You should read my revised blog from yesterday below – the SEC staff still is mulling over some open issues on the new Item 703 stock repurchase table. I will revise this blog later today if I hear any developments.
One open issue is whether you need to include the 703 table if you did not make any repurchases during the quarter, but you have a publicly announced repurchase plan under which future repurchases can be made? Some companies apparently think the answer is “yes” – Qualcomm’s 10-Q has a table with zeroes under the columns for repurchases during the quarter, along with the column for future possible repurchases that includes the number of shares available for repurchase and a footnote about the terms of the ongoing repurchase program.
And some companies appear to think the answer is “sort of” – Raytheon’s 10-Q has narrative disclosure about its ongoing repurchase program. I think either approach makes sense and is a much better idea than dropping the table completely – but we await word from the staff as to what is acceptable.
Weaknesses in the Proxy Process
John Wilcox, Vice Chair of Georgeson has been the voice of reason during the shareholder access debate by pointing out how our proxy system might be too broken to accommodate the SEC’s proposed framework. Learn more in my interview with John on Weaknesses in the Proxy Process.
’33 Act Filing Fees Going Down Again for Fiscal ’05
Effective October 1st – or 5 days after the date on which the SEC receives its fiscal year 2005 regular appropriation – whichever date comes later (and the appropriation always comes later), the Section 6(b) fee rate applicable to the registration of securities, the Section 13(e) fee rate applicable to the repurchase of securities, and the Section 14(g) fee rates applicable to proxy solicitations and statements in corporate control transactions will decrease to $117.70 per million from the current rate of $126.70 per million.
As usual, the adjusted fee rates will not affect the amount of funding available to the Commission. A copy of the SEC’s order, including the calculation methodology, is available.
We have been inundated with interp questions on the new Item 703 repurchase table that will debut in the 10-Qs (that are required to be filed by COB Monday), as I’m sure the SEC staff has been. Below are several issues that have been informally addressed recently by the SEC staff – most of these are drawn from our Q&A Forum:
Restricted Stock: Executives purchase stock on day 1 for $.01 per share, which is par value. The shares are restricted and cannot be sold until the restrictions lapse. The restrictions lapse 20% per year for 5 years. Each time restrictions lapse, the executives have a tax withholding obligation to the Company which they may satisfy by delivering back to the Company some of the shares on which the restrictions have lapsed. Also, when an executive leaves the employ of the Company, the shares must be sold back to the Company for $.01 per share.
Answer: I have heard that some staffers have told practitioners that both types of repurchases have to be reported under 703 – any consideration given by the company means that the stock must be included in the table (if no consideration is given, it need not be included). I have also heard that you don’t need to include restricted stock units (because they are not registered under Section 12) – but this could be an area where the staff changes its view. One area that is clear is that you don’t need to include forfeitures of restricted stock upon failure to satisfy vesting requirements or vesting conditions (so long as no consideration is given).
Options: As noted in my interview with Jonathan Wolfman, the staff has said that you don’t need to include net option exercises to pay the exercise price of an option – nor the net option exercise to pay tax withholding of an option. But the staff has now decided that a stock-for-stock exchange does get included (so i am adding a note about the reversed position into Jonathan’s interview).
Rabbi Trusts: An issuer has a non-qualified deferred compensation plan for executives which allows participants to invest in the issuer’s stock. A rabbi trust purchases stock, subject to formulaic parameters, according to the investment choices of the participants. The issuer does not direct the purchase or sale.
Answer: These repurchases should be included in the table (because they are the company’s assets).
By the way, the March/April issue of The Corporate Counsel asks some interesting questions about some still unanswered issues regarding affiliated purchasers and employee benefit plan repurchases (the March/April issue is just hitting the streets as I type).
More from Oxley on SOX
Aparently, at the Security Traders Association conference last week, Representative Oxley said one – or more hearings – will be held this summer to evaluate how the legislation that bears his name is impacting businesses and whether or not it is working as intended. The hearings would include testimony from corporate executives, the SEC and the PCAOB.
In addition, Oxley told reporters that the House committee he chairs will soon review the FASB’s controversial stock option exposure draft.
We have posted the May issue of our popular email newsletter.
