Last week, the European Commission announced proposed amendments to the notification forms that companies must complete to report mergers subject to antitrust review in the EU, with the stated intention of reducing burdens on filing parties. If adopted, the proposed changes would reduce the amount of information parties must provide in transactions that are unlikely to raise competitive concerns.

The EC proposes to expand the categories of mergers that are eligible for review under a simplified procedure that allows companies to file “short form” notifications with more limited information requirements. Under the proposed changes, the simplified procedure would apply to all mergers that result in the combined firm holding a market share of less than 20% in any market in which both parties are active, up from the current threshold of 15%. In addition, at the EC’s discretion, filing parties would be permitted to use the “short form” when a merger results in a small market share increase, even if the combined firm’s market share exceeds 20%. For vertical mergers, the market share threshold for the simplified procedure would increase from 25% to 30%. The EC estimates that, as a result of these changes, an additional 10% of all reportable mergers could be reviewed under the simplified procedure, with significant benefits—in terms of both time and costs—for companies no longer required to complete the full notification.

…continue reading: European Commission Proposes Amendments to Premerger Notification Regime

On December 3, 2012, FINRA’s new Rule 5123 went into effect. [1] The Rule requires members selling securities issued by non-members in a private placement to file the private placement memorandum, term sheet or other offering documents with FINRA within 15 days of the date of the first sale of securities, or indicate that there were no offering documents used. In connection with the effectiveness of the Rule, FINRA issued frequently asked questions (the “Private Placement FAQs”) on the process as well as rolled out the Private Placement Filing System in the FINRA Firm Gateway.

Private Placement FAQs

The Private Placement FAQs are a mix of technical filing requirements and substantive guidance. The technical questions address how firms gain access to the Private Placement Filing System, the use of third parties, such as law firms and consultants, to make the required filings, the requirement that offering documents be filed in searchable PDF format, and the maximum size of individual documents. In addition, while a firm can designate another member participating in the private placement to file on its behalf, it should arrange to receive confirmation from the designated filer in order to satisfy its own filing obligation.

The substantive FAQs include the following:

…continue reading: FINRA Issues Guidance for Private Placement Filings

The ability of U.S. banking organizations, as well as non-U.S. organizations that are subject to U.S. bank regulation (“banking organizations”), to obtain required U.S. bank regulatory approvals for acquisition transactions on a timely basis is absolutely critical to both buyers and sellers in such transactions. For a buyer, a failure to obtain the necessary approvals for an announced transaction can mean public embarrassment, a loss of confidence in management, shareholder ire, difficult disclosure issues, substantial unproductive expense, lost management time and even litigation with the seller or others. Depending on the nature and significance of the transaction, it can also mean the failure of a buyer’s strategic plan and result in the buyer itself becoming vulnerable to a takeover. For a seller, a failed transaction can often be even more deleterious, as it can result in the loss of a premium to the seller’s shareholders (which may not otherwise be currently available), damage the seller’s ongoing business, client relationships and employee relationships and morale, make it very difficult to continue as an independent organization, and leave the seller vulnerable to takeover in unfavorable circumstances.

To assist buyers to avoid a failed transaction, we recommend that:

…continue reading: Recent Federal Reserve Guidance Regarding Informal Pre-Filing Inquiries

In January 2011, FINRA proposed to amend Rule 5122 (“Private Placements of Securities Issued by Members”) so that its disclosure and filing requirements, which currently apply only to private placements of securities issued by a FINRA member or a “control entity” of a member, would apply to all private placements, including those of unaffiliated issuers, covered by the rule. [1] On October 18, 2011 and in response to comments on the January proposal, FINRA withdrew its proposal to amend Rule 5122 and instead submitted new proposed Rule 5123 (“Private Placements of Securities”) to the Securities and Exchange Commission for adoption. [2] Rule 5122 would remain unchanged.

Proposed Rule 5123 would prohibit members and persons associated with a member from offering or selling a security in reliance on an exemption from registration under the Securities Act of 1933 (which the proposed rule defines as a “private placement”), or from participating in the preparation of a private placement memorandum, term sheet or other disclosure document in connection with such a private placement, unless the member or associated person provides to each investor, prior to sale, information about the anticipated use of the offering proceeds and the amount and type of offering compensation and expenses. This required information must be included in a private placement memorandum or term sheet or, if none is prepared, in a separate disclosure document. Although the rule’s definition of “private placement” is literally quite broad, it is unclear whether FINRA intends the rule to apply outside the context of non-public offerings generally effected pursuant to Section 4(2) or Regulation D.

