Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

The SEC has proposed several new measures to allow small businesses greater access to new capital and to ensure less-burdensome reporting requirements. These new measures include:

1. A new, simpler disclosure regime for what will be known as “smaller reporting companies.” This new regime will apply to companies with up to a $75 million public float and will replace the rules that currently apply to “Small Businesses” and require SB Forms. Smaller reporting companies will instead comply with applicable provisions of Regulation S-K.
2. Shelf registration for companies with a public float below $75 million. This new rule would allow smaller public companies that timely file their SEC reports but otherwise don’t meet current public float requirements to have the flexibility of shelf registration.
3. A new category of securities purchasers who are exempt from registration. This amendment establishes a new Rule 507 of Regulation D which allows no registration and limited advertising for sales of securities to “qualified purchasers.” Also built into the rule are inflation adjustments for investors who currently qualify as “accredited.”
4. Shortened holding periods under Rule 144. These shortened periods allow for faster resale of restricted securities for a more efficient use of capital. There is also a proposal to allow insiders to satisfy their Form 144 requirements by filing a Form 4.
5. New exemptions from registration of compensatory employee stock options. This would ensure that registration requirements are not triggered by option granting practices alone.
6. Finally, electronic filing of Form D, the form by which companies disclose securities transactions that are exempt from registration. Electronic filing would presumably allow for simpler reporting and review of exempt securities transactions.

Comments on the proposed amendments are due within 60 days of publication in the Federal Register.

• Print
• Comments
• Trackbacks

One day after the SEC approved interpretive guidance to assist management in creating a process for evaluating internal controls over financial reporting, the PCAOB adopted Auditing Standard No. 5, An Audit of Internal Control over Financial Reporting that Is Integrated with an Audit of Financial Statements. This new standard replaces Auditing Standard No. 2. 

The PCAOB collaborated with the SEC to ensure Auditing Standard No. 5 is consistent with the SEC’s interpretive guidance. Mark Olson, PCAOB Chairman, indicated that, similar to the SEC’s interpretive guidance, the “new standard is more risk-based and scalable.” The new standard requires that auditors report to the audit committee any control deficiencies that are important, even though they may not constitute a “material weakness.” Thus, while eliminating unnecessary procedures and costs, the new standard is designed to increase the chances of finding material weaknesses in internal controls before such material weaknesses have a material effect on a company’s financial statements. 

The standard is effective for audits performed during fiscal years ending on or after November 15, 2007, but the PCAOB encourages auditors to comply with the new standard once it is approved by the SEC.

The PCAOB is developing guidance for auditors of smaller companies to apply the new standard.

• Print
• Comments
• Trackbacks

The SEC recently released new telephone interpretations on Section 16 of the Securities Exchange Act and related rules and forms. The new guidance replaces the Section 16 interpretations in the July 1997 Manual of Publicly Available Telephone Interpretations, the March 1999 Supplement to the Manual, the Section 16 Electronic Reporting Frequently Asked Questions, and the November 2002 Sarbanes-Oxley Act Frequently Asked Questions.

Two issues that arise fairly frequently are highlighted in questions 102.02 and 133.08 of the Guidance. Question 102.02 highlights the fact that when filing a Form 4 or Form 5, the insider need only report ownership for all classes of equity securities for which there was a transaction. The issue arises because Section 16(a)(3)(B) of the Exchange Act states that Forms 4 and 5 “shall indicate ownership by the filing person at the date of filing.” This language led some to wonder whether ownership of all classes of securities must be reported with every filing, regardless of whether there was a transaction for every class. The SEC says “no.” 

Question 133.08 highlights an important issue for brokers reporting their clients’ sales to the securities lawyers. When a sale is executed in increments at different prices on the same day, the number of securities sold at each price must be reported. The SEC states, “It is not acceptable to report the aggregate number of securities and a weighted average price.”

Several other specific situations and questions are detailed in the Guidance.

• Print
• Comments
• Trackbacks

As we reported on May 2, 2007, the SEC has been analyzing Section 404 of the Sarbanes-Oxley Act and rules promulgated thereunder in connection with developing interpretive guidance to assist management in creating a process for evaluating internal controls over financial reporting. The SEC was particularly interested in providing guidance that would enable public companies of all sizes to tailor their internal control procedures appropriately, in an effort to reduce needless costs, especially for smaller companies.

Yesterday, the SEC approved such guidance, which provides a principles-based framework to help public companies strengthen internal control over financial reporting without needless costs. Smaller companies in particular should benefit from the scalability of the guidance. 

The SEC also amended its rules to provide for the following:

• a company that complies with the interpretive guidance in evaluating its internal controls satisfies the annual evaluation required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934;
• a definition for the term “material weakness”;
• the elimination of the requirement that auditors attest to management’s evaluation process; and
• the requirement for an auditor’s single opinion on the effectiveness of internal control over financial reporting in its attestation report.

The guidance and rule amendments will be effective 30 days from their publication in the Federal Registrar.

• Print
• Comments
• Trackbacks

Last week the N.Y. Times reported here that Ohio Attorney General Marc Dann is bringing Ohio to the national stage regarding securities law enforcement and responsible corporate governance.

Since taking office in January, Mr. Dann has received national attention for persuading 23 state attorneys general to join in an amicus brief opposing the SEC’s position in a case before the U.S. Supreme Court about the Private Securities Litigation Reform Act of 1995. When enacted, the law created stricter standards for bringing private securities litigation against issuers of securities. Mr. Dann opposes the SEC’s contention that investor-plaintiffs should have to show “a high likelihood” that the defendant intended to violate the law.