SEC’s Letter Explaining E&Y Suspension
The SEC has posted a letter from its Chief Accountant to E&Y’s CEO explaining the terms of the 6-month suspension on E&Y’s ability to obtain new clients. It makes clear that the SEC’s action is intended to focus on E&Y – and not hurt any of E&Y’s clients.
Good News in California regarding Shareholder Access!
I had reported a few months ago (see this March Eminders archive ) that California had introduced its own shareholder access legislation – introduced by Assemblymember Judy Chu – that would have gone a few steps further than the SEC’s proposal. It appears sanity has prevailed as the California bill has been substantially amended so that it’s no longer the threat it once was to the SEC’s proposal. Here is the latest marked-up version of the bill (i.e. note changes like “nominate” to “recommend,” etc.).
At Wednesday’s open Commission meeting, the SEC proposed new rules – Regulation AB – governing registration, reporting and disclosure requirements for asset-backed securities. The SEC intends this new regulatory regime to codify existing staff positions taken in no-action letters and other interpretive guidance. There is a 60-day comment period. Here is the SEC’s press release. We have started posting client alerts in A.11 of our Sarbanes-Oxley Law Firm Memos.
The following are meeting notes from Jenner & Block that indicate that the proposal would:
– provide for asset-backed securities to be registered on Forms S-1 or S-3. Form S-3 would be available for shelf registration of asset-backed securities under certain conditions, including the requirement that the securities be investment grade.
– enhance foreign access to the U.S. asset-backed securities markets by alleviating impediments to shelf registration by foreign asset-backed security issuers. At the same time, increased disclosure would be required regarding the material effect of foreign laws and regulations on the securities.
– emphasize differences between asset-backed and other securities require tailored disclosure requirements that target information that is important to investors in asset-backed securities.
– codify the many exemptive orders and over 200 no-action letters that have been issued to modify Exchange Act reporting requirements for asset-backed security issuers.
– continue to allow asset-backed security issuers to file, in place of quarterly reports on Form 10-Q, distribution reports that detail the performance of pool assets and payments on the securities.
– specify which of the recently adopted Form 8-K events would be applicable to issuers of asset-backed securities and includes events that are specific to asset-backed securities, such as the failure to make a distribution.
– codify the form of certification under Section 302 of the Sarbanes-Oxley Act and would retain current requirements for an annual service or compliance statement and an assessment and report attested to by an accountant as to compliance with particular servicing criteria.
– introduce a new subpart of Regulation S-K consisting of principles-based disclosure items that would form the basis of Securities Act and Exchange Act disclosure for asset-backed securities. The proposed disclosure items are based largely on current industry practice. They further enhance requirements regarding the sponsor, servicer and trustee of the securities and require disclosure of certain statistical information on a static pool basis if material to an offering.
– codify no-action letters issued in the mid-1990s permitting the use of certain written materials about asset-backed securities. These materials may contain information about the structure and asset pool and data regarding potential payouts of the assets under various pre-payment and other assumptions.
– clarify certain interpretive issues addressed by the staff over the past decade, such as the ability to include loan level information. The new rules would also require the filing of these materials.
– place foreign asset-backed offerings on a more comparable footing with domestic issuers. In the past, foreign issuers were required to use Form S-1 until the staff was comfortable with the issuer’s disclosure of its home country’s regulatory environment, particularly regarding bankruptcy, tax and the perfection of a security interest. The staff determined that it could be just as vigilant on these disclosure issues in the shelf context as in the non-shelf context, and that Form S-3 should therefore be more available to foreign issuers.
Who Do Ya Like in the Derby?
If you follow the ponies, you are duty-bound as a card-carrying legal practitioner to bet on “Read The Footnotes,” who a 12-1 entry in the Kentucky Derby on Saturday.
I have heard members complain about a number of snafus related to the new mandatory e-filing of Form IDs that commenced Monday. In hindsight, the SEC might have been better off with a phase-in period to work out the kinks.
The most trouble appears to occur in the area of “notarized authenticating documents.” For example, when you fax in your signed authentication, do not use the print version of the Form ID – you need to use the online version of the form or the SEC’s system will reject it.
Thanks to Ruth Kaufman of RR Donnelley, below is an excerpt of what Donnelley sent to clients regarding notarized authenticating documents:
“The SEC has added one additional step to the Form ID process. The SEC now requires applicants to fax to the SEC (202.504.2474 or 703.914.4240) a notarized authenticating document within two days before/after the
electronic filing of Form ID. The fax must include the accession number of the electronically filed Form ID if the electronic filing preceded the fax.
