SEC to Vote on GAAP Reconciliation; More

The Securities and Exchange Commission will vote this week on two notable proposals: whether to let foreign private issuers file financial statements in International Financial Reporting Standards without reconciling those statements to U.S. Generally Accepted Accounting Principles, and whether to approve a package of reforms to simplify financial reporting for smaller companies.

The Commission will meet Thursday, and the session will be open to the public and available via Webcast. For details on tuning into the meeting, please see the box at right.

The reconciliation requirement has been on the SEC chopping block for months. Many in the business and investing communities say the reconciliation statements no longer serve any useful purpose and are a drag on U.S. efforts to maintain its dominance in the global capital markets. The Commission is already planning even further ahead, with a related concept release to let U.S. companies file financial statements in IFRS if they choose; that measure is likely to come to a vote sometime later this winter.

For smaller filers, the SEC has proposed amendments to its disclosure and reporting requirements to expand the number of companies that qualify for scaled-down disclosure requirements. Under the proposal, companies with less than $75 million in public equity float would qualify for the scaled requirements. Companies without a calculable public equity float would qualify if their annual revenues were below $50 million. The amendments would also move the disclosure requirements from Regulation S-B into Regulation S-K and would eliminate the SB forms.

Proposed amendments to rules 144 and 145 of the Securities Exchange Act would shorten the holding period for the resale of restricted securities, if the issuer of the securities is subject to the Exchange Act reporting requirements. The amendments would also ease restrictions applicable to resale of restricted securities by non-affiliates of both reporting and non-reporting companies; codify staff interpretations relating to Rule 144; and revise the manner of sale requirements, volume limitations, and Form 144 filing thresholds.

Additional rule amendments would provide two exemptions from the registration requirements for compensatory employee stock options. One would be available to issuers that aren’t required to file periodic reports under the Exchange Act. The other would be available to issuers required to file those reports because they’ve registered a class of security under Section 12 of the Exchange Act or are required to file those reports under Section 15(d).

The SEC will also consider rule proposals and related amendments aimed at improving mutual fund disclosure.

Proxy Access Rules Slipping Onto Back Burner

Notably absent from this week’s SEC meeting agenda was consideration of proposed rules to allow—or prohibit—shareholder access to the proxy statement.

Corporations, lawmakers, and shareholder activists have all been awaiting SEC action on two competing rules, both proposed in July. One would allow shareholders to place director nominations in the proxy statement if they have held more than 5 percent of the company’s securities for at least a year; the other would deny it.

Cox

SEC Chairman Christopher Cox has repeatedly insisted that the Commission will have a rule in place in time for next year’s proxy season, but the clock is winding down and no consensus exists on what to do. Shareholder activists fiercely oppose the non-access proposal favored by Republican commissioners Kathleen Casey and Paul Atkins. They also dislike a proposal from Cox and the Democratic commissioners favoring access, saying its requirements—owning 5 percent of common stock—would be nearly impossible to meet.

Further complicating things, Democratic Commissioner Roel Campos left the agency in September, and fellow Democrat Annette Nazareth says she wants off the Commission as soon as the White House can name a replacement. As a result, some institutional investors and lawmakers have urged the SEC to delay a vote on the proposals until all five commissioner posts are filled.

Senate Banking Committee chairman Chris Dodd, D-Conn., and eight other senators, who favor shareholder proxy access, sent a letter to Cox urging him not to adopt either proposal, suggesting that the SEC “should proceed only after it has a full complement of Commissioners.”

Nazareth has also said the SEC might be wise to wait.

Nazareth

“I see no reason to rush to a vote,” she said in an Oct. 29 speech. “I do not think that the Commission should make hasty decisions that impair shareholder rights simply to fit within a self-imposed timeframe.”

Nazareth called the “non-access” proposal a way “to eliminate a perceived problem, rather than to address it.”

A Nov. 2 report by the Financial Times quotes Cox as saying the SEC will “go back to the drawing board” on the issue next year.

Deadline for Direct Registration System Eligibility Looms

A reminder to issuers who list securities on the New York Stock Exchange, Nasdaq, or the American Stock Exchange: The Jan. 1, 2008, deadline for ensuring that listed securities are eligible for participation in the Direct Registration System is fast approaching.

The Direct Registration System provides for electronic direct registration of securities in an investor’s name on the books for the transfer agent or issuer and allows shares to be transferred between a transfer agent and broker electronically.

While the exchange rules don’t require issuers to participate in DRS or to eliminate physical certificates, they require that all listed securities be DRS eligible, notes a legal bulletin from the law firm Skadden, Arps Meagher & Flom.

Land

“The Jan. 1 deadline does place pressure on issuers, in that they also need to review their bylaws and determine whether an amendment is required, and if so, such amendment must be adopted prior to the deadline,” Skadden partner Allison Land says. And for companies incorporated in Delaware, the board of directors is required under the Delaware General Corporation Law to authorize the issuance of “uncertificated” shares, also by Jan. 1.

“The process is not very complicated, but the approaching deadline does require that such action be taken soon,” Land says.

To become DRS eligible, issuers of listed securities must ensure, prior to the Jan. 1 deadline, that:

Their transfer agent is DRS eligible;

Their transfer agent has instructed the Depository Trust Company to designate their listed securities as “direct registered eligible securities” no later than Dec. 7, 2007 (DTC requires at least ten business days’ notice prior to DRS activation);

Their bylaws allow for securities to be issued in uncertificated form; and

Their board of directors has adopted a resolution permitting the issuance of uncertificated securities.

Specifically in Delaware, unless an issuer’s charter or bylaws already provide for the issuance of uncertificated securities, a company might need to amend its bylaw provisions relating to stock certificates and stock transfers to ensure DRS eligibility, the alert notes. Issuers organized in other jurisdictions should consult counsel to determine the appropriate steps to issue uncertificated securities.