SEC Takes Aim At SOX 404, Internet Proxies

All eyes in the corporate-governance world will turn to the Securities and Exchange Commission tomorrow when it will consider a whirlwind of rulemaking, from long-awaited guidance to help companies comply with Sarbanes-Oxley, to disseminating proxy materials via the Internet, to easing the way for foreign private issuers to delist from U.S. markets.

Absent from tomorrow’s agenda is the thorny subject of shareholder access to the proxy statement, which has been postponed for the second time and is now scheduled for discussion at the SEC’s next open meeting in January.

Cox

The delay on proxy access was a last-minute decision announced Dec. 6, but not terribly surprising given all of the other blockbuster issues the Commission must tackle. In a statement, Chairman Christopher Cox said tomorrow’s agenda is already “overloaded,” with the meeting expected to be one of the longest open meetings “in quite a while.”

By far, the biggest item on the agenda is issuing new guidance to help companies understand how they should audit internal controls over financial reporting, as required by Section 404 of Sarbanes-Oxley. The SEC promised such guidance seven months ago, and corporate executives—exasperated with external auditors telling them how to conduct such audits—have been waiting for the new rules ever since.

The Commission published a concept release in July asking for public input on what the guidance should include, and in recent months rumors have circulated that the SEC wants auditors to play less of a role in reviewing how corporate managers test their internal controls; the auditors would merely say yes, they agree that controls are good; or no, their own audits show control deficiencies.

A chief complaint from corporate executives has been that auditors require them to do much duplicate testing to satisfy the auditors’ own standards as spelled out in Auditing Standard No. 2, which has pushed SOX compliance costs sky-high. The SEC is also working with the Public Company Accounting Oversight Board to make AS2 less onerous, but the PCAOB will not unveil its proposals to amend AS2 until Dec. 19. [For a related story on reforms to Audit Standard No. 2, see box at right.]

As the two agencies sort out how to fix Section 404 and AS2—which still will take months of comment periods and further deliberations, no matter what unfolds in the next week—the SEC has proposed extending the date by which non-accelerated filers must start providing a management attestation to the effectiveness of internal controls until fiscal years ending on or after Dec. 15, 2007; the deadline for external auditors’ attestations also would be extended until the first annual report for a fiscal year ending on or after Dec. 15, 2008. The SEC wants to use the delay to get its new guidance in executives’ hands well before their Section 404 deadlines arrive. The SEC also granted relief for certain foreign private issuers and proposed transitional relief for newly public companies.

Also On The Agenda …

Aside from Section 404, the Commission will consider a recommendation to re-propose new rules governing when a foreign private issuer can deregister its securities and end its SEC reporting obligations. The new proposals will recommend deregistration thresholds based solely on trading volume, making it easier for foreign companies to withdraw from a U.S. stock-market listing.

PREVIEW

An excerpt from the SEC’s notice regarding the issues the Commission will consider at its Dec. 13 open meeting follow.

The subject matters of the Open Meeting scheduled for Wednesday, December 13, 2006, will be:

The Commission will consider whether to propose, jointly with the Board of Governors of the Federal Reserve System, new rules under the Securities Exchange Act of 1934 (“Exchange Act”) to implement the Gramm-Leach-Bliley Act bank exceptions to the definition of “broker.” The Commission will also consider extending the temporary exemption of banks from the definition of “broker.” In addition, the Commission will consider whether to propose additional related rules, including rules exempting banks from the definition of “dealer” under the Exchange Act.

The Commission will consider whether to repropose a new rule that would enable a foreign private issuer meeting specified conditions to terminate permanently its Exchange Act registration and reporting obligations under Section 12(g) regarding a class of equity securities and its Section 15(d) reporting obligations regarding a class of equity or debt securities. The Commission will also consider whether to repropose a rule amendment that would apply the exemption from Exchange Act registration under Rule 12g3-2(b) to a class of equity securities immediately upon the effective date of the issuer's termination of registration and reporting obligations under the reproposed new exit rule.