Examples of how to comply with the authenticating document requirement:
“I [name of applicant] hereby confirm the authenticity of the Form ID [filed on] / [to be filed on] [specify date] containing the information contained in this document.”
One way to satisfy the authenticating document requirement after electronic filing, would be to use a print-out of the Form ID application acknowledgment generated by the EDGAR Filer Management website. To use the printout to satisfy the requirement, the applicant must notarize the printout and add an authenticity confirming statement. Before faxing the printout, the applicant also should make illegible the passphrase that appears on it (as it should be kept highly confidential).
The adopted amendment, unlike the proposed, also includes a requirement to place in the notarized authenticating document the accession number of the related electronic Form ID filing when electronic filing occurs first.”
Yesterday, the WSJ ran an article that contained criticism of the fact that some controlled companies have taken advantage of the exceptions in the new SRO governance standards regarding director independence. I’m not convinced the criticism is warranted in all cases – rather, true independence is what counts regardless of relationships, etc.
Last week, the OECD Council approved these updated corporate governance principles after much deliberation and changes. The original OECD priniciples were established in 1999. It is expected that these principles will be ratified by the OECD Ministers at a meeting on May 12.
Some of the final principles are bound to be controversial in the US, such as:
– shareholders should have more say in nominating directors and deciding their pay
– shareholders should be able to express their views about compensation policy for board members and executives
– all equity components of an executive pay package, such as options or share incentives, should be subject to shareholders’ approval
– boards should make a clear link between pay and performance when disclosing remuneration policy
– rating agencies, banks, brokers and information providers should disclose and manage conflict of conflicts of interests that may arise in the course of close contacts with a company
The BRT has been one of the more outspoken opponents of the SEC’s shareholder access proposal – and the BRT recently filed a petition for rulemaking asking the SEC to allow companies to have direct access to beneficial owners. In addition to saving money, this would provide companies with greater opportunities to communicate with their “true” owners in the mini-contested elections that would be part of a shareholder access world.
In its petition, the BRT requests that the SEC “take steps to make the system of shareholder communications more efficient.” Specifically, the petition seeks:
– companies be able to obtain a list of all beneficial owners so that they can communicate directly with beneficial owners rather than through brokers, banks and ADP
– brokers and banks be required to execute proxies in favor of their customers so that beneficial owners can vote directly rather than through “voting instructions”
– companies be permitted to transmit proxy materials directly to beneficial owners, and not have to go through brokers and banks
The petition asks the SEC to begin the process with a concept release to solicit public comment.
FOIA Flap over Shareholder Access Rulemaking
Speaking of the BRT, Gibson Dunn (which has represented the BRT for some time) recently filed a letter as part of the shareholder access rulemaking record regarding a recent denial of a FOIA request. For what I can gather from this letter, the original FOIA request sought data that ADP provided to the SEC staff – this data was prominently noted when the 35% withheld vote trigger was proposed (egs. see footnotes 78 and 84 – and related text – of the proposing release).
It appears that the SEC staff has denied this FOIA request so far. From my dwindling memory of rulemaking, under the Administrative Procedures Act, a federal agency is required to publicly state what it relied upon when proposing a rule because it can’t base its rulemaking on secret evidence.
Suzanne Rothwell of Skadden Arps has put together a “bible” on new NASD Rule 2710. This 60-page memo – entitled “A New Approach to the Regulation of Underwriting Agreements” – follows up on her February interview with me, plus much more. It is available as a link from that interview as well as a link on the home page (until I create an “Underwriting Arrangements” Practice Area next week).
Updating Governance Practices
Learn how Nextel – a Nasdaq company – has coped with new governance obligations by forming a new department and more from my interview with their Corporate Secretary/Head of Governance & Corporate Responsibility Office, Christie Hill.
Today, You Need a New Passphrase to Make an EDGAR Filing
Starting today, you will not be able to make an EDGAR filing without a new passphrase. I blogged about this last week (and before that). If you have any questions about how to do this, look at the two Q&A Forums on Section16.net as Alan Dye has been answering hordes of questions there. Me, I ain’t no EDGAR expert…
Last Friday, the SEC filed an amicus brief in a 2nd Circuit court appeal from a district court decision certifying a class of investors who alleged that they were defrauded in purchasing WorldCom, Inc.’s securities based in large part upon misrepresentations contained in defendants’ analyst reports.
