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

Pursuant to the Consumer Financial Protection Act of 2010 (“CFP Act”), which is part of the Dodd-Frank Act, the Secretary of the Treasury has designated July 21, 2011, as the date for the transfer of functions to the Bureau of Consumer Financial Protection (“CFPB”).  On this “designated transfer date,” certain authorities will transfer from other agencies to the CFPB, and the CFPB will be able to exercise certain additional, new authorities under the CFP Act and other laws. After consulting with the heads of the agencies whose functions will transfer to the CFPB, as well as the Director of the Office of Management and Budget, the Secretary of the Treasury found that designating July 21, 2011 as the transfer date will advance the mission of the CFPB and promote an orderly and organized startup.

On the designated transfer date, the consumer financial protection functions currently carried out by the federal banking agencies, as well as certain authorities currently carried out by the Department of Housing and Urban Development and the Federal Trade Commission, will be transferred to the CFPB. In particular, as of the designated transfer date, the CFPB will assume responsibility for consumer compliance supervision of very large depository institutions and their affiliates and promulgating regulations under various federal consumer financial laws.  The transfer of certain employees from six of those agencies to the CFPB must also occur within days after the designated transfer date. New authorities of the CFPB under subtitle C of the Act, as well as other consumer protection provisions, will become effective on the designated transfer date as well.  In the intervening period, the CFPB will lay the groundwork for an efficient transfer and prepare for consumer protection activities after July 21, 2011.  For instance, prior to the designated transfer date, the CFPB will begin to conduct research relating to consumer financial products and services, develop its nationwide consumer complaint response center, plan and take steps to implement the risk-based supervision of nondepository covered persons, and prepare for the opening of outreach offices.

Separately, Treasury Secretary Tim Geithner and Elizabeth Warren, Assistant to the President and Special Advisor to the Treasury Secretary, hosted a forum to seek input on the simplification of mortgage disclosure forms so that consumers have the clear and easy-to-understand information they need to make the financial choices that are best for themselves and their families.

Under the Dodd-Frank Act, the newly created CFPB is charged with combining and simplifying two overlapping mortgage disclosure forms that the Truth in Lending Act (TILA) of 1968 and the Real Estate Settlement Procedures Act (RESPA) of 1974, respectively, require lenders to provide to applicants. The forms have converged in some respects over time, yet they remain separate despite more than a decade of attempts to combine them.  Many believe they have remained highly technical and difficult for borrowers to understand. Merging these two forms into one clear, easy-to-understand document is a high priority for the CFPB as the Obama Administration continues its work implementing the consumer protections included in the Dodd-Frank Act.

The Dodd-Frank Act also included a number of provisions that allow the CFPB and other federal regulators to help put an end to mortgage lending practices that proved unsustainable and damaged the overall economy.  For example, the Act requires mortgage lenders to verify a borrower’s income or assets; prohibits incentives that encourage lenders to steer borrowers into higher-cost loans; and requires firms that buy mortgages and package them into securities to retain an interest in certain securities so they will, in other words, keep their skin in the game.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

The CFTC has announced that it will hold an open meeting on Friday, October 1, 2010 to consider issuance of the following first proposed rules under the Dodd-Frank Act:

• the interim final rule regarding the time frame for reporting unexpired pre-enactment swaps to a swap data repository or the CFTC;
• proposed rules that would prescribe certain financial resource standards for systemically important derivatives clearing organizations (“SIDCOs”)
• proposed rules specifying requirements regarding governance arrangements and mitigation of conflicts of interest for derivatives clearing organizations, designated contract markets, and swap execution facilities

The meeting will be open to public viewing, webcast via the Internet, and available via a listen-only conference call.

SEC Chair Mary Schapiro gave her thoughts on some of the implications of the Dodd-Frank Act for security based swaps in remarks given to the Security Traders Association.  Ms. Schapiro noted “Title VII of the Dodd-Frank Act provides a comprehensive framework for the regulation of the over-the-counter derivatives market.  It specifies the jurisdiction of the CFTC and SEC over the markets in swaps and security-based swaps, respectively.  It creates new classes of market participants.  And it provides for the registration and regulation of these market participants and of other aspects of the OTC derivatives market.”

