SEC Adopts Rules on Say-on-Pay and Golden Parachute Compensation

The Final Rule adopted by the SEC on January 25 implements Dodd-Frank Act Section 951 requirements relating to shareholder votes on executive compensation ("say-on-pay") and "golden parachute" compensation granted to officers in connection with mergers, acquisitions, consolidations or other change in control transactions.  The rules increase the required disclosures while creating exceptions for smaller companies. All relevant shareholder votes would be advisory.

The say-on-pay votes are required at least once every three years beginning with the first annual shareholders’ meeting that takes place on or after January 21, 2011.  Companies must disclose whether the vote is non-binding and whether they considered the results of the most recent say-on-pay vote.  Also, at least once every six years shareholders are to be allowed to vote on how often the “say on pay” vote will be taken: every year, every other year, or once every three years.  In order to implement the requirement for such a "frequency" vote, the rules revises the proxy rules to permit these three choices on the proxy card. 

Several recent Form DEF14A proxy filings reflect these new provisions for non-binding advisory votes, including on January 27:

• Alberto-Culver Co.
• Applied Materials, Inc.
• Biodel Inc.
• Innovative Solutions and Support, Inc.
• OMNOVA Solutions Inc.

Form 8-K has been revised to allow shareholders to learn how often a company will provide the say-on-pay vote.  The Form 8-K must be filed no later than 150 calendar days after the date of the annual meeting in which the vote took place, and no later than 60 calendar days before the deadline for submitting a shareholder proposal under Rule 14a-8 for the subsequent annual meeting. 

Rescission Offers

A rescission offer is an attempt from a company to redress an error made in the offering of securities.  Contract law defines a rescission as the unmaking of a contract between parties.  The purpose of the rescission is to bring both parties back to where they were before the contract.

In the two most recent rescission offers filed with the Securities & Exchange Commission, previous offerings were found after the registration to be in violation of one or more laws.  The rescission offer gives purchasers of those securities and option to return them for the price they paid.  Often, if the purchaser refuses the rescission offer, the securities are re-registered with the legal ommissions/errors having been corrected.

Prosper Marketplace Inc., provider of a peer-to-peer online credit platform, had allowed its registration in Florida to offer and sell Borrower Payment Dependent Notes to expire.  The Florida Office of Financial Regulation informed the company that it was required to make a rescission offer to any Florida resident that purchased a Note from Prosper between July 10 and August 5, 2010.  The rescission offer was filed 1/24/11 on Form S-1, file no. 333-171837.  Purchasers that accept the offer will receive the price they paid for the notes plus 6% (per annum) interest.

Common shares of Brenham Oil & Gas Corp. were spun-off as a dividend distribution to shareholders of American International Industries, Inc. on July 21, 2010.  However, the registration statement pertaining to the Brenham shares was not filed until September 21 (Form S-1, file no. 333-169507).  Because the shares were issued prior to the registration being declared effective by the SEC, the distribution was not in compliance with federal and state securities laws.  The registration was converted to a rescission offer on the Amendment filed 1/6/11.

The Brenham rescission offer expires on January 31.  Individuals who accept the rescission offer will receive no consideration because the shares were issued as a dividend without any shareholder consideration.  If the offer is not accepted, the shares can be sold after the effective date of the registration without limitation as to the number or manner of sale, but remain subject to any of Brenham’s insider trading policy requirements.

New Disclosure Rules Intended to Revitalize Securitization Market

To improve transparency in asset-backed securities ("ABS") in the wake of significant losses suffered by investors during the financial crisis, the SEC has adopted new rules that require expanded issuer disclosure of information regarding the underlying assets.  The requirements and new Form ABS-15G that were adopted in the Final Rule implement the requirements of Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and also conform disclosure requirements for prospectuses and ongoing reports for ABS sold in registered transactions. 

The final rules require ABS issuers to file with the SEC, in tabular format, the history of the requests they received and asset repurchases they made relating to their outstanding ABS.  The table will provide comparable disclosures so that investors may identify originators with clear underwriting deficiencies.  Specifically, issuers are required to disclose the last three years of repurchase history in an initial filing on EDGAR due by Feb. 14, 2012, and additional disclosures will be required quarterly thereafter. 

Disclosures also will be required in prospectuses for new ABS.  Each prospectus must include the repurchase history for the last three years for the issuer’s ABS of the same asset class as the offered securities.  This requirement also is effective Feb. 14, 2012.  In its ongoing reports, an issuer will be required to provide updated repurchase history for the particular, related asset pool beginning with distribution reports required to be filed on Form 10-D after Dec. 31, 2011.

In addition, the final rules require Nationally Recognized Statistical Rating Organizations (NRSROs) to provide a description of the representations, warranties and enforcement mechanisms available to investors in an ABS offering, and to disclose how these differ from those of similar ABS.  NRSROs will be required to make the disclosures in any report accompanying a credit rating, including in presale reports that are distributed prior to the sale of the security.  NRSROs will be required to provide this information for any report issued on or after six months after the effective date of the rules (which is 60 days after their publication in the Federal Register.)

