Securities Regulation
Disclosure and Accuracy
• Mandatory disclosure
– Forms
– Board duties
• Regulation FD
• “Up the ladder” reporting
(last updated 19 Mar 13)
Disclosure and Accuracy
• Mandatory disclosure
– Forms
– Board duties
• Regulation FD
• “Up the ladder” reporting
Regulation
Ex ante disclosure
Ex post enforcement
Info
Price
Market forces
ECMH
Intermediaries
What is a “public company”?
• Section 12(a)
– Listed on national exchange
– Brokers can’t transact in stock
unless registered
• Section 12(g)
– OTC companies: 500 record
Shs + $10 MM assets
– Deregistration: [< 300 Shs] OR
[ < 500 Shs + < 10 MM for 3 yrs]
• Section 15(d)
– Company files RS under ’33 Act
– Subject to periodic reporting
(not proxy or TO rules)
Pink Sheets
Reverse Merger
What is a “public company”?
• Section 12(a)
– Listed on national exchange
– Brokers can’t transact in stock
unless registered
• Section 12(g)
– OTC companies: 500 record Shs +
$10 MM assets
– Deregistration: [< 300 Shs] OR [ <
500 Shs + < 10 MM for 3 years]
• Section 15(d)
– Company files RS under ’33 Act
– Subject to periodic reporting (not
proxy or TO rules)
Online information
(real time) …
• sec.gov
– Search EDGAR
– Description of SEC forms
– Regulation S-K
• Netflix
– Annual report / Form 10K
– Special report / Form 8K
– Ownership report / Form 3, 4, 5,
13G
“Continuous disclosure”
(real time basis) …
Orange Inc. sells consumer batteries. Sales have
lagged this year so it engages in some late-year
“channel stuffing.”
When its auditor finds out, the auditor threatens to
quit – unless the company revises its financials.
Instead, the company CEO resigns in disgrace!
What must be disclosed? When?
1.The “channel stuffing” – once discovered
2.The auditor’s threats to quit
3.The CEO’s departure
4.The company’s restatement
Form 8-K (revised 2004)
1. Registrant’s
Business &
Operations
• The entry into, a material amendment to, or termination of a “material
definitive agreement,” defined as contracts outside the ordinary course
of business.
• The filing of bankruptcy or receivership.
2. Financial
Information
•The completion of the acquisition or disposition of assets constituting
more than 10% of the registrant’s total assets.
•The results of operations and financial condition (if they are disclosed
by press release before the filing of the 10-Q or 10-K).
• The creation or triggering of an off-balance sheet arrangement.
• Costs associated with exit or disposal activities, including termination
benefits for employees, contract termination costs and other associated
costs.
• Material impairments to assets such as goodwill.
3. Securities &
Trading Markets
• Receipt of a notice of delisting or a transfer of listing.
• The unregistered sale of equity securities.
• Material modifications to the rights of security holders.
4. Matters Related
to Accountants &
Financial
Statements
• Changes in the company’s outside auditor (and the reasons for the
change).
• Notice that previously issued financial statements or audit reports
should no longer be relied upon.
Form 8-K (revised 2004)
5. Corporate
Governance &
Management
• A change in control of the registrant.
• The departure or election/appointment of directors and principal
officers [disclose if there is disagreement / opportunity for director
response – see Hewlett-Packard (SEC 2007)].
• Amendments to the articles of incorporation or bylaws.
• Changes in the company’s fiscal year.
• Temporary suspension of trading under employee benefit plans
• Amendment to the registrant’s code of ethics or the waiver of the
requirements of that code.
[[Reserved for later use]
7. Regulation FD
• Any disclosure required to comply with Regulation FD
8. Other Events
• Anything that the issuer thinks would be of interest to its security
holders.
