Financial Reporting Manual Has Been Updated

Yesterday, the SEC posted its updated Financial Reporting Manual, which was revised as of June 30, 2012 (search for the date tag, “Last updated: 6/30/2012,” to view the changes).   The SEC added a note regarding Title I of the Jumpstart Our Business Startups Act (JOBS Act) to the manual, but the note did not add any new guidance regarding the financial reporting and other requirements for emerging growth companies and just referred to the existing SEC guidance regarding the JOBS Act at http://www.sec.gov/divisions/corpfin/cfjobsact.shtml.

The remaining revisions to the Financial Reporting Manual clarify the following matters:

  • proxy statement requirements for the disposal of a business;
  • auditor association with amounts from inception in development stage companies;
  • application of PCAOB auditor requirements in connection with  a reverse merger; and
  • reporting requirements in a reverse acquisition with a domestic registrant that is not a shell company.

Last Minute Summer Reading Alert! SEC Adopts Rules Regarding Conflict Minerals and Resource Extraction Payments

           If you were concerned that you had finished all your summer reading with time to spare, worry no more.  The SEC has adopted a total of 588 pages of final rules regarding disclosures of the use of conflict minerals and payments by resource extraction issuers.

          The new rules were adopted on August 22, 2012.   Both rules were mandated by the Dodd-Frank Act and apply to all reporting companies (including foreign issuers and smaller reporting companies).  Congress enacted the conflict minerals requirement out of concerns that the exploitation and trade of “conflict minerals” by armed groups was helping to finance conflict in the Democratic Republic of the Congo (DRC) and adjoining countries.  Congress enacted the resource extraction payments disclosure to increase the transparency of payments made by oil, natural gas and mining companies to foreign governments so that, in theory, the citizens of those countries could hold their governments accountable for the wealth generated by those resources.

            The conflict minerals rule will require reporting companies that use certain minerals, including gold, tin, tungsten and tantalum, that are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company, to make disclosures on new Form SD (rather than as an exhibit to Form 10-K as originally proposed).  The rule requires that the company make a reasonable inquiry to determine whether any of the conflict minerals originated in the DRC or an adjourning country and, based on the results of that inquiry, make disclosures including, in some cases, a Conflict Minerals Report that will require an independent private sector audit.  There is no de minimis standard in the rule.   All issuers are required to use the same reporting period, the calendar year, regardless of fiscal year.  The first report is due on or before May 31, 2014 for the 2013 calendar year and no later than May 31st every year thereafter.

            The resource extraction payment rule will require reporting companies that are engaged in the commercial development of oil, natural gas or minerals to disclose certain payments (including taxes, royalties, fees, bonuses, dividends and costs of infrastructure improvements) made to foreign governments (including foreign local governments) or the U.S. government.  Payments (including a series of related payments) of less than $100,000 are considered de minimis under the rule and need not be disclosed.

            As with the conflict minerals rules, disclosure will be made on Form SD, but are required to be filed within 150 days after the end of the issuer’s fiscal year.  Issuers are required to comply with the new rules for fiscal years ending after September 30, 2013. For the first report, most resource extraction issuers may provide a partial report disclosing only those payments made after September 30, 2013.

            Both rules provide that the disclosures will be deemed “filed” and not “furnished” (as had originally been proposed), thereby imposing potential liability under the Securities Exchange Act, but no separate CEO and CFO certifications will be required.

How should companies evaluate whether there is a conflict of interest related to the compensation consultant’s work?

Tomorrow, on July 27, 2012, a new Regulation S-K, Item 407(e)(3)(iv), disclosure requirement focusing on the conflicts of interest of compensation consultants will become effective.  Item 407(e)(3)(iv) disclosure should be addressed in any proxy or information statement for a meeting of shareholders at which directors will be elected occurring on or after January 1, 2013.

Pursuant to the new requirement, public companies will have to disclose the nature of the conflict of interest, if any, related to the compensation consultant’s work on executive and director compensation and how the conflict of interest is being addressed.  To comply with this requirement, one of the threshold questions that a public company should ask is whether there is a conflict of interest.

In order to evaluate whether such conflict of interest exists, public companies should act now to establish controls and procedures for obtaining conflict of interest information. For example, the company should:

1. Establish internal procedures and processes to track:

(i)  all services provided to the company by the compensation consultant and the entity that employs the consultant starting from the last completed fiscal year; and

(ii) the amount of fees paid by the company to the entity that employs the compensation consultant.

