Rulemaking

SEC Announces a New Director of the Division of Corporation Finance; House Wants to Know Where the JOBS Act Rules Are

by Vanessa Schoenthaler on May 16, 2013

The New Director of Division of Corporation Finance

Yesterday the Securities and Exchange Commission announced the naming of Keith F. Higgins as director of the Commission’s Division of Corporation Finance.

Higgins was a partner in the Boston office of Ropes & Gray LLP, where he advised public companies regarding securities offerings, mergers and acquisitions, compliance and corporate governance, and underwriters regarding initial and other public offerings.

Higgins will replace Lona Nallengara, who has served as acting director since Meredith Cross’ departure in December 2012. Nallengara will assume the role of the Commission’s chief of staff.

Pressure Continues to Implement the JOBS Act 

Also yesterday, the House Financial Services Committee announced that the House of Representatives passed of a bill by a vote of 416 to 6 that directs the Commission to finalize rules implementing the provisions of the JOBS Act related to “Regulation A+” by October 31, 2013.

Of course, the bill would still have to make its way through the Senate and be signed into law before the deadline were to take effect (for what it’s worth, govtrack.us currently gives the bill a 15% chance of being enacted).

The Washington Post has a nice short piece summing up some of the current regulatory tensions facing Mary Jo White, who is scheduled to testify before the Financial Services Committee for a second time this morning on the subject of the Commission’s 2014 budget request (the Commission is seeking a 27% budgetary increase for fiscal year 2014, which would be funded entirely out of fees collected by the Commission on securities transactions).

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Inadequacy of Cost-Benefit Analysis In SEC Rulemaking – A Fall Trend?

by Vanessa Schoenthaler on October 12, 2012

On Wednesday the American Petroleum Institute (API), the largest U.S. trade association for the oil and natural gas industry, the U.S. Chamber of Commerce, the Independent Petroleum Association of America, a U.S. trade association for independent oil and natural gas producers, and the National Foreign Trade Council, the oldest and largest trade association advocating an open, rules-based international trade system, jointly filed a complaint with the D.C. District Court and petition for review with the U.S. Court of Appeals for the D.C. Circuit, seeking to vacate and enjoin the Securities and Exchange Commission from implementing and enforcing the recently adopted, and Dodd-Frank Act-mandated, rule requiring disclosure of certain payments made by resource extraction issuers to the U.S or foreign governments. The case was filed in both the District Court and the Court of Appeals pending resolution of the jurisdiction question.

Among other things, the District Court complaint alleges that the Commission failed to adequately perform a cost-benefit analysis when promulgating the final rule.

Remember it was just last year that the U.S. Court of Appeals for the D.C. Circuit vacated the Commission’s proxy access rule on the basis of the same inadequate cost-benefit analysis argument. However, shortly thereafter the Commission revamped its approach to economic analysis in rulemaking and released an internal memorandum providing guidance on the revised approach.

The disclosure rule at issue in the API et al. v. SEC suit underwent an economic analysis under the revised approach, so it’ll be interesting to see how the court which ultimately hears the case rules on the cost-benefit analysis argument.

The outcome of this case may also influence the approach of others. Compliance Week has already asked Is the Conflict Minerals Rule Next to Face a Legal Challenge?, noting that the U.S. Chamber of Commerce has not ruled out that possibility.

In an unrelated article, Reuters notes that investor groups are also making the cost-benefit analysis argument in the context of the Dodd-Frank Act-mandated proposed rule to lift the ban on general solicitation and general advertising, but that those groups feel it’s still too early to talk about filing a lawsuit.

In any event, the outcome of the API et al. v. SEC suit is one to watch, as it may determine whether the cost-benefit analysis argument becomes a trend.

Update October 24, 2012:

The National Association of Manufacturers, the largest industrial trade association in the U.S., Business Roundtable and U.S. Chamber of Commerce have filed a joint petition with the U.S. Court of Appeals for the D.C. Circuit seeking to have the conflict mineral rules modified or set aside in whole or in part, but without specifying a basis for challenging the rule.