The Commission will consider whether to propose interpretive guidance to assist the management of an Exchange Act reporting company, other than an investment company registered under Section 8 of the Investment Company Act of 1940, in planning and performing its annual evaluation of internal control over financial reporting. The Commission will also consider whether to propose amendments to Rules 13a-15 and 15d-15 under the Exchange Act that would make it clear that a company choosing to perform an evaluation of internal control in accordance with the interpretive guidance would satisfy the annual evaluation required by those rules.

The Commission will consider whether to adopt amendments to the proxy rules under Section 14 of the Exchange Act. The amendments would provide an alternative for Internet-based disclosure. Companies conducting proxy solicitations could satisfy the Rule 14a-3 requirement to furnish proxy materials by posting those proxy materials on an Internet website and providing shareholders with notice of the Internet availability of the materials. Other soliciting persons also would be permitted to follow the Internet alternative. The Commission also will consider whether to propose mandating Internet disclosure of proxy materials.

The Commission will consider whether to propose a new antifraud rule under Section 206 of the Investment Advisers Act of 1940. The Commission will also consider whether to propose a new rule under the Securities Act of 1933 to revise the criteria for natural persons to be considered “accredited investors” for purposes of investing in certain privately offered investment vehicles.

The Commission will consider whether to re-open the comment period on proposed Rule 0-1(a)(7) under the Investment Company Act of 1940 to enhance the independence and effectiveness of investment company directors, and in connection therewith, to publish economic analyses of mutual fund governance and independence issues by the Office of Economic Analysis.

Source

Sunshine Act Notice Regarding Dec. 13 Meeting (Securities And Exchange Commission; Dec. 6, 2006)

Currently, FPIs only can exit the Securities Exchange Act registration and reporting regime if the class of their securities has fewer than 300 record-holders who are U.S. residents, making it difficult for many to terminate their registration and reporting obligations, even when interest from U.S. investors is scant. A previous proposal issued in December 2005 used thresholds based primarily on the percentage of U.S. holders, as well as trading volume. The re-proposal will reflect other changes made in response to public comments. A 30-day comment period is expected with final rules expected in the first quarter of 2007.

Additionally, the SEC will consider whether to adopt amendments to the proxy rules under Section 14 of the Securities Exchange Act, to allow companies to satisfy the requirement for furnishing proxy materials by posting them on a Web site and providing shareholders with notice of their availability. Other soliciting persons also would be permitted to follow the Internet alternative. The SEC will consider whether to propose mandating Internet disclosure of proxy materials.

Currently, companies can deliver paper proxies or send them electronically only with explicit shareholder consent, an approach that’s only been used on a limited basis. The so-called “e-proxy” rules, published for comment in December 2005, would instead use an opt-out approach. Shareholders still would be able to request free paper proxies.

The proposals are seen as an extension of the “access-equals-delivery” concept promulgated by the SEC’s Securities Act reform, which took effect late last year. Supporters of the measure hail it as modernizing proxy delivery and as a way to save issuers millions on printing and postage; critics say the plan would hurt shareholder participation and actually could increase issuer costs.

Proposals on hedge funds and Gramm-Leach-Bliley Act rules are also on the agenda for tomorrow’s meeting.

Proxy Access: Stay Tuned

The issue of shareholder access to the proxy appeared dead after Corporate America successfully lobbied to kill an SEC rule proposed in 2003 that would have given shareholders more power to put their nominees for director in corporate proxy statements. But the issue was revived in September, when a federal appeals court decided that shareholder groups can at least submit proposals to loosen up access to the proxy statement, sowing confusion over how Securities Exchange Act Rule 14a-8 should be interpreted and prompting the SEC to announce plans to propose new guidance to clarify the proxy-access process.

Campos

The SEC first said it would propose revisions to the rules on using proxy statements to nominate directors under Rule 14a-8 back in October, but then said it would delay until tomorrow’s meeting. Press reports early last week quoted Commissioner Roel Campos as saying that the agency was “still struggling” to reach a consensus on the controversial issue. The item wasn’t included in the SEC meeting notice published late last Wednesday.

“The SEC response to the [appeals court] decision on Rule 14a-8 is entitled to thorough consideration and public discussion on its own merits,” Cox said in his statement. “For that reason [it] is now scheduled for consideration at the next open meeting in January.”