Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

A review of many comment letters issued to date indicates so far the SEC has not routinely issued comments on the interactive data file, or XBRL, exhibits.  The most frequent comment we found was regarding incorrectly checking the XBRL question on the cover page of Forms 10-K or 10-Q.  Some of the other comments we found are set forth below.

Hyatt Hotels Corporation

Comment:

Please tell us how you determined you are not required to submit electronically and post on your corporate Web site, Interactive Data Files pursuant to Rule 405 of Regulation S-T. Refer to Item 601(b)(101) of Regulation S-K. 

Response:

Item 601(b)(101) of Regulation S-K states that an Interactive Data File is required to be submitted to the Commission and posted on a registrant’s corporate Web site based on the phase-in schedule outlined in Item 601(b)(101)(i)(A – C). Item 601(b)(101) of Regulation S-K also states that an Interactive Data File first is required for a periodic report on Form 10-Q.

Reference is made to Question 105.07 of the Commission’s Compliance and Disclosure Interpretations (“C&DIs”) of the Commission’s interactive data rules. The Company completed its Initial Public Offering in November 2009. As such, the Company first qualified as a “large accelerated filer” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2010. Following the guidance set forth in Question 105.07, because the Company did not qualify as a large accelerated filer until December 31, 2010 the Company was not required to submit Interactive Data Files until its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011 (the “1Q2011 Form 10-Q”). The Company filed its 1Q2011 Form 10-Q with the Commission on May 3, 2011. The Company then filed Amendment No. 1 to its 1Q2011 Form 10-Q with the Commission on May 20, 2011, the sole purpose of which amendment was to furnish Exhibit 101 to Form 10-Q in accordance with Rule 405 of Regulation S-T. In accordance with Rule 405(a)(2) of Regulation S-T, Amendment No. 1 to the 1Q2011 Form 10-Q was filed with the Commission within 30 days of the filing date of the 1Q2011 Form 10-Q.

Amdocs Limited

Comment:

We note that you did not file the certifications required under Rules 13a-14(a) and 15d- 14(a) of the Exchange Act with your amendment to the Form 20-F for the fiscal year ended September 30, 2010. Please tell us how you considered including the required certifications in your amended Form 20-F and the reason for omitting such certifications.

Response:

Pursuant to Rule 405(a)(2) of Regulation S-T, the Company filed the Amended Form-20-F solely for the purpose of submitting its interactive data file for the fiscal year ended September 30, 2010 (the “Interactive Data File”). The Interactive Data File was prepared under the same disclosure controls and procedures in place during the Company’s preparation of the Form 20-F and reflects the same information about the Company’s financial condition, results of operations and cash flows that was reported in the Form 20-F. The Company believes that the certifications filed as exhibits to the Form 20-F, pursuant to Rules 13a-14(a) and 15d- 14(a) of the Exchange Act, are also applicable to the disclosure contained in the Amended Form 20-F.

According to the Commission’s Compliance and Disclosure Interpretations, Question 130.1 related to Rule 405 under the Securities Act of 1933, as amended (issued May 29, 2009) (the “C&DI”), in an amendment filed for the sole purpose of submitting its interactive data file, the Commission requires an issuer to include the cover page, an explanatory note, the signature page, an exhibit index, and exhibit 101. The C&DI does not state that that new certifications must be filed with such an amendment.  Lastly, although the Company acknowledges that the practices of other issuers are not dispositive, the Company’s review of other public filings suggests that numerous other issuers take the position that new certifications are not required to be filed with an amended filing filed for the sole purpose of submitting an interactive data file.

Dr. Pepper Snapple Group, Inc.

Comment:

We note you calculated the aggregate market value of common equity held by non-affiliates to be $5,382,637,225 as of June 30, 2009, and that you did not indicate by check mark whether you have submitted electronically and posted on your corporate Website, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T. Please tell us whether you have filed such interactive data, and if not, explain to us why you have not provided the interactive data files pursuant to Rule 405 of Regulation S-T.