The amicus brief—combined with Mr. Dann’s focus on stock option backdating by Ohio executives, state antitrust laws, and the obligations owed by directors to investors—has the N.Y. Times suggesting that Mr. Dann is emulating former New York Attorney General Eliot Spitzer.

• Print
• Comments
• Trackbacks

As our corporate department recently reported, the U.S. Treasury has issued final regulations under Internal Revenue Code Section 409A. The following includes a summary of actions that employers should take by December 31, 2007 to comply with the final regulations and to guard against taxation of nonqualified deferred compensation and a 20 percent excise tax:

1. Review all types of compensatory arrangements to determine whether they are subject to Section 409A. Arrangements that create a legally binding right to compensation in one year that is payable in a later year are typically subject to Section 409A.
2. Amend plan documents in writing to comply with Section 409A.
3. Determine which nonqualified plan deferrals that are linked to qualified plans comply with Section 409A and which ones do not. The arrangements that are not in compliance with Section 409A should be unlinked from the qualified plans or amended.
4. Consider amending plan documents to allow participants to change the time and form of payment of amounts subject to Section 409A.
5. Consider whether stock rights that are not exempt from Section 409A should be replaced with stock rights that are exempt.
6. Update severance and employment arrangements in light of the final regulations.

Click here for the full text of the Executive Compensation Law Alert.

• Print
• Comments
• Trackbacks

Reuters is reporting here that Nasdaq is in talks with the China Securities Regulatory Commission (China’s version of the SEC) to set up an office in Beijing. According to the article, the NYSE is also pursuing a Chinese office, the obvious goal being to secure listings from Chinese companies. Nasdaq has signed memorandums of understanding with the governments of two Chinese provinces to obtain listings and an additional MOU with the Shanghai Stock Exchange, the contents of which have not been disclosed. 

Beijing has recently drafted rules to allow foreign stock exchanges to establish offices in China, but at the same time several reports have indicated that China wants to start its own Nasdaq-style exchange. Commentators predict China, followed by India, will inspire the fiercest competition for listings among numerous overseas exchanges including markets in Germany, Hong Kong, and South Korea.

• Print
• Comments
• Trackbacks

You may review the agenda here and view the webcast here. Also, if you are interested in the SEC’s briefing paper on the roundtable, click here.

• Print
• Comments
• Trackbacks

The SEC is holding its Roundtable on the Federal Proxy Rules and State Corporation Law today. Topics include:

1. the federal role in upholding shareholders' state law rights;
2. the purpose and effect of the federal proxy rules;
3. non-binding proposals under the proxy rules; and
4. binding proposals under the proxy rules.

Panelists include:

• Stephen Bainbridge (UCLA School of Law)
• R. Franklin Balotti (Richards, Layton & Finger, P.A.)
• John C. Coffee (Columbia Law School)
• Richard J. Daly (BroadRidge Financial Solutions, Inc.)
• Jill E. Fisch (Fordham University School of Law)
• Amy L. Goodman (Gibson, Dunn & Crutcher LLP)
• Joseph A. Grundfest (Stanford Law School)
• James J. Hanks, Jr. (Venable LLP)
• Stanley Keller (Edwards Angell Palmer & Dodge LLP)
• Cary Klafter (Intel Corporation)
• Stephen P. Lamb (Court of Chancery of the State of Delaware)
• Donald C. Langevoort (Georgetown University Law Center)
• Paul M. Neuhauser (University of Iowa College of Law)
• Larry E. Ribstein (University of Illinois College of Law)
• Roberta Romano (Yale Law School)
• Leo E. Strine, Jr. (Court of Chancery of the State of Delaware)
• William Underhill (Slaughter and May)
• Ted White (Knight Vinke Asset Management)
• John C. Wilcox (TIAA-CREF)
• Ann Yerger (Council of Institutional Investors)

• Print
• Comments
• Trackbacks

The same day the House of Representatives approved the Shareholder Vote on Executive Compensation Act, a similar bill was introduced by Senator Barack Obama in the U.S. Senate. The bill has been referred to the Committee on Banking, Housing, and Urban Affairs. We will continue to update you on any developments.

• Print
• Comments
• Trackbacks

According to testimony given by SEC Chairman Christopher Cox before the Senate Committee on Small Business & Entrepreneurship on April 18, 2006, the SEC is currently in the midst of a “critical time for small businesses” as it finalizes its analysis of Section 404 of the Sarbanes-Oxley Act of 2002 in the coming weeks.

Section 404 of SOX requires the SEC to prescribe rules mandating that:

• Management of a publicly-traded company must disclose their own conclusions about the effectiveness of their internal control structure and procedures for financial reporting; and
• A publicly-traded company’s independent registered public accounting firm must attest to, and report on, management’s assessment.

The SEC complied with this rule-making requirement by creating rules that applied to all issuers, including small businesses; however, implementation for small businesses was delayed due to concerns over the cost of developing procedures to identify, test, and analyze the effectiveness of controls. In the past year the SEC has continued to analyze potential reforms of Section 404 implementation, specifically with regard to small businesses.

Proposed interpretative guidance to assist management in developing a process for evaluating internal controls is no longer open to public comment, and according to Commissioner Cox, the SEC is currently working to provide guidance in time for companies and auditors to use in connection with annual reports to be filed in 2008. Commentators have expressed concerns that the current principles-based SEC guidance is not in line with restrictive auditing standards proposed by the PCAOB. Both organizations are attempting to reconcile the discrepancies.

The SEC rule adopted in December 2006 continues to permit companies with a public float of $75 million or less to postpone their first 404 audit until March 2009 (for calendar year end companies).  

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks

• Print
• Comments
• Trackbacks