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Should There Be Uniform Disclosure Requirements Regarding Political Contributions?

by Vanessa Schoenthaler on February 27, 2012

Two years ago, in its landmark Citizens United v. FEC decision, the U.S. Supreme Court ruled that government imposed restrictions on corporate political speech–prohibiting corporations and other associations from using treasury funds to make independent political expenditures–were a violation of the First Amendment.

Following Citizens United there was a tremendous uptick in election spending and a great deal of debate around what kind of disclosure corporations should make about political expenditures.

In April 2010 Congressman Chris Van Hollen introduced the DISCLOSE Act in the House of Representatives. It was later introduced in the Senate in July 2010.  The DISCLOSE Act sought to amend the Federal Election Campaign Act of 1971 to require, among other things, that corporations, unions and other associations make certain disclosures regarding political expenditures. The bill passed in the House, but not in the Senate.

Earlier this month Congressman Van Hollen again introduced legislation to amend the Federal Election Campaign Act to require additional disclosure regarding political expenditures, though the text of this latest bill is not yet available.

Taking a different route, in August 2011, the Committee on Disclosure of Corporate Political Spending (the “Committee on Disclosure”), a group made up of ten prominent securities law professors, petitioned the Securities and Exchange Commission to develop uniform disclosure rules for corporate political spending. That petition remains pending.

This past Friday Commissioner Aguilar, in his remarks before PLI’s SEC Speaks in 2012 program, also called for the Commission to enact uniform disclosure rules related to corporate political spending, noting the large number of comment letters received in support of the Committee on Disclosure’s petition for rulemaking (64,790 in total as of this writing; 42,439 of which the Commission has characterized as a variant on the form of Letter A and 22,118 as a variant on the form of Letter B).

However, according to Reuters, at the same PLI program Chairman Shapiro told reporters that while the Commission will address the rule-making petitions that it receives “at some point” shareholders already have a means of requiring more disclosure. “Companies that receive a shareholder proposal asking them for disclosure about political contributions have been required to put those shareholder proposals in the proxy, so there is a mechanism for shareholders to directly represent to the companies they own to have that issue put forward for a shareholder vote.”

In his remarks Commissioner Aguilar noted that, according to the Committee on Disclosure’s rulemaking petition, out of a total of 465 shareholder proposals that made it into company proxy statements in 2011, 50 addressed disclosure of political expenditures (10.7% of all proposals). A quick search on the outcome of those proposal shows that at least 10 (of the 10 I looked at) failed to garner a sufficient vote to pass.

The success rate of shareholder proposals notwithstanding, there are a number of companies that are making voluntary disclosures about direct and, to a lesser extent, indirect political expenditures on their websites (e.g., Time Warner Inc. and Merck & Co Inc.).

In October 2011, the Center for Political Accountability released an index of corporate political accountability and disclosure policies in S&P 100 companies. The index will be updated annually and expanded to include S&P 500 companies in 2012.

While it doesn’t appear that uniform disclosure rules regarding corporate political expenditures will be a priority, unless Congress suddenly decides to allocate enough funds for the Commission to get through its Dodd-Frank rulemaking and still have something left, the number of companies making voluntary disclosures, at least in the S&P 100, is encouraging. Though the disclosure is sometimes difficult to find and certainly not uniform.

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Exchange Policy and Rule Changes and the Upcoming Meeting of the Advisory Committee on Small and Emerging Companies

by Vanessa Schoenthaler on January 30, 2012

I’m still playing a bit of catch up, but hopefully this is the week that I finally get back to a regular posting schedule … in the meantime, here are a few items from the week that was:

NYSE and Amex Changes to Broker Non-Votes

As has been widely reported, on Wednesday NYSE issued a Information Memo relating the the application of Rule 452, which governs when NYSE and Amex brokers may vote shares without specific shareholder instructions.