 One of the new types of market participant created by the Dodd-Frank Act is the security-based swap execution facility, or SEF.

 One of the key principles in any market is fair and open access.  The Dodd-Frank Act provides that a SEF must “provide market participants with impartial access” and may not adopt any rules or take any actions that result in any unreasonable restraint of trade or impose any material anticompetitive burden on trading or clearing.  As the market structure develops, the SEC will work to ensure that all market participants have a fair opportunity to compete in the market, Ms. Schapiro stated.

 Ms. Schapiro noted central clearing should significantly mitigate counterparty risks in the security-based swaps market.  Fair and open access to central clearing will be a key element to the new market structure for security-based swaps.

 Closely related to access is the question of how to structure SEF operations to maximize transparency and competition, and thus liquidity.  According to Ms. Schapiro, one way to promote these goals is to provide for greater pre-trade transparency of trading interest, while at the same time encouraging greater participation by market participants willing to provide liquidity.  Any trading systems intended to qualify as SEFs should support these goals.

 Another important element of a new security-based swaps market will be the increased transparency that comes from real-time reporting of all transactions.  The Dodd-Frank Act provides that all security-based swaps – whether cleared or uncleared, executed over the counter or on a SEF or exchange — must be publicly reported in real time.

 Many key details of this regime remain to be fleshed out in greater detail through the rulemaking process.  Ms. Schapiro believes that real-time reporting will have a profound and positive effect on the market.  She noted “all market participants will have the same knowledge of executed trades.  Customers and end-users will be able to see whether quotes they receive from dealers approximate the last-sale prices, and if they do not, ask why their quotes are not closer to the last-sale prices.”

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

In remarks before the U.S. Chamber of Commerce yesterday, CFTC Chairman Gary Gensler discussed several aspects of the Commission’s implementation of the Dodd-Frank Act. According to the Chairman, the Commission is following two guiding principles with respect to its rule-writing process. The first principle, which should come as no surprise, is adherence to the text of the statute. The second principle is consultation with other regulators (apparently including even European Commission regulators who recently released regulations very similar to the provisions of Dodd-Frank) and the broader public.

Chairman Gensler went on to address a few substantive rulemaking areas of particular interest to Chamber members. Regarding the end-user exemption to mandatory central clearing, he stated: “The statute on this issue is clear: those non-financial entities that are ‘using swaps to hedge or mitigate commercial risk’ will be able to choose whether or not to bring their swaps to clearinghouses.” Regarding what entities might be categorized as “swap dealers” or “major swap participants,” he stated that the CFTC anticipates that around 200 entities will likely be categorized as swap dealers and that most end users will be unlikely to fall within the major swap participant category. Finally, the Chairman indicated that, given that the Dodd-Frank Act generally gives regulators until July 15, 2011 to write the rules to implement the Act and requires a minimum transition period of 60 days following promulgation before rules goes into effect, he expects that rules such as those implementing the real-time reporting requirements of the Act will go into effect by September 2011.

Back on September 10, 2010, we summarized new Exchange Act Rule 14a-11 relating to shareholder proxy access.  Last week, in a panel discussion organized by the Practising Law Institute, several commentators predicted that the new rule will have a limited impact because of low shareholder utilization, for a number of reasons. 

The panel featured Ann Yerger, executive director of the Council of Institutional Investors, Michael McAlevey, a vice president with General Electric Co., John Olson, a partner with Gibson Dunn & Crutcher LLP, and John White, a partner with Cravath, Swaine & Moore LLP.  You can find a more detailed description of the panel discussion here in BNA’s Securities Litigation & Law Report.

As reported by BNA, the consensus of the panel seemed to be that Rule 14a-11 will be used by only a small number of shareholders forseveral reasons:

1.  It will be difficult for shareholders to meet the 3% ownership threshold required by Rule 14a-11, and large shareholders that might more easily meet the threshold, such as money managers and mutual funds, are unlikely to take active roles in management and governance matters.

