Venable SEC Update We are pleased to introduce Venable s SEC - - PDF document

w w w. v e n a b l e . c o m

Venable SEC Update

We are pleased to introduce Venable’ s SEC Update, which is designed to keep you informed of developments affecting SEC reporting companies.

Post Enron Initiatives

The SEC, NYSE and Nasdaq recently have adopted or recommended a number of new rules intended to address some of the issues arising out of the current crisis in confidence in the public markets related to the Enron debacle. A variety of propos- als from many corners in the accounting, legal and business world have been made to improve best practices in the accounting, disclosure and corporate governance areas; this update will let you know what rules have just been adopted or what proposals we believe are very likely to be adopted in the near future. We will keep you posted from time to time on new rules and proposals from the SEC or the SROs that could affect your company.

SEC PROPOSES CHANGES TO CERTAIN DISCLOSURE REQUIREMENTS

MD&A Disclosure of Critical Accounting Policies

In May 2002, the SEC released a proposal addressing disclosure requirements relating to (i) accounting estimates a company makes in applying its accounting policies and (ii) the initial adoption by a company of an accounting policy that has a material impact on its financial presentation.

Accounting Estimates

The Management’ s Discussion and Analysis section of the annual report (MD&A) would contain a qualitative and quantitative disclosure identifying and describing critical accounting estimates, assumptions and uncertainties and other related matters. A critical accounting estimate means that (i) the estimate requires the company to make assumptions about highly uncertain matters and (ii) that it must be the case that different estimates which could have reasonably been used would have a material impact on the company’ s financial presentation. The disclosure would include:

• An identification and discussion of the critical accounting estimate, the methodol-
• gy used in determining the critical accounting estimate and certain other

information, such as material underlying assumptions and known trends, events

• r uncertainties that are reasonably likely to occur and materially affect the

methodology or assumptions described;

• A description of the significance of the accounting estimate to the company’

s financial condition, changes in financial condition and results of operations;

• A quantitative discussion of changes in overall financial performance and

material line item changes that would occur assuming the accounting estimate

July 2002

Continued

Form 8-K Amendments Regarding Certain Management Transactions

In April 2002, the SEC proposed to amend Form 8-K to require reporting companies to report the following in a new Item 10:

• Transactions by each director and executive officer in the company’

s equity securities (whether or not registered), including derivative securities;

• The adoption, modification or termination of a Rule 10b5-1(c) sales plan; and
• Loans of money to each director or executive officer made or guaranteed by the

company or its affiliate. The Form 8-K would be due (i) within two business days after any transaction or loan with an aggregate value of $100,000 or more (other than employee benefit plan grants) and (ii) within two business days of the week following the date of the transaction for employee benefit plan grants, and transitions or loans under $100,000. Reports of transactions not in excess of $10,000 could be deferred until the aggregate value of unreported transactions for such director or executive officer exceeded $10,000. The SEC expects the amendment to be come effective within 60 days after its adoption (with an additional 60 day delay applicable to some provisions). was changed, either by using reasonably possible near-term changes in the material assumptions underlying the estimate or by using the reasonably possible range of the estimate;

• A quantitative and qualitative discussion of any material changes made to the

accounting estimate in the last three years, the reasons for the changes and the effect on line items in the financial statements and overall financial performance;

• A statement whether senior management has discussed the accounting estimate

and related MD&A disclosure with the audit committee; and

• If the company has more than one segment, an identification of the segments

affected by the estimate and a discussion of the estimate on a segment basis.

Accounting Policies

MD&A would contain a qualitative discussion (in addition to the existing financial state- ment footnote disclosure) about (i) events or transactions giving rise to the adoption of the policy, (ii) the accounting policy itself and (iii) the impact the adoption of such policy will have on the company’ s financial presentation. If upon initial adoption of an accounting policy the company is permitted a choice among acceptable accounting principles, it would be required to disclose in the MD&A that it made a choice, identify the alternatives, de- scribe why it made the choice it did and, where material, provide a qualitative discussion of the impact on the financial condition and results of operation that the alternatives would have had. Also, if there is no accounting literature relating to the events or transactions giving rise to the adoption of the accounting policy, the company would be required to explain its decision regarding which accounting principle and method to use. In quarterly reports, companies would be required to provide an update to the MD&A information related to critical accounting estimates disclosed in the last filed annual or quarterly report. The SEC also indicated that it is considering subjecting the MD&A to the auditing process or some other review by the independent auditors. The SEC is taking comments on this proposal until July 19.

Continued from page 1

Nasdaq Board Approves Corporate Governance Changes

In June, Nasdaq approved rule changes that, when approved by the SEC, will require among other things:

• shareholder approval for any

equity based plans that include executive officers or directors; and

• approval of related-party

transactions by the audit committee (or other committee composed of independent directors). In addition, the rules would tighten the definition of independent director to exclude any director from the definition who receives or whose family member receives any payments (other than payments for Board service) in excess of $60,000 or whose charity receives more than the greater

• f $200,000 or 5% of the gross

revenues of the company or the

• charity. In the case of charities, the

director must have been an executive

• fficer of the charity.

Companies would also be allowed to use Reg FD compliant disclosure methods for disclosure of material information, such as conference calls, press conferences and web casts, not just releases through news services, so long as the public is provided adequate notice (generally by press releases) and granted access. Finally, the receipt of going concern

• pinions would have to be disclosed

through the news media. These rules have been sent to the SEC, which is expected to approve them in late summer or fall of this year.