Under the new policy brokers will not be permitted to vote uninstructed shares on corporate governance proxy proposals, including proposals related to:

  • de-stagger boards;
  • majority voting in director elections;
  • the elimination of supermajority voting requirements;
  • use of consents;
  • the right to call special meetings; and
  • certain types of anti-takeover provision overrides.

The above list is meant to be illustrative, not exhaustive, and if you have any questions about a specific proposal you should speak to your counsel or contact the NYSE staff.

Additionally, you might recall that the Dodd-Frank Act required the national securities exchanges to adopt rules prohibiting members from voting uninstructed shares on matters related to the election of directors, executive compensation and “other significant matters” as determined by the Commission. The Commission hasn’t yet defined “other significant matters” and, according to its current Dodd-Frank Act implementation schedule, hasn’t yet determined when it will do so. As such, we may continue to see a narrowing of the matters over which broker have discretionary voting authority, which in turn requires that you plan to spend more time on shareholder analysis and voting outreach.

Finally remember that Rule 452 applies to NYSE and Amex member firms, not the companies whose securities are listed on the NYSE and Amex. Meaning that these changes also affect companies with their securities listed on Nasdaq and those that are quoted in the over the counter markets.

Nasdaq Reverts Back to its Two-Tier Fees Structure for Written Interpretations of Listing Rules

On Thursday the Commission published a rule change relating to the fees that Nasdaq charges for written interpretations of its listing rules.

Under the revised rule Nasdaq is reverting back to its previous two-tier fee structure, whereby a company that seeks a written interpretation of the listing rules will be required to submit a $5,000 non-refundable fee for a regular request or, alternatively, can submit a $15,000 non-refundable fee for an expedited request.

For regular requests Nasdaq will generally provide a written response within four weeks of the date that it receives all of the information necessary to respond.  For expedited requests Nasdaq will generally provide a written response by a date that is less than four weeks, but at least one week, after it receives all of the information necessary to respond.

Advisory Committee on Small and Emerging Companies Meets Again on Wednesday

Also on Thursday, the Advisory Committee on Small and Emerging Companies announced the agenda for its meeting this Wednesday and posted a number of useful background materials on the Commission’s website.

Up for discussion and consideration are recommendations related the triggers for public registration and reporting (the 500 shareholder rule) and the suspension of reporting requirements, crowdfunding, Regulation A and the IPO On-Ramp report.

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A Few Odds and Ends from the Last Week or So

by Vanessa Schoenthaler on August 8, 2011

Commissioner Casey Announces Her Departure

On Friday Commissioner Casey officially announced her departure on from the Securities and Exchange Commission. While her five year term ended on June 5, 2011, Commissioners can stay in office for up to 18 months after their terms expire.

In May President Obama nominated Daniel Gallagher to replace Casey. Gallagher, whose nomination has not yet been confirmed, is a Republican and currently a Partner at Wilmer Hale. Formerly he was the Deputy Director of the Commission’s Division of Trading and Markets.

No word yet on where Casey is headed.

Coming Soon: Additional Reverse Merger Listing Requirements

On Thursday NYSE and Amex filed proposed rule changes to adopt additional listing requirements for companies applying to list following a reverse merger. Nasdaq also has a similar set of proposed rule changes pending.

Petition for Rulemaking on Political Spending

On Wednesday the Committee on Disclosure of Corporate Political Spending, a group of ten securities law professors, submitted a rulemaking petition requesting that the Commission develop rules requiring companies’ to disclose their corporate political spending.

(Download File)

The Burdensome Data Collection Relief Act

In March Representative Nan Hayworth et al. introduced the Burdensome Data Collection Relief Act to repeal Section 953(b) of the Dodd-Frank Act.