Response:

As more fully discussed in our public filings, we became a public company on May 7, 2008 with the spin-off by Cadbury plc of its beverages business in the United States, Canada, Mexico and the Caribbean. We became a “large accelerated filer” on December 31, 2009 under Rule 12b-2 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934.

Under Regulation S-K (Item 601(b)(101)(i)) an Interactive Data File is required to be submitted to the Commission and posted on the registrant’s corporate Web site in the manner provided by Rule 405 of Regulation S-T by “a large accelerated filer that had an aggregate worldwide market value of the voting and non-voting common equity held by non-affiliates of more than $5 billion as of the last business day of the second fiscal quarter of its most recently completed fiscal year that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States and the filing contains financial statements of the registrant for a fiscal period that ends on or after June 15, 2009”, except that an Interactive Data File is first required for a Form 10-Q.

Since we first became a large accelerated filer on December 31, 2009 and had market value in excess of $5 billion as of last day of our second quarter in calendar year 2009, under our reading of the above-noted rule, the first filing for which we would be required to file an Interactive Data File would be our Quarterly Report on Form 10-Q for the first quarter ended March 31, 2010 (“our next Form 10-Q”). As a result, we will file an Interactive Data File with our next Form 10-Q.

With respect to our decision to not indicate by check mark on the facing page of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (“our 2009 Form 10-K”) whether or not we had submitted the Interactive Data File electronically and posted it on our corporate website, we relied on Question 105.04 of the Compliance and Disclosure Interpretations posted by the Division of Corporation Finance, which provides that “[a] company should not start checking the cover page box relating to Interactive Data File compliance until it is required to submit those files”. In our view, at the time we filed our 2009 Form 10-K, we were not then required to comply with Rule 405 for the reasons noted above. We will check mark the facing page of our next Form 10-Q to indicate our compliance with the Interactive Data File rules.

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Section 942(a) of the Dodd-Frank Act eliminated the automatic suspension of the duty to file under Section 15(d) of the Exchange Act for asset-backed securities, or ABS, issuers and granted the SEC the authority to issue rules providing for the suspension or termination of such duty.  The SEC has issued final rules to implement this provision of the Dodd-Frank Act.

Exchange Act Section 15(d) generally requires an issuer with a registration statement that has become effective pursuant to the Securities Act to file ongoing Exchange Act reports with the SEC. Prior to enactment of the Dodd-Frank Act, Exchange Act Section 15(d) provided that for issuers without a class of securities registered under the Exchange Act the duty to file ongoing reports is automatically suspended as to any fiscal year, other than the fiscal year within which the registration statement for the securities became effective, if the securities of each class to which the registration statement relates are held of record by less than 300 persons. As a result, the reporting obligations of ABS issuers, other than those with master trust structures, were generally suspended after the ABS issuer filed one annual report on Form 10-K because the number of record holders was below, often significantly below, the 300 record holder threshold.

The Dodd-Frank Act removed any class of ABS from the automatic suspension provided in Exchange Act Section 15(d) by inserting the phrase, “other than any class of asset-backed securities.” Consequently, ABS issuers no longer automatically suspend reporting under Exchange Act Section 15(d). Instead, the Dodd-Frank Act granted the SEC authority to “provide for the suspension or termination of the duty to file under this subsection for any class of asset-backed security, on such terms and conditions and for such period or periods as the Commission deems necessary or appropriate in the public interest or for the protection of investors.” 

As adopted, Exchange Act Rule 15d-22(b) provides that the duty to file annual and other reports under Section 15(d) is suspended:

  • As to any semi-annual fiscal period, if, at the beginning of the semi-annual fiscal period, other than a period in the fiscal year within which the registration statement became effective or, for shelf offerings, the takedown occurred, there are no ABS of such class that were sold in a registered transaction held by non-affiliates of the depositor and a certification on Form 15 has been filed; or
  • When there are no ABS of such class that were sold in a registered transaction still outstanding, immediately upon the filing with the Commission of a certification on Form 15 if the issuer has filed all required reports for the most recent three fiscal years.