2.  Hedge funds might be a category of shareholders that would be likely to use the new rule, but the rule requires shareholders to have held their stock for at least three years, which is much longer than the typical hedge fund holding period.

3. Rule 14a-11 requires a certification that the shareholder is not using the rule in an attempt to effect a change in control, which will prevent use of the rule in connection with takeover bids.

4. Shareholders that want to use the rule to include director nominees in proxy materials may have trouble finding director candidates that are willing to sit on a hostile board.

5. In the proxy materials, the company’s board can recommend against voting for a shareholder candidate, since nothing in the new rule prevents negative endorsements.

The panelists also noted that although public pension funds are expected to use 14a-11, they will likely only use it as a last resort when there are profound governance problems and other communications with boards have not been effective.

McAlvey also recommended that public companies examine their governance policies and revise them where necessary.  For example, many companies may have policies that allow for action to be taken by a minority of the board of directors; these policies may need to be reconsidered in light of shareholder proxy access.

Check back at Dodd-Frank.com frequently for continuing updates on the implementation of Rule 14a-11 and other developments relating to the Dodd-Frank Act.

The SEC’s recently released rulemaking schedule for implementation of the Dodd-Frank Act includes a schedule for implementing the derivatives trading provisions of the Act. Generally speaking, the agency plans to propose derivatives trading rules during the period from October to December 2010, including rules to address the following:

– Definitions of key terms in the Act (joint rulemaking with the CFTC)
– Recordkeeping required of swap dealers and major swap participants with respect to security-based swap agreements (joint rulemaking with the CFTC)
– Mandatory clearing of security-based swaps
– The end-user exception to mandatory clearing
– Registration and regulation of security-based swap dealers and major security-based swap participants

Presumably, the agency will be receiving and addressing comments on these items during January to March 2011, as the agency plans to adopt the corresponding final rules during April to July 2011.

Although the CFTC has not announced a rulemaking schedule, its rulemaking requirements with respect to swaps are analogous to the SEC’s (but apply to energy, agricultural, and other non-security-based swaps) and are generally subject to a July 16, 2011 rulemaking deadline. As such, the SEC schedule may provide a good indication of what kind of rulemaking schedule to expect from the CFTC.

Filings by public companies continue to include references to Rule 14a-11, which permits shareholders to nominate a director and include the nomination in the registrant’s proxy statement.  In the last several days we have noted the following:

 LAM Research Proxy (filed September 13, 2010)

 Proposals Submitted under SEC Rules. Stockholder-initiated proposals (other than director nominations) may be eligible for inclusion in our Proxy Statement for next year’s 2011 Annual Meeting (in accordance with SEC Rule 14a-8) and for consideration at the Annual Meeting. The Company must receive a stockholder proposal no later than June 6, 2011 for the proposal to be eligible for inclusion. Further, on August 25, 2010 the SEC adopted its new “proxy access” rule (SEC Rule 14a-11); this rule is expected to be effective prior to our next annual meeting, and if so will permit inclusion in our proxy statement of nominees for director that meet all of the requirements of the new rule (including, without limitation, stockholding requirements and receipt of any such nomination not earlier than May 7, 2011 and not later than June 6, 2011). Any stockholder interested in submitting a proposal or nomination is advised to contact legal counsel familiar with the detailed securities law requirements for submitting proposals or nominations for inclusion in a company’s proxy statement.

 Massey Energy Proxy (filed September 13, 2010)

 16. How do I make a stockholder proposal for the 2011 annual meeting?

 Any proposal of a stockholder intended to be presented at our 2011 annual meeting of stockholders for inclusion in our 2011 proxy statement and form of proxy/voting instruction card for that meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), must be received by us no later than December 17, 2010, by such stockholder delivering written notice to our Corporate Secretary at our principal executive offices at P.O. Box 26765, Richmond, Virginia 23261.