Section 953(b) requires the Commission to adopt rules regarding disclosure of the:

  • median of the annual total compensation of all of a company’s employees, except the chief executive officer;
  • annual total compensation of the chief executive officer; and
  • ratio of the median of the annual total compensation of all of a company’s employees to the annual total compensation of the chief executive officer.

Two weeks ago a group of attorneys and compensation consultants submitted a comment letter to the Commission expressing their support for repeal of Section 953(b), and, if not repealed, for the adoption of fair and reasonable interpretations of its requirements.

Among other things, the letter highlights the difficulties of integrating multiple payroll systems, especially in an organization with a global workforce, and questions the utility of information regarding foreign employee compensation, which varies considerably from average U.S. employee compensation.

The letter also argues for flexibility in the disclosure requirements, including allowing a company the option of reporting the ratio of its chief executive officer’s annual total compensation to that of the annual total compensation of a private nonfarm worker, which was $40,929.20 according to the Bureau of Labor Statistics’ April 2011 numbers.

(Download File)

 

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Proposed Rules Requiring Proposed Listing Standards About Compensation Committees

by Vanessa Schoenthaler on March 31, 2011

Proposed Rules on Compensation Committees and Compensation ConsultantsSection 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amends the Securities Exchange Act of 1934 by adding new Section 10C, requiring the Securities and Exchange Commission to adopt rules directing the national securities exchanges* to prohibit the listing of the equity securities of a company that does not comply with certain compensation committee and compensation advisor requirements. Yesterday the Commission released a set of proposed rules and amendments that are designed to implement Section 952.

As per usual, the Commission is soliciting public comments on the proposed rules and amendments, which are due on or before April 29, 2011.

Updated April 29, 2011:

On April 29, 2011, in response to a request from the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, the Commission has extended the comment period through May 19, 2011.

Who do the proposed rules and amendments apply to?

Proposed Rule 10C-1

Proposed Exchange Act Rule 10C-1 requires that the rules of the national securities exchanges prohibit the initial or continued listing of any equity security of a company that does not comply with certain compensation committee and compensation advisor requirements.

As proposed Rule 10C-1 only applies to companies with exchange-listed equity securities, excluding security future products and standardized options. The Commission estimates that there are approximately 76 companies that fall outside of the scope of Rule 10C-1 by virtue of having only exchange-listed debt securities, and is specifically seeking comment on whether these companies should be made to comply with the final rule.

Additionally, by definition, companies with securities quoted through inter-dealer quotation systems in an over the counter market, such as the OTC Bulletin Board or the OTC Markets Group (formerly the Pink Sheets), are excluded from Rule 10C-1, unless, of course, they also have a class of equity securities listed on a national securities exchange.

Proposed Amendments to Item 407 of Regulation S-K

The proposed amendments to Item 407 of Regulation S-K broaden the scope of existing disclosure requirements with respect to compensation advisor and conflict of interest disclosures.

As proposed the amendments apply to all Exchange Act reporting companies that are subject to the proxy rules, this includes companies with securities quoted in an over the counter market, such as the OTC Bulletin Board or the OTC Markets Group, and controlled companies, but excludes foreign private issuers, which are not subject to the proxy rules, and registered investment companies, but only because they are not subject to the disclosure requirements of Item 407 of Regulation S-K.

What does proposed Rule 10C-1 require regarding compensation committees?

Proposed Rule 10C-1 requires that if a company has a compensation committee, or a committee performing the function of a compensation committee (i.e., one that oversees executive compensation), each committee member must also be a member of the company’s board of directors and must be independent. The national securities exchanges are themselves tasked with defining independence in the context of compensation committee membership, but must take into consideration factors such as:

  • sources of compensation paid to a board member, including consulting, advisory and other fees paid by the company; and
  • whether a board member is affiliated with the company or a subsidiary of the company.