NYSE Recommends Corporate Governance Changes

In June, the NYSE announced recommenda- tions for additional corporate governance and listing requirements, some of the more far reaching of which are listed below:

• Require a majority of the board of

directors to be independent (two year transition period for implementation);

• Require the CEO to attest to information

given to investors;

• Require companies to adopt and publish a

code of ethics and governance guides;

• Require companies to have audit,

nominating/corporate governance and compensation committees, each consisting solely of independent directors, and to adopt written charters for such committees that address certain minimum responsibilities;

• Impose stricter audit committee

qualification requirements, including accounting or financial management experience for the chair;

• Limit the definition of independent director

to individuals affirmatively determined by the board of directors to have no material relationship with the company and establish a five-year “cooling-off” period during which former employees of the company or its auditor and certain other persons are deemed not to be independent;

• Require shareholder vote on all equity-

based compensation plans; and

• Require audit committee to have sole

responsibility for hiring and firing the company’s auditors and for approving any significant non-audit work by the auditors. The release contains other recommendations affecting corporate governance standards for NYSE listed companies. The NYSE is currently taking public comment

• n these proposals. Final action by the NYSE

Board is expected by August 1 of this year, to be followed by submission of the proposal to the SEC.

Certification of Disclosures in Annual and Quarterly Reports

In June 2002, the SEC released a rule proposing to require the principal executive

• fficer and principal financial officer of a company each to certify in the

company’s annual and quarterly reports that:

• He or she has read the report;
• To his or her knowledge, the information in the report is true in all important

respects as of the last day of the period covered by the report; and

• The report contains all information about the company of which he or she is

aware that he or she believes is important to a reasonable investor as of the last day of the period covered by the report. For purposes of the certification, information is considered “important to a reasonable investor” if:

• There is a substantial likelihood that a reasonable investor would view the

information as significantly altering the total mix of information in the report; and

• The report would be misleading to a reasonable investor if the information was
• mitted from the report.

Also, the SEC is proposing that companies be required to maintain procedures to provide reasonable assurance that the company is able to collect, process and disclose the information required in the periodic and annual reports under the Exchange Act and to conduct an annual review and evaluation of these procedures and present such evaluation to the principal executive officer and principal finan- cial officer. The principal executive officer and principal financial officer would be required to certify in the company’ s annual report that they have reviewed the results of this evaluation. The SEC is taking comments on this proposal until August 19, 2002.

Accelerated Filing Requirements

In April 2002, the SEC proposed to accelerate the deadlines for filing Form 10-K from 90 to 60 days and Form 10-Q from 45 to 30 days. These acceler- ated deadlines would apply only to domestic companies that have a public float of at least $75 million, have filed at least one Form 10-K, and have been subject to Exchange Act reporting requirements for at least 12 calendar

• months. If these new deadlines are adopted, the SEC currently expects them

to apply to covered companies as of the end of their first fiscal year ending after October 31, 2002. The SEC also proposes to encourage companies to post their SEC filings on their company website.

Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date

In June 2002, the SEC issued a release proposing to require companies to file a Form 8-K to disclose the following additional events:

• Entry into a material agreement not made in the ordinary course of business;
• Termination of a material agreement not made in the ordinary course of business;
• Termination or reduction of a business relationship with a customer if the revenue lost from

such termination or reduction equals 10% or more of the company’ s consolidated revenues forthe most recent fiscal year;

• Creation of a direct or contingent financial obligation that is material to the company;
• Exit activities, including any material write-off or restructuring;
• Any material impairment;
• A change in a rating agency decision, issuance of a credit watch or change in company
• utlook;
• Changes in the listing of a company’

s securities, including movement from an exchange or quotation system to another, delisting, or notice that the company does not comply with a listing standard;

• Notice from the company’

s current or former auditor that it is withdrawing a previously issued audit report or that the company may not rely on a previously issued audit report; and

• Any material limitation, restriction or prohibition, including the beginning and end of

lock-out periods, regarding the company’ s employee benefit, retirement and stock owner- ship plans. Also, the proposal would amend existing disclosure requirements as follows:

• Disclosure of (i) unregistered sales of equity securities, and (ii) material modifications to

rights of holders of the company’ s securities would be required to be disclosed on Form 8-K rather than the annual and quarterly reports.

• Existing Form 8-K disclosure items would be amended to include (i) disclosure regarding

thedeparture of a director for reasons other than a disagreement or removal for cause, (ii) theappointment or departure of a principal officer and the election of new directors, and (iii) disclosure regarding any material amendment to a company’ s certificate of incorpora- tion or bylaws. The Form 8-K would be amended to reduce the current filing deadlines from five business days

• r 15 calendar days, depending on the item disclosed, to two business days for all items.

The SEC is taking comments on this proposal until August 26, 2002.

For more information about any of the rules or proposals discussed here, please contact Beth Hughes at (410) 244-7608 or (703) 760-1649, Thomas Washburne at (410) 244-7744, Anita Finkelstein at (202) 962-4905, Melissa Warren at (410) 244-7695, Michael Conron at (410) 244-7424 or Don Creston at (703) 760-1648. SEC Update is published by the Corporate Finance and Securities Group of Venable, Baetjer and Howard, LLP . It is not intended to provide legal advice or opinion. Such advice many only be given when related to specific fact situations.

VENABLE ATTORNEYS AT LAW logo is a U.S. Registered Service Mark of Venable, Baetjer and Howard, LLP.

w w w. v e n a b l e . c o m