New 8-K Guidance; 404b Delay Posted; More

The Securities and Exchange Commission’s Division of Corporate Finance has posted new interpretations that simplify Form 4 reporting under Section 16(a) and clarify Form 8-K reporting obligations related to director resignations.

The new Section 16(a) interpretation, detailed in a June 25 no-action letter, allows same-day, same-way open-market purchases or sales within a one dollar price range to be aggregated and reported on a single line on Form 4 and Form 5, subject to certain conditions. The letter reverses an interpretation issued last year that required each trade made at a different price to be reported on a separate line.

Plimpton

Anne Plimpton of the law firm McDermott Will & Emery, who led the charge to get the SEC staff to change its position, says the new interpretation will simplify the preparation of the reports and make them easier to read.

Because trade orders are often executed in small increments with trade prices reported out to four decimal places, previously a person subject to Section 16(a) would need to report dozens of transactions on multiple forms for the execution of a single market order—resulting in lengthy reports that were confusing to read and took hours to prepare, Plimpton says. “This will cut the time to prepare the reports from at least eight hours to about 15 minutes,” she says.

Under the no-action letter, same-day, same-way open-market purchases or sales within a one dollar price range may be aggregated and reported on a single line on Form 4 and Form 5 if the reporting person:

Reports in the price column the weighted average purchase or sale price for the transactions reported on that line;

Specifies in a footnote the range of prices for the transactions reported on that line; and

States in a footnote that full information regarding the number of shares purchased or sold at each separate price will be provided upon request by the SEC staff, the issuer, or a security holder of the issuer.

The SEC staff position is limited to open-market purchase or sale transactions reportable using transaction codes “P” and “S,” respectively. It does not apply to aggregate reporting of separate transactions involving direct and indirect forms of beneficial ownership, or different forms of indirect beneficial ownership.

Meanwhile, the staff also updated its Form 8-K compliance and disclosure interpretations to clarify that when a director tenders a resignation to comply with a corporate governance policy, Form 8-K reporting obligations under Item 5.02(b) are only triggered when the board accepts the resignation.

If the board doesn’t accept the resignation, the SEC staff recommends the company consider informing shareholders “as to whether and to what extent corporate governance policies are being followed and enforced.”

Mueller

Ronald Mueller, a partner with Gibson Dunn & Crutcher, says the staff interpretation will help prevent what could have been a “flood of 8-Ks” related to conditional resignations tendered in accordance with governance policies, but that don’t actually result in a director leaving a board.

“This will help preserve the purpose of the rule by making sure shareholders are notified when a director really is leaving a board, as opposed to when they’re simply complying with governance procedure,” he says.

Final Rule on Section 404b Delay Posted

The SEC has posted the text of the final rule officially giving non-accelerated filers another year to comply with the auditor attestation requirement under Section 404(b) of Sarbanes-Oxley.

The rule means those companies will submit their first auditor’s attestation report on internal control over financial reporting when they file an annual report for a fiscal year ending on or after Dec. 15, 2009. Non-accelerated filer companies have to comply with the management report requirement—Section 404(a)—for fiscal years ending on or after Dec. 15, 2007. Larger companies have been subject to both requirements for four years.

The SEC says deferred implementation would give smaller companies and auditors a chance to reap the benefits of the new auditing standard adopted by the Public Company Accounting Oversight Board last year, and related implementation guidance for auditors of smaller public companies. It will also give the SEC time to complete a cost-benefit study to determine whether those efforts, along with the Commission’s new guidance for corporate management, are making internal control evaluations and audits for smaller companies more cost-effective.

The SEC hopes to release its initial findings of that study this fall.

Oil & Gas Disclosure Plans Finally Disclosed

The SEC has unveiled its long-awaited plans to overhaul its requirements for energy companies to report their oil and gas reserves.

Cox

The proposal, detailed in a whopping 172-page proposing release, aims to modernize the nearly 30-year-old rules to reflect changes in technology to give investors a better picture of companies’ reserves. In a statement, SEC Chairman Christopher Cox noted that the current disclosure rules often interfere with an investor’s analysis because they are tied to outdated technologies.

The proposed rule changes include:

Requiring companies to report oil and gas reserves using an average price based upon the prior 12-month period, rather than year-end prices.

Permitting use of new technologies to determine proved reserves, if those technologies have been demonstrated to lead to reliable conclusions about reserves volumes.

Letting companies also disclose their probable and possible reserves to investors; current rules limit disclosure to only proved reserves.

Allowing previously excluded resources such as oil sands, which are currently considered mining reserves, to be classified as oil and gas reserves.

Requiring companies to report the independence and qualifications of a preparer or auditor based on current Society of Petroleum Engineers criteria.

Requiring the filing of reports for companies that rely on a third party to prepare reserves estimates or conduct a reserves audit.

The proposed amendments would codify Industry Guide 2 in Regulation S-K and would bring oil and gas disclosures by foreign private issuers more in line with the proposed disclosures for domestic issuers.

The release asks for public input on the proposed pricing method, whether any lag time is needed between the close of the pricing period and a company’s fiscal year end, and whether companies should be required to use the same prices for accounting purposes as they do for disclosure outside the financial statements. Comments are due 60 days after publication in the Federal Register.

SEC Looks to Revamp Its Credit Rating Rules

The SEC has also published its third set of proposals for revamping the way the agency refers to, and relies on, credit ratings. The amendments are part of an effort to discourage over-reliance by investors on those ratings to judge credit risk.

Among other things, the proposals would establish new criteria, independent of ratings, for issuers to access forms and use the shelf registration process. Comments are due to the SEC by Sept. 5.

The proposing releases mark the SEC’s final rulemaking efforts in response to the sub-prime mortgage meltdown and credit crunch. In early June, the Commission unveiled proposals to curb conflicts of interest and increase transparency among credit ratings agencies and to require the agencies to distinguish the ratings they issue on structured products from those issued on bonds. Comments on those proposals are due July 25.