Notably, as proposed Rule 10C-1 does not direct the national securities exchanges to adopt listing standards that would require a company to have a compensation committee, or to apply the compensation committee independence standards to the independent members of a board of directors that oversee executive compensation when there is no committee. The Commission is also specifically seeking comment on whether the final rule should instead direct the national securities exchanges to adopt listing standards that simply require compensation committees.

What does proposed Rule 10C-1 require regarding compensation advisors?

Proposed Rule 10C-1 requires that a compensation committee have the discretion and reasonable funds available to retain compensation consultants, independent legal counsel and other advisors, and that the committee be responsible for appointing, compensating and overseeing the work of such advisors, but not be required to follow the their advice or recommendations.

When choosing advisors, proposed Rule 10C-1 does not require that they also be independent, only that the compensation committee, in its selection process, consider:

  • whether the advisor provides other services to the company;
  • the amount of fees the advisor receives from the company as a percentage of the advisor’s total revenues;
  • what policies and procedures the advisor has in place to prevent conflicts of interest;
  • whether the advisor has a business or personal relationship with any member of the compensation committee; and
  • whether the advisor owns any company stock.

In addition to the foregoing, the national securities exchanges may adopt other relevant factors for consideration in their respective listing standards.

Are there any exemptions?

Exchange Act Section 10C exempts five categories of companies from the the compensation committee independence requirements:

  • controlled companies;
  • limited partnerships;
  • companies in bankruptcy proceedings;
  • open-ended management companies; and
  • foreign private issuers that disclose in their annual report the reason they do not have an independent compensation committee.

Proposed Rule 10C-1 also authorizes the national securities exchanges to adopt listing standards that exempt:

  • certain relationships from the compensation committee independence requirements; and
  • entire categories of companies from all of the Section 10C requirements, taking into consideration the potential impact that the requirements may have on smaller reporting companies.

When will the new listing standards take effect?

Procedurally, following the public comment period, and once the final rules and amendments are adopted and published in the Federal Register, the national securities exchanges will have 90 days to propose conforming listing standards, which must then be approved by the Commission within one year of the date on which its final rules and amendments were published in the Federal Register.

To the extent that they do not already do so, the listing standards of the national securities exchanges will have to provide companies with a reasonable opportunity to cure any defects that would otherwise cause their securities to be delisted, or ineligible for listing, based on a failure to meet the new standards.

What new disclosures do the proposed amendments to Item 407 of Regulation S-K require?

As proposed, the amendments to Item 407 of Regulation S-K would require a company to make certain expanded disclosures in any proxy or information statement filed in connection with an annual or special meeting at which directors are elected, regarding whether:

  • management or the company’s compensation committee retained or obtained the advice of a compensation advisor during the most recently completed fiscal year; and
  • the work of the compensation advisor raised any conflicts of interest, and, if so, how the conflicts are being addressed.

When do the new disclosure requirements take effect?

The new disclosure requirements will not take effect until the effective date of the final rules and amendments adopted by the Commission.

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* The proposed rules would also apply to a registered national securities association that lists equity securities in an automated inter-dealer quotation system.  At present, the Financial Industry Regulatory Authority (FINRA) is the only registered national securities association, however, FINRA does not list equity securities and, as such, the new rules do not apply to it.

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The Proposed Amendments to the Definition of Accredited Investor and Other Odds and Ends

by Vanessa Schoenthaler on February 1, 2011

Last week the Securities and Exchange Commission issued proposed amendments to conform the definition of accredited investor to the requirements of Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As amended, the definition would read:

Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of purchase, exceeds $1,000,000, excluding the value of the primary residence of such natural person, calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.

An interesting tidbit from the footnotes of the proposing release: in fiscal year 2010 the Commission received 17,593 initial Form D filings, of those 16,856, or 96%, claimed an exemption that relies on the definition of an accredited investor.

