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February 2008

Published by RR Donnelley
Editorial Content by LegalWorks
Blake A. Bell, Editor in Chief

In This Issue:

SEC I: SEC Votes to Propose Amendments to Form ADV

During its February 13 open meeting, the Commission voted to propose amendments to Form ADV. The proposal is linked to the Commission's long-standing "Plain English" initiative.

The proposal involves amendments to Part 2 of Form ADV that would require investment advisers to deliver to their clients "narrative brochures" that contain plain English descriptions of the advisers' businesses, services and conflicts of interest. Additionally, the proposed amendments would require advisers to file their brochures with the SEC electronically so that the brochures would be available to the public on the Commission's Web site.

The Commission issued a brief statement regarding the proposal stating, in part, as follows:

"Most advisers currently use a check-the-box, fill-in-the-blank form for their brochures. The plain English narrative brochure being proposed by the Commission would provide investors with more detailed information about an adviser's business practices, including the types of advisory services they provide, fees they charge, and the risks that clients can anticipate. The narrative also would disclose the disciplinary history of an investment adviser including any violation of the securities laws, as well as conflicts of interest such as the use of affiliates to execute transactions, the use of client brokerage to obtain "soft dollars benefits," and the adviser's interests in certain transactions.

The SEC proposal also would address developing areas of concern, including conflicts of interest arising from the side-by-side management of clients who pay performance fees (such as hedge funds) and those who do not; conflicts of interest arising from an adviser's receipt of compensation from issuers of financial products the adviser recommends to clients; and qualifications of a firm's employees who give advice to clients."

SEC II: SEC Votes To Propose All-Electronic Disclosure for Foreign Issuers

Also during its February 13 open meeting, the Commission voted to propose a package of amendments to various Commission rules and forms that it labeled its "Foreign Issuer Reporting Enhancements". In general, various of the proposed amendments would: (1) allow foreign private issuer status to be tested once a year; (2) change the deadline for annual reports filed by foreign private issuers; (3) revise the annual report and registration statement forms used by foreign private issuers to improve disclosure; and (4) amend the rule regarding going private transactions to reflect recent regulatory changes.

One of the most interesting elements of the package of proposals is a set of proposed amendments to eliminate all requirements for paper submissions by foreign issuers. In announcing the proposal, SEC Chairman Christopher Cox stated "[t]he proposed amendments would bring our foreign company disclosure requirements into the 21st Century by eliminating any requirement for paper, and by giving investors instant access to foreign company disclosure documents electronically, in English, on the Internet."

Another set of related proposals would amend Exchange Act Rule 12g3-2(b) which exempts a foreign private issuer from having to register a class of equity securities under Section 12(g) of the Exchange Act based on the submission to the Commission of certain information published outside the United States.

RealCorporateLawyer.com is pleased to offer in-depth guidance on the proposed amendments to Exchange Act Rule 12g3-2(b). See:



SEC III: SEC Proposes To Require Registered Investment Companies to Disclose When They Divest from Securities of Issuers with Ties to Sudan

Last December 31, President Bush signed into law the "Sudan Accountability and Divestment Act". The Act provided, among other things, that no person may bring any civil, criminal, or administrative action against any registered investment company or any employee, officer, director or investment adviser of any such investment company based solely upon the investment company divesting from securities issued by those that the investment company determines are conducting business with or have direct investments in certain business operations in Sudan. The protections, however, do not apply by the terms of the statute unless the investment company makes disclosures regarding its divestments in accordance with regulations prescribed by the Commission.

To implement the disclosure provisions of the Act, on February 11 the Commission "proposed to require each registered investment company that divests securities in accordance with the Act to disclose the divestment on the next Form N-CSR or Form N-SAR (forms that registered investment companies currently use to file periodic reports) that it files following the divestment. Management investment companies would provide the disclosure on Form N CSR, and unit investment trusts would provide it on Form N-SAR. The proposed amendments would require disclosure of the issuer's name; exchange ticker symbol; CUSIP number; total number of shares or, for debt securities, principal amount divested; and dates that the securities were divested."

Comments on the proposal must be received by the Commission on or before March 17.



SEC IV: SEC Issues Final Rule Release on Electronic Shareholder Forums

On February 11, the SEC's Advisory Committee on Improvements to Financial Reporting released a draft "Progress Report" on its work to date. The report detailed the Advisory Committee's work on recommendations for overhauling the nation's accounting and financial reporting systems. Among the most interesting elements of the report, however, was its continued recommendation that the Commission slow its XBRL "data tagging" efforts.

The issue continues to be a sore subject and a major area of dispute among the seventeen members of the Advisory Committee. They must resolve all such issues and issue their final report by early August.

Among other things, various members of the Committee are concerned that auditors' scrutiny of data tags might result in substantially increased costs to companies much as the increased costs that were experienced in connection with audits of internal financial reporting controls required by Sarbanes-Oxley.



PCAOB: PCAOB Proposes "Engagement Quality Review" Auditing Standard

On February 26, the Public Company Accounting Oversight Board voted to propose a new auditing standard on engagement quality review and a conforming amendment to the Board's interim quality control requirements. According to the Board, the proposed standard is intended to supersede the interim quality control standard, SECPS Requirements of Membership § 1000.08(f).

The purpose of the proposal is to improve the so-called "second partner review process" required under Section 103 of the Sarbanes-Oxley Act of 2002. According to the PCAOB:

"The proposed standard, which would apply to all engagements performed in accordance with the standards of the PCAOB, is risk-based and designed to increase the likelihood that engagement deficiencies will be identified and corrected prior to the issuance of the auditor's report. The proposed standard provides a firmer framework for an engagement quality reviewer to objectively evaluate the significant judgments made by the engagement team and the conclusions reached in forming the overall conclusion on the engagement and in preparing the engagement report."