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The CFTC has published its final whistleblower rules as required by the Dodd-Frank Act.  The CFTC received more than 635 comment letters.  Over 600 of these comments, sent by or on behalf of different individuals and entities, were variations of the same form letter.  The form letters provide no specific comments or requested revisions regarding the proposed rules.  These letters: express concern that the “corporate lobby will have undue influence on the final rules to protect whistleblowers;” allege that “[t]he SEC proposed rules completely undermine efforts to protect employees who risk their careers to expose fraud;” and opine that “the CTFC should not blindly follow any of the SEC’s recommendations and should instead write rules will encourage whistleblowers to report commodities fraud.”

A significant issue discussed in the proposed rules was the impact of the whistleblower program on company systems for internal reporting of potential misconduct.  With respect to the criteria for determining the amount of an award, the final rules provide that while the amount of an award is within the CFTC’s discretion, the CFTC will consider:

  • a whistleblower’s report of information internally to an entity’s whistleblower, compliance or legal system as a factor that potentially can increase the amount of an award; and
  • a whistleblower’s interference with such internal systems is a factor that can potentially decrease the amount of an award.

The CFTC did not propose a requirement that a whistleblower must report his information internally to an entity to be eligible for an award, and commenters were sharply divided on the issues raised by this topic. Upon consideration of the comments, the CFTC determined that it is inappropriate to require whistleblowers to report violations internally to be eligible for an award.

The CFTC did, however, recognize that internal compliance and reporting systems ought to contribute to the goal of detecting, deterring and preventing misconduct, including Commodity Exchange Act violations, and does not want to discourage employees from using such systems when they are in place. Accordingly, the Commission has tailored the final rules so that a whistleblower may be eligible for an award for reporting original information to an entity’s internal compliance and reporting systems if the entity later reports information to the CFTC that leads to a successful CFTC action or related action. Under this provision, all of the information provided by the entity to the CFTC will be attributed to the whistleblower, which means the whistleblower will get credit—and potentially a greater award—for any information provided by the entity to the CFTC in addition to the original information reported by the whistleblower.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

Much attention has been focused on the XBRL rules for second quarter Form 10-Qs.  Less attention has been given to the XBRL rules for registration statements.  About the only thing that may be perfectly clear is XBRL exhibits are not needed for an initial public offering.  Even to arrive at that conclusion requires a tortured reading of Regulation S-K Rule 601(b)(101) and the statement “first is required for a periodic report on Form 10-Q.”  Obviously if an issuer is doing an IPO they have never filed a 10-Q.

So what about a resale registration statement for selling security holders on Form S-1?  Looking at the Rule, a registration statement is only required to include XBRL exhibits if “the registration statement contains a price or price range.”  That is almost never the case for a resale registration statement so one may be tempted to conclude XBRL exhibits are not necessary.  We believe the SEC takes the opposite position.  The reasoning is the securities have already been sold, a price has been determined, and therefore the registration statement must include XBRL exhibits.  Those planning PIPEs should consider themselves forewarned.

There are a couple of other noteworthy follow-up points to the S-1 resale registration statement situation that follow from the foregoing.  It appears initial filing must include the XBRL exhibits, adding it by pre-effective amendment would apparently be poor form.  And just including the XBRL exhibits from your first 10-Q will not do either.  For registration statements, XBRL exhibits must cover all of the financial statements, including your annual financial statements.

Note that this is a multiple year problem.  All issuers are subject to detailed footnote tagging requirements for filings that include an XBRL exhibit for a fiscal period that ends after June 15, 2012.  So it appears annual financial statements included in an S-1 resale registration statement that include financial statements for a quarterly period ended June 30, 2012 will have to include detailed tagging, even though the Form 10-K was not so tagged.  Issuers considering PIPE transactions during this time period may want to think about using detailed foot note tagging with their Form 10-K so they will be ready.