The Commission is soliciting comments on a number of aspects of the new definition, which are due on or before March 11, 2011. Of particular note, at the Commission’s January 25, 2011 open meeting, both Commissioners Casey and Paredes expressed interested in hearing comments on whether the amended definition should “grandfather” existing investors who were accredited at the time of their initial investment, but who may no longer be accredited under the new definition, to allow those investors to make follow-on investments.

An Extension of Comment Periods

On Friday the Commission announced that it was extending the comment period for its proposed rules on disclosures related to conflict minerals, mine safety and payments made in connection with resource extractions through March 2, 2011. The original comment period was set to expire on January 31, 2011. The extension is being issued in response to several requests for additional time to “allow for the collection of information and improve the quality of responses” by interested persons. Each of the extending releases, available here, here and here, references a representative sample of letters that have made a request for additional time.

The Cost of Implementing Dodd-Frank

Also on Friday Representatives Randy Neugebauer, Chairman of the Subcommittee on Oversight and Investigations, and Spencer Bachus, Chairman of the House Financial Services Committee, issued a joint letter to the Commission, and several other federal agencies, seeking information regarding the estimated costs associated with implementing and executing the Dodd-Frank Act. The Commission has until February 10, 2011 to respond.

(Download File)

The Commission continues to suffer from budgetary constraints and is currently operating on the basis of a continuing resolution that temporarily extends its fiscal year 2010 budget through March 4, 2011. As a result, the Commission has been forced to scale back or delay a number of Dodd-Frank initiatives, among other things.

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Four Ways You Can Encourage Internal Whistleblowing

by Vanessa Schoenthaler on November 27, 2010

One of the primary concerns expressed with respect to the proposed rules for the Securities and Exchange Commission’s new Whistleblower Program is that the monetary incentives being offered (between 10% and 30% of recovered amounts where sanctions are in excess of $1,000,000) will undermine the effectiveness of a company’s internal compliance programs.

In attempting to reconcile this concern with the program’s goal of incentivizing persons with information about potential securities law violations to come forward, the proposed rules prohibit an employee that is responsible for, or who gains information through, a company’s internal compliance programs from qualify as a whistleblower, unless the company fails to disclose the reported violations within a reasonable time or acts in bad faith.  An employee that learns of a potential violation other than through a company’s internal compliance programs would, however, qualify as a whistleblower.  Such an employee would have the option, but not the obligation, of first reporting a potential violation through their company’s internal compliance programs, and would still be able to preserve their right to receive an award under the Whistleblower Program by submitting the same information to the Commission within 90 days of the original report.

In its proposing release the Commission states that it will consider whether a potential violation was reported through internal compliance programs in determining the percentage of sanctions to award a whistleblower, and will consider higher percentages for those who first report violations internally but will not penalize those who do not do so for legitimate reasons.  The Commission is of course seeking public comment (due by December 15) on all aspects of the potential interplay between its proposed rules and company compliance programs.

In the meantime, it’s definitely not too early to begin assessing the effectiveness of and revising your own internal compliance programs.  Remember, regardless of when the new rules are implemented, any information submitted to the Commission after July 21, 2010 (the enactment date of Dodd-Frank) is eligible for an award under the Commission’s Whistleblower Program, and we’re already seeing the emergence of websites like SECWhistleBlowerProgram.org and WhistleBlowerLawyerBlog.com that encourage would-be whistleblowers to: Call Now for a Free Consultation!

In light of the proposed rules, here are four things you can do to strengthen your existing internal compliance programs:

1.  Increase Awareness. Educate your employees.  Provide training to help them recognize the red flags associated with potential securities law violations, such as financial statement manipulation or false regulatory reporting.  Make sure your employees are fully acquainted with your internal procedures for reporting potential violations.

2.  Make Internal Reporting Easy. According to the Association of Certified Fraud Examiner’s 2010 Report to the Nations, occupational fraud is more than twice as likely to be uncovered by a tip than by any other means:

It should be as simple as possible for your employees to report a potential securities law violation.  Do you have a hotline or a helpline?  Consider using a single, central helpline to address possible compliance issues, whether they be securities law violations or human resource issues, and encourage your employees to proactively seek guidance on all ethical, legal and regulatory issues. Ensure that your compliance programs are available during more than just regular business hours and offer multiple means of reporting; employees should be able to anonymously mail, email or submit tips via a web form.

