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01/08/07 |
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Recent Securites Law Developments
Penny Somer-Greif
Frank C. Bonaventure
There are several important developments in the securities law area that will be of interest to our public company readers.1 This article outlines those developments and provides information regarding where you can get additional information
On December 13, 2006, the Securities and Exchange Commission ("SEC") adopted amendments to its proxy rules that allow companies to furnish their proxy materials to shareholders through a "notice and access" model using an Internet website. Under the new rules, instead of mailing paper copies of their proxy statements to shareholders, companies (and others conducting a proxy solicitation) may post their proxy materials on an Internet website and send a Notice of Internet Availability of Proxy Materials ("Notice") to shareholders at least 40 days before the meeting date. The Notice must contain information specifically prescribed in the new rules. Companies may send a paper proxy card, with another copy of the Notice, 10 days or more after sending the initial Notice. The new rules also provide for shareholders to request paper copies of the proxy materials and address the role of brokers, banks and similar intermediaries in the process. The e-proxy rules are effective on July 1, 2007. The SEC is also proposing to make the "notice and access" model mandatory, except for solicitations in connection with business combination transactions. Under the proposal, the full set of proxy materials could accompany the Notice. The adopting release with respect to the e-proxy rules has not been posted as of this writing. You can view the SEC's press release with respect to its adoption of the e-proxy rules at http://www.sec.gov/news/press/2006/2006-209.htm. Also on December 13, 2006, the SEC adopted further extensions for non-accelerated filers, including small business issuers, for compliance with the internal control over financial reporting requirements mandated by Section 404 of the Sarbanes-Oxley Act of 2002, as well as a transition period for newly public companies with respect to these requirements. Under the amendments, a non-accelerated filer will be required to provide the management's report on internal control over financial reporting ("Management's Report") with its annual report on Form 10-K or 10-KSB for the year ended December 15, 2007. This is a slight extension from the previous deadline of years ended on or after July 15, 2007. More significantly, the SEC also adopted a one-year extension for the auditor's attestation report on internal control over financial reporting. Under the amendments, non-accelerated filers would not be required to provide the auditor's attestation report until their annual reports on Forms 10-K or 10-KSB for the fiscal year ended on or after December 15, 2008. In connection with such extension, Management's Report for the 2007 fiscal year must include a statement that the report does not include the auditor's attestation report and that the company's registered public accounting firm has not attested to Management's Report on the company's internal control over financial reporting. Under the amendments, a newly public company2 will not have to comply with the internal control over financial reporting requirements until after it files, or has been required to file, at least one annual report on Form 10-K or Form 10-KSB with the SEC.3 Such a newly public company must include a statement in its first annual report that the report does not include a Management's Report or an attestation report of the company's auditor. Such companies will also be exempt from the provisions of Rules 13a-15(a) and 15d-15(a) that require public companies to maintain internal control over financial reporting until the company has been required to file or has filed an annual report with the SEC for the prior fiscal year and are exempt from the provisions regarding an evaluation of changes in internal control over financial reporting until after the first periodic report due after its first annual report that must include a Management's Report. The SEC's adopting release implementing these amendments is available at http://www.sec.gov/rules/final/2006/33-8760.pdf. Also on December 13, 2006, the SEC voted to propose interpretive guidance to assist the management of public companies in designing and conducting their evaluation and assessment of the effectiveness of their company's internal control over financial reporting. Pursuant to the proposed guidance, management would use a top-down, risk-based approach and exercise judgment to design and conduct an evaluation tailored for the individual company. Under the proposed guidance, management would first identify "financial reporting risks," which are the potential sources of a material misstatement in the financial statements. Next, management would identify the controls that are intended to address those risks. Those identified controls would be within the scope of management's evaluation. The proposed guidance indicates that after the first year of conducting this assessment, management's focus in subsequent years would be on changes in risks and controls rather than the identification thereof, and that evidence needed to support the assessment need only be updated in each subsequent year. The next step is management's evaluation. The proposed guidance suggests ways in which management can evaluate the operation of the internal control over financial reporting based on its identification of control risks in the prior step. It also discusses considerations management should take into account in determining the nature and extent of its testing procedures and the level of evidentiary matter it needs to maintain in conducting its evaluation. The proposed guidance also clarifies that management's day-to-day activities in connection with its management of the business can be used in its evaluation. Finally, the proposed guidance outlines several factors that management should consider in assessing whether a control deficiency or a combination of control deficiencies could result in a material weakness that must be reported and identifies "strong indicators" of a material weakness. The proposed guidance also outlines additional disclosures management should consider in connection with its disclosure of a material weakness. In addition, the proposed guidance clarifies the nature and amount of documentation management must maintain in connection with each step of its evaluation, and provides examples thereof. The proposed guidance also clarifies how to address entity-level controls in this process, the role of information technology controls, and considerations in connection with multiple locations. In connection with the proposed guidance, the SEC also proposed amendments to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 that would clarify that an evaluation of internal control over financial reporting in accordance with the guidance will satisfy the evaluation requirement of those rules, although use of the proposed guidance would not be mandatory. The SEC's release proposing the guidance on management's evaluation of internal control over financial reporting is available at http://www.sec.gov/rules/proposed/2006/33-8762.pdf. On December 19, 2006 the Public Company Accounting Oversight Board ("PCAOB") voted to propose a new standard, "An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements," to replace its existing auditing standard on internal control over financial reporting, Auditing Standard No. 2 ("AS2"). The proposed new standard would: The PCAOB also voted to propose related standards, including: In connection with its proposed guidance on management's evaluation of internal control over financial reporting, the SEC proposed amendments to Regulation S-X that would eliminate the requirement that the auditor opine whether management's assessment of the effectiveness of internal control over financial reporting is fairly stated. Instead, the auditor would be required only to state its opinion as to whether the company maintained effective internal control over financial reporting. The PCAOB's press release about its proposed new standard on auditing internal control over financial reporting and other related proposals is available at http://www.pcaob.org/News_and_Events/ The text of the proposals is available at http://www.pcaob.org/Rules/Docket_021/ This article highlights certain material provisions, and does not discuss all material elements, of the rules, proposed rules and proposed guidance discussed herein and should not be construed as providing legal advice. If you have any questions about the information herein, feel free to contact Frank C. Bonaventure at 410-347-7305 or Penny Somer-Greif at 410-347-7341, both of the law firm of Ober | Kaler. NOTES |
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Ober, Kaler, Grimes & Shriver
Maryland Washington, D.C. Virginia |