2. Request from the compensation consultant, or from the entity that employs the consultant, the following information:

(i) the percentage that the amount of fees received from the company by the entity that employs the compensation consultant represents to the total revenue of such entit; and 

(ii) direct or indirect ownership of the company’s stock by the compensation consultant, and

(iii) policies and procedures of the entity that employs the compensation consultant that are designed to prevent conflicts of interest.

3. Add the following question to the company’s Directors’ and Officers’ Questionnaire:

Do you have a business or personal relationship with the compensation consultant or the entity employing the compensation consultant?   ___ Yes  ___ No         

If “yes,” please describe:

                                                                                                          

                                                                                                          

 

SEC Approves Rule Requiring a Single, Consolidated Audit Trail System to Track Trading Activity

On July 11, 2012, the Securities and Exchange Commission announced that it approved Rule 613 pursuant to the Securities Exchange Act of 1934 requiring the national securities exchanges and the Financial Industry Regulatory Authority (collectively, the “SROs”) to develop a detailed, comprehensive plan for creating, implementing, and operating a single, market-wide consolidated audit trail system.  The rule requires that the system, when implemented, collect and accurately identify every order, cancellation, and trade execution for all “National Market System” securities.  

Currently, there is no single, readily accessible database regarding orders and executions.  Instead, such information must be compiled from separate audit trail systems established by the various SROs that cover orders only in their respective markets.  Presently, preparing such a compilation can be a long and tedious process.  For example, according to comments from SEC Chairman Mary L. Shapiro, after the Flash Crash of May 6, 2010, it took dozens of highly-trained economists, financial professionals, and data technologists four months to assemble and process information necessary to fully analyze just a few hours of trading on a single day. 

While the rule was approved, Commissioner Aguilar did not support the rule, stating in part that “today’s rule falls short of establishing the process that investors deserve. . . . I am concerned that the [proposed rule] fails to set appropriately specific requirements to ensure the creation of a comprehensive market surveillance system . . . .”

The rule will become effective 60 days after publication in the Federal Register and requires the SROs to submit their plan for the consolidated audit trail system to the SEC within 270 days after publication of the SEC adopting release in the Federal Register.  The plan will not be implemented unless and until approved by the SEC.

 

SEC to hold Sunshine Act Meeting

The SEC announced yesterday that on August 22, 2012 at 10:00 a.m. it will hold an open meeting to consider:

  • whether to adopt rules regarding disclosure and reporting obligations with respect to the use of conflict minerals;
  • whether to adopt rules regarding disclosure and reporting obligations with respect to payments to governments made by resource extraction issuers; and
  • rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act of 1933, as amended and Rule 144A promulgated thereunder.

What has changed in compensation committee requirements and disclosures after the issuance of the new SEC release last week? What should we do now?

Due to the SEC’s adoption of a new Rule 10C-1, Listing Standards Relating to Compensation Committees, we are one step closer to having the mandate of Section 952 of the Dodd-Frank Act fully implemented and to securities exchanges adopting listing standards relating to the independence of the compensation committee members, the committee’s authority to retain compensation advisers, and the committee’s responsibility for the appointment, compensation and oversight of the work of a compensation adviser. Each national securities exchange must provide to the SEC proposed rules that comply with Rule 10C-1 no later than September 25, 2012 and must have final rules that comply with Rule 10C-1 no later than June 27, 2013.

Public companies will also have to comply with a new disclosure requirement related to the conflicts of interest of compensation consultants in any proxy statement for a meeting of shareholders at which directors will be elected occurring on or after January 1, 2013.  Pursuant to this new requirement under Item 407(e)(3)(iv) of Regulation S-K,  public companies will have to disclose the nature of the conflict of interest, if any, related to the compensation consultant’s work on executive and director compensation and how the conflict is being addressed. 

In addition to monitoring the rulemaking of national securities exchanges related to the implementation of Rule 10C-1 directives, public companies should consider taking the following actions in connection with the required analysis of the conflicts of interest related to the work of a compensation consultant:

  • establish procedures for obtaining information about (i) all services provided to the company by the compensation consultant and the entity that employs the consultant during the last completed fiscal year, (ii) the amount of fees received from the company by the entity that employs the compensation consultant as a percentage of the total revenue of such entity, and (iii) any stock of the company owned by the compensation consultant;
  • request and review the policies and procedures of the entity that employs the compensation consultant that are designed to prevent conflicts of interest; and
  • update directors’ and officers’ questionnaires to include questions related to the business or personal relationships of (i) the compensation consultant with a member of the compensation committee; and (ii) the compensation consultant, or the entity employing the compensation consultant, with an executive officer of the company.