3.  Set the Ground Rules. You should have protocols in place to timely investigate and effectively deal with reports of potential securities law violations.  Your compliance programs should delineate a clear line of reporting with assigned roles and responsibilities and your policies should be readily understandable and conspicuous, particularly your policies regarding non-retaliation and disciplinary measures for reports made in bad faith.

4.  Consider Implementing Your Own Reward System. Reward systems are a polarizing issue.  On the one hand there are those that believe employees, by virtue of their employment, are already obligated to report potential securities law violations and, as such, should not be rewarded for simply doing their job.  On the other hand there are those that believe, whether as an incentive to report or as a reward for having reported, employees should receive recompense when they report potential securities law violations.  How ever you may feel about the issue, Congress made its opinion known with the enactment of Dodd-Frank, and whether to compete or simply keep up, you should consider implementing your own reward system, monetary or otherwise, to encourage internal reporting of, and acknowledge those who do report, potential securities law violations.

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The SEC Proposes New Whistleblower Rules and Forms

by Vanessa Schoenthaler on November 3, 2010

The SEC Proposes New Whistleblower Rules and Forms

Today the Securities and Exchange Commission proposed a new set of rules and forms to implement Section 21F of the Exchange Act, which was added by Section 922 of the Dodd-Frank Act to address whistleblower incentives and protections.

To qualify for an award under the proposed rules a whistleblower must voluntarily come forward with original information concerning a securities law violation that leads to a successful enforcement action in which the Commission obtains monetary sanctions in excess of $1,000,000.

In an effort to avoid some of the unintended consequences that might crop up when offering monetary incentives to potential whistleblowers the proposed rules exclude certain categories of persons from qualifying as whistleblowers, specifically:

  • persons with a preexisting duty to report the information they’ve obtained;
  • attorneys who attempt to use information obtained from a client;
  • independent public accountants who obtain information through an engagement required under the securities laws;
  • foreign government officials; and
  • persons who learn of the information through a company compliance program or who are in a position of responsibility within a company, and the information is reported to them with the expectation that they will take appropriate action in response; however,  if a company does not itself disclose the information within a reasonable period or acts in bad faith persons otherwise covered by this exclusion may then become whistleblowers.

Finally the proposed rules include provisions intended to encourage would-be whistleblowers to first report information of any violations internally through company compliance programs.

Each of the components of what constitutes a whistleblower and the procedures for making a claim are fully elaborated on in the Commission proposal and any comments are due on or before December 17, 2010.

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The SEC Proposes Enhanced Disclosure Requirements for Short-term Borrowing

by Vanessa Schoenthaler on September 17, 2010

Earlier today, in an open meeting, the Securities and Exchange Commission proposed a new set of rule amendments designed to expand and enhance company disclosure of short-term borrowings.  If adopted the amendments would require reporting companies to include detailed quantitative and qualitative information about short-term borrowings in their filings with the Commission.

In her opening statement at the meeting Chairman Shapiro commented that:

The proposed rules we are considering today, if adopted, would shed greater light on a company’s short-term borrowings, including a practice some refer to as balance sheet ‘window-dressing.’ Under these proposals, investors would have better information about a company’s financing activities during the course of a reporting period — not just a period-end snapshot. With this information, investors would be better able to evaluate the company’s ongoing liquidity and leverage risks.

The Commission also approved additional interpretive guidance relating to discussions of liquidity and capital resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Comments on the proposed short-term borrowing rule amendments can be made here and are due 60 days after amendments’ publication in the Federal Registrar.  The MD&A guidance is effective as soon as it’s published in the Federal Registrar.

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