In broad terms, the proposed standard is intended to require the second partner who reviews another's audit report in order to provide a concurring opinion to focus the review on areas of the engagement that likely involve higher risks.

The 75-day comment period on the proposed auditing standard ends on May 12.



IOSCO: IOSCO Encourages Issuers To Clarify Use of Accounting Standards

On February 6, the International Organization of Securities Commissions released a statement urging publicly-traded companies to provide investors with "clear and accurate information on the accounting standards used in the preparation of their accounts". The statement was prompted by concerns that with the convergence of global accounting standards, "investors may assume that all company accounts are generally comparable, even when they are prepared in accordance with quite different generally accepted accounting principles". The IOSCO Statement indicates that all companies that prepare annual and interim financial statements based on national standards that are modified or adapted from IFRS should include at least the following statements:

  • A clear and unambiguous statement of the reporting framework on which the accounting policies are based
  • A clear statement of the company's accounting policies on all material accounting areas
  • An explanation of where the accounting standards that underpin the policies can be found
  • A statement that explains that the financial statements are in compliance with IFRS as issued by the IASB, if this is the case
  • A statement that explains in what regard the standards and the reporting framework used differ from IFRS as issued by the IASB, if this is the case




PRACTICAL GUIDANCE: Courtesy of RealCorporateLawyer.com

RealCorporateLawyer.com provides its readers with free access to a very large collection of law firm memoranda providing practical guidance on current hot topics. Readers are encouraged to visit the frequently-updated "Emerging Legal Issues" area of the home page for such current memoranda, as well as the Expert Analysis: SEC Reform Portal section containing hundreds of other such memoranda. Recent additions include:

Also, don’t forget RR Donnelley’s acclaimed reference publications designed to help you with your SEC filing requirements. For a copy, contact your RR Donnelley sales representative or click here.



COMINGS AND GOINGS: Who's Doing and Saying What and Where?

On February 28, the Commission announced that SEC veteran Jonathan Sokobin has been named Director of the Commission's Office of Risk Assessment. See U.S. Securities and Exchange Commission, Jonathan Sokobin Named Director of SEC's Office of Risk Assessment, News Release 2008-24 (Feb. 28, 2008).

On February 27 FINRA announced dozens of nominees for its District Committees and District Nominating Committees. See FINRA, Election Notice: District Elections - Nominees for the District Committees and District Nominating Committees (Feb. 27, 2008).

On February 6, the Commission announced that Chyhe K. Becker has been appointed as an Assistant Chief Economist in the SEC's Office of Economic Analysis effective March 3. See U.S. Securities and Exchange Commission, Chyhe Becker Named Assistant Chief Economist in SEC Office of Economic Analysis, News Release 2008-13 (Feb. 6, 2008).

The day before, February 5, SEC Chairman Christopher Cox announced the creation of the new Office of Collections and Distributions to expedite distribution of recovered funds to injured investors. He also announced that Richard J. D'Anna has joined the Commission as Director of the new office. Lynn M. Powalski was named Deputy Director of the new Office. See U.S. Securities and Exchange Commission, SEC Chairman Cox Announces Creation of New Office, Appointment of Leaders, to Expedite Distribution of Billions to Injured Investors, News Release 2008-12 (Feb. 5, 2008).

What Are the Commissioners and Commission Staffers Saying?

On February 21, SEC Commissioner Kathleen L. Casey delivered "Remarks Before the ALI-ABA Conference on 'Corporate Governance: The Changing Environment'". During the Commission's open meeting on February 13, SEC Chairman Christopher Cox delivered three sets of remarks that are available as Video Webcasts: (1) Order Regarding Review of FASB Accounting Support Fee for 2008 Under Section 109 of the Sarbanes-Oxley Act of 2002; (2) Remarks on "Amendments to Form ADV"; and (3) Remarks on "Exemption from Registration / Reporting Enhancements for Foreign Private Issuers". Commissioner Casey delivered "Remarks Before SEC Speaks" on February 8, 2008. The same day Chairman Cox spoke twice: (1) "The 75th Anniversary of the Securities Act:: Remarks to the Association of Securities and Exchange Alumni 16th Annual Dinner"; and (2) "The SEC Agenda for 2008: Remarks to the SEC Speaks in 2008 Program of the Practising Law Institute". Also on February 8, Commissioner Paul S. Atkins delivered "Remarks to the 'SEC Speaks in 2008' Program of the Practising Law Institute". Chairman Cox spoke on February 1, delivering "Remarks on Acceptance of the Atlantic Leadership Award from the European-American Business Council".

Commission Staffers were not quite as busy as the Commissioners during the month of February. On February 20, the Commission's Director of OCIE, Ethiopis Tafara, spoke at the ASIC Summer School 2008 in Melbourne, Australia regarding "The New Frontier and The Man Who Shot Liberty Valance". SEC Special Counsel Elliot B. Staffin and Senior Special Counsel, Felicia H. Kung, both of the Office of International Corporation Finance in the Division of Corporation Finance, delivered "Opening Remarks" before the Commission's February 13 open meeting. Finally, the Commission's Director of the Division of Finance, Erik R. Sirri, delivered a "Keynote Speech at the SIFMA 2008 Dark Pools Symposium" on February 1.



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©2008 RR Donnelley

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