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

In a move that is expected to ease filing burdens for small businesses in particular, the SEC announced today proposed amendments to Regulation D and Form D. The most significant is that Form D—the form used by issuers to report offerings of securities without registration under the Securities Act—must be filed electronically, and paper submissions will no longer be accepted.

The SEC has officially been considering electronic filing of Form D since 1998, but the inquiry into electronic filing stalled over concerns that it might be burdensome to force small businesses to file Form D using the SEC’s EDGAR filing system. The SEC’s description of the proposed amendments, however, states that Form D will be filed through a new filing system accessible by any computer with internet access. Issuers will file by providing information in electronic data fields in response to a series of questions. The SEC promises clearer and simpler questions, streamlined informational requirements, and an electronic database of Form D information available to regulators and the public. 

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The SEC recently announced that it has adopted amendments to the proxy rules, which will require companies to make their proxy materials available to shareholders on an Internet website. Large accelerated filers (excluding registered investment companies) must comply with the amendments starting January 1, 2008 and registered investment companies, soliciting persons other than issuers, and issuers that are not large accelerated filers must comply with the amendments starting January 1, 2009.

Companies and other soliciting persons may choose one of two options in order to provide shareholders with proxy materials: (1) the “notice only option”; or (2) the “full set delivery option.”

The “notice only option” requires companies to send a Notice of Internet Availability of Proxy Materials to its shareholders 40 calendar days or more in advance of a meeting. Notably, no other materials (including a proxy card) may be sent with the Notice, except for the notice of a shareholder meeting required by state corporation law. The “notice only option” also requires all proxy materials to be posted on a specified Internet website (other than EDGAR) by the time the company sends the Notice to shareholders. Under this option, companies are required, upon request from a shareholder, to deliver a hard copy of all proxy materials, at no charge to the requesting shareholder.

Under the “full set delivery option,” a company may continue to deliver its proxy materials to shareholders the traditional way - by sending them a hard copy of the materials. Two requirements, however, have been added to this option: (1) the company must provide the same information required in a Notice of Internet Availability of Proxy Materials with the proxy materials or in a separate notice; and (2) the company must post the proxy materials on a specified Internet website (other than EDGAR).

The amendments to the proxy rules do not apply to business combination transactions.

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The SEC voted Wednesday to strengthen Rule 105 of Regulation M in an effort to prevent manipulation of the offering prices of securities. The SEC press release is available here. Specifically, the SEC wants to combat traders who sell short prior to the pricing of an offering and then cover the short position with shares bought at a reduced offering price.

Selling short is a bet that the price of a particular security will decrease. A trader sells short by borrowing a specific security and selling it. If the price then goes down, the trader buys the amount of securities it initially borrowed and profits off the difference between the price on the date of sale and the price on the date of purchase.

The old Rule 105 prohibited using shares obtained in an offering to cover a short position taken in the restricted period before the pricing of the offering. The new rule prohibits purchasing an offered security if the trader took a short position in the restricted period prior to pricing the offering. In the words of the SEC, “the amended rule changes the prohibited activity from covering to purchasing the offered security.”

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Yesterday, the SEC released its guidance regarding management’s report on internal control over financial reporting, and made clear that an evaluation in compliance with the guidance is one way to satisfy the Exchange Act Rules 13a-15 and 15d-15 evaluation requirements. As we reported on May 24, 2007, the guidance is meant to provide a principles-based framework to help public companies strengthen internal control over financial reporting without needless costs, which will particularly benefit small companies.

If you are interested in reviewing the actual text of the rule amendments, the SEC has also posted its adopting release. In addition to providing that a company which complies with the interpretive guidance in evaluating its internal control over financial reporting satisfies the Exchange Act Rules 13a-15 and 15d-15 evaluation requirements, the amendments provide for the following:

• 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.

With one exception, the effective date of the rule amendments is August 27, 2007.

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Lauren Cohen of Yale University, Andrea Frazzini of the University of Chicago, and Christopher Malloy of the London Business School have made available a study indicating a correlation between mutual fund returns and the relationship between the fund manager and the executives of the companies in which the fund managers invest. The study indicates that funds do better when fund managers invest in companies operated by old college and graduate school classmates.

Professor Dale Oesterle of Ohio State University’s Moritz College of Law blogs here that this study could indicate these mutual fund results are due to insider trading. Another explanation is that fund managers simply have better information regarding whether old acquaintances know how to run a business. If insider trading is the reason, this study could lead to scandal just as similar studies regarding correlations in stock trading led to the option backdating scandal.       

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Staying in line with Aflac CEO Dan Amos’ belief that executives should be respected and not feared by a company’s shareholders and employees, Aflac is the first U.S. company to permit shareholders to have a say on pay. Thus, beginning in 2009, Aflac shareholders will have an advisory vote on executives’ compensation. ABC News Nightline ran a brief story about Aflac on Monday.

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Yesterday, ISS blogged about Booz Allen Hamilton’s annual CEO succession study, which reported several interesting findings that I also think are worth sharing. The study, which is based on the world’s 2,500 largest public companies concludes that the imperial CEO has been replaced by the inclusive CEO, as reported in the press release on the study – “The Era of The Inclusive Leader.” 

As noted in the press release, the study shows that CEOs are becoming acutely aware that in order to succeed, they must listen to the concerns of their directors, shareholders and employees, and respond timely and appropriately. Thus, the days of CEOs answering only to themselves appear to be closer to a distant memory than today’s reality. 

The study shows that boards are becoming less tolerant of current poor performance and indications of future underperformance than in the past. It used to be that boards would primarily only remove CEOs for proven underperformance, however, boards are becoming more focused on future performance and more inclined to remove CEOs based on indications of future underperformance.

The study also indicates that splitting the roles of chairman and CEO can be very beneficial to companies. Notably, in 2006, all of the underperforming CEOs of North American companies were also chairmen of their companies, or served under chairmen who were the companies’ former CEOs. The conclusion that investors benefit more when the positions of chairman and CEO are held by different individuals is a consistent conclusion on a global scale.

The press release is a quick read and I recommend checking it out.

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The IRS has revised the definition of “covered employee” under Section 162(m) of the Internal Revenue Code. The old definition used to mirror the SEC’s definition of Named Executive Officer (officers for whom compensation must be disclosed), but the SEC’s recent changes to executive compensation disclosure rules caused the two definitions to be out-of-sync.

Under new guidance from the IRS, the text of which is not yet available on the IRS website, “covered employee” means any employee who is either the principal executive officer or whose total compensation is required to be reported by the SEC for being one of the three highest paid officers. This definition aligns 162(m) with the SEC’s new executive compensation disclosure rules. Interestingly, a corporation’s principal financial officer is excluded as a “covered employee” if his or her compensation disclosure required by the SEC is simply on account of he or she being the principal financial officer.  

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