SEC Adopts New Rules For Issuer Review of Assets in ABS Offerings

By Final Rule adopted January 20 and to be effective 60 days after publication in the Federal Register, the SEC has approved new requirements in order to implement Section 945 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and new Rule 193 (17 CFR 230.193) under the Securities Act of 1933 to require any issuer registering the offer and sale of an asset-backed security (“ABS”) to perform a review of the assets underlying the ABS.

Rule 193, which implements Securities Act Section 7(d)(1), applies to all registered asset-backed securities, regardless of the assets that comprise the bundle.  However, the type of review may vary depending on such circumstances as the nature of the assets being securitized.  Under the final rules, the review must, at a minimum, be designed and effected to provide reasonable assurance that the prospectus disclosure about the assets is accurate in all material respects. 

The rule permits issuers to perform the review themselves or hire third parties to perform the review.  If an issuer obtains assistance from a third party to perform the review, and attributes, in the prospectus, the findings and conclusions of the review to the third party, the issuer may rely on the third-party's review to satisfy the review requirement provided the third party is named in the registration statement and consents to being named as an "expert" under federal securities laws. 

The SEC also adopted amendments to Item 1111 (17 CFR 229.1111) of Regulation AB (17 CFR 229.1100 through 17 CFR 229.1123) to require an ABS issuer to disclose the nature of its review of the assets and the findings and conclusions of the issuer’s review of the assets.  Issuers will be required to disclose:

• Information about how the loans in the pool differ from the loan underwriting criteria disclosed in the prospectus.
• Information about loans that did not meet the disclosed underwriting criteria but were nonetheless included in the pool.
• Information about the entity that made the determination that such loans should be included in the pool, despite not having met the disclosed underwriting standards.

The final rule provides a phase-in period to allow market participants to adjust their practices to comply with the new requirements.  Any registered offering of ABS commencing with an initial bona fide offer after December 31, 2011, must comply with the new rules.

Updated EDGAR Filer Manual to be Effective January 11, 2011

By Final Rule adopted January 5, the SEC adopted revisions to the Electronic Data Gathering, Analysis, and Retrieval System (EDGAR) Filer Manual to reflect updates to the EDGAR system.  The revisions:

• implement the new EDGARLink Online Application to allow filers to submit EDGARLink submission form types online without the use of the offline EDGARLink Tool; 
• support the electronic filing of submission form type ABS 15G and its amendment (See Proposing Release No. 33-9148, Disclosure for Asset-Backed Securities Required by Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, relating to to representations and warranties in ABS offerings); 
• add new Form 8-K Item 6.10 (Alternative Filings of Asset-Backed Issuers), which requires a PDF attachment to be included as Exhibit 99;
• support minor changes in XBRL validations for filings containing Exhibit 101 attachments. 

The filer manual is also being revised to address changes previously made in EDGAR to support the electronic filing of new submission form types SC 14N, SC 14N-S, and the new Form 8-K Item 5.08 (Shareholder Director Nominations).  However, use of SC 14N, SC 14N-S and 8-K Item 5.08 is delayed until further notice. See Order Rel. No. 33-9149 (Order Granting Stay) for more information.

Registrants Disclosing Amendments or Waiver of a Code of Ethics Provision

Item 5.05 of Form 8-K is reserved for disclosure of amendments to or waiver of a provision of a registrant's code of ethics (this had been Item 10 prior to the Final Rule that reorganized 8-K items effective 8/23/04).  Companies reporting a new, revised or amended code of ethics or conduct under 8-K Item 5.05 are common, including Alliqua Inc., Autoliv Inc., Christopher & Banks Corp. and Symmetricom Inc. all filing on January 5, 2011.

Filings disclosing the waiver of code provisions are much less frequent.  The most recent example would be the Form 8-K filed on 9/3/10 by Nautilus, Inc. when it granted a waiver to their Chairman & CEO regarding his control and interest of purchasers of notes being offered by the company. The waiver was granted "to the extent that [his control] may constitute a 'conflict of interest' within the meaning of" the code.

Sometimes these waivers are discussed using Item 8.01 (Other Events) rather than Item 5.05.  Gran Tierra Energy Inc.'s 8-K on 7/6/10 reported a waiver that permitted its management to negotiate and execute a proposed agreement notwithstanding that one of Gran Tierra's directors was also the CEO of the other company.  In its Form 8-K filed on 3/13/09, Power Integrations, Inc. reported a waiver granted to a newly appointed director regarding his options and stock holdings of a direct competitor that had been a previous employer.

The likely reason that 8-Ks reporting waivers are so few is that filers are not required to provide any information pursuant to Item 5.05 when they have published the information on their website and it has been disclosed in their most recently filed annual report. However, it must be available on the website for at least twelve months and must be retained by the company for a minimum of five years.