July 27, 2010

SEC Updates Compliance and Disclosure Interpretations

SEC Updates Compliance and Disclosure Interpretations

On June 4, 2010, the Securities and Exchange Commission’s (“SEC”) Division of Corporation Finance released several updates to its compliance and disclosure interpretations. The June 2010 interpretation updates as well as the full complement of compliance and disclosure interpretations can be found on the SEC’s website. Certain key interpretation updates are discussed below.

Regulation FD: Section 101 – Directors Speaking Privately with Shareholders

Question 101.11 clarifies that Regulation FD does not prohibit directors from speaking privately with a shareholder or groups of shareholders, but rather encourages that, if a company’s directors are authorized to speak on behalf of the company and plan on speaking privately with a shareholder or group of shareholders, the company consider implementing policies and procedures intended to help avoid Regulation FD violations. The policies and procedures can be in the form of pre-clearing discussion topics with the shareholder or having company counsel participate in the meeting. In addition, the interpretation adds that if a shareholder provides an express agreement to maintain the disclosed information in confidence, there would be no Regulation FD issues because Regulation FD does not apply to disclosures made to a person who expressly agrees to maintain the disclosed information in confidence.

Regulation S-K: Section 117 – Item 402(a) – Principal Financial Officer Serving Part of a Year

The interpretation contained in question 117.06 encompasses scenarios where the company’s principal financial officer for part of the last year completed was serving the company as an executive officer in a different capacity at the end of that year and was among the company’s three most highly compensated executive officers. The interpretation indicates that this individual should be included as a named executive officer who served as principal financial officer during the fiscal year pursuant to Item 402(a)(3)(ii). The interpretation also gives guidance that pursuant to Item 402(a)(3)(iii) companies are to identify its three most highly compensated executives from individuals serving as executive officers at the end of the last completed fiscal year who did not serve as either its principal executive officer or principal financial officer at any time during that year.

Securities Act Rules – Rule 415 – Delayed of Continuous Offering and Sale of Securities
Registration of Dividend Reinvestment Plan

The interpretation in question 212.30 comments that registrants may not use a non-automatic shelf registration statement that registers offers and sales pursuant to a dividend and reinvestment plan more than three years after the initial effective date of that registration statement if the dividend reinvestment plan also permits new investors to purchase shares through the plan. The registration statement may not be used for new investor direct stock purchases upon the expiration of the three-year period because new investor direct stock purchases do not fit within the definition of a dividend or interest reinvestment plan. The interpretation further states that if issuers continue to use the registration statement for dividend reinvestment and existing investor direct stock purchases, then the prospectus should be revised to reflect the changes to the offering.

Registration of Securities Underlying Securities Exchangeable at the Option of the Issuer

The guidance in question 212.31 indicates that an issuer does not have to register the offering on the underlying security when it registers the offer and sale of securities immediately exchangeable, at the option of the issuer, into other securities of that issuer. Because the exchange is at the option of the issuer only, the decision to purchase the exchangeable security is also, in effect, a decision to accept the underlying security whenever the exchange takes place. Both offerings must be registered and the offering of the underlying securities is deemed to be completed at the same time as the offering of the exchangeable securities.

Securities Act Section 2(a)(11) – At-the Market Offering Statutory Underwriter

Securities Act Rule 451(a)(4) was amended in 2005 to permit an issuer to register an at-the-market offering of equity securities without identifying an underwriter in the registration statement and without a limitation on the amount of the offering. The guidance in question 111.01 clarifies the Commission’s position that that the 2005 amendment did not change the Commission’s interpretation, as set forth in Securities Act Release No. 6334 (August 6, 1981), that “any market professional – a market maker, specialist, or ordinary broker-dealer – who purchases a registered security as principal from the registrant or who sells that security for the registrant as agent ordinarily would be deemed a statutory underwriter under Section 2[(a)](11) of the Securities Act even in the absence of a specific written agreement between the issuer and the market professional”.

Form 8-K: Item 5.07 – Submission of Matters to a Vote of Security Holders

Question 121A.02 provides guidance that registrants are required to report the number of shareholder votes cast for, against or withheld in any matter that is submitted to a vote of security holders, through solicitation of proxies or otherwise, and not just matters voted upon at a meeting that involves the election of directors.

Form S-3: Eligibility

Guidance contained in question 115.16 indicates that a company can satisfy the eligibility requirement in instruction I.A.5 to Form S-3 in the following fiscal year even if there are current year defaults on indebtedness, which default is material to the company as a whole or there is a failure to pay a dividend on preferred stock. Even if the defaults have not been cured or the dividends have not been paid in the following year, a company will be eligible to use Form S-3 provided that it has filed a Form 10-K which includes audited financial statements covering the period in which the material event of default or failure to pay preferred dividends occurred. If at the end of the fiscal year, the company has a new event of material defaults or a new failure to pay preferred stock dividends, the company would not be eligible to use Form S-3 until the filing of its next Form 10-K.

Additional guidance contained in question 115.17 states that a company that declares bankruptcy and subsequently fails to make required interest or principal payments on indebtedness, pursuant to the terms of the indebtedness, will not satisfy the eligibility requirement of instruction I.A.5 to Form S-3 even though the filing of bankruptcy results in an automatic stay of creditor’s rights with respect to the indebtedness.


The SEC continues to provide guidance on a periodic basis in the form of interpretations which reflect the views of the staff of the Division of Corporation Finance. These interpretations are not rules or regulations and have been neither approved nor disapproved by the Commission. Accordingly, the guidance should not be relied on as definitive.