As the NY Times noted in an article earlier in the week, the SEC’s brief supports the lead plaintiff – New York State Retirement Fund – by arging that analysts like Jack Grubman affect the price of a company’s stock and bonds and may be held accountable for misrepresentations they may make. Citigroup, the parent of Grubman’s employer, is contending that his unrelenting enthusiasm for WorldCom securities had no impact – and therefore investors were not harmed when they relied on his reports. Here is more from the NY Times’ article:
“At issue is a bedrock concept in securities law known as the fraud-on-the-market theory, used in many securities fraud cases. Under this concept, all widely disseminated information about a publicly traded security is reflected in its market price, and investors rely on the integrity of this price when deciding whether to buy or sell a security. Therefore, any information about the company that is false or misleading is reflected in the market price and can harm investors who buy or sell relying on that market price.
Lawyers at Paul, Weiss, Rifkind, Wharton & Garrison in New York, representing Citigroup in the class action, argue in their brief that this legal theory should apply neither to analysts in general nor to Mr. Grubman in particular. Their brief states that institutional investors ignore analysts’ reports and that analysts’ opinions – including that of Mr. Grubman – are simply part of a conglomeration of information and do not have a distinct effect on securities prices.
There is no reason to believe that Mr. Grubman’s opinions, which relied on WorldCom’s disclosures, had any distinct price impact “over and above the price consequences of WorldCom’s massive ongoing fraud,” Citigroup’s lawyers said in their brief. As such, each investor should have to prove that he was harmed by Mr. Grubman and Salomon in individual cases, not as a class action.
But lawyers at the S.E.C. countered that economic studies showed that analysts’ reports affect securities prices and that their very purpose was to provide information upon which investors base their decisions.
In arguing that Mr. Grubman’s opinions did have an impact on WorldCom’s stock and bond prices, lawyers for the New York State fund noted in their brief the “unusually close relationship” between Mr. Grubman and WorldCom, citing the analyst’s attendance at board meetings where acquisitions were discussed.
Mr. Grubman’s influence was so pervasive that Salomon specifically solicited prospective investment banking clients by promising them that Mr. Grubman would “support” the stock with favorable research reports if they retained Salomon as their investment banker, the brief stated.
The brief also noted that the New York fund has uncovered new evidence showing that Mr. Grubman “fraudulently manipulated the underlying financial analyses he used to value WorldCom stock to maintain falsely inflated target prices for the stock and justify a buy rating, even though WorldCom’s performance did not satisfy Salomon’s own criteria to earn such a rating.”
It is unclear what prompted the WorldCom filing. But the brief seems to be evidence of continued vigilance by the S.E.C. on issues related to brokerage firm research even after its historic settlement with Citigroup and other Wall Street firms over analyst conflicts more than a year ago.”
In our “Proxy Season Resource Center,” we have pulled disclosures from recent filings to give a window into what companies tend to be disclosing in five hot areas in “Top Disclosure Trends From This Proxy Season.” These hot areas include:
SEC to Propose New Asset-Backed Registration & Reporting Framework
The SEC will consider proposing an overhaul of registration, disclosure and reporting requirements for asset-backed securities at an open Commission meeting on April 28th. The proposals will relate to four primary regulatory areas: ’33 Act registration; disclosure requirements; communications during the offering process; and ongoing reporting under the ’34 Act.
This has been in the works in Corp Fin for about a decade as the ABS market has grown enormously and is quite a complicated project as ABS issuers have been putting a “square peg through a round hole” for quite some time. Hats off to the staffers who slugged this one! If all the staffers who had ever worked on the project were named, I would imagine they would number about 2 dozen. I even worked on the project as a staffer briefly back in ’97, didn’t I Knute?
Yes, Private Companies Also Getting the “Treatment” from Auditors
One member – who is at a law firm – forwarded a legal opinion request from one of the Big 4 in connection with a new audit of a privately held company. Even though the private company was seeking just a routine audit – there was no registration statement or offering involved – E&Y asked the CFO to obtain a legal opinion from outside counsel that the company is duly organized, what the capitalization is, etc. Any other interesting stories to share?
