more in tomorrow’s blog.

The SEC “Really” Wants Comments

Last week, the SEC posted an atypical “Notice of Additional Solicitation of Comments” relating to the PCAOB’s AS #5, seeking comment on seven specific questions. This notice seeks “additional” comments in addition to those solicited by the SEC’s notice from the prior week. My guess is that the SEC might not get much in response – how many times have folks had to comment on internal controls over the past five years? There’s gotta be some burnout from comment writers…comments are due July 12th.

SEC Adopts Universal E-Proxy

Also at yesterday’s open Commission meeting, the SEC adopted “universal” notice-and-access model of proxy distribution (commonly known as “mandatory e-proxy”) as well as amendments to Rule 105 of Regulation M to prohibit abusive short selling in the context of public offerings (here is Reg M press release). From Paul Weiss, here are notes from that portion of the open meeting (note the reference to a California conflict, as raised in Monday’s blog and teased out in our Q&A Forum further, specifically #2881 and #2889).

Regarding mandatory e-proxy, here is the opening statement from the Corp Fin Staff. For universal e-proxy, the new requirement will be phased in over two years, with large accelerated filers starting in 2008 and smaller companies and mutual funds beginning in 2009.

You may recall the Staff has been avoiding using the term “mandatory” with this rulemaking because that term implies that a company would have to deliver electronically. This is not true, companies can still deliver in paper under universal e-proxy – the only thing mandatory about it really is that companies will have to post their proxy materials on their website. And most companies already do that. The other change wrought by universal e-proxy is that the proxy materials would have to include another half-page worth of content, the “Notice of Internet Availability of Proxy Materials.”

SEC Proposes Elimination of Reconciliation of US GAAP for Foreign Issuers

At yesterday’s open Commission meeting, the SEC proposed to eliminate the requirement for foreign issuers to reconcile their financial statements with US GAAP if they are prepared in accordance with International Financial Reporting Standards (IFRS). Here are some opening remarks from the Corp Fin Staff.

Under the proposal, a foreign private issuer that presents financial statements in accordance with IFRS as adopted by the International Accounting Standards Board (IASB) will no longer be required to present a reconciliation to US GAAP. Such a reconciliation is currently required for audited financial statements, and in particular in an annual report on Form 20-F. It is also currently required for interim financial statements used in a registered offering of securities when the audited financial statements are more than nine months old.

Here are notes from this portion of the open meeting, courtesy of Cleary Gottlieb:

– The proposal will only apply to IFRS as adopted by the IASB. IFRS have been adopted with variations in particular jurisdictions, and notably in the European Union. The SEC, however, would only eliminate reconciliation if the issuer uses IASB IFRS, and the auditor opines on conformity with IASB IFRS. The technical implications of this approach were the subject of extensive discussion at the meeting and will be a focus for comments, since European issuers are required to prepare financial statements in accordance with IFRS as approved by the European Union.

– The proposal will refer to the English-language version of IFRS. The staff explained that IFRS are published in many languages, but under the proposal an issuer and its auditors will be required to refer to the English-language version.

– The proposal will apply only to foreign private issuers. As previously announced, the SEC staff is working on a concept release concerning whether U.S. domestic issuers should also be permitted to report under IFRS rather than US GAAP. That release was reported to be forthcoming later this summer.

– The proposal would affect Form 20-F and several other SEC forms and rules. The staff announced that the proposal would amend Securities Act Rule 701, which permits companies to issue shares and stock options to employees in the United States without SEC registration. Rule 701 currently requires a company to reconcile its financial statements to U.S. GAAP when it sells more than $5 million of securities per year to employees.

– It is too early to say when the rule changes might be effective, but it would appear that the process is on track for them to apply to calendar 2008 reports. The commissioners mentioned the importance of the European Commission’s deadline to decide by January 1, 2009 whether to allow U.S. issuers to file US GAAP financial statements in Europe.

The SEC said that the proposing release will also seek comment on whether to shorten the deadline for a foreign private issuer to file its annual report on Form 20-F, which is currently six months from the end of the fiscal year. The SEC has considered changing this deadline in the past, and the time required for the US GAAP reconciliation has been one reason it has not done so.

The SEC staff announced at the meeting that it plans to create an area on its website where the public can readily locate the reports of foreign private issuers using IFRS and the comment letter correspondence on those reports.

The proposal will be open for comment for 75 days from the date of publication in the Federal Register.

– Broc Romanek