Update from the 35th Annual Securities Regulation Institute

John-Paul Motley
The Northwestern University School of Law hosted the 35th Annual Securities Regulation Institute in San Diego on January 23-35, 2008. The principal topics and themes that were discussed are summarized below. You can access the full opening remarks by John W. White, the Director of the Division of Corporation Finance at the SEC, on the SEC's website at http://www.sec.gov/news/speech/2008/spch012308jww.htm.

Financial Reporting

• Interactive data through the use of XBRL, or eXtensible Business Reporting Language, in periodic reports continues to be a top priority for the SEC. Initiatives related to the implementation of XBRL are expected in 2008.
• The Advisory Committee on Improvements to Financial Reporting has been meeting extensively and is expected to vote on interim proposals on February 11, 2008. One proposal, which has been raised by the significant number of restatements in recent years, relates to the materiality, correction, and disclosure of accounting errors. The Advisory Committee may provide guidance in 2008 that would reinforce the concept that materiality should be determined based on the perspective of a reasonable investor. That guidance also would recognize the ability of qualitative factors, in certain circumstances, to lead to a determination that a quantitatively significant error is not material. The Advisory Committee may also provide guidance on those situations in which accounting errors may be properly corrected through a current period adjustment rather than a restatement.
• The SEC likely will provide additional guidance in 2008 relating to situations where an issuer discloses in a periodic report rather than in a separate 8-K filing that its past financial statements should no longer be relied upon -- a situation that is sometimes referred to as a "stealth restatement." The SEC Staff has issued an FAQ on this point, clarifying that Item 4.02 of Form 8-K requires a separate filing on Form 8-K.
• The SEC likely will authorize an additional one-year delay in the implementation of the requirement of Section 404(b) of the Sarbanes-Oxley Act -- the requirement of an auditor's attestation report relating to an issuer's internal control over financial reporting -- for non-accelerated filers. Such a delay would extend the requirement for these auditor's attestation reports to fiscal years ending on or after December 15, 2009. This extension would not, however, change the need for non-accelerated filers to comply with Section 404(a) of Sarbanes-Oxley -- management's certification of internal control over financial reporting -- this year. The Commission proposed this extension on February 1, 2008 in Release No. 33-8889.

International Initiatives

• The SEC recently eliminated the requirement that foreign private issuers who prepare their financial statements using International Financial Reporting Standards, or IFRS, must include a U.S. GAAP reconciliation. This elimination of the reconciliation to U.S. GAAP will be available only where a foreign private issuer prepares its financial statements in accordance with IFRS as promulgated by the International Accounting Standards Board. This new rule is indicative of the SEC's desire for a single set of globally accepted accounting principles. In this regard, the SEC also has issued a concept release regarding the possible use of IFRS by U.S. issuers. Director White noted that, while the rest of the world is heading toward adopting IFRS, little consideration has been given to the idea that U.S. GAAP could become the uniform global standard.
• Mutual recognition of brokers and exchanges is likely to be a significant topic for the SEC in 2008. As part of a mutual recognition system, foreign brokers and exchanges from selected jurisdictions would be allowed to operate in the U.S. without Exchange Act registration where certain conditions are present.
• The SEC may address the definition of the term "foreign private issuer" in 2008. Action in this regard may include new rules regarding the process by which issuers determine whether they qualify as foreign private issuers.
• The SEC is reviewing whether the six-month filing deadline for Form 20-F should be accelerated. If the deadline is accelerated, it is expected to be phased-in gradually.
• The SEC is reviewing the cross-border tender offer rules and may propose rules in this area in 2008. 

Other Topics -- Division of Corporation Finance

• The Division will continue to emphasize the "analysis" portion of Compensation Disclosure and Analysis. Issuers should focus on a discussion of why they reached their executive compensation decisions rather than focusing on the manner in which they implement their executive compensation programs.
• The Division will continue to focus on disclosure of the use of performance targets in Compensation Discussion and Analysis.
• The Division is finalizing recommendations to the Commission with regard to the proposed changes to Regulation D. If adopted, these changes to Regulation D would address the ability of issuers to engage in limited advertising for certain offers and sales of securities to large accredited investors, modernize the definition of an "accredited investor," shorten the timing of the integration safe harbor, and apply uniform disqualification provisions to all offerings seeking to rely on Regulation D. The rulemaking regarding Regulation D also may provide additional guidance about the integration of concurrent public and private offerings.
• Notwithstanding the recent Mangan and Lyon decisions, Director White restated the SEC's position that, in a short sale, the time of sale for Securities Act purposes occurs at the time the seller establishes the short position and not at the time the seller closes out the short position. Thus, in a PIPE offering, if an investor establishes a short position and uses shares that later are registered for resale to settle the short position, this violates Section 5 because the short sale was completed before the registration statement for the sale of those shares was effective.
• The Division will monitor the use of e-proxy. In this regard, one of the concerns that has been voiced is that the retail vote is believed to decrease when using the e-proxy model.

Other Topics -- Division of Enforcement

• Foreign Corrupt Practices Act violations will remain a top enforcement priority for the SEC in 2008.
• Enforcement actions relating to the backdating of stock options may be less prominent than in recent years.
• The Division is studying the potential for conflicts of interest in deferred prosecution agreements and corporate monitor appointments.

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This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. John-Paul Motley, an O'Melveny partner licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the author except as otherwise noted.