At the annual SEC Speaks conference in Washington, D.C., last week, senior staff of the U.S. Securities and Exchange Commission reviewed significant SEC actions from the previous year and identified their top priorities for the year to come.

This update lists our top 10 takeaways from the conference that may have an impact on your business. We will continue to follow these hot topics and provide updates in the future as developments occur.

1. Improving Financial Reporting

The SEC formed the Advisory Committee on Improvements to Financial Reporting in response to concerns raised by accounting scandals and restatements. On February 11, 2008, the Advisory Committee published a draft progress report, posted on the SEC's website that includes 12 proposals and identifies areas the Advisory Committee plans to consider as it moves forward. The Advisory Committee made these recommendations to increase the usefulness of financial information to investors, while reducing the complexities of the financial reporting system to investors, companies and auditors. Among other things, the Advisory Committee recommends the gradual phase-in of XBRL data-tagging, the issuance of interpretive guidance by the SEC regarding the use of corporate websites for disclosure of corporate information and the convergence of global accounting standards.

2. Implementing XBRL Data-Tagging

XBRL data-tagging provides a format for enhancing financial reporting data that can turn text-based information, such as filings available on EDGAR, into documents that can be more efficiently and effectively retrieved, searched and analyzed through automated means. The SEC established the XBRL Voluntary Filing Program in February 2005. The Advisory Committee's draft progress report includes a recommendation that the SEC phase in the mandatory filing of XBRL data-tagged financial statements. Rulemaking in this area is a top priority of Chairman Cox and the Staff expects to provide a recommendation to the SEC regarding XBRL in the near future. The Staff acknowledges that the SEC will need to update EDGAR and create software allowing investors and issuers to take advantage of XBRL data.

3. Using Corporate Web Sites to Disclose Corporate Information

The Chief Counsel of the SEC's Division of Corporation Finance noted that the Staff expects to publish an interpretive release on the use of corporate websites for disclosures of corporate information that will update a 2000 release.  The Advisory Committee draft progress report notes that encouraging reporting companies to increase their use of their websites and to utilize a tiered format where an investor may select the level of detail of information would benefit investors of all types, retail and institutional. The Chief Counsel cited Microsoft's Web site as a great example of tiered-format disclosure.

4. Reviewing the Impact of the e-Proxy Rules

In 2007 the SEC adopted amendments to the proxy rules that will require companies to post their proxy materials on a publicly available Internet website. Large accelerated filers must comply with these rules commencing with proxy solicitations on or after January 1, 2008, and all other filers must comply commencing with proxy solicitations on or after January 1, 2009.  At the end of the 2008 proxy season, the SEC intends to conduct a review of the effect of the e-Proxy rules on shareholder votes.

5. Facilitating Electronic Forums

Amendments to the proxy rules to facilitate electronic shareholder forums will be effective February 25, 2008. The amendments:

• clarify that participation in an electronic shareholder forum that could potentially constitute a solicitation subject to the proxy rules is exempt from most of the proxy rules if all of the conditions to the exemption are satisfied; and
• state that a shareholder, company or third party acting on behalf of a shareholder or company that establishes, maintains or operates an electronic shareholder forum will not be liable under the federal securities laws for any statement or information provided by another person participating in the forum.

The amendments remove legal ambiguity that might deter shareholders and companies from energetically using electronic forums. With the use of electronic shareholder forums, shareholder participation and communication could be extended throughout the year, rather than occurring only during the period leading up to companies’ annual shareholder meetings. Shareholders might also use such a forum as a polling mechanism to elicit the sentiments of the company’s managers or other shareholders on various potential actions. Additionally, if companies choose to participate in, or sponsor, electronic forums, they might find them of use in better gauging shareholder interest with respect to a variety of topics.

6. Providing Limited Relief for Delinquent Reporting Companies to Hold Annual Meetings

On February 4, 2008, the SEC published a final rule release granting the Director of the Division of Corporation Finance authority to grant exemptions from the requirement for registrants in connection with an annual meeting of security holders to furnish an annual report to security holders that contains audited financial statements as required by rules under the Exchange Act. A number of companies have faced the dilemma of being required to hold a meeting of security holders pursuant to state corporation laws when they are unable to comply with the requirements of Rule 14a-3(b) and Rule 14c-3(a) under the Exchange Act to deliver an annual report to shareholders. Although these situations are infrequent, the SEC recognizes the need to flexibly address this conflict.

7. Rulemaking for Small Business and Private Offerings

The SEC has been active on the rulemaking front with respect to small business and private offerings. Amendments to Rules 144 and 145 will become effective on February 15, 2008.  On February 6, 2008, the SEC published a final rule release regarding the adoption of rule amendments that revise and mandate the electronic filing of Form D. Additionally, the Staff noted that it hopes to have recommendations based on its August 3, 2007 proposing release that would revise the limited offering exemptions in Regulation D to, among other things, create an exemption for a new category of investors called "large accredited investors." The proposed exemption for offerings to large accredited investors would permit limited advertising of such offerings.

8. Improving Executive Compensation Disclosure

The Staff has closed its review of executive compensation disclosures for approximately 30% of the 350‑issuer sample from the 2007 proxy season. The most common issue identified in the review process was the disclosure of performance targets. The Staff noted that where an issuer that uses performance targets as part of its executive compensation structure determines not to disclose the targets because such a disclosure would result in competitive harm, the issuer should be proactive about preparing a competitive harm analysis. If an issuer is requested by the Staff to provide an explanation of competitive harm, a registrant may request confidential treatment of that explanation. 

9. Developing Global Accounting Standards

In August 2007, the SEC published a concept release on allowing U.S. issuers to prepare financial statements in accordance with International Financial Reporting Standards. The Chief Accountant for the Division of Corporation Finance noted that in his view it is not a matter of whether a conversion to one global accounting standard will happen, but when, because it is more efficient to have one standard of accounting to accommodate global investment.

10. Enforcing Securities Laws

The Division of Enforcement has Staff dedicated to addressing conduct in the specific areas of the subprime market, stock option backdating, and hedge funds and institutional trading. The Staff noted several actions issuers should take during investigations:

• Establish credibility with the Staff. Have meetings with the Staff early on and acknowledge what you do and do not know.
• Share the results of internal inquiries with the Staff so that the Staff will not need to duplicate efforts.
• Have an effective compliance program in place because the Staff considers the environment in which the conduct occurred.
• Demonstrate credible cooperation with the Staff to reduce the ultimate costs (both that of the investigation and the penalties assessed); for example, according to the Director of the Division of Enforcement, the SEC did not charge Apple, Inc. in connection with its stock option backdating investigation in part because of Apple's cooperation in the investigation.

Of course, you should consult with your counsel regarding the appropriate response to the SEC given the specific facts of any investigation or inquiry made of your company.

Additional Information

This Update is only intended to provide a general summary of our top 10 takeaways from the conference.