August 17, 2007

Update on Corp Fin Developments

At the American Bar Association meeting earlier this week, John White delivered this speech entitled “Corporation Finance in 2007 – An Interim Report.” The speech provides an update on the status of a number of projects that are happening in Corp Fin. Here are some highlights:

1. There are no plans for any further extensions for Section 404 compliance by non-accelerated filers.

2. The Staff is interested in hearing about experiences with implementing E-proxy so that they can make any changes necessary to maximize benefits while minimizing problems associated with the process.

3. On the executive compensation front, no rule changes are anticipated for this year. The Staff is getting ready to issue the first round of comment letters coming out of its exec comp review program. No letters have yet been issued, as the Staff has been holding on to them in order to ensure consistency. The Staff’s report on the first year of disclosures under the new rules will be out in time for next year’s proxy season. The big things that the Staff has been looking at in the course of its reviews are:

– analysis of the different components of compensation and change of control and termination payments;

– the adequacy of disclosure about performance targets;

– the justification for not disclosing performance targets, and the adequacy of the “degree of difficulty” disclosure provided instead;

– disclosure about benchmarking; and

– who makes the compensation decisions, including the role of the CEO and others in the process.

4. The Staff is committed to putting together a rule this fall from the two competing shareholder access proposals. The Staff is continuing to consider what to do about other issues that came up during the May proxy roundtables, including NYSE Rule 452, empty voting, over-voting, and shareholder communications.

5. With regard to interactive data, the Staff is working on a second prototype XBRL tool, which it hopes to release soon. This prototype will feature enhanced graphics and an easy search function. Expanded taxonomies are expected to be released for public testing and comment this fall. The much anticipated “Executive Compensation Disclosure Viewer” (it has a catchy name now) is still anticipated, and will be available some time this year. More progress on implementation of interactive data is expected in the near future.

6. On the PIPEs front, the Staff hopes that the pending proposal for opening up primary offerings on Form S-3 to smaller issuers and the proposal to shorten the holding period for Rule 144 will help give smaller issuers some alternatives to PIPEs financing.

7. The Staff still has the topic of “stealth restatements” and disclosure under Item 4.02 of Form 8-K on its agenda, although no proposals are ready on these issues.

8. The Staff is still considering possible rule proposals or guidance dealing with voluntary filers.

The Rise of Alternative Trading Platforms

This seems to be the summer of alternative trading platforms for unregistered securities. As Broc noted in the blog back in May, Goldman Sachs launched its new system called GS TRuE – short for Goldman Sachs Tradable Unregistered Equity. Earlier this week, Nasdaq rolled out its new and improved PORTAL trading platform, which is described as a centralized trading and negotiation system for Rule 144A securities. Now Citigroup, Lehman Brothers Holdings, Merrill Lynch, Morgan Stanley and Bank of New York Mellon announced that they are pulling together their considerable resources to launch OPUS-5, which is short for Open Platform for Unregistered Securities (I love the name on this one). OPUS-5 is expected to begin operations next month.

These trading platforms are popping up in an environment where there is an unprecedented amount of private money sloshing around the financial system. As noted in this Washington Post article on the PORTAL Market “[f]or the first time last year, corporate America raised more money – $162 billion – from private investors than from initial public offerings, which raised $154 billion from the three major U.S. stock markets – Nasdaq, the New York Stock Exchange and the American Stock Exchange.”

The SEC Staff recently issued an interpretive letter facilitating trading of the securities of foreign private issuers on the Nasdaq PORTAL Market. In the letter, the Staff indicated its view that a foreign private issuer would continue to be eligible to claim the exemption from SEC registration under Exchange Act Rule 12g3-2(b), notwithstanding the fact that the securities would be traded through the PORTAL market, because PORTAL would not be deemed an “automated inter-dealer quotation system” under Rule 12g3-2(d)(3).

There is no doubt that one thing we need right now is more liquidity in the markets, and that seems to be what these new trading platforms are all about.

Credit Rating Agencies Face Scrutiny

It has been a wild ride in the markets over the last few weeks, and that has got to mean somebody, somewhere is at fault. It is time once again to look for some gatekeepers who were not manning their gates, and it looks like the credit rating agencies are one of the prime targets this time around. A page one article in Wednesday’s WSJ noted:

“It was lenders that made the lenient loans, it was home buyers who sought out easy mortgages, and it was Wall Street underwriters that turned them into securities. But credit-rating firms also played a role in the subprime-mortgage boom that is now troubling financial markets. S&P, Moody’s Investors Service and Fitch Ratings gave top ratings to many securities built on the questionable loans, making the securities seem as safe as a Treasury bond.

Also helping spur the boom was a less-recognized role of the rating companies: their collaboration, behind the scenes, with the underwriters that were putting those securities together. Underwriters don’t just assemble a security out of home loans and ship it off to the credit raters to see what grade it gets. Instead, they work with rating companies while designing a mortgage bond or other security, making sure it gets high-enough ratings to be marketable.

The result of the rating firms’ collaboration and generally benign ratings of securities based on subprime mortgages was that more got marketed. And that meant additional leeway for lenient lenders making these loans to offer more of them.”

This is by no means the first time that the credit rating agencies have to take the heat for market troubles. This time around, however, they will be facing scrutiny as SEC-regulated entities. Back in June, final rules implementing the Credit Rating Agency Reform Act of 2006 and certain provisions of that Act went into effect, and the rating agencies filed their registrations with the SEC. The SEC’s new rules regarding rating agencies are outlined in this press release and in this adopting release. Check out our “Rating Agencies” Practice Area for more information.

While on the topic of the choppy markets, check out this timely music video from “Merle Hazard.” Thanks to Jack Ciesielski’s AAO Weblog for pointing out this gem. With this kind of competition, Billy Broc and Dave “the Animal” are going to have to tune up their crooning voices!

– Dave Lynn