TheCorporateCounsel.net

Did you ever wonder why SEC releases have to be so long? There is no doubt that the SEC has sometimes had a tough time with the review of its regulatory actions in the DC Circuit over the past several years, and that certainly can lead the agency to try to provide as much analysis of its actions as possible in order to comport with the Administrative Procedures Act.

In a case decided last week, the Court of Appeals vacated a 2008 SEC order approving a proposal by NYSE Arca to charge investors a fee for accessing ArcaBook, a “depth-of-book” product developed by the exchange. The petition for review was brought by NetCoalition, a public policy organization composed of approximately 20 Internet companies (including Google and Yahoo!), and SIFMA.

The Court held that the SEC’s “market-based” approach to evaluating the fairness and reasonableness of NYSE Arca’s fees for ArcaBook did not conflict with the Exchange Act, however the SEC did not adequately explain the basis of its approval nor support its conclusion with substantial evidence. As a result, the action was remanded back to the SEC for further consideration.

SEC Staff Seeking More and Better Risk Factor Disclosure

A recent CFO.com article notes that recent filing reviews by the Corp Fin staff have involved comments seeking more information about the risks that companies face. The article notes that the SEC has been asking for more specific risk factor disclosure, particularly in areas such as: reliance on customers, suppliers, governments and key employees; the market for the company’s products and services; the impact of regulatory changes; ineffective disclosure and internal controls; legal exposures and reliance on legal positions; conflicts of interest and related party transactions; a history of operating loss; and going concern issues.

The article also notes that risk disclosure remains an area that “needs fixing” in the SEC’s efforts to review all of its disclosure rules. Last month, Chairman Schapiro indicated that the Staff is working on making a recommendation to change the risk disclosure requirements, all as part of the agency’s overall focus on risk.

There are several factors that could help explain the Staff’s increased focus on risk disclosure in filing reviews. First, there is an overarching focus on risk at all levels of the SEC, so there is no doubt an interest in ensuring that public company disclosures to investors are sufficiently robust from the SEC’s perspective. Second, the SEC has hired more lawyers into Corp Fin, which has enabled that Division to do many more “full reviews” of periodic reports than had been done in the past, and one of the areas ripe for any review by lawyers is the risk factors section. Lastly, the Staff has been casting the net widely in terms of the material that it reviews when looking at a company’s periodic reports (including press releases, trade articles, website postings, earnings releases, etc.), and this may in some instances lead the Staff to ask more questions about potential risks associated with a company’s business and financial condition.

Revisiting Emergency Succession Planning

High profile, rapid CEO departures of the type that we have been seeing lately are a good reminder of the potential need for putting in place an emergency succession plan. Succession planning on the whole has become a focal point of investors, and will likely be a significant issue in the upcoming proxy season thanks to the Staff’s position on CEO succession planning in Staff Legal Bulletin No. 14E. So now may be a good time to revisit your succession planning process.

While not all public companies have implemented emergency succession plans, the implementation of such plans appears to be on the rise these days. The main purpose of an emergency succession plan is to ensure that decisions about successor appointments (usually interim appointments) are made in advance of an unexpected event and can be implemented quickly, so as to minimize the adverse impact on a company’s stock price and ongoing operations.

Keep in mind that an emergency succession plan may be very different from the company’s long-term succession plan. It may be the case that different executive officers or directors are identified to succeed a CEO or other executive officers on an interim basis as compared to the long-term succession plan, because an emergency succession plan is put in place to provide for a transition of management during a crisis situation, rather than seeking to meet the company’s long-term strategy.

For more on succession planning, be sure to check out our “Succession Planning” Practice Area.

– Dave Lynn