April 7, 2011

A Government Shutdown and the SEC: What Now?

A month ago, I blogged some high-level stuff about what happens to the SEC if the federal government shuts down. Now that it’s looking likely that the shutdown will indeed happen, members are emailing me in droves asking what the definitive answers are to the numerous pressing questions that relate to a shutdown.

We haven’t yet heard from the SEC – but luckily, our friends at Gibson Dunn posted this memo last night with their own reasoned guesses about what may happen, which is repeated below:

On Tuesday, April 5, 2011, the Obama administration and Congressional leaders announced that they had failed to reach a budget agreement, which could lead to a partial shutdown of the federal government if no budget bill or continuing resolution is approved by the close of business on Friday, April 8, 2011. The SEC is likely to be significantly affected by any shutdown due to the budget impasse.

While the details of a potential SEC shutdown have not been officially announced or confirmed, we understand that, in the event of a shutdown, only a very limited number of essential emergency personnel will be on duty at the SEC after Friday, April 8, 2011, until funding or a continuing resolution is approved in legislation passed by Congress and signed by President Obama. We understand that during any shutdown, non-emergency personnel will not have access to their offices or SEC online resources.

As a result, we believe that little or no action will be taken during any shutdown on matters requiring action by SEC staff, including with respect to comment letters for IPOs or other securities offerings, M&A transactions or periodic filings, reviews of confidential treatment requests or no-action letters, review/no-review decisions and rulemaking actions. We expect that the Division of Trading and Markets will have limited staff on hand to deal with time sensitive trading, markets, or financial responsibility issues.

We believe that EDGAR will still be operational, and that filings and transactions that do not require processing by the SEC staff may proceed. For example, we believe it will be possible to file reports on Forms 8-K, 10-K and 10-Q, Section 16 reports, definitive proxy statements for annual meetings and similar reports.

We also believe that it will be possible to file registration statements that are automatically effective upon filing (and post-effective amendments for such registration statements), such as Forms S-8 and S-3ASR, and to file prospectus supplements in connection with such registration statements and already effective registration statements on Form S-3. Issuers contemplating such transactions in the near future should ensure they have sufficient funds in their accounts with the SEC to pay any necessary filing fees. We note that offices such as the Office of EDGAR Information Analysis and EDGAR Filer Support will likely not be available to support filers that are having difficulties.

We recommend that clients and friends prepare for a possible SEC shutdown by:

– wiring funds into the SEC’s lock-box for any potential filing that requires the payment of filing fees sufficiently in advance of Friday;

– submitting any requests for any necessary SEC filing codes as soon as possible; and

– for those working on responding to SEC comment letters, waiting for a review/no-review decision, seeking no-action relief, or otherwise actively dealing with SEC staff on a matter, reaching out to your contact person regarding the status of any outstanding comments or other feedback, on or before this Friday.

In Corporate Disclosure, a Murky Definition of Material

Yesterday, the NY Times’ DealBook ran this article by Prof. Steven Davidoff entitled “In Corporate Disclosure, a Murky Definition of Material.” The Professor is pushing for real-time disclosure under a new materiality standard. Good food for thought on a topic that was heavily debated a decade ago and I think is worth revisiting.

How Insider Traders (Eventually) Get Caught

It’s always fascinating to read the background of how those that engage in illegal insider trading get caught because I’m constantly amazed over how brazen most of them are. The simple stuff, such as if a record of those phone calls being placed doesn’t exist. Today’s Washington Post has a front-page article about the latest – a law firm deal lawyer in DC who traded ahead of deal announcements for 17 years. 17 years! Here’s the SEC’s press release.

– Broc Romanek