RECENT DEVELOPMENTS IN FEDERAL SECURITIES REGULATION

Transcription

1 Sarbanes-Oxley Institute: Corporate Governance, Financial Disclosure, Auditing, and Other Issues ALI-ABA October 6-7, 2005 Washington, D.C. RECENT DEVELOPMENTS IN FEDERAL SECURITIES REGULATION OF CORPORATE FINANCE AS OF AUGUST 25, 2005 By John F. Olson Jonathan C. Dickey Stephen I. Glover Brian J. Lane Bradford P. Weirick Ronald O. Mueller Scott J. Calfas Amy L. Goodman James J. Moloney Paul J. Collins Gillian McPhee Peter W. Wardle W. Stephen Venable, Jr. GIBSON, DUNN & CRUTCHER LLP 2000, 2001, 2002, 2003, 2004, 2005 by John F. Olson. Portions of this outline may be used for other programs. The authors gratefully acknowledge the assistance of William Adkerson, Mari Anzai, Candice Choh, Patrick Dykstra, David Egdal, Sandra Farkas, Lynn Hang, Elizabeth Ising, David Lee, Farshad More, Maeling Pan, Ian Puente, Theodore Schneider, Michael Scanlon, Eric Scarazzo and Ashley Wright in the preparation of this outline.

2 TABLE OF CONTENTS I. Introduction...1 II. Current Issues...1 A. Changes to the Registered Offering Process under the Securities Act of B. The Public Company Accounting Oversight Board s Auditing Standard No C. Form 8-K Disclosure Requirements...15 D. Regulation M...25 E. Amendments to NYSE Listing Standards...28 F. Public Release of Staff Comment Letters...30 G. NASD Proposed Rules on Fairness Opinions in Corporate Control Transactions...31 III. The Sarbanes-Oxley Act of 2002 and Rules Thereunder...32 A. Code of Ethics for Senior Financial Officers...33 B. Audit Committee Financial Experts...34 C. Conditions for the Use of Non-GAAP Financial Information and Filing of Earnings Releases...35 D. Disclosure in Management s Discussion and Analysis about Off- Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments...42 E. Insider Trades During Pension Fund Blackout Periods...46 F. Standards of Professional Responsibility for Attorneys Appearing and Practicing before the SEC...48 G. Auditor Workpaper Retention...55 H. Auditor Independence...56 I. Standards related to Listed Company Audit Committees...62 J. Management Assessment of Internal Controls...72

3 K. Improper Influence on the Conduct of Audits...77 L. Certification of Filings with the SEC and Disclosure Controls and Procedures...82 M. Section 16 Amendments...95 N. Consensus Outline on Interpretive Issues under Section 402 of the Sarbanes-Oxley Act O. Additional Provisions IV. Adopted and Proposed Changes to Proxy Rules A. Director Election Rules B. Enhanced Nominating Committee Disclosures C. Disclosure Regarding Shareholder Communications with Directors D. Staff Legal Bulletin No. 14B: Shareholder Proposals E. Staff Legal Bulletin No. 14C: Shareholder Proposals V. Corporate Governance A. Approval of Changes to the Listing Standards of the Major Securities Markets B. Other Corporate Governance Statements VI. Staff Accounting Bulletins A. Introduction B. Staff Accounting Bulletin No. 103: Update of Codification of Staff Accounting Bulletins C. Staff Accounting Bulletin No. 104: Revenue Recognition D. Staff Accounting Bulletin No. 105: Application of Accounting Principles to Loan Commitments E. Staff Accounting Bulletin No. 106: Application of Full Cost Method of Accounting F. Staff Accounting Bulletin No. 107: Application of FASB Statement 123R VII. Other SEC Rule Changes or Items of Note ii

4 A. Other Changes in SEC Rules B. The California Corporate Disclosure Act C. Employee Stock Options D. Selected SEC Enforcement Actions Concerning Regulation FD E. PCAOB Enforcement Actions F. Court Rulings iii

5 I. Introduction Recent Developments in Federal Securities Regulation of Corporate Finance This outline reviews recent cases, no-action letters, releases and other information promulgated by the Securities and Exchange Commission (the SEC or Commission ), the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act ) and actions taken by the major securities exchanges that address many recent and proposed changes to the federal securities laws, the related rules and regulations and the Commission s practices. II. Current Issues A. Changes to the Registered Offering Process under the Securities Act of 1933 On June 29, 2005, the Commission voted unanimously to adopt major amendments to the registered offering framework under the Securities Act of 1933, as amended (the Securities Act ), in the areas of offering communications, registration procedures, the timing of disclosures provided to investors and liability issues. 1 The amendments dramatically change the securities offering process and particularly for a new category of large, already public companies that will be categorized as well-known seasoned issuers ( WKSIs ). 1. Overview The amendments modernize certain aspects of the regulation of securities offerings under the Securities Act, and address three main areas: permissible communications before and after the filing of a registration statement and clarification of associated liability; timely delivery of information to investors without imposition of regulatory delays through mandatory delivery of information; and improvement of registration and other procedures in the registered offering process. The amendments categorize issuers into four groups: 1 Securities Offering Reform, Release Nos ; ; IC-26993, (June 29, 2005), available at 1

6 Non-Reporting Issuers are issuers that are not required to file reports pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act ); Unseasoned Issuers are issuers that are required to file reports pursuant to Sections 13(a) or 15(d) of the Exchange Act, but do not satisfy the requirements of Forms S-3 or F-3 for primary offerings of their securities; Seasoned Issuers are issuers that are eligible to use Forms S-3 or F-3 for primary offerings of their securities; and WKSIs constitute a new class of issuers that are eligible to register primary offerings of their securities on Forms S-3 or F-3 and have either (1) $700 million of public common equity float or (2) issued $1 billion of registered debt during the preceding three years. Blank check companies, shell companies, penny stock issuers, financiallydistressed issuers and issuers that have violated the anti-fraud provisions of the federal securities laws will not be permitted to avail themselves of WKSI status or other benefits of the amendments. In addition, investment companies and business development companies, as well as merger and acquisition transactions, are not covered by many of the amendments, as they are subject to separate regulatory frameworks. 2. Communications and Associated Liability In recognition of the fact that issuers communicate in a variety of ways on an ongoing basis (including through electronic communications), the amendments significantly relax the prohibition on gun-jumping - offers prior to the filing of the registration statement and written communications during the waiting period or quiet period that begins after the filing of the registration statement and ends when the registration statement is declared effective. Generally, the amendments allow communications to be made before and during the registered offering process and will subject these communications to liability under Section 12(a)(2) of the Securities Act, but not Section 11 liability (that is, liability for material misstatements or omissions will attach only to the person who offers or sells the security, such as the issuer, and is subject to a defense if that person did not and could not reasonably have known of the untruth or omission). The amendments related to gun-jumping are expected to have the following effects: WKSIs will be permitted to engage at any time in oral and written communications, including use at any time of a free writing prospectus, defined as any written offer that is not a Section 10(a) statutory prospectus, subject to enumerated conditions (including, in specified cases, filing with the Commission); 2