8- K F iling F requencies
(s am ple of 200 NYSE fir m s )
4000
3500
3509
3000
2500
2000
2174
1500
1548
1000
927
500
0
660
396
2000
2001
2002
2003
2004
2005
1-A / 2-B / 3-A / 4-B / 5-B / 6-A / 7-A / 8-B
Public Company Disclosure –
Pop Quiz
1. What is “public company”?
A. One whose securities are listed on
NYSE
B. One with more than $100MM in
assets
2. What is required of a public
company?
A.Disclosure of material information as
it becomes known to management
B.Disclosure as required in SEC
forms, even when not material
3. Where would you find out whether
Reed Hastings sold his Netflix
stock?
A. Form 4
B. Form 8-K
C. Form 10-Q
D. Form 10-K
4. Where would you find Reed
Hastings’s current pay?
A. Form 8-K
B. Form 14A
C. Form 10-K
5. Where would you find out whether Netflix
subscriber numbers fell or rose last year?
A. Form 10-Q
B. Form 10-K
C. Form 14A
6. If Reed Hastings went to a high-tech conference?
A.He could not say that Netflix would be doing a
special deal with Apple, if nobody knew
B. He could describe this special deal, given that
many stock analysts were at the conference
7. If you noticed that Netflix’s latest 10-Q had a note
identifying a big drop in new customers?
A. You should sell your NFLX stock
B. Don’t bother, the market already knows
C. Don’t sell NFLX: it’s insider trading
8. A friend works at NFLX and tells you about secret
negotiations with Apple …
A. Buy NFLX because it’s stock price is likely to rise
B. Don’t do anything, because the info is insider
information
C. Turn your friend into the SEC
Hewlett-Packard (SEC 2007)
Thomas Perkins
(Chair, Nominating/Governance Committee)
Disclosure and Accuracy
• Mandatory disclosure
– Forms
– Board duties
• Regulation FD (voluntary
disclosures)
• “Up the ladder” reporting
Hypothetical
CEO of SSSystems Inc. is invited to tech conference by Goldman
Sachs. In Q&A, CEO is asked about effects of 9/11 on
industry. CEO answers that “contracts are now getting signed”
and “our Q4 appears quite normal.”
This is news! The securities analysts flip open their cell phones
and type into their Blackberrys – “Buy SSS”
Has CEO violated Reg FD –
• What is purpose of Reg FD?
• Were statements material? Non-public?
• Does Reg FD apply at conference?
• Could CEO talk to Auditor? Lawyer? Credit rating agency?
Disclosure of material, non-public
information
• “covered persons”: B-D, IA, IC,
person expected to trade
• Intentional disclosures
Regulation FD
– Must disclose “simultaneously”
– Later file Form 8-K
• Unintentional disclosures
– Must disclose “promptly” (within 24
hours)
– File 8-K
• Applies to senior executives and
those who communicate to public
• Exceptions:
– normal course of business (after
Dodd-Frank not credit rating
agency, unless confidentiality)
– government officials
– ’33 Act “road show”
– Disclosure by foreign private
issuers (still subject to antifraud
rules)
Is Reg FD constitutional?
Siebel Systems
• CEO calls favored stock analyst
– Tipper of “inside information”?
– Mechanism for market
efficiency?
• CEO talks at industry
conference
– Disclosure of non-public
information
– Regulation FD
• CFO and IR director have
dinner with inst investor
– Disclosure of good news
– Company duties?
Thomas Siebel (CEO)
Regulation FD
Coverage – Rule 100
• Issuer disclosures (senior execs and IR)
• Material nonpublic information
• Specified market professionals [securities
firms, inv advisers, mutual funds, hedge
funds, pension funds, stock traders]
• Exceptions for internal, confidential
communications, to credit agencies
Effect
• Intentional – simultaneous public
disclosure
• Unintentional – promptly, within 24 hours
• Liability – SEC enforcement (Rule 102)
Regulation FD
Coverage:
• Issuer disclosures (senior execs and IR)
• Material nonpublic information
• Specified market professionals [securities
firms, inv advisers, mutual funds, hedge
funds, pension funds, stock traders]
• Exceptions for internal, confidential
communications, to credit agencies
Effect – Rule 100
• Intentional – simultaneous public
disclosure
• Unintentional – promptly, within 24 hours
• Liability – SEC enforcement (Rule 102)
Siebel Systems
• Call to favored stock analyst
– Tipper of “inside information”?