…continue reading: FINRA Proposed Rule on Private Placements

On March 28, 2011, the Final Regulations, issued by the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (“Treasury”) relating to the filing of Reports of Foreign Bank and Financial Accounts (“FBAR”) became effective. Notably, the Final Regulations do not require ownership interests in, or signing or other authority over, private investment funds, such as hedge funds and private equity funds, to be reported on FBARs, although Treasury will continue to study the issue.

The Final Regulations apply to FBARs required to be filed by June 30, 2011 with respect to foreign financial accounts maintained in the calendar year 2010, and for all subsequent years. United States persons who deferred FBAR filings for prior reporting years in accordance with guidance issued by Treasury, [1] may apply the provisions of the Final Regulations in determining their FBAR filing requirements for any deferred reports due June 30, 2011.

A revised FBAR form (Form TD-F-90-22.1) and General Instructions, which should be used for the June 30, 2011 filing deadline, were also recently released.

…continue reading: Treasury Clarifies FBAR Regulations for Private Investment Funds

Over the last several days, there has been a raft of SEC filings in which companies have disclosed “reasonably possible” litigation losses. These filings are the result of SEC pressure and an interpretative position advanced by the Staff. In recent speeches, the Chief Accountant of the SEC’s Division of Corporation Finance has questioned whether companies are complying with the existing disclosure standards applicable to litigation contingencies. ASC 450 (formerly known as SFAS 5) requires the disclosure of a litigation contingency if there is at least a “reasonable possibility” that a loss has been incurred, and the disclosure must include an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. The Chief Accountant has stated that the Staff is “seeing a lack of disclosure with respect to ‘reasonably possible’ losses.” Moreover, in comment letters sent to various financial services companies, the Division of Corporation Finance has questioned the adequacy of litigation-related disclosures that do not either set forth estimates of possible losses or range of losses or explain why such estimates cannot be provided.

…continue reading: The SEC Push for Enhanced Disclosure of Litigation Contingencies

The U.S. Court of Appeals for the Second Circuit recently decided Litwin v. Blackstone Group, L.P. (2d Cir. 2011), addressing “trend disclosure” requirements under Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii).  This decision highlights the importance of giving appropriate consideration to trend disclosures in public filings, including registration statements as well as annual and quarterly reports.

…continue reading: Second Circuit Rules on MD&A Trend Disclosure Requirements

By arguing that the SEC’s EDGAR system provides instantaneous access to information in periodic SEC filings, recent studies document significant stock price reactions surrounding both 10-K and 10-Q filings. In our forthcoming The Accounting Review paper Market Reaction Surrounding the Filing of Periodic SEC Reports, we scrutinize these findings by taking into consideration the following facts: (1) 22.7% (16.4%) of interim (annual) SEC filing dates coincide with the first release of earnings information; (2) about a quarter of the 10-K filings are made within five days surrounding calendar quarter-ends when money managers report their quarterly holding; and (3) earnings announcements are increasingly preempting financial statement disclosures in periodic SEC filings.

Our analysis provides new evidence regarding circumstances in which a market reaction is observed surrounding the filing of periodic reports. First, we find significant price and volume reactions when periodic SEC reports coincide with earnings releases. However, with the exception of 10-K reports, we find no evidence of significant market reactions for the other periodic reports (i.e., 10-Q, 10KSB, and 10QSB) that follow earnings announcements. Second, we document that the market reaction to 10-K reports is limited to those filed around calendar quarter-ends. Consistent with the incentives of money managers to window dress and to “lean for the tape” for quarterly reporting purposes, we find a calendar quarter-end effect in both price and volume reactions that is generally unrelated to the filing of 10-K reports. However, while volume reactions for calendar quarter-ends with a 10-K filing are statistically indistinguishable from those without a filing, there is some evidence of an incremental price reaction to 10-K filing after the Sarbanes-Oxley Act, possibly due to the new disclosures required under the statute. Third, while we find support for information transfer from quarter-end 10-K filers to the other firms, we find no significant equity analyst forecast revisions around any type of periodic SEC filings, and no evidence of a calendar quarter-end effect in analyst reactions, suggesting that analyst actions do not contribute to the information transfer. The results for analyst reactions corroborate our findings regarding muted price and volume reactions.