And do not forget the web site posting rules.  Once that resale registration statement is filed with the SEC, all of the XBRL exhibits must be posted to the corporate web site (if there is one) on the same day.

Compare the foregoing results to an issuer filing an S-1 for an underwritten follow-on offering.  Here, the adopting release is helpful and clear.  The initial filing would not need to include the XBRL exhibits since that would not typically include a price or price range.  Once a price or price range is included, all financial statements included in the S-1, including annual financial statements, will need to be covered by the XBRL exhibits.

So what about a universal shelf registration statement on Form S-3?  We believe that as long as all financial statements are incorporated by reference, no further XBRL exhibits would be required.  If financial statements are included within the four corners of the S-3, whether additional XBRL exhibits will be required depends on the facts and circumstances.

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The Municipal Securities Rulemaking Board, or MSRB, has announced it will provide written verification of the registration status of municipal advisors and dealers so state and local governments, and others, can verify that these firms are currently registered with the MSRB.

At any time, the registration status of municipal advisors and dealers can be confirmed on the MSRB website. Beginning yesterday, registered entities can obtain a Certificate of Current MSRB Registration so they can respond to requests from municipal entities and others to provide this information.

Federal securities laws and MSRB rules require municipal advisors and dealers to be registered with both the SEC and the MSRB.

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The Federal Reserve Board has issued an interim final rule establishing regulations for savings and loan holding companies, or  SLHCs.  Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, supervisory and rulemaking authority for SLHCs and their nondepository subsidiaries transferred from theOffice of Thrift Supervision, or OTS, to the Board on July 21, 2011.  Previously, the Board sought comment on a notice identifying regulations previously issued by the OTS that the Federal Reserve will continue to enforce. The interim final rule implements the transfer of those regulations from the OTS to the Board.

The Board also issued an Order delegating to staff and to the Reserve Banks the authority to take certain actions with respect to SLHCs.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Dodd-Frank Wall Street Reform and Consumer Protection Act established the Office of Financial Research and provides it with the authority to collect data to support the Financial Stability Oversight Council, or FSOC,  and to set standards for reporting such data.  To support the FSOC in identifying connections among market participants and monitoring systemic risk, the Office of Financial Research, or OFR, intends to standardize how parties to financial contracts are identified in the data it collects on behalf of the FSOC.  

In 2010, the OFR issued a statement of policy regarding its preference to adopt a universal standard for identifying parties to financial contracts that is established and implemented by private industry and other relevant stakeholders.  The OFR sought comment on a statement of policy, including but not limited to the desired characteristics for a Legal Entity Identifier, or LEI, and the institutional arrangements for issuing and maintaining identifiers and associated reference data.  An LEI is a unique number that would identify a legally distinct entity that engages in financial market activities.  Currently, there are many ways to identify entities, but there is no universal identification scheme for legal entities across markets and jurisdictions.

The OFR has issued a statement on the progress made to date and next steps forward in the global initiative to establish an LEI.   The OFR noted that although significant progress has been made to date in developing an LEI—including discussions of principles by global regulators; recommendations by a global coalition of financial services firms and trade associations; a technical specification for the identifier by an international standards body; and proposals by parties to manage the LEI—additional work needs to be done to build international consensus on key issues before the OFR issues a rule.

Because of the work that has been done to date, the OFR believes that sufficient progress can be made to allow for an initial phase of implementation in 2012, consistent with the needs of regulatory authorities in a variety of jurisdictions.  The OFR intends to issue a notice of proposed rulemaking consistent with that timeline.  In the United States, the OFR’s objective remains to coordinate with the SEC and CFTC, which are issuing rules for reporting swap transactions to trade repositories, and for all three agencies to require the same system for identifying parties in reporting.