– Mechanism for market efficiency?
• CEO talks at industry conference
– Disclosure of non-public information
– Regulation FD
• CFO and IR director have dinner with
inst investor
– Disclosure of good news
– Company duties?
What should the company
have done?
•
•
•
•
Not held conference?
Not meet with analysts?
Add disclosure controls?
Webcast? [click here]
Siebel Systems
• Call to favored stock analyst
– Tipper of “inside information”?
– Mechanism for market efficiency?
• Industry conference
– Disclosure of non-public information
– Regulation FD
• CFO and IR director have been
having dinner with inst investor
– Your duties?
– Company duties?
Thomas Siebel (CEO)
Disclosure and Accuracy
• Mandatory disclosure
– Forms
– Board duties
• Regulation FD
• “Up the ladder” reporting
“Up- the-ladder”
Rule 205
Securities attorney (including
subordinate attorney)
• Represents issuer
• Becomes aware of evidence of a
“material violation” (securities fraud
or fiduciary breach)
Must report evidence forthwith
• to issuer's chief legal officer (and
perhaps also CEO)
• If not resolved
– Audit committee
– Board committee of outside Ds
– Whole board
“Up- the-ladder”
3(b)(1) If an attorney, appearing and
practicing before the Commission in the
representation of an issuer, becomes
aware of evidence of a material
violation by the issuer or by any officer,
director, employee, or agent of the issuer,
the attorney shall report such evidence to
the issuer's chief legal officer (or the
equivalent thereof) or to both the issuer's
chief legal officer and its chief executive
officer (or the equivalents thereof)
forthwith.
Rule 205
“Up- the-ladder”
3(b)(2) If the chief legal officer (or the
equivalent thereof) determines no
material violation has occurred, is
ongoing, or is about to occur, he or she
shall notify the reporting attorney and
advise the reporting attorney of the basis
for such determination. OR he or she
shall take all reasonable steps to cause
the issuer to adopt an appropriate
response, and shall advise the reporting
attorney thereof.
Rule 205
“Up- the-ladder”
3(b)(3) Unless an attorney … reasonably
believes that the chief legal officer or the
chief executive officer of the issuer (or
the equivalent thereof) has provided an
appropriate response within a
reasonable time, the attorney shall
report the evidence of a material
violation to:
•
The audit committee of the issuer's
board of directors;
•
Another committee of the issuer's board
of directors consisting solely of [outside
directors] or
•
The issuer's board of directors
Rule 205
“Up- the-ladder”
3(b), (d) A subordinate attorney shall comply
with this part notwithstanding that the
subordinate attorney acted at the
direction of or under the supervision of
another person.
A subordinate attorney may take the steps
permitted or required by Rule 3(b) or (c)
if the subordinate attorney reasonably
believes that a supervisory attorney to
whom he or she has reported evidence
of a material violation under Rule 3(b)
has failed to comply with Rule 3.
Rule 205
The end
WR Grace
Board duties
You are the chair of the
compensation committee of
Grace. What are your
responsibilities?
•
•
•
•
Send out questionnaires?
Rely on lawyers?
Review contracts?
Make sure contract filed?
SEC Commissioner
Steven Wallman
Board duties
You are the chair of the
compensation committee of
Grace. What are your
responsibilities?
•
•
•
•
Send out questionnaires?
Rely on lawyers?
Review contracts?
Make sure contract filed?
Wallman: “Officers and directors
[need not ensure] the accuracy and
completeness of company disclosures.
… Enough that Company consented to
cease and desist order.”