 Our Amended and Restated Bylaws (the “Bylaws”) provide that a stockholder entitled to vote for the election of directors may (i) nominate persons for election to the Board or (ii) bring business before a stockholder meeting, by delivering written notice to our Corporate Secretary at our principal executive offices at P.O. Box 26765, Richmond, Virginia 23261. Such notice must be delivered to or mailed and received between January 18, 2011 and February 17, 2011; provided, however, in the event that the date of the 2011 annual meeting is advanced by more than 30 days, or delayed by more than 90 days, from the first anniversary date of the 2010 annual meeting (or May 18, 2011), written notice must be delivered not earlier than the 120th day prior to the 2011 annual meeting and not later than the close of business on the later of the 90th day prior to the annual meeting or the 10th day following the day on which the date of the 2011 annual meeting is first publicly announced by Massey. We anticipate holding the 2011 annual meeting of stockholders on May 17, 2011.

 The stockholder’s notice must include, as to each person whom the stockholder proposes to nominate for election as a director:

  •  all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors or is otherwise required pursuant to Regulation 14A under the Exchange Act and Rule 14a-11 of the Exchange Act;
  • such person’s written consent to being named in the proxy statement as a nominee and to serving as such a director if elected; and
  • an executed copy of Massey’s director agreement and questionnaire (a copy of which can be obtained by contacting Massey’s Corporate Secretary at the address above), along with all information required in connection with that agreement and the questionnaire.

 Standex International Proxy (filed September 16, 2010):

 In order for a shareholder to bring other business before a shareholder meeting, the Company by-laws require that timely notice should be received by the Company on or before May 20, 2011, but no later than June 17, 2011.  In order for shareholders to submit director nominee(s) for consideration pursuant to SEC Rule 14a-11, proper notice must be received no earlier than April 20, 2011, and not later than May 20, 2011.

 Resources Connection Proxy (filed September 16, 2010)

 Stockholder Nominations for the 2011 Annual Meeting.  If you are submitting director nominees for inclusion in next year’s proxy statement pursuant to SEC Rule 14a-11, you must follow the procedures prescribed in SEC Rule 14a-11. To be eligible for inclusion, notice of stockholder nominations on Schedule 14N must be transmitted to our corporate secretary at our executive offices no earlier than April 19, 2011, and no later than May 19, 2011.

 Web MD Proxy (filed September 17, 2010)

 Submission of Director Nominations for Inclusion in WebMD’s Proxy Materials. Stockholders that intend to submit director nominations for inclusion in WebMD’s proxy statement and form of proxy relating to the 2011 Annual Meeting must follow the procedures prescribed in SEC rule 14a-11, including filing a notice on Schedule 14N with the SEC and transmitting the notice to WebMD’s Corporate Secretary (at the address provided below under “—Advance Notice Provisions under WebMD’s Bylaws”) not later than May 24, 2011 and not earlier than April 24, 2011, unless the date of our 2011 Annual Meeting is changed by more than 30 days from the date of the 2010 Annual Meeting, in which case the notice must be filed and transmitted a reasonable time before a solicitation is made.

 Advance Notice Provisions under WebMD’s Bylaws. WebMD’s Amended and Restated By-laws establish an advance notice procedure with regard to director nominations and proposals by stockholders intended to be presented at an annual meeting, but not included in WebMD’s proxy statement. For these nominations or other business to be properly brought before the 2011 Annual Meeting by a stockholder, the stockholder must provide written notice delivered to the Secretary of WebMD at least 90 days and not more than 120 days in advance of the anniversary of the 2010 Annual Meeting date, which notice must contain specified information concerning the matters to be brought before the meeting and concerning the stockholder proposing these matters. All notices of proposals by stockholders, whether or not intended to be included in WebMD’s proxy materials, should be sent to: Corporate Secretary, WebMD Health Corp., 111 Eighth Avenue, New York, New York 10011. If a stockholder intends to submit a director nomination or a proposal at the 2011 Annual Meeting that is not intended for inclusion in WebMD’s proxy statement relating to that meeting, notice from the stockholder in accordance with the requirements in the WebMD Amended and Restated By-laws must be received by WebMD no later than July 23, 2011, unless the date of the meeting is changed, in which case WebMD will announce any change in the date by which the notice must be received by WebMD when WebMD first announces the change in meeting date.

