March 26, 2009

Corp Fin Updates Exchange Act Rules CDIs

Yesterday, the Corp Fin Staff updated the Exchange Act Rules CDIs to include interpretations of Exchange Act Rule 10b5-1. Rule 10b5-1 interpretations had not been included in the Exchange Act Rules CDIs back when they were first published in September 2008, and were last addressed in the Fourth Supplement to the Manual of Publicly Available Interpretations from May 2001.

The new Exchange Act Rules CDIs largely repeat the Rule 10b5-1 interpretations from the Fourth Supplement without substantive change. There are, however, a few revised or new interpretations of note. In CDI 120.19 – which deals with the question of whether cancelling one or more plan transactions affects the availability of the affirmative defense in Rule 10b5-1(c) – the Staff notes that if a new contract, instruction or plan is put in place after the termination of a prior plan, then you would have to look at all of the facts and circumstances, including the period of time between termination of the old plan and establishment of the new plan, to determine whether a plan was established “in good faith and not as part of a plan or scheme to evade.” In order to address this concern, it has become relatively common to impose a significant waiting period before a new plan can be adopted (i.e., six months), as well as a cooling off period (i.e., 30 days) before any sales are made following a plan termination.

In CDI 120.20, the Staff notes that the Rule 10b5-1(c) affirmative defense is not available when a person establishes a 10b5-1 plan while aware of material nonpublic information but delays any plan transactions until after the material nonpublic information is made public. Further, CDI 220.01 provides guidance on how a 10b5-1 plan can be transferred to a new broker when the original broker goes out of business (something to think about these days), while CDI 220.02 indicates that an issuer contemplating a repurchase plan relying on Rule 10b5-1 and 10b-18 could not structure the plan so that the amount to be repurchased by the broker under the plan could be automatically reduced by publicly disclosed block purchases, given the potential for the issuer to effectively modify the plan through the block purchases.

Even though the Rule 10b5-1 CDIs don’t necessarily break new ground, it is a good time now to go back and review Rule 10b5-1 policies (or adopt such policies if none are in place). Some very useful resources are posted in our Rule 10b5-1 Practice Area. To date, we have not heard of any significant Rule 10b5-1 developments from the Division of Enforcement, but it is likely some of the cases that the Division began looking at a couple of years ago remain ongoing.

FASB Takes Quick Action on Fair Value and OTTI

Last week, the FASB took action to address fair value criticisms by issuing proposed FSP FAS 157-e, Determining Whether a Market is Not Active and a Transaction is Not Distressed, which clarifies when an issuer is dealing with an “inactive market” and a “distressed sale” under fair value standards. The FASB also released proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, which would revise guidance on determining other-than-temporary impairments. As noted in this Morrison & Foerster memo, concern has already been expressed as to whether the FASB’s actions on these standards have gone far enough. The guidance is subject to a 15-day comment period and the FASB expects to finalize the guidance at its April 2 board meeting.

In testimony yesterday before the House Financial Services Committee, SEC Acting Chief Accountant Jim Kroeker commended the FASB for its quick action and called for guidance to be in place for the first quarter.

Earlier this week, the FASB and the IASB announced that, in order to help address issues arising from the financial crisis, “the two boards have agreed to work jointly and expeditiously towards common standards that deal with off balance sheet activity and the accounting for financial instruments. They will also work towards analysing loan loss accounting within the financial instruments project.”

A Washington Tradition Goes Nationwide

One of the more interesting (or perhaps odd is the better word) White House traditions is the annual Easter egg roll on the South Lawn. This tradition dates back to 1878, and the current financial crisis is by no means going to stop the eggs from rolling this year. In fact, the White House is taking steps to make the egg roll more open to the general public, by distributing tickets online to the nation rather than in person the weekend before the event. If you are interested in rolling some eggs on Monday, April 13 you can try to sign up today for tickets.

– Dave Lynn