SEC Approves FINRA Rule Related to Private Placements

On June 7, 2012, the SEC approved, on an accelerated basis, new FINRA Rule 5123 “Private Placements of Securities”).  The new rule will require, subject to certain exceptions, FINRA member firms that sell securities in certain private placements to submit a notice filing with FINRA, including disclosure documents, if any, utilized in the offering.  FINRA has noted that the filing requirement is a notice filing only.  Therefore, issuers and member firms should not expect to receive FINRA comments or input before commencing an offering.

SEC Extends Compliance Date for Third-Party Solicitor Provisions of Advisers Act Pay-to-Play Rule

On June 8, 2012, the SEC extended the compliance date for the third-party solicitor provisions of Rule 206(4)-5 of the Advisers Act (the “Pay-to -Play Rule”). The Pay-to-Play Rule, among other things, prohibits an adviser from providing or agreeing to provide, directly or indirectly, compensation to any person to solicit a government entity for investment advisory services on behalf of such adviser unless the person is an executive officer, general partner, managing member or employee of the adviser, or such person is a registered investment adviser, a registered broker-dealer, or a registered municipal adviser. 

The SEC extended the compliance date for the third-party solicitor provisions of the Pay-to-Play Rule until nine months after the compliance date of a final rule adopted by the SEC related to the registration of municipal advisor firms. Once the final rule regarding the registration of municipal advisor firms is adopted, the SEC will issue the new compliance date for the ban on third-party solicitations.

SEC Updates Procedures for Non-Public Submission of Registration Statements by Foreign Private Issuers

On May 30th, the SEC updated its procedures for foreign private issuers wishing to make non-public submission to the SEC of draft registration statements for review by the SEC.  Prior to the enactment of the JOBS Act, domestic issuers filing initial registration statements with the SEC were required to file publicly through the EDGAR system.  Under certain limited circumstances, however, foreign private issuers had the option of submitting to the SEC registration statements and amendments on a non-public basis for SEC review in connection with their first-time registration of securities with the SEC.   

Pursuant to Section 106(a) of the JOBS Act, any emerging growth company (EGC), in connection with its initial public offering, may submit to the SEC a draft registration statement for confidential, non-public review.  Section 106(a) of the JOBS Act also requires that the EGC file publicly the initial confidential submission and all amendments at least 21 days prior to the date the company starts its road show.  In addition, SEC policy requires EGCs to submit on EDGAR all company responses to SEC comment letters on confidential draft registration statements at the time the EGC first files its registration statement publicly on EDGAR.  The SEC will then publicly release its comment letters and company responses no earlier than 20 business days following the effective date of the registration statement, which is the same time frame the SEC uses for non-confidential filings.

Pursuant to the updated procedures, the process for non-public submission of initial registration statements by foreign private issuers that are not EGCs now tracks the process applicable to EGCs.  When a foreign private issuer utilizing the SEC’s non-public submission policy first publicly files its registration statement, it is also required to file publicly all previously submitted draft registration statements and to resubmit all previously submitted responses to SEC comment letters.  Thereafter, the SEC will publicly release its comment letters and company responses in accordance with its policy described above.  A foreign private issuer that both qualifies as an EGC and meets the SEC’s requirements for non-public submission of registration statements by foreign private issuers can elect to submit its initial draft registration statement confidentially to the SEC as an EGC or non-publicly as a foreign private issuer.  The new filing and submission requirements set forth in the SEC’s May 30th update apply to foreign private issuers seeking non-public review (as opposed to confidential review as an EGC) only where the initial draft registration statement was submitted after May 30, 2012.

SEC Provides Updated Instructions for Submitting Confidential, Non Public Review Registration Statements by Emerging Growth Companies and Foreign Private Issuers

The SEC published new instructions for the submission of draft registration statements by emerging growth companies (as permitted under the JOBS Act) and by foreign private issuers (under the SEC’s policy) for confidential, non-public review by the SEC.  Such registration statements, exhibits and correspondence must be submitted to the SEC via a secure e-mail system.  Users will be required to create an e-mail account.  All draft submissions must be in text searchable PDF format and should include a transmittal letter identifying the issuer and the type of submission. Emerging growth companies should confirm their status as an EGC in their transmittal letters. The registration statement, correspondence and exhibits should each be in a separate file, using simple names to identify them, such as DRAFTS.pdf for the registration statements, LETTER.pdf for the transmittal letter and EXHIBIT10.1.pdf for each exhibit (numbered to correspond to the exhibit number).  All SEC comment letters and other correspondence also will be sent via the secure email system.  These procedures are effective May 14, 2012 and replace the SEC‘s prior announcement of April 5, 2012.