 Awesome Living Bylaws (filed September 15, 2010)

 SECTION 2.9 Advance Notice of Stockholder Proposals and Stockholder Nominations. Nominations of persons for election to the board of directors of the Corporation and the proposal of business to be considered by the stockholders may be made at any meeting of stockholders only (a) pursuant to the Corporation’s notice of meeting, (b) by or at the direction of the Board, or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in these bylaws, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.9.

 To be timely, a stockholder’s notice shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date or if the Corporation has not previously held an annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation.  In no event shall the public announcement of a postponement or adjournment of an annual meeting to a later date or time commence a new time period for the giving of a stockholder’s notice as described above. 

 Such stockholder’s notice shall set forth (I) as to each person whom the stockholder proposes to nominate for election or reelection as a director (a) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (or any successor thereto) and Rule 14a-11 thereunder (or any successor thereto) (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected), (b) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated, (c) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting and nominate the person or persons specified in the notice; (d) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; and (e) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the United States Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the Board, (II) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (III) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (a) the name and address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, and (b) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner.  In addition, the stockholder making such proposal shall promptly provide any other information reasonably requested by the Corporation. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any meeting of the stockholders except in accordance with the procedures set forth in this Section 2.9(A). The Chairman of any such meeting shall direct that any nomination or business not properly brought before the meeting shall not be considered.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

The SEC has released its planned rulemaking schedule through July 2011.  As was expected, the agency is going to be busy adopting numerous new regulations and amending existing regulations in order to implement the various provisions of the Dodd-Frank Act.  In most cases, the SEC intends to have adopted rules before July 21, 2011, the one-year anniversary of the Dodd-Frank Act and the effective date for many of its provisions, although there are several instances where rules will be adopted sooner.  Here’s a preview of the rulemaking schedule as it relates to some of the topics we’ve been following here.  Section references are to the Dodd-Frank Act itself, which can be found here.

Oversight of Investment Advisers

October – December 2010

§§404 and 406: Propose (jointly with the CFTC for dual-registered investment advisers) rules to implement reporting obligations on investment advisers related to the assessment of systemic risk

§§407 and 408: Propose rules implementing the exemptions from registration for advisers to venture capital firms and for certain advisers to private funds

§410: Propose rules and changes to forms to implement the transition of mid-sized investment advisers (between $25 and $100 million in assets under management) from SEC to State regulation, as provided in the Act

§418: Propose rules to adjust the threshold for “qualified client”

January – March 2011

§913: Report to Congress regarding the study of the obligations of brokers, dealers and investment advisers

§914: Report to Congress regarding the need for enhanced resources for investment adviser examinations and enforcement

§919B: Complete study of ways to improve investor access to information about investment advisers and broker-dealers

April – July 2011 

§§404 and 406: Adopt rules (jointly with the CFTC for dual-registered investment advisers) to implement reporting obligations on investment advisers related to the assessment of systemic risk

§§407 and 408: Adopt rules implementing the exemption from registration for advisers to venture capital firms and to certain advisers to private funds

§410: Adopt rules and form changes to implement the transition of mid-sized investment advisers (between $25 and $100 million in assets under management) from SEC to State regulation, as provided in the Act

§418: Adopt rules to adjust the threshold for “qualified client”

§913: Propose rules as may be appropriate, based on §913 study conducted on the obligations of brokers, dealers and investment advisers

Exempt Offerings

October – December 2010

§413: Propose rules to revise the “accredited investor” standard

§926: Propose rules disqualifying the offer or sale of securities in certain exempt offerings by certain felons and others similarly situated

April – July 2011 

§413: Adopt rules to revise the “accredited investor” standard

§926: Adopt rules disqualifying the offer or sale of securities in certain exempt offerings by certain felons and others similarly situated

