SEC to Consider IFRS Rule; SOX Lives; More

The SEC will delve into foreign fare at an open meeting this week, reviewing rule changes for foreign private issuers and possibly proposing a rule to let U.S. companies file financial reports according to International Financial Reporting Standards.

The Commission will hold its meeting at 10 a.m. Wednesday, at SEC headquarters in Washington. According to an agenda posted late Friday, the agency “will consider whether to propose a roadmap for potential use by U.S. issuers” to file their statements according to IFRS.

SEC spokesmen declined to say whether an IFRS proposal has actually been drafted for commissioners to review, or whether they will merely talk about the idea—as they have several times already this year—without taking any specific action. But momentum to let U.S. companies file in IFRS has been growing since last year when the SEC decided to let foreign filers use IFRS without reconciling their statements to U.S. Generally Accepted Accounting Principles. Most observers believe it’s only a matter of time before the SEC gives the IFRS choice to U.S. companies.

Also on the agenda: whether to adopt amendments to rules regarding when foreign private issuers are required to register a class of equity securities under Exchange Act Section 12(g); whether to adopt amendments to the forms and rules applicable to FPIs aimed at enhancing the information available to investors; and whether to adopt revisions to the current exemptions for cross-border business combination transactions and rights offerings to expand the usefulness of the exemptions, and to adopt changes to the beneficial ownership reporting rules to permit certain foreign institutions to file reports on a shorter form.

The SEC is also slated to consider whether to publish interpretive guidance on issues related to cross-border transactions.

Lawsuit Challenging SOX Fails Again

A long-shot lawsuit filed by conservative activists to have the Sarbanes-Oxley Act ruled unconstitutional has failed yet again in federal appeals court.

A three-judge panel on the U.S. Appeals Court for the District of Columbia ruled Aug. 22 that the Public Company Accounting Oversight Board does not violate the Appointments Clause of the Constitution, even though its members are appointed by the Securities and Exchange Commission rather than the White House.

The plaintiffs, the Washington D.C.-based Free Enterprise Fund and Las Vegas accounting firm Beckstead & Watts, had argued that the president must appoint PCAOB members. Their suit was dismissed in federal district court last year. Whether they will now appeal to the U.S. Supreme Court is unclear at the moment.

The appeals court ruling prevents what could have been a major chaotic twist in the Sarbanes-Oxley Act. Because the law has no severability clause, the entire statute would be invalidated if any single portion were struck down. A defeat anywhere along the line would force Congress and the SEC to devise some sort of backup plan and invite all sorts of lobbying pressure if they reopened SOX to amendments.

The three-judge panel upheld SOX on a 2-1 vote. SOX does not violate the Appointments Clause, they said, because “in view of the [SEC’s] comprehensive control of the [PCAOB], Board members are subject to direction and supervision of the Commission and thus are inferior officers not required to be appointed by the President.”

Cox

A PCAOB statement said the Board is “gratified” by the decision. SEC Chairman Christopher Cox called the decision “welcome news for the Commission, investors, and U.S. capital markets.”

In a dissenting opinion, Judge Brett Kavanaugh said the case “raises fundamental questions about the scope of the president’s constitutional power to appoint and remove officers in the Executive Branch.”

The plaintiffs could now ask the U.S. Supreme Court to hear the case or seek a ruling by the full appeals court rather than the three-member panel.

Exchanges Revise Director Independence Rules

The New York Stock Exchange, Nasdaq, and Amex stock exchanges have all revised their director independence standards to bring them in line with Securities and Exchange Commission disclosure requirements.

All three exchanges have filed rule changes with the Commission to raise the dollar threshold of their respective director compensation test for their listed companies from $100,000 to $120,000. The change brings the standards into line with the dollar threshold applicable to related-party transactions that must be disclosed to the SEC under Item 404 of Regulation S-K, which was amended in 2006.

While the changes are effective immediately, the SEC is accepting comment on the respective rule filings for 21 days following publication in the Federal Register.