While our study finds no pervasive evidence of market reaction to periodic SEC filings (especially the 10-Q filings), we are not suggesting that SEC filings have no economic or informational value. First, the circumstances in which researchers expect significant new information in periodic reports may also be the same circumstances in which firms may have incentives to provide complementary disclosures through a different medium. For instance, we show that when firms report a lower earnings number in their periodic filings compared to the figure reported in the earnings press releases, they almost invariably provide preemptive or concurrent press releases highlighting the downward revision to mitigate disclosure risk. Consequently, although the information is valuable, the concurrent price or volume reaction may be triggered by the more salient contemporaneous disclosure rather than the periodic SEC reports. Future research using market microstructure data can provide additional insights regarding the role of different disclosure channels. Second, the demand for the services of data aggregators such as Standard & Poor’s, FactSet, and Bloomberg indicate that various market participants such as money managers, other institutional investors, and credit analysts must consider the information in periodic SEC filings collected by data aggregators to be valuable for sophisticated investment and other economic decisions. Future research examining the role of information intermediaries in spreading corporate accounting information is likely to add to our understanding of the capital market information infrastructure.

The full paper is available here.

Preparing environmental disclosure for Securities and Exchange Commission filings has always been a complicated task. Although most of the securities and accounting rules governing environmental disclosure have been in place for some time, environmental costs and liabilities can take various forms, the key facts are often difficult to ascertain and the underlying environmental laws (and their enforcement) are constantly changing. Further complicating matters is the fact that many publicly traded company operations are subject to multiple jurisdictional requirements, from very local to international or supranational regimes. Finally, and particularly problematic for disclosure purposes, is the fact that environmental matters often take many years to investigate, address and resolve, which raises significant estimation and other challenges.

This memorandum describes the current requirements relating to environmental disclosure in SEC filings. Many of the disclosure obligations relate to costs and liabilities that are familiar to all companies—such as costs to investigate and remediate contamination and costs and liabilities arising from the failure to comply with laws or the existence of environmental litigation—but there are some recent developments that companies must consider.

Certain new and proposed changes to environmental accounting rules may affect current and near-term qualitative and quantitative disclosure. In particular, the Financial Accounting Standards Board is looking for more footnote disclosure about a company’s environmental liabilities. There is also a general movement towards “fair value” (or mark-to-market) accounting. Complying with these changes can be difficult given the uncertainty in the timing and cost of many environmental liabilities, as noted above.

Climate change must also be considered when preparing SEC disclosure. While there are many uncertainties, and the current profound international economic crisis may adversely affect the ability of the new U.S. administration to move forward with aggressive climate change laws, costs relating to climate change are already affecting some companies and will, in the future, affect many others. Certain environmental interest groups and regulators have made climate change disclosure a focus of their agendas, and companies must therefore consider practical and political issues in addition to purely legal requirements.

Finally, it is worth noting that some of these developments may result in a need for companies to collect information not currently being collected (from the measurement of carbon emissions to new “fair value” estimates to careful tracking of legal developments).

This memorandum discusses these recent developments and provides practical guidance on how to analyze and address the related disclosure issues facing your company.

The memo is available here.

In the last several years, there have been a number of situations where issuers have failed to file reports with the SEC on a timely basis and bondholders alleged that such failure violated certain provisions of the Trust Indenture Act (“TIA”), that are incorporated into all public debt indentures. In the first case that was litigated on such matters, Bank of New York v. Bearingpoint, Inc. (“BearingPoint”), 13 Misc.3d 1209(A), 824 N.Y.S.2d 752 (Sup. Ct. N.Y.County 2006), a New York state court held that the TIA required timely filing of SEC reports. Since then, a number of federal courts have disagreed and held that the TIA does not impose an independent obligation to make timely filings of SEC reports. Yesterday, the U.S. Court of Appeals for the Eighth Circuit filed an opinion, in United Health Group Inc. v. Wilmington Trust Co., affirming a district court decision that an issuer’s delinquency in filing its Exchange Act reports with the SEC was not a breach of its indenture reporting covenant or Section 314(a) of the TIA. The Eighth Circuit is the first appellate level court that has addressed this question, and this case is therefore an important contribution to a growing body of case law that rejects the BearingPoint court’s interpretation of reporting covenants and Section 314(a) of the TIA.

The BearingPoint Case
Many indentures contain some form of standard language that generally provides that the company shall file with the trustee, within a certain number of days after it files such information with the SEC, copies of the reports which it is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. Many indentures also expressly require compliance with Section 314(a) of the TIA.

…continue reading: Court Rules on Alleged Breach of Indenture Reporting Covenant