Memo to those who prepare 10-Ks and proxy statements: The Securities and Exchange Commission has posted new Compliance & Disclosure Interpretations related to Regulation S-K that you’ll want to bookmark.

The new C&DIs, posted July 3, include new and updated interpretations and consolidate portions of the old telephone interpretations manual and other guidance. “There is a lot of useful information in one place,” says Stephen Quinlivan of the law firm Leonard, Street & Deinard. “Anyone who prepares 10-Ks and proxy statements should keep this material close at hand.”

One interpretation likely to be of interest is Question 115.02, Quinlivan says. It relates to non-accelerated filers that didn’t include a management report on internal control over financial reporting—which, in theory, non-accelerated filers were supposed to start including with annual reports filed this year.


“Most people know a significant number of non-accelerated filers did not include the report, but the consequences were unclear,” Quinlivan says. The new interpretations state that failure to provide the report makes the annual report materially deficient. As a result, the company can’t file short-form registration statements on Form S-3 or Form S-8. Moreover, Rule 144, which is used by shareholders to sell unregistered securities purchased from the company, isn’t available. The company must also suspend any sales under existing S-3s and S-8s.

Once the 10-K is amended to include the report on internal control, the company can resume sales under S-8s, file new S-8s, and sell securities under Rule 144. But since the initial 10-K isn’t considered a timely filing because it was materially deficient, the company is ineligible to file new Form S-3s for a period of time, Quinlivan says.

He also says the new interpretations provide “more focused insights” into the Compensation Discussion & Analysis portion of the proxy statement, including guidelines on the disclosure of performance targets and when that disclosure can be omitted because of competitive harm. They also help define “benchmarking,” which is crucial to determining when the related rules must be applied.

Finally, the C&DIs clarify whether the role of a compensation consultant needs to be disclosed in the CD&A or as part of the corporate governance disclosure requirements of Item 407(e)(3)(iii). Quinlivan says the answer is straightforward: “If the compensation consultant plays a material role in compensation-setting decisions, then the role must be discussed in the CD&A.”

SEC, Fed Reach Understanding on Cooperation

The SEC and the Federal Reserve have agreed to increase their collaboration and information sharing, as part of a regulatory scramble to prevent another Bear Stearns-type fiasco in the banking world.

The agreement comes amid calls to overhaul the U.S. regulatory system following the credit crisis. That crisis first led the Federal Reserve to provide emergency lines of credit to investment banks earlier this year and reached a low point in March when the venerable Bear Stearns nearly collapsed anyway before a Fed-orchestrated bailout. Congress and other critics of the SEC and the Treasury Department have been calling for reforms that would prevent another such debacle ever since.

Under the memorandum of understanding signed July 7, the SEC and the Fed will share information and cooperate on areas of common interest including anti-money laundering, bank brokerage activities under the Gramm-Leach-Bliley Act, clearance and settlement in the banking and securities industries, and the regulation of transfer agents.

The agreement lets the SEC keep its role as the primary supervisor of investment banks, or “consolidated supervised entities,” while the Fed maintains oversight of commercial banks. The MOU calls for the two agencies to meet at least quarterly to discuss and share information about the financial condition, risk-management systems, internal controls, and capital, liquidity, and funding resources of the entities they each oversee, and other “regulatory and supervisory issues of mutual interest.”


Calling the MOU “smart government,” SEC Chairman Christopher Cox said the agreement will “help ensure that regulated entities receive a coherent message from Uncle Sam.”

“The interconnectedness of mortgage and lending markets, credit derivatives, securitizations, and counterparty relationships requires the U.S. government to adopt a more coherent and coordinated approach,” Cox said.

In a speech a day after the MOU was unveiled, Fed Chairman Ben Bernanke said that legislation may ultimately be needed to provide “a more robust framework” for the prudential supervision of investment banks and other large securities dealers.

Currently, the SEC’s oversight of the holding companies of the major investment banks is based on a voluntary agreement. Bernanke said Congress should consider requiring consolidated supervision of those firms, so a single regulator has the authority to set standards for capital, liquidity holdings, and risk management.


Top officials and lawmakers, meanwhile, lauded the MOU. Treasury Secretary Henry Paulson said the agreement is consistent with the long-term vision of his “Blueprint for a Modernized Regulatory Structure” and should “help inform future decisions” as Congress considers how to overhaul the U.S. regulatory structure.

Senate Banking Committee Chairman Chris Dodd said he’s “pleased that the MOU seeks to achieve its important objectives” while leaving consideration of broader regulatory reforms to Congress—issues he said his committee will “examine in greater detail over the coming weeks and months.” Indeed, the House Financial Services Committee just last week began a series of hearings on possible reforms, with more likely to come this fall.

The SEC entered into a similar MOU in March with the Commodity Futures Trading Commission. An agreement between the SEC and the Department of Labor is anticipated later this summer.

SEC Publishes Rule, Guidance to Simplify SRO Processes

The SEC has made good on its promise to simplify how stock exchanges and other self-regulatory organizations can accelerate their own rule-making processes, publishing a new rule and accompanying guidance to give SROs more autonomy.

The final rule and guidance, posted to the SEC Website July 3, aim to address concerns about SRO rule-processing delays. Critics complained that delays hampered exchanges’ efforts to amend their trading rules or trade new products to compete with foreign and futures exchanges.

The guidance should result in more rule changes qualifying for immediate effectiveness and speedier handling of proposed rule changes submitted pursuant to Exchange Act Section 19(b).

The new rule requires that any proposed rule change filed by an SRO for review be published within 15 business days, with exceptions granted only by the director of the SEC Division of Trading and Markets in rare instances.

The guidance includes a partial list of the types of trading rules the Commission believes are appropriate for filing as immediately effective rule changes. Additional changes that also could be filed for immediate effectiveness include those relating to an SRO’s minor rule violation plan and so-called “copycat” rule filings not related to trading rules.

The guidance and rule take effect upon publication in the Federal Register.