SEC Agenda; Auditor Independence; More

Heads up, public registrants: The Securities and Exchange Commission will be firing off a flurry of new rules this fall.

That’s according to remarks by John White, head of the SEC’s Division of Corporation Finance. White outlined the Commission’s priorities Aug. 11 in a speech to the American Bar Association.

White

One top item on the agenda will be to study the proposals submitted Aug. 1 by the SEC’s Committee to Improve Financial Reporting. White said the staff is particularly studying CIFR’s recommendations related to materiality, correction of accounting errors, and a framework for accounting judgments.

Another CIFR idea getting close attention is to mandate inclusion of an executive summary in the Form 10-K, with updates of material changes in Form 10-Qs. Since that recommendation may tie into the SEC’s new 21st Century Disclosure Initiative, however, any related rule proposal is more likely to come next year, White said.

Other significant rulemaking plans White touched on:

XBRL: The SEC is “gearing up for the next step” on its proposals for phasing in mandatory use of XBRL technology in financial reports, and hopes to publish final rules this fall.

Oil and gas reserves: The staff is “prepped and ready to move quickly to the next step” once the comment period closes Sept. 8 on its proposal to update the reporting requirements for oil and gas reserves.

E-proxy rules: The staff is considering whether refinements to its new e-proxy rules are necessary “sooner rather than later—perhaps as early as this fall or early next year.” In particular, White said, the staff is looking closely at the reported decline in the retail vote.

Inflation: The staff is “getting closer” to recommending that the dollar thresholds cited in most rules be raised to reflect today’s higher prices.

IFRS: On the prospect of letting U.S. companies file financial statements according to International Financial Reporting Standards, White would only say: “Hopefully we will be prepared to make a recommendation soon.”

Meanwhile, the staff is analyzing comments on a trio of pending proposals to update the rules that apply to foreign private issuers. The goal is to present staff recommendations on all three releases as a package “hopefully later this summer,” White said.

One proposal addresses the entrance rules for foreign issuers and the workings of the Rule 12g3-2(b) exemption. White said the staff is “working through” commenters’ concern about a proposed condition that the exemption would no longer be available if, at the end of a subsequent year, an issuer exceeds a proposed average U.S. daily trading volume test of 20 percent or more compared to worldwide volume.

The second proposal, Foreign Issuer Reporting Enhancements, would update the reporting requirements for FPIs, including a proposal to shorten the six-month Form 20-F filing requirement. White said the staff is “evaluating carefully” commenters’ concerns on the shorter deadline. The third proposal, related to rules governing cross-border tender offers, would aim to fix provisions in the existing rules that result in the exclusion of some U.S. investors in foreign companies from tender offers and related transactions.

The staff is also in the early stages of evaluating beneficial ownership reporting on Schedules 13D and 13G and considering what recommendations to make concerning changes in the disclosure obligations relating to the use of equity swaps, other derivative instruments, and short positions.

Finally, noting that the staff processed more than 400 no-action requests during this proxy season, White offered a staff wish list for those who submit no-action letter requests:

Submit requests promptly, since the staff takes a first-in, first-out approach;

Send all correspondence from all proponents;

Consider whether your Rule 14a-8(b) notices of defect need updating;

“Don’t throw in the kitchen sink” when arguing reasons for exclusion; and

Let the staff know as soon as possible if a request is withdrawn, so it can move on to the next proposal.

SEC Action Sends Warning Shot to Board

A novel SEC action against a director for impairing an audit firm’s independence, and consequently causing securities law violations by three companies, should put companies and directors on notice, according to at least one securities law expert.

An Aug. 5 administrative proceeding brought by the SEC against Mark Thompson may be a harbinger of future SEC actions, says Jay Brown, a University of Denver law professor and blogger for “The Race to the Bottom.”

The SEC faulted Thompson for failing to tell the boards of three public companies where he served as a director that he had a business relationship with Ernst & Young, which was outside auditor for the three companies. Thompson therefore impaired E&Y’s independence and caused the companies to violate federal securities law requiring audits from independent firms.

Brown

Brown says the action is newsworthy because enforcing auditor independence is typically left to stock exchanges, not the SEC. “That’s not only never happened before, but it’s also a completely new area of enforcement that hasn’t existed,” he says. That opens the door to the SEC imposing sanctions on companies or boards as a whole for the same blunder, he says.

While the exchanges set director independence standards, SEC rules require companies to disclose their compliance with stock exchange rules on independence. That means incorrectly listing directors as independent violates exchange rules, and disclosing the false information in a proxy statement or periodic report violates federal securities laws, including Exchange Act Rule 14a-9, Brown says.

The SEC also brought an action against E&Y for violating auditor independence standards. The firm agreed to pay $2.38 million in disgorgement and prejudgment interest.

SEC Seeks Comment on Insider-Trading Surveillance

The SEC is seeking public comment on an agreement among 10 stock exchanges and other self-regulatory organizations to consolidate surveillance, investigation, and enforcement of insider trading in securities.

The plan, unveiled Aug. 13, gives responsibility for the detection of insider trading in AMEX- and Nasdaq-listed securities to the Financial Industry Regulatory Authority; responsibility for securities listed on the New York Stock Exchange or NYSE-Arca would fall to NYSE Regulation. The goal is to eliminate gaps and duplication in surveillance. Currently, each equity exchange is responsible for surveillance of trading on its market and any investigations and enforcement actions involving its members.

Cox

SEC Chairman Christopher Cox said the proposal should “send a strong warning to those who would undermine market integrity and undercut investor confidence for their own personal gain.”

The insider trading initiative follows a similar consolidation of responsibility for surveillance for insider trading involving securities options, approved by the SEC in June 2006.

Comments on the proposal are due 21 days after publication in the Federal Register.