During the recent crisis, the lack of a universal entity identifier made it difficult for firms and regulators to assess market exposures to risky or failing institutions.  An LEI would promote financial stability by illuminating those exposures.  It would also contribute to market efficiency by enhancing transparency for investors, reducing reporting burdens and other operational costs for financial firms, and improving customer service. 

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Municipal Securities Rulemaking Board, or MSRB, has requested comment on extending the MSRB’s rule on advertisements to cover municipal advisors and on a draft interpretive notice covering other forms of marketing communications.  It also requested comment on a new rule requiring municipal advisors to evidence their engagements in writing, as well as to make certain required disclosures.

The MSRB’s existing rule on advertising, Rule G-21, applies to advertisements by municipal securities dealers. The MSRB is requesting comment on extending this rule to cover advertising by municipal advisors.  The rule would prohibit municipal advisors from publishing or disseminating advertisements related to municipal securities, municipal financial products or third-party services the municipal advisors knows or has reason to know are materially false or misleading. This would include any written or electronic promotional materials, such as a circular, report or press release.   The MSRB recognizes that many of the communications municipal advisors have with municipal entities and obligated persons are not advertisements.  The MSRB, therefore, is also requesting comment on an interpretive notice under Rule G-17, which would provide that all written and oral sales or marketing communications and correspondence (e.g., pitch books and responses to request for proposals) must not be materially false or misleading.  

The MSRB is also requesting comment on a new rule for municipal advisors—draft MSRB Rule G-46—which would require municipal advisors to evidence in writing a municipal advisory relationship with a municipal entity client or obligated person client at the time the municipal advisor provides advice or agrees to provide advice. The rule would require the writing to include the basis of compensation; the disclosures required by the MSRB’s fair dealing and fiduciary duty rules; the affiliates that will provide advice, services or products related to the municipal advisor engagement; and whether the municipal advisor is registered with the MSRB and the SEC.  In certain cases, municipal advisors would also be required to disclose those affiliations to investors.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Municipal Securities Rulemaking Board, or MSRB, has requested approval from the SEC of a notice that would establish detailed obligations of underwriters of municipal securities to their state and local government clients covering clear disclosure of risks and conflicts of interest, among other things. The proposal is a key piece of the MSRB’s rulemaking initiatives to protect issuers in the municipal market, which is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

While MSRB rules already prohibit an underwriter from engaging in any deceptive, dishonest or unfair practice with an issuer of municipal securities, today’s proposed notice further addresses disclosure required by underwriters to issuers. For example, underwriters in a negotiated offering of municipal securities recommending a complex municipal securities financing—such as a variable rate demand obligation with a swap—to an issuer would have an obligation under the MSRB’s guidance to disclose all material risks and characteristics associated with the financing, as well as any incentives to recommend the financing and other conflicts of interest.

The notice also would require that all representations by underwriters, whether written or oral, to issuers be truthful and accurate. For example, an underwriter may not represent that it has the requisite knowledge or expertise with respect to a particular financing if its personnel that it intends to work on the financing do not have that expertise.

The MSRB’s proposed notice addresses conflicts of interest in municipal securities transactions by requiring underwriters to disclose to issuers compensation received from third-party providers of derivatives and investments. With respect to credit default swaps, underwriters would have to disclose the issuance or purchase by the dealer of swaps for which the reference is either the issuer or the issuer’s obligations, thereby reducing a potential conflict of interest that can affect the pricing of an issuer’s securities.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Consumer Financial Protection Bureau, or CFPB, anticipates that users of social media will interact with the CFPB through services such as Facebok, Twitter, YouTube and Flickr.  The CFPB believes the use of social media will enable the CFPB to:

  • ·        interact with the public in effective and meaningful ways,
  • ·        encourage the wide sharing of consumer financial information and the strengthening of an online community of consumers, and
  • ·        ensure that critical information about the agency and key consumer finance issues is distributed.

The CFPB recently issued this notice explaining when social media records may be disclosed.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.