SEC Update—Proposed Rulemaking Agenda for 2008; Use of Electronic Shareholder Forums; Delegated Authority to Exempt Audited Financial Information from Proxy and Information Statements in Certain Instances; New Office to Expedite Distribution of Fair Fun
SEC Announces Proposed Rulemaking Agenda for 2008
At the recent Practicing Law Institute “SEC Speaks in 2008” program, Securities and Exchange Commission (the “SEC”) Chairman Christopher Cox indicated that the SEC intends to embark upon a large number of rulemaking initiatives in 2008. Included among these are the following:
The Division of Corporation Finance will consider rules that would cover the use by
In addition, Chairman Cox unveiled some of the SEC’s proposed rulemaking agenda items targeted at the subprime lending crisis. The Division of Trading and Markets will consider proposing rules to require credit rating agencies to disclose surrounding past ratings in a format that would make it easier for investors to compare track records and would promote competitive assessments of the accuracy of past ratings. Additional rules may be proposed to improve investors’ understanding of differences between corporate and municipal debt ratings and ratings for structured debt issuances.
Moreover, Chairman Cox expects the Division of Investment Management to present to the SEC final rules to implement the use of “summary prospectuses” for mutual funds. These rules had been proposed in November 2007. The summary prospectus would present a brief, plain-English description of a mutual fund’s investment objectives, fees, risks, performance and other material information in a standardized order. The summary information could then be used by investors as a springboard to locate more detailed information contained in the mutual fund’s prospectus. Under the proposed rules, mutual funds would be able to take advantage of an “access equals delivery” system to make the mutual fund prospectus available to investors through the Internet. As the comment period expires at the end of February 2008, Chairman Cox expressed his desire to have final rules presented to the SEC on mutual fund disclosure reform by this summer.
SEC Permits Use of Electronic Shareholder Forums
The SEC recently released final rules to facilitate the use of electronic shareholder forums. Under the prior proxy rules, the use of an electronic shareholder forum could be deemed a solicitation subject to regulation. Under the new SEC rule, if certain conditions are met, participation in a shareholder forum will be exempt from most of the SEC’s proxy rules. The intent of the SEC in adopting these rules is to provide a convenient, cost-effective method for shareholders to communicate among themselves and for shareholders to communicate with company management. The new rules took effect February 25, 2008.
Under the new rules, an exemption from most of the SEC’s proxy rules is provided to a participant in an electronic shareholder forum if:
- his or her communication is more than 60 days prior to the date announced by the company for its annual or special shareholder meeting; and
- the participant does not, indirectly or directly, seek to act as a proxy for a shareholder and does not furnish or request, or act on behalf of another person who furnishes or requests, a form of revocation, abstention, consent or authorization in an electronic forum.
When a public company announces a shareholders’ meeting less than 60 days before the meeting, the proxy solicitation cannot occur more than two days following the company’s announcement of the meeting. The requirement to file solicitation materials with the SEC, the rules regarding a company’s obligation to provide a list of security holders or to mail soliciting material to security holders, and the antifraud rules, will continue to apply to activities in an electronic shareholder forum.
The new shareholder forum rules also provide protection from liability for shareholders, companies and third parties acting on behalf of a shareholder or a public company who establish, maintain, or operate an electronic shareholder forum, provided the forum is conducted in compliance with the securities laws, applicable state law and a company’s charter and bylaws. These rules provide that these parties would not be liable under the federal securities laws for statements and information provided by others participating in the forum. Notwithstanding the foregoing, the persons providing information to or making statements on an electronic forum will still be liable under federal securities laws for their individual communications.
Whether these electronic forums provide any value to public companies remains to be seen. Companies deciding to utilize these forums for their own purposes should give careful considerations to the method used to interact with shareholders, the ability to control the content of such discussions and any Regulation FD issues that may result.
SEC Approves Delegated Authority to Exempt Audited Financial Information from Proxy and Information Statements in Certain Instances
Certain state corporate codes require corporations to periodically call and hold a shareholder’s meeting for the election of directors. If a corporation has not held a shareholders’ meeting as required by state law, a court, upon the request of a shareholder, may require a corporation to hold such a meeting. In
In an attempt to provide more flexibility to reporting companies faced with this dilemma, the SEC has issued final rules permitting the Director of the Division of Corporation Finance to exempt any reporting company from the financial statement delivery requirements of the proxy rules. The Director may use this authority only where the matter does not appear to present significant issues that have not been previously addressed or to raise questions indicating that SEC review is required. To seek a grant of exemptive relief from the Director, an applicant must demonstrate that it:
- has been required to hold a shareholder’s meeting as a result of a shareholder action taken under state law;
- is unable to comply with the audited financial statement requirements of the proxy rules;
- has made a good faith effort to furnish audited financial information before holding the meeting;
- has made a determination that it has disclosed to security holders all available material information in accordance with the proxy rules; and
- absent a grant of exemptive relief, it would be forced to either violate state law or the proxy rules.
Nevertheless, the staff retains the ability to submit any request for exemptive relief to the SEC if it deems it appropriate. Also, under the Exchange Act, the SEC retains full authority to review on its own or upon any adversely affected party any exemption granted or denied under delegated authority.
SEC Creates New Office to Expedite Distribution of Fair Funds to Injured Investors
The SEC has created a new office, to be known as the Office of Collections and Distributions, to expedite the distribution of penalties and disgorgements to injured investor entities under the Fair Funds authority enacted as part of the Sarbanes-Oxley Act of 2002. The Fair Funds provision was intended to encourage investor confidence and ensure that a greater amount of the funds collected by the SEC in its enforcement actions would be returned to defrauded investors. Since 2005, the SEC has distributed more than $3.5 billion in penalties and disgorgements, with more than $2.0 billion being distributed over the past year; however, the SEC has been criticized by the General Accounting Office for its handling of the distribution of amounts deposited in the Fair Funds program and its related data collection methods. The new office is intended to expedite the return of more than $5 billion in remaining Fair Funds to harmed investors, while reducing the bureaucracy and costs associated with the distributions.
SEC Changes Lockbox Depository and Procedures for Wire Transfers of EDGAR Filing Fees
Historically, Mellon Bank, N.A. has served as the depository to receive fees required to be paid under the securities laws in connection with particular filings and transactions. As of February 4, 2008, however, the SEC has changed this depository to U.S. Bank. Issuers who prior to February 4, 2008 have not made filings requiring the payment of filing fees, such as registration statements under the Securities Act of 1933 and tender offer materials, should be aware that the wire transfer and payment instructions have changed to reflect this new depository designation.
In addition, the SEC has amended other rules regarding the payment of filing fees to clarify that the payment of these fees may only be made by wire transfer, certified check, bank check,
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