In late November 2004, Alan Beller attracted a packed audience of attentive securities lawyers, in-house company counsel and accountants attending the Federal Regulation of Securities Subcommittee meeting at the American Bar Association's Business Section Fall Meeting in Washington, D.C. The topic? The latest on current and emerging securities law developments. This Update highlights some of the key points addressed by Mr. Beller (which he noted were his own views and did not necessarily reflect the views of the SEC).

Companies Should Expect SEC Review of Periodic Reports to Continue

Mr. Beller stated that the SEC has shifted the focus of its approach to the review of periodic reports. At the current level of IPO traffic, the SEC Staff has time to devote resources to the review of periodic reports. Also, the SEC has substantially increased its accounting staff, recently hiring 150 accountants, and has acquired quantitative analytical tools to assist them in their work. The current focus of reviews is on financial statements and MD&A. The SEC has also begun to conduct "targeted reviews," which take into account the industry of the issuer and the subject or nature of the filing.

New Office of Disclosure Standards to be Formed to Improve Consistency of SEC Review and Comments

Mr. Beller has directed the formation of an SEC Office of Disclosure Standards to streamline and improve the consistency of disclosure review. Currently the Staff's review of disclosure is spread over many different offices, divided primarily by industry. Mr. Beller acknowledged that this situation leads to inconsistency in the SEC's approach to disclosure. The goal of the Office of Disclosure Standards would be to provide a coordinated function in the SEC's review of filings, minimizing the circumstances in which companies in different industries receive different and sometimes inconsistent comments on their disclosure.

Abuse of Confidential Treatment Requests Could Trigger Staff Crackdown

Mr. Beller observed that the number of requests for confidential treatment of SEC comment response letters by issuers is increasing, but most of these requests are not warranted. When these requests are actually evaluated, he said the rejection rate is 90% when the requests are tested in a Freedom of Information Act setting. Mr. Beller advised that issuers must have a compelling reason for their requests for confidential treatment, and that if the requests get out of hand, the SEC might need to overhaul the whole system. The implication was that there could be a crackdown on such requests.

Companies Need to Improve Executive Compensation Disclosure - Focus on Quality, not Quantity

Mr. Beller prefaced his remarks by referring to his speech on executive compensation given in San Francisco on October 20, 2004 (which can be found at http://www.sec.gov/news/speech/spch102004alb.htm). He reiterated that, in general, executive compensation disclosure could be better. He doesn't think we need more disclosure, but we do need better disclosure. In particular, compensation committee reports are, as he put it, "not very good" and contain too much boilerplate. He suggested that the compensation committees of most companies simply throw out last year's report and start with a clean sheet of paper. This view on compensation committee reports echoes the SEC's views on MD&A, as articulated in the MD&A release from December 2003. For more information on the MD&A Release, see our January 14, 2004 Client Update, SEC Urges Management to Pick Up the Drafting Pen: MD&A Drafting Tips Based on New SEC Interpretive Release.

Internal Control Assessments and Reports Under Sarbanes-Oxley Section 404

Mr. Beller addressed concerns raised by companies about the consequences of failure to complete in a timely fashion the internal controls review mandated by Section 404 of the Sarbanes-Oxley Act. Specifically, he addressed the situation of a company that cannot complete its 404 internal control assessment in a timely manner for inclusion in the Form 10-K, despite the fact that the audit of the company's financial statements has been completed. He would prefer that, in the interest of full disclosure, the company file the Form 10-K without the 404 assessment and related auditor's report, so at least investors have timely access to the information contained in the Form 10-K. He noted that this 10-K would nonetheless be considered deficient. (See our December 8, 2004 Update regarding the limited extension of the 404 report and attestation deadline available for smaller accelerated filers at SEC Gives Smaller Accelerated Filers Extra Time to File Sarbanes-Oxley Internal Control Reports) Regarding the Section 906 certification, he stated that although the wording of the certification could not be changed, the SEC would not object to an additional statement in the certification noting that the Form 10-K is being filed without the 404 assessment and auditor's report because the internal control assessment has not been completed.

1933 Act Reform - Reformation, not Revolution

Mr. Beller indicated that the recent proposal to reform the 1933 Act for securities offerings calls for incremental change, working with existing rules and forms, as compared to the ill-fated Aircraft Carrier Proposal, which called for sweeping changes to the 1933 Act but was mothballed in 1998. He noted that many features of the recent proposal were mined from the Aircraft Carrier Proposal. Key features of the recent proposal that Mr. Beller addressed included:

• Liberalizing Communications During a Securities Offering. The proposal seeks to codify what the Staff currently considers the interpretive safe harbors with respect to improper communications, or "gun jumping," during a securities offering. He noted that the safe harbor proposed for communications made by a company during an offering focuses on the manner of use of the communication rather than its content, permitting companies to continue to release information during the offering period in the same manner as they have in the past, but not permitting safe harbor for the release of information in a manner inconsistent with past practice. Thus, for example, if an underwriter were to fax an earnings release of a company to an investor before its release to the public, the press release would not be protected by the safe harbor from gun jumping.

  Mr. Beller also indicated a loosening up of the SEC's approach to Rule 134 press releases (those very limited press releases announcing the filing of a registration statement or the pricing of an offering). The proposal expands Rule 134 to permit more information on the offering process, such as the timeline for the roadshow. Companies would not, however, be permitted to include detailed term sheets in the Rule 134 release.

• Fixing Timing Anomalies For Securities Liability. Mr. Beller noted that the current system, in which the final prospectus is the basis for certain forms of securities liability, does not make much sense because this document is delivered to investors after their investment decision has been made. He stated that whether there is a material omission involving the offering prospectus will be determined without regard to what is contained in the final prospectus. The information an investor has at the time of the contract of sale is what's important. Mr. Beller also noted that the proposal would eliminate the requirement of physical delivery of final prospectuses in connection with confirmations, taking the approach that electronic access (via Edgar or other similar services) equals delivery. (For more information on the proposed 1933 Act Reform, see our October 29, 2004 Update,SEC Proposes Securities Offering Reform.)

Additional Information

This Update reflects only some of the key points addressed by Mr. Beller (which he noted were his own views and did not necessarily reflect the views of the SEC) from informal notes taken at the meeting. You can find discussion of other recent rule proposals, laws and regulations of interest to public companies on our website.