Meanwhile, NYSE also filed a rule change to amend its bright-line test relating to a listed company’s internal or external auditor. The current test precludes a director from being deemed independent if any of the following occur: the director or an immediate family member is a current partner of a firm that is the company’s internal or external auditor; the director is a current employee of such a firm; the director has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit, assurance, or tax compliance practice; or the director or an immediate family member was within the last three years a partner or employee of such a firm and personally worked on the company’s audit within that time.

The NYSE said the current standard has precluded a director from being deemed independent in cases even where an immediate family member had no relationship to the listed company’s audit.

The proposal approved by the SEC modifies the current test for immediate family member to cover only an immediate family member who: is a current partner of the company’s internal or external auditor; is a current employee of such a firm and personally works on the listed company’s audit; or was within the last three years a partner or employee of such a firm and personally worked on the listed company’s audit within that time.

The change bring NYSE standards more in line with the auditor tests used by Nasdaq and the American Stock Exchange. Comments are due 21 days after publication in the Federal Register.

Tips for Avoiding Trouble With 10b5-1 Trading Plans

Amid ongoing heightened scrutiny by enforcement authorities of activities around 10b5-1 plans, lawyers at the law firm Latham & Watkins offer some tips on best practices to ensure plans are designed and executed within the confines of the rule for which they’re named.

Burwell

The plans can provide protection against allegations of insider trading by prescribing a fixed schedule for when a company insider will buy or sell company stock. Still, the potential for abuse “is substantial and the possibility for the appearance of abuses in today’s environment is even greater,” according to the Aug. 18 client alert, written by Robert Burwell, James Barrall, and John Tang. “So companies should consider adopting guidelines for the adoption of plans by insiders to minimize the risk of SEC investigations and very unflattering and widely disseminated news reports.”

The alert goes on to state that the SEC may soon propose a rule to prevent 10b5-1 plan abuses by requiring more than just disclosure of plan adoption, spurred by a recent academic study that concluded voluntary disclosure regarding 10b5-1 plans is associated with greater abnormal returns from insiders’ trades.

Required disclosure of plan terminations and modifications, which was part of a proposed SEC rule in 2002, may resurface in future rulemaking. The SEC also might require issuers to disclose whether they have adopted internal policies or guidelines to limit abusive practices by insiders, the authors note.

The alert offers a list of guidelines companies should consider adopting to limit opportunities for insiders to engage in abusive practices and to avoid the appearance of practices that might be viewed as abusive based on later developments:

Plan approval. Plans should use one or more company-approved templates and be approved by the general counsel or compliance officer.

Cooling-off period. The time between the establishment of a plan and commencement of sales should be at least 30 days.

Trading windows. Insiders shouldn’t be allowed to enter into 10b5-1 plans outside of ordinary open trading windows. Some recommend a single, short window each year, such as after the filing of the company’s Form 10-K.

One insider; one plan. Companies should prohibit insiders from entering into multiple, overlapping 10b5-1 plans.

Disclosure. Guidelines should call for prompt disclosure of the adoption of 10b5-1 plans through a press release or Form 8-K identifying the insider, the maximum number of shares or dollar amount of sales covered by the plan, and the period during which sales may be made. Plan modifications or terminations should also be disclosed.

Modifications. Guidelines should provide that modifications cannot be made other than during open trading windows, with a minimum 30-day waiting period before changes take effect.

Terminations. While some companies prohibit plan terminations other than during open trading windows, the authors say it’s more common for companies to permit insiders to terminate plans at any time, but then impose a 180-day waiting period before a new plan can be adopted and a 30-day waiting period before any additional trades outside of a plan.

No “fast selling” and no sales outside of the plan. Guidelines should encourage insiders to design plans to cause a number of smaller sales over time to minimize the appearance of sales timed with material non-public information. Insiders also should avoid sales outside of the plan, especially in large concentrations of sales during a short period of time.

Execution broker. The company should consider specifying the execution broker insiders must use or require insiders to obtain company approval of the broker they intend to use.

Documentation. Since the SEC may soon require documentation that 10b5-1 plans are entered into when insiders aren’t aware of material non-public information, companies should consider monitoring the adoption of 10b5-1 plans and mandate that the company and the insiders keep adoption documentation that is “sufficiently detailed to show compliance with the rule.”