Corporate Governance and Disclosure

October – December 2010

§951: Propose rules regarding shareholder votes on executive compensation, golden parachutes

§951: Propose rules regarding disclosure by investment advisers of votes on executive compensation

§952: Propose exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence; propose disclosure rules regarding compensation consultant conflicts

January – March 2011

§951: Adopt rules regarding shareholder votes on executive compensation, golden parachutes

§ 951: Adopt rules regarding disclosure by investment advisers of votes on executive compensation 

April – July 2011

§952: Adopt exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence; adopt disclosure rules regarding compensation consultant conflicts

§§953 and 955: Propose rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors

§954: Propose rules regarding recovery of executive compensation

§957: Propose rules defining “other significant matters” for purposes of exchange standards regarding broker voting of uninstructed shares

The full SEC rulemaking schedule is available here.  In the coming months we’ll be tracking SEC rule-making and will continue to monitor the implementation and effects of the Dodd-Frank Act, so check Dodd-Frank.com frequently.

The SEC issued proposed rules on short-term borrowing disclosures.  Separately, the SEC issued an interpretive release on the presentation of liquidity and capital resource disclosures in MD&A disclosures.  The interpretive release will be effective upon publication in the Federal Register.  This rule making was not required by the Dodd-Frank Act but is a response to the financial crisis.

Proposed Rules on Short-Term Borrowings

–MD&A

In the proposed release, the SEC noted existing MD&A requirements call for discussion and analysis of a registrant’s liquidity and capital resources.  With respect to liquidity, registrants must identify any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the registrant’s liquidity increasing or decreasing in any material way.   Registrants are also required to identify and separately describe internal and external sources of liquidity.  With respect to capital resources, a registrant is required to describe any known material trends, favorable or unfavorable, in its capital resources, indicating any expected material changes in the mix and relative cost of such resources.  In its discussion of capital resources, a registrant is also required to consider changes between equity, debt and any off-balance sheet financing arrangements.   However, other than in connection with this discussion of liquidity and capital resources under Item 303(a)(1) and (2) of Regulation S-K, companies that do not provide Guide 3 disclosure are not subject to any line item requirements for the reporting of specific data regarding short-term borrowing amounts or information about intra-period borrowing levels.

Currently, registrants that are bank holding companies provide statistical disclosures in accordance with the industry guidance set forth in Guide 3.   Guide 3 is primarily intended to provide supplemental data to facilitate analysis and to allow for comparisons of sources of income and evaluations of exposures to risk

The SEC is proposing to amend its MD&A requirements to include a new section that would provide tabular information about a company’s short-term borrowings, as well as a discussion and analysis of those short-term borrowings.  The SEC noted that the current Guide 3 disclosure of short-term borrowings does not call for a qualitative discussion of the reasons for use by a registrant of the particular types of financing techniques, or of the drivers of differences between average amounts and period-end amounts outstanding for the period.  The SEC believes that including a requirement for a narrative explanation together with tabular data would provide important information so that investors can better understand the role of short-term financing and its related risks to the registrant as viewed through the eyes of management.

The proposed amendments would codify in Regulation S-K the Guide 3 provisions for disclosure of short-term borrowings applicable to bank holding companies and would apply to all companies that provide MD&A disclosure, not only to bank holding companies and other financial institutions.  If the proposals are adopted, it is expected that the corresponding provisions of Guide 3 would be eliminated in their entirety to avoid redundant disclosure requirements for bank holding companies.    As proposed, registrants would be required to provide disclosure in MD&A of:

  • the amount in each specified category of short-term borrowings at the end of the reporting period and the weighted average interest rate on those borrowings;
  • the average amount in each specified category of short-term borrowings for the reporting period and the weighted average interest rate on those borrowings;
  • for registrants meeting the proposed definition of “financial company,” the maximum daily amount of each specified category of short-term borrowings during the reporting period; and
  • for all other registrants, the maximum month-end amount of each specified category short-term borrowings during the reporting period.

 Specifically, as proposed, “short-term borrowings” would mean amounts payable for short-term obligations that are:

  •  federal funds purchased and securities sold under agreements to repurchase;
  • commercial paper;
  • borrowings from banks;
  • borrowings from factors or other financial institutions; and
  • any other short-term borrowings reflected on the registrant’s balance sheet.

 In order to provide context for the short-term borrowings data, the SEC is also proposing to require a narrative discussion of short-term borrowings arrangements.   This narrative discussion is not currently included in Guide 3.   The topics proposed to be included would be:

  •  a general description of the short-term borrowings arrangements included in each category (including any key metrics or other factors that could reduce or impair the registrant’s ability to borrow under the arrangements and whether there are any collateral posting arrangements) and the business purpose of those arrangements;
  • the importance to the registrant of its short-term borrowings arrangements to its liquidity, capital resources, market-risk support, credit-risk support or other benefits;
  • the reasons for the maximum amount for the reporting period, including any non-recurring transactions or events, use of proceeds or other information that provides context for the maximum amount; and
  • the reasons for any material differences between average short-term borrowings for the reporting period and period-end short-term borrowings.

 As proposed, the requirements would be applicable to annual and quarterly reports and registration statements.  For annual reports, information would be presented for the three most recent fiscal years and for the fourth quarter. In addition, registrants preparing registration statements with audited full-year financial statements would be required to include short-term borrowings disclosure for the three most recent full fiscal year periods and interim information for any subsequent interim periods, consistent in each case with general MD&A requirements and instructions applicable to the relevant registration statement form requirements.  For quarterly reports, information would be presented for the relevant quarter, without a requirement for comparative data. For registrants that are not subject to Guide 3, the SEC is proposing a yearly phase-in of the requirements for comparative annual data until all three years are included in the annual presentation.

 –Possible Leverage Ratio Disclosures

 Under U.S. GAAP, bank holding companies are currently required to disclose certain capital and leverage ratios (calculated in accordance with the requirements of their primary banking regulator) in the financial statements that are included in filings with the Commission.   The SEC’s staff has observed that some bank holding companies also include disclosure of these ratios in their MD&A presented in annual and quarterly reports.

 The SEC is considering whether to extend a leverage ratio disclosure requirement to companies that are not bank holding companies.   The SEC is requesting comment as to the scope of a potential disclosure requirement, and importantly, how such a requirement would take into account the differences among metrics and industries while still providing comparability.

 –Changes to Form -8-K

 The SEC is proposing revisions to the definition of “direct financial obligation” used in Items 2.03 and 2.04 of Form 8-K to conform to the definition of short-term borrowings used in proposed Item 303(a)(6). Specifically, the proposed amendment would revise paragraph (4) of the definition of “direct financial obligation” contained in Item 2.03(c) of Form 8-K.   In doing so, however, the SEC proposes to retain the existing carve-out in the definition of direct financial obligation for obligations that arise in the ordinary course of business, in order to maintain the focus of Items 2.03 and 2.04 on real-time disclosure of individual transactions that are not routine or “ordinary course” financing transactions.

 Interpretive Release

–Liquidity Disclosure

 The interpretive release points out a number of ways in which registrants can improve disclosure about financing activities in the liquidity and financial resources section of the MD&A.   MD&A requires companies to provide investors with disclosure that facilitates an appreciation of the known trends and uncertainties that have impacted historical results or are reasonably likely to shape future periods.   Some additional important trends and uncertainties relating to liquidity might include, for example, difficulties accessing the debt markets, reliance on commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty risk.

 In addition, the SEC noted in the context of liquidity and capital resources, if the registrant’s financial statements do not adequately convey the registrant’s financing arrangements during the period, or the impact of those arrangements on liquidity, because of a known trend, demand, commitment, event or uncertainty, additional narrative disclosure should be considered and may be required to enable an understanding of the amounts depicted in the financial statements.  For example, depending on the registrant’s circumstances, if borrowings during the reporting period are materially different than the period-end amounts recorded in the financial statements, disclosure about the intra-period variations is required under current rules to facilitate investor understanding of the registrant’s liquidity position.

 To provide context for the exposures identified in MD&A, companies should also consider describing cash management and risk management policies that are relevant to an assessment of their financial condition.  Banks, in particular, should consider discussing their policies and practices in meeting applicable banking agency guidance on funding and liquidity risk management, or any policies and practices that differ from applicable agency guidance.  In addition, a company that maintains or has access to a portfolio of cash and other investments that is a material source of liquidity should consider providing information about the nature and composition of that portfolio, including a description of the assets held and any related market risk, settlement risk or other risk exposure.

 –Contractual Obligations Table Disclosure

 As an aid to understanding other liquidity and capital resources disclosures in MD&A, the contractual obligations tabular disclosure should be prepared with the goal of presenting a meaningful snapshot of cash requirements arising from contractual payment obligations.  The SEC’s staff has observed that divergent practices have developed in connection with the contractual obligations table disclosure, with registrants drawing different conclusions about the information to be included and the manner of presentation.   The requirement itself permits flexibility so that the presentation can reflect company-specific information in a way that is suitable to a registrant’s business.   Accordingly, registrants are encouraged to develop a presentation method that is clear, understandable and appropriately reflects the categories of obligations that are meaningful in light of its capital structure and business. Registrants should highlight any changes in presentation that are made, so that investors are able to use the information to make comparisons from period to period.

 Since the adoption of Item 303(a)(5), registrants and industry groups have raised questions about how to treat a number of items under the contractual obligations requirement, including: interest payments, repurchase agreements, tax liabilities, synthetic leases, and obligations that arise under off-balance sheet arrangements.  In addition, a variety of questions has been raised in the context of purchase obligations. Because the questions that arise tend to be fact-specific and closely related to a registrant’s particular business and circumstances, the SEC has not issued general guidance as to how to treat these resources needs and to provide context for investors to assess the relative role of off-balance sheet arrangements; registrants should prepare the disclosure consistent with that objective. Uncertainties about what to include or how to allocate amounts over the periods required in the table should be resolved consistent with the purpose of the disclosure.    To that end, footnotes should be used to provide information necessary for an understanding of the timing and amount of the specified contractual obligations, as indicated in the instructions contained in Item 303(a)(5)(i), or, where necessary to promote understanding of the tabular data, additional narrative discussion outside of the table should be considered.

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The SEC adopted amendments to its rules and forms to conform them to new Section 404(c) of the Sarbanes-Oxley Act, as added by Section 989G of the Dodd-Frank Act.   Section 404(c) provides that Section 404(b) of the Sarbanes-Oxley Act shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-29 under the Exchange Act.  Prior to enactment of the Dodd-Frank Act, a non-accelerated filer would have been required, under existing SEC rules, to include an attestation report of its registered public accounting firm on internal control over financial reporting in the filer’s annual report filed with the SEC for fiscal years ending on or after June 15, 2010.

 To conform the SEC’s rules to Section 404(c) of the Sarbanes-Oxley Act, these amendments remove the requirement for a non-accelerated filer to include in its annual report an attestation report of the filer’s registered public accounting firm.   The SEC also adopted a conforming change to its rules concerning management’s disclosure in the annual report regarding inclusion of an attestation report to provide that the disclosure only applies if an attestation report is included.  Lastly, the SEC made a conforming change to Rule 2-02(f) of Regulation S-X to clarify that an auditor of a non-accelerated filer need not include in its audit report an assessment of the issuer’s internal control over financial reporting.

 All issuers, including non-accelerated filers, continue to be subject to the requirements of Section 404(a) of the Sarbanes-Oxley Act. Section 404(a) and its implementing rules require that an issuer’s annual report include a report of management on the issuer’s internal control over financial reporting.

 We believe public companies exempted by the Dodd-Frank Act should consider whether obtaining an auditor’s attestation is desirable, particularly those who may soon meet the definition of an “accelerated filer” or those who may seek to be acquired or